RPM International Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended November 30, 2010 (fiscal 2011 second quarter and first half), compared with the periods ended November 30, 2009. RPM manufactures specialty paints, coatings, roofing systems, sealants and adhesives through industrial and consumer segments. Results are seasonal and weather-sensitive; the filing says the December–February quarter is historically weaker.
Comparisons are affected by RPM’s May 31, 2010 deconsolidation of Specialty Products Holding Corp. (SPHC) and Bondex following their Chapter 11 filings. Management provides adjusted prior-year comparisons excluding the deconsolidated group and adding back sales to it that had previously been eliminated.
Key financial metrics
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $826.3 million | $858.7 million | $1,721.2 million | $1,774.6 million |
| Gross profit / margin | $339.5 million / 41.1% | $363.2 million / 42.3% | $714.9 million / 41.5% | $757.0 million / 42.7% |
| Income before tax | $77.3 million | $80.7 million | $185.2 million | $189.7 million |
| Net income | $53.5 million | $56.4 million | $128.5 million | $129.5 million |
| Net income attributable to RPM shareholders | $48.8 million | $55.9 million | $117.8 million | $128.9 million |
| Diluted EPS | $0.38 | $0.43 | $0.91 | $1.00 |
| Operating cash flow | Not separately provided | Not separately provided | $183.1 million | $184.7 million |
- Adjusted comparisons: Q2 sales rose 5.3% versus management-adjusted prior-year sales, with 2.5% organic growth and 2.8% from acquisitions. First-half sales rose 5.8% on the adjusted basis, with 3.1% organic growth and 2.7% from acquisitions. Reported sales fell 3.8% in Q2 and 3.0% for the half, largely reflecting deconsolidation.
- Against adjusted prior-year results, gross margin declined from 42.6% to 41.1% in Q2 and from 42.9% to 41.5% for the first half. Management cited higher raw-material costs, supplier outages and seasonal demand, as well as product mix and overhead.
- SG&A was 30.3% of sales in Q2 versus 31.5% on an adjusted prior-year basis; first-half SG&A was 29.2% versus 30.6% adjusted. Lower discretionary, acquisition-related and certain corporate expenses, volume leverage, and service reimbursements contributed to the improvement.
- Q2 pretax income was $2.9 million above management-adjusted prior-year pretax income of $74.4 million. First-half pretax income of $185.2 million exceeded adjusted prior-year pretax income of $175.9 million. Adjusted prior-year diluted EPS was $0.37 for Q2 and $0.86 for the first half.
- First-half operating cash flow was nearly flat year over year. Cash and equivalents were $299.2 million at November 30, up from $215.4 million at May 31. Receivables provided $66.4 million of cash, while inventory used $44.9 million.
- Long-term debt, including current maturities, was $925.1 million; debt-to-capital was 43.8%, down from 46.2% at May 31. Reported available liquidity, including cash and committed credit facilities, was $807.6 million. The current ratio was approximately 2.5, based on reported current assets and liabilities.
Material changes, outlook and risks
- Industrial Q2 sales increased 8.0% versus adjusted prior-year sales, while consumer sales declined 0.6% as reported. Consumer organic sales were weaker; both segments faced margin pressure from input costs.
- RPM reported compliance with its existing credit-facility covenants at November 30: leverage ratio 44.1%, interest coverage 5.99:1 and fixed-charge coverage 1.55:1. On January 5, 2011, after quarter-end, RPM replaced its revolving facility with a new $400 million, four-year unsecured facility, expandable by up to $100 million. The new agreement has a 60% leverage limit and a 3.5:1 interest-coverage covenant; it removed the former fixed-charge coverage and subsidiary-debt leverage requirements.
- Management expected fiscal-year capital spending to remain below depreciation, citing available capacity and anticipated production shifts and acquired capacity. It did not provide earnings or revenue guidance. Management expected planned pension contributions of approximately $10.1 million in the U.S. and $8.9 million outside the U.S. to remain unchanged.
- SPHC and Bondex remain in Chapter 11 to address asbestos claims, with lawsuits stayed during proceedings. RPM says it is not responsible for their liabilities; the former asbestos reserve is no longer included in RPM’s consolidated balance sheet. The timing and outcome of reorganization, any trust and related insurance litigation remain uncertain, and RPM received no assurance that pre-petition intercompany amounts will be paid.
- Other risks include volatile raw-material supply and prices, foreign exchange and interest-rate exposure, weather and demand conditions, acquisitions, pension assumptions, tax valuation allowances and potential environmental, warranty and other contingent losses. The filing says no material change in market-risk exposure had occurred since May 31.
- Available-for-sale securities had a fair value of $125.3 million. RPM recorded $0.5 million of other-than-temporary investment impairments in the first half and cautioned that further impairments could materially affect a reporting period. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- How reported and management-adjusted comparisons treat SPHC deconsolidation, including the associated noncontrolling-interest earnings.
- Whether raw-material cost inflation, supplier availability, and product mix continue to pressure gross margins, particularly in consumer products.
- Developments in the SPHC/Bondex bankruptcy, asbestos trust process, insurance-coverage appeal, and any potential impact on RPM or intercompany receivables.
- Liquidity and covenant headroom under the new revolving facility, along with debt maturities, borrowing needs and acquisition spending.
- Performance and impairment exposure of the marketable-securities portfolio, plus changes in tax examinations, valuation allowances, warranty, environmental and pension exposures.