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RPM International’s industrial segment—the engine behind two-thirds of its sales—helped deliver unexpectedly strong third-quarter sales and a record share price, but that won’t stop the company from raising prices “aggressively” this year.
The coatings and sealant holding company behind Stonhard, Tremco, Carboline, Flowcrete, Universal Sealants. Zinsser, Rust-Oleum, DAP and other well-known brands said it would increase both its FY 2011 guidance and its prices—the latter, to offset raw materials prices.
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| RPM is the holding company behind dozens of industrial coatings and sealant brands. |
"We still are facing raw material challenges," an RPM executive said on a conference call about the quarter ended Feb. 28. "We're addressing some of that with price increases, more aggressively as we move throughout the year."
Q3 Overview
Net sales, net income and earnings per share for the third quarter all posted sharp improvements versus prior-year pro-forma results.
Pro-forma accounting is a statement of the company's financial activities that excludes unusual and nonrecurring transactions.
In RPM’s case, prior-year pro-forma results assume that the deconsolidation of its Specialty Products Holding Corp. and subsidiaries occurred before fiscal 2010. RPM put SPHC into Chapter 11 bankruptcy last May, eliminating about $300 million in annual revenues from the company's industrial segment beginning June 1, 2010.
Net sales grew 12.6% to $678.9 million from a pro-forma $603.1 million; on an as-reported basis, RPM's net sales inched up 1.8% of $678.9 million.
Net income attributable to stockholders was $1.1 million, compared to a year earlier pro-forma loss of $9.7 million and an as-reported loss of $9.4 million. Diluted earnings per share were $0.01, contrasted with a pro-forma loss of $0.08 ($0.07 as reported) in the year-ago period. Consolidated earnings before interest and taxes (EBIT) grew 323.8% (375.8% as reported), to $13.6 million.
Share Record
Shares of RPM rose 7% to an all-time high of $26, Reuters reported. The stock has outpaced the S&P Specialty Chemicals Sub-Industry index by 3% year to date, it said.
"We are extremely pleased with RPM's performance during the typically weak third quarter and in the face of significantly higher raw material costs coupled with severe winter weather conditions across the U.S,” said chairman and CEO Frank C. Sullivan. “Nearly all of our business units generated strong sales increases and substantially stronger growth in earnings.”
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| Chairman and CEO Frank Sullivan revised the company’s sales and earnings projections upward. |
Segment Results: Construction Uptick
Third-quarter industrial segment sales grew 14% on a pro-forma basis, to $449.1 million, from a pro-forma $393.9 million a year ago. Organic sales improved 11.2%, including 0.3% in foreign exchange translation gains, while acquisition growth added 2.8%. Industrial segment EBIT increased 664.1%, to $13.6 million from a pro-forma $1.8 million in the fiscal 2010 third quarter.
The industrial segment includes corrosion control coatings, heavy-duty sealants, and roofing and flooring systems.
"Following two years of depressed demand for our products serving commercial construction markets, we are starting to see some improvement in our businesses that address this sector of the economy, both domestically and in Europe,” said Sullivan.
“At the same time, our high-performance industrial coatings, maintenance products and polymer flooring systems continued their strong sales performance.”
RPM's consumer segment, largely unaffected by the deconsolidation, had a 9.8% year-over-year Q3 increase in net sales to $229.8 million from a pro-forma $209.2 million.
Nine-Month Overview
FY 2011 nine-month net sales, net income and earnings per share all posted gains on a pro-forma basis.
Net sales increased 7.6% to $2.4 billion from a pro-forma $2.2 billion during the first nine months of fiscal 2010; on an as-reported basis, net sales for same period declined 1.7% to $2.40 billion.
Nine-month net income attributable to stockholders improved 16.8% to $118.9 million from a pro-forma basis; as reported, the figure declined 0.5% to $118.9 million.
Segment Sales
Nine-month sales for RPM's industrial segment increased 10.1% year over year, to $1.63 billion. The organic sales increase was 6.8%, including net foreign exchange losses of 0.7%, and acquisition growth added 3.3%. Industrial segment EBIT grew 12.2% to $165.6 million from a pro-forma $147.5 million in the first nine months of fiscal 2010.
In the consumer segment, nine-month sales increased 2.7% to $766.2 million from a pro-forma $746.4 million reported in the first nine months of fiscal 2010. Organic sales increased by 2.6%.
Outlook
The "comparatively strong” numbers in the seasonally weak period prompted the Medina, OH-based company to increase the FYI 2011 guidance it issued July 26, 2010.
“We now expect sales growth of between 7% and 8% to approximately $3.35 billion from a pro-forma base of $3.12 billion in fiscal 2010 and growth in diluted earnings per share to a range of $1.40 to $1.45, up from a pro-forma $1.26 per share in fiscal 2010,” said Sullivan.
“During the third quarter, we saw signs of improvement in the commercial construction market, while consumer sales also rebounded from a flat first six months. Both price and availability of raw materials remain challenging, and we expect this environment to continue through the fourth quarter and into the 2012 fiscal year," Sullivan stated.
Raw materials include color pigments, resins, solvents and other natural-gas and oil-based components.
Subsidiary Acquires Manufacturer
RPM also noted that its subsidiary, The Euclid Chemical Company, had recently acquired PSI Packaging Inc., a producer of micro- and macro-fibers for the ready-mixed and pre-cast concrete market. Based in LaFayette, GA, PSI has annual sales of about $6 million.
Euclid Chemical is a unit of RPM's Building Solutions Group, which serves the global construction market. PSI will provide additional manufacturing and sales capacity, expertise and a complementary product line to Euclid Chemical products, RPM said.
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