RPM International Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2017 (fiscal 2018), compared with the periods ended November 30, 2016. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,315.4 million, up 10.5% | $2,660.8 million, up 8.9% |
| Gross margin | 41.9%, versus 43.8% | 42.2%, versus 44.0% |
| Net income attributable to RPM | $95.5 million, versus a $70.9 million loss | $211.9 million, versus $41.8 million |
| Diluted earnings per share | $0.70, versus a $0.54 loss | $1.56, versus $0.32 |
| Operating cash flow | Not separately presented | $115.2 million, versus $158.7 million |
- Quarterly sales growth reflected acquisitions of 4.7%, organic growth of 4.2%, and favorable foreign exchange of 1.6%. For the six months, the respective contributions were 5.5%, 2.5%, and 0.9%.
- Quarterly SG&A was nearly flat in dollars but declined to 31.9% of sales from 35.2%; six-month SG&A declined to 30.6% from 32.9% of sales. Management cited sales leverage, tighter cost controls, and prior-year severance actions.
- Quarterly interest expense was $26.4 million, up from $22.9 million; six-month expense was $53.2 million, up from $45.7 million. Higher rates and acquisition-related borrowing contributed to the increase.
- Cash and equivalents were $267.9 million at November 30, versus $350.5 million at May 31, 2017. Total debt was $2.137 billion, including $253.7 million current and $1.883 billion long-term. Debt-to-capital was 57.1%, compared with 59.3% at May 31.
- Reported available liquidity, including cash and committed credit facilities, was $971.7 million. Revolver availability was $553.9 million; no balance was outstanding under the $200 million receivables securitization program.
- Six-month operating cash flow fell despite higher net income; working-capital movements and other accruals used about $52 million more cash year over year. Receivables days outstanding rose to 63.0 from 59.5 a year earlier.
Segments and changes versus the prior period
- Quarterly sales rose across industrial ($702.9 million, up 11.0%), consumer ($415.4 million, up 11.1%), and specialty ($197.1 million, up 7.4%). Segment pretax income was $67.7 million, $45.1 million, and $34.4 million, respectively.
- Gross margin declined 1.9 percentage points in the quarter. Management attributed the pressure primarily to higher raw-material costs (about 110 basis points), unfavorable manufacturing absorption (50 basis points), and product mix (100 basis points), partly offset by organic growth.
- The comparison in earnings is affected by $188.3 million of goodwill and intangible-asset impairments recorded in the prior-year quarter, all in the consumer segment and related to Kirker nail enamel. No impairment charge was recorded in the current quarter.
- Consumer six-month organic sales were essentially flat, with shipment timing, retailer inventory adjustments, and softer consumer takeaway cited as factors. Industrial results continued to be affected by weak Latin American and oil-and-gas markets.
Outlook, risks and unusual items
- Management expects raw-material prices to continue rising, citing global demand and petrochemical costs. It plans higher fiscal 2018 capital spending, particularly for overseas growth initiatives.
- Management described the consumer segment’s current-quarter performance as challenging and expects challenges to continue through the fiscal year’s second half, with increased advertising and promotional spending anticipated.
- 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 discrete $18 million tax benefit was recorded in the quarter, mainly from foreign-entity restructuring and tax planning. The six-month effective tax rate was 19.6%. The Tax Cuts and Jobs Act was enacted after quarter-end; the company expected to assess its effects and record provisional amounts in its third-quarter statements. The federal rate reduction was expected to produce a blended rate of approximately 29.2% for the current fiscal year.
- After quarter-end, RPM issued $300 million of 4.25% notes due 2048, intending to repay $250 million of 6.50% notes due February 2018 and use the balance for general corporate purposes.
- The SEC enforcement action concerning fiscal 2013 disclosure and loss-reserve timing remained pending; motions to dismiss were denied, discovery was expected to begin in January 2018, and the company stated it would contest the allegations. RPM accrued an estimated loss at the low end of its range; it said no amount in the range would materially affect consolidated results, financial condition, or cash flows.
- A subsidiary’s trade-secret and trademark case was assessed as a reasonably possible loss, but the company could not estimate a potential amount or range. The company also disclosed an air-quality notice in California, with estimated fees, penalties, and costs of approximately $325,000–$500,000, potentially partly offset by credits. Management said environmental matters were not expected to have a material effect.
- RPM noted that weather affects its business and that its third fiscal quarter historically tends to be weaker. Forward-looking risks include raw-material supply and pricing, interest and currency rates, acquisitions, litigation, environmental matters, and reserve adequacy.
Important facts for investors to verify
- Whether sales growth converts into improved margins as raw-material costs, manufacturing absorption, and product mix evolve.
- Whether working-capital use and lower operating cash flow improve, particularly given higher receivables days outstanding.
- The consumer segment’s second-half sales and promotional spending, and the realized impact of the edible-coatings patent expiration.
- The final effects of the Tax Cuts and Jobs Act, including deferred-tax remeasurement and taxes on foreign earnings.
- Outcomes and potential costs of the SEC action and other litigation, plus compliance with debt covenants and execution of the planned February 2018 refinancing.