H.B. Fuller Reports Second Quarter Fiscal Year 2020 Results

Rhea-AI Summary

H.B. Fuller Company (NYSE: FUL) reported a net income of $32 million and adjusted EBITDA of $101 million for Q2 2020, surpassing guidance. Organic revenues saw a 7% decline due to COVID-19 impacts, yet Hygiene, Health, and Consumable Adhesives experienced a 7% revenue increase. The company achieved a 40% rise in year-to-date cash flow from operations and paid down $45 million in debt, staying on track to meet a $200 million repayment target. The dividend was raised for the 51st consecutive year, with expected annual restructuring savings of $55 to $65 million.

Positive

• Net income of $32 million, exceeding previous guidance.
• Adjusted EBITDA of $101 million, showcasing strong operational performance.
• 7% organic revenue growth in Hygiene, Health, and Consumable Adhesives.
• 40% increase in year-to-date cash flow from operations.
• Debt paydown of $45 million, on track for $200 million target in 2020.
• Dividend increased for the 51st consecutive year.
• Estimated annual savings from restructuring expected to be $55 to $65 million.

Negative

• Total net revenue decreased by 11% year over year.
• Organic revenue declined by 7% excluding currency impacts.
• Engineering and Construction Adhesives organic revenue declined by 20% and 15%, respectively.

ST. PAUL, Minn., June 24, 2020 /PRNewswire/ -- H.B. Fuller Company (NYSE: FUL) today reported financial results for its second quarter ended May 30, 2020.

Items of Note for Second Quarter 2020

• Strong operational performance with net income of $32 million and adjusted EBITDA of $101 million, which exceeded the company's guidance, driven by solid organic sales results, benefits from restructuring efficiencies, and lower raw material costs.
• Total organic revenues declined by 7% compared with last year, reflecting the company's broadly diversified customer base and end markets.
• 7% organic growth in Hygiene, Health and Consumable Adhesives (HHC) revenues, driven by double-digit growth in adhesives for essential goods and packaging.
• Greater China organic revenues increased approximately 1% versus the same period last year as a result of China's ongoing recovery from COVID-19.
• Year-to-date cash flow from operations increased by 40% versus the same period in 2019, driven by working capital reductions.
• Debt paydown of $45 million in the quarter exceeded the amount repaid in the second quarter of last year.
• The company remains on track to achieve $200 million debt repayment target for 2020.
• During the quarter, the company increased its dividend payout for the 51^st consecutive year.
• Restructuring savings were $7 million in the quarter. The company has expanded its operational review and now anticipates total savings to be in the range of $55 to $65 million on an annual run-rate basis. The revised amount includes estimated additional savings of $20 to $30 million related to the company's operations and supply chain project initiated this year. These additional savings are expected to begin in the fourth quarter of 2020, and be fully realized in 2022.

Summary of Second Quarter 2020 Results
Net revenue of $675 million decreased 11% compared with the second quarter of 2019. Foreign currency exchange rates and the sale of the surfactants, thickeners and dispersants business negatively impacted revenues by 4% on a combined basis. Organic revenue excluding these impacts was down 7% versus the same period last year. Hygiene, Health and Consumable Adhesives organic revenue increased 7% year over year, with double-digit growth in hygiene, packaging, and health and beauty. Engineering Adhesives and Construction Adhesives organic revenue declined 20% and 15% versus last year, respectively, in-line with the company's planning assumptions for expected impacts related to the COVID-19 pandemic.

Gross profit margin was 27.4%. Adjusted gross profit margin of 27.7% was down 120 basis points versus last year. The decline was due to lower revenues and unfavorable product mix related to impacts from COVID-19, partially offset by favorable raw material costs. Selling, General and Administrative (SG&A) expense was $128 million. Adjusted SG&A expense of $125 million declined 10% compared with the same period last year, driven by cost savings realized from the company's business realignment to three global business units and lower discretionary expenses in the quarter. Additionally, interest expense declined 20% driven by the company's accelerated debt paydown and lower interest rates.

As a result of these factors, net income attributable to H.B. Fuller in the quarter was $32 million, or $0.61 per diluted share. Adjusted net income attributable to H.B. Fuller was $35 million, or $0.68 of adjusted EPS, down from $46 million, or $0.88 of adjusted EPS in the prior year. Adjusted EBITDA was $101 million in the quarter, compared with $121 million in the same period last year, and adjusted EBITDA margin was 14.9% versus 16% in the prior year.

