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RPM Reports Record Second-Quarter Sales, Expects Strong Second Half

Published on 2006-01-06. Author : SpecialChem

MEDINA, Ohio -- RPM International Inc. (NYSE: RPM - News) reported record sales of $739.4 million for its fiscal 2006 second quarter ended November 30, 2005. Net income for the quarter increased 103% to $18.5 million from $9.1 million a year ago, as a result of lower asbestos related charges year over year. Diluted per share earnings increased to $0.15 from $0.08 in the fiscal 2005 second quarter. Before asbestos charges, comparably adjusted net income and diluted earnings per share both declined 26%.

"Our second-quarter results were impacted by effects associated with the Gulf Coast hurricanes, including higher raw materials costs and slower sales growth, particularly in our consumer segment," said Frank C. Sullivan, president and chief executive officer. "Second-quarter earnings were further impacted by $10.2 million, or $0.05 per diluted share, from unrelated one-time costs. The most significant of these involved the finalization of the Dryvit national residential class action settlement, which amounts to positive news for that business," he said.

"We are encouraged by our top-line growth as we rounded out the first half and the fact that, following the hurricanes early in the second quarter, our sales strength is continuing. As raw materials costs begin to stabilize and higher selling prices take effect, our margins should strengthen in the second half of fiscal 2006, resulting in greater earnings leverage. As a result, we continue to anticipate record earnings, excluding asbestos charges, for the fiscal year ending May 31, 2006," Sullivan said.

Second Quarter Sales and Earnings

RPM's net sales for the second quarter of fiscal 2006 were $739.4 million, an 18.6% increase over the $623.5 million reported a year ago. Excluding asbestos charges, net income declined to $28.3 million from $38.5 million in the year-ago period and diluted earnings per share declined to $0.23 from $0.31 in the fiscal 2005 second period.

Including asbestos charges, earnings before interest and taxes (EBIT) were $37.5 million in the fiscal 2006 second quarter, a 73.0% increase compared to $21.7 million a year ago. Excluding asbestos charges, fiscal 2006 second quarter EBIT was $52.5 million, a 23.6% decrease compared to the $68.7 million reported in the year-ago second quarter.

RPM's industrial segment sales in the second quarter grew to $465.6 million from $364.9 million, up 27.6%. Of this increase, 16.5% was the result of illbruck Sealant Systems, acquired at the end of the fiscal 2006 first quarter, plus three smaller acquisitions. Approximately 11.1% of the industrial segment's growth was organic. A number of industrial businesses posted double-digit sales increases, including corrosion control coatings, fiberglass grating composites, roofing services, exterior insulation finish systems (EIFS), concrete admixtures and powder coatings, as well as many international operations. Industrial segment EBIT increased 10.8% for the quarter, to $50.9 million from $45.9 million.

RPM's consumer segment sales grew 5.9% in the fiscal 2006 second quarter, to $273.8 million from $258.6 million, with virtually all of this growth being organic. Sales of several RPM operating units in the segment were heavily impacted by hurricane disruptions to distribution channels. Despite this impact, several consumer segment businesses still posted sales increases of greater than 5%, including caulks and sealants, confectionary coatings and glazes, small package paints, wood care finishes and auto restoration products.

Consumer segment EBIT declined by 16.8%, to $26.0 million from $31.3 million, due primarily to the hurricanes' impact and the inherent lag in gaining relief for higher raw materials costs through selling prices in this segment. "We expect higher consumer segment sales increases the second half of the year as the hurricane disruptions are behind us, and we expect improving margins in this segment as price increases continue to phase in and further mitigate the higher raw materials costs," said Sullivan.

Asbestos Charge

RPM took a pre-tax charge of $15.0 million in the second quarter of fiscal 2006 to increase its asbestos liability reserves, which now total $101.2 million on the company's balance sheet. In the year-ago second quarter, RPM took a $47 million pre-tax charge for asbestos liabilities. Before tax asbestos-related payments were $13.4 million during the second quarter and $29.9 million in the first half of fiscal 2006, both of which are lower amounts versus the comparable prior year periods and sequentially.

"The company evaluates its asbestos reserves on an ongoing basis to support its more aggressive defense strategy, which is beginning to result in declining total costs," said Sullivan. "It also appears that the U.S. Senate will bring the FAIR Act to the floor in early calendar 2006, which could result in a more permanent resolution to the asbestos litigation crisis facing a host of manufacturers and small businesses," he said.

