10.02.19
RPM International Inc. reported financial results for its fiscal 2020 first quarter ended Aug. 31, 2019.
First-Quarter Consolidated Results
Fiscal 2020 first-quarter net sales were a record $1.47 billion compared to the $1.46 billion reported a year ago. First-quarter net income was $106.2 million, up 52.2% over the $69.8 million reported in the year-ago period, and diluted earnings per share (EPS) were $0.82, up 57.7% compared to $0.52 in the year-ago quarter. Income before income taxes (IBT) was up 55.4% to $142.8 million compared to $91.9 million reported in the fiscal 2019 first quarter. RPM’s consolidated earnings before interest and taxes (EBIT) were up 45.5% to $165.8 million compared to $113.9 million reported in the fiscal 2019 first quarter.
The first quarter included restructuring-related expenses and other items of $26.8 million during fiscal 2020 and $39.8 million of restructuring-related items in fiscal 2019. Excluding these charges, RPM’s adjusted EBIT was up 25.3% to $192.6 million compared to $153.7 million during the year-ago period. In addition, the company has continued to exclude the impact of all unrealized net gains and losses from marketable equity securities, as well as realized net gains and losses on sales of all marketable securities from adjusted EPS, as their inherent volatility is outside of management’s control and cannot be predicted with any level of certainty. These investments resulted in a net after-tax gain of $2.8 million for the first quarter of fiscal 2020 and were de minimis during the same quarter last year. Excluding the restructuring and other charges, as well as investment gains, adjusted diluted EPS increased by 25% to $0.95 compared to $0.76 in fiscal 2019.
“We continued to experience the benefits of the plant rationalization, manufacturing improvements and center-led procurement initiatives of our 2020 MAP to Growth operating improvement plan during the quarter. These actions resulted in adjusted EBIT and EPS performance that met our projections despite modest top-line sales growth,” RPM Chairman and CEO Frank C. Sullivan said. “As we anticipated in July, sales growth was modest as a result of an extremely wet June that slowed painting and construction activity in North America and unfavorable foreign exchange. We were encouraged to see our restructuring program drive significant EBIT margin improvement across all of our segments. On a consolidated basis, our adjusted EBIT margin improved 260 basis points.”
First-Quarter Segment Sales and Earnings
“As we communicated last quarter, we have realigned the business into four reportable segments from our previous three segments. The new segments are the Construction Products Group, Performance Coatings Group, Consumer Group and Specialty Products Group,” Sullivan said. “The objectives of this realignment are to position the business for accelerated growth and to provide our investors with greater visibility into the business and better comparability among our peers. Starting with the current quarter of fiscal 2020, we are reporting our results under this four-segment structure and are providing comparable fiscal 2019 financials that have been recast to reflect the effect of this realignment.”
Construction Products Group net sales increased 3.6% to $536.1 million during the fiscal 2020 first quarter compared to fiscal 2019 first-quarter sales of $517.5 million, reflecting organic growth of 0.7% and acquisitions contributing an additional 4.4%. Foreign currency translation reduced sales by 1.5%. Segment IBT was $82.7 million compared with IBT of $65 million a year ago. EBIT was $84.7 million, up 25.8% compared to EBIT of $67.3 million in the fiscal 2019 first quarter. The segment incurred $2.2 million in restructuring-related expenses and other costs during the first quarter of fiscal 2020 and $3.3 million in restructuring-related expenses during the same period of fiscal 2019. Excluding these charges, fiscal 2020 adjusted EBIT increased 23.1% to $86.9 million from adjusted EBIT of $70.6 million reported during the year-ago period.
“The recent acquisitions of Nudura and Schul, as well as last year’s price increases, helped to drive sales growth in the Construction Products Group, despite unfavorable foreign exchange. Impacting our North American businesses were labor shortages and June weather conditions that delayed construction activity," Sullivan said. "Also contributing to the top line was our basement waterproofing solutions business, as well as a recovery in our Brazilian operation, which generated significant sales growth. The $16.3 million improvement in the segment’s adjusted EBIT was substantially driven by savings from our restructuring program, including management delayering, plant rationalization and improved manufacturing disciplines.”
