RPM International Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, three months ended August 31, 2011; comparisons are with the quarter ended August 31, 2010 unless noted. Unaudited consolidated results include majority-owned subsidiaries, with SPHC and Bondex excluded following their May 2010 bankruptcy filing.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $985.9 million | $894.8 million | +10.2% |
| Gross profit / margin | $409.6 million / 41.5% | $375.4 million / 42.0% | Margin down about 0.4 percentage points |
| SG&A / sales | $273.1 million / 27.7% | $253.4 million / 28.4% | Margin improved about 0.7 points |
| Income before taxes / margin | $118.7 million / 12.0% | $107.9 million / 12.1% | +10.0% |
| Net income | $83.3 million | $75.0 million | +11.1% |
| Net income attributable to RPM shareholders | $76.8 million | $69.0 million | +11.3% |
| Diluted EPS | $0.59 | $0.53 | +11.3% |
| Operating cash flow | $7.5 million | $41.1 million | Down $33.6 million |
| Capital expenditures | $4.9 million | $3.3 million | Up $1.7 million |
Sales growth comprised 9.2% organic growth and 1.0% net acquisition growth. Organic growth reflected approximately 2.3% higher volume, 2.8% favorable pricing, and 4.1% favorable foreign exchange. Industrial sales rose 10.7% to $667.0 million; consumer sales rose 9.0% to $318.9 million. The effective tax rate was 29.8%, versus 30.5%.
Balance sheet and liquidity
- At August 31, 2011, cash and cash equivalents were $373.4 million, total debt was $1,105.4 million, and net debt was approximately $732.1 million. Current assets were $1,855.3 million and current liabilities were $683.3 million.
- Available liquidity, including cash and committed credit facilities, was $834.3 million. The debt-to-capital ratio was 45.9%, compared with 46.7% at May 31, 2011.
- The company reported compliance with its revolving-credit covenants; leverage ratio was 47.0% against a 60% maximum, and interest coverage was 7.24x against a 3.50x minimum.
- Operating cash flow was pressured by working-capital movements, including inventory growth, lower accounts payable, and lower accrued compensation. Days sales outstanding rose to 62.6 from 59.7 a year earlier; inventory days rose to 77.4 from 73.0.
Material changes, outlook and commentary
- Management attributed sales growth to improving economic conditions, pricing actions intended largely to offset rising raw-material costs, foreign exchange, product launches and acquisitions. Consolidated SG&A declined as a share of sales, aided partly by a $4.0 million one-time insurance reimbursement.
- Industrial pretax margin was 13.7%, unchanged year over year. Consumer pretax margin declined to 16.2% from 16.8%, reflecting raw-material, distribution and compensation costs despite higher pricing and sales.
- Management said capital spending was expected to begin exceeding depreciation in fiscal 2012, with planned spending focused mainly on maintenance, capacity upgrades, products and technology. No specific full-year earnings or revenue guidance is provided in the filing.
- After quarter-end, RPM announced that its RPM2 unit had signed an agreement to acquire Legend Brands, which has annual sales of more than $70 million. The filing does not state the purchase price or expected closing date.
- Marketable securities had a fair value of $140.0 million; $35.7 million was in an unrealized loss position, with $3.9 million of gross unrealized losses. Management said it intended and was able to hold the investments until recovery, but warned that future impairments could materially affect results in a reporting period.
Risks, contingencies and unusual items
- SPHC and Bondex remain in Chapter 11 proceedings intended to resolve asbestos claims through a proposed trust and channeling injunction. The duration, form and timing of resolution are uncertain. Related claims are stayed; no asbestos claims have been paid since the bankruptcy filing. RPM says it is not a party to the DIP facility and has not guaranteed it.
- An appeal in insurance-coverage litigation related to asbestos claims was pending, with oral argument scheduled for October 12, 2011. Bondex did not include potential insurance recoveries in its asbestos liability calculations.
- RPM identifies exposure to raw-material prices and availability, interest and foreign-exchange movements, economic conditions, acquisitions, environmental matters, warranties and contingent liabilities. The company says environmental proceedings were not expected to materially affect consolidated results or financial condition; actual warranty costs may exceed accrued amounts.
- Q1 included a $4.0 million insurance reimbursement, a one-time UK tax-rate benefit and a $1.4 million reduction in the reserve for unrecognized tax benefits following settlement of federal tax examinations for fiscal 2007 and 2008.
Important facts for investors to verify
- Whether sales growth and pricing can offset raw-material inflation, particularly as consumer-segment margins weakened.
- Whether operating cash flow recovers as receivables, inventory and other working-capital balances normalize.
- Progress and potential financial consequences of the SPHC/Bondex bankruptcy, asbestos claims and insurance-coverage appeal.
- Closing terms and financial impact of the Legend Brands acquisition, including purchase price, financing and integration costs.
- Future marketable-securities losses, credit-facility covenant headroom, and the timing and amount of pension contributions and debt obligations.