News Details

Second Quarter 2018 Highlights:

• Net revenue grew 41 percent in the second quarter of 2018 versus the same period in 2017, driven by the addition of the Royal business. On a proforma basis, including Royal in 2017, net revenue increased 8 percent2, of which half was organic growth. The Engineering Adhesives, EIMEA, and Asia Pacific segments all experienced growth in the double digits;
• Net income was $44.5 million or $0.86 per diluted share; adjusted net income was $46.4 million, or $0.891 per diluted share, 44 percent higher than the second quarter of 2017;
• Gross profit margin was 28.2 percent; adjusted gross profit margin3 was 28.3 percent, an increase of 30 basis points versus a proforma second quarter of 20172 and up 190 basis points sequentially, reflecting pricing actions and acquisition-related synergies;
• Adjusted EBITDA1 was $123 million, in-line with expectations, and up 72 percent versus the second quarter of 2017. On a proforma basis, this represents an increase of 12 percent2 over the same period the previous year with the impact of Royal included;
• The Royal integration continues to progress well and generated an incremental $4 million in cost synergies in the second quarter, totaling $6 million year-to-date, in-line with expectations. Remain on target to realize a total of $15 million of cost synergies in 2018 and $35 million of savings by 2020, as previously communicated;
• Cash flow from operations of $54 million in the quarter, slightly ahead of expectations, of which $36 million was used to repay debt. On track to meet our $170 million debt reduction goal for the 2018 fiscal year.
   

Second Quarter 2018 Key Financial Metrics:

Second Quarter 2018 Results: 
Net revenue for the second quarter of 2018 was $789.4 million, an increase of 40.5 percent versus the second quarter of 2017. Proforma organic revenue growth, including Royal, increased approximately three and a half percent year-over-year2, driven by pricing, which made up about three percent, and volume/mix, which comprised about a half of a percent.

Net income for the second quarter of 2018 was $44.5 million, or $0.86 per diluted share, versus net income of $25.9 million, or $0.50 per diluted share, in the second quarter of 2017. Adjusted diluted earnings per share in the second quarter of 2018 was $0.891. Adjusted EBITDA1was $123 million in the second quarter, in-line with expectations and up 72 percent versus the prior year, or 12 percent2 higher on proforma basis including Royal in 2017.

Gross profit margin was 28.2 percent. Adjusted gross profit margin3 was 28.3 percent, up 30 basis points versus the prior year on a proforma basis including Royal2, reflecting positive pricing contribution and realized raw material synergies. Selling, General and Administrative (SG&A) expense was $145.2 million. Adjusted SG&A expense5 was $139.3 million, an increase versus the second quarter of 2017, due to the impact of acquisitions and foreign currency translation. However, on a proforma basis, including Royal in 20172, adjusted SG&A declined 30 basis points as a percentage of net revenue, due to sales leverage and overall cost controls.

Jim Owens, President and Chief Executive Officer, said, “We had a very strong second quarter, driven by solid revenue growth and robust pricing momentum, which helped us deliver $123 million of EBITDA. We remain committed to strengthening the performance of both the core legacy H.B. Fuller businesses and our recently acquired businesses. The contributions being made to our business by Royal continue to gain traction, and we are pleased that the integration plans and synergy progress remain in-line with our expectations, as do our free cash flow improvement and debt reduction. In addition, we are closely monitoring raw materials inflation, have implemented the appropriate pricing changes needed to offset these cost increases and we continue to focus on volume improvements in all of our businesses and across all regions.

“Organic growth performance was solid at three and a half percent, in-line with our expectations, led by 17 percent growth in Engineering Adhesives as a result of a series of customer wins, strong organic volume growth in Asia Pacific and pricing improvements across nearly all segments. EBITDA margins also increased in all segments as a result of strong pricing and manufacturing and operating cost management, and we expect further improvement throughout the remainder of the year. Our focus on generating free cash flow resulted in debt pay down of $36 million during the quarter, and we continue to expect a total reduction of $170 million of debt in 2018. Our plans to deliver our EBITDA targets for both fiscal year 2018 and 2020 remain firmly on track.

“We look forward to discussing these metrics, our 2020 goals, and most importantly our path to achieving these targets in more detail at our Investor Day on July 19th.”

EBITDA Calculation Revision: 
In order to conform with SEC interpretations, we modified our EBITDA calculation for 2017 and 2018 to include joint venture earnings as well as non-operating income and expenses. Using our historical methodology, adjusted EBITDA would have been $120 million in the second quarter of 2018. For the full year, this change is expected to impact EBITDA by approximately $6 million. This change has no impact on operating income or earnings per share.