Performance Coatings Group net sales were $297.2 million during the fiscal 2020 first quarter as compared to sales of $296.4 million reported a year ago, reflecting organic growth of 0.4% and acquisitions contributing an additional 1.8%. Foreign currency translation reduced sales by 1.9%. Segment IBT was $28.1 million compared with IBT of $8.3 million reported a year ago. EBIT was $28.2 million, compared to EBIT of $8.4 million in the fiscal 2019 first quarter. The segment reported first-quarter restructuring-related charges of $8.7 million in fiscal 2020 and $19.8 million in fiscal 2019. Adjusted EBIT, which excludes these charges, increased 31% to $36.9 million during the first quarter of fiscal 2020 from adjusted EBIT of $28.2 million during the year-ago period.
“Savings from our 2020 MAP to Growth plan provided significant earnings leverage in the Performance Coatings Group, driven by a reduction of our operational footprint and strategic decisions to exit low-margin businesses. In addition, the segment has benefited from executing a reorganization and management delayering as it moves towards a global brand management structure,” Sullivan said.
Consumer Group sales were $479.3 million during the first quarter of fiscal 2020 compared to sales of $477.4 million reported in the first quarter of fiscal 2019. Organic sales increased by 0.1%, while acquisition growth contributed 1.3%. Foreign currency translation reduced sales by 1.0%. Consumer Group IBT was $59.2 million compared with IBT of $51 million in the prior-year period. EBIT was up 15.9% to $59.3 million compared to EBIT of $51.1 million in the fiscal 2019 first quarter. The segment incurred restructuring-related expenses of $2.4 million during fiscal 2020 and $0.9 million during fiscal 2019. Excluding these charges, fiscal 2020 first-quarter adjusted EBIT was $61.7 million, an increase of 18.6% over adjusted EBIT of $52 million reported during the prior period.
“The Consumer Group’s improvement in EBIT was largely due to a favorable year-over-year comparison resulting from $10 million in costs associated with legal settlements during the first quarter of fiscal 2019," Sullivan said. "Results in the first quarter were impacted by market share gains in the prior quarter, which led to higher costs from outsourcing production to service this increased demand. In light of market share gains and expectations for continuing growth, we are investing in new equipment, improving production methods and leveraging RPM’s internal manufacturing network to produce products more efficiently and create greater capacity.”
The Specialty Products Group reported sales of $160.1 million during the first quarter of fiscal 2020 as compared to sales of $168.7 million in the fiscal 2019 first quarter. Organic sales decreased 4.3% and foreign currency translation reduced sales by 0.8%. Segment IBT was $23.3 million compared with $23.8 million in the prior-year period. EBIT was $23.3 million compared to EBIT of $23.7 million in the fiscal 2019 first quarter. The segment reported first-quarter restructuring-related charges of $5.3 million in fiscal 2020 and $2.7 million in fiscal 2019. Adjusted EBIT, which excludes restructuring-related expenses, was $28.6 million in the fiscal 2020 first quarter, up 8.5% compared to adjusted EBIT of $26.4 million in fiscal 2019.
“The Specialty Products Group experienced sluggish demand in the OEM, manufacturing and international markets it serves, which impacted the top line. However, on the bottom line, adjusted EBIT margins improved by 230 basis points and adjusted EBIT increased by $2.2 million due to good cost discipline, manufacturing yield improvements and restructuring activities from our 2020 MAP to Growth program,” Sullivan said.
Cash Flow and Financial Position
During the fiscal 2020 first quarter, cash generated from operations was $145.1 million compared to cash used for operations of $7.1 million a year ago.
“The increase in cash from operations resulted from improved earnings and margin improvement initiatives, which removed early cash payment discounts and effectively shifted approximately $100 million in receipts from the fourth quarter of fiscal 2019 to the first quarter of fiscal 2020, which we discussed in our previous earnings release,” Sullivan said.