"Even without Congressional action, we are encouraged by the direction the asbestos issue is taking for us, in terms of reduced settlement costs, increased dismissal rates and declining quality of claims. We are also encouraged by the ongoing Federal investigation into potential plaintiff attorney fraud surrounding the asbestos issue," Sullivan said.

illbruck Assimilation

"We continue to anticipate that our Tremco unit's acquisition of the $190 million illbruck Sealant Systems business on August 31, 2005 will be earnings neutral for the fiscal year ending May 31, 2006, but will be accretive to earnings thereafter, adding $0.03 to $0.05 per diluted share beginning in our 2007 fiscal year," he said. "illbruck has boosted RPM's European sales significantly, adding $55 million in revenue for the second quarter, and will be the strong complement to our Tremco operation that we envisioned," Sullivan said.

Dryvit Settlement

During the second quarter, RPM's Dryvit Systems business unit finalized a national class action lawsuit settlement related to residential EIFS claims dating back several years. To fully provide for the settlement, RPM established additional reserves of $10.0 million, half of which are expected to be covered by insurance. "For all intents and purposes, this settlement puts the residential EIFS issue behind us and allows Dryvit to step up its residential marketing efforts, particularly to its architectural constituency. Dryvit EIFS represent an outstanding combination of insulation and attractive exterior finishes, and we are expecting renewed growth by upscale homebuilders now that this lingering issue has been resolved," said Sullivan.

Other One-Time Costs

The other costs taken during the second quarter, unrelated to ongoing operations, included $2.5 million of one-time pension plan and hurricane- related property-casualty costs. In addition, the company was in negotiations during the second quarter to sell its small, non-core wallpaper business for approximately $10 million in cash, which will result in a loss on sale of approximately $2.7 million. Accordingly, this loss was accounted for during the second quarter, and this sale is expected to close in January 2006.

Cash Flow and Financial Position

At the end of the fiscal 2006 first half, cash from operations was $95.6 million, up from $90.5 million a year ago. Capital expenditures during the first half were $20.4 million, compared to depreciation of $27.0 million during the period. Total debt now stands at $866.4 million, compared to $838.0 million at the end of fiscal 2005. The increase essentially reflects additional indebtedness for acquisitions, particularly illbruck, and the retirement of $150 million in 7.0% bonds that matured on June 15, 2005. RPM's debt-to-capitalization ratio stood at 44.1% at November 30, 2005, down slightly from November 30, 2004 and May 31, 2005.

First Half Sales and Earnings

For the first half of fiscal 2006, net sales increased to $1.5 billion, compared to $1.3 billion a year ago, a 15.7% increase. Six-month net income of $68.5 million, a 7.7% increase over the $63.6 million reported a year ago, includes asbestos charges in both periods. Diluted earnings per share increased 5.8%, to $0.55 compared to $0.52 in the first six months of fiscal 2005. Excluding asbestos charges, first-half net income declined 5.7% to $87.6 million from $93.0 million earned in the fiscal 2005 first half, and diluted earnings per share were $0.70, a 6.7% decline from the $0.75 earned in the fiscal 2005 first half.

First-half EBIT increased 8.4%, to $123.7 million from $114.1 million in the fiscal 2005 first half, including asbestos charges in both periods. Excluding asbestos charges, EBIT for the first six months of fiscal 2006 was $153.7 million, a 4.6% decline from the $161.1 million earned a year ago.

For the six months, industrial segment sales grew 22.7%, to $896.4 million from $730.4 million. Of this growth, 9.4% was acquisition-related and 13.3% was organic. Industrial segment EBIT increased 13.7% in the first six months of fiscal 2006, to $116.0 million from $102.1 million.

First-half sales for the consumer segment grew 6.4%, to $590.3 million from $554.6 million a year ago, with nearly all of this growth being internally generated. Consumer segment EBIT for the first half declined by 6.8% to $72.3 million from $77.6 million a year ago, due primarily to higher raw materials costs being only partially offset by higher selling prices.

Business Outlook

"As anticipated and disclosed in our first-quarter earnings report, the second quarter proved challenging. We are expecting substantially improved results going forward, as our operating units continue to post solid top-line growth and the one-time factors that dampened second-quarter results disappear. In particular, we look for further improvement in our gross margins as higher selling prices begin to better recover the sharp raw materials cost increases we incurred during the first half of our 2006 fiscal year. Moreover, while hurricane disruptions negatively impacted our second quarter, we expect several RPM operations to be beneficiaries of the rebuilding efforts in those areas. We are expecting a strong second half of this 2006 fiscal year, which will result in record earnings, prior to asbestos charges, for the full year," Sullivan said.

About RPM

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 other reports and statements filed with the Securities and Exchange Commission, including the risk factors set forth in the company's prospectus and prospectus supplement included as part of the company's Registration Statement on Form S-4 (File No. 333-120536), as the same may be amended 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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