RPM International Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, three months ended August 31, 2014; comparatives are the three months ended August 31, 2013. Balance-sheet comparisons are against May 31, 2014. RPM manufactures specialty paints, coatings, roofing systems, sealants and adhesives, reported in Industrial and Consumer segments.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $1,203.9 million | $1,164.7 million |
| Gross profit / gross margin | $508.4 million / 42.2% | $499.1 million / 42.9% |
| SG&A / share of sales | $346.5 million / 28.8% | $335.5 million / 28.8% |
| Income before income taxes | $148.1 million | $147.2 million |
| Net income | $104.8 million | $106.9 million |
| Net income attributable to RPM stockholders | $99.1 million | $103.1 million |
| Diluted EPS | $0.73 | $0.77 |
| Operating cash flow | $(125.2) million | $(129.5) million |
| Cash and cash equivalents at period end | $225.0 million | $204.9 million |
Sales rose 3.4%, while income attributable to RPM stockholders fell about 3.9% and diluted EPS fell about 5.2%. The effective tax rate increased to 29.2% from 27.4%, largely because the prior-year quarter included a nonrecurring net tax benefit. Foreign-currency translation reduced comprehensive income by $21.3 million in the quarter.
Industrial sales increased 5.8% to $773.9 million and pretax income rose to $102.5 million. Consumer sales declined 0.8% to $430.0 million and pretax income fell to $76.7 million. Consolidated pretax income was nearly flat despite higher sales; consumer weakness and lower gross margin weighed on results.
Liquidity, debt and cash flow
- Cash used in operating activities was $125.2 million, mainly reflecting seasonal working-capital outflows, including higher receivables and lower accounts payable. Days sales outstanding rose to 67.4 from 63.4 a year earlier; days inventory outstanding rose to 81.3 from 77.4.
- Cash used in investing was $43.4 million, including $33.5 million for acquisitions and $12.1 million in capital expenditures. Financing provided $65.3 million, including $131.9 million of debt additions. Cash declined $107.8 million from the start of the quarter.
- Total debt, including current maturities, was $1.478 billion at August 31, 2014, versus $1.352 billion at May 31, 2014. The debt-to-capital ratio was 50.72%, up from 49.4%. Available liquidity, including cash and committed credit facilities, was $892.7 million.
- RPM reported compliance with credit-facility covenants: leverage ratio 50.82% against a 60% limit and interest coverage of 7.96 times against a 3.50-times minimum. The $600 million revolving credit facility expires in June 2017; the $200 million receivables facility had $50 million outstanding.
- The quarterly dividend declared was $0.240 per share, up from $0.225. Planned fiscal-year pension contributions remained approximately $53.1 million in the U.S. and $6.3 million outside the U.S.
Material changes, outlook and risks
- Management attributed consolidated sales growth to 2.1% organic growth, including a 0.1% favorable foreign-exchange impact, and 1.3% acquisition growth. Industrial organic growth was 4.5%. Consumer organic sales declined 2.0%, partly because unusually strong prior-year launch and distribution-loading sales did not repeat.
- Gross margin contracted 0.7 percentage points, primarily due to product mix and, to a lesser extent, raw-material inflation. SG&A included $5.6 million of higher legal and professional expense related to the SEC/audit committee review, proposed SPHC settlement, and Delaware unclaimed-property review.
- No specific earnings or sales guidance was provided. Management said current capacity, moderate plant modifications, additional shifts, acquisition capacity and planned higher capital spending were expected to support anticipated fiscal 2015 demand.
- Asbestos proceedings: RPM had an agreement in principle to resolve present and future asbestos personal-injury claims involving Bondex, SPHC and related entities, including Republic and NMBFiL. The proposed trust funding includes an initial $450 million in cash and/or promissory notes, followed by $102.5 million, $120 million and $125 million by the second, third and fourth anniversaries of the plan’s effective date, payable in cash, RPM stock or a combination. A plan was filed September 26, 2014, after quarter-end, and required claimant and court approval. RPM had accrued no trust-funding amount at August 31; confirmation was not assured. Failure to confirm could leave liabilities uncertain and materially affect financial position, cash flows or results.
- Other legal matters: The SEC notified RPM in June 2014 of a formal investigation into the timing of disclosure and accrual of the prior GSA/DOJ matter; RPM said it was cooperating and could not predict the outcome or quantify any impact. It expected about $2.1 million more in related legal and other costs. Two Rust-Oleum deck-coating complaints sought class certification; outcomes could not be predicted. Environmental proceedings were described as not expected to be material.
- Other principal risks identified include raw-material prices and availability, weather-driven demand, economic conditions, interest and foreign-exchange rates, acquisitions, litigation and adequacy of contingent reserves, and the SPHC bankruptcy process. RPM noted seasonal variability, with stronger results typically in the first, second and fourth fiscal quarters.
Most important facts for investors to verify
- Progress, approval conditions, timing and ultimate funding obligations under the asbestos trust plan, and whether any amount should be accrued as circumstances develop.
- Developments and potential financial consequences of the SEC investigation concerning GSA-related disclosure and loss-reserve timing.
- Whether consumer-segment sales and profitability recover, and whether gross-margin pressure from product mix and raw materials persists.
- Cash conversion and working-capital trends, especially receivables, inventory and payable timing, alongside acquisition-related debt growth and covenant headroom.
- Whether the stated fiscal 2015 capacity and capital-spending plans translate into demand growth and improved earnings; the filing gives no numerical earnings guidance.