H.B. Fuller Reports Fourth Quarter and Fiscal Year 2019 Results

ST. PAUL, Minn., Jan. 22, 2020 /PRNewswire/ -- H.B. Fuller Company (NYSE: FUL) today reported financial results for the fourth quarter and fiscal year ended Nov. 30, 2019.

Items of Note for Fourth Quarter 2019

• Higher full year 2019 operating cash flow of $269 million enabled debt pay down of $268 million, exceeding the company's initial 2019 paydown target of $200 million by 34%, and also exceeding its updated outlook of $260 million, as provided during its Sept. 25, 2019 analyst call;
• Integration of Royal Adhesives on target with $15 million of incremental cost synergies realized in fiscal 2019;
• Organic revenue was down 0.9% versus the fourth quarter of 2018, with improved volume trends sequentially versus the third quarter of 2019; 
• Net income was $32 million or $0.61 of earnings per diluted share (EPS). Adjusted net income was $46 million¹, or $0.88¹ adjusted EPS. Adjusted EPS decreased 2% versus the same period last year, and would have increased approximately 4% excluding unfavorable impacts from foreign currency exchange and the divestiture of the surfactants, thickeners and dispersants business;
• Completed the previously announced strategic realignment of our business into three new global business units as of Dec. 1, 2019.

Items of Note for 2020 Guidance

• Adjusted diluted EPS of $3.15 to $3.35; up approximately 10% at the midpoint;
• Adjusted EBITDA of $440 to $460 million; up approximately 4% at the midpoint;
• Organic revenue growth of 1 to 2% from new business wins and share gains, even as challenging global macroeconomic conditions are assumed to continue in manufacturing sectors in 2020;
• Approximately $20 million of cost savings resulting from the company's business realignment drives additional earnings growth;
• Debt repayment of approximately $200 million, on-track to accelerate the company's 2020 deleveraging and exceed the three-year target by more than 10%.

Summary of Fourth Quarter 2019 Results
Net revenue of $739 million decreased 3.8% compared with the fourth quarter of 2018. Foreign currency exchange rates negatively impacted revenues by 2.1%, and the sale of the surfactants, thickeners and dispersants business negatively impacted revenues by 0.8%. Organic revenue, which excludes impacts from foreign currency and divestitures, was down 0.9% versus last year. Organic revenue growth in Americas Adhesives, Asia Pacific and Engineering Adhesives was offset by organic revenue declines in Construction Adhesives and EIMEA, primarily reflecting general industry and economic slowdowns in these areas.

Gross profit margin was 27.2%. Adjusted gross profit margin of 27.6%⁴ was down 20 basis points versus last year, driven by lower revenues and temporary higher manufacturing and inventory write off costs at certain former Royal Adhesives factories in the quarter, partially offset by favorable raw material costs. Selling, General and Administrative (SG&A) expense was $149 million. Adjusted SG&A expense of $133 million⁵ was roughly flat compared with the fourth quarter of 2018.

As a result of these factors, net income attributable to H.B. Fuller for the fourth quarter of 2019 was $32 million, or $0.61 per diluted share. Adjusted net income attributable to H.B. Fuller was $46 million¹, or $0.88¹ of adjusted EPS, versus $47 million¹, or $0.90¹ of adjusted EPS last year. Adjusted EPS decreased 2% versus the same period last year, and would have increased approximately 4% excluding unfavorable impacts from foreign currency exchange and the divestiture of the surfactants, thickeners and dispersants business.

"In the fourth quarter, we continued to gain share in strategic businesses including Engineering Adhesives and Hygiene, and our organic revenue trends improved sequentially compared with the third quarter," said Jim Owens, president and chief executive officer. "For the full year, adjusted EPS was within our guidance range of $2.95 to $3.05 and adjusted earnings and EBITDA improved year-over-year on a constant currency basis. These results were achieved in a weak external environment which impacted organic growth. Our cash flow conversion remained very strong as a result of solid earnings and working capital management and we significantly exceeded our debt paydown target."

Full Year 2019 Summary
Net revenue for fiscal 2019 of $2,897 million decreased 4.7% compared with fiscal 2018. Foreign currency exchange rates negatively impacted full year revenues by 3.3%, and the divestiture negatively impacted revenues by 0.3%. Organic full year revenue decreased by 1.1% year-over-year, due to lower revenues in Construction Adhesives and EIMEA partially offset by growth in Engineering Adhesives, Americas Adhesives and Asia Pacific.

