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H.B. Fuller Reports Second Quarter 2019 Results

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ST. PAUL, Minn., June 26, 2019 /PRNewswire/ -- H.B. Fuller Company (NYSE:FUL) today reported financial results for the second quarter that ended on June 1, 2019.

(PRNewsfoto/H.B. Fuller Company)

Items of Note for Second Quarter 2019:

  • Net income was $37 million or $0.70 per diluted share (EPS), and adjusted net income was $46 million1, or $0.881 of EPS;
  • Adjusted EBITDA of $121 million1 was in line with the company's guidance and improved versus the prior year on a constant currency basis;
  • Adjusted EBITDA margin of 16%1 increased by 50 basis points;
  • Organic sales increased by 10.5% year over year in Engineering Adhesives, the company's key strategic growth segment;
  • Gross margin of 28.8% and adjusted gross margin of 28.9%4 were up 90 basis points year over year driven by pricing, improved business mix, Royal integration-related synergies and moderating raw material costs;
  • Debt paydown was $42 million in the quarter and $54 million year to date. Year-to-date debt paydown was $7 million higher than the same period last year;
  • On June 11, 2019, the company announced a signed definitive agreement to sell a non-core, non-adhesive business for $71 million. Net proceeds will be utilized to increase 2019 debt paydown commitment from $200 million to $250 million.

Summary of Second Quarter 2019 Results:
Net revenue for the quarter of $760 million decreased 3.8% compared with the second quarter of 2018. Organic revenue, which excludes the impact of foreign currency, increased approximately 1%. Pricing was a positive contributor to organic revenue growth, and total volumes, while down year over year, increased sequentially from the first quarter. Strong year-over-year organic sales growth in Engineering Adhesives was partially offset by lower construction-related volumes, primarily due to portfolio repositioning in Construction Adhesives toward more profitable product lines.

Gross profit margin was 28.8% and adjusted gross profit margin was 28.9%4, an increase of 90 basis points versus last year for both metrics, driven by positive pricing contribution, improved business mix, synergies from the integration of Royal Adhesives and lower raw material costs. Selling, General and Administrative (SG&A) expenses were $146 million. Adjusted SG&A expenses of $139 million5 decreased 1.5% compared with the second quarter of 2018, driven by foreign currency exchange rates and continued focus on expense management. 

As a result of these factors, net income attributable to H.B. Fuller for the second quarter of 2019 was $37 million, or $0.70 per diluted share, compared with $44 million, or $0.86 per diluted share in the same period last year. Adjusted net income attributable to H.B. Fuller was $46 million1, or $0.881 adjusted EPS, compared with $46 million1, or $0.891 adjusted EPS last year. Adjusted EBITDA was $121 million1, compared with $123 million1 in the prior year, and adjusted EBITDA margin of 16%1 increased versus 15.5%1 in the prior year.

"Strong operational execution drove margin expansion, improved organic revenue growth and excellent cash flow performance in the second quarter, and we forecast additional improvement in the second half of the year," said Jim Owens, H.B. Fuller president and chief executive officer. "Our Engineering Adhesive business grew by double digits and despite weakness in some end markets we continue to drive increased profitability and cash flow conversion at H.B. Fuller. Strong free cash flow combined with the recently announced divestiture of a non-core surfactants and thickeners business are enabling us to increase our expected 2019 debt paydown by $50 million, accelerating our deleverage timeline. We continue to build on our strategic position as a global leader in adhesives, delivering innovation for our customers and sustainable value for our shareholders."

Balance Sheet and Cash Flow:
At the end of the second quarter of 2019, the company had cash on hand of $100 million and total debt equal to $2,194 million. This compares to cash and debt levels equal to $113 million and $2,235 million, respectively, in the first quarter of 2019. Cash flow from operations in the second quarter was $77 million compared with $55 million for the same period in 2018, reflecting improved profitability and working capital management. Capital expenditures were $18 million in the second quarter of 2019, compared with $15 million in the prior year.

Updated Fiscal 2019 Guidance:
Full year organic sales growth is expected to be 1 to 2%. 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 $3.10 to $3.30, compared with prior guidance of $3.15 to 3.45; and annual adjusted EBITDA in the range of $455 to $465 million, compared with prior guidance of $465 to $485 million. Adjusted EBITDA and adjusted EPS reflect the loss of approximately $5 million dollars and $0.05 related to the divestiture of the surfactants business, and continued macroeconomic challenges impacting growth in Europe and Asia Pacific regions. The company's core tax rate, excluding the impact of discrete items, is expected to be between 26 and 29%, and capital expenditures are expected to be approximately $90 million.

This guidance excludes approximately $20 million of pre-tax expenses required to integrate the Royal business and other businesses acquired in 2017, between $6 and $8 million of pre-tax expenses related to ERP development costs, and any gain on the divestiture of the surfactants, thickeners and dispersants business. 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 second quarter results on Thursday, June 27, 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 approximately 30 minutes prior to the start of the call. Participants should access the webcast 15 minutes 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 1 hour after the conclusion of the call, through July 4, 2019. To access the telephone replay dial 1-877-344-7529 or 1-412-317-0088 and enter passcode 10132231.

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 June 1, 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. 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 tables below with the exception of our forward-looking non-GAAP measures contained in our fiscal 2019 outlook, which are unknown or have not yet occurred.

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 document 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 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.

H.B. FULLER COMPANY AND SUBSIDIARIES

CONSOLIDATED FINANCIAL INFORMATION

In thousands, except per share amounts (unaudited)












Three Months Ended


% of


Three Months Ended


% of


June 1, 2019


Net Revenue


June 2, 2018


Net Revenue

Net revenue

$

759,583


100.0%


$

789,387


100.0%

Cost of sales


(541,124)


(71.2%)



(569,201)


(72.1%)

Gross profit


218,459


28.8%



220,186


27.9%











Selling, general and administrative expenses


(146,079)


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