RPM International Inc. — Form 10-Q Summary
Business context and reporting period
RPM manufactures and sells specialty paints, coatings, roofing systems, sealants, adhesives and related products through industrial and consumer segments. This filing covers the three months ended August 31, 2012, the first quarter of fiscal 2013; comparisons are with the three months ended August 31, 2011 unless otherwise noted. Results are unaudited. The company notes that weather affects its business and that its first, second and fourth fiscal quarters historically tend to be stronger than its third.
Financial performance and liquidity
| Metric | Quarter ended Aug. 31, 2012 | Prior-year quarter |
|---|---|---|
| Net sales | $1,046.7 million | $985.9 million |
| Gross profit / margin | $433.9 million / 41.5% | $409.6 million / 41.5% |
| Income before income taxes | $72.1 million | $118.7 million |
| Net income | $37.9 million | $83.3 million |
| Net income attributable to RPM stockholders | $33.9 million | $76.8 million |
| Diluted EPS | $0.26 | $0.59 |
| Cash provided by operating activities | $17.7 million | $7.5 million |
Sales increased 6.2%; management attributed approximately 6.0% to acquisitions and 0.2% to organic growth. Organic volume rose 2.4%, pricing contributed about 2.0%, and foreign exchange reduced sales by about 4.2%. Industrial sales rose 5.4% to $703.3 million; consumer sales rose 7.7% to $343.4 million. Segment pretax income was $74.3 million for industrial, down from $91.5 million, and $58.8 million for consumer, up from $51.5 million.
SG&A increased to 29.7% of sales from 27.8%. The effective tax rate rose to 47.5% from 29.8%. At August 31, cash and cash equivalents were $257.4 million, total debt was $1,202.6 million, and total equity was $1,369.6 million. Cash declined $58.6 million during the quarter. Investing activities used $143.1 million, including $141.2 million for acquisitions; financing activities provided $56.6 million. Available liquidity, including cash and committed credit facilities, was $870.8 million. Debt-to-capital was 49.5%; the company reported compliance with credit covenants, with interest coverage of 6.79 to 1.
Material changes and unusual items
- RPM recorded approximately $42.5 million of after-tax losses tied to Kemrock investments: a $32.1 million impairment of its equity-method investment, an $8.2 million loss on the convertible-bond conversion option, and a $5.0 million loan write-down. The Kemrock share price fell from 531.0 rupees at May 31 to 116.6 rupees at August 31 amid deterioration in Indian markets and rupee depreciation.
- Industrial results included a $10.6 million roofing-division loss related to an unprofitable contract outside North America and contract exit costs. These charges reduced gross margin by approximately 40 basis points.
- Higher compensation, pension, distribution and acquisition-related expenses also weighed on earnings. Pension and postretirement benefit costs were $12.9 million versus $8.7 million.
- After quarter-end, RPM acquired Kirker Enterprises on September 5 and Synta on September 21, 2012. The filing reports annual sales in excess of $100 million for Kirker and expected annualized sales above $40 million for Synta.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management expected capital spending for the remainder of fiscal 2013 to begin exceeding depreciation and said existing capacity, acquisitions and planned spending were expected to support anticipated demand. Planned fiscal-year retirement-plan contributions remained approximately $38.2 million in total.
Key risks include raw-material costs and availability, foreign-exchange movements, economic conditions, acquisition execution, investment losses, pension funding, and legal and environmental exposures. The SPHC and Bondex Chapter 11 proceedings concerning asbestos claims remain unresolved; their duration and ultimate resolution are uncertain, and pre-petition intercompany amounts may not be recovered. RPM reported a $60,550 EPA penalty and a $95,000 environmental project commitment for a late Toxic Release Inventory filing at a subsidiary facility. The company stated that its disclosure controls were effective and that there were no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether Kemrock’s financial condition and valuation recover, and whether the remaining loan balance and convertible-bond investment can be recovered.
- Whether the roofing contract issues and associated exit costs are contained, and whether margins improve despite foreign exchange and input-cost pressures.
- Acquisition integration, funding and performance, including the post-quarter Kirker and Synta transactions.
- Cash availability and debt covenant headroom, particularly given foreign-held cash and the company’s stated intent to keep those funds invested abroad.
- Developments in the SPHC/Bondex bankruptcy, asbestos-related claims, insurance recovery and other contingent liabilities.