RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2022. The request metadata labels this “2021 Q3,” but the filing is for fiscal 2022 Q3. RPM manufactures specialty paints, coatings, roofing systems, sealants, adhesives, and related products across four reportable segments.
Financial results
| Metric | Three months ended Feb. 28, 2022 | Three months ended Feb. 28, 2021 | Nine months ended Feb. 28, 2022 | Nine months ended Feb. 28, 2021 |
|---|---|---|---|---|
| Net sales | $1,433.9 million | $1,269.4 million | $4,723.8 million | $4,362.0 million |
| Gross profit | $498.6 million | $471.9 million | $1,694.6 million | $1,711.8 million |
| Gross margin | 34.8% | 37.2% | 35.9% | 39.2% |
| Net income | $33.2 million | $38.5 million | $293.2 million | $347.1 million |
| Net income attributable to RPM shareholders | $33.0 million | $38.2 million | $292.5 million | $346.5 million |
| Diluted EPS | $0.25 | $0.29 | $2.26 | $2.66 |
| Income before income taxes | $40.5 million | $55.9 million | $385.1 million | $464.2 million |
- Third-quarter sales increased 13.0% year over year, including 13.4% organic growth; acquisitions contributed 1.4% and foreign exchange reduced growth by 1.8%. Year-to-date sales rose 8.3%, including 6.5% organic growth.
- Gross margin fell 240 basis points in the quarter and 330 basis points year to date. Management cited raw-material, freight and wage inflation, lower absorption, labor shortages, supply-chain disruptions, and production inefficiencies; pricing actions and MAP to Growth savings partly offset these pressures.
- Quarterly SG&A was $433.6 million, up $31.4 million, but declined to 30.2% of sales from 31.7%. Nine-month SG&A was $1,290.2 million, up $92.7 million, and was 27.3% of sales versus 27.4%.
- Quarterly EBIT, a non-GAAP measure, was $66.9 million versus $65.4 million. Nine-month EBIT was $450.7 million versus $494.4 million.
- Cash provided by operating activities was $156.0 million for the nine months, versus $651.9 million a year earlier. Inventory growth used $273.5 million of cash; management attributed the build primarily to inflation and precautionary inventory for supply constraints.
- Capital expenditures were $152.4 million, acquisitions net of cash acquired used $116.5 million, and dividends paid were $152.6 million year to date. Cash and cash equivalents were $193.2 million at period end, down from $246.7 million at May 31, 2021.
- Total debt was $2.586 billion, compared with $2.380 billion at May 31, 2021. RPM issued $300 million of 2.95% notes due 2032 in January, using proceeds partly to repay revolving-credit borrowings. The filing reports $703.3 million as current debt, versus $1.3 million at fiscal year-end.
- Available liquidity, including cash and committed credit facilities, was $1.46 billion. Revolver availability was $1.06 billion; RPM had no balance outstanding under its accounts-receivable securitization program. The company reported compliance with debt covenants, a net leverage ratio of 2.78 and interest coverage ratio of 10.64.
Material changes and segment performance
- Construction Products Group sales grew 21.7% in the quarter and 20.3% year to date. Segment pretax income increased to $31.5 million for the quarter and $276.2 million year to date; the year-to-date figure includes a $41.9 million real-estate sale gain.
- Performance Coatings Group sales grew 19.6% in the quarter and 15.3% year to date. Pretax income rose to $24.9 million for the quarter and $97.8 million year to date, supported by pricing, operating improvements and acquisitions.
- Consumer segment sales grew 2.9% in the quarter but declined 6.4% year to date, reflecting comparison with unusually high pandemic-era demand and continuing supply constraints. Pretax income fell to $16.9 million for the quarter and $95.9 million year to date.
- Specialty Products Group sales grew 11.9% in the quarter and 12.3% year to date. Pretax income was $25.9 million for the quarter and $71.0 million year to date; year-to-date results were slightly below the prior year.
- Net investment results shifted from income to expense: a $4.4 million expense for the quarter versus $11.5 million income in the prior-year quarter, and $1.4 million expense year to date versus $33.7 million income. The nine-month comparison also includes the prior-year investment gains.
- The Toronto-area property sale generated $48.0 million of net proceeds and a $41.9 million gain; RPM leased the property back through September 2024.
Outlook, risks and unusual items
- Management expects elevated raw-material, freight and wage costs to continue through the remainder of fiscal 2022 and into fiscal 2023, and intends to pursue further selling-price increases. Supplier force majeures and supply-chain constraints may impede timely fulfillment of customer demand.
- Consumer demand remained strong relative to pre-pandemic levels, but shortages and disruptions constrained sales and productivity. RPM also cited semiconductor shortages affecting restoration-equipment products, although that business regained supply and adapted products during the quarter.
- MAP to Growth was formally concluded May 31, 2021, but remaining projects are expected to generate fiscal 2022 restructuring expense. The filing estimates $2.7 million of future costs as of February 28, 2022; the company previously stated an intended annualized pretax savings target of approximately $290 million.
- A former distributor obtained a $6.0 million jury award in December 2021. RPM accrued $2.6 million, described as the low end of its estimated loss range, and was evaluating appeal options; attorneys’ fees may also be recoverable by the distributor.
- RPM identifies uncertainty in raw-material supply and costs, transportation, demand, interest and foreign-exchange rates, acquisitions, litigation and environmental exposure, pension assumptions, weather, and COVID-related effects. Management said environmental proceedings were not expected to materially affect results or financial condition.
- No numerical sales or earnings guidance was provided in the filing. RPM noted that its third fiscal quarter historically tends to be weaker due to weather-related seasonality.
Most important facts for investors to verify
- Whether price increases can keep pace with persistent input, freight and labor inflation without materially reducing demand.
- Whether inventory levels and operating cash flow improve as supply constraints ease; inventory was $1.192 billion and year-to-date operating cash flow was substantially below the prior-year period.
- The sustainability of segment growth and Consumer-segment recovery once comparisons with pandemic-driven demand normalize.
- The debt maturity and refinancing profile, including the $703.3 million current-debt classification, and continued compliance with credit covenants.
- The outcome of the distributor litigation, including any appeal, fees, or loss above the $2.6 million accrual.
- The realization and timing of MAP to Growth savings, and whether remaining restructuring costs exceed the current $2.7 million estimate.
- The effect of the $41.9 million property-sale gain and marketable-securities results when assessing underlying earnings trends.