RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2011. The filing’s comparative periods ended February 28, 2010. Amounts are in U.S. dollars unless stated otherwise.
Business context
RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants and adhesives through industrial and consumer segments. Results are seasonal and weather-dependent; the company historically reports weaker performance in its December–February quarter.
Comparability is materially affected by the May 31, 2010 deconsolidation of Specialty Products Holding Corp. (SPHC) and Bondex following their Chapter 11 filings. Their results are excluded from RPM’s reported results from that date. Management provides adjusted comparisons excluding the deconsolidated businesses.
Key financial results
| Metric | Three months ended February 28 | Nine months ended February 28 |
|---|---|---|
| Net sales | $678.9 million, up 1.8% reported; up 12.6% versus adjusted prior-year sales, including 10.8% organic growth | $2,400.1 million, down 1.7% reported; up 7.6% versus adjusted prior-year sales, including 5.4% organic growth |
| Gross profit / margin | $269.5 million; 39.7%, versus 39.0% reported and 39.3% on an adjusted prior-year basis | $984.4 million; 41.0%, versus 41.7% reported and 41.9% on an adjusted prior-year basis |
| SG&A | $255.9 million; 37.7% of sales, versus 38.8% of adjusted prior-year sales | $759.4 million; 31.6% of sales, versus 32.8% of prior-year sales |
| Income before taxes | $2.0 million, versus a reported loss of $11.1 million; 1.8% margin on adjusted prior-year sales compared with a 1.8% adjusted loss margin | $187.2 million, up from $178.6 million reported and $165.0 million on an adjusted prior-year basis |
| Net income attributable to RPM stockholders / diluted EPS | $1.1 million / $0.01, versus a loss of $9.4 million / $(0.07) | $118.9 million / $0.91, versus $119.5 million / $0.93 reported; adjusted prior-year stockholder income was $101.7 million |
| Operating cash flow | Not separately reported for the quarter | $191.0 million, versus $188.9 million |
| Debt and liquidity | At February 28, 2011: total debt carrying value $935.7 million; cash $275.5 million; available liquidity, including cash and committed facilities, $715.7 million; debt-to-capital ratio 43.6%, versus 46.2% at May 31, 2010. |
Material changes and management commentary
- Third-quarter adjusted sales growth was broad-based: industrial segment sales rose 14.0% and consumer sales rose 10.0% against adjusted prior-year comparisons. Volume growth and acquisitions contributed; pricing was also favorable.
- Higher raw-material costs—among them oil-related inputs—pressured gross margins, particularly in the nine-month period. Third-quarter industrial margin improved on favorable pricing, mix and labor costs; consumer margin was slightly lower.
- For the nine months, receivables released $98.6 million of cash, but inventory used $81.4 million. Days sales outstanding increased to 68.0 from 62.5 a year earlier, and days inventory outstanding to 104.0 from 97.7.
- Investing activities used $66.5 million, including $21.7 million in capital expenditures and $39.0 million net for acquisitions. Financing activities used $87.8 million, including $81.2 million in dividends and $21.8 million in stock repurchases.
- RPM established a new $400 million four-year revolving credit facility in January 2011, replacing its prior facility. At quarter-end RPM reported compliance with covenants; its leverage ratio was 43.9% and interest coverage ratio 7.04:1 under the new facility.
- Management expected capital spending to remain below depreciation through fiscal 2011, citing existing capacity and capacity added through acquisitions. No specific earnings or sales forecast was provided.
Risks, contingencies and unusual items
- SPHC and Bondex are in Chapter 11 seeking to resolve asbestos claims. Litigation is stayed, including certain derivative claims against RPM and affiliates; no claims have been paid since the filing. RPM states it believes it has no responsibility for SPHC/Bondex liabilities and is not a party to the insurers’ coverage litigation. The bankruptcy outcome, timing and potential recoveries remain uncertain.
- RPM’s consolidated balance sheet no longer includes the historical Bondex asbestos reserve following deconsolidation. The filing reports a $7.9 million loss on deconsolidation in fiscal 2010 and notes that potential insurance recoveries were not included in Bondex’s asbestos liability calculation.
- Other risks include escalating or volatile raw-material costs, weather and demand variability, foreign exchange and interest-rate movements, acquisitions, environmental and warranty claims, and uncertain legal and tax matters. Management says environmental proceedings were not expected to materially affect consolidated results or financial condition, while acknowledging estimation uncertainty.
- Marketable securities were valued at $130.4 million; $27.9 million were in an unrealized loss position, with gross unrealized losses of $0.7 million. Management said it intended and was able to hold the affected investments, but further losses could lead to impairment charges.
- Quarterly net investment income included $3.2 million of net realized gains on securities. The quarter also included a $0.8 million write-off of fees on the replaced credit facility. The nine-month effective tax rate was 30.7%, including a one-time benefit from UK tax-law changes.
Most important facts for investors to verify
- How reported trends compare with adjusted results after accounting for SPHC/Bondex deconsolidation, including the basis of management’s adjusted comparisons.
- Whether volume and pricing gains can offset further raw-material inflation and sustain gross margins.
- Working-capital trends, especially the increases in inventory days and receivable collection days, and their effect on operating cash flow.
- Debt maturities, facility availability and covenant headroom, including the effect of acquisitions, dividends and repurchases on leverage and liquidity.
- Developments in the SPHC/Bondex bankruptcy, asbestos trust proposals and insurance-coverage appeal, including any potential financial exposure or recovery for RPM.
- Whether marketable-security losses, warranty/environmental claims, pension costs or tax examinations create material additional charges or cash needs.