RPM International Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended November 30, 2022. Fiscal Q2 is typically a stronger seasonal period for RPM. Comparisons below are with the periods ended November 30, 2021 unless otherwise noted. Dollar amounts are in millions, except per-share data.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $1,791.7 | $1,639.5 | $3,724.0 | $3,290.0 |
| Gross profit | $690.4 | $582.6 | $1,434.9 | $1,196.0 |
| Gross margin | 38.5% | 35.5% | 38.5% | 36.4% |
| Income before taxes | $175.1 | $163.2 | $400.3 | $344.6 |
| Net income | $131.5 | $125.1 | $300.8 | $259.9 |
| Net income attributable to RPM shareholders | $131.3 | $124.9 | $300.4 | $259.5 |
| Diluted EPS | $1.02 | $0.96 | $2.33 | $2.00 |
- Q2 sales increased 9.3%; organic growth was 12.4%, acquisition growth 1.0%, and foreign exchange reduced growth by 4.1%. First-half sales increased 13.2%, including 16.0% organic growth and a 3.8% foreign-exchange headwind.
- Q2 gross margin expanded 300 basis points; first-half margin expanded 210 basis points. RPM attributed improvement to pricing, better raw-material availability and production efficiencies, and savings from its MAP initiatives. Higher raw-material and wage costs partly offset gains.
- Q2 SG&A rose $52.9 million and increased to 27.3% of sales from 26.7%. First-half SG&A increased $119.1 million and was 26.2% of sales versus 26.0%.
- Q2 operating results included no asset-sale gain; the prior-year quarter included a $42.1 million gain on real estate sales, affecting the comparison, particularly for CPG. Interest expense increased to $27.9 million from $21.0 million in Q2 and to $54.6 million from $42.1 million for the first half.
Segments and material changes
- CPG: Q2 sales grew 3.2% reported and 6.9% organically, but pretax income fell to $75.5 million from $130.4 million. Results faced weaker European conditions, lower demand tied to new residential construction, unfavorable currency effects, and the prior-year real-estate gain. Roofing restoration and concrete admixtures and repair were sources of strength.
- PCG: Q2 sales grew 10.8% reported and 15.4% organically; pretax income rose to $45.3 million from $37.9 million. Flooring, protective coatings and fiberglass grating performed well, supported by pricing, volume and end-market demand.
- Consumer: Q2 sales grew 15.3% reported and 17.5% organically; pretax income rose to $93.9 million from $33.1 million. Pricing and improved raw-material availability, especially alkyd-based resins, supported growth and efficiencies.
- SPG: Q2 sales grew 9.5% reported and 11.5% organically; pretax income rose to $27.4 million from $20.6 million. Food coatings and additives and disaster restoration contributed to growth.
Cash flow, debt and liquidity
- First-half cash from operating activities was $190.9 million, up from $159.4 million. Capital expenditures were $113.5 million versus $101.4 million; operating cash flow less capital expenditures was approximately $77.5 million.
- Working capital absorbed cash: inventory increased by $189.5 million in the cash-flow reconciliation, with management citing inflation and strategic inventory build-up. Days inventory outstanding increased to 102.3 from 85.9 a year earlier.
- Cash and equivalents were $232.1 million at November 30, 2022, versus $201.7 million at May 31, 2022. Total debt carrying value was $2,844.8 million, versus $2,686.6 million at May 31. Available liquidity, including cash and committed facilities, was $880.0 million, down from $1.31 billion.
- RPM repaid $300 million of 3.45% notes due 2022, drew on its revolving facility and used the $250 million accounts-receivable program. The revolving facility was extended to August 2027 and increased to $1.35 billion; its November 30 balance was approximately $699 million. The term loan maturity was extended to August 2025 and its balance reduced to $250 million.
- RPM reported compliance with debt covenants: net leverage ratio 2.53x against a 3.75x limit and interest coverage ratio 10.64x against a 3.50x minimum. Variable-rate borrowings expose the company to higher interest costs.
Outlook, risks and unusual items
- RPM gave no numerical earnings or sales guidance in the provided filing text. Management expected inflation in raw materials and wages to continue through the rest of FY2023 and said higher interest rates were weighing on construction activity, existing-home sales and broader demand, with weakness expected to continue into Q3.
- In August 2022, RPM announced MAP 2025, an operational improvement initiative. It was evaluating restructuring of certain European businesses’ go-to-market strategy; potential impairment of goodwill, other intangible assets or long-lived assets was identified as a possibility.
- The MAP to Growth restructuring plan had expected total costs of $121.3 million, of which $119.9 million had been incurred. FY2023 first-half restructuring expense was $2.6 million.
- A distributor litigation matter remained on appeal after a 2021 jury award of $6.0 million. RPM had accrued $2.6 million, described as the low end of the estimated loss range; attorneys’ fees may also be at issue. The filing states that environmental proceedings were not expected to materially affect results or financial condition.
- Other risks cited include raw-material and transport costs, currency movements, pension expense and asset returns, acquisitions, weather and natural disasters, geopolitical conditions including the war in Ukraine, and legal, environmental, warranty and insurance exposures. RPM noted that pension costs may materially fluctuate.
Key facts for investors to verify
- Whether Q3 demand weakness, especially in construction-related markets and Europe, develops as management anticipated.
- Whether pricing, cost savings and improved supply continue to offset raw-material and wage inflation and sustain gross-margin gains.
- Debt, variable-rate borrowing costs and liquidity after the debt refinancing, revolver usage and accounts-receivable funding.
- Progress and costs under MAP 2025, including the European restructuring review and any resulting impairment charges.
- Developments in the distributor appeal, warranty claims and other contingencies beyond amounts accrued.