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Sep 25, 2019

Third Quarter 2019 Results

Diluted Net Income of $50 Million and EPS of $0.97; Adjusted Diluted EPS1 of $0.86

$97 million Debt Paydown in the Quarter; Company Increases 2019 Paydown Target

Announces Operating Segment Realignment to Drive Growth and Operating Efficiencies

 

 

ST. PAUL, Minn. – H.B. Fuller Company (NYSE: FUL) today reported financial results for the fiscal third quarter ended on Aug. 31, 2019.

 

Items of Note for Third Quarter 2019:

  • Net income was $50 million or $0.97 per diluted share (EPS), and adjusted net income was $44 million1, or $0.861 of EPS;
  • Adjusted EBITDA was $116 million1 and adjusted EBITDA margin of 16%1 increased by 40 basis points year over year;
  • Gross margin was 28.6% and adjusted gross margin of 28.8%4 increased by 40 basis points year over year;
  • $97 million debt paydown in the quarter was more than double the paydown amount in the third quarter of 2018; $151 million year-to-date debt paydown increased $63 million versus last year;
  • Fiscal 2019 debt paydown expectation increased from $200 million at the beginning of the year to approximately $260 million;
  • Announced a 2020 business realignment from five to three operating segments to deliver cost savings and improved organic growth.

 

Summary of Third Quarter 2019 Results

Net revenue for the quarter of $725 million decreased 5.8% compared with the third quarter of 2018. On a year-over-year basis, foreign currency exchange rates negatively impacted revenues by 1.9% and the sale of the surfactants, thickeners and dispersants business negatively impacted revenues by 0.6%. Organic revenue, which excludes the impact of foreign currency and divestitures, decreased 3.3%. Organic revenue growth in Engineering Adhesives and the Asia Pacific segment was offset by decreased organic revenues in EIMEA and Construction Adhesives, reflecting general economic slowdowns in these areas. Construction Adhesives revenues also were impacted by portfolio repositioning toward more profitable product lines. Americas Adhesives revenues were approximately the same as in the comparable 2018 quarter.

 

Gross profit margin was 28.6%. Adjusted gross profit margin was 28.8%4, an increase of 40 basis points versus last year, driven by lower raw material costs, favorable product mix, and synergies from the integration of Royal Adhesives. Selling, General and Administrative (SG&A) expenses were $141 million. Adjusted SG&A expenses of $131 million5 decreased approximately 6% compared with the third quarter of 2018, due to expense controls and fluctuations in foreign currency exchange rates.

 

As a result of these factors, net income attributable to H.B. Fuller for the third quarter of 2019 was $50 million, or $0.97 per diluted share, compared with $38 million, or $0.72 per diluted share in the same period last year. Adjusted net income attributable to H.B. Fuller was $44 million1, or $0.861 adjusted EPS, compared with $45 million1, or $0.861 adjusted EPS last year. Adjusted EBITDA was $116 million1, compared with $120 million1 in the prior year, and adjusted EBITDA margin of 16%1 increased versus 15.6%1 in the prior year.

 

We delivered solid profit performance and strong cash flow in the quarter despite challenging macroeconomic headwinds impacting global industrial production,” said Jim Owens, H.B. Fuller president and chief executive officer. “Share gains in Engineering Adhesives and Asia Pacific were offset by weakness across numerous manufactured goods sectors, including automotive, which is reported as part of our Engineering Adhesives segment. We improved margins compared with the prior year by growing our share in strategic markets and by leveraging lower raw material costs, acquisition synergies and expense controls. We doubled our debt paydown versus last year, enabling us to continue to accelerate our deleverage plan, and increase our full year debt paydown target to $260 million from the original target of $200 million. We’ve also announced a realignment of our reporting segments, which will simplify our business, reduce costs and improve our long-term growth capabilities.

 

Balance Sheet and Cash Flow

At the end of the third quarter of 2019, the company had cash on hand of $120 million and total debt equal to $2,097 million. This compares to cash and debt levels equal to $100 million and $2,194 million, respectively, at the end of the second quarter of 2019. For the nine-month period, cash flow from operations was $160 million compared with $107 million in the same period last year, and capital expenditures were $47 million, equal to the amount of expenditures in the same period last year.

