RPM International Inc. recently reported financial results for its fiscal 2021 third quarter, ended February 28, 2021. Fiscal 2021 third quarter net sales were almost $1.3 billion, an increase of 8.1% over the nearly $1.2 billion reported a year ago. Net income in the 2021 quarter increased 222.6% to $38.2 million, compared to $11.9 million reported in the year-ago period.
"In mid-February, severe winter storm Uri disrupted North American transportation, distribution and supply chains," said Frank C. Sullivan, chairman and CEO. "With concern about the potential impact of transportation gridlock and lost shipping days as we closed out the quarter and the desire to maintain transparent communication with our investors, we lowered our third-quarter guidance on February 18. The third quarter is our seasonally low quarter and historically generates only 5% to 10% of our annual earnings, so the magnitude of relatively small variations in earnings becomes magnified. Fortunately, due to the extraordinary efforts of our associates who were able to catch up and execute delivery of customer orders, as well as the fact that plants, distribution centers and transportation networks resumed operation more quickly than anticipated, we exceeded our original third-quarter sales and earnings guidance.
"Similar to last quarter, three of our four operating segments generated solid sales growth and significant EBIT growth due to MAP to Growth benefits being leveraged to the bottom line. This was particularly impressive given a difficult comparison to last year's third quarter when adjusted EBIT increased 30.4%. Organic sales grew 4.9% during the quarter and acquisitions contributed 2.1%. Foreign currency translation added 1.1% as a result of the weaker U.S. dollar. Our year-to-date cash flow from operations improved by $270.7 million over last fiscal year as a result of continued better working capital management and margin improvement from our MAP to Growth program."
Net sales in the Construction Products Group increased 6.4% to $396 million during the fiscal 2021 third quarter, compared to fiscal 2020 third quarter net sales of $372.1 million, reflecting organic growth of 5.4%. Favorable foreign currency translation increased sales by 1%.
"Our Construction Products Group continued to focus on renovation and restoration projects, leading to solid sales growth during the quarter, despite softness in the commercial and institutional construction markets, which it leveraged to the bottom line," said Sullivan. "Our roofing business performed well, as did our Nudura insulated concrete forms, which are seeing accelerated long-term adoption as a wall system due to their environmental and structural benefits relative to traditional building methods. Overall, the group was able to generate 310 basis points of adjusted EBIT margin growth as a result of MAP to Growth savings and the favorable leverage of sales volume increases. The segment's European businesses continue to improve due to ongoing restructuring and better product mix."
Performance Coatings Group net sales were $226.5 million during the fiscal 2021 third quarter, a decrease of 11.4% from net sales of $255.7 million reported a year ago. Organic sales decreased 12.7%, which was partially offset by favorable foreign currency translation of 1.3%.
"Challenging market trends persisted for our Performance Coatings Group during the quarter, including weak energy demand that impacted industrial coatings and Covid-19 protocols that restricted access to facilities for flooring system installations," said Sullivan. "Lower sales volumes and pricing pressures resulted in earnings deleveraging, which was offset, in part, by discretionary cost cuts and MAP to Growth savings. As vaccines are administered and the impact of the pandemic diminishes, we expect the segment to rebound as its industrial customers resume maintenance projects and energy markets recover due to increased travel."
Net Sales in the Consumer Group were $477.7 million during the third quarter of fiscal 2021, an increase of 19.8% compared to net sales of $398.7 million reported in the third quarter of fiscal 2020. Organic sales increased 12.7%. Acquisitions contributed 6.1% to sales growth, and foreign currency translation was favorable by 1%.
"Our Consumer Group continued to leverage its broad distribution and market leadership in caulks, sealants, cleaners, abrasives and small-project paints to capitalize on the positive DIY home improvement trend," said Sullivan. "Similar to the U.S., the segment's international results were equally robust in Europe and Canada. Adjusted EBIT margins improved due to MAP savings and the leveraging of higher sales volumes, which offset rising distribution expenses."
The Specialty Products Group reported net sales of $169.2 million during the third quarter of fiscal 2021, an increase of 14.7% compared to net sales of $147.5 million in the fiscal 2020 third quarter. Organic sales increased 13.4%, and favorable foreign currency translation added 1.3%.
"Specialty Products Group results were a record," Sullivan said. "For the second consecutive quarter, the segment showed dramatic improvement due to recent management changes and improving market conditions for many of its businesses. In particular, our restoration equipment business, driven by extreme weather events in North America, experienced excellent top-line growth, as did our businesses serving the furniture, outdoor recreational equipment, food and OEM markets. The segment was able drive MAP to Growth savings and operating leverage from higher sales volumes to the bottom line."
Sullivan also commented on RPM's business outlook. "Several macroeconomic factors are creating inflationary and supply pressures on some of our product categories," he said. "These factors include supplier refineries operating at lower levels due to low fuel demand; the disruption winter storm Uri caused on supply chains; intermittent supplier plant shutdowns in response to the pandemic; and significant worldwide demand for packaging, solvents and chemicals used in cleaning products. We expect that these increased costs will be reflected in our results for the fourth quarter of fiscal 2021 and more significantly during fiscal 2022. We are moving aggressively to offset these increased costs with commensurate selling price increases.
"Fortunately, due to our MAP to Growth program, we are in a much better position to weather these challenges than we were three years ago when the last inflationary cycle occurred. With a stronger partnership with our supplier base and longer-term contracts, we are working with our supplier partners to secure necessary raw materials and control costs to whatever extent possible. Additionally, our improved center-led processes and systems are providing more timely and actionable information. We are also working in collaboration with customers through these supply chain challenges.
"Looking ahead to our fourth quarter and beyond, there is currently a great deal of volatility around input costs and uncertainty regarding material availability. While our third-quarter earnings did not reflect spiking material costs due to our FIFO inventory methodology, inflation is expected to be significant in our fourth quarter and into the first quarter of fiscal 2022. We are currently implementing appropriate price increases and changes in terms, which we anticipate will offset the inflationary impact by the end of the first quarter of fiscal 2022.
"There is also much uncertainty related to the breadth and speed at which global economies reopen as people become vaccinated. Based on the information we have on hand today, we expect our fiscal 2021 fourth-quarter sales to increase by double digits compared to the fiscal 2020 fourth quarter. Last year's fourth quarter should prove to be an easier revenue comparison because it was heavily impacted by the onset of the pandemic. Our earnings comparison versus last year, on the other hand, will be more challenging because of raw material inflation, as well as an extraordinary situation last year when our non-operating segment reported a profit due to lower travel and medical expenses, incentive reversals and other factors. As a result, our fourth quarter adjusted EBIT is expected to increase double digits, but below the rate of sales growth. Excluding our non-operating segment, adjusted EBIT for our four operating segments in total is expected to increase by more than 20%."
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