Capital expenditures were $36.6 million in the quarter, compared to $28.3 million in the year-ago period. Total debt on Aug. 31, 2019, of $2.60 billion compares to $2.53 billion on May 31, 2019. Total liquidity, including cash and long-term available credit, was $1.2 billion at Aug. 31, 2019, compared to $1.28 billion at May 31, 2019.
“During the quarter we repurchased approximately $100 million of our common shares. This is in addition to the $200 million we repurchased during fiscal 2019. Coupled with the $200 million cash redemption of our convertible notes in November of 2018, we are halfway to our 2020 MAP to Growth objective to repurchase $1 billion of stock by May 31, 2021,” Sullivan said.
Business Outlook
“For the second quarter of fiscal 2020, we expect sales to be up 2% to 3% with strong leverage to the bottom line for an estimated 20% to 24% adjusted EBIT growth, resulting in adjusted diluted EPS in the low- to the mid-70-cent range," Sullivan said.
“Looking ahead to our fiscal 2020 third and fourth quarters, it is important to note the seasonality in our business. Historically, our third quarter provides our most modest results each year because it falls during the winter months of December through February, when painting and construction activity slow due to cold and snowy weather. Our fourth-quarter results are generally stronger as work begins to accelerate on painting and construction projects," Sullivan continued.
“Based on our results for the first quarter and our expectations for the remainder of the year, we are affirming the full-year fiscal 2020 guidance we provided on July 22, 2019. Revenue growth is anticipated to be on the low end of our previously disclosed range of 2.5% to 4%. Despite the tightening of our revenue growth assumption, we expect to leverage the positive momentum of the 2020 MAP to Growth operating improvement plan to our bottom-line results. Therefore, we are maintaining our projected adjusted EBIT growth in the 20% to 24% range, as previously reported in July. We expect this to result in adjusted diluted EPS between $3.30 and $3.42 for fiscal 2020,” Sullivan concluded.
First-Quarter Consolidated Results
Fiscal 2020 first-quarter net sales were a record $1.47 billion compared to the $1.46 billion reported a year ago. First-quarter net income was $106.2 million, up 52.2% over the $69.8 million reported in the year-ago period, and diluted earnings per share (EPS) were $0.82, up 57.7% compared to $0.52 in the year-ago quarter. Income before income taxes (IBT) was up 55.4% to $142.8 million compared to $91.9 million reported in the fiscal 2019 first quarter. RPM’s consolidated earnings before interest and taxes (EBIT) were up 45.5% to $165.8 million compared to $113.9 million reported in the fiscal 2019 first quarter.
The first quarter included restructuring-related expenses and other items of $26.8 million during fiscal 2020 and $39.8 million of restructuring-related items in fiscal 2019. Excluding these charges, RPM’s adjusted EBIT was up 25.3% to $192.6 million compared to $153.7 million during the year-ago period. In addition, the company has continued to exclude the impact of all unrealized net gains and losses from marketable equity securities, as well as realized net gains and losses on sales of all marketable securities from adjusted EPS, as their inherent volatility is outside of management’s control and cannot be predicted with any level of certainty. These investments resulted in a net after-tax gain of $2.8 million for the first quarter of fiscal 2020 and were de minimis during the same quarter last year. Excluding the restructuring and other charges, as well as investment gains, adjusted diluted EPS increased by 25% to $0.95 compared to $0.76 in fiscal 2019.
“We continued to experience the benefits of the plant rationalization, manufacturing improvements and center-led procurement initiatives of our 2020 MAP to Growth operating improvement plan during the quarter. These actions resulted in adjusted EBIT and EPS performance that met our projections despite modest top-line sales growth,” RPM Chairman and CEO Frank C. Sullivan said. “As we anticipated in July, sales growth was modest as a result of an extremely wet June that slowed painting and construction activity in North America and unfavorable foreign exchange. We were encouraged to see our restructuring program drive significant EBIT margin improvement across all of our segments. On a consolidated basis, our adjusted EBIT margin improved 260 basis points.”