 

Company Realignment to Drive Growth and Operating Efficiencies

H.B. Fuller announced today that it will realign its business from five to three operating segments to drive long-term global growth and generate operating efficiencies. This change in operating segments reflects how we will organize the company to make operating decisions and assess business performance. The new structure will be effective with the start of the company’s 2020 fiscal year on Dec. 1, 2019, and will be comprised of the following three global business units (GBUs):

  • Engineering Adhesives: This GBU enables engineers and product designers to create and build the newest advances in consumer and durable goods by utilizing our adhesive expertise around the world. While Engineering Adhesives is currently reported as an operating segment, the company’s durable assembly business will be combined with the previously-reported Engineering Adhesives segment under the new structure. The Engineering Adhesives team has a strong track record of organic growth resulting from leveraging our know-how and products around the globe for new developments in electronics, solar energy, electrification of automobiles and energy efficient building materials.
  • Hygiene, Health and Consumable Adhesives: This newly formed GBU will address trends in sustainable packaging, beauty care, medical care and hygiene, all of which require advanced adhesive technology and systems. By operating globally instead of regionally, this new GBU will be able to more effectively focus resources on global trends and growth opportunities. The medical and beauty segment has strong growth potential driven by significant changes and advancements in these end markets, and is an area of increased focus for H.B. Fuller.
  • Construction Adhesives: This GBU delivers adhesive solutions that enable architects, builders and construction workers to complete projects in less time, at lower cost and with greater durability. This business focuses on energy efficient and labor saving building practices in commercial roofing, residential and commercial flooring, and utility and infrastructure projects predominantly in the United States. The company expects to deliver organic growth through product innovation and new business development around the world. Construction Adhesives is currently reported as a business segment and will remain a standalone GBU under the new structure.

“Realigning the company into three, global business units will drive higher levels of growth and create cost savings by eliminating the complexity associated with H.B. Fuller’s historic structure of both regional and global operating segments,” said Owens. “Our company will have clearer global strategic alignment and improved accountability between market segment strategies and financial results under this new structure. Over the last decade, we have added new markets and strengthened our capabilities through numerous acquisitions and investments to reach nearly $3 billion in annual sales. By leveraging the business model that has resulted in tremendous success in Engineering Adhesives, H.B. Fuller now has an opportunity to simplify the management of our entire business to focus on growth and innovation, as well as to aggressively manage our cost structure in this challenging macroeconomic environment.”

 

The company’s preliminary target for annualized cost savings potential resulting from this realignment is in the range of $20 to $40 million by 2021, with approximately half of the savings to be realized in 2020. Over the next several weeks, the company will continue to review and refine the cost savings impact of the realignment. Further details will be provided on the company’s fiscal fourth quarter analyst call in January 2020, upon completion of its business realignment plans.

 

Updated Fiscal 2019 Outlook:

Full year organic sales are expected to be down approximately 1% versus last year. Foreign currency exchange is expected to have a full year negative impact on reported revenues of 3% to 4%, and the divestiture of the surfactants business is forecasted to impact sales by approximately 0.5%. Management anticipates annual adjusted EPS in the range of $2.95 to $3.05, and annual adjusted EBITDA in the range of $440 to $445 million. The company’s core tax rate, excluding the impact of discrete items, is expected to be between 26% and 28%, and capital expenditures are expected to be approximately $80 million.

 

This guidance excludes approximately $20 million of pre-tax expenses required to integrate the Royal Adhesives business and other restructuring activities, approximately $8 million of pre-tax expenses related to ERP development costs, and a gain of $14 million on the divestiture of the surfactants, thickeners and dispersants business. This guidance also excludes approximately $2 million of pre-tax expenses that have been incurred to date related to the changes associated with the realignment of our business from five operating segments to three global business units as well as additional expenses associated with these changes that are expected to be incurred in the fourth quarter that cannot be estimated at this time. The company’s guidance could be impacted by further rule-making relative to U.S. Tax Reform. A complete reconciliation of the non-GAAP financial information contained in our 2019 guidance is not being provided in accordance with the “unreasonable efforts” exception of Item 10(e)(1)(i)(B) of Regulation S-K of the Securities and Exchange Commission.

 

Conference Call:

The company will host an investor conference call to discuss third quarter results on Thursday, Sept. 26, 2019, at 10:30 a.m. Eastern U.S. time. The conference call audio and accompanying presentation slides will be available to interested parties via a simultaneous webcast accessible on the company's website at https://investors.hbfuller.com/calendar. The slides will be made available on its website approximately one hour prior to the start of the call. Participants should access the webcast prior to the start of the call to register for the event, and install and test any necessary software. The webcast and presentation will be archived on the company’s website. A telephone replay of the conference call will be available approximately one hour after the conclusion of the call and through Oct. 3, 2019. To access the telephone replay dial 1-877-344-7529 or 1-412-317-0088 and enter passcode 10134752.

