RPM International Inc. — Form 10-Q Summary
Business context and period. This filing covers the fiscal second quarter and six months ended November 30, 2019. RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants, adhesives and related products. Its four reportable segments are Construction Products Group (CPG), Performance Coatings Group (PCG), Consumer and Specialty. Results are seasonal and weather-sensitive; management says the first, second and fourth fiscal quarters are historically stronger than the third.
Key financial results
| Metric | Three months ended Nov. 30 | Six months ended Nov. 30 |
|---|---|---|
| Net sales | $1,401.3 million, up 2.8% year over year | $2,874.1 million, up 1.8% |
| Gross margin | 37.8%, versus 36.2% | 38.4%, versus 37.0% |
| Income before taxes | $101.8 million, versus $66.6 million | $244.6 million, versus $158.5 million |
| Net income attributable to RPM shareholders | $77.0 million, versus $49.2 million | $183.2 million, versus $119.0 million |
| Diluted EPS | $0.59, versus $0.37 | $1.41, versus $0.89 |
| Operating cash flow | Not separately reported for the quarter | $300.2 million, versus $148.3 million |
Amounts are in U.S. dollars. Comparative gross margin and SG&A figures were retrospectively reclassified because shipping and handling costs moved from SG&A to cost of sales; this accounting change did not affect pretax income, net income or EPS. Second-quarter organic sales increased 3.5%, while acquisitions added 0.6% and foreign exchange reduced sales 1.3%. For the first half, acquisitions added 1.5%, but organic sales declined 1.6% and foreign exchange reduced sales 1.3%.
Segment performance
- CPG: Second-quarter sales rose 6.9%; pretax income was $57.1 million versus $35.4 million. Growth and profit reflected higher volume, pricing, restructuring savings and acquisitions.
- PCG: Sales increased 0.3%; pretax income was $33.3 million versus $22.3 million. Management cited pricing, savings and improved mix, partly offset by foreign exchange and weakness in certain markets.
- Consumer: Sales rose 6.0%, but pretax income fell to $34.5 million from $41.8 million. Costs included a $6.9 million charge for prepaid assets related to a discontinued OEM-targeted product line, as well as inventory-related charges.
- Specialty: Sales declined 11.1% and pretax income fell to $18.8 million from $26.1 million. The comparison was affected by prior-year disaster-related demand at restoration and fluorescent-pigment businesses; OEM-related sales were also soft.
Cash, debt and liquidity
- Cash and cash equivalents were $208.2 million at November 30, 2019, versus $223.2 million at May 31, 2019. Total debt, including current maturities, was $2.523 billion, versus $2.526 billion. The company used its revolving facility to repay $450 million of notes that matured in October 2019.
- Available liquidity, including cash and committed credit facilities, was $822.0 million. Revolver availability was $513.8 million; the company also had $100 million outstanding under its $200 million accounts-receivable program.
- RPM reported compliance with its credit-facility covenants: leverage ratio of 2.93 to 1 against a maximum of 3.75 to 1, and interest coverage of 7.59 to 1 against a 3.50-to-1 minimum.
- First-half operating cash flow rose to $300.2 million, supported in part by working-capital changes, including lower receivables. Management attributed a substantial portion of the receivables cash-flow improvement to receipts shifted from fiscal 2019’s fourth quarter into fiscal 2020’s first quarter. Capital expenditures were $71.4 million; acquisition spending, net of cash acquired, was $36.3 million.
- Financing cash outflows included $92.0 million in dividends and $100.0 million in share repurchases during the first half. No shares were repurchased under the program during the second quarter.
Changes, outlook and notable items
- 2020 MAP to Growth restructuring: The multi-year program targets simplification, facility consolidation and cost savings. RPM reported $11.4 million of restructuring charges in the first half and estimated $32.2 million of further charges, with most activity expected to finish by the end of calendar 2020. Management targets approximately $290 million of annualized pretax savings and $230 million of working-capital improvement. It also projected fiscal 2021 operating cash flow of approximately $872 million, assuming 3% organic growth and $150–$200 million of annual acquisitions. These are management targets and depend on assumptions; the plan’s scope and costs may change.
- To date, the plan has included the closure or planned closure of 18 plants and 23 warehouses. Management said it has broadened the initiative to include possible additional plant consolidations, outsourcing and G&A changes; costs for these added actions were not finalized.
- Second-quarter investment income included $6.9 million of net gains on marketable securities, compared with a $7.0 million net investment expense in the prior-year quarter. The first-half comparison was $14.2 million of investment income versus $4.6 million of expense. These gains materially contributed to the improvement in reported pretax results.
- Management cited pricing and restructuring savings as drivers of higher gross margins. For the first half, labor inflation, product mix, raw-material costs and supply-chain challenges partly offset those gains. Tariffs, including U.S. steel tariffs affecting cans and packaging, were identified as cost risks.
- Other risks and uncertainties include foreign exchange, economic conditions, Brexit-related softness, acquisition and divestiture execution, raw-material availability and cost, and the timing and realization of restructuring savings. The filing does not provide formal full-year earnings or sales guidance.
- Legal and contingencies: The SEC enforcement action concerning fiscal 2013 disclosure and loss-reserve timing remained pending; RPM said it would contest the allegations. The company accrued a loss at the low end of an estimated range, but the filing does not provide a clear dollar amount. A related derivative action is stayed. After quarter-end, Carboline agreed in principle to a $1.3 million settlement concerning the Lammers Barrel Superfund Site, subject to approval. A New Jersey environmental notice proposed a penalty of approximately $192,000. RPM also cautioned that future warranty claims could exceed recorded liabilities.
Most important facts for investors to verify
- How much of earnings growth is repeatable operating improvement versus marketable-security gains, favorable tax adjustments and other unusual items.
- Whether MAP to Growth savings, working-capital improvements and the fiscal 2021 cash-flow target are achieved, and whether additional restructuring costs arise.
- Cash-flow quality: the effect of shifted customer receipts, receivables, inventory and payable timing on first-half operating cash flow.
- Debt and liquidity trends, covenant headroom, and the company’s capacity to fund dividends, repurchases, acquisitions and capital spending.
- Developments in the SEC action, environmental matters and product-warranty exposures, including any changes to accruals or potential costs.