MEDINA, OH -- RPM International Inc. reported sharply improved net sales for its fiscal 2012 second quarter ended Nov. 30, 2011. Net income increased slightly and earnings per diluted share were flat, due to higher raw material and acquisition-related expenses.
Net sales grew 10.9% to $916.1 million from $826.3 million a year ago. Consolidated EBIT increased 4.0%, to $93.0 million from $89.4 million in the year-ago second quarter. Net income attributable to RPM stockholders was up 2.3%, to $49.9 million from $48.8 million in the fiscal 2011 second quarter. Earnings per diluted share for the second quarter were $0.38 in both years.
"Investments in future growth, including much higher acquisition expenses associated with the roughly $165 million in annualized sales from businesses acquired so far this fiscal year, and higher raw material costs were the primary factors behind our net income lagging sales growth," stated Frank C. Sullivan, chairman and chief executive officer. "Raw material costs continued to be a challenge during our second quarter and typically have a more significant impact on our consumer segment, which faces longer lead times in adjusting prices than our industrial segment," he stated.
Earnings for the second quarter of fiscal 2011 and 2012 were both impacted by "one-time" items. As previously reported, last year's second quarter contained approximately $7.5 million in non-recurring items, representing an after-tax benefit of approximately $0.04 per share.
This year's second quarter results of $0.38 per share include the benefit of the company's equity ownership in Kemrock Industries and Exports Ltd. of $0.04 per share, partially offset by $0.03 per share from the impact of higher acquisition-related expenses.
Excluding "one-time" items from both years, diluted earnings per share for the fiscal 2012 second quarter of $0.37 exceeded diluted earnings per share for the same quarter last year of $0.34, for an increase of 8.8%.
Second-Quarter Segment Sales and Earnings
During the second quarter, industrial segment sales grew 10.1% to $641.5 million from $582.5 million in the fiscal 2011 second quarter. Organic sales improved 5.9%, including 0.2% in foreign exchange translation losses, while acquisition growth added 4.2%. Industrial segment EBIT increased 14.0%, to $78.3 million from $68.7 million in the fiscal 2011 second quarter.
In the second quarter, RPM's ownership position in Kemrock, India's leading producer of reinforced polymer composites, exceeded 20% for the first time, thereby triggering a reportable equity ownership position in a portion of Kemrock's earnings. As a result, the industrial segment's EBIT included $5.2 million in equity in earnings of Kemrock, of which $4.6 million related to a one-time cumulative catch-up benefit. Industrial EBIT also included higher acquisition-related expenses of $1.8 million, partially offsetting the Kemrock benefit.
"High performance corrosion control coatings, commercial flooring, bridge deck products and edible shellac products all posted double digit sales increases, with most other industrial products having solid sales improvements," Sullivan said.
RPM's consumer segment sales increased 12.6% to $274.6 million from $243.8 million in the fiscal 2011 second quarter. Organic sales improved 12.5%, with no foreign exchange impact, while acquisition growth added 0.1%. Consumer segment EBIT fell 2.0%, to $26.8 million from $27.3 million a year ago.
"Our consumer product lines enjoyed solid organic sales volume growth due to strong market acceptance of higher end new products and increased market share, but their difficulty in quickly passing along higher raw material costs kept this sales increase from immediately carrying to the bottom line," said Sullivan.
Corporate and other expenses were higher by approximately $5.4 million, due primarily to higher acquisition costs of $3.0 million and insurance recoveries of $2.9 million realized in the prior-year second quarter.
Cash Flow and Financial Position
For the first half of fiscal 2011, cash from operations was $110.0 million compared to $183.1 million a year ago. Although RPM experienced a favorable decline in accounts receivable during the strong sales quarter, higher inventory attributable to higher raw material costs, a drop in accounts payable due to the timing of payments and a decrease in other accrued liabilities were the primary drivers to the overall cash shortfall to last year. Capital expenditures of $18.4 million compare to depreciation of $25.9 million during the first half of this fiscal year. Total debt at the end of the first half was $1.094 billion compared to $925.1 million at the end of the fiscal 2011 second quarter and $1.109 billion at the end of the 2011 fiscal year. RPM's net (of cash) debt-to-total capitalization ratio was 38.7%, compared to 34.8% at May 31, 2011, and it continues to be at the low end of the company's historic norms. At Nov. 30, 2011, liquidity stood at $803.9 million, including cash of $301.0 million and $502.9 million in long-term committed available credit.
"In addition to supporting our growing cash dividend and internal capital investments, this solid cash and liquidity position enables RPM to continue a more robust acquisition program. Businesses with approximately $165 million in annual sales have been acquired so far this fiscal year, all of which will be accretive to earnings within a year," Sullivan said.
First-Half Sales and Earnings
Fiscal 2012 first-half net sales, net income and diluted earnings per share all improved. Net sales increased 10.5% to $1.90 billion from $1.72 billion during the first six months of fiscal 2011. Consolidated EBIT increased 8.6% to $229.5 million from $211.4 million during the first six months of fiscal 2011. Net income attributable to RPM stockholders improved 7.6% to $126.7 million from $117.8 million in the fiscal 2011 first half. Diluted earnings per share attributable to RPM stockholders grew 6.6% to $0.97 from $0.91 a year ago.
First-Half Segment Sales and Earnings
RPM's industrial segment first-half sales improved 10.4%, to $1.31 billion from $1.18 billion in the fiscal 2011 first half. The organic sales increase was 7.5%, including net foreign exchange translation gains of 2.4%, while acquisition growth added 2.9%. Industrial segment EBIT grew 12.3% to $170.8 million from $152.0 million a year ago, including $5.2 million, or 3.4%, from the recognition of RPM's share of Kemrock's net earnings, of which $4.6 million related to a one-time cumulative catch-up benefit.
First-half sales for the consumer segment increased 10.6% to $593.4 million from $536.3 million a year ago. Organic sales increased 10.7%, including net foreign exchange gains of 1.1%. A small divestiture reduced the improvement by 0.1%. Consumer segment EBIT increased 2.5% to $78.3 million from $76.3 million in the first half a year ago.
During the second quarter and subsequent to it, RPM announced acquisitions with sales totaling more than $130 million, all of which are expected to be accretive to earnings within one year.
On Sept. 30, 2011, the company's RPM2 business unit acquired the Legend Brands group of companies, which provide equipment and solutions for water and fire damage restoration, professional cleaning and environmental control. Based in Burlington, WA, the business has annual sales of more than $70 million.
The RPM Performance Coatings Group announced the acquisition of the Grupo P&V group of companies on Oct. 5, 2011. Grupo P&V is a leading vertically integrated supplier of passive fire protection and insulation products based in Barcelona, Spain. Annual sales are approximately $23 million.
Subsequent to the close of the fiscal 2012 second quarter, the RPM Building Solutions Group completed the acquisition of FEMA Farben + Putze GmbH on Jan. 3, 2012. This business, with annual sales of more than $40 million, is a leading supplier of external insulating and finish systems and related products to the German and French construction markets.
"We reiterate our full year guidance announced on July 25, 2011, which anticipated sales growth of 8% to 10% and growth in diluted earnings per share of 10% to 15%. As usual, we expect weaker results for the seasonally difficult fiscal third quarter ending Feb. 29, 2012, but anticipate a strong fiscal fourth quarter, with continued strength in top-line sales from both our industrial and consumer segments, combined with a moderating of raw material costs and improved gross margin contribution," Sullivan said.
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