RPM International Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2015 (fiscal 2016). Unaudited consolidated financial statements. RPM manufactures specialty paints, protective coatings and roofing systems, sealants, adhesives and related products. The business is seasonal and weather-sensitive.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,156.0 million, up 7.9% | $2,398.5 million, up 5.4% |
| Gross profit margin | 42.7%, versus 42.4% | 42.8%, versus 42.3% |
| Income before income taxes | $120.3 million, versus $105.8 million | $262.5 million, versus $253.8 million |
| Net income attributable to RPM stockholders | $83.4 million, versus $69.8 million | $183.2 million, versus $168.8 million |
| Diluted EPS | $0.62, versus $0.52 | $1.36, versus $1.24 |
| Operating cash flow | Not separately stated | $167.1 million, versus $55.3 million |
| Capital expenditures | Not separately stated | $31.3 million, versus $26.5 million |
For the quarter, SG&A was $352.6 million, or 30.5% of sales, compared with 31.3% a year earlier. For the six months, SG&A was $725.4 million, or 30.2% of sales, versus 30.0%. Interest expense rose to $22.5 million for the quarter and $44.9 million for the half-year, mainly reflecting acquisition-related borrowing. The effective tax rate was 30.0% for the quarter and 29.7% for the six months.
Cash and cash equivalents were $190.6 million at November 30, 2015. Long-term debt, including its current portion, was $1,676.1 million. The debt-to-capital ratio was 56.5%, versus 56.2% at May 31, 2015. Total available liquidity was reported as $960.8 million; availability under the revolving credit facility was $725.2 million. The $200 million receivables facility had $155 million outstanding.
Material changes versus the prior comparable period
- Quarterly sales growth reflected 2.6% organic growth and 11.6% acquisition growth, offset by a 6.3% unfavorable foreign-exchange impact. First-half sales reflected 1.2% organic growth, 10.7% acquisition growth and a 6.5% unfavorable currency impact.
- Reconsolidation of SPHC and its subsidiaries, effective January 1, 2015, materially increased Specialty segment sales. Specialty quarterly sales rose to $186.7 million from $70.5 million; the filing attributes most of the increase to acquisitions, including SPHC.
- Industrial sales fell 5.8% in the quarter and 5.1% in the first half, principally because of foreign exchange; management also cited weaker energy-sector demand and a deteriorating Brazilian economy. Consumer sales rose 1.8% for the quarter but declined 3.6% for the half-year, with unseasonably rainy weather cited as a factor in the half-year decline.
- Operating cash flow improved substantially, helped by receivables collections and working-capital timing. Receivables provided $117.4 million of cash in the first half; inventory used $49.8 million.
- Foreign-currency translation reduced first-half other comprehensive income by $84.4 million. The second-quarter securities portfolio also recorded a $2.5 million other-than-temporary impairment.
Outlook, management commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management anticipated continued unfavorable foreign-exchange effects in the industrial segment, particularly in Brazil, and cited continued softness in energy-related sales. It planned increased fiscal 2016 capital spending, especially for overseas growth initiatives.
- Management adopted a split-discount-rate method for pension service and interest cost estimates. The change reduced estimated fiscal 2016 pension expense and increased reported net income by about $1.1 million for the quarter and $2.2 million for the first half, adding $0.01 and $0.02 to diluted EPS, respectively.
- RPM paid $450 million to an asbestos trust under the SPHC bankruptcy plan. Further contributions of $102.5 million, $120 million and $125 million are due by the second, third and fourth anniversaries of the plan’s effective date, respectively; RPM may pay in cash, stock or a combination. The filing reports $347.5 million of remaining trust-note payments in its contractual obligations table.
- The SEC investigation concerning prior-period disclosure and loss-reserve accruals continued. RPM and its General Counsel received Wells notices; the SEC staff preliminarily indicated it may recommend an enforcement action and a clawback claim relating to incentive compensation paid to the CEO and CFO. The staff did not indicate it intended to recommend charges against those officers. RPM made a Wells submission, intends to contest charges, and accrued a probable loss at the low end of an estimated range; no clear dollar amount for the accrual is provided.
- A class-action complaint concerning certain Rust-Oleum deck coatings is pending; RPM says it cannot predict the outcome or quantify potential impact. Environmental proceedings were described as not expected to materially affect results or financial condition. Warranty and product-liability outcomes remain subject to estimation risk.
- Management reversed $14.5 million of acquisition-related contingent consideration in the quarter because earnout targets were not expected to be met, citing delays that shifted anticipated orders into fiscal 2017. The prior-year quarter included a $17.0 million reversal. Such reversals benefited reported expenses.
- RPM reported compliance with its revolving-credit financial covenants: a 55.2% leverage ratio against a 65% maximum and interest coverage of 8.8x against a 3.5x minimum. It noted that facility funding depends on participating banks’ ability to meet their commitments.
Most important facts for investors to verify
- How much of sales and earnings growth reflects SPHC reconsolidation and other acquisitions versus sustainable organic growth, and how segment margins develop.
- The scale and duration of foreign-exchange, Brazilian economic and energy-sector pressures, along with consumer demand and weather effects.
- Cash conversion and working-capital trends, including whether receivables collections and inventory levels normalize.
- Debt repayment capacity, covenant headroom, future trust contributions and the cost and availability of credit facilities.
- Developments in the SEC investigation, potential sanctions or compensation clawback, the accrued loss estimate, and the Rust-Oleum litigation.
- Whether marketable-security losses deepen or persist and whether pension assumptions, warranty claims or other contingencies require revised estimates.