Fiscal 2019 second-quarter net sales were a record $1.36 billion, up 3.6 percent over the $1.32 billion reported a year ago. The quarter’s results include the impact of charges of $29.2 million primarily for acquisitions, convertible debt extinguishment and restructuring related to the company’s operating improvement plan. Investment losses were $6.5 million during the current quarter as a result of a new accounting standard, which now requires RPM to record unrealized gains and losses on equity securities in earnings rather than as a component of equity.
“We achieved solid top-line improvement with sales growth of 3.6 percent, despite the unfavorable foreign currency translation effect of two percent,” said Frank C. Sullivan, RPM chairman and CEO. “Like many manufacturers, our bottom line was impacted by a continued rise in costs for raw materials, freight, labor and energy, as well as adverse foreign exchange translation. SG&A improved by 30 basis points, and adjusted SG&A, excluding restructuring expenses, improved by 100 basis points versus last year’s second quarter. Restructuring activities related to our MAP to Growth operating improvement plan, the details of which we shared at an investor day on Nov. 28, are well underway. Our plan is focused on driving greater efficiency and long-term profitability of the business to enhance shareholder value.”
As previously announced, on Nov. 27, 2018, RPM redeemed all of its outstanding 2.25 percent Convertible Senior Notes due 2020, primarily with cash. As a result, approximately 3.3 million shares will be removed from the calculation of diluted EPS going forward.
Second-Quarter Segment Sales and Earnings
During the fiscal 2019 second quarter, RPM’s industrial segment net sales increased 2.1 percent to $718 million from $702.9 million a year ago, reflecting organic growth of 3.3 percent and acquisitions contributing an additional 1.5 percent. Foreign currency translation reduced sales by 2.7 percent. Industrial segment IBT was $54.4 million compared with $67.7 million a year ago. EBIT was $56.8 million compared to $70.2 million in the fiscal 2018 second quarter. Adjusted EBIT, which excludes charges related to acquisitions, restructuring and other expenses, increased one percent to $70.9 million from the year-ago period.
“Solid performance in our businesses providing corrosion control coatings and concrete admixture and repair products drove top-line growth in the industrial segment, despite the impact of the second wettest autumn on record in the U.S., which affected sales somewhat, particularly in our commercial roofing business,” Sullivan said. “International sales, which account for approximately half of our industrial segment business, were soft this quarter. Higher raw material costs, unfavorable foreign exchange, restructuring and other related charges impacted results. We made good progress on our operating improvement initiatives in the segment, which included consolidating production after announcing the closure of three plants and shifting that manufacturing to other facilities.”
RPM’s consumer segment generated a 4.1 percent increase in sales to $432.6 million from $415.4 million in the fiscal 2018 second quarter. Organic sales increased 2.8 percent, while acquisition growth contributed 2.9 percent. Foreign currency translation reduced sales by 1.6 percent. Consumer segment IBT was $41.2 million compared with $45.1 million in the prior-year period. EBIT was $41.3 million compared to $45.2 million in the fiscal 2018 second quarter. Excluding restructuring-related expenses, adjusted EBIT was $42.9 million for the fiscal 2019 quarter.
“Price increases instituted late in the first quarter helped to mitigate margin erosion in the consumer segment. However, raw material costs and foreign exchange continue to be challenges,” said Sullivan. “On the top line, organic sales growth was aided by pricing and new product introductions in our sealants and adhesives business, resulting in new accounts and market share gains. Sales were tempered by the exceptionally wet weather in the U.S., the segment’s largest market. We continued to make operational improvements, which were kicked off in our fourth quarter of last year, leading to reductions in working capital and the announced closure of one additional manufacturing facility during the second quarter.”
RPM’s specialty segment reported fiscal 2019 second-quarter sales growth of 7.6 percent to $212.0 million from $197.1 million in the year-ago period. Organic growth contributed 2.3 percent, while acquisition growth was 6.1 percent. Foreign currency translation reduced sales by 0.8 percent. Specialty segment IBT was $30 million compared with $34.4 million in the prior-year period. EBIT was $29.9 million compared to $34.4 million in the fiscal 2018 second quarter. Adjusted EBIT, which excludes acquisition costs and restructuring-related expenses, was $34.1 million in the fiscal 2019 second quarter.
“Driving the strong second-quarter performance in the specialty segment were our businesses providing wood coatings, powdered coatings and fluorescent colorants. The segment also received a boost to the top line from the acquisition of Nudura in September, which extends our building envelope product line offerings. Performance by our restoration equipment business was brisk as it responded to recent natural disasters but was below elevated sales levels that resulted from Hurricane Harvey last year. We made MAP to Growth progress in this segment as well, with the announced closure of one manufacturing facility,” Sullivan said.
