RPM International Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2013, ended February 28, 2013; comparisons are with the periods ended February 29, 2012. The filing is dated April 4, 2013. RPM manufactures and sells specialty coatings, paints, roofing systems, sealants, adhesives, and related products through Industrial and Consumer segments. Its business is seasonal and weather-dependent, with historically weaker results in the December–February quarter.
Financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $843.7 million, up 9.1% | $2,907.9 million, up 8.7% |
| Gross margin | 40.7%, versus 39.2% | 41.4%, versus 40.4% |
| Income (loss) before taxes | $(62.8) million, versus $11.4 million | $80.3 million, versus $206.3 million |
| Net income (loss) attributable to RPM shareholders | $(42.4) million, versus $6.6 million | $33.2 million, versus $133.4 million |
| Diluted earnings (loss) per share | $(0.33), versus $0.05 | $0.25, versus $1.02 |
| Cash from operating activities | Not separately provided | $170.9 million, versus $153.5 million |
- Quarterly sales growth included 1.9% organic growth and approximately 7.2% contribution from six acquisitions; nine-month growth included 1.5% organic growth and approximately 7.2% from acquisitions. Nine-month organic growth was partly offset by unfavorable foreign exchange.
- Quarterly Industrial sales rose 6.1% to $532.3 million; Consumer sales rose 14.6% to $311.4 million. Consumer pretax income increased, while Industrial recorded a pretax loss, primarily reflecting the GSA-related accrual.
- Quarterly SG&A was 37.7% of sales, versus 35.9%; for nine months, 32.8%, versus 31.1%. Interest expense was $58.8 million for nine months, up from $53.6 million.
- Cash and cash equivalents were $247.1 million at February 28, down from $316.0 million at May 31, 2012. Current assets were $1.75 billion and current liabilities $731.0 million.
- Long-term debt, including current maturities, totaled $1.396 billion, compared with $1.116 billion at May 31, 2012. RPM classified $200 million due within a year as long-term, citing intent and ability to refinance through its $600 million five-year revolver.
Material changes and unusual items
- A $68.8 million estimated loss contingency for an investigation of Building Solutions Group roofing contracts with the U.S. General Services Administration (GSA) was recorded in the quarter. The matter concerns contract pricing terms; settlement discussions with the Department of Justice and GSA were ongoing, and the actual loss could differ from the accrual and remains subject to approval.
- RPM recorded approximately $51.1 million of impairment and related losses on its Kemrock investment during the first nine months, including write-downs of its equity investment and convertible feature. Kemrock faced declining sales and earnings, liquidity and lending difficulties, and adverse currency movements; its stock price fell sharply.
- A Brazil operations repositioning and subsidiary liquidation resulted in a $6.1 million loss in the quarter. Earlier in the year, roofing contract overruns, including a Mumbai airport project, led to charges and exit costs; management said it did not anticipate additional losses on that project.
- Acquisition spending was $397.0 million net of cash acquired during the nine months. Recent acquisitions included Kirker Enterprises and Synta; preliminary purchase accounting included $160.9 million of goodwill and $103.3 million of other intangible assets, with valuations still in progress.
Outlook, risks, and contingencies
- The filing gives no specific consolidated earnings or sales guidance. Management expected capital spending to remain above depreciation for the rest of fiscal 2013 and said existing capacity, modifications, and acquired capacity were expected to support anticipated demand.
- Management said warranty expense could fluctuate but was likely to decline gradually over the next few years. Pension expense may fluctuate with investment performance and interest rates.
- Asbestos-related proceedings involving deconsolidated SPHC and Bondex remained unresolved. A bankruptcy-court trial to estimate liabilities had concluded, with an opinion expected by the end of May 2013 and subject to appeal; the outcome and ultimate resolution could not be predicted.
- Other stated risks include raw-material and transportation costs, economic conditions, foreign exchange and international operations, acquisitions, litigation and environmental exposures, reserve adequacy, pension assumptions, and investment-market declines. About 83% of consolidated cash was held at foreign subsidiaries and considered permanently reinvested.
Most important facts for investors to verify
- Developments in the GSA/DOJ investigation, including whether the $68.8 million accrual adequately reflects the eventual settlement.
- Industrial segment earnings excluding the GSA accrual, Brazil repositioning loss, and roofing-contract charges; and performance of the Consumer segment.
- Whether Kemrock-related exposure is fully impaired and whether the remaining loan balance will be repaid in cash or goods and materials as anticipated.
- Debt maturities, revolver availability and covenants, and liquidity given acquisition spending and the increase in borrowings.
- Final acquisition purchase-price allocations and any resulting changes to goodwill, intangible assets, or contingent consideration.
- The status and potential financial impact of SPHC/Bondex asbestos proceedings and associated intercompany claims.