RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 29, 2016, compared primarily with the periods ended February 28, 2015. Although the request metadata says “2015 Q3,” the filing is for fiscal 2016 Q3. RPM manufactures and sells specialty paints, coatings, roofing systems, sealants, adhesives and related products. The third quarter is seasonally weaker for the company.
Key financial metrics
Amounts below are in millions of U.S. dollars, except per-share data and ratios.
| Metric | Three months ended Feb. 29, 2016 | Three months ended Feb. 28, 2015 | Nine months ended Feb. 29, 2016 | Nine months ended Feb. 28, 2015 |
|---|---|---|---|---|
| Net sales | $988.6 | $946.4 | $3,387.1 | $3,221.4 |
| Gross profit / margin | $413.0 / 41.8% | $379.7 / 40.1% | $1,439.9 / 42.5% | $1,342.1 / 41.7% |
| Income before income taxes | $21.9 | $20.4 | $284.4 | $274.3 |
| Net income (loss) attributable to RPM shareholders | $18.6 | $(57.3) | $201.8 | $111.5 |
| Diluted EPS | $0.14 | $(0.44) | $1.50 | $0.84 |
| Cash dividends declared per share | $0.275 | $0.260 | $0.810 | $0.760 |
- Cash flow: Operating activities provided $223.8 million in the first nine months, versus $24.1 million a year earlier. Capital expenditures were $54.8 million; operating cash flow less capital expenditures was approximately $169.0 million.
- Liquidity: Cash and cash equivalents were $220.7 million at February 29, 2016, versus $174.7 million at May 31, 2015. Available liquidity, including cash and committed credit facilities, was $864.5 million. Revolver availability was $551.8 million; the accounts-receivable program had $58.0 million outstanding.
- Debt and leverage: Total debt, including current maturities, was $1,753.2 million, compared with $1,656.1 million at May 31, 2015. Debt-to-capital was 58.6%, versus 56.2%. RPM reported compliance with its credit covenants; its leverage covenant measure was 57.3% against a 65% limit, and interest coverage was 8.8x against a 3.5x minimum.
Material changes versus the comparable period
- Quarterly sales rose 4.5%; management attributed growth to 3.9% organic growth and acquisitions, partly offset by a 4.2% unfavorable currency effect. Nine-month sales increased 5.1%, with 2.0% organic growth and 8.9% acquisition growth, partly offset by a 5.8% currency impact.
- Gross margin improved in both periods, supported by lower manufacturing costs and, in the quarterly comparison, the absence of $5.0 million of prior-year inventory step-up expense related to SPHC. Foreign exchange was a partial offset.
- Quarterly shareholder earnings turned positive from a loss, but the comparison is significantly affected by the prior-year $106.2 million deferred tax charge for potentially repatriated foreign earnings. The nine-month earnings increase also reflects this prior-year tax charge and SPHC consolidation effects.
- SPHC businesses were reconsolidated beginning January 1, 2015 and are included in the Specialty segment. The filing says prior segment results were recast, but acquisition-related comparisons still reflect the timing of reconsolidation.
- Industrial sales declined 3.1% in the quarter and 4.6% year to date, with currency and weaker energy-sector demand weighing on results. Specialty sales rose 37.5% in the quarter, largely from acquisitions and SPHC, with 7.5% organic growth. Consumer sales increased 3.9% in the quarter, but declined 1.4% year to date, reflecting currency, weather and softness in nail enamel.
- Accumulated other comprehensive loss increased to $497.8 million from $394.1 million at May 31, 2015, chiefly reflecting foreign currency translation losses and unrealized investment losses.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numeric sales or earnings guidance. Management expected unfavorable foreign-exchange effects to continue through the remainder of fiscal 2016, particularly in Industrial. It planned increased capital spending to support internal growth, especially overseas, and said existing capacity and planned additions were expected to meet anticipated demand.
- Operating items: Quarterly SG&A included higher warranty expense, severance costs and, in Consumer, advertising. Management attributed the warranty increase principally to specific claims and customer goodwill and did not expect that increase to recur. A change to the pension-cost estimation method increased nine-month net income by approximately $3.3 million and EPS by $0.02; management described it as a change in estimate, applied prospectively.
- SPHC asbestos trust: The bankruptcy plan requires total future trust contributions of $347.5 million under a promissory note: $102.5 million by the second anniversary of the plan’s effective date, $120.0 million by the third, and $125.0 million by the fourth. The note’s net present value was $333.2 million at February 29, 2016. The trust assumed the covered asbestos claims under the plan.
- SEC investigation: The SEC’s formal investigation concerns timing of fiscal 2013 disclosures and loss-reserve accruals relating to DOJ/GSA matters. RPM and its General Counsel received Wells notices; the SEC staff preliminarily indicated it may recommend an enforcement action and a clawback claim for incentive compensation paid to the CEO and CFO, but did not indicate it intended to recommend charges against those officers. RPM said it would contest any charges. The company accrued a loss at the low end of its estimated range and stated that no amount in the range would materially affect consolidated financial condition, results or cash flows.
- Other contingencies and risks: A Rust-Oleum deck-coating class action is pending; RPM could not predict its outcome or quantify any effect. An environmental notice to Rust-Oleum estimated potential fees and penalties of $0.2–$0.35 million, potentially offset in whole or in part by prior overpayments. Product warranties, environmental matters, marketable-security losses, pension assumptions, foreign exchange, raw-material costs and acquisition execution remain risks. Marketable securities had $17.0 million of pretax unrealized losses at quarter-end; RPM recorded $3.3 million of other-than-temporary investment impairments year to date.
- Foreign cash and taxes: Approximately $198.0 million of cash was held by foreign subsidiaries. RPM estimated $356.5 million of foreign earnings could be repatriated, with a related deferred tax liability of $91.6 million; no U.S. or withholding tax provision was made for remaining earnings considered permanently reinvested.
Most important facts for investors to verify
- Confirm the filing period: fiscal Q3 ended February 29, 2016, notwithstanding the “2015 Q3” request metadata.
- Assess how much reported sales and earnings growth reflects organic performance versus SPHC reconsolidation, acquisitions, foreign exchange and the unusually large prior-year tax charge.
- Track Industrial’s energy-market exposure and currency headwinds, Consumer’s nail-enamel performance, and whether Kirker’s delayed business returns as expected; management warned that continued shortfalls could lead to impairment testing outcomes.
- Review debt maturities, interest costs, covenant headroom and the scheduled $347.5 million of future asbestos-trust payments alongside pension contributions and dividends.
- Monitor the SEC investigation and the Rust-Oleum class action, including developments that could change the company’s loss estimates or create additional costs.
- Evaluate whether unrealized investment losses persist or deepen enough to require further impairment charges.