RPM International Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2021; filed January 5, 2022. Comparisons are with the prior-year periods. RPM manufactures and sells specialty paints, coatings, roofing systems, flooring solutions, sealants, adhesives and related products. The company notes that weather affects results and that its December–February quarter is historically weaker.
Financial results
| Metric | Three months ended Nov. 30, 2021 | Year-over-year | Six months ended Nov. 30, 2021 | Year-over-year |
|---|---|---|---|---|
| Net sales | $1,639.5 million | +10.3% | $3,290.0 million | +6.4% |
| Gross profit | $582.6 million | −0.6% | $1,196.0 million | −3.5% |
| Gross margin | 35.5% | 39.4% prior year | 36.4% | 40.1% prior year |
| Net income | $125.1 million | −2.2% | $259.9 million | −15.8% |
| Net income attributable to RPM stockholders | $124.9 million | vs. $127.7 million | $259.5 million | vs. $308.3 million |
| Diluted EPS | $0.96 | vs. $0.98 | $2.00 | vs. $2.37 |
| Operating cash flow | Not separately presented | — | $159.4 million | vs. $579.5 million |
Quarterly income before taxes was $163.2 million, compared with $167.0 million. Six-month income before taxes was $344.6 million, compared with $408.3 million. Results included a $42.2 million gain on asset sales, primarily the $41.9 million gain from selling Toronto real estate; the company leased the property back for an initial three-year term.
For the quarter, CPG sales rose 22.0%, PCG 16.9% and SPG 10.0%; Consumer sales fell 3.3%. For the six months, CPG rose 19.7%, PCG 13.4% and SPG 12.5%, while Consumer declined 10.2%. Consumer’s prior-year comparison reflected unusually strong pandemic-related demand.
Cash, debt and liquidity
- Cash and cash equivalents were $192.9 million at November 30, 2021, down from $246.7 million at May 31, 2021. Total debt, including current maturities, was approximately $2.466 billion; the filing estimates its fair value at $2.713 billion.
- Available liquidity, including cash and committed facilities, was $1.32 billion, compared with $1.46 billion at May 31, 2021. Revolver availability was $877.8 million; the $250 million receivables program had no balance outstanding.
- RPM reported compliance with debt covenants. Net leverage was 2.61x against a 3.75x maximum; interest coverage was 10.92x against a 3.50x minimum.
- Six-month operating cash flow fell to $159.4 million, chiefly reflecting lower net income and working-capital demands. Inventory increased $102.8 million on the balance sheet from May 31; the cash-flow statement reports a $124.9 million inventory use, versus a $21.7 million source in the prior-year period. Management cited supply-chain protection, price inflation and purchase timing.
- Investing cash use was $168.4 million, including $101.4 million of capital expenditures and $114.2 million for acquisitions, partly offset by $50.6 million of asset-sale proceeds. Financing cash use was $26.0 million, including $100.7 million of dividends and $12.5 million of share repurchases.
Drivers, outlook and risks
- Management attributed the 370–390 basis-point gross-margin contraction to raw-material inflation, higher freight, lower absorption and production inefficiencies from supply disruption and material shortages. Pricing increases and MAP to Growth savings partly offset these pressures.
- Management expected elevated raw-material, freight and wage costs to continue through fiscal 2022 and planned further selling-price increases. Supplier force majeure declarations could constrain timely fulfillment. No specific revenue or earnings guidance is provided in the filing.
- MAP to Growth generated approximately $6.0 million of incremental savings in the first half. RPM formally concluded the program on May 31, 2021, but expected $3.7 million of additional restructuring costs during fiscal 2022 to complete remaining projects. The plan’s previously stated target was approximately $290 million in annualized pretax savings.
- Six-month earnings also reflected investment-market volatility: investment income was $2.9 million, versus $22.3 million in the prior-year period. The Toronto property sale supported earnings and cash but involved a leaseback.
- A distributor litigation matter resulted in a $6.0 million jury award on December 10, after quarter-end. RPM accrued $2.6 million in the second quarter, described as the low end of the estimated loss range; attorneys’ fees may also be recoverable by the distributor. RPM was evaluating appeal options.
- Other disclosed exposures include product warranty, environmental and other contingent liabilities; pension costs may fluctuate with asset returns and interest rates. Management identified general economic conditions, input availability and prices, supply-chain disruption, acquisitions, foreign exchange, weather, climate and pandemic-related risks.
Most important facts for investors to verify
- Whether price increases and cost actions can offset continuing inflation, freight pressure and supply interruptions without weakening demand.
- How much of reported earnings and cash generation depends on the $42.2 million asset-sale gain, and the ongoing cost and terms of the Toronto leaseback.
- Whether inventory builds convert to sales and cash, given the sharp year-over-year reduction in operating cash flow.
- The final outcome of the distributor litigation, including any appeal, fees and potential additional accrual.
- Progress and realized annual savings from MAP to Growth, alongside remaining restructuring costs and capital expenditure needs.
- Debt maturity and refinancing requirements, covenant headroom, and the continued availability of committed credit facilities.