RPM International Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended February 28, 2021 (fiscal 2021 third quarter). The filing compares the quarter with the three months ended February 29, 2020, and the year-to-date period with the nine months ended February 29, 2020. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $1,269.4 | $1,174.0 | $4,362.0 | $4,048.0 |
| Gross profit | $471.9 | $434.7 | $1,711.8 | $1,538.9 |
| Income before taxes | $55.9 | $16.3 | $464.2 | $260.9 |
| Net income | $38.5 | $12.1 | $347.1 | $195.9 |
| Net income attributable to RPM shareholders | $38.2 | $11.9 | $346.5 | $195.1 |
| Diluted EPS | $0.29 | $0.09 | $2.66 | $1.50 |
| Gross margin | 37.2% | 37.0% | 39.2% | 38.0% |
- Quarterly sales rose 8.1%: organic growth was 4.9%, acquisition growth 2.1%, and foreign exchange contributed 1.1%. Nine-month sales rose 7.8%, including 6.1% organic growth.
- Quarterly SG&A was $402.2 million, or 31.7% of sales, versus $381.9 million, or 32.5%. Nine-month SG&A was $1,197.6 million, or 27.4% of sales, versus $1,185.8 million, or 29.3%.
- Interest expense declined to $21.0 million for the quarter and $64.0 million year to date, from $24.0 million and $78.6 million, respectively. Lower variable borrowing rates contributed to the reductions.
- Investment income was $11.5 million in Q3 versus expense of $3.8 million a year earlier, including a $9.5 million marketable-securities gain versus a $6.9 million loss. Nine-month investment income was $33.7 million, including $29.7 million of securities gains.
Cash flow, debt and liquidity
- Operating cash flow for the nine months was $651.9 million, up from $381.2 million. Investing used $217.9 million, including $114.4 million for acquisitions and $103.2 million of capital expenditures. Financing used $439.7 million, including $249.5 million of debt repayments and $145.5 million of dividends.
- Cash and equivalents were $249.2 million at February 28, 2021, versus $233.4 million at May 31, 2020. Total debt carrying value was $2,311.5 million, versus $2,539.2 million; cash less debt implies net debt of approximately $2,062.3 million.
- Available liquidity, including cash and committed credit facilities, was $1.43 billion. Revolver availability was $1.03 billion; no amounts were outstanding under the receivables program, with $150 million then available.
- RPM reported compliance with debt covenants. At period-end, its net leverage ratio was 2.13x against a 4.25x permitted threshold then applicable, and interest coverage was 11.94x against a 3.50x minimum.
- On March 18, 2021, the company extended its $250 million receivables securitization facility to May 21, 2024.
Material changes and management commentary
- Consumer was the largest growth contributor, with Q3 sales up 19.8% and nine-month sales up 25.4%, supported by DIY home-improvement and cleaning demand and an acquisition. CPG sales grew 6.4% in Q3; SPG grew 14.7%. PCG declined 11.4% in Q3 amid deferred projects and weaker energy-sector spending.
- Quarterly gross margin improved 20 basis points, primarily from MAP to Growth savings and volume, partly offset by higher freight. Nine-month gross margin improved 120 basis points, reflecting selling prices, restructuring savings, and volume.
- Management expects double-digit consolidated sales growth in Q4 FY2021 compared with the pandemic-affected prior-year quarter. It expects higher input costs in Q4 and more significantly in FY2022, and plans corresponding price increases.
- The MAP to Growth restructuring plan was delayed by COVID-19. Management expects to pursue its goals through the remainder of FY2021, with some projects extending into FY2022. Total expected restructuring costs were $113.2 million; management stated it expects to exceed its approximately $290 million annualized pretax savings goal and make substantial progress toward its $230 million working-capital improvement goal by May 31, 2021.
Risks, contingencies and unusual items
- COVID-19 has affected businesses unevenly; management said future effects on sales, margins, and SG&A could be material. Risks include facility access and closures, weaker construction and energy demand, and supplier capacity and delivery constraints.
- Many major chemical suppliers issued force majeure notifications. Raw-material, packaging, freight, and supply constraints—including disruption from the February 2021 winter storm—could affect costs and the ability to meet demand.
- Q3 included a $5.3 million discrete tax charge related to withholding taxes on additional foreign earnings no longer considered permanently reinvested. The quarterly effective tax rate was 31.1%, versus 25.9%.
- The SEC enforcement matter was resolved by a December 2020 final judgment. RPM paid a $2.0 million civil penalty, accrued in the prior quarter; the company neither admitted nor denied the SEC’s allegations. A related shareholder derivative action had been stayed and could be revisited following resolution of the SEC matter.
- Warranty, environmental, pension, currency, and acquisition-related obligations remain relevant uncertainties. Management said it does not expect environmental matters to materially affect results or financial condition. Pension expense may fluctuate materially; RPM contributed $62.1 million to U.S. pension plans in the quarter and expected total FY2021 U.S. contributions of $62.3 million.
Important facts for investors to verify
- Whether expected Q4 sales growth and planned price increases offset input-cost inflation and supplier disruptions.
- How much reported earnings growth persists excluding marketable-securities gains, acquisition contributions, and other unusual items.
- Whether PCG project deferrals and energy-market weakness improve, and whether unusually strong DIY and cleaning demand continues.
- Progress and final costs of MAP to Growth, including realization of savings and working-capital targets and projects deferred into FY2022.
- Debt covenant headroom, access to committed facilities, and the effects of acquisitions, dividends, and resumed share repurchases on leverage and liquidity.