RPM International Inc. — Fiscal 2015 Second-Quarter 10-Q
Reporting period: Three and six months ended November 30, 2014; balance-sheet amounts are as of November 30, 2014, unless otherwise noted. RPM manufactures specialty paints, coatings, roofing systems, sealants and adhesives through industrial and consumer segments. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,071.1 million, flat year over year | $2,275.0 million, up 1.7% |
| Gross profit / margin | $453.9 million / 42.4%, versus 42.7% | $962.3 million / 42.3%, versus 42.8% |
| Income before income taxes | $105.8 million, versus $97.6 million | $253.8 million, versus $244.8 million |
| Net income attributable to RPM shareholders | $69.8 million, versus $63.6 million | $168.8 million, versus $166.7 million |
| Diluted EPS | $0.52, versus $0.48 | $1.24, versus $1.25 |
| Cash provided by operating activities | Not presented separately in the filing text | $55.3 million, versus $21.8 million |
- Quarterly SG&A was $334.9 million, or 31.3% of sales, versus $343.0 million, or 32.0%. A roughly $17.0 million reversal of acquisition contingent consideration obligations materially reduced current-quarter SG&A and supported earnings. The six-month reversal was $18.1 million.
- Quarterly net income included $4.1 million attributable to noncontrolling interests. The six-month effective tax rate was 29.6%, versus 28.4%; the quarter rate was 30.2%, versus 29.9%.
- Cash and cash equivalents were $296.5 million, down from $332.9 million at May 31, 2014. Total debt was $1,427.2 million, including $151.4 million current, compared with $1,351.6 million at May 31. Total debt exceeded cash by approximately $1,130.7 million.
- Working-capital movements were significant: receivables provided $44.6 million of cash, inventory used $41.4 million, and accounts payable decreased by $134.0 million. Days sales outstanding rose to 64.3 from 61.2 a year earlier; inventory days rose to 93.0 from 87.7.
- Available liquidity, including cash and committed facilities, was reported at $1.0 billion. Debt-to-capital was 50.7%, versus 49.4% at May 31; the company reported compliance with its credit-facility covenants.
Material changes and segment results
- Second-quarter industrial sales increased 1.4% to $718.3 million; consumer sales declined 2.8% to $352.8 million. For the first six months, industrial sales rose 3.6%, while consumer sales fell 1.7%.
- Industrial pretax income was $77.1 million for the quarter, down from $81.4 million; consumer pretax income rose to $61.6 million from $51.7 million, principally reflecting the contingent-consideration reversal. For six months, industrial pretax income was essentially flat at $179.6 million and consumer pretax income increased to $138.2 million.
- Gross margin pressure reflected unfavorable foreign exchange and product mix; the six-month comparison also included higher raw-material costs. Foreign-currency translation reduced other comprehensive income by $112.5 million in the first half and $91.2 million in the second quarter.
- Lower average interest rates reduced interest expense despite higher acquisition-related borrowings. Net investment income increased, including realized investment-sale gains of $5.3 million for the first half.
- Operating cash flow improved year over year, but remained below net income. Capital expenditures were $26.5 million; acquisitions used $33.4 million in cash during the first half.
Outlook, contingencies and unusual items
- No quantified earnings or sales guidance is provided in the filing text. Management said existing capacity and moderate plant changes should meet immediate needs, and expected added shifts, acquisition capacity and higher planned capital spending to support demand in fiscal 2015. RPM noted that its business is weather-dependent and historically has a weaker third fiscal quarter.
- Asbestos bankruptcy plan: After quarter-end, the plan was confirmed on December 10, 2014; the relevant entities emerged from bankruptcy effective December 23. The trust received $450 million in cash and three non-interest-bearing promissory notes. Further contributions of $102.5 million, $120 million and $125 million are scheduled by the second, third and fourth anniversaries of the effective date, respectively. No trust-funding amount was accrued at November 30 because approvals were then pending. RPM expected to reconsolidate the entities’ operating results for most of the second half of fiscal 2015.
- To help fund the future trust contributions, RPM concluded after quarter-end that $347.5 million of foreign earnings could be repatriated. It estimated a related deferred tax liability of $100 million to $110 million, expected to be recognized in fiscal third-quarter results. The final accounting impact, including any reconsolidation gain or loss, remained subject to determination.
- RPM entered into a new $800 million unsecured revolving credit facility after quarter-end, expiring December 5, 2019, with potential expansion to $1.0 billion. The facility may support general needs and obligations under the bankruptcy plan.
- The SEC was conducting a formal investigation into the timing of RPM’s disclosure and accrual of loss reserves related to the prior GSA/DOJ investigation; RPM said it was cooperating and could not predict the outcome or quantify any impact. RPM had paid $61.9 million to the GSA Office of Inspector General and expected about $1.5 million more in related legal and other costs.
- Other exposures include Rust-Oleum deck-coating class-action complaints, product warranty claims, environmental matters, tax examinations and unrecognized tax benefits. The filing states that outcomes of certain legal matters cannot be predicted or quantified. Management cautioned that raw-material prices, foreign exchange, interest rates, economic conditions, acquisitions and litigation could affect results.
- Other notable items: the company reversed contingent earnout liabilities after performance milestones were not met or were not expected to be met; its marketable securities had $1.9 million of gross unrealized losses at November 30, which management did not consider other-than-temporary. The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Fiscal third-quarter reporting of the $100 million to $110 million estimated tax charge, bankruptcy-plan funding obligations and reconsolidation accounting.
- Cash sources and timing for the scheduled $347.5 million of future trust contributions, and the effect on debt, liquidity and foreign-cash plans.
- How much of earnings growth depended on the $17.0 million quarterly contingent-consideration reversal, and underlying segment margins excluding that benefit.
- Resolution and potential financial consequences of the SEC investigation concerning GSA-related reserve disclosure and accrual timing.
- Whether consumer-segment sales weakness, gross-margin pressure, foreign-exchange effects and working-capital trends persist.