RPM

RPM International Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for RPM International Inc. for the quarterly and six-month periods ended November 30, 2009. RPM is a manufacturer and marketer of specialty paints, protective coatings, roofing systems, sealants, and adhesives. The company operates through two reportable segments: Industrial and Consumer. The company is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Consolidated net sales declined 3.5% ($31.3 million) for the quarter and 5.4% ($100.8 million) for the six months compared to the prior year. The Industrial segment saw a 6.0% quarterly decline due to volume drops in the commercial construction market, while the Consumer segment grew 3.3% quarterly.
• Profitability: Despite lower sales volumes, net income increased 34% for the quarter ($55.9 million vs. $41.7 million) and 16% for the six months ($128.9 million vs. $111.2 million). Gross profit margins improved significantly (42.3% vs. 40.1% quarterly) driven by lower raw material costs and prior pricing initiatives.
• Segment Performance: The Consumer segment's income before taxes more than doubled to $31.8 million from $14.5 million in the prior year quarter. The Industrial segment's income before taxes increased modestly to $73.9 million from $71.0 million.
• Debt Refinancing: On October 9, 2009, the company sold $300 million of 6.125% Notes due 2019. Proceeds were used to repay $163.7 million in unsecured notes and $120 million in short-term borrowings.

Guidance, Outlook, and Risks

• Outlook: Management expects the weak economic environment in domestic commercial construction to continue for the remainder of fiscal 2010 but anticipates more favorable comparisons in the Industrial segment in the second half of the fiscal year. Capital spending is expected to trail depreciation expense through the end of the fiscal year.
• Asbestos Litigation: The company faces significant contingent liabilities related to asbestos. As of November 30, 2009, there were 10,531 active cases. Total cash payments for asbestos cases were $37.5 million for the six months ended November 30, 2009. The company maintains a liability of approximately $452.8 million (current and long-term) but notes it is reasonably possible additional material liabilities could be incurred.
• EIFS Litigation: Subsidiary Dryvit is involved in litigation regarding exterior insulating finishing systems. A recent court ruling denied insurers' duty to pay defense costs under specific policies, potentially increasing the company's cost share.
• Market Risks: The company is exposed to raw material price volatility, interest rate fluctuations, and foreign currency exchange rates. The strengthening U.S. dollar negatively impacted foreign exchange results in the first six months.

Investor Verification Checklist

• Asbestos Liability Adequacy: Verify the sufficiency of the $452.8 million accrual given the increase in active cases to 10,531 and the volatility in settlement costs.
• Raw Material Cost Trends: Monitor whether the favorable raw material cost environment (which boosted margins by ~320 bps) persists or if costs rebound, impacting future gross margins.
• Industrial Segment Volume: Assess the trajectory of the domestic commercial construction market, which drove a 9.8% volume decline in the Industrial segment.
• Debt Covenants: Confirm continued compliance with the 3.50:1 interest coverage ratio and 55% leverage ratio covenants under the amended Credit Facility.
• Insurance Coverage Litigation: Track the outcome of the EIFS coverage litigation and asbestos insurance coverage disputes, as unfavorable rulings could materially increase out-of-pocket costs.