RPM International Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal first quarter ended August 31, 2015, compared with the three months ended August 31, 2014. RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants and adhesives. Results are seasonal and weather-sensitive. The filing reports the reconsolidation of SPHC and subsidiaries effective January 1, 2015; prior-year segment results were recast following a segment realignment.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $1,242.5 million | $1,203.9 million |
| Gross profit margin | 42.9% | 42.2% |
| Income before taxes | $142.2 million | $148.1 million |
| Net income | $100.4 million | $104.8 million |
| Net income attributable to RPM stockholders | $99.8 million | $99.1 million |
| Diluted EPS | $0.74 | $0.73 |
| Cash provided by (used for) operating activities | $6.6 million | ($125.2 million) |
Sales increased 3.2%, comprising 0.2% organic growth and 9.9% acquisition contribution, partly offset by a 6.9% adverse foreign-exchange impact. SG&A rose to 30.0% of sales from 28.8%; interest expense increased to $22.5 million from $19.4 million, principally reflecting acquisition-related borrowings. The effective tax rate was 29.4%, versus 29.2%.
Industrial sales fell 4.5% to $663.3 million, with FX and energy-market weakness partly offset by 3.7% organic growth. Specialty sales rose 130.7% to $183.6 million, primarily reflecting SPHC reconsolidation and acquisitions. Consumer sales declined 8.0% to $395.6 million, amid unfavorable weather and lower organic sales. Segment pretax income was $82.8 million industrial, $28.2 million specialty and $66.1 million consumer.
Liquidity, debt and capital
At August 31, cash was $169.5 million, total current assets $2,125.5 million and current liabilities $812.8 million. Long-term debt, including current maturities, was $1,732.2 million; debt-to-capital was 57.2%, up from 56.2% at May 31. Available liquidity, including cash and committed credit facilities, was $882.2 million. The $800 million revolving facility had $612.7 million available; RPM reported compliance with its covenants, a 56.0% leverage ratio against a 65% maximum and interest coverage of 8.8x against a 3.5x minimum. The accounts-receivable program had $100 million outstanding of up to $200 million.
Operating cash flow improved year over year, mainly because of working-capital timing. Inventory used $52.1 million of cash, and inventory days increased to 91.2 from 81.3 a year earlier. Capital expenditures were $12.0 million. The quarterly dividend declared was $0.26 per share, up from $0.24. RPM repurchased approximately 300,000 shares for $12.8 million under its program; total shares repurchased or returned for taxes were 777,101.
Material changes, outlook and risks
- SPHC and related entities emerged from bankruptcy and were reconsolidated. The asbestos trust received $450 million in cash and a note; additional trust contributions total $347.5 million, payable in installments through the fourth anniversary of the December 2014 effective date. The note’s net present value was $329.7 million at quarter-end.
- Management anticipated foreign-exchange pressure in industrial results through at least the first half of fiscal 2016. It planned increased capital spending, particularly for overseas growth, and expected capacity and production shifts to support demand. No specific earnings or sales guidance was provided.
- Unseasonably rainy weather weighed on consumer sales. Management cited continued energy-sector weakness, raw-material and transportation costs, interest rates, currency movements, international risks, and acquisition and litigation exposures among key uncertainties.
- A change to the pension-cost estimation method reduced current-quarter expense by about $1.6 million and increased diluted EPS by $0.01. Management estimated the change would reduce annual net periodic benefit expense by approximately $6.4 million.
- RPM remained subject to an SEC investigation concerning the timing of fiscal 2013 disclosures and loss-reserve accruals related to GSA/DOJ matters; the company said the outcome and potential impact could not be predicted. A Rust-Oleum deck-coating class action was also pending, with outcome and impact uncertain. Environmental and warranty claims remain subject to estimation risk.
- Marketable securities were worth $142.0 million, with $9.8 million of gross unrealized losses. RPM reported no other-than-temporary impairment in the quarter but warned that persistent or larger losses could affect results.
Important facts for investors to verify
- How much reported sales and specialty-segment growth reflects SPHC reconsolidation and other acquisitions versus sustainable organic demand.
- Whether foreign-exchange pressure, energy-sector weakness and weather-related consumer softness persist, and whether planned capital investment translates into growth.
- Debt, liquidity and covenant headroom, including scheduled asbestos-trust contributions and the company’s reliance on revolving and receivables facilities.
- The effect of the SEC investigation, warranty litigation and other contingencies when outcomes become clearer.
- The sustainability of operating cash flow given inventory growth and working-capital timing, and the sensitivity of pension costs and investment values to market changes.