RPM International Inc. — Form 10-Q Summary
Period: Fiscal third quarter ended February 28, 2015, with nine-month results for the period then ended. The filing reports fiscal 2015 Q3, rather than calendar-year 2014 Q3.
Business context and reporting period
RPM manufactures and sells specialty paints, protective coatings, roofing systems, sealants and adhesives through industrial and consumer segments. The company notes that its third fiscal quarter is historically a weaker season. In January 2015 it reconsolidated SPHC and related businesses following their emergence from bankruptcy; their results are included from January 1, 2015.
Financial results and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $946.4 million | $863.4 million | $3,221.4 million | $3,099.6 million |
| Gross profit margin | 40.1% | 41.5% | 41.7% | 42.4% |
| Income before tax | $20.4 million | $25.2 million | $274.3 million | $270.0 million |
| Net income (loss) attributable to RPM shareholders | $(57.3) million | $16.2 million | $111.5 million | $182.9 million |
| Diluted EPS | $(0.44) | $0.12 | $0.84 | $1.37 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $24.1 million | $25.9 million |
- Quarterly sales grew 9.6%; management attributed growth to 6.7% organic growth and 8.5% from acquisitions, partly offset by a 5.6% unfavorable foreign-exchange impact. Segment and consolidated growth components are stated separately in the filing and may not sum due to rounding or mix.
- Quarterly SG&A was $346.2 million, or 36.6% of sales versus 37.3% a year earlier. Higher sales and acquisition costs, legal and professional fees, distribution costs and amortization affected expenses.
- The quarterly income-tax provision was $99.4 million, including a $106.2 million deferred tax charge tied to the possible repatriation of $347.5 million of foreign earnings. Net discrete tax benefits of $13.1 million partly offset the charge.
- At February 28, 2015, cash was $220.4 million; current assets were $2,036.4 million and current liabilities $862.9 million. Long-term debt, including its current portion, was $1,868.1 million, up from $1,351.6 million at May 31, 2014. Available liquidity, including cash and committed facilities, was $648.3 million.
- Debt-to-capital was 60.3%, versus 49.4% at May 31, 2014. The company reported compliance with credit-facility covenants; its stated leverage ratio was 58.91% against a 65% limit, and interest coverage was 9.41x against a 3.50x minimum.
Material changes versus the prior comparable period
- Quarterly sales increased, but gross margin declined 1.4 percentage points and pretax income fell. Management cited acquired-inventory step-up costs, foreign exchange, less profitable product mix and weakness in some smaller niche businesses.
- Quarterly results shifted from profit to loss, primarily reflecting the large repatriation-related tax charge. For the nine-month period, shareholder-attributable income and diluted EPS also declined substantially year over year.
- Nine-month operating cash flow was broadly similar to the prior year. Investing cash outflow rose to $461.8 million, including $433.9 million for acquisitions; financing provided $355.7 million, including increased borrowing.
- Foreign-currency translation losses were $191.8 million for the nine months and contributed to a decline in accumulated other comprehensive equity.
Outlook, commentary, risks and unusual items
- Management described steady improvement in sales serving U.S. commercial construction and retail markets. It said existing capacity, additional production shifts, acquired capacity and planned higher capital spending were expected to support anticipated fiscal 2015 demand; the filing provides no quantified earnings or sales guidance.
- SPHC, Bondex, Republic and NMBFiL emerged from bankruptcy under a confirmed plan. A trust assumed asbestos personal-injury liabilities. RPM funded an initial $450 million in cash and is required to make further trust contributions totaling $347.5 million by the second through fourth anniversaries of the plan’s effective date, payable in cash, RPM stock or a combination at RPM’s discretion. The initial payment was funded using revolving-credit borrowings.
- The company recorded $325.1 million as the net present value of the bankruptcy note within other long-term liabilities. Acquisition accounting, including certain fair values and tax amounts, remained preliminary.
- The SEC is investigating the timing of RPM’s disclosure and accrual of loss reserves related to the prior GSA/DOJ matter. RPM said it is cooperating and cannot predict the outcome. It also disclosed pending Rust-Oleum deck-coating complaints and ordinary-course environmental matters.
- Other risks highlighted include raw-material and transportation costs, foreign exchange, interest rates, acquisition execution, warranty and contingent-liability estimates, pension funding, and market volatility affecting investments. Management reported no material change in market-risk exposure since May 31, 2014.
Important facts for investors to verify
- How the $106.2 million repatriation tax charge, planned remittances and future tax payments affect cash and earnings.
- The timing, funding method and balance-sheet effects of the remaining $347.5 million of asbestos-trust contributions, and whether preliminary SPHC valuations change.
- Debt levels, liquidity, covenant compliance and refinancing needs as contractual maturities and trust payments approach.
- Whether organic sales, margins and cash conversion improve, particularly after separating acquisition, foreign-exchange and seasonal effects.
- Developments in the SEC investigation and Rust-Oleum litigation, including any changes to reserves or potential exposure.