 

Certain amounts presented in this release and the accompanying financial statements and data are preliminary and are subject to change in the company’s Quarterly Report on Form 10-Q for the period ended Aug. 31, 2019, when it is filed with the Securities and Exchange Commission.

 

Regulation G:

The information presented in this earnings release regarding segment operating income, adjusted gross profit, adjusted gross profit margin, adjusted selling, general and administrative expense, adjusted income before income taxes and income from equity investments, adjusted income taxes, adjusted effective tax rate, adjusted net income, adjusted diluted earnings per share and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) does not conform to generally accepted accounting principles (GAAP) and should not be construed as an alternative to the reported results determined in accordance with GAAP. Management has included this non-GAAP information to assist in understanding the operating performance of the company and its operating segments as well as the comparability of results to the results of other companies. The non-GAAP information provided may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results in the “Regulation G Reconciliation” tables in this press release with the exception of our forward-looking non-GAAP measures contained in our fiscal 2019 outlook, which the company cannot reconcile to forward-looking GAAP results without unreasonable effort. The footnotes in the text of this press release refer to the footnotes in these tables.

 

About H.B. Fuller:
Since 1887, H.B. Fuller has been a leading global adhesives provider focusing on perfecting adhesives, sealants and other specialty chemical products to improve products and lives. With fiscal 2018 net revenue of over $3 billion, H.B. Fuller’s commitment to innovation brings together people, products and processes that answer and solve some of the world's biggest challenges. Our reliable, responsive service creates lasting, rewarding connections with customers in electronics, disposable hygiene, medical, transportation, aerospace, clean energy, packaging, construction, woodworking, general industries and other consumer businesses. And, our promise to our people connects them with opportunities to innovate and thrive. For more information, visit us at https://www.hbfuller.com/.

 

Safe Harbor for Forward-Looking Statements:

Certain statements in this press release may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, including but not limited to the following: the Royal Adhesives transaction may involve unexpected costs or liabilities; our business or stock price may suffer as a results of uncertainty surrounding the transaction; the substantial amount of debt we have incurred to finance our acquisition of Royal, our ability to repay or refinance it or incur additional debt in the future, our need for a significant amount of cash to service and repay the debt and to pay dividends on our common stock, and the effect of restrictions contained in our debt agreements that limit the discretion of management in operating the business or ability to pay dividends; various risks to stockholders of not receiving dividends and risks to our ability to pursue growth opportunities if we continue to pay dividends according to the current dividend policy; we may be unable to achieve expected synergies and operating efficiencies from the transaction within the expected time frames or at all; we may be unable to successfully integrate Royal’s operations into our own, or such integration may be more difficult, time consuming or costly than expected; the ability to effectively implement Project ONE; political and economic conditions; product demand; competitive products and pricing; costs of and savings from restructuring initiatives; geographic and product mix; availability and price of raw materials; the company’s relationships with its major customers and suppliers; changes in tax laws and tariffs; devaluations and other foreign exchange rate fluctuations; the impact of litigation and environmental matters; the effect of new accounting pronouncements and accounting charges and credits; and similar matters. Further information about the various risks and uncertainties can be found in the company’s SEC 10-K filing for the fiscal year ended December 1, 2018. All forward-looking information represents management’s best judgment as of this date based on information currently available that in the future may prove to have been inaccurate. Additionally, the variety of products sold by the company and the regions where the company does business make it difficult to determine with certainty the increases or decreases in net revenue resulting from changes in the volume of products sold, currency impact, changes in product mix, and selling prices. However, managements’ best estimate of these changes as well as changes in other factors have been included.

 

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Media Contacts

News Media:
Kimberlee Sinclair
Director, Global Communications
H.B. Fuller
1200 Willow Lake Boulevard
St. Paul, MN 55110
Office: +1 651-236-5823
Investors:
Barbara Doyle
Vice President, Investor Relations
H.B. Fuller
1200 Willow Lake Boulevard
St. Paul, MN 55110
Office: +1 651-236-5023
All Others:
H.B. Fuller Corporate
1200 Willow Lake Boulevard
P.O. Box 64683
St. Paul, MN 55164-0683
+1 888-423-8553

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