RPM International Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2018, the first quarter of fiscal 2019. Comparatives are the three months ended August 31, 2017 unless stated otherwise. RPM manufactures specialty paints, coatings, roofing systems, sealants and adhesives. Results are seasonally affected by weather.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $1,460.0 million | $1,345.4 million |
| Gross profit | $594.0 million | $572.0 million |
| Gross margin | 40.7% | 42.5% |
| SG&A expense | $459.7 million | $394.4 million |
| Restructuring charges | $20.1 million | None reported |
| Income before income taxes | $91.9 million | $155.3 million |
| Net income attributable to RPM shareholders | $69.8 million | $116.4 million |
| Diluted EPS | $0.52 | $0.86 |
| Cash used in operating activities | $7.1 million | $26.1 million |
- Sales rose 8.5%, comprising 7.8% organic growth and 1.5% contribution from acquisitions, partly offset by a 0.8% unfavorable foreign-exchange impact.
- Gross margin contracted 1.8 percentage points. Management attributed about 160 basis points of pressure to higher raw-material costs and 40 basis points to restructuring-related inventory charges; price increases did not offset the cost pressure.
- SG&A rose $65.3 million and increased to 31.5% of sales from 29.3%. The filing cites restructuring-plan implementation, ERP and consolidation expenses, higher doubtful-account allowances, legal costs, acquisition expenses, distribution costs and unfavorable transactional foreign exchange.
- Segment sales were $782.0 million Industrial, $485.2 million Consumer and $192.8 million Specialty. Segment pretax income was $69.1 million, $51.3 million and $27.8 million, respectively; each was below the prior-year quarter.
Balance sheet, liquidity and cash flow
- At August 31, 2018, cash and cash equivalents were $202.2 million; total debt, including current maturities, was $2,270.5 million. Debt-to-capital was 58.5%, versus 57.1% at May 31, 2018.
- Available liquidity, including cash and committed credit facilities, was $868.9 million. The revolving credit facility had $466.7 million available; RPM reported compliance with its covenants, with a 58.3% leverage ratio against a 65% limit and interest coverage of 7.7x against a 3.5x minimum.
- Operating cash use improved to $7.1 million from $26.1 million, primarily reflecting more favorable working-capital movements, despite lower net income. Investing activities used $60.5 million, including $28.3 million of capital expenditures and $26.4 million for acquisitions. Financing activities provided $31.7 million, including $120.7 million of debt additions and $42.7 million of dividends paid.
- Available-for-sale marketable securities totaled $174.0 million. Their unrealized losses were $5.0 million; management said it had the ability and intent to hold the investments, but noted that prolonged or deeper losses could result in impairment charges.
Material changes, outlook and risks
- 2020 MAP to Growth: The multiyear restructuring targets simplification, lower overhead and headcount, SKU and inventory rationalization, facility actions and focus on better-performing businesses. Management expects the overall plan to be completed by the end of calendar 2020; phases were still being developed, with the comprehensive plan expected to be formalized in the quarter ending November 30, 2018. Disclosed expected costs in the restructuring table totaled $84.9 million, subject to finalization.
- Management expects raw-material prices to continue rising, citing petrochemical costs, global demand and trade duties; tariffs, including those on steel imports, may raise can and packaging costs. It also said fiscal 2019 capital spending would increase to support internal growth and production consolidation, and expected capacity and facility shifts to support demand. No quantified earnings or sales guidance is provided in the filing.
- Tax reform reduced the U.S. federal statutory rate to 21% for fiscal 2019. The effective tax rate was 23.7%, compared with 24.7%; the filing says GILTI and FDII effects were not material for this quarter. The company continued refining certain provisional tax estimates.
- The SEC enforcement action concerning fiscal 2013 disclosure and loss-reserve timing remained in discovery; RPM said it would contest the allegations. The company had accrued at the low end of its estimated loss range and stated that no amount in the range would materially affect its consolidated financial condition, results or cash flows. A separate subsidiary case was settled after quarter-end for $6.5 million. An EPA matter resulted in a $170,000 penalty.
- After quarter-end, RPM acquired Nudura Corporation, with annual sales of approximately $40 million. It also issued notice to redeem all $205 million of its 2.25% convertible notes on November 27, 2018; holders could convert before November 26, with settlement in cash and shares. RPM additionally repurchased $46.4 million of shares after quarter-end through October 1.
- RPM adopted ASC 606 revenue guidance effective June 1, 2018 using the modified retrospective method; it reported no material overall financial-statement impact. Operating lease obligations were approximately $202.3 million; the forthcoming lease standard was expected to increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether price increases, restructuring benefits and operating efficiencies can offset continuing raw-material inflation and tariff-related costs.
- The full scope, finalized cost, cash-payment schedule and realized savings of the 2020 MAP to Growth plan.
- Drivers of the sharp decline in pretax income and EPS, including elevated SG&A, legal costs, restructuring and segment margin deterioration.
- Cash conversion and working-capital trends, given negative operating cash flow and increased capital spending.
- Funding and share dilution implications of the convertible-note redemption and subsequent repurchases, along with covenant headroom and liquidity.
- Developments in the SEC action, product-liability and warranty exposures, and valuation risk in the marketable-securities portfolio.