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RPM Fourth-Quarter, Year-End Numbers Mixed

Friday, July 20, 2018

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Holding company RPM International Inc. (Medina, Ohio), parent of paints and coatings companies including Carboline, Tremco and Rust-Oleum, reported record sales but a dip in net income in the fourth quarter of its fiscal year 2018, which ended May 31.

The company attributes a fourth-quarter net income decrease of 33 percent and adjusted net income increase of just 3 percent to higher raw material costs and an extended winter season.

RPM Products
RPM International Inc.

RPM International Inc., the parent company of paints and coatings firms including Rust-Oleum, Carboline and Tremco, released on Thursday (July 19) its financial report for its fiscal fourth quarter and year—which ended May 31—and reported a fourth-quarter net income decrease despite record sales reports.

The company notes, though, that it “recorded restructuring and other charges to reduce expenses and position RPM for long-term growth, as well as inventory-related charges in its consumer segment tied to a strategic shift in direction.”

Fourth-Quarter and Year-End Results

Despite the income reporting (which decreased year-over-year from $128.1 million to $85.7 million), net sales for the quarter increased 4.4 percent to $1.56 billion—up from $1.49 billion at this time last year.

“We achieved respectable top-line sales growth in the fourth quarter, particularly in light of the unseasonably cold and rainy spring in North America that delayed coating and construction projects,” said RPM CEO Frank C. Sullivan.

“Bottom-line results were adversely affected by rising raw material costs, as well as the decline in sales in the consumer segment and the resulting lack of leverage, exacerbated by strategic restructuring initiatives introduced by new management at Rust-Oleum.”

Sullivan noted the management changes a few times in the report, in reference to an announcement the company made public within the past month about a new agreement with fund manager Elliott Management and a restructured leadership team.

RPM announced on June 28 that its agreement with Elliott would bring about changes, including two new directors, the establishment of an Operating Improvement Committee on its board and the engagement of a consultant on operational improvements.

Rust-Oleum

Sullivan noted the management changes a few times in the report, which is in reference to an announcement the company made public within the past month about a new agreement with fund manager Elliott Management and a restructured leadership team.

“We began addressing operating improvement opportunities with our board over a year ago,” Sullivan said. “We were in the early phases of this initiative when a now major shareholder—Elliott Management—contacted us because they believed that RPM’s stock was undervalued, particularly in relationship to opportunities to improve our operating performance and margin profile. We agree.”

On the year, consolidated net sales increased 7.3 percent from $4.96 billion to $5.32 billion.

By Segment

The company’s Consumer Segment was the only business to see a drop in net sales, decreasing from $565.3 million this time last year to $548 million. EBIT in the fiscal 2018 fourth quarter was $25.5 million, versus $99.6 million in fiscal 2017. The company noted that the segment recorded $47.3 million in restructuring and inventory-related charges in the quarter and a $4.3 million severance charge in fiscal 2017. Excluding these charges, EBIT was $72.8 million compared with $103.9 million a year ago.

“Sales growth in our consumer segment was hampered by extremely unfavorable weather conditions in North America, the segment’s largest market, which resulted in sluggish consumer takeaway,” Sullivan said. “Our retail partners reacted to the unfavorable weather by reducing inventory, further compounding the problem.

“The lag in our ability to achieve price increases to offset raw material inflation contributed to the decline in EBIT. During the quarter, Rust-Oleum eliminated approximately 150 positions, announced the closure of two manufacturing facilities and simplified its management structure to lower cost. As part of this initiative, we rationalized product lines, resulting in a $36.5 million charge. These actions will enable Rust-Oleum to better optimize manufacturing, focus on key products and improve working capital going forward.”

Carboline

The Industrial Segment, which includes Carboline, saw the largest growth in both the quarter and the year.

On the year, the segment increased 4.4 percent from $1.68 billion to $1.75 billion.

Fourth-quarter sales in the company’s Specialty Segment increased 1.5 percent from $194 million to $196.9 million. The company noted that it anticipated a modest increase, partially due to a patent expiration. The segment increased 5.5 percent on the year, however, from $713.6 million to $752.5 million.

Industrial Growth

The Industrial Segment saw the largest growth in both the quarter and the year, up 10.8 percent from $733.5 million to $812.9 million in the fourth, with organic sales improving 6.2 percent, which Sullivan attributed to the company’s North American waterproofing business. For fiscal 2018, the segment increased 9.8 percent from $2.56 billion to $2.81 billion.

Looking ahead, RPM says it expects certain challenges to continue.

“During fiscal 2019, we expect the challenging raw material environment to continue, perpetuating the stress on gross profit margins,” Sullivan said. “All of our businesses are aggressively pursuing price increases and we expect to see some of that benefit in our consumer segment this fiscal year.”

   

Tagged categories: Business matters; Carboline; Earnings reports; Finance; RPM

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