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. This filing covers the quarter and six months ended November 30, 2016, the second quarter and first half of fiscal 2017 (fiscal year ending May 31). Comparisons are with the corresponding 2015 periods. RPM reports Industrial, Specialty and Consumer segments.
Financial performance and position
| Metric | Three months ended Nov. 30 | Six months ended Nov. 30 |
|---|---|---|
| Net sales | $1,190.8 million, up 3.0% | $2,442.8 million, up 1.8% |
| Gross margin | 43.8%, versus 42.7% | 44.0%, versus 42.8% |
| SG&A as a percentage of sales | 35.2%, versus 30.5% | 32.9%, versus 30.2% |
| Net income (loss) attributable to RPM shareholders | $(70.9) million, versus $83.4 million | $41.8 million, versus $183.2 million |
| Diluted earnings (loss) per share | $(0.54), versus $0.62 | $0.32, versus $1.36 |
| Cash provided by operating activities | Not separately stated for the quarter | $158.7 million, versus $167.1 million |
Quarterly sales growth reflected organic growth of 3.8% and acquisition contribution of 1.7%, partly offset by a 2.5% unfavorable foreign-exchange impact. First-half organic growth was 2.6%, acquisition contribution 1.5%, and unfavorable foreign exchange 2.3%. First-half capital expenditures were $48.0 million; operating cash flow less capital expenditures was approximately $110.7 million, compared with $135.8 million a year earlier.
- Segments, second quarter: Industrial sales were $633.4 million (+1.6%) and pretax income $50.3 million, compared with $64.0 million. Specialty sales were $183.6 million (+5.7%) and pretax income $31.2 million, compared with $28.3 million. Consumer sales were $373.8 million (+4.1%); the segment recorded a $140.6 million pretax loss, versus $65.4 million income.
- Balance sheet, Nov. 30: Cash and equivalents were $205.9 million; current assets $2.041 billion and current liabilities $886.6 million. Long-term debt, including current maturities, was $1.639 billion. Debt-to-capital was 56.1%, versus 54.4% at May 31, 2016. Total equity was $1.283 billion.
- Liquidity and covenants: Management reported total available liquidity of $956.1 million, including $600.2 million available under the revolving credit facility. RPM reported compliance with debt covenants; its leverage ratio was 54.8% against a 65% maximum, and interest coverage was 9.5x against a 3.5x minimum. No amount was outstanding under the receivables securitization program.
- Dividends: Declared dividends were $0.30 per share for the quarter and $0.575 per share for the half-year, up from $0.275 and $0.535, respectively, in the prior-year periods.
Material changes and unusual items
- RPM recorded preliminary goodwill and intangible-asset impairment charges of $188.3 million in the Consumer segment related to Kirker nail enamel: $140.7 million for goodwill and approximately $47.8 million for other intangible assets. The assessments were preliminary, with final valuation work expected in the third quarter of fiscal 2017.
- Kirker’s results fell significantly below historical and expected performance. The company cited market-share losses at key customers, including the loss of its largest customer (more than 15% of Kirker’s fiscal 2016 sales), as well as customer-relationship problems and a leadership change. After the goodwill charge, no goodwill remained for Kirker.
- SG&A rose substantially, including higher compensation, advertising, professional fees, acquisition costs and warranty expense. The prior-year quarter benefited from a $14.5 million reversal of a Kirker contingent earnout obligation.
- Gross-margin improvement reflected more favorable manufacturing costs and supply-chain improvements; first-half improvement also reflected price increases. Foreign exchange, including British pound weakness, reduced sales.
- First-half results also include discrete tax benefits from adoption of share-based-payment accounting guidance and foreign tax-credit attributes. The six-month effective tax benefit rate was 3.7%, versus a 29.7% tax expense rate in the prior-year period.
Outlook, risks and contingencies
- The filing provides no formal consolidated earnings or EPS guidance. Management said planned capacity additions, increased capital spending and acquisitions are intended to support demand through fiscal 2017 and beyond. Four acquisitions announced after quarter-end were expected to cost approximately $180 million and add about $160 million in annual sales.
- After quarter-end, RPM decided to exit its Flowcrete polymer flooring business in the Middle East. It recorded approximately $12.3 million of related charges as of November 30, including $11.4 million of additional bad-debt reserves. RPM also planned to close a European facility and take specialty-segment severance charges, currently estimated at approximately $10 million in the third quarter.
- RPM deposited $102.5 million into the bankruptcy-related trust on December 23, 2016. Further contributions of $120 million by December 2017 and $125 million by December 2018 are specified in the plan.
- An SEC enforcement action filed in September 2016 concerns the timing of fiscal 2013 disclosures and loss-reserve accruals related to Tremco Roofing’s government contracts. RPM disputes the allegations and intends to contest them. It accrued at the low end of an estimated loss range; management stated that no amount in the range would materially affect consolidated financial condition, results or cash flows, but the action could entail sanctions, costs and management distraction.
- Other disclosed exposures include product warranties and liability claims, environmental matters, a parking-garage coating claim in Dubai, and a Rust-Oleum deck-coating class action settlement of $9.3 million subject to final court approval. Management cautioned that warranty claims and investment-market losses could exceed estimates. Other risks include raw-material costs, interest and currency movements, global economic conditions, Brexit-related uncertainty, and acquisition and litigation risks.
Important facts for investors to verify
- Final Kirker impairment valuation and subsequent operating performance, including customer retention and the revised outlook.
- Flowcrete exit charges, collectability of related receivables, and implementation and cost of the European restructuring plan.
- Whether acquisition spending and expected annual sales contribution materialize, and how acquisitions affect leverage and cash flow.
- Cash generation, inventory levels, debt covenant headroom, and funding of the remaining trust contributions.
- Developments in the SEC enforcement action, the Dubai claim, warranty exposure and the Rust-Oleum settlement approval.