RPM International Inc. — Form 10-Q Summary
Business context and reporting period: The filing covers the second quarter and first six months of fiscal 2021, ended November 30, 2020, compared with the periods ended November 30, 2019. RPM manufactures and sells specialty paints, coatings, roofing systems, flooring solutions, sealants, cleaners and adhesives through four segments: Construction Products Group (CPG), Performance Coatings Group (PCG), Consumer and Specialty Products Group (SPG). Results are unaudited and seasonality and COVID-19 affected demand unevenly.
Key financial results
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1.486 billion, up 6.0% | $3.093 billion, up 7.6% |
| Gross profit margin | 39.4%, versus 37.8% | 40.1%, versus 38.4% |
| Net income | $127.9 million, versus $77.3 million | $308.7 million, versus $183.8 million |
| Net income attributable to RPM shareholders | $127.7 million | $308.3 million |
| Diluted EPS | $0.98, versus $0.59 | $2.37, versus $1.41 |
| Operating cash flow | Not separately presented for the quarter | $579.5 million, versus $300.2 million |
For the quarter, gross profit was $586.2 million and SG&A was $399.4 million, or 26.9% of sales versus 28.8% a year earlier. Six-month SG&A was $795.4 million, or 25.7% of sales versus 28.0%. EBIT, a non-GAAP measure, was $178.7 million for the quarter and $429.1 million for six months; the filing cautions it is not a substitute for GAAP results. Investment gains contributed to earnings: net investment income was $9.5 million for the quarter and $22.3 million for six months, including six-month net gains on marketable securities of $20.2 million.
Balance sheet and liquidity: At November 30, cash and equivalents were $272.9 million; current assets were $2.452 billion and current liabilities $1.133 billion. Total debt, including current maturities, was $2.300 billion, down from $2.539 billion at May 31, 2020. Stockholders’ equity was $1.548 billion. The company reported $1.56 billion of available liquidity, including cash and committed credit facilities, and $1.11 billion of availability under its revolving facility. The AR securitization program had $75 million outstanding against stated maximum availability of $250 million, subject to eligibility and other limits.
RPM generated $579.5 million of operating cash, used $186.0 million in investing activities (including $113.6 million for acquisitions and $70.9 million in capital expenditures), and used $370.0 million in financing activities. Financing included $256.1 million of debt repayments and $96.0 million of dividends. Cash ended the period at $272.9 million. The quarterly dividend was $0.38 per share; the six-month cash dividend total was $96.0 million.
Material changes versus the prior comparable period
- Quarterly sales grew 6.0% overall, with 3.5% organic growth; six-month sales grew 7.6%, with 6.5% organic growth.
- Consumer was the largest growth driver: quarterly sales rose 21.4% and six-month sales 27.8%, reflecting DIY home-improvement and cleaning demand. Quarterly and six-month Consumer income before taxes rose to $88.4 million and $221.1 million, respectively.
- PCG remained pressured: quarterly sales fell 11.6% and six-month sales 12.1%, with weaker industrial and energy-related demand, COVID access restrictions and Gulf hurricanes. Quarterly segment income before taxes declined to $24.0 million from $33.3 million.
- CPG sales increased 0.8% in the quarter and 1.5% for six months; SPG sales increased 11.3% and 5.0%, respectively. CPG and SPG reported higher segment income before taxes in both comparison periods.
- Higher selling prices, MAP to Growth savings and sales volume helped lift gross margin. Lower interest rates contributed to reduced interest expense: $21.3 million for the quarter versus $26.3 million and $43.0 million for six months versus $54.7 million.
- Operating cash flow rose year over year, while acquisition spending increased. Debt declined; the company made no repurchases under its stock repurchase program during the six-month period, which remained suspended because of COVID-related uncertainty.
Outlook, management commentary and risks
- Management expected consolidated sales growth in the mid-single digits in fiscal 2021’s third quarter. It said the duration and scope of COVID-19 made future results difficult to estimate and that impacts could be material.
- COVID-19 had mixed effects: it supported DIY, cleaning and disinfectant demand, while restricting contractor access and weakening energy, industrial maintenance and some construction markets. Supplier ability to meet demand and facility closures were also identified as factors.
- Management noted raw-material and packaging cost pressure was emerging as suppliers struggled to meet demand, although inflation had been neutral overall in the reported quarter and first half. The company had generally maintained principal operations despite temporary plant shutdowns.
- The MAP to Growth restructuring was delayed beyond its original December 2020 completion target. RPM expected to use the remainder of fiscal 2021 to advance the plan, with some projects extending into fiscal 2022. Cumulative charges were $102.1 million against expected total costs of $112.4 million; approximately $10.3 million of future costs were estimated. Management continued to target approximately $290 million of annualized pretax savings and substantial progress toward a $230 million working-capital improvement goal by May 31, 2021.
- At November 30, RPM was in compliance with its financial covenants. Its net leverage ratio was 2.16 to 1, against a 4.25-to-1.0 limit then in effect following notice related to the Ali Industries acquisition; interest coverage was 11.12 to 1, versus a 3.50-to-1.0 minimum.
- Other risks include raw-material supply and pricing, interest and foreign-exchange movements, acquisitions, restructuring execution, pension assumptions, product warranties, environmental and litigation matters, and adequacy of contingent-liability reserves. Management said product-liability, environmental and specified other potential losses were not expected to materially affect results or financial condition, while noting warranty claims could exceed accrued estimates.
Contingencies and unusual items
- The SEC enforcement matter concerning historical disclosure and loss-reserve timing was resolved by a December 22, 2020 final judgment. RPM consented without admitting or denying the allegations, agreed to a $2.0 million civil penalty and an injunction concerning specified reporting and books-and-records provisions; the amount was accrued at November 30 and paid before filing. A related shareholder derivative action had been stayed pending resolution of the SEC matter; the court was to revisit the stay.
- Restructuring charges were $4.9 million for the quarter and $9.2 million for six months. Fiscal 2021 restructuring charges were lower for six months than the prior-year period, and inventory-related restructuring charges in the current periods were immaterial.
- Six-month net income included larger marketable-securities gains than the prior year. Pension expense also increased, with management citing lower discount rates and higher recognized actuarial losses.
- RPM reported no off-balance-sheet financings. Disclosure controls were considered effective, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether mid-single-digit sales growth materialized and whether DIY, cleaning and disinfectant demand remains durable as pandemic conditions change.
- Whether PCG’s industrial, energy and contractor-access pressures ease, and how the Consumer segment performs against strong demand and comparison periods.
- Progress on MAP to Growth savings and working-capital targets, final restructuring costs, and any further schedule or scope changes.
- Cash conversion and working-capital trends, acquisition spending, debt repayment, and covenant headroom; assess liquidity availability subject to facility and receivables eligibility conditions.
- Exposure to rising raw-material and packaging costs, pension expense variability, warranty claims, and the status of the stayed shareholder derivative action.
- Separate recurring operating performance from investment gains and other potentially variable items when assessing earnings growth.