Roofing Inquiry Brings RPM Q3 Loss
A federal investigation into RPM International's roofing contracts and the closing of a business brought Rust-Oleum's parent company a $42.4 million loss in the third quarter.
The Medina, OH, holding company that owns Tremco, Carboline and dozens of other consumer and industrial coatings products and brands reported a $42.4 million net loss for the period ending Feb. 28, as opposed to a $6.6 million profit in the same quarter of 2012, the company reported Thursday (April 4).
The company reported a diluted loss per share of $0.33, compared to diluted earnings per share of $0.05 in the year-ago period.
Total sales, however, showed a net increase of 9.1 percent over the year-ago period, to $843.7 million, and the company stuck by its full-year outlook. Excluding adjustments, earnings per share increased by 40 percent to 7 cents for the third quarter, which beat analysts’ expectations by a penny, market reports noted.
'Solid Operating Results'
"RPM achieved solid operating results in the quarter," said Chairman and CEO Frank C. Sullivan.
Excluding adjustments, net sales, net income and diluted earnings per share increased significantly, Sullivan said, “driven by strong performance in all of our consumer segment businesses and in many industrial segment businesses.”
He also noted that the third quarter of 2012 set records for the company, with a five-fold increase in net income, two new acquisitions, and unseasonably mild weather that jumpstarted sales in the slow season.
Roofing Products Investigation
RPM’s biggest loss involves a $68.8 million contingency associated with the company’s anticipated settlement of an investigation of roofing contracts between its Building Solutions Group and the General Services Administration.
The Building Solutions group includes the Tremco, Dryvit, DPA, WTI and CanAm brands for cool roofs, deck coatings and membranes, air barriers, sealants and waterproofing, and other building envelope applications.
Tremco's green headquarters and other businesses in RPM's Buildings Solutions group are awaiting the outcome of a federal investigation into the company's roofing division. RPM says it is in talks to settle the case.
Building Solutions is part of RPM’s industrial segment, which makes up 67 percent of the company’s net sales.
RPM said Thursday that it was in settlement talks with the Justice Department and GSA “aimed at resolving the investigation.”
“The company is cooperating with the investigation, which involves compliance with certain pricing terms and conditions of GSA contracts under which RPM's Building Solutions Group roofing division sold products and services to the federal government,” RPM said.
Most of the contingency relates to products and services sold between 2002 and 2008. The final settlement may vary from the contingency, RPM noted.
The company also noted other weakness in its North American roofing market.
Brazilian Bust, Boom
The company also wrote off $6.1 million in deciding to close a flooring business in Brazil after acquiring Viapol Ltda. building materials in 2012. The acquisition was RPM’s first in Brazil.
The write-off, however, also triggered a $7.7 million tax benefit, boosting net by $1.6 million or $0.01 per share, in the end.
The Viapol deal gives RPM "a significant platform" for its products in Brazil.
"We are extremely excited about the establishment of a significant platform for RPM in Brazil with the Viapol acquisition, where we can leverage its substantial sales force, manufacturing facilities, broad distribution network and entrepreneurial management team to expand RPM's epoxy and polyurethane flooring presence," stated Sullivan.
Consumer Sales and Earnings
Boosted by new products and the “gradual recovery” of the housing market, and unaffected by one-time adjustments, RPM's consumer segment posted a 14.6 percent increase in net sales, to $311.4 million, over the third quarter of fiscal 2012, RPM reported.
Acquisitions accounted for nearly all of the increase, although organic sales grew by 2.5 percent and foreign exchange translation added 0.3 percent.
Consumer segment Earnings Before Interest and Taxes (EBIT) increased 61.6 percent to $34.7 million from $21.5 million a year ago.
“We are particularly encouraged by the traction being gained by new products that are well beyond our traditional consumer price points and by increases in market share across virtually all consumer product lines,” said Sullivan.
He noted the recent acquisitions of nail polish enamel maker Kirker and HiChem Paint Technologies Pt. Ltd., a leading Australian manufacturer of automotive aftermarket coatings, as well as specialty coatings for industrial applications and home maintenance.
Unaffected by the industrial adjustment, RPM's consumer segment posted a 14.6 percent increase in net sales.
Those companies "provide a counter to the historic seasonal low of most of RPM's core consumer businesses," stated Sullivan.
Nine-month sales increased by 13.4 percent to $981.1 million, including 4.9 percent growth in organic sales. Consumer segment EBIT improved 32.4 percent, to $132.1 million from the first nine months of 2012.
Industrial Sales and Earnings
Excluding adjustments, industrial segment sales grew by 6.1 percent to $532.3 million in the fiscal 2013 third quarter. Acquisitions accounted for 4.5 percent of the figure, while organic sales improved by 1.6 percent.
Including adjustments, industrial segment EBIT plummeted by $12.6 million, to $8.7 million, from the year-ago period. A downswing in foreign exchange losses accounted for $7.5 million of that hit, combined with $4.1 million in non-operating expense changes in Europe, where economic conditions remain difficult, RPM said.
"With the exception of our roofing division, most of our North American industrial businesses benefited from the gradual economic recovery in the U.S., especially our businesses serving commercial construction markets," Sullivan said.
Carboline and other brands in RPM's industrial segment make up 67 percent of the company's net sales. Nine-month organic sales for the segment were flat.
Nine-month sales on an as-reported basis increased by 6.4 percent, to $1.93 billion; organic sales were flat. Industrial segment EBIT fell to $88.8 million from $192.0 million in the first nine months of fiscal 2012. Adjusted, nine-month industrial segment EBIT declined 1.3 percent to $184.4 million from the prior year.
The full year should bring mixed results, Sullivan said.
"For the full year, we now expect consumer segment sales to exceed the higher end of our targeted 8 percent to 10 percent range, while industrial segment sales will most likely fall short of the lower end of our previous 6 percent to 10 percent range.
The company’s full-year guidance calls for consolidated net sales growth of 8 percent to 10 percent and net income growth of 9 percent to 12 percent, resulting in diluted earnings per share in a range of $1.80 to $1.85, on an as-adjusted basis.
“While we are hopeful of hitting our full year goals, this third-quarter shortfall and continuing weakness in Europe and roofing will make this challenging," Sullivan said.