RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 29, 2020. The filing is for fiscal 2020 Q3, not calendar 2019 Q3. Dollar amounts below are in millions unless stated otherwise.
Business context and results
RPM manufactures specialty paints, coatings, roofing systems, sealants and adhesives. It reports four segments: Construction Products Group (CPG), Performance Coatings Group (PCG), Consumer and Specialty. The quarter is seasonally weaker for the company.
- Third quarter: Sales were $1,174.0, up 2.9% year over year; organic growth was 3.0%, acquisitions added 0.7%, and foreign exchange reduced sales by 0.8%. Gross margin rose to 37.0% from recast 35.9%. Net income attributable to RPM shareholders was $11.9 versus $14.2; diluted EPS was $0.09 versus $0.11. Pretax income increased to $16.3 from $4.5.
- First nine months: Sales were $4,048.0, up 2.1%; organic growth was 2.0%, acquisitions added 1.3%, and foreign exchange reduced sales by 1.2%. Gross margin was 38.0% versus recast 36.7%. Net income attributable to RPM shareholders was $195.1 versus $133.2; diluted EPS was $1.50 versus $1.00.
- Segment trends: Q3 sales grew in CPG (4.7%), PCG (1.0%) and Consumer (5.4%), but declined in Specialty (4.1%). Nine-month Specialty sales fell 7.0%; the other segments grew. Nine-month pretax income increased in CPG, PCG and Consumer, and declined in Specialty.
Cash flow, liquidity and debt
- Operating cash flow for the first nine months was $381.2, versus $145.5 a year earlier. Management attributed much of the improvement to working capital, including receivables collections and payment timing.
- Capital expenditures were $105.4; acquisitions, net of cash acquired, used $65.1. Cash and equivalents were $212.2 at February 29, 2020.
- Total debt was $2,559.8, including $71.2 current and $2,488.5 long-term. Available liquidity, including cash and committed credit facilities, was $1.14 billion. RPM reported covenant compliance, a leverage ratio of 2.90 and interest coverage of 7.95.
- Cash dividends were $138.8 and share repurchases were $100.0 during the nine-month period. After quarter-end, RPM repurchased about $25.0 of shares through April 8, then suspended its buyback program because of COVID-19 uncertainty.
Changes, outlook and notable items
- Q3 pretax income improved, but net income and EPS declined, reflecting, among other items, a $3.8 net investment expense versus $4.7 net investment income in the prior-year quarter. The prior-year tax benefit also made the comparison unusual.
- RPM reclassified shipping and handling costs from SG&A to cost of sales retrospectively. This reduced reported gross margins and SG&A percentages for prior periods but did not affect pretax income, net income or EPS.
- Management expects Q4 fiscal 2020 sales to decline year over year because of COVID-19; the eventual impact on sales, margins and results could be material and could not be reasonably estimated. The pandemic is also expected to delay the 2020 MAP to Growth restructuring program beyond its original December 31, 2020 target.
- RPM reported approximately $32.4 of expected additional restructuring charges and previously estimated annualized pretax savings of about $290 once the program is implemented. The filing says timing and total costs may change; 19 plant and 24 warehouse closures had been completed or were in progress.
- Other items include $6.9 of second-quarter SG&A expense for a discontinued Consumer OEM product line, a $1.3 settlement agreed in principle for the Lammers Barrel environmental matter, and a continuing SEC enforcement action relating to fiscal 2013 disclosures. RPM accrued a loss at the low end of its estimated range and said no amount in the range would materially affect consolidated results, liquidity or financial position.
Investor facts to verify
- COVID-19 effects on Q4 sales, margins, plant operations, supply chain and cash flow, and any subsequent guidance.
- Progress, revised timing, costs and realized savings from 2020 MAP to Growth.
- Debt, covenant headroom and liquidity as operating conditions evolve.
- Developments and potential costs from the SEC action and environmental matters.
- Whether the share repurchase suspension continues and how capital is allocated instead.