RPM International Inc. — Form 10-Q summary
Reporting period: First quarter of fiscal 2020, three months ended August 31, 2019; comparatives are for the three months ended August 31, 2018. RPM manufactures and sells specialty paints, coatings, roofing systems, sealants, adhesives and related products. The company notes that results are seasonal and weather-dependent, with historically stronger performance in the August, November and May quarters. Interim statements are unaudited.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $1,472.8 million | $1,460.0 million | +0.9% |
| Gross profit | $574.8 million | $549.4 million | +4.6% |
| Gross margin | 39.0% | 37.6% | +1.4 percentage points |
| SG&A | $400.6 million | $415.1 million | Down $14.5 million |
| Restructuring charges | $6.6 million | $20.1 million | Down $13.5 million |
| Income before income taxes | $142.8 million | $91.9 million | +55.4% |
| Net income attributable to RPM shareholders | $106.2 million | $69.8 million | +52.2% |
| Diluted EPS | $0.82 | $0.52 | +$0.30 |
| Operating cash flow | $145.1 million | $(7.1) million | Improved $152.3 million |
Gross-margin improvement reflected selling-price increases and 2020 MAP to Growth savings, partly offset by lower volume and unfavorable mix, higher raw-material costs and supply-chain challenges. SG&A was 27.2% of sales versus 28.4%. Interest expense rose to $28.3 million from $24.4 million, while net investment income increased to $5.4 million from $2.4 million. The effective tax rate increased to 25.5% from 23.7%.
Segment results
| Segment | Sales | Year-over-year sales change | Pretax income |
|---|---|---|---|
| Construction Products Group | $536.1 million | +3.6% | $82.7 million, up from $65.0 million |
| Performance Coatings Group | $297.2 million | +0.3% | $28.1 million, up from $8.3 million |
| Consumer Group | $479.3 million | +0.4% | $59.2 million, up from $51.0 million |
| Specialty Products Group | $160.1 million | −5.1% | $23.3 million, down from $23.8 million |
Management attributed consolidated sales growth to acquisitions, partly offset by unfavorable foreign exchange; organic sales were down 0.1%. Specialty sales declined on weakness in fluorescent pigments, specialty coatings and OEM businesses. Segment comparisons were recast to the new four-segment reporting structure.
Cash flow, debt and liquidity
- Cash and cash equivalents were $212.1 million at August 31, 2019, down from $223.2 million at May 31, 2019. Operating cash flow was supported in part by working-capital movements, including receivables collections; management said approximately $100 million of receipts shifted from the prior fiscal fourth quarter into this quarter.
- Capital expenditures were $36.6 million and business acquisitions, net of acquired cash, used $30.6 million. Dividends paid were $45.3 million, and share repurchases used $100.0 million.
- Total debt carrying value, including current maturities, was $2.601 billion. Current debt was $582.6 million and long-term debt was $2.018 billion. The filing says RPM expected likely to use its revolving facility in October 2019 to repay approximately $450.5 million of 6.125% notes maturing October 15, 2019.
- Available liquidity, including cash and committed credit facilities, was $1.20 billion, versus $1.28 billion at May 31, 2019. Revolver availability was $916.7 million; the $200 million receivables program had $130 million outstanding.
- RPM reported compliance with credit-facility covenants: leverage ratio 3.12x against a 3.75x limit (potentially 4.25x for qualifying acquisitions) and interest coverage 7.47x against a 3.50x minimum.
Material changes, outlook and risks
- 2020 MAP to Growth: The multi-year restructuring spans all segments and includes simplification, SKU rationalization, headcount reductions and facility consolidation. RPM recorded $6.6 million in quarterly charges and estimated $32.4 million of additional charges through calendar 2020. Management targeted approximately $290 million in annualized pretax savings upon completion and $230 million of working-capital improvement. Its approximately $872 million FY2021 operating-cash-flow expectation assumes 3% organic growth and $150–$200 million of annual acquisitions. The plan’s scope and costs may change; additional G&A consolidation, outsourcing and plant closures were under evaluation.
- Accounting and reporting: RPM adopted lease accounting Topic 842 on June 1, 2019, recognizing $257.6 million of operating lease right-of-use assets and $265.8 million of lease liabilities at August 31; management said there was no material income-statement, cash-flow or covenant impact. Shipping and handling costs were retrospectively reclassified from SG&A to cost of sales, changing reported gross margin but not pretax income, net income or EPS. RPM also realigned its segments effective June 1, 2019.
- Capital returns: RPM repurchased 1.66 million shares for approximately $100 million in the quarter, averaging $60.40 per share. The stated goal was to return $1.0 billion through repurchases by May 31, 2021; approximately $494.7 million remained authorized at quarter-end.
- Risks and contingencies: Management cited exposure to economic conditions, raw-material and packaging costs, tariffs (including steel-related tariffs), interest and currency rates, weather, foreign-market conditions, acquisitions and restructuring execution. A pending SEC enforcement action concerns fiscal 2013 disclosure and loss-reserve timing; RPM disputes the allegations and intends to contest them. The company accrued a loss at the low end of an estimated range, which it said would not materially affect consolidated results, liquidity or financial position. Environmental matters were generally described as not expected to be material; two subsidiaries received notices of alleged reporting/permit violations with proposed penalties of approximately $134,000 and $192,000.
- Other unusual items: Prior-year results included approximately $10 million of legal settlements and associated fees and $5.7 million of unfavorable transactional foreign exchange that did not recur. Current-quarter net investment income included gains on marketable securities. Foreign-currency translation reduced other comprehensive income by $28.4 million.
Important facts for investors to verify
- Whether MAP to Growth savings, working-capital targets and projected FY2021 operating cash flow are achieved, and whether expanded restructuring plans add costs.
- How the October 2019 maturity was refinanced and the subsequent effect on debt, interest expense and liquidity.
- Whether operating cash flow remains strong after the benefit of shifted customer receipts and other working-capital timing effects.
- Performance in Specialty and the durability of segment margin gains, particularly in Performance Coatings.
- Developments and potential financial consequences in the SEC action, as well as the environmental and product-liability contingencies.
- Effects of tariffs, raw-material costs, foreign exchange, weather and the new lease accounting presentation on future results.