Consumer Declines Ding RPM's Q2
Slumping sales, legal bills, Eurozone instability, and a disappointing acquisition drove Rust-Oleum parent RPM International on Wednesday (Jan. 7) to shave its earnings guidance for fiscal year 2015.
Those were the lowlights of a flat second quarter for the Medina, OH, holding company, which owns dozens of brands of coatings, sealants and construction materials.
Industrial segment sales inched up just 1.4 percent in the second quarter, while consumer sales slid by 2.8 percent, RPM reported Wednesday.
The industrial segment, which makes up nearly two-thirds of the company’s business, includes high-performance architectural products. Indeed, rebounding commercial construction activity in the U.S. accounted for some of the quarter's bright spots.
The quarterly numbers echoed the company’s performance for the first half of the year, which saw gains across the board in the 1 percent range.
On the plus side, the forthcoming reconsolidation of a key RPM subsidiary and its associated businesses should substantially bolster the sales and income column next quarter, the company said.
RPM announced in December that it had gained final court approval for a reorganization plan to reunite its Specialty Products Holding Corp. and SPHC's seven subsidiaries with the rest of the parent company.
SPHC, an RPM subsidiary, and its businesses have been living in the legal netherworld of bankruptcy protection since May 2010 as RPM developed a plan to permanently resolve hundreds of millions of dollars in asbestos claims related to its Bondex International subsidiary.
Bondex, owned by SPHC, sold asbestos-containing building materials until 1977, eventually drawing a mountain of asbestos claims.
In July 2014, RPM announced that it would create a $797.5 million trust fund to address all asbestos claims going forward. The last step in the process was to reunite SPHC and its subsidiaries with RPM and its balance sheet.
A recently approved corporate reorganization plan will reunite RPM subsidiaries with the parent company, bringing their sales revenue back onto the balance sheet.
In the third quarter, these companies (and their $400 million in annual sales) will rejoin RPM:
Mixed Q2 Performance
Meanwhile, however, chairman and CEO Frank C. Sullivan reported a "mixed" second quarter, "with stronger sales in our businesses serving the U.S. commercial construction market offset by weaker results in Europe, a continued unfavorable year-over-year trend from our Kirker nail enamels business, and the negative impact of foreign currency."
Overall net sales of $1.07 billion were flat compared to last year. Consolidated EBIT (earnings before interest and taxes) increased 3.2 percent, to $120.1 million, while second-quarter net income was up 9.8 percent. Earnings per diluted share increased 8.3 percent, to $0.52.
Industrial Segment Results
RPM's large industrial segment includes construction sealants and chemicals, corrosion control coatings, powder coatings, waterproofing and concrete repair, EIFS, pigments, and flooring and roofing systems. RPM's dozens of industrial brands include market-leading Carboline, Day-Glo, Dryvit, Mohawk, Pettit, Stonhard and Tremco.
RPM's Stonhard is the top global supplier of industrial polymer flooring systems.
Segment sales for the quarter were flat, but the segment's first-half sales improved 3.6 percent, to $1.49 billion. Organic sales increased 2.6 percent, including foreign exchange losses, while acquisition growth added 1.0 percent. EBIT for the first half was flat over the prior-year period.
Sullivan centered much of the problem in the Eurozone: "Most of our European businesses are experiencing a challenging economic climate, negatively impacting our results," he said. "Additionally, the strong dollar has negatively impacted all of our international results upon translation."
On the other hand, the U.S. commercial construction rebound boosted RPM's concrete admixture and commercial sealants companies, he said. Remediation equipment for water and smoke damage also performed well, as did the South American businesses.
Consumer Segment Results
The smaller consumer segment comprises 18 brands, including the well-known Rust-Oleum, DAP, Varathane and Zinsser—brands that, as RPM says, "can be found on almost every garage or basement shelf in the U.S. and Canada."
Consumer segment sales declined for both the second quarter and the first half of the year. Organic sales dipped by 4.2 percent for the quarter and 3.0 percent for the half.
The quarter also recorded a $2.8 million pre-tax one-time cost for legal expenses related to a U.S. Securities and Exchange Commission investigation into expense reporting in FY 2013.
Consumer segment EBIT improved 19.1 percent in the quarter, however, due mainly to the reversal of a $17 million "earnout" related to RPM's 2012 acquisition of Kirker Enterprises, a maker of nail-care enamels.
RPM acquired Bondex in 1966. By the time the company stopped making asbestos-containing products 11 years later, the legal fallout was well underway.
The acquisition bookkeeping mechanism allows for performance-related payments to offset any shortfall in earnings, and Kirker has not been making its numbers since the acquisition. RPM blames excess investory and tightened consumer spending for the shortfall.
Overall, RPM's acquisition-intensive 2014 brought growth hovering around the 1 percent mark, the company reported.
In January, RPM's Rust-Oleum Group bought Citadel Restoration and Repair Inc., a maker of concrete and wood deck floor coatings based in Minnesota.
In June, RPM's Viapol Ltda. acquired Beumat Quimica Ltda., a Brazilian waterproofing products manufacturer. (RPM acquired Viapol, a major Brazilian manufacturer of building materials and construction products, in 2012.)
In July, Rust-Oleum bought Georgia-based Krud Kutter Inc., a supplier of residential, commercial and industrial cleaners and removers.
The company does not expect dramatic improvement in the third quarter and, in fact, reduced its EPS guidance for the year to $2.25 from $2.30.
"In our industrial segment, we do not see a near-term turnaround in the European economies and expect continued strengthening of the U.S. dollar to continue negatively impacting results on translation," said Sullivan.
The outlook is better on the consumer side, where RPM expects stronger spending to bring home 6 percent sales growth in the second half.
And beyond that, Sullivan said: "From a longer-term perspective, we are optimistic given the return of our SPHC businesses and the elimination of their asbestos liability. We can now accelerate growth investments in our businesses and more aggressively return capital to shareholders when appropriate."