Gross profit margin was 27.9%. Adjusted gross profit margin of 28.1%⁴ increased 50 basis points versus last year on lower raw material cost, favorable pricing and cost synergies from the integration of Royal Adhesives. Net income attributable to H.B. Fuller for fiscal 2019 was $131 million, or $2.52 per diluted share. Adjusted net income attributable to H.B. Fuller was $154 million¹, or $2.96¹ per diluted share, compared with $156¹ million, or $3.00¹ per diluted share, in fiscal 2018. Adjusted EPS would have increased approximately 6% compared with fiscal 2018 excluding the unfavorable impacts of foreign currency exchange and the divestiture of the surfactants and thickeners business. Adjusted EBITDA was $432 million¹, compared with $449 million¹ in the prior year period, and would have modestly increased year-over-year excluding unfavorable impacts from foreign currency and the divestiture.

Balance Sheet and Cash Flow
At the end of the fourth quarter of 2019, the Company had cash on hand of $112 million and total debt equal to $1,979 million. This compares to cash and debt levels equal to $151 million and $2,248 million, respectively, at the end of the fourth quarter of 2018. Cash flow from operations for the full year increased to $269 million from $253 million in 2018. Capital expenditures were $62 million in 2019, compared with $68 million in 2018.

Update on Business Realignment
Effective Dec. 1, 2019, H.B. Fuller completed the realignment of its business from five to three operating segments. Aligning our resources around the three new global business units (GBUs) – Engineering Adhesives, Hygiene, Health and Consumable Adhesives, and Construction Adhesives – better positions us to quickly identify trends and utilize our vast adhesives portfolio to deliver new solutions targeted to evolving trends. In addition, the new organizational structure enabled a simplification of our business processes and elimination of more than 150 redundant positions, globally, leading to reduced costs.

"We are entering the new year with a strategically focused and realigned business poised for growth and beginning to see areas of positive trends on the top line," said Owens. "We win with customers by solving their adhesive problems better and faster than competitors. By organizing into global business units, we benefit from reduced complexity, enhanced collaboration, and increased speed to market. Our new global teams and expanded utilization of our shared services model are in place, and our entire organization is focused on capturing new market share at greater profitability in 2020, and in the years ahead."

The company updated the range of its previously disclosed cost savings target from this realignment to $25 to $35 million by 2021, with approximately two thirds of the savings to be realized in 2020. In its Nov. 13, 2019 filing on Form 8-K with the Securities and Exchange Commission, the company announced approximately $9 to $11 million of restructuring costs associated with this initiative to be recognized across the next several fiscal quarters. The company incurred $9 million of restructuring costs in the quarter ended Nov. 30, 2019.            

Financial Guidance
For fiscal year 2020, the company anticipates adjusted EPS of $3.15 to $3.35 and adjusted EBITDA of $440 to $460 million. Full year organic revenue growth is expected to be 1 to 2% compared with 2019, with net revenue growth impacted by an estimated unfavorable impact from foreign currency exchange rates of 0.5% and an unfavorable 0.5% impact from the divestiture of the surfactants business resulting in net revenue growth between 0 and 1%. The company's core tax rate, excluding the impact of discrete items, is expected to be between 26% and 28%. H.B. Fuller expects to invest approximately $85 million in capital items in 2020.

"In 2020, we are focused on executing the growth drivers and cost savings that are enabled by our GBU realignment and the synergies provided by the Royal Adhesives acquisition," Owens said. "Our plan delivers organic growth in a continued challenging global manufacturing environment forecasted for 2020. In addition, we are reducing costs to support 10% earnings growth and increased cash flow. As a result of profit margin and working capital improvements, high cash flow conversion rates and our focused capital management programs, we remain on track to significantly exceed our committed $600 million in debt paydown by the end of 2020."

This guidance excludes estimated pre-tax expenses of $6 to $10 million related to the company's global business realignment and completion of the integration of the Royal business, and pre-tax expenses of $12 to $15 million related to ERP development costs. The company's guidance could be impacted by further rule making relative to U.S. Tax Reform as well as potential tax law changes in other countries where we do business. A complete reconciliation of the non-GAAP financial information contained in our 2020 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 fourth quarter results on Thursday, Jan. 23, 2020, at 10:30 a.m. EST. The conference call audio and accompanying presentation slides will be available to interested parties via a simultaneous webcast, and may be accessed from the company's website at https://investors.hbfuller.com/calendar. 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 1 hour after the conclusion of the call, through Jan. 30, 2020. To access the telephone replay dial 1-877-344-7529 or 1-412-317-0088 and enter access code 10137645.

Certain amounts presented in this release and the accompanying financial statements and data are preliminary and are subject to change in the company's Annual Report on Form 10-K for the year ended Nov. 30, 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 2019 net revenue of $2.9 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, cost savings and operating efficiencies from the Royal transaction or the business realignment 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.