RPM International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2018 (fiscal 2018 Q3). The request metadata says “2017 Q3,” but the filing itself reports fiscal 2018 Q3. RPM manufactures and sells specialty paints, coatings, roofing systems, sealants and adhesives through industrial, consumer and specialty segments. RPM notes that its third fiscal quarter is seasonally weaker.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Feb. 28, 2018 | Prior year | Nine months ended Feb. 28, 2018 | Prior year |
|---|---|---|---|---|
| Net sales | $1,102.7 | $1,022.5 | $3,763.5 | $3,465.3 |
| Gross margin | 39.9% | 41.9% | 41.5% | 43.4% |
| Income before income taxes | $34.7 | $17.0 | $299.2 | $58.6 |
| Net income attributable to RPM | $40.2 | $11.9 | $252.1 | $53.8 |
| Diluted EPS | $0.30 | $0.09 | $1.87 | $0.41 |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $140.7 | $173.5 |
- Sales growth: Q3 sales rose 7.8%, comprising 3.1% from acquisitions, 1.8% organic growth and 2.9% favorable foreign exchange. Nine-month sales rose 8.6%, including 4.7% from acquisitions, 2.4% organic growth and 1.5% favorable foreign exchange.
- Margins and costs: Gross margin declined 2.0 percentage points in Q3 and 1.9 points year to date, primarily because of higher raw-material costs; the nine-month decline also reflected unfavorable absorption and product mix. SG&A was 34.8% of sales in Q3 versus 37.8% a year earlier, and 31.8% year to date versus 34.3%.
- Cash flow: Nine-month operating cash flow fell despite much higher reported net income. Working-capital changes and accruals used more cash year over year. Cash at period-end was $264.4 million, down from $350.5 million at May 31, 2017.
- Debt and liquidity: Debt carrying value was $2.183 billion, versus $2.090 billion at fiscal year-end. Debt-to-capital was 57.2%, compared with 59.3%. Available liquidity, including cash and committed credit, was $966.9 million; revolving-facility availability was $552.5 million. RPM reported compliance with covenants and an interest-coverage ratio of 8.0x.
- Dividends: Declared dividends were $0.32 per share in Q3 and $0.94 per share for the nine months, compared with $0.30 and $0.875, respectively, in the prior periods.
Material changes versus prior periods
- Q3 pretax income increased to $34.7 million from $17.0 million; RPM-attributable net income rose to $40.2 million from $11.9 million. The quarter’s income-tax benefit included effects of the U.S. Tax Cuts and Jobs Act.
- Nine-month pretax income increased to $299.2 million from $58.6 million. The prior-year period included $193.2 million of goodwill and intangible-asset impairment charges, principally in the consumer segment; the current period had none.
- All three segments grew sales in Q3. Industrial and specialty pretax income improved, while consumer pretax income was slightly lower than the prior-year quarter. Year-to-date consumer results improved substantially compared with the prior-year impairment-affected loss.
- Interest expense rose to $27.5 million in Q3 from $23.8 million, and to $80.6 million year to date from $69.5 million, reflecting higher average borrowings and interest rates.
- RPM issued $300 million of 4.25% notes due 2048 in December 2017, using proceeds in part to repay $250 million of 6.50% notes due in February 2018.
Outlook, risks and unusual items
- Management expects raw-material prices to continue rising, citing global demand and higher petrochemical costs. No consolidated earnings or revenue guidance is provided in the filing.
- Management described the consumer segment’s current-year Q3 as challenging, expects challenges to continue through fiscal year-end, and anticipates higher advertising and promotional spending in the final three months.
- RPM expected to increase fiscal 2018 capital spending to support internal growth and capacity. Nine-month capital expenditures were $72.8 million, compared with depreciation of $61.1 million.
- The expiration of a U.S. edible-coatings patent in August 2017 is expected to reduce fiscal 2018 pretax income by at least $10 million. A subsequent acquisition, Miracle Sealants Company, closed March 19, 2018; it has approximately $24 million in annual sales and is assigned to the consumer segment.
- The Tax Cuts and Jobs Act produced a provisional net tax benefit of $1.4 million in Q3, comprising provisional tax adjustments that may change as RPM completes its accounting. RPM also reported $27.0 million of discrete tax benefits in earlier quarters of fiscal 2018.
- RPM remains subject to an SEC enforcement action concerning fiscal 2013 loss-reserve disclosures. Motions to dismiss were denied, answers were filed, and formal discovery began in January 2018. RPM contests the allegations and accrued an estimated loss at the low end of a range; the filing says no amount in the range would materially affect consolidated results, liquidity or financial position.
- A subsidiary faces a trade-secret and trademark infringement claim for which a loss is reasonably possible, but RPM cannot estimate a potential amount or range. Product warranties, environmental matters and marketable-security losses are also monitored; management warns that future warranty claims or prolonged investment declines could increase costs or impairments.
- Other notable commitments include a final $125 million payment to a bankruptcy trust due on or before December 23, 2018, and approximately $275.5 million of undiscounted operating lease payments. RPM contributed an additional $52.8 million to U.S. pension plans during the period.
Important facts for investors to verify
- Confirm the correct period: the filing is for fiscal 2018 Q3, ended February 28, 2018, not 2017 Q3.
- Assess how much reported earnings growth reflects the prior-year $193.2 million impairment, tax-law adjustments and earlier discrete tax benefits, versus ongoing operating improvement.
- Track whether pricing and productivity offset continued raw-material inflation, particularly given the year-over-year gross-margin decline.
- Monitor consumer-segment sales, advertising and promotional spending, and the expected edible-coatings patent impact.
- Evaluate operating cash conversion, working-capital needs, debt costs, covenant headroom and the upcoming $125 million trust payment.
- Follow developments in the SEC action and the unquantified infringement claim, as well as warranty and environmental exposures.