Charges in Company’s Industrial Segment Impact RPM’s Third Quarter
MEDINA, OH - RPM International Inc. reported strong sales for its fiscal 2013 third quarter ended February 28, 2013, but reported a $42 million loss for the quarter due primarily to two major charges in the company's industrial segment.
"RPM achieved solid operating results in the quarter," stated Frank C. Sullivan, Chairman and Chief Executive Officer. "Net sales, net income and diluted earnings per share (EPS) all increased significantly, on an as-adjusted basis, driven by strong performance in all of our consumer segment businesses and in many industrial segment businesses. Together with accretive acquisitions, this performance helped offset weaknesses in our European operations and North American roofing business. The improvement was all the more noteworthy given the difficult comparisons to last year's strong third quarter during which RPM's sales and earnings grew to record levels as a result of the exceptionally mild weather throughout most of North America."
On an as-reported basis, net sales grew 9.1 percent to $843.7 million from $773.6 million. Consolidated earnings before interest and taxes (EBIT) were a negative $48.6 million, compared to EBIT of $27.1 million a year ago, due primarily to an adjustment for a $68.8 million accrual associated with an investigation of the company's Building Solutions Group roofing contracts with the U.S. General Services Administration (GSA). The substantial majority of the accrual relates to the sale of products and services from 2002 to 2008. The as-reported net loss for the quarter was $42.4 million, compared to net income of $6.6 million in the year-ago period. The diluted loss per share was $0.33, compared to diluted earnings per share of $0.05 in the fiscal 2012 third quarter.
RPM's Building Solutions Group is in ongoing settlement discussions with the U.S. Department of Justice (DOJ) and the GSA aimed at resolving the investigation. The company is cooperating with the investigation, which involves compliance with certain pricing terms and conditions of GSA contracts under which RPM's Building Solutions Group roofing division sold products and services to the federal government. The actual amount of the company's loss, which remains subject to approval by the DOJ, may vary from the amount of the accrual.
The second non-operating adjustment for the quarter is associated with the company's decision to close an existing flooring business in Brazil in light of the Viapol acquisition there earlier this fiscal year. The impact of this decision resulted in a $6.1 million cumulative translation adjustment (CTA) write-off, which also triggered a $7.7 million tax benefit that impacted the current quarter as well. The net impact of this strategic repositioning of RPM's existing flooring business in Brazil was an increase to net income of $1.6 million or $0.01 per share.
On an as-adjusted basis, EBIT declined 3.1 percent, to $26.3 million from $27.1 million a year ago. The decrease in EBIT was primarily due to a $6.4 million unfavorable swing in foreign exchange losses on working capital balances at quarter end, principally related to the devaluation of the British Pound versus the Euro, and $4.1 million in non-operating expense changes, principally related to severance in Europe. Net income increased 30.8 percent to $8.7 million, compared to $6.6 million in the year-ago period. Diluted earnings per share were $0.07, up 40.0 percent from $0.05 in the fiscal 2012 third quarter.
On an as-reported basis, industrial segment sales grew 6.1 percent to $532.3 million from $501.9 million in the fiscal 2012 third quarter. Organic sales improved 1.6 percent, including foreign exchange translation gains of 1.2 percent, while acquisitions added 4.5 percent. Industrial segment EBIT fell to a negative $66.3 million, including the impact of both adjustments referred to above.
"With the exception of our roofing division, most of our North American industrial businesses benefited from the gradual economic recovery in the U.S., especially our businesses serving commercial construction markets," Sullivan stated.
RPM's consumer segment had a 14.6 percent increase in net sales to $311.4 million from $271.7 million in the fiscal 2012 third quarter. Organic sales improved 2.5 percent, including foreign exchange translation gains of 0.3 percent, while acquisitions added 12.1 percent. Consumer segment EBIT increased 61.6 percent to $34.7 million from $21.5 million a year ago.
"Our consumer segment continued to benefit from the introduction of new products, market share gains and increased consumer spending as the housing market continues its gradual recovery. We are particularly encouraged by the traction being gained by new products that are well beyond our traditional consumer price points and by increases in market share across virtually all consumer product lines. The recent acquisitions of HiChem in southern hemisphere Australia and Kirker, specializing in nail polish enamels, added to the strong consumer segment results as their business dynamics provide a counter to the historic seasonal low of most of RPM's core consumer businesses," stated Sullivan.
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