First-Quarter Segment Sales and Earnings
“As we communicated last quarter, we have realigned the business into four reportable segments from our previous three segments. The new segments are the Construction Products Group, Performance Coatings Group, Consumer Group and Specialty Products Group,” Sullivan said. “The objectives of this realignment are to position the business for accelerated growth and to provide our investors with greater visibility into the business and better comparability among our peers. Starting with the current quarter of fiscal 2020, we are reporting our results under this four-segment structure and are providing comparable fiscal 2019 financials that have been recast to reflect the effect of this realignment.”
Construction Products Group net sales increased 3.6% to $536.1 million during the fiscal 2020 first quarter compared to fiscal 2019 first-quarter sales of $517.5 million, reflecting organic growth of 0.7% and acquisitions contributing an additional 4.4%. Foreign currency translation reduced sales by 1.5%. Segment IBT was $82.7 million compared with IBT of $65 million a year ago. EBIT was $84.7 million, up 25.8% compared to EBIT of $67.3 million in the fiscal 2019 first quarter. The segment incurred $2.2 million in restructuring-related expenses and other costs during the first quarter of fiscal 2020 and $3.3 million in restructuring-related expenses during the same period of fiscal 2019. Excluding these charges, fiscal 2020 adjusted EBIT increased 23.1% to $86.9 million from adjusted EBIT of $70.6 million reported during the year-ago period.
“The recent acquisitions of Nudura and Schul, as well as last year’s price increases, helped to drive sales growth in the Construction Products Group, despite unfavorable foreign exchange. Impacting our North American businesses were labor shortages and June weather conditions that delayed construction activity," Sullivan said. "Also contributing to the top line was our basement waterproofing solutions business, as well as a recovery in our Brazilian operation, which generated significant sales growth. The $16.3 million improvement in the segment’s adjusted EBIT was substantially driven by savings from our restructuring program, including management delayering, plant rationalization and improved manufacturing disciplines.”
Performance Coatings Group net sales were $297.2 million during the fiscal 2020 first quarter as compared to sales of $296.4 million reported a year ago, reflecting organic growth of 0.4% and acquisitions contributing an additional 1.8%. Foreign currency translation reduced sales by 1.9%. Segment IBT was $28.1 million compared with IBT of $8.3 million reported a year ago. EBIT was $28.2 million, compared to EBIT of $8.4 million in the fiscal 2019 first quarter. The segment reported first-quarter restructuring-related charges of $8.7 million in fiscal 2020 and $19.8 million in fiscal 2019. Adjusted EBIT, which excludes these charges, increased 31% to $36.9 million during the first quarter of fiscal 2020 from adjusted EBIT of $28.2 million during the year-ago period.
“Savings from our 2020 MAP to Growth plan provided significant earnings leverage in the Performance Coatings Group, driven by a reduction of our operational footprint and strategic decisions to exit low-margin businesses. In addition, the segment has benefited from executing a reorganization and management delayering as it moves towards a global brand management structure,” Sullivan said.
Consumer Group sales were $479.3 million during the first quarter of fiscal 2020 compared to sales of $477.4 million reported in the first quarter of fiscal 2019. Organic sales increased by 0.1%, while acquisition growth contributed 1.3%. Foreign currency translation reduced sales by 1.0%. Consumer Group IBT was $59.2 million compared with IBT of $51 million in the prior-year period. EBIT was up 15.9% to $59.3 million compared to EBIT of $51.1 million in the fiscal 2019 first quarter. The segment incurred restructuring-related expenses of $2.4 million during fiscal 2020 and $0.9 million during fiscal 2019. Excluding these charges, fiscal 2020 first-quarter adjusted EBIT was $61.7 million, an increase of 18.6% over adjusted EBIT of $52 million reported during the prior period.
