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RPM Reports Record Sales and Net Income for Fiscal 2007 Second Quarter

Published on 2007-01-05. Author : SpecialChem

MEDINA, Ohio -- RPM International Inc. (NYSE: RPM - News) reported record sales, record net income and record diluted earnings per share for its fiscal 2007 second quarter ended November 30, 2006. Continuing a pattern established in the prior fiscal year, strong sales and earnings growth in the company's larger industrial segment offset slower growth in the company's consumer segment.

Second Quarter Results

RPM's record net sales of $809.4 million were up 9.5% from the $739.4 million reported in the fiscal 2006 second quarter. Organic sales growth accounted for 7.5% of the increase, with 1.2% of that amount representing net foreign exchange gains. Net acquisition growth was 2.0% of the total.

Record net income for the quarter grew 185.8%, to $52.9 million from $18.5 million a year ago, while record diluted earnings per share advanced 180.0%, to $0.42 from $0.15 in the year-ago second quarter. Prior year net income included a pre-tax asbestos reserve charge of $15.0 million, while this year's second quarter included a $15.0 million pre-tax gain from the settlement of asbestos-related claims against an insurance carrier. Excluding these asbestos items, net income grew 52.1% to $43.1 million from $28.3 million a year ago, while diluted earnings per share increased 47.8% to $0.34 from $0.23 in the fiscal 2006 second quarter.

"As anticipated, RPM's second-quarter operating results showed strong improvement over the second quarter of fiscal 2006, when Gulf Coast hurricanes impacted both of our business segments, and we incurred one-time costs of $10.2 million," said Frank C. Sullivan, president and chief executive officer.

Consolidated earnings before interest and taxes (EBIT) was $91.4 million, a 143.9% improvement over the $37.5 million reported a year ago. Excluding the asbestos-related items, EBIT increased 45.6%, to $76.4 million from $52.5 million.

Second-Quarter Segment Sales and Earnings

The company's industrial segment posted a 13.5% sales increase to $528.6 million from $465.6 million in the year-ago second quarter. Organic sales increased 11.3%, including 1.6% in foreign exchange gains. Acquisitions accounted for the remaining 2.2% of the increase. Industrial segment EBIT for the second quarter was $64.3 million, a 26.3% increase over EBIT of $50.9 million a year ago. "Industrial segment sales and EBIT growth was robust across almost all product lines, with particular strength internationally," said Sullivan.

Sales by RPM's consumer segment increased 2.6% to $280.8 million from $273.8 million a year ago. Of the growth in sales, 1.0% was organic, including 0.6% in foreign exchange, and the remaining growth was through acquisitions. Segment EBIT grew 5.1% to $27.3 million from $26.0 million in the fiscal 2006 second quarter.

"Our consumer segment continued to share in the sluggish business climate being experienced by our major retail customers. This climate is resulting in a continuation of uneven buying patterns and ongoing inventory reductions by the retailers, along with slower retail takeaway by consumers as a result of lower sales of both existing and new homes. We did see a slight improvement in consumer segment demand compared to the first quarter. We continue to anticipate some strengthening of consumer sales during the second half of the year, and are encouraged by recent reports regarding a stabilizing climate for both new and existing home sales," Sullivan said.

Asbestos Liability

During the quarter, RPM drew down $13.8 million of its 10-year pre-tax asbestos reserve established in the fourth quarter of fiscal 2006 to cover indemnity and defense costs. Comparable costs were $13.4 million during the fiscal 2006 second quarter. The total asbestos reserve balance stood at $391.1 million at November 30, 2006.

Also during the second quarter, RPM's Bondex subsidiary secured a $15.0 million pre-tax cash settlement from one of its asbestos liability insurance carriers, which has now been dismissed from the ongoing insurance coverage case. Litigation against the remaining defendant insurance companies will continue to be pursued, as each has significantly greater liability exposure based on their applicable insurance policies. "We are encouraged by this settlement, which was with the defendant carrier whose policies presented the smallest level of exposure to our claims," Sullivan said. "Beyond the cash value of this settlement, we believe it has strategic importance to the overall case and will enhance our position with respect to the remaining carriers as we press our case forward," he said.

Day-Glo, Carboline and Tremco Subsidiaries Complete Acquisitions

During the second quarter, three RPM subsidiaries completed acquisitions of complementary product lines.

RPM's Day-Glo unit acquired the daylight fluorescent, phosphorescent and thermochromatic pigments business of The Dane Group in Manchester, England. With revenue of approximately $20 million, this business will operate as a stand-alone business within Day-Glo, and will continue to be led by its existing management team. The acquisition is expected to broaden Day-Glo's geographic market coverage and to be accretive to earnings during the first year as part of RPM.

