RPM International Inc. reported record sales, net income and diluted earnings per share for both its fiscal fourth quarter and fiscal year ended May 31, 2014.
Fourth-quarter net sales increased 9.1% to $1.28 billion from $1.17 billion. Consolidated earnings before interest and taxes (EBIT) improved 36.5% to $172.1 million, from $126.1 million a year ago on an "as-reported" basis. Net income for the fourth quarter was $108.8 million, up 66.4% from the $65.4 million reported in the fourth quarter of fiscal 2013. Diluted earnings per share were $0.80, up 63.3% from $0.49 reported a year ago.
The fourth quarter of fiscal 2013 included one-time, pre-tax adjustments totaling $42.7 million. Compared to "as-adjusted" results in the fiscal 2013 fourth quarter, EBIT was up 10.9% from $155.2 million, and net income was up 14.1% from $95.4 million. Diluted earnings per share were up 11.1% from an adjusted $0.72 in the fiscal 2013 fourth quarter.
"Our overall operating results for both the quarter and year were strong, led by continued vigor in both our consumer segment and most of our European businesses. In addition, our Legend Brands subsidiary had an extraordinary year, driven in part by the severe winter in North America, which stimulated demand for its restoration services equipment," stated Frank C. Sullivan, chairman and chief executive officer. "Net sales, net income and diluted earnings per share all experienced significant growth, compared to both reported and adjusted prior-year results."
Fourth-Quarter Segment Sales and Earnings
Fiscal 2014 fourth-quarter industrial segment sales increased 8.5% to $769.2 million from $709.2 million reported a year ago. Organic sales improved 8.2%, including unfavorable foreign exchange translation of 0.5%, while acquisition growth added 0.3%. Industrial segment EBIT was up 15.2% to $99.2 million from $86.1 million in the prior year on an "as-reported" basis. EBIT for the fourth quarter of fiscal 2014 was up 9.1% over the adjusted $91.0 million a year ago.
"We were particularly heartened by the continued turnaround of our industrial businesses in Europe, which had struggled in the face of a very difficult economy a year ago, and where some of our businesses posted strong double-digit growth this year. This exceptional performance was also true for Legend Brands, which manufactures equipment for water and smoke damage remediation mainly in North America. Our businesses serving the North American commercial construction markets continued their slow, but steady improvement and are well-positioned to capitalize on anticipated future acceleration in the markets they serve. Finally, the past 18 months have been particularly challenging for our Tremco roofing division. It has now completed an internal reorganization, including a new, energized management team that is focused on a return to growth, and initial results of this effort appear promising," stated Sullivan.
Net sales for RPM's consumer segment grew 10.0% to $507.6 million from $461.6 million in the fiscal 2013 fourth quarter. Organic sales were up 9.0%, while acquisition growth added 1.0%. Foreign exchange translation was slightly negative. Consumer segment EBIT increased 46.9% in the fiscal 2014 fourth quarter to $86.0 million from $58.5 million, on an "as-reported" basis. Consumer segment EBIT improved 10.3% from an adjusted $78.0 million in the fourth quarter of fiscal 2013.
"The story on our consumer product lines for the fourth quarter of fiscal 2014 is remarkable considering that consumer sales in last year's fourth quarter grew by 22.4%, while EBIT was up 29.2% on an 'as-adjusted' basis. In addition to benefitting from the gradual comeback in the North American housing market, they are driving their own success through market share gains and the introduction of new products at price points higher than our traditional offerings," stated Sullivan.
Cash Flow and Financial Position
For fiscal 2014, cash from operations was $278.1 million, compared to $368.5 million in fiscal 2013. The decrease was attributable to the General Services Administration (GSA) and related settlement payments of $63.0 million during the first quarter of fiscal 2014 and uses of working capital required to support sales growth in the fourth quarter. Capital expenditures during the year were $93.8 million, while depreciation was $58.5 million. Total debt at the end of fiscal 2014 was $1.35 billion, compared to $1.37 billion at the end of fiscal 2013. RPM's net (of cash) debt-to-total capitalization ratio was 42.4%, compared to 46.2% at May 31, 2013.
"RPM's capital position remains strong, with 99.8% of total debt fixed at an average interest rate of 5.1%, aided in part by the sale during the third quarter of $205 million in 2.25% convertible senior notes due 2020. Most of the proceeds were used to retire $200 million of 6.25% unsecured notes due December 15, 2013. Our robust cash position enables a continuation of our acquisition program, internal growth efforts and a growing cash dividend. At May 31, 2014, RPM had $1.13 billion in liquidity, including cash and long-term committed available credit," Sullivan stated.
