RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2012 (FY2013); unaudited. The company makes specialty paints, coatings, roofing systems, sealants and related products, reported in Industrial and Consumer segments.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Six months ended Nov. 30, 2012 |
|---|---|---|
| Net sales | $1,017.4 million, up 11.1% | $2,064.1 million, up 8.5% |
| Gross profit / margin | $425.0 million / 41.8% (40.3% prior year) | $858.9 million / 41.6% (40.9% prior year) |
| Income before taxes | $71.0 million; 7.0% of sales | $143.1 million; 6.9% of sales |
| Net income attributable to RPM shareholders | $41.7 million; diluted EPS $0.31 | $75.6 million; diluted EPS $0.57 |
| Operating cash flow | Not separately presented | $127.6 million, versus $110.0 million |
Quarterly SG&A was 32.0% of sales, versus 30.8% a year earlier. For the six months, it was 30.8%, versus 29.2%. The quarterly dividend declared was $0.225 per share, compared with $0.215 in the prior-year quarter.
At November 30, cash and equivalents were $261.9 million; current assets were $1,798.5 million and current liabilities $698.6 million. Total debt, including current maturities, was $1,415.2 million, versus $1,115.5 million at May 31. The debt-to-capital ratio was 53.2%, compared with 48.5% at fiscal year-end. Available liquidity, including cash and committed credit facilities, was $962.0 million. The company reported compliance with credit-facility covenants; its leverage ratio was 53.4% against a 60% limit, and interest coverage was 6.88:1 against a 3.50:1 minimum.
Investing cash outflow was $433.8 million, including $396.8 million for acquisitions and $30.8 million of capital expenditures. Financing provided $239.5 million, including net proceeds from borrowing; cash declined by $54.0 million during the half-year.
Changes versus prior comparable periods
- Quarterly sales growth reflected 2.7% organic growth and an 8.4% contribution from acquisitions. Six-month sales growth reflected 1.3% organic growth and a 7.2% acquisition contribution.
- Quarterly shareholder net income fell from $49.9 million to $41.7 million, and diluted EPS declined from $0.38 to $0.31. For the first half, shareholder net income fell from $126.7 million to $75.6 million and diluted EPS from $0.97 to $0.57.
- Consumer segment pretax income increased to $38.6 million for the quarter and $97.3 million for the half-year. Industrial segment pretax income was $75.5 million for the quarter and $149.8 million for the half-year, down from the corresponding prior-year periods.
- Management attributed the first-half earnings decline principally to $51.1 million of after-tax Kemrock-related write-downs. Other pressures included higher compensation, distribution, legal and acquisition-related expenses, and a $10.6 million first-quarter charge related to an unprofitable roofing contract and exit costs.
Outlook, unusual items and risks
- RPM acquired Kirker Enterprises and Synta in September 2012; the filing also cites eight acquisitions over the preceding year. Preliminary goodwill and other intangible assets for the two acquisitions were approximately $160.9 million and $103.3 million, respectively; purchase accounting remained in progress.
- During the quarter, RPM issued $300 million of 3.450% notes due 2022; approximately $297.7 million of net proceeds repaid revolving-credit borrowings. Capital spending was expected to remain above depreciation for the rest of FY2013. Management said warranty expense could fluctuate but would likely decline gradually over coming years.
- Kemrock’s share price fell from 531.0 rupees at May 31 to 56.70 rupees at November 30 amid deterioration in Indian markets and rupee depreciation. RPM recorded a $42.2 million first-half impairment on its equity-method investment, a $9.0 million loss on the convertible-bond conversion option, and a $5.0 million loan-loss charge. The Kemrock equity investment’s carrying value was zero at November 30.
- Approximately 91% of consolidated cash was held at foreign subsidiaries and considered permanently reinvested; repatriation could be subject to restrictions and taxes. Other identified risks include raw-material costs, foreign exchange, acquisition execution, pension assumptions and contingent liabilities.
- SPHC and Bondex remain in Chapter 11 proceedings intended to resolve asbestos claims. The duration and outcome are uncertain; the filing states that related claims are generally stayed and no ultimate resolution can yet be predicted. Management said environmental proceedings were not expected to materially affect results or financial condition.
- The six-month effective tax rate rose to 41.3% from 29.6%, with valuation allowances and other tax factors contributing. RPM reported $7.4 million of unrecognized tax benefits and an ongoing IRS examination; it did not expect the examination’s final resolution to have a material financial-statement impact.
Most important facts for investors to verify
- Whether sales growth and margin performance persist after separating organic growth, acquisitions, pricing and foreign-exchange effects.
- The full financial impact and recoverability of remaining Kemrock-related exposures, including the loan, convertible bonds and any further impairment risk.
- Acquisition integration, final purchase-price allocations and the effect of additional borrowing on leverage and interest costs.
- Compliance with debt covenants and access to committed credit facilities, particularly as leverage increased.
- Developments in the SPHC/Bondex asbestos bankruptcy proceedings, tax examinations and other contingent liabilities.