The company's Carboline unit acquired certain assets of Nu-Chem, Inc., including intumescent fireproofing products for the protection of exposed structural steel, and epoxy intumescents for the petrochemical and offshore oil markets. Tremco Global Sealants acquired Permaquik Corp., a leading supplier of high-performance, hot-applied waterproofing and green roof systems, as well as crystalline waterproofing, epoxies, sealers and expansion joints, based in Mississauga, Ontario. These product line acquisitions will initially add approximately $12 million in annual revenues.

Cash Flow and Financial Position

For the first half of fiscal 2007, cash from operations was $91.4 million, down slightly from $95.6 million in the fiscal 2006 first half. Capital expenditures were $22.2 million, compared to depreciation of $28.4 million over the same period. Total debt at the end of the first half was $949.8 million, compared to $876.6 at the end of fiscal 2006, mostly as a result of acquisitions. The company's net (of cash) debt-to-total capitalization ratio was 44.3%, compared to 45.3% at May 31, 2006.

First Half Sales and Earnings

First-half sales, net income and earnings per share were all records.

RPM's net sales for the fiscal 2007 first half were up 11.2%, to $1.7 billion from $1.5 billion a year ago. Net income for the first six months was $114.3 million, up 66.9% from the $68.5 million reported in the first half of fiscal 2006. Prior year net income included a $30.0 million pre-tax asbestos charge, while the 2007 first half included a $15.0 million pre-tax benefit from the asbestos insurance litigation settlement. Diluted per share earnings for the period increased 63.6%, to $0.90 from $0.55 a year ago. Excluding asbestos items, first-half net income increased 19.1%, to $104.4 million, from $87.6 million in fiscal 2006, with diluted earnings per share improving to $0.83 from $0.70, an 18.6% increase.

First-half EBIT was $198.8 million, up 60.7% from the $123.7 million reported a year ago, including asbestos-related items. Excluding asbestos items, EBIT increased 19.6%, to $183.8 million from $153.7 million in the 2006 first half.

RPM's industrial segment sales grew 19.8% in the fiscal 2007 first half, to $1.07 billion from $896.4 million a year ago. Of this growth, acquisitions represented 8.8%, with organic growth adding 11.0%, including 1.5% of foreign exchange gains. Industrial segment EBIT increased 19.2% to $138.3 million from $116.0 million in the fiscal 2006 first half.

First-half sales for the consumer segment were $579.7 million, a 1.8% decline from the $590.3 million reported in the first half of fiscal 2006. Organic sales declined by 2.6%, including a foreign exchange gain of 0.7%, while acquisitions contributed 0.8%. Consumer segment EBIT declined by 4.2%, from $72.3 million in fiscal 2006 to $69.3 million in the current fiscal year.

Business Outlook

"We remain confident in our fiscal 2007 guidance of overall sales growth in the 8% to 10% range and net income growth of 10% to 12%, excluding the affect of asbestos. Raw material costs, while continuing high by historical standards, seem to have stabilized for the time being. New home sales and, much more importantly for our consumer business, housing turnover, are also showing signs of stabilizing. Our international markets in particular are seeing more project and development activity, driving continuing industrial segment growth. These factors lead us to believe we will achieve record results in the second half of our 2007 fiscal year, despite challenging comparisons to last year's tremendous performance," Sullivan said.

RPM International Inc., a holding company, owns subsidiaries that are world leaders in specialty coatings and sealants serving both industrial and consumer markets. RPM's industrial products include roofing systems, sealants, corrosion control coatings, flooring coatings and specialty chemicals. Industrial brands include Stonhard, Tremco, illbruck, Carboline, Day-Glo, Euco and Dryvit. RPM's consumer products are used by professionals and do-it- yourselfers for home maintenance and improvement, automotive and boat repair and maintenance, and by hobbyists. Consumer brands include Zinsser, Rust- Oleum, DAP, Varathane, Bondo and Testors.

This press release contains "forward-looking statements" relating to the business of the company. These forward-looking statements, or other statements made by the company, are made based on management's expectations and beliefs concerning future events impacting the company and are subject to uncertainties and factors (including those specified below) which are difficult to predict and, in many instances, are beyond the control of the company. As a result, actual results of the company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) general economic conditions; (b) the price, supply and capacity of raw materials, including assorted resins and solvents; packaging, including plastic containers; and transportation services, including fuel surcharges; (c) continued growth in demand for the company's products; (d) legal, environmental and litigation risks inherent in the company's construction and chemicals businesses and risks related to the adequacy of the company's insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon the company's foreign operations; (g) the effect of non- currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with the company's ongoing acquisition and divestiture activities; (i) risks related to the adequacy of its contingent liability reserves, including for asbestos-related claims; and other risks detailed in the company's filings with the Securities and Exchange Commission, including the risk factors set forth in the company's Annual Report on Form 10-K for the year ended May, 31 2006, as the same may be updated from time to time. RPM does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release.

Source: RPM International Inc.


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