RPM International Inc. — Form 10-Q Summary
Business context and reporting period
RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants and adhesives. Its reportable segments are Industrial and Consumer. This unaudited filing covers the quarter and six months ended November 30, 2013, the second quarter and first half of fiscal 2014; comparisons are with the corresponding fiscal 2013 periods.
Financial performance and position
| Metric | Three months ended Nov. 30, 2013 | Six months ended Nov. 30, 2013 |
|---|---|---|
| Net sales | $1,071.5 million, up 5.3% | $2,236.2 million, up 8.3% |
| Gross profit / margin | $457.9 million / 42.7% | $957.0 million / 42.8% |
| Income before income taxes | $97.6 million | $244.8 million |
| Net income attributable to RPM stockholders | $63.6 million | $166.7 million |
| Diluted EPS | $0.48 | $1.25 |
| Cash provided by operating activities | $21.8 million for the six months |
- Second-quarter sales growth comprised 5.3% organic growth and 0.8% acquisition growth, partly offset by 0.8% unfavorable foreign exchange. Industrial sales rose 2.6%; Consumer sales rose 11.2%.
- First-half gross margin increased from 41.6% to 42.8%; SG&A declined from 30.8% to 30.4% of sales. The second-quarter net margin was 6.4%, versus 4.5% a year earlier.
- At November 30, cash and cash equivalents were $224.2 million, total current assets $1,813.6 million and current liabilities $734.1 million. Total debt, including current maturities, was $1,369.95 million. The reported debt-to-capital ratio was 50.9%, compared with 53.3% at May 31.
- Operating cash flow fell to $21.8 million from $127.6 million in the prior-year first half, primarily reflecting working-capital movements, including lower cash generation from receivables, higher inventory use and payments of accrued liabilities. Cash decreased $119.4 million from May 31.
- Available liquidity, including cash and amounts available under committed credit facilities, was $969.5 million. About 86% of consolidated cash was held at foreign subsidiaries and was considered permanently reinvested.
Material changes versus prior comparable periods
- First-half pretax income rose to $244.8 million from $143.1 million, while net income attributable to RPM stockholders rose to $166.7 million from $75.6 million. The prior-year period included approximately $56.1 million of Kemrock investment-related impairment losses and approximately $11.0 million of roofing contract and exit-related losses. These items make the reported year-over-year earnings comparison unusually favorable; management cited prior-year adjusted net income of approximately $147.3 million.
- Consumer segment first-half sales increased 18.9%, with 9.6% organic growth and 9.8% acquisition growth. Industrial first-half sales increased 3.3%.
- Despite higher net income, first-half operating cash flow was substantially lower year over year. The filing attributes this to noncash adjustments and working-capital and accrual changes.
- The six-month effective tax rate fell to 28.4% from 41.3%, including a discrete benefit from recognition of a foreign deferred tax asset; the prior-year rate also reflected Kemrock-related tax effects.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said existing capacity and planned spending should support anticipated fiscal 2014 demand, and expects warranty expense to fluctuate but likely decline gradually over the next few years. Fiscal-year pension contributions were expected to be approximately $27.4 million in the U.S. and $7.4 million outside the U.S.
- RPM noted that its business is weather-dependent and historically has stronger results in the first, second and fourth fiscal quarters than in the third. Risks include economic and market conditions, raw-material and transportation costs, currency movements, acquisitions, legal and environmental matters, insurance adequacy and contingent liabilities.
- Asbestos proceedings: SPHC and Bondex remain in Chapter 11 and are deconsolidated. The bankruptcy court estimated current and future asbestos claims at approximately $1.17 billion; RPM and the debtors appealed, and RPM said the estimate substantially overstates liability. The court granted claimant representatives standing to pursue estate claims against RPM and others. Competing reorganization plans remain unresolved. RPM supports a debtors’ plan that would include notes with an initial $125 million trust payment and potentially additional payments; ultimate plan terms, liability and timing are uncertain.
- GSA/DOJ settlement: RPM finalized an agreement in August 2013 concerning an investigation into historical GSA contract compliance. It paid $61.9 million plus approximately $0.4 million of related expenses and expected approximately $2.8 million more in legal and related costs.
- Subsequent financing: On December 9, 2013, RPM issued $205 million of 2.25% convertible senior notes due 2020. Net proceeds of approximately $200.1 million refinanced $200 million of 6.25% notes due December 15, 2013. The initial conversion price was approximately $52.94 per share, subject to adjustment and specified conversion conditions.
- RPM reported compliance with its revolving-credit covenants at November 30: leverage ratio 51.0% against a 60% maximum and interest coverage of 5.89x against a 3.50x minimum. The filing identifies no material change in market-risk exposure since May 31.
- Unrecognized tax benefits were approximately $14.9 million, with $4.9 million accrued for related interest and penalties. RPM did not anticipate significant changes to total unrecognized tax benefits within 12 months.
Important facts for investors to verify
- Whether operating cash flow and working-capital trends improve, particularly inventory, receivables and payables.
- How much of earnings growth reflects sustainable organic performance versus acquisitions, tax benefits and the prior-year Kemrock and roofing charges.
- Progress, potential financial exposure and timing of the SPHC/Bondex bankruptcy, asbestos-estimation appeal and estate claims against RPM.
- Whether the remaining GSA-related legal and other costs stay near management’s estimate, and whether any additional liabilities emerge.
- Foreign cash availability and repatriation restrictions, covenant headroom, and the terms and potential dilution or settlement effects of the convertible notes.