RPM International Inc. — Form 10-Q Summary
Business context and reporting period. RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants and adhesives. This filing covers the third quarter and first nine months of fiscal 2017, ended February 28, 2017; comparisons are to the periods ended February 29, 2016. RPM reports Industrial, Specialty and Consumer segments. The third quarter is typically a weaker seasonal period for the company.
Financial performance
| Metric | Three months ended Feb. 28, 2017 | Nine months ended Feb. 28, 2017 |
|---|---|---|
| Net sales | $1,022.5 million; +3.4% | $3,465.3 million; +2.3% |
| Gross margin | 41.9%, versus 41.8% | 43.4%, versus 42.5% |
| SG&A as % of sales | 37.8%, versus 37.5% | 34.3%, versus 32.4% |
| Goodwill and intangible impairment | $4.9 million | $193.2 million |
| Income before income taxes | $17.0 million, versus $21.9 million | $58.6 million, versus $284.4 million |
| Net income attributable to RPM shareholders | $11.9 million, versus $18.6 million | $53.8 million, versus $201.8 million |
| Diluted EPS | $0.09, versus $0.14 | $0.41, versus $1.50 |
Quarterly sales growth reflected acquisitions (+4.4%), offset by a 0.1% decline in organic sales and 0.9% unfavorable foreign exchange. For the nine-month period, organic sales grew 1.8%, acquisitions added 2.4%, and foreign exchange reduced sales 1.9%. The nine-month profit comparison was heavily affected by the current-year impairment charges; the prior-year period had no such impairment.
Quarterly Industrial sales rose 5.8%, Specialty 1.8%, and Consumer 0.7%. Consumer organic sales declined 3.6%; nail enamel sales were down approximately 37% year over year. For the nine months, segment sales rose 2.1% in Industrial, 3.8% in Specialty and 2.0% in Consumer.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $173.5 million, down from $223.8 million. Capital expenditures were $80.1 million, acquisitions net of cash acquired used $246.9 million, and dividends paid were $116.7 million.
- Cash and cash equivalents were $210.8 million at February 28, 2017, versus $265.2 million at May 31, 2016. Inventories rose to $856.5 million from $685.8 million; management cited purchasing timing, customer needs and geographic expansion.
- Total debt carrying value, including current maturities, was $1.982 billion. Current debt was $384.0 million, compared with $4.7 million at fiscal year-end. Debt-to-capital was 60.7%, versus 54.4% at May 31, 2016.
- Available liquidity, including cash and committed facilities, was $620.0 million. The revolving credit facility had $389.2 million available. RPM reported compliance with its covenants; its leverage ratio was 59.4% against a 65% maximum, and interest coverage was 9.73x against a 3.50x minimum.
- On March 2, 2017, after quarter-end, RPM issued $50 million of 5.250% notes due 2045 and $400 million of 3.750% notes due 2027. Proceeds repaid amounts outstanding on revolving credit facilities.
Material changes, outlook and risks
- Impairments and customer exposure: RPM recorded preliminary charges of $140.5 million for Kirker goodwill and approximately $47.7 million for Kirker intangible assets, plus $4.9 million for the Restore tradename. Kirker lost its largest customer, which represented over 15% of its fiscal 2016 sales. Restore’s largest customer, representing over 60% of fiscal 2016 Restore sales, was considered highly likely to discontinue the product line. RPM expected to complete impairment valuations in its fourth fiscal quarter; final adjustments could differ.
- Other operational charges: RPM recorded an $11.4 million bad-debt reserve associated with its decision to exit Flowcrete’s Middle East polymer flooring business, and $3.6 million of severance related to a European facility closure. Management said it continues to assess unprofitable facilities and could incur further charges.
- Cash commitments: RPM deposited $102.5 million into the 524(g) trust in December 2016 and was obligated to contribute a further $120 million by December 23, 2017 and $125 million by December 23, 2018.
- Legal and environmental matters: The SEC filed an enforcement action in September 2016 concerning fiscal 2013 disclosure and loss-reserve timing. RPM and its General Counsel filed motions to dismiss and said they would contest the allegations. RPM accrued a loss at the low end of an estimated range, but the filing text does not provide a clear dollar value for the range or accrual. Environmental proceedings were described as not expected to have a material adverse effect; specific Rust-Oleum matters include estimated AQMD costs of $100,000–$200,000 and an EPA penalty estimate of approximately $181,000.
- Management outlook: The filing provides no quantified earnings or revenue guidance. Management said planned capacity additions, facility shifts and increased capital spending were expected to support demand through fiscal 2017 and beyond. It also cited slow growth in many markets, weakness in energy-related industrial coatings, foreign-exchange exposure, raw-material and transportation costs, acquisition risks, and sensitivity to interest rates and legal claims.
Most important facts for investors to verify
- Final Kirker and Restore impairment amounts and whether customer losses lead to further deterioration in sales or asset values.
- Progress and costs associated with the Flowcrete exit, European facility closure and any additional restructuring actions.
- Cash generation and working-capital trends, particularly the inventory increase and the scheduled 524(g) trust contributions.
- Debt maturities, refinancing effects following the March 2017 notes issuance, and continued compliance with credit-facility covenants.
- Developments in the SEC enforcement action, including potential financial exposure; the filing does not specify the accrued amount or quantified loss range.