RPM International Inc. — Form 10-Q Summary
Business context and reporting period
RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants, adhesives and related products through Industrial and Consumer segments. This report covers the fiscal second quarter and six months ended November 30, 2011; comparisons are with the corresponding 2010 periods. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Nov. 30, 2011 | Six months ended Nov. 30, 2011 |
|---|---|---|
| Net sales | $916.1 million, up 10.9% | $1,902.0 million, up 10.5% |
| Gross margin | 40.3%, versus 41.1% | 40.9%, versus 41.5% |
| Income before taxes | $76.2 million, versus $77.3 million | $194.9 million, versus $185.2 million |
| Net income attributable to RPM shareholders | $49.9 million, versus $48.8 million | $126.7 million, versus $117.8 million |
| Diluted EPS | $0.38, unchanged | $0.97, versus $0.91 |
| Operating cash flow | Not separately reported in the supplied filing text | $110.0 million, versus $183.1 million |
Quarterly pretax margin declined to 8.3% from 9.4%, and shareholder net margin to 5.5% from 5.9%. For the first half, shareholder net margin was 6.7%, versus 6.8%. Quarterly organic sales growth was 7.9% (volume +5.1%, pricing +2.9%); acquisitions net of a divestiture contributed 3.0%. First-half organic growth was 8.6%, with acquisitions net of divestitures contributing 1.9%.
Industrial sales rose 10.1% in the quarter to $641.5 million; segment pretax income increased to $77.2 million from $67.7 million. Consumer sales rose 12.6% to $274.5 million, while segment pretax income decreased to $26.8 million from $27.4 million.
At November 30, cash and equivalents were $301.0 million; total debt, including current maturities, was $1,094.4 million. Available liquidity, including committed facilities, was $803.9 million. Debt-to-capital was 46.6%, versus 46.7% at May 31. Six-month capital expenditures were $18.4 million. Cash declined $134.1 million from the fiscal year-end balance, including the impact of acquisitions and adverse currency translation.
Material changes versus prior comparable periods
- Revenue grew, but higher raw-material costs reduced gross margins in both the quarter and first half.
- Quarterly pretax income was slightly lower despite higher sales. First-half pretax income and EPS increased.
- Operating cash flow fell by $73.1 million year over year, primarily reflecting less favorable working-capital and accrual movements.
- Quarterly other income included $5.5 million of equity earnings from unconsolidated affiliates, including $4.6 million recognized for prior periods following the change to equity-method accounting for Kemrock. RPM raised its Kemrock ownership to 23% in September 2011.
- Interest expense increased, reflecting acquisition-related borrowings and higher average interest rates. Corporate/other expenses also rose, including acquisition costs.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expected fiscal-year capital spending to begin exceeding depreciation and said existing capacity, acquisitions and additional production shifts should support anticipated demand.
- Management cited economic improvement in several industrial markets, new products, brand strength and international expansion. Consumer growth was supported by new product launches and broader retail-channel penetration.
- Risks include volatile and rising raw-material costs, demand and general economic conditions, foreign exchange, interest rates, acquisitions and divestitures, and access to financing. Pension expense and funding can vary with asset returns and interest rates.
- SPHC and Bondex remain in Chapter 11 proceedings related to asbestos claims. The proceedings’ duration and ultimate resolution are uncertain; RPM stated it believes it is not responsible for their liabilities. Access to SPHC cash flows is restricted. A related insurance-coverage appeal was exhausted.
- Warranty claims and environmental matters may exceed recorded reserves, although environmental proceedings were not expected to have a material adverse effect based on available information. Marketable securities had $2.7 million of unrealized losses; management reported intent and ability to hold them, but further impairment could affect results.
- RPM was in compliance with its credit-facility covenants at November 30; its reported interest-coverage ratio was 7.05 to 1. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and volume gains can offset raw-material inflation and restore gross margins.
- How much first-half earnings growth depended on Kemrock’s $4.6 million prior-period adjustment, and how Kemrock contributes in subsequent periods.
- Whether operating cash flow improves as working-capital outflows and payment timing normalize.
- Acquisition-related debt, liquidity availability and covenant headroom, including the reliability of bank funding commitments.
- Developments in the SPHC/Bondex bankruptcy and asbestos proceedings, and any effect on RPM despite the stated separation.
- Changes in marketable-security valuations, warranty or environmental exposures, tax assessments and pension contribution expectations.