RPM International Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended August 31, 2022, compared with the three months ended August 31, 2021. RPM manufactures and sells specialty paints, coatings, roofing systems, flooring solutions, sealants, adhesives, and related products and services. The company notes that results are seasonal and weather-dependent.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,932.3 million | $1,650.4 million | Up 17.1% |
| Gross profit | $744.5 million | $613.4 million | Up 21.4% |
| Gross margin | 38.5% | 37.2% | Up 130 basis points |
| Income before taxes | $225.1 million | $181.5 million | Up 24.1% |
| Net income attributable to RPM | $169.0 million | $134.6 million | Up 25.6% |
| Diluted EPS | $1.31 | $1.04 | Up 26.0% |
| Operating cash flow | $23.6 million | $76.1 million | Down $52.6 million |
SG&A rose $66.4 million to $485.2 million, but declined to 25.1% of sales from 25.4%. Interest expense increased to $26.7 million from $21.1 million; the average interest rate rose to 3.50% from 3.15%. The effective tax rate was 24.8%, versus 25.7%. EBIT, a non-GAAP measure, was $255.5 million compared with $196.8 million.
Cash and investment: Capital expenditures were $57.8 million, making operating cash flow less capital expenditures approximately negative $34.3 million. Investing activities used $96.4 million; financing activities provided $79.7 million. Cash ended the quarter at $197.6 million, down from $201.7 million at May 31, 2022. Inventory increased to $1.34 billion from $1.21 billion.
Debt and liquidity: Total debt carrying value, including current maturities, was $2.84 billion, up from $2.69 billion at May 31. Available liquidity, including cash and committed facilities, was $1.15 billion, versus $1.31 billion. Revolver availability was $953.6 million; the company had $250 million outstanding under its accounts-receivable securitization program. It reported compliance with debt covenants, with a net leverage ratio of 2.69x and interest coverage ratio of 10.90x. Current assets were $3.29 billion and current liabilities $1.65 billion.
Business performance and material changes
Organic sales growth, which includes price and volume, was 19.5% companywide; acquisitions added 1.0%, while foreign exchange reduced reported growth by 3.4%. Sales increased in all four segments:
- CPG: Sales up 13.2% to $729.7 million; pretax income fell to $109.2 million from $114.4 million. Management cited pricing and demand, partly offset by a transportation strike and concrete shortages in Canada and weaker European conditions.
- PCG: Sales up 19.2% to $340.4 million; pretax income rose to $47.0 million from $35.1 million, supported by pricing, volume, product mix, and demand in flooring, protective coatings, and energy markets.
- Consumer: Sales up 22.5% to $659.5 million; pretax income rose to $116.7 million from $45.9 million. Improved raw-material availability and pricing contributed to the increase.
- SPG: Sales up 11.3% to $202.7 million; pretax income rose to $27.9 million from $24.6 million. Management cited improved pricing, operating efficiencies, and demand in food coatings and restoration.
Gross margin improved through production efficiencies, restructuring savings, stronger volume, and pricing. These benefits were partly offset by raw-material, freight, and wage inflation. Corporate/other pretax loss widened to $75.6 million from $38.4 million, reflecting, among other factors, an unfavorable pension non-service-cost swing, investment losses, higher interest expense, stock compensation, and professional fees.
Outlook, risks, and notable items
- Management said inflation-related costs were expected to affect results through the remainder of FY2023 and into FY2024, and that it planned to continue pursuing price increases to offset costs. No specific numerical earnings or revenue guidance is provided in the filing text.
- Supplier force majeure declarations, transportation constraints, supply-chain shortages, raw-material availability and costs, and the Russia-Ukraine war could constrain supply or affect costs. Management also cited interest-rate and foreign-exchange exposure, weather, macroeconomic conditions, and acquisition, environmental, product-liability, and warranty risks.
- Operating cash flow was pressured by inventory investment and working-capital timing. Management attributed inventory growth to inflation and strategic purchases to protect supply and availability.
- The revolving credit facility was extended to August 1, 2027, and increased to $1.35 billion. The term loan maturity was extended to August 1, 2025, and borrowings were paid down to $250 million. The company also reported using its $250 million receivables program during the quarter.
- Foreign currency translation contributed a $79.0 million other comprehensive loss. The quarter included a $6.6 million net loss on marketable securities, compared with a $3.5 million gain in the prior-year quarter.
- The concluded MAP to Growth restructuring plan had expected total costs of $120.2 million, of which $118.7 million had been incurred; $1.4 million of restructuring expense was recorded in the quarter.
- A distributor litigation matter remains on appeal after a $6.0 million jury award. RPM accrued $2.6 million, described as the low end of the loss range; the company said a higher loss was reasonably possible, with the high end not expected to be materially more than $6.0 million. Management stated environmental proceedings were not expected to materially affect results or financial condition.
Important facts for investors to verify
- Whether pricing and productivity savings continue to offset persistent input, freight, and wage inflation, and whether supplier disruptions ease.
- Whether elevated inventory converts into sales and cash without increased obsolescence or further working-capital strain.
- How debt costs and liquidity evolve, including use of the receivables program and compliance with leverage and interest-coverage covenants.
- Whether Consumer segment profitability and CPG segment margins remain sustainable, and the reasons for the widening corporate/other loss.
- Developments in the distributor appeal, product-liability and warranty claims, and other contingencies.