"H.B. Fuller's operating performance in the second quarter was strong as our worldwide team relentlessly focused on supporting customers in producing essential goods," said Jim Owens, president and chief executive officer. "Throughout the quarter, we found new opportunities to grow our business while managing costs and working capital. Our business model of global collaboration with local execution and a culture of customer focus enabled us to meet customer needs faster than competitors and gain share. Our supply chain and sourcing teams were able to meet demand while reducing costs and our technical, sales and office staff around the globe embraced new ways of working to increase productivity while reducing expenses. All of this was accomplished without any employees becoming infected with COVID-19 at work in our 72 factories."

Owens continued, "We realized significant growth in Hygiene, Health and Consumable Adhesives revenues by being the first and fastest to support customers during this crisis. Our restructuring into three global business units has resulted in productivity and efficiency gains that helped deliver EBITDA above our guidance range and enabled us to exceed last year's debt paydown in the quarter while raising our dividend. During the quarter, we also scoped new operational initiatives which will generate $20 to $30 million in additional savings. Despite the challenging economic environment, we expect to continue delivering strong cash flow performance in 2020 by operating efficiently, reducing working capital needs and maintaining our debt paydown momentum, all while ensuring the health and safety of our workforce."

Key Balance Sheet and Cash Flow Items
At the end of the second quarter of 2020, the company had cash on hand of $70 million and total debt equal to $1,928 million. This compares to cash and debt levels equal to $79 million and $1,973 million, respectively, at the end of the first quarter of 2020. For the six-month year-to-date period, cash flow from operations increased to $108 million from $77 million for the same period of 2019, driven by improved working capital management. Capital expenditures were $22 million versus $18 million in the second quarter of fiscal 2019, reflecting timing of capital projects and expenditures related to growth initiatives. The company estimates capital investment for the fiscal year totaling $75 to $85 million. 

H.B. Fuller has more than adequate liquidity to meet any foreseeable needs, including a $400 million revolving credit facility with a feature that allows for an increase of the facility by $300 million dollars if needed. The company also has ample room under its debt covenants using significantly conservative outlook scenarios. 

2020 Planning Assumptions
The extent of COVID-19's impact on global economic factors and the pace of economic recovery as businesses reopen remains uncertain. The company is providing the following planning assumptions based on current economic projections, order patterns and assumptions for global commercial activity:

• Estimated revenue in the third quarter anticipated to be down 5% to 10% year over year, and adjusted EBITDA anticipated to be approximately $95 million to $105 million.
• Continued elevated demand for HHC goods, such as food and e-Commerce packaging, paper products, medical and personal protective equipment through the second half of the year, although at a slower rate than experienced in the second quarter as restocking of these products returns to more typical levels.
• Lower year-over-year demand for durable products and building materials in industries such as new energy, transportation and construction. The company currently anticipates year-over-year comparisons for Engineering Adhesives and Construction Adhesives in the second half of the year will improve compared with second quarter results as industrial production and building construction starts to ramp up around the world.
• Continued moderate declines in raw material costs in the second half of the year, driven by supply-demand dynamics for specialty chemicals and petrochemical feedstock costs.
• Continued benefits from restructuring actions taken at the end of 2019.

The company remains committed to managing working capital and cash costs in order to reduce debt by $200 million in 2020. Contingency plans are available as necessary for adjustments in expenses, working capital and capital expense to achieve this target.

Company Update on COVID-19
Throughout the COVID-19 pandemic, H.B. Fuller's factories have remained open and operational. By rapidly implementing health and safety protocols and business continuity plans around the world, the company has been able to successfully protect employees, reinforce its supply chains, and deliver products to customers.

The company also created new ways to collaborate and accelerate productivity during this period. Over the past few years, H.B. Fuller has made considerable investments in technology, analytics platforms and virtual collaboration tools. The company has leveraged these tools to facilitate decision-making, maintain high levels of customer service, pursue new customer relationships, and accelerate its sales cycle through virtual product trials.

"By quickly mobilizing resources upon the outbreak of COVID-19, we were able to mitigate the severity of its impact on our operating and financial results through the first half of the year," said Owens. "At the same time, we have found new and creative ways of working with customers and colleagues around the globe that will extend beyond this crisis. Moving forward, we will continue to leverage electronic tools and new methods of interacting with customers to improve our speed and agility. We are using the critical lessons learned during this crisis to refine our planning so that we are well-prepared for growth opportunities and any potential headwinds as we progress toward a global recovery."