First-Half Sales and Earnings
Fiscal 2019 first-half net sales improved 6.1 percent to $2.82 billion from $2.66 billion during the first six months of fiscal 2018. Organic growth was 5.4 percent, with acquisitions adding 2.1 percent and foreign currency translation reduced sales by 1.4 percent. Net income was $119 million compared to $211.9 million in the fiscal 2018 first half. Diluted EPS was $0.89 versus $1.56 a year ago. IBT was $158.5 million compared to $264.5 million reported in the fiscal 2018 first half. EBIT was $210.7 million versus the $309.4 million reported last year. Excluding charges for acquisitions, convertible debt extinguishment, asset write-offs, restructuring and other expenses, fiscal 2019 first-half adjusted EBIT was $279.7 million and diluted EPS was $1.28. Excluding a charge for a favorable discrete tax adjustment of $18 million, fiscal 2018 first-half adjusted diluted EPS was $1.43.
First-Half Segment Sales and Earnings
Fiscal 2019 first-half sales in RPM’s industrial segment were up 4.7 percent to $1.5 billion from $1.43 billion in the fiscal 2018 first half. Organic sales increased by five percent, while acquisition growth added 1.6 percent. Foreign currency translation decreased sales by 1.9%. IBT for the industrial segment was $123.5 million from $156.6 million in fiscal 2018. EBIT of $128.3 million compared to $161.7 million in the first half last year. Excluding the fiscal 2019 first-half charges mentioned above, industrial segment EBIT increased 1.9 percent to $164.7 million from adjusted EBIT of $161.7 million a year ago.
First-half sales for the consumer segment improved 8.9 percent to $917.8 million from $842.6 million a year ago. Organic sales growth was 7.6 percent, acquisitions added 2.3 percent, while foreign currency translation reduced sales by one percent. The consumer segment reported IBT of $92.5 million, compared to $117.5 million in the year-ago first half. EBIT of $92.8 million for the first six months of fiscal 2019 compares to $117.8 million in the prior-year period. Excluding charges previously mentioned, fiscal 2019 first-half consumer segment EBIT was $95.8 million.
Specialty segment sales grew five percent to $404.8 million from $385.6 million in the 2018 first half. Organic growth was two percent, while acquisitions added 3.3 percent. Foreign currency translation reduced sales by 0.3 percent. IBT for the specialty segment was $57.8 million compared to $67.6 million in fiscal 2018. For the first half of fiscal 2019, specialty segment EBIT was $57.6 million compared to $67.4 million a year ago. Excluding charges mentioned above, specialty segment EBIT was $64.7 million for the first six months of fiscal 2019.
Cash Flow and Financial Position
For the first half of fiscal 2019, cash from operations grew by 28.7 percent to $148.3 million compared to $115.2 million a year ago. This increase of $33.1 million was due to improved working capital management. Capital expenditures of $57.8 million compared to $45.3 million during the first half of last year. Total debt at Nov. 30, 2018, was $2.37 billion, compared to $2.14 billion at Nov. 30, 2017, and $2.17 billion at May 31, 2018. At Nov. 30, 2018, liquidity grew from the prior quarter to $1.1 billion, as a result of a recent refinancing of the company’s revolving line of credit. Total liquidity includes cash of $226.9 million and $862.9 million in long-term committed available credit.
“We remain focused on executing our MAP to Growth operating improvement plan, targeting a 540-basis-point improvement in our operating margin. As we announced on Nov. 28, 2018, we intend to return $1.5 billion in capital to our stockholders by May 31, 2021, through a combination of dividends and share repurchases. In addition to the previously mentioned convertible bond redemption, we have repurchased approximately $82 million of our common stock through Nov. 30, 2018. Additional actions we completed during our fiscal 2019 second quarter include the announced closure of five manufacturing plants, the reduction of 149 positions, and the start of our transition to center-led manufacturing and procurement functions. We also began to implement actions to improve our manufacturing processes, optimize assets and reduce inventory, while moving forward on our supply chain initiatives to consolidate the number of vendors used and negotiate more favorable pricing and payment terms. Accordingly, we are maintaining the long-term projections that we provided at our Nov. 28 investor day,” said Sullivan.
“In the third quarter, from an operating perspective, revenue growth should remain in the low- to mid-single-digit range. While we are seeing the early benefits of our purchasing activities and softness in certain raw material categories, it is important to note that because RPM is on a FIFO basis for inventory, the benefits we are beginning to see on the raw material front will typically flow into our income statement 90 days later than if we were under the LIFO method of accounting, as is the case with our large industry competitors. Further, due to three non-operating items, we anticipate significantly lower reported earnings and earnings per share for the third quarter period ending Feb. 28, 2019.
“Taken together, expectations of continuing raw material cost challenges and these non-operating items are likely to result in third-quarter EPS in the range of $0.10 to $0.12,” said Sullivan.
“Although we are in the early innings of our restructuring efforts, we are making good progress, which has us excited about the prospects for the future. As we work through the plan over the next few quarters, we will continue to adjust out associated charges to provide a clear picture of the initiative and its results,” Sullivan concluded.