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 quarter and six months ended November 30, 2018 (fiscal 2019 Q2), compared with the corresponding 2017 periods. Results are seasonal and weather-sensitive. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Three months ended Nov. 30, 2018 | Prior year | Six months ended Nov. 30, 2018 | Prior year |
|---|---|---|---|---|
| Net sales | $1,362.5 | $1,315.4 | $2,822.5 | $2,660.8 |
| Gross profit margin | 39.5% | 41.9% | 40.1% | 42.2% |
| Income before taxes | $66.6 | $109.2 | $158.5 | $264.5 |
| Net income attributable to RPM shareholders | $49.2 | $95.5 | $119.0 | $211.9 |
| Diluted EPS | $0.37 | $0.70 | $0.89 | $1.56 |
| Operating cash flow | Not separately stated | Not separately stated | $148.3 | $115.2 |
- Q2 sales rose 3.6%; management attributed growth to acquisitions (+2.6%) and organic growth (+3.0%), partly offset by foreign exchange (-2.0%). First-half sales rose 6.1%, with acquisitions contributing 2.1%, organic growth 5.4%, and foreign exchange reducing sales 1.4%.
- Q2 gross margin fell 2.4 percentage points, primarily from higher raw-material costs (about 150 basis points), restructuring-related inventory charges (about 30 basis points), and acquisition inventory step-up. First-half margin fell 2.1 points.
- Q2 SG&A was $430.1 million, or 31.6% of sales, versus $419.6 million, or 31.9%. First-half SG&A was $889.8 million, or 31.5% of sales, versus $814.0 million, or 30.6%.
- Interest expense was $23.1 million in Q2 and $47.5 million for the first half, down from $26.4 million and $53.2 million, respectively. Net investment expense was $7.0 million in Q2 and $4.6 million year to date, versus investment income in the prior-year periods; current-period losses included marketable securities losses.
- Cash from operations improved year over year despite lower earnings, aided by working-capital movements. Investing used $165.9 million, including $127.8 million for acquisitions and $57.8 million of capital expenditures. Financing provided $8.8 million; cash dividends were $89.2 million and share repurchases/withholding were $98.5 million.
Balance sheet and liquidity
- At November 30, 2018, cash and cash equivalents were $226.9 million; total debt was $2,372.7 million, compared with $2,174.1 million at May 31, 2018. Debt-to-capital was 60.8%, up from 57.1%.
- Current assets were $2,372.2 million and current liabilities $1,299.4 million. Current debt maturities were $453.9 million. Reported available liquidity, including cash and committed credit facilities, was $1.1 billion.
- RPM replaced its $800 million revolver with a $1.3 billion facility expiring October 2023; $787.9 million was available at quarter-end. It also had $125 million outstanding under a $200 million receivables securitization program. The company reported compliance with credit covenants; leverage was 3.04x against a stated limit generally of 3.75x, and interest coverage was 7.74x against a 3.50x minimum.
- RPM redeemed all $205 million of its 2.25% convertible notes in November, paying approximately $204.6 million cash and issuing 598,601 shares. It recorded a $3.1 million extinguishment/remeasurement loss.
Material changes and management commentary
- All three segments increased sales in Q2, but pretax income declined in each: Industrial $54.4 million versus $67.7 million; Consumer $41.2 million versus $45.1 million; Specialty $30.0 million versus $34.4 million. Higher raw-material costs and restructuring costs weighed on results; other segment-specific pressures included ERP consolidation, legal costs, and inventory charges.
- RPM continued its multi-year 2020 Margin Acceleration Plan (“2020 MAP to Growth”), including management simplification, SKU and inventory reduction, headcount actions, and facility rationalization. The plan includes closure of 12 plants and seven warehouses. Reported cumulative restructuring costs were $45.3 million, with total expected costs of $79.3 million; the filing also describes broader potential actions whose costs are not yet finalized.
- Management expects approximately $34 million of additional charges by the end of calendar 2020 and targets annualized pretax savings of about $290 million after implementation. It also targets a $230 million working-capital improvement and estimates fiscal 2021 operating cash flow of about $872 million, assuming 3% organic growth and $150–$200 million of annual acquisitions. These are plan assumptions and targets, not a guarantee; scope and costs may change.
- Management cited higher petrochemical costs, global demand and trade-policy changes as risks to raw-material costs, including likely adverse effects from steel tariffs on cans and packaging. It expects capital spending to rise in fiscal 2019 to support growth and facility consolidation.
- RPM announced a goal to return $1.5 billion to shareholders through dividends and repurchases by May 31, 2021. It repurchased about $82 million of shares during the first half; subsequent to quarter-end, it repurchased a further 1.47 million shares for about $86 million through January 8, 2019.
Risks, contingencies and unusual items
- Q2 and first-half earnings comparisons were affected by prior-year favorable discrete tax benefits, including an $18 million foreign restructuring-related benefit in the prior-year quarter. Effective tax rates were 26.2% versus 12.2% in Q2 and 24.7% versus 19.6% for the first half.
- Marketable-security losses, including losses recognized in earnings following adoption of updated accounting guidance, reduced current-period results. Management said it did not consider the unrealized losses on available-for-sale debt securities to be other-than-temporary, but warned further market declines could cause impairment charges.
- An SEC enforcement action concerning disclosure and reserve timing related to fiscal 2013 remains in discovery. RPM disputes the allegations and intends to contest them; it has accrued the low end of an estimated loss range, and states that no amount in that range would materially affect consolidated results, liquidity or financial position.
- A subsidiary settled a trade-secret and trademark case for $6.5 million during the quarter. Environmental matters were described as not expected to materially affect results or financial condition; disclosed EPA penalties included $168,000 paid/agreed and a proposed approximately $155,000 penalty under negotiation.
- Other principal risks include commodity and packaging costs, foreign exchange, interest rates, economic and market conditions, acquisitions, litigation and environmental exposure, and adequacy of reserves and insurance. RPM stated that market-risk exposures had not materially changed since May 31, 2018.
Investor verification priorities
- Track whether pricing and productivity can offset raw-material inflation and whether segment margins recover.
- Check actual restructuring charges, facility closures, savings realization and working-capital improvement against the 2020 MAP targets, including any added initiatives.
- Assess cash conversion and liquidity after acquisitions, dividends, repurchases, capital spending and debt repayment; monitor leverage and covenant headroom.
- Review the marketable-securities portfolio, reported investment losses and any future impairment assessments.
- Follow the SEC action, other litigation and legal costs, and any changes in contingencies or reserves.
- Confirm the assumptions underlying management’s fiscal 2021 cash-flow estimate and note that the filing provides no conventional consolidated earnings or revenue guidance.