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RPM Down—or Up, Depending on the Basis

Thursday, January 6, 2011

Industrial fared better than consumer, but global coatings giant RPM International Inc. posted slight declines overall in second-quarter net sales and earnings on an as-reported basis.

On an as-reported basis, RPM’s net sales of $826.3 million were down 3.8% from the $858.7 million reported in the fiscal 2010 second quarter, according to the company’s second-quarter report for FY2011.

Net income attributable to RPM stockholders was off 12.7%, to $48.8 million from $55.9 million in the year-ago second quarter, while earnings per diluted share were down 11.6% to $0.38 from the fiscal 2010 second quarter. Consolidated earnings before interest and taxes (EBIT) dropped 4.1% to $89.4 million from a year ago.

Pro-Forma Gains

On the other hand, the company sought to emphasize its pro-forma results. On that basis, RPM said, net sales, net income and earnings per share all posted improvements.

Prior-year pro-forma results assume that the bankruptcy of RPM’s Special Products Holding Corp. and Bondex International subsidiary, which eliminated some $300 million in annual revenue from the industrial segment as of June 1, 2010, occurred before fiscal 2010.

On a pro-forma basis, net sales grew 5.3% to $826.3 million, while net income attributable to RPM stockholders was up 2.3%, to $48.8 million, from a year ago. Diluted earnings per share increased 2.7% to $0.38 from the fiscal 2010 second period. Consolidated EBIT grew 2.7%, to $89.4 million, from the year-ago second quarter.

Industrial Sales Growth

“On a prior-year pro-forma basis, which offers a better comparison to current-year actual results, RPM’s industrial segment continued a trend of year-over-year sales increases on the strength of our businesses concentrated in maintenance, repair and infrastructure, while our consumer segment faced the challenges of tough comparisons following record results in the fall of 2009,” said chairman and CEO Frank C. Sullivan.

Sullivan said both segments remained “challenged by higher raw material costs, mainly due to capacity reductions by suppliers, which has exerted downward pressure on our gross margins.”

Chairman and CEO Frank Sullivan predicted a weak third quarter, followed by a strong fourth quarter.

RPM’s industrial brands include Stonhard, Tremco, illbruck, Carboline, Euco, Flowcrete and Universal Sealants.

Second-Quarter Segment Sales

On a pro-forma basis, industrial segment sales grew 8% to $582.5 million in the fiscal 2011 second quarter from a year ago. Organic sales improved 4.3%, offset by 1% in foreign exchange translation losses, and acquisition growth added 3.7%. Industrial segment EBIT increased 0.7%, to $68.7 million from the fiscal 2010 second quarter.

“Industrial sales growth in the second quarter continued to benefit from strong sales comparisons in corrosion control coatings and high performance polymer flooring, while domestic and international sealants lines continued to struggle in the face of weak new construction markets,” Sullivan stated.

RPM’s consumer segment, largely unaffected by the deconsolidation, had a 0.6% decline in net sales to $243.8 million from the fiscal 2010 second quarter. Organic sales were off 1.4%, including foreign exchange translation losses of 0.6%, while acquisition growth added 0.8%. Consumer segment EBIT fell 14.4%, to $27.3 million from a pro-forma $31.9 million a year ago.

Expenses, Debt Decline

Corporate and other expenses declined by about $7.6 million, due primarily to insurance recoveries of $2.9 million, ongoing expense improvements of $2.8 million, and lower acquisition related costs of $1.8 million.

For the first half of fiscal 2011, cash from operations was $183.1 million, compared to $184.7 million in the first half of fiscal 2010. Total debt at the end of the first half was $925.1 million, compared to $928.6 million at the end of fiscal 2010 and $906.2 million at the end of the second quarter of fiscal 2010. RPM’s net (of cash) debt-to-total capitalization ratio was 34.5%, compared to 39.8% at May 31, and both remain at the low end of the company’s historic norms.

Liquidity stood at $807.6 million on Nov. 30, Sullivan said.

“Our strong cash and liquidity position continues to support our active acquisition pipeline, as well as internal investment and our cash dividend,” Sullivan stated.

First-Half Sales and Earnings

On a pro-forma basis, fiscal 2011 first-half net sales, net income and earnings per share all improved. On an as-reported basis, net sales for the first half of fiscal 2011 declined 3% to $1.72 billion from a year ago.

First-half industrial segment sales improved 8.7%, to $1.18 billion from a pro-forma $1.09 billion in the first half of FY2010. The organic sales increase was 5.1%, offset by net foreign exchange losses of 1.1%, while acquisition growth added 3.6%. Industrial segment EBIT grew 4.3% to $152 million from a pro-forma $145.7 million in the fiscal 2010 first half.

First-half sales for the consumer segment declined 0.2% to $536.3 million from a pro-forma $537.2 million reported in the first half of fiscal 2010.

Acquisition, Outlook

RPM announced Dec. 21 that its Performance Coatings Group had acquired Pipeline & Drainage Systems Ltd. (PDS), a supplier of curb, bridge and channel drainage products for construction and infrastructure markets, primarily in the United Kingdom and Ireland. PDS has annual sales of about $8 million.

Sullivan said RPM’s year-to-date results were “on target for achieving the fiscal 2011 guidance we announced on July 26, 2010, which anticipated sales growth of between 4% and 5% to approximately $3.25 billion from a pro-forma base of $3.12 billion in fiscal 2010 and growth in diluted earnings per share to a range of $1.35 to $1.40, up from a pro-forma $1.26 in fiscal 2010.”

He added: “We expect a loss for the seasonally weak fiscal third quarter ending Feb. 28, 2011, but anticipate a strong fiscal fourth quarter.”

“Our industrial segment should continue its strong performance in the back half of this fiscal year, with signs of improvement in the depressed commercial construction market this spring, while consumer sales are expected to be relatively flat as they face very strong prior-year comparisons, combined with consumer uncertainty.”