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RPM International Sees Tough Times Ahead Despite Record Sales

By Dan Caplinger – Updated Apr 14, 2019 at 9:27PM

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The coatings and sealants specialist saw growth rates slow.

Investors have been increasingly worried about the ability of the U.S. economy to keep growing at the same pace it's enjoyed in recent years, and those concerns have spread to companies across just about every industry. Even for coatings and sealants specialist RPM International (RPM 0.70%), which makes products that help users fight rust in their tools and equipment, the prospect of slowing economic growth has implications for its business. Rising costs have also weighed on profits to some extent, making it important for RPM to respond with efficiency measures to cut expenses.

Coming into Friday's fiscal second-quarter financial report, RPM shareholders wanted evidence that the company could continue to grow at a healthy rate. RPM's sales hit another quarterly record, but the slower pace of sales gains will have investors paying close attention to the company's efforts to bolster its business.

Box for DAP door installation kit labeled QuickKit.

An RPM International product. Image source: RPM International.

Here's how RPM's doing

RPM International's fiscal second-quarter results showed both the successes and the challenges that the coatings maker has had. Revenue was higher by 3.6% to $1.36 billion, and that growth rate was less than half what the company posted in the fiscal first quarter. Substantial extraordinary charges caused net income to fall by nearly half to $49.2 million. And even after making allowances for those items, adjusted earnings of $0.52 per share were down slightly from the year-ago period's $0.57.

Looking more closely at RPM's sales numbers, various factors pulled them in opposite directions. For instance, in the industrial segment, overall sales were up 2.1%. But holding back that number was a 2.7 percentage point hit from adverse foreign currency movements. Organic growth for the segment came in at 3.3%, and acquisitions added another 1.5 percentage points to the overall numbers. Even though a wet autumn weighed on performance, RPM saw good demand for corrosion-control coatings and concrete-related products.

The consumer segment fared slightly better. Overall segment sales were higher by 4.1%, with 2.8% organic growth and a 2.9 percentage point boost from acquisitions offset by 1.6 percentage points of downward pressure from currency impacts. Price increases helped to keep the segment's margin levels healthier, but raw material costs continued to weigh on profitability.

Specialty-segment numbers saw the best sales gains, with a boost of 7.6% from year-earlier levels. Acquisitions gave more than 6 percentage points of gains to the top line, but organic growth of 2.3% was also solid. Especially noteworthy was the fact that the year-earlier period had included restoration efforts following Hurricane Harvey, so this year's comparison was relatively tough.

Yet all three segments continued to struggle in terms of pre-tax profit. Only the industrial segment managed a slight gain on an adjusted basis, and bottom lines for the consumer and specialty segments fell.

CEO Frank Sullivan explained some of the challenges. "Like many manufacturers, our bottom line was impacted by a continued rise in costs for raw materials, freight, labor and energy, as well as adverse foreign exchange translation," Sullivan said. Yet he also noted that cost controls are helping RPM's overall expense structure.

Can RPM bounce back?

The company is optimistic about its long-term prospects. In Sullivan's words, restructuring efforts are "well underway, [and] our plan is focused on driving greater efficiency and long-term profitability of the business."

Some financial moves should also contribute to RPM's progress over the long run. The company confirmed that it paid off all of its convertible senior notes that were due in 2020, primarily using cash. That removes the potential for those notes to get converted into shares, eliminating possible dilution and helping boost earnings per share going forward.

Yet RPM sees headwinds directly ahead. The company projects that fiscal third-quarter revenue will rise at low- to mid-single digit percentages. Noting that its inventory accounting leads to delays in seeing efficiency-driven benefits, the company gave guidance for earnings of $0.10 to $0.12 per share in the current quarter.

Those numbers were disappointing to RPM shareholders, and the stock fell nearly 5% Friday following the announcement. If the company's long-term efforts pay off, then investors will forget the temporary current weakness, but RPM will have to demonstrate its success first before the stock is likely to see significant gains.

Check out the latest RPM International earnings call transcript.

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

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