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A Slow Winter Holds RPM International Back

By Dan Caplinger – Apr 6, 2017 at 10:01AM

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The maker of specialty coatings and sealants didn't produce the growth that investors wanted to see.

RPM International (RPM 0.59%) isn't a household name among investors, but the maker of Rust-Oleum and DAP makes a variety of coatings and sealants to serve consumer and industrial customers alike, including cleaning products, specialty restoration equipment, and building materials. Coming into Thursday's fiscal third-quarter financial report, its shareholders had wanted to see significant sales growth, even as they were prepared for a pullback in earnings. RPM wasn't quite able to live up to those expectations, and further reductions in full-year guidance were also a negative for investors.

Let's look more closely at RPM International to see how it did and what's ahead for the coating and sealant maker in the future.

Businesses within the RPM corporate structure.

Image source: RPM.

RPM International deals with slow times

RPM International's fiscal third-quarter results reflected the typical seasonal sluggishness that the company faces in light of winter conditions. Sales climbed 3% to $1.02 billion, but that wasn't as much as the 5% growth that most investors had wanted to see. Net income actually fell by roughly a third to $11.9 million, and that resulted in earnings of $0.09 per share. That was below the $0.11-per-share consensus forecast.

Looking more closely at the numbers, RPM said that several factors weighed on its performance. First, impairment charges related to the company's Restore product line weighed on the bottom line. At the same time, RPM also took a pre-tax charge due to its decision to close a manufacturing facility in Europe. In total, those charges amounted to $9.1 million, accounting to roughly $0.05 per share in downward earnings pressure.

On a segment-by-segment basis, RPM had mixed results. Industrial segment sales climbed 6%, with 2.5 percentage points coming from organic growth and the rest coming from positive contributions from acquisitions. Pretax profit for the segment was up sharply from the year-ago quarter. However, gains for the specialty segment weren't as impressive, with a 2% climb in overall sales coming from acquisitions despite a slight decrease in organic revenue. Pretax profit was down more than 30%, and customer behavior in deferring projects until warmer spring weather comes played a vital role in holding back the business. The consumer business saw even tougher conditions, with less than a 1% rise in revenue and a nearly 4% drop in organic sales helping to send pretax segment profit downward by more than a fifth from year-ago levels.

CEO Frank Sullivan explained the situation to investors. "We were pleased with our consolidated sales growth during the third quarter," Sullivan said, "which is typically slow due to cold winter weather that limits outdoor repair, maintenance, and construction activities." Yet Sullivan noted that five separate acquisition transactions should add $170 million in annualized revenue going forward, helping to bolster long-term growth.

Can RPM get things turned around?

RPM is optimistic about its future prospects. As Sullivan put it, "We are encouraged by housing market activity, retail customer results, and the acceptance of recently introduced new products," and RPM is poised to take maximum advantage of more favorable conditions as they surface.

However, RPM once again reduced its guidance for the full 2017 fiscal year. Reflecting the $0.05 per share hit to the bottom line that came from the impairment and restructuring costs, RPM now expects that adjusted earnings for the year will come in between $2.57 and $2.67 per share. Yet the company sees mid-single-digit percentage sales growth for the industrial and consumer segments during the fourth quarter, with low- to mid-single-digit percentage gains for the specialty segment.

Going forward, RPM shareholders will want to see more evidence that the company can produce better results from its organic and acquisition activity going forward. Weather impacts are a reality of the business, but that doesn't mean that RPM shouldn't take steps to bolster its growth and find ways to appeal to customers year-round. If it can do so, then RPM will have further room to run in the future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends RPM International. The Motley Fool has a disclosure policy.

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