Conference Call
The Company will host an investor conference call to discuss first quarter results on Thursday, June 25, 2020, at 10:30 a.m. EDT. 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 -1%26h%3D2970519641%26u%3Dhttps%253A%252F%252Finvestors.hbfuller.com%252Fcalendar%26a%3Dhttps%253A%252F%252Finvestors.hbfuller.com%252Fcalendar&a=https%3A%2F%2Finvestors.hbfuller.com%2Fcalendar" rel="nofollow">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. Accompanying presentation slides will be available at the link above 30 minutes prior to the call, and 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 2, 2020. To access the telephone replay dial 1-877-344-7529 in the US, 855-669-9658 in Canada, and 1-412-317-0088 outside the US and Canada, and enter access code 10144467.

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 above in our fiscal 2020 Planning Assumptions, which the company cannot reconcile to forward-looking GAAP results without unreasonable effort.

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 consequences of the COVID-19 outbreak and other pandemics; 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 more 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. Many of the foregoing risks and uncertainties are, and will be, exacerbated by COVID-19 and any worsening of the global business and economic environment as a result.

Further information about the various risks and uncertainties can be found in the company's SEC 10-K filing for the fiscal year ended November 30, 2019. 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		Percent of		Three Months Ended		Percent of
	May 30, 2020		Net Revenue		June 1, 2019		Net Revenue
Net revenue	$	674,602		100.0%		$	759,583		100.0%
Cost of sales		(489,701)		(72.6%)			(541,124)		(71.2%)
Gross profit		184,901		27.4%			218,459		28.8%
Selling, general and administrative expenses		(127,998)		(19.0%)			(146,079)		(19.2%)
Other income, net		3,049		0.5%			2,986		0.4%
Interest expense		(21,644)		(3.2%)			(26,940)		(3.5%)
Interest income		2,898		0.4%			3,023		0.4%
Income before income taxes and income from equity method investments		41,206		6.1%			51,449		6.8%
Income taxes		(11,471)		(1.7%)			(16,441)		(2.2%)
Income from equity method investments		1,893		0.3%			1,633		0.2%
Net income including non-controlling interests		31,628		4.7%			36,641		4.8%
Net (loss) income attributable to non-controlling interests		(15)		(0.0%)			-		0.0%
Net income attributable to H.B. Fuller	$	31,613		4.7%		$	36,641		4.8%
Basic income per common share attributable to H.B. Fuller	$	0.61				$	0.72
Diluted income per common share attributable to H.B. Fuller	$	0.61				$	0.70
Weighted-average common shares outstanding:
Basic		51,420					50,902
Diluted		52,029					52,105
Dividends declared per common share	$	0.1625				$	0.160

 

Selected Balance Sheet Information (subject to change prior to filing of the Company's Quarterly Report on Form 10-Q)
	May 30, 2020		November 30, 2019		June 1, 2019
Cash & cash equivalents	$	70,346		$	112,191		$	100,246
Trade accounts receivable, net		448,126			493,181			499,406
Inventories		388,698			337,267			382,612
Trade payables		319,616			298,869			299,935
Total assets		3,979,060			3,985,734			4,149,864
Total debt		1,928,055			1,979,116			2,193,760

 

H.B. FULLER COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL INFORMATION
In thousands, except per share amounts (unaudited)
	Six Months Ended		Percent of		Six Months Ended		Percent of
	May 30, 2020		Net Revenue		June 1, 2019		Net Revenue
Net revenue	$	1,321,166		100.0%		$	1,432,518		100.0%
Cost of sales		(966,003)		(73.1%)			(1,034,134)		(72.2%)
Gross profit		355,163		26.9%			398,384		27.8%
Selling, general and administrative expenses		(269,507)		(20.4%)			(291,792)

FAQ

What were H.B. Fuller’s Q2 2020 earnings results?

H.B. Fuller reported a net income of $32 million and adjusted EBITDA of $101 million for Q2 2020.

How did COVID-19 impact H.B. Fuller’s revenue?

H.B. Fuller experienced an 11% decline in net revenue and a 7% decline in organic revenues due to COVID-19.

What guidance did H.B. Fuller provide for future quarters?

The company anticipates a 5% to 10% decline in revenue for Q3 2020 and adjusted EBITDA of $95 million to $105 million.

What is H.B. Fuller’s dividend status?

H.B. Fuller raised its dividend payout for the 51st consecutive year.

What savings is H.B. Fuller expecting from restructuring?

Estimated annual restructuring savings are expected to be between $55 to $65 million.