RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2014; comparisons are to the periods ended February 28, 2013. The filing’s third quarter is seasonally weaker, and weather can materially affect results.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $863.4 million, up 2.3% | $3,099.6 million, up 6.6% |
| Gross margin | 41.5%, versus 40.7% | 42.4%, versus 41.4% |
| Income before taxes | $25.2 million, versus a $62.8 million loss | $270.0 million, versus $80.3 million |
| Net income attributable to RPM shareholders | $16.2 million, versus a $42.4 million loss; diluted EPS $0.12 versus $(0.33) | $182.9 million, versus $33.2 million; diluted EPS $1.37 versus $0.25 |
| Cash provided by operating activities | Not presented separately | $25.9 million, versus $170.9 million |
Quarterly consolidated sales growth reflected organic growth of 1.9% and acquisition growth of 0.4%, partly offset by foreign exchange. Industrial sales rose 5.3%; consumer sales declined 2.7%, primarily due to severe North American weather. For nine months, industrial sales rose 3.8% and consumer sales rose 12.0%, including acquisition growth.
Balance sheet, cash flow and capital
- At February 28, cash and cash equivalents were $216.0 million; total debt, including current maturities, was $1,388.4 million. Current assets were $1,751.4 million and current liabilities $687.3 million.
- Available liquidity, including cash and committed credit facilities, was $927.2 million. The debt-to-capital ratio was 51.6%; the company reported compliance with credit-facility covenants, with a 51.7% leverage ratio and 7.21-to-1 interest coverage ratio.
- Nine-month operating cash flow fell by $145.0 million year over year. The filing cites working-capital movements, a $63.0 million contingency payment, and lower cash generation from receivables; inventory also absorbed $82.6 million.
- Capital expenditures were $54.3 million for nine months. Cash dividends paid were $93.8 million. The quarterly dividend declared was $0.240 per share, up from $0.225.
Material changes and unusual items
- The prior-year quarter included a $68.8 million accrual related to the DOJ/GSA investigation; RPM reached a final agreement in August 2013 and paid $61.9 million plus approximately $1.1 million in legal expenses during the current nine months. Approximately $2.1 million of further related costs were expected.
- Prior-year nine-month results included $51.1 million of Kemrock investment impairment in cash-flow adjustments, as well as losses associated with the Kemrock investment, Brazilian operations repositioning and roofing contracts. Management reported prior-year adjusted net income of approximately $156.1 million for the nine-month period, compared with reported current-period net income of $192.2 million.
- During the quarter, RPM issued $205 million of 2.25% convertible senior notes due 2020. Net proceeds refinanced $200 million of 6.25% notes due December 2013. The initial conversion price was approximately $52.94 per share.
- At February 28, the Chapter 11 cases involving SPHC and Bondex remained unresolved. Competing reorganization plans were pending; the company supported the debtors’ plan and opposed the ACC/FCR plan. A court estimate of asbestos claims of approximately $1.17 billion was under appeal. RPM stated that it believed claims against it were without merit and intended to contest them.
Outlook, commentary and risks
Management said consumer demand began to improve toward the end of the quarter and anticipated an upward trend in the fourth fiscal quarter. It believed existing capacity, added shifts, acquisitions and planned capital spending would support anticipated fiscal 2014 demand; no numerical earnings guidance was provided. The filing identifies risks including raw-material and freight costs, demand, foreign exchange, acquisitions, litigation and environmental exposure, asbestos proceedings, pension assumptions, and access to credit-facility funding.
Important facts for investors to verify
- Whether operating cash flow and working-capital trends improve, particularly inventory levels and days sales outstanding.
- The final outcome, timing and potential financial effect of the SPHC/Bondex bankruptcy, asbestos estimation appeal and competing reorganization plans.
- Remaining payments and any residual exposure related to the settled DOJ/GSA matter.
- The contribution of acquisitions versus organic growth, and whether weather-related consumer demand recovery materializes.
- Debt, covenant headroom and potential dilution or cash settlement under the convertible notes.