"For the second half of our fiscal year, we expect our consumer segment to benefit from a return to more normal inventory levels at our retail customers with continued growth in DIY spending, and anticipate that the decline in nail polish enamel sales will be much less severe," Chairman and CEO Frank Sullivan said.
CLEVELAND, Ohio -- RPM International Inc. reported a "disappointing" second quarter for fiscal 2015, despite the fact that profits rose 10 percent and earnings-per-share were up 8 percent.
The Medina County-based holding company whose subsidiaries manufacture high-performance coatings, sealants and specialty chemicals said its net sales for the second quarter that ended Nov. 30, 2014, were flat at $1.07 billion.
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View full sizeRPM Chairman and CEO Frank Sullivan"Second-quarter operating performance was mixed, with stronger sales in our businesses serving the U.S. commercial construction market offset by weaker results in Europe, a continued unfavorable year-over-year trend from our Kirker nail enamels business, and the negative impact of foreign currency," Chairman and Chief Executive Frank C. Sullivan said in a written statement.
This is the second straight quarter that results have fallen short of expectations, but Sullivan said the company is optimistic about its long-term prospects.
Highlights of this week's earnings report include:
1.) Second-quarter profits rose 9.8 percent to $69.8 million, from $63.6 million for the second quarter of fiscal 2014.
Earnings per diluted share rose 8.3 percent to 52 cents per share, up from 48 cents per share for the same period last year.
2.) Industrial segment sales grew 1.4 percent to $718.3 million, up from $708.7 million in last year's second quarter.
"Most of our European businesses are expecting a challenging economic climate, negatively impacting our results," Sullivan said. The strong U.S. dollar has hurt all of RPM's international business, because of unfavorable currency rates.
"However, we had strong positive performance by our concrete admixture and commercial sealants companies, which serve the U.S. construction market, and our line of remediation equipment for water and smoke damage. Additionally, our South African businesses are generating good results in their local currencies," Sullivan said.
3.) Consumer segment sales slipped 2.8 percent to $352.8 million, down from $362.8 million in the second quarter of fiscal 2014.
"As stated in the first quarter, Kirker [nail enamel subsidiary] continues to be challenged by a comparison to extremely strong prior-year performance," Sullivan said.
In addition, RPM's large retail customers aggressively pared their inventory after the harsh weather in early November. "This was in reaction to last year's severe winter weather when they were caught off guard and held excess inventory," he said. "We expect to benefit from a return to more normal inventory levels by our retail customers in the second half of the fiscal year."
4.) RPM also reported $2.8 million in pre-tax costs primarily related to legal expenses related to a U.S. Securities and Exchange Commission investigation of the timing of expense accruals in fiscal 2013 (which did not affect annual earnings), as well as a Specialty Products Holding Corp. settlement, and a voluntary self-disclosure agreement with the State of Delaware for unclaimed property.
5.) For the first six months of the fiscal year, net sales increased 1.7 percent to $2.28 billion, up from $2.24 billion in the first half of fiscal 2014.
Net income for the first half rose 1.3 percent to $168.8 million, compared to $166.7 million in the first six months of last year.
Diluted earnings per share fell a penny to $1.24 per share, compared to $1.25 last year.
6.) The financial results of RPM's SPHC subsidiary and its business units will be recombined with the rest of the company's results starting in the third quarter of fiscal 2015. Those subsidiaries include: Chemical Specialties Manufacturing Corp.; Day-Glo Color Corp.; Dryyit Systems Inc.; Kop-Coat Inc.; RPM World Finishes Group; TCL Inc.; and ValvTech Petroleum Products.
The re-consolidation is because a plan of reorganization was consummated that resulted in a trust formed under Section 524(g) of the U.S. Bankruptcy Code for the benefit of current and future asbestos personal injury claimants, as previously disclosed. The trust, funded with an initial contribution of $450 million in cash from RPM's revolving line of credit, will assume all liability and responsibility for current and future asbestos claims against the parties emerging from bankruptcy, the company said.
SPHC filed for bankruptcy protection on May 31, 2010, to resolve asbestos claims against its Bondex International INc. subsidiary. RPM still owns SPHC and its subsidiaries, but has not been consolidating its financial results with the rest of the company's. Payments to the trust, including the initial $450 million, will total $797.5 million in pre-tax contributions over the next four years.
7.) "For the second half of our fiscal year, we expect our consumer segment to benefit from a return to more normal inventory levels at our retail customers with continued growth in DIY spending, and anticipate that the decline in nail polish enamel sales will be much less severe," Sullivan said. "In our industrial segment, we do not see a near-term turnaround in the European economies and expect continued strengthening of the U.S. dollar to continue negatively impacting results."
As a result, RPM has reduced its diluted earnings-per-share forecast to $2.25 to $2.30 for the year. "We are optimistic given the return of our SPHC businesses and the elimination of their asbestos liability," Sullivan said. "We can now accelerate growth investments in our businesses and more aggressively return capital to shareholders when appropriate."
For fiscal 2016, earnings-per-share is expected to range from $2.70 to $2.80 per share.
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