Balance Sheet and Cash Flow:
At the end of the second quarter of 2018, the Company had cash on hand of $129 million and total debt equal to $2,405 million, of which approximately 70 percent had a fixed interest rate. This compares to cash and debt levels equal to $132 million and $2,441 million, respectively, in the first quarter of 2018. Cash flow from operations in the second quarter was $54 million, reflecting the improving profitability of the businesses. Capital expenditures were $15 million in the second quarter of 2018, compared to $7 million in the same period last year.

Fiscal 2018 Guidance:
The Company is narrowing its guidance for the 2018 fiscal year for adjusted EPS to $3.15 to $3.40, versus the previous range of $3.10 to $3.40. H.B. Fuller is also updating its adjusted EBITDA guidance to approximately $470 million to reflect the impact of the modified calculation of EBITDA. Revenue growth for the remainder of the 2018 fiscal year is expected to be between 5 and 6 percent when compared to 2017 on a proforma basis. The Company’s core tax rate, excluding the impact of discrete items, is unchanged and is expected to be between 25 and 27 percent. H.B. Fuller expects to invest a total of approximately $80 million in capital items in 2018.

This guidance excludes approximately $20 million of pre-tax expenses required to integrate the Royal business and other businesses acquired in 2017, and between $7 and $10 million of pre-tax expenses related to Project ONE ERP development costs. This guidance also excludes the discrete tax benefit of $35.6 million related to Tax Reform that was recorded in the first quarter, as well as any future discrete tax items. A complete reconciliation of the non-GAAP financial information contained in our 2018 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 first quarter results on Thursday, June 28, 2018, at 9:30 a.m. Central U.S. time (10:30 a.m. Eastern U.S. time). The conference call audio and accompanying presentation slides will be available to all interested parties via a simultaneous webcast at H.B. Fuller’s Investor Relations website. The event is scheduled to last one hour. For those unable to listen live, an audio replay of the event along with the accompanying presentation will be archived on the Company’s website.

Regulation G:
The information presented in this earnings release regarding segment operating income, adjusted gross profit, adjusted selling, general and administrative expense, adjusted diluted earnings per share, earnings before interest, taxes, depreciation, and amortization (EBITDA) and constant currency revenue 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 2018 outlook, which are unknown or have not yet occurred.

About H.B. Fuller Company:
For 130 years, 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 2017 proforma 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, 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 www.hbfuller.com and subscribe to our blog.

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 result 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; following the transaction, revenues may be lower than expected, and operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) may be greater than expected; risks that the transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the transaction; 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 2, 2017. 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, management’s best estimates of these changes as well as changes in other factors have been included.
 

1   Adjusted diluted earnings per share (EPS) is a non-GAAP financial measure and excludes the following costs included on the adjusted earnings per share reconciliation table above referenced in table 1): Tax reform impacts; organizational realignment to support the 2020 strategic plan as announced in December 2016; Project ONE development costs; integrating and accounting for past and present acquisitions; and Royal integration activities. Other than items referenced in the press release, we have not included a full reconciliation of adjusted EPS to EPS as part of our guidance because all potential adjustments are not known at this time. EBITDA is a non-GAAP financial measure defined on a consolidated basis as gross profit, less SG&A expense, plus depreciation expense, plus amortization expense. Adjusted EBITDA excludes items listed on the adjusted earnings per share reconciliation table above. On a segment basis it is defined as operating income, plus depreciation expense, plus amortization expense. Adjusted EBITDA margin is defined as adjusted EBITDA divided by net revenue. Other than items referenced in the press release, we have not included a full reconciliation of adjusted EBITDA to EBITDA or net income as part of our guidance because all of the potential adjustments are not known at this time.
2   Proforma financial results are provided to reflect the historical combination of H.B. Fuller and Royal as of the comparable prior periods before the acquisition was completed. The proforma results and reconciliations to GAAP outcomes were filed on form 8-k dated March 28, 2018.
3   Adjusted gross profit and adjusted gross profit margin are non-GAAP financial measures. Adjusted gross profit excludes costs associated with: organizational realignment to support the 2020 strategic plan as announced in December 2016; integrating and accounting for past and present acquisitions; and Royal integration activities. Adjusted gross profit margin is defined as adjusted gross profit divided by adjusted net revenue.
4   Revenue and Operating Income in FY 2017 are presented on a Proforma basis and reconciled in the 8-K filed March 28, 2018. Net Income and diluted EPS are adjusted as they were presented during FY 2017 and do not include the impact of Royal in 2017.
5   Adjusted SG&A expense is a non-GAAP financial measure which excludes costs associated with: organizational realignment to support the 2020 strategic plan as announced in December 2016; Project ONE development costs; integrating and accounting for past and present acquisitions; and Royal integration activities.
6   Constant currency revenue is a non-GAAP financial measure defined as changes in revenue due to price, volume, mix and acquisitions and excludes revenue changes driven by foreign currency translation. The schedule above reconciles each component of net revenue growth.

Source: H.B. Fuller Company