RPM International Inc. — Form 10-Q Summary
Business context and reporting period: RPM manufactures specialty paints, coatings, roofing systems, flooring solutions, sealants, adhesives and related products. This unaudited filing covers the three months ended August 31, 2021, RPM’s first quarter of fiscal 2022, with comparison to the three months ended August 31, 2020. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $1,650.4 million | $1,606.7 million |
| Gross profit / margin | $613.4 million / 37.2% | $653.7 million / 40.7% |
| Income before income taxes | $181.5 million | $241.4 million |
| Net income attributable to RPM stockholders | $134.6 million | $180.6 million |
| Diluted earnings per share | $1.04 | $1.39 |
| EBIT (non-GAAP) | $196.8 million | $250.4 million |
| Cash provided by operating activities | $76.1 million | $318.1 million |
| Capital expenditures | $51.9 million | $41.5 million |
- Consolidated sales grew 2.7%; organic sales declined 1.0%, while acquisitions contributed 2.1 percentage points and foreign currency 1.6 points.
- Gross margin contracted 350 basis points, primarily from raw-material inflation, higher freight, lower volume and supply-related production inefficiencies. Selling-price increases and MAP to Growth savings partly offset these pressures. SG&A rose to 25.4% of sales from 24.6%.
- The effective tax rate was 25.7%, compared with 25.1%. Investment income was $5.8 million, down from $12.8 million, chiefly reflecting lower marketable-securities gains.
Segments and changes versus prior year
| Segment | Sales | Year-over-year sales change | Income before tax |
|---|---|---|---|
| Construction Products Group (CPG) | $644.4 million | +17.7% | $114.4 million |
| Performance Coatings Group (PCG) | $285.6 million | +9.9% | $35.1 million |
| Consumer | $538.4 million | -16.0% | $45.9 million |
| Specialty Products Group (SPG) | $182.1 million | +15.2% | $24.6 million |
CPG, PCG and SPG benefited from stronger demand, pricing, operating improvements and, in some cases, acquisitions or easier comparisons with pandemic-affected activity a year earlier. Consumer sales and pretax income fell sharply from unusually strong pandemic-era DIY demand; sales were also constrained by raw-material availability. Consumer sales nevertheless remained above the comparable pre-pandemic quarter in fiscal 2020.
Balance sheet, liquidity and capital
- At August 31, 2021, cash and cash equivalents were $213.2 million, versus $246.7 million at May 31, 2021. Inventories rose to $997.3 million from $938.1 million.
- Total debt, including current maturities, was $2.431 billion, compared with $2.380 billion at May 31. Cash was $213.2 million; marketable securities totaled $175.6 million.
- Available liquidity, including cash and committed credit facilities, was $1.38 billion, down from $1.46 billion at May 31. Revolver availability was $971.1 million; the accounts-receivable program had $60 million outstanding against stated maximum availability of $250 million, subject to eligibility limits.
- RPM reported compliance with debt covenants. Its net leverage ratio was 2.42x against a temporarily increased maximum of 4.25x through August 31, 2021; interest coverage was 11.49x against a 3.50x minimum.
- Operating cash flow fell substantially year over year, reflecting lower earnings and working-capital movements, including inventory investment and compensation payments. The company paid $48.9 million in dividends ($0.38 per share) and repurchased $12.5 million of shares during the quarter.
Outlook, management commentary and risks
- The filing gives no specific revenue or earnings guidance. Management expects inflationary raw-material costs to continue affecting fiscal 2022 results and plans further selling-price increases to offset them.
- Management reported force majeure notices from many major suppliers, with potential effects on timely fulfillment of demand. Cited pressures include strained supply chains, extreme weather, supplier shutdowns, transportation availability and cost, power curtailments in China, and strong global demand.
- RPM formally concluded its MAP to Growth restructuring plan on May 31, 2021, but expects to complete previously identified projects and incur restructuring expense during fiscal 2022. Remaining expected restructuring costs were $4.8 million. The program had previously targeted approximately $290 million in annualized pretax savings; the filing does not quantify savings realized to date.
- Management cited potential volatility in pension expense due to asset performance and interest rates. Other stated risks include COVID-19 effects, economic and currency conditions, acquisitions, weather and climate impacts, raw-material supply and pricing, litigation, environmental matters, and the adequacy of contingent-liability reserves.
- Environmental proceedings were not expected to materially affect results or financial condition; RPM stated it knew of no environmental matter meeting its $1 million disclosure threshold. The company notes that warranty claims may exceed accrued amounts, although no clear estimate of potential excess losses is provided.
Most important facts for investors to verify
- Whether price increases keep pace with raw-material, freight and labor inflation, and whether supplier disruptions ease.
- Whether Consumer sales recover as product availability improves, and whether demand in the other segments persists beyond favorable comparisons.
- Whether cash generation improves as inventory and other working-capital requirements normalize.
- Actual delivery of MAP to Growth savings and the cost and completion timing of remaining projects.
- Debt, liquidity and covenant headroom as acquisition spending, dividends, repurchases and operating needs evolve.
- Developments in warranty, environmental, pension and other contingent exposures that could affect reported results.