RPM International Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2021, the three months ended August 31, 2020. Comparative figures are for the three months ended August 31, 2019. Financial statements are unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $1,606.7 million | $1,472.8 million | +9.1% |
| Gross profit / margin | $653.7 million / 40.7% | $574.8 million / 39.0% | Margin +170 bps |
| SG&A / sales | $396.0 million / 24.6% | $400.6 million / 27.2% | Expense down $4.6 million |
| Restructuring charges | $4.2 million | $6.6 million | Down $2.4 million |
| Income before taxes | $241.4 million | $142.8 million | +69.0% |
| Net income attributable to RPM | $180.6 million | $106.2 million | +70.0% |
| Diluted EPS | $1.39 | $0.82 | +$0.57 |
| Cash provided by operations | $318.1 million | $145.1 million | +$173.0 million |
| Capital expenditures | $41.5 million | $36.6 million | +$4.9 million |
Sales growth was 9.3% organic, supplemented by 0.5% from acquisitions and offset by 0.7% unfavorable currency. Higher selling prices, MAP to Growth savings, raw-material savings and volume growth contributed to gross-margin improvement. Lower interest expense ($21.7 million versus $28.3 million) also supported earnings.
Net investment income was $12.8 million versus $5.4 million, including an $11.8 million net gain on marketable securities versus $3.5 million in the prior-year quarter. This non-operating gain was a meaningful contributor to pretax income growth.
Segment results
| Segment | Sales | Year-over-year sales change | Income before taxes |
|---|---|---|---|
| Construction Products Group (CPG) | $547.7 million | +2.2% | $98.3 million |
| Performance Coatings Group (PCG) | $259.8 million | -12.6% | $28.5 million |
| Consumer | $641.2 million | +33.8% | $132.7 million |
| Specialty Products Group (SPG) | $158.0 million | -1.3% | $20.4 million |
Consumer’s strong DIY demand, as people spent more time at home, drove much of the consolidated growth and profit improvement. PCG was affected by COVID-related limits on customer-site access and weaker energy-sector maintenance spending. SPG faced disruption in restoration and softness in certain product lines.
Balance sheet, debt and liquidity
- At August 31, 2020, cash and equivalents were $251.8 million; total debt, including current maturities, was $2.343 billion, down from $2.539 billion at May 31, 2020.
- Available liquidity, including cash and committed credit facilities, was reported at $1.50 billion. Revolving-credit borrowing availability was $1.04 billion.
- The company reported compliance with financial covenants: leverage ratio of 2.39x versus a maximum of 3.75x, and interest-coverage ratio of 9.80x versus a minimum of 3.50x.
- Cash dividends paid were $46.6 million, or $0.36 per share. The company suspended its share-repurchase program amid COVID-19 uncertainty; no program repurchases were made in the quarter.
Operating cash flow rose substantially, but comparisons reflect working-capital timing and temporary government tax-payment deferrals. The company deferred an additional $14.8 million of government payments during the quarter. Other accrued liabilities increased by $109.4 million; management also cited inventory and payable timing as factors affecting cash flow.
Outlook, management commentary and risks
- Management expected consolidated sales growth in the low- to mid-single digits, while noting that the duration and scope of COVID-19 and its financial effects could not be reliably predicted and could be material.
- COVID-19 had mixed effects across businesses. Risks cited include customer operations and facility closures, continued DIY demand, energy-market weakness and maintenance spending, and supply constraints or cost pressure for raw materials and packaging.
- MAP to Growth implementation was delayed beyond the original December 31, 2020 target. RPM expected approximately $18.6 million of additional restructuring charges and stated it expected to achieve approximately $290 million of annualized pretax savings and make substantial progress toward its $230 million working-capital improvement goal by May 31, 2021.
- Through the balance-sheet date, the plan had completed or was in the process of completing closure of 23 plants and 26 warehouses. The plan’s scope and total costs remain subject to change.
- On September 1, 2020, after quarter-end, RPM acquired Ali Industries, a manufacturer of sandpaper and abrasives with approximately $75 million in annual sales, for its Consumer segment.
- A long-running SEC enforcement action concerning fiscal 2013 disclosure and loss-reserve timing remained pending; summary-judgment briefing was due to conclude in April 2021. RPM said it would contest the allegations and had accrued a loss at the low end of its estimated range, which it said would not materially affect consolidated results, financial condition or cash flows. A related shareholder derivative action is stayed.
Most important facts for investors to verify
- Whether Consumer demand remains strong and whether weaker PCG and SPG markets recover as COVID-related restrictions and energy-sector conditions evolve.
- How much earnings growth is supported by recurring operations versus the quarter’s $11.8 million marketable-securities gain.
- The quality and sustainability of operating cash flow, including the effects of tax deferrals and working-capital timing.
- Progress toward MAP to Growth savings and working-capital targets, and the revised completion schedule and final restructuring costs.
- Debt, liquidity and covenant headroom after the Ali Industries acquisition and any subsequent capital allocation decisions.
- Developments and potential costs in the SEC matter, warranty claims, and other contingencies.