“The Consumer Group’s improvement in EBIT was largely due to a favorable year-over-year comparison resulting from $10 million in costs associated with legal settlements during the first quarter of fiscal 2019," Sullivan said. "Results in the first quarter were impacted by market share gains in the prior quarter, which led to higher costs from outsourcing production to service this increased demand. In light of market share gains and expectations for continuing growth, we are investing in new equipment, improving production methods and leveraging RPM’s internal manufacturing network to produce products more efficiently and create greater capacity.”
The Specialty Products Group reported sales of $160.1 million during the first quarter of fiscal 2020 as compared to sales of $168.7 million in the fiscal 2019 first quarter. Organic sales decreased 4.3% and foreign currency translation reduced sales by 0.8%. Segment IBT was $23.3 million compared with $23.8 million in the prior-year period. EBIT was $23.3 million compared to EBIT of $23.7 million in the fiscal 2019 first quarter. The segment reported first-quarter restructuring-related charges of $5.3 million in fiscal 2020 and $2.7 million in fiscal 2019. Adjusted EBIT, which excludes restructuring-related expenses, was $28.6 million in the fiscal 2020 first quarter, up 8.5% compared to adjusted EBIT of $26.4 million in fiscal 2019.
“The Specialty Products Group experienced sluggish demand in the OEM, manufacturing and international markets it serves, which impacted the top line. However, on the bottom line, adjusted EBIT margins improved by 230 basis points and adjusted EBIT increased by $2.2 million due to good cost discipline, manufacturing yield improvements and restructuring activities from our 2020 MAP to Growth program,” Sullivan said.
Cash Flow and Financial Position
During the fiscal 2020 first quarter, cash generated from operations was $145.1 million compared to cash used for operations of $7.1 million a year ago.
“The increase in cash from operations resulted from improved earnings and margin improvement initiatives, which removed early cash payment discounts and effectively shifted approximately $100 million in receipts from the fourth quarter of fiscal 2019 to the first quarter of fiscal 2020, which we discussed in our previous earnings release,” Sullivan said.
Capital expenditures were $36.6 million in the quarter, compared to $28.3 million in the year-ago period. Total debt on Aug. 31, 2019, of $2.60 billion compares to $2.53 billion on May 31, 2019. Total liquidity, including cash and long-term available credit, was $1.2 billion at Aug. 31, 2019, compared to $1.28 billion at May 31, 2019.
“During the quarter we repurchased approximately $100 million of our common shares. This is in addition to the $200 million we repurchased during fiscal 2019. Coupled with the $200 million cash redemption of our convertible notes in November of 2018, we are halfway to our 2020 MAP to Growth objective to repurchase $1 billion of stock by May 31, 2021,” Sullivan said.
Business Outlook
“For the second quarter of fiscal 2020, we expect sales to be up 2% to 3% with strong leverage to the bottom line for an estimated 20% to 24% adjusted EBIT growth, resulting in adjusted diluted EPS in the low- to the mid-70-cent range," Sullivan said.
“Looking ahead to our fiscal 2020 third and fourth quarters, it is important to note the seasonality in our business. Historically, our third quarter provides our most modest results each year because it falls during the winter months of December through February, when painting and construction activity slow due to cold and snowy weather. Our fourth-quarter results are generally stronger as work begins to accelerate on painting and construction projects," Sullivan continued.
“Based on our results for the first quarter and our expectations for the remainder of the year, we are affirming the full-year fiscal 2020 guidance we provided on July 22, 2019. Revenue growth is anticipated to be on the low end of our previously disclosed range of 2.5% to 4%. Despite the tightening of our revenue growth assumption, we expect to leverage the positive momentum of the 2020 MAP to Growth operating improvement plan to our bottom-line results. Therefore, we are maintaining our projected adjusted EBIT growth in the 20% to 24% range, as previously reported in July. We expect this to result in adjusted diluted EPS between $3.30 and $3.42 for fiscal 2020,” Sullivan concluded.
