RPM International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2019 (fiscal 2019 third quarter; unaudited). The request metadata says “2018 Q3,” but the filing covers fiscal 2019 Q3. RPM makes specialty paints, coatings, roofing systems, sealants and adhesives. Its business is seasonal, with the December–February quarter typically weaker.
Financial performance
| Metric | Three months ended Feb. 28 | Nine months ended Feb. 28 |
|---|---|---|
| Net sales | $1,140.6 million, up 3.4% from $1,102.7 million | $3,963.2 million, up 5.3% from $3,763.5 million |
| Gross profit / margin | $446.1 million / 39.1%, versus $439.5 million / 39.9% | $1,578.2 million / 39.8%, versus $1,562.5 million / 41.5% |
| Income before taxes | $4.5 million, versus $34.7 million | $163.0 million, versus $299.2 million |
| Net income | $14.5 million, versus $40.6 million | $133.9 million, versus $253.3 million |
| Net income attributable to RPM shareholders | $14.2 million; diluted EPS $0.11, versus $40.2 million and $0.30 | $133.2 million; diluted EPS $1.00, versus $252.1 million and $1.87 |
| Operating cash flow | Not separately presented for the quarter | $145.5 million, versus $140.7 million |
Quarter sales growth included 2.1% from acquisitions and 4.3% organic growth, partly offset by 3.0% unfavorable foreign exchange. Nine-month growth included 2.1% from acquisitions and 5.1% organic growth, partly offset by 1.9% unfavorable foreign exchange. Higher raw-material costs, restructuring-related inventory charges and unfavorable product mix weighed on gross margin; higher costs and restructuring also pressured operating results.
For the quarter, segment sales were $580.9 million Industrial, $385.0 million Consumer and $174.7 million Specialty. Segment income before taxes was $11.4 million, $23.2 million and $17.1 million, respectively. For the nine months, segment sales were $2,080.8 million, $1,302.8 million and $579.6 million, respectively; segment pretax income was $134.8 million, $115.7 million and $74.9 million.
Balance sheet, debt and liquidity
- At February 28, 2019, cash and cash equivalents were $195.2 million, total debt was $2.524 billion, and stockholders’ equity was $1.439 billion. Debt-to-capital was 63.7%, compared with 57.1% at May 31, 2018.
- Current assets were $2.300 billion and current liabilities $1.270 billion. Current debt was $453.5 million, including approximately $451.1 million of 6.125% senior notes due October 2019.
- Available liquidity, including cash and committed credit facilities, was $1.2 billion. The $1.3 billion revolving facility had $949.4 million available; RPM reported compliance with its financial covenants, with leverage of 3.36x and interest coverage of 7.55x.
- The accounts receivable securitization program had $90 million outstanding against $150 million of availability at period-end.
- During the nine months, RPM spent $84.5 million on capital expenditures, paid $167.7 million for acquisitions, paid $135.5 million in dividends and used $191.1 million for share repurchases and shares returned for taxes. Cash declined by $49.3 million from the fiscal-year opening balance.
Material changes, outlook and risks
- Restructuring: The multi-year 2020 Margin Acceleration Plan (“2020 MAP to Growth”) recorded $36.5 million of charges in the first nine months and $8.7 million in Q3. RPM expects approximately $14.4 million of additional charges under the currently estimated plan, with most activities targeted for completion by the end of calendar 2020. It expects approximately $290 million of annualized pretax savings and $30 million of working-capital improvement. Management estimated fiscal 2021 operating cash flow of approximately $872 million, assuming 3% organic growth and $150–$200 million of annual acquisitions. The plan’s scope and costs may change; additional potential closures, outsourcing and G&A consolidation costs are not yet finalized.
- Cost pressures: Management cited rising raw-material prices, petrochemical costs, global demand and trade duties, including U.S. steel tariffs that may raise can and packaging costs. Price increases partially offset raw-material inflation.
- Tax and unusual items: Q3 included a $12.7 million net discrete tax benefit, including an $8.1 million benefit from completing accounting for the Tax Cuts and Jobs Act and releases of uncertain-tax-position reserves. The tax benefit substantially affected the quarter’s reported net income given low pretax earnings. Nine-month investment income was also lower year over year, including $6.5 million of net losses on marketable securities versus $6.8 million of net gains in the prior-year period. RPM recorded a $3.1 million loss related to redemption of its 2.25% convertible notes in November 2018.
- Financing and capital returns: RPM issued $350 million of 4.550% notes due 2029 in February 2019, using proceeds partly to repay revolving-credit borrowings. It redeemed $205 million of convertible notes in November 2018, principally for cash. RPM’s stated goal is to return $1.5 billion to shareholders through dividends and repurchases by May 31, 2021; it repurchased $173.2 million of shares in the first nine months.
- Contingencies: An SEC enforcement action concerning fiscal 2013 disclosure and loss-reserve matters remained in discovery. RPM disputes the allegations, intends to contest them, and says it accrued the low end of its estimated loss range; it states no amount in the range would materially affect consolidated financial condition, results or cash flows. The action could entail sanctions, costs and management distraction. A subsidiary agreed to a $6.5 million settlement in the quarter ended November 30, 2018. Separately, a March 2019 EPA agreement included a $154,220 penalty.
- Goodwill and other risks: Interim impairment tests found no impairment, but Construction Products Group–Europe had only approximately 9% excess fair value over carrying value on about $125 million of goodwill. RPM warned that delayed European recovery or operational improvements could lead to impairment. Warranty claims, environmental matters, foreign exchange, interest rates and acquisition execution are also relevant risks.
- Guidance: The filing does not provide a clear full-year revenue or EPS forecast. The cash-flow and savings estimates above are plan targets based on stated assumptions, not unconditional guidance.
Most important facts for investors to verify
- Whether organic growth, pricing and productivity can offset raw-material inflation and foreign-exchange headwinds, and whether margins stabilize.
- Actual restructuring costs, timing and realized savings against the $290 million annualized pretax target, including costs from expanded plan activities.
- Funding and repayment plans for the $451.1 million of notes due in October 2019, covenant headroom and the effect of debt on liquidity and capital returns.
- The drivers of the sharp decline in pretax income and EPS, including restructuring, higher SG&A, investment losses and discrete tax benefits.
- Developments in the SEC litigation and any changes to accrued contingencies, as well as progress and impairment sensitivity at Construction Products Group–Europe.