RPM International Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended May 31, 2021. Although the request metadata says “2020 Q4,” this filing is an annual report for FY2021; it does not provide a standalone Q4 income statement. Unless otherwise noted, figures below are for the full fiscal year and are compared with FY2020.
Business context
RPM manufactures and sells specialty paints, coatings, roofing systems, sealants, adhesives, construction and repair products, and related services. Its four reportable segments are Construction Products Group (CPG), Performance Coatings Group (PCG), Consumer, and Specialty Products Group (SPG). About 32% of sales came from foreign operations, excluding direct U.S. exports. The company reported sales in approximately 160 countries and operated manufacturing facilities in approximately 122 locations.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Net sales | $6.106 billion | $5.507 billion | +10.9%; organic growth 8.1% |
| Gross profit | $2.405 billion | $2.093 billion | +14.9% |
| Gross margin | 39.4% | 38.0% | +1.4 percentage points |
| Income before income taxes | $668.4 million | $407.8 million | +64.0% |
| Net income attributable to RPM shareholders | $502.6 million | $304.4 million | +65.2% |
| Diluted EPS | $3.87 | $2.34 | +65.4% |
| Operating cash flow | $766.2 million | $549.9 million | +$216.2 million |
| Cash and cash equivalents | $246.7 million | $233.4 million | +$13.3 million |
| Total debt, including current portion | $2.380 billion | $2.539 billion | -$159.4 million |
Net income was 8.2% of sales, versus 5.5% in FY2020. SG&A declined to 27.3% of sales from 28.1%, despite increasing in dollars. Interest expense fell to $85.4 million from $101.0 million; the average interest rate declined to 3.30% from 3.73%. Investment income was $44.5 million, including $38.8 million of net gains on marketable securities, versus $9.7 million of investment income in FY2020; this materially contributed to the year-over-year increase in pretax income.
Cash used for investing was $326.4 million, including $165.2 million for acquisitions and $157.2 million of capital expenditures. Cash used for financing was $459.6 million, including $194.7 million of dividends, $50.0 million of share repurchases, and $188.3 million of debt repayments. The annual dividend was $1.50 per share, compared with $1.43. Current assets were $2.782 billion and current liabilities were $1.331 billion at year-end.
Available liquidity, including cash and committed credit facilities, was $1.457 billion. Unused credit lines totaled $1.2 billion; the accounts receivable securitization program had no balance drawn against its $250 million capacity. Debt-to-capital was 57.8%, down from 66.8%. RPM reported compliance with debt covenants at May 31, 2021, with a leverage ratio of 2.17:1 and interest coverage of 12.24:1.
Segments and material changes
| Segment | FY2021 sales | Year-over-year sales change | FY2021 pretax income |
|---|---|---|---|
| CPG | $2.077 billion | +10.4% | $291.8 million |
| PCG | $1.028 billion | -4.8% | $90.7 million |
| Consumer | $2.295 billion | +18.0% | $354.8 million |
| SPG | $706.0 million | +17.5% | $108.2 million |
CPG growth reflected market-share gains in construction technologies and roofing, plus a rebound in distributor orders after COVID-related restrictions in the prior-year period. Consumer benefited from stronger DIY demand, distribution gains, and cleaning-product sales. SPG gained from cleaning and disinfecting, restoration equipment, furniture, outdoor recreation, OEM, and wood-protection demand. PCG declined as pandemic restrictions limited contractor access to customer sites and weak energy-sector conditions delayed maintenance spending.
Management attributed improved gross margin to MAP to Growth savings, plant consolidation and operating improvements, procurement savings, pricing, and sales-volume leverage. Consolidated organic sales growth was 8.1%; acquisitions contributed 1.8 percentage points and foreign exchange 1.0 percentage point. FY2021 included four acquisitions, one in each reportable segment; acquisition spending, net of cash acquired, was $165.2 million versus $65.1 million in FY2020.
Outlook, commentary, risks and unusual items
- Costs and supply: Input costs were slightly deflationary through the first three quarters, but inflation affected selected categories in Q4. Management expected cost inflation to be more significant in FY2022, especially in the first half, and planned commensurate price increases. Supplier force majeure notices and disruptions involving chemicals, packaging, transport, weather, and pandemic-related shutdowns could constrain supply and fulfillment.
- MAP to Growth: The program formally concluded May 31, 2021, with some projects and restructuring costs continuing into FY2022. Management said it exceeded its approximately $290 million annualized pretax savings target and made substantial progress toward its $230 million working-capital improvement goal. FY2021 restructuring expense was $18.1 million; expected future costs were $7.3 million.
- COVID-19 and cyclicality: The filing cites continuing uncertainty around the pandemic’s effects on demand, operations, transport, materials, and customers. Weather and seasonality also affect results; the third fiscal quarter is historically weaker.
- Debt and other exposures: Significant indebtedness, covenant requirements, refinancing needs, foreign currency movements, pension assumptions and asset returns, customer concentration, and acquisition integration are identified risks. The ten largest Consumer customers represented about 24% of consolidated sales in FY2021; Home Depot was less than 10% of consolidated sales.
- Legal and environmental: In December 2020, RPM resolved an SEC enforcement action concerning historical disclosure and reserve timing. RPM neither admitted nor denied the allegations, paid a $2.0 million civil penalty, and was permanently enjoined from specified reporting and books-and-records violations. The filing says a related derivative action may be revisited and management did not believe a material loss was reasonably possible or probable. Accrued product-liability, warranty, and environmental reserves were $18.3 million, $9.4 million, and $1.3 million current, respectively, plus noncurrent reserves.
- Accounting and audit: No goodwill impairment was recorded in FY2021; goodwill was $1.346 billion. Deloitte issued unqualified opinions on the financial statements and internal control, while identifying goodwill valuation for certain reporting units as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Review FY2022 execution of price increases against input-cost inflation, supplier constraints, and the timing of pass-through to customers.
- Assess the durability of FY2021’s strong Consumer and SPG growth and the recovery prospects for PCG, particularly in energy-related and international markets.
- Reconcile earnings growth with the $38.8 million marketable-securities gain and assess the sustainability of underlying operating performance.
- Check debt maturities and refinancing: the filing lists approximately $701.5 million due in FY2023 and $340.2 million in FY2024, alongside substantial longer-dated debt.
- Monitor MAP to Growth’s remaining FY2022 costs and verify the realization of stated savings and working-capital objectives.
- Review the SEC settlement, any developments in the stayed derivative action, and changes in product-liability, warranty, environmental, or other contingency estimates.
- Consider pension funding and market sensitivity: RPM contributed $62.3 million to U.S. pension plans in FY2021, above the required contribution, and estimates pension expense and contributions may fluctuate.