RPM International Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended February 29, 2012; comparisons are with the quarter and nine months ended February 28, 2011. The financial statements are unaudited. RPM manufactures and sells specialty paints, coatings, roofing systems, sealants, adhesives and related products through industrial and consumer segments. RPM notes that its December–February third quarter is historically weaker because of weather-related seasonality.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Net sales | $773.6 | $678.9 | $2,675.6 | $2,400.1 |
| Gross profit | $303.2 | $269.5 | $1,081.8 | $984.4 |
| Gross margin | 39.2% | 39.7% | 40.4% | 41.0% |
| Income before income taxes | $11.4 | $2.0 | $206.3 | $187.2 |
| Net income | $7.9 | $1.2 | $145.2 | $129.7 |
| Net income attributable to RPM shareholders | $6.6 | $1.1 | $133.4 | $118.9 |
| Diluted EPS | $0.05 | $0.01 | $1.02 | $0.91 |
| Operating cash flow | Not separately presented | Not separately presented | $153.5 | $191.0 |
- Q3 sales increased 14.0%; management attributed growth to 9.3% organic growth and 4.7% net acquisition contribution, partly offset by unfavorable foreign exchange. Nine-month sales rose 11.5%, including 8.8% organic growth and 2.7% acquisition contribution.
- Q3 gross margin fell 0.5 percentage points and nine-month gross margin fell 0.6 points, primarily because of higher raw-material costs. SG&A fell as a percentage of sales: 35.9% versus 37.8% for Q3 and 31.1% versus 31.7% year to date, reflecting sales growth and lower warranty-related costs, among other factors.
- Q3 pretax income improved substantially year over year; nine-month pretax margin was 7.7%, compared with 7.8%. Nine-month net margin was 5.4% in both years. Nine-month diluted EPS increased from $0.91 to $1.02.
- Industrial Q3 sales rose 11.8% and segment pretax income increased to $20.4 million from $12.6 million. Consumer Q3 sales rose 18.2% and segment pretax income increased to $21.5 million from $16.0 million. Year-to-date segment sales rose 10.8% in industrial and 12.9% in consumer.
- Interest expense increased to $17.9 million in Q3 from $16.5 million and to $53.6 million year to date from $49.0 million, mainly reflecting acquisition-related and higher average borrowings. The nine-month tax rate was 29.6%, versus 30.7%.
- Cash from operations declined $37.5 million year over year for the first nine months. Working-capital and other accrual changes used more cash, partly offset by higher earnings and cash collected from receivables. Capital expenditures were $34.4 million; acquisitions used $151.2 million.
- Cash and cash equivalents were $272.2 million at February 29, down from $435.0 million at May 31, 2011. Long-term debt, including its current portion, was $1,102.7 million. Available liquidity, including cash and committed credit availability, was $733.3 million. Management reported compliance with debt covenants; the interest coverage ratio was 6.99 to 1 against a 3.50-to-1 minimum.
Material changes, outlook and notable items
- Management cited volume growth, pricing actions intended to offset input-cost inflation, acquisitions and improved SG&A leverage as contributors to performance. It said warranty expense was expected to decline gradually through the remainder of the fiscal year and possibly over the next few years.
- Management expected capital spending to begin exceeding depreciation in fiscal 2012 and said current capacity, facility shifts and acquired capacity were expected to support demand. The filing provides no specific consolidated revenue or earnings guidance.
- In September 2011, RPM increased its Kemrock Industries and Exports ownership to 23% and changed to equity-method accounting. Nine-month other income included $5.6 million of Kemrock equity earnings, including $4.6 million recorded for prior periods; management deemed the prior-period adjustment immaterial. RPM also advanced or loaned funds to Kemrock and purchased approximately $7.2 million of its global depositary receipts.
- Approximately 92% of consolidated cash was held at foreign subsidiaries and regarded as permanently reinvested. RPM said repatriation could involve restrictions and taxes, and that it did not intend to repatriate significant amounts in the foreseeable future.
- SPHC and Bondex remained in Chapter 11 proceedings relating to asbestos claims. RPM stated it believed it was not responsible for their liabilities; claims against the filing entities were stayed, and the ultimate timing and outcome of the proceedings could not be predicted. RPM was not a party to the debtor-in-possession credit facility.
- Other disclosed exposures include raw-material price and availability, foreign currency and interest-rate movements, acquisition risks, warranty and product-liability claims, environmental matters, tax examinations and marketable-security impairment. RPM reported no material change in market-risk exposure since May 31, 2011 and said environmental proceedings were not expected to materially affect results or financial condition.
- The effective tax rate benefited from a $1.4 million reduction in reserves following settlement of the U.S. federal tax examination for fiscal 2007 and 2008. RPM disclosed possible additional payments of approximately $1.2 million relating to proposed non-U.S. tax assessments.
Most important facts for investors to verify
- Whether sales growth and pricing can continue to offset elevated raw-material costs without further gross-margin deterioration.
- How much of reported earnings growth reflects recurring operations versus acquisitions and the Kemrock prior-period equity-method adjustment.
- Cash conversion and working-capital trends, particularly after the year-over-year decline in operating cash flow and significant acquisition spending.
- Debt, covenant headroom, committed-credit availability and the implications of cash held overseas for U.S. liquidity.
- Potential costs or indirect effects from the SPHC/Bondex asbestos proceedings, warranty and product-liability claims, environmental matters and tax assessments.