RPM International Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers RPM’s first quarter of fiscal 2011, the three months ended August 31, 2010, compared with the three months ended August 31, 2009. RPM manufactures and sells specialty paints, coatings, roofing systems, sealants and adhesives through Industrial and Consumer segments. The business is seasonal and weather-dependent; historically, the quarter ended August 31 is among its stronger quarters.
Financial results
| Metric | Q1 FY2011 | Q1 FY2010 |
|---|---|---|
| Net sales | $894.8 million | $916.0 million |
| Gross profit / margin | $375.4 million / 42.0% | $393.8 million / 43.0% |
| Income before income taxes | $107.9 million | $109.0 million |
| Net income | $75.0 million | $73.1 million |
| Net income attributable to RPM shareholders | $69.0 million | $73.0 million |
| Diluted EPS | $0.53 | $0.57 |
| Cash from operating activities | $41.1 million | $52.1 million |
- Reported sales declined 2.3%. However, the comparison is distorted by SPHC and Bondex, which were deconsolidated on May 31, 2010. Against prior-year sales adjusted for that change, current-quarter sales grew 3.6% organically; acquisitions contributed a further 2.5%.
- Industrial sales were $602.3 million, down 3.5% reported but up 5.8% organically against the adjusted prior-year base. Consumer sales were $292.5 million, approximately flat reported.
- Gross margin fell to 42.0% from 43.0% reported (43.2% on the adjusted prior-year sales base). Management cited higher raw-material costs, pricing, labor and overhead pressures, and product mix. Consolidated SG&A declined to 28.4% of sales from 29.8%.
- Interest expense rose to $16.0 million from $12.8 million, principally because average interest rates increased to 6.03% from 5.04%. The effective tax rate declined to 30.5% from 32.9%, including a one-time benefit from UK tax-law changes.
- Operating cash flow was $41.1 million. Inventory growth used $33.6 million of cash; receivables reductions provided $10.0 million. Capital expenditures were $3.3 million, versus depreciation of $13.3 million. Cash and cash equivalents were $219.3 million at quarter-end.
- Long-term debt, including current maturities, was $935.8 million. Available liquidity, including cash and committed credit availability, was $717.3 million. The reported debt-to-capital ratio was 45.0%, down from 46.2% at May 31, 2010. RPM reported compliance with its credit covenants; leverage, interest coverage and fixed-charge coverage ratios were 45.0%, 5.90:1 and 1.52:1, respectively.
Material changes, outlook and risks
- SPHC and Bondex filed for Chapter 11 on May 31, 2010 and were deconsolidated. Their asbestos-related liabilities are no longer on RPM’s consolidated balance sheet. The prior-year comparison includes SPHC results, so reported year-over-year changes are not directly comparable. RPM stated it believes it has no responsibility for SPHC and Bondex liabilities; bankruptcy proceedings and related claims remain subject to uncertain outcomes.
- Management attributed Industrial organic growth to improved economic conditions and cited new products, brand strength and international expansion. Consumer commentary emphasized retail penetration, product launches and existing repair-and-maintenance products.
- Management expected capital spending to remain below depreciation at least through fiscal 2011, citing available capacity and acquisitions. The filing provides no numeric revenue or earnings guidance.
- Raw-material availability and cost were significant current-quarter margin pressures. Other stated risks include economic and demand conditions, interest and foreign-exchange movements, acquisitions, litigation, environmental exposures, and the SPHC bankruptcy. RPM also cautioned that investment portfolio losses could lead to further impairments; at August 31, $26.2 million of securities were in an unrealized loss position, with $2.2 million of gross unrealized losses.
- RPM repurchased approximately 0.5 million shares for $8.6 million and declared dividends of $0.205 per share, compared with $0.200 a year earlier.
Important facts for investors to verify
- How the SPHC/Bondex bankruptcy, asbestos claims, insurance coverage litigation and any eventual reorganization affect RPM, intercompany balances and future obligations.
- Whether organic sales growth can be sustained and whether pricing, raw-material costs and labor costs allow gross margins to recover.
- Cash conversion and working-capital trends, particularly inventory, accounts payable and accrued compensation.
- Debt maturities, credit-facility availability and continued compliance with leverage, interest-coverage and fixed-charge covenants.
- Whether marketable securities incur additional impairments and whether pension, warranty, environmental or tax exposures exceed recorded estimates.