Fiscal 2014 Consolidated Sales and Earnings
Fiscal 2014 consolidated net sales increased 7.3% to $4.38 billion from $4.08 billion in fiscal 2013. On an "as-reported" basis, consolidated EBIT was up 95.5% to $489.7 million from $250.6 million in fiscal 2013. Net income improved 195.8% to $291.7 million from $98.6 million in fiscal 2013. Diluted earnings per share of $2.18 were up 194.6% from $0.74 a year ago.
Fiscal 2013 adjustments totaled $184.8 million pre-tax. Based on adjusted results for fiscal 2013, net sales in fiscal 2014 were up 7.2%. Consolidated EBIT increased 16.1% over the adjusted $421.7 million a year ago. Net income was up 20.9% over the adjusted $241.3 million in fiscal 2013, while diluted earnings per share improved 19.8% over the adjusted $1.82 last year.
Fiscal 2014 Segment Sales and Earnings
Sales for RPM's industrial segment increased 5.1% to $2.77 billion from $2.64 billion in fiscal 2013. Organic sales increased 4.6% including unfavorable foreign exchange translation of 0.9%, with acquisition growth contributing 0.5%. Industrial segment EBIT improved 74.9% to $306.0 million from $174.9 million in fiscal 2013, on an "as-reported" basis. Industrial segment sales increased 5.0% over adjusted sales in fiscal 2013, while EBIT increased 11.1% from the adjusted $275.4 million in the prior year.
Consumer segment sales for fiscal 2014 increased 11.4% to $1.61 billion from $1.44 billion in fiscal 2013. Organic sales increased by 6.4%, including unfavorable foreign exchange translation of 0.4%, and acquisition growth added 5.0%. Consumer segment EBIT increased 31.7%, to $251.1 million from $190.6 million on an "as-reported" basis. Consumer segment EBIT grew 19.5% over the adjusted $210.1 million in fiscal 2013.
SEC Investigation as to Fiscal 2013 Timing of GSA Accrual
RPM was notified by the Securities and Exchange Commission on June 24, 2014, that it is the subject of a formal investigation pertaining to the timing of its disclosure and accrual of loss reserves with respect to the previously disclosed fiscal 2013 GSA and Department of Justice investigation into compliance issues relating to Tremco roofing division's GSA contracts. RPM accrued $68.8 million for a settlement with the GSA during the third quarter of fiscal 2013, which was revised to $65.1 million during the fourth quarter of fiscal 2013, and the investigation was ultimately resolved with a payment to the GSA of $61.9 million in the first quarter of fiscal 2014. RPM's audit committee has retained independent counsel to investigate issues surrounding the timing of the disclosure and accruals in question.
RPM believes that the potential financial statement impact of this issue is confined to whether some or all of the reserve accrued in connection with RPM's submission of a settlement proposal during the third quarter of fiscal 2013 should have been recorded during prior quarterly periods of that same fiscal year. As a result, the resolution of this matter is not expected to impact RPM's reported results for the full fiscal year 2013 or fiscal year 2014.
Pending resolution of this matter, RPM intends to file a Notification of Late Filing on Form 12b-25 with respect to its Annual Report on Form 10-K by July 31, 2014, which will include a substantial portion of the disclosures required in RPM's Form 10-K other than the financial statements. RPM anticipates that the audit committee's investigation will be completed in mid-August, and RPM expects that it will file its complete Form 10‑K shortly after completion of the investigation.
"For our 2015 fiscal year, we anticipate 6% to 8% growth in consolidated net sales, with 5% to 7% growth in our consumer segment and 6% to 8% growth in our industrial segment. Net income is expected to increase 9% to 11%, resulting in diluted earnings per share in the range of $2.38 to $2.42. This expectation is predicated on continued growth within our consumer segment, as a result of continuation of trends from fiscal 2014: ongoing recovery in the North American housing market, market share gains and market acceptance of new products at higher price points than our traditional consumer product lines. In the industrial segment, we expect momentum in our European businesses to continue at a more moderate pace, with a return to growth at the Tremco roofing division, along with slow growth in businesses serving the North American commercial construction markets. We will continue to leverage a great management team at Viapol in Brazil to fuel growth for RPM in South America by building their own business and adding manufacturing for other RPM companies in fiscal 2015," Sullivan stated.