Annual Statements Open main menu

RPM INTERNATIONAL INC/DE/ - Quarter Report: 2022 August (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2022,

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File No. 1-14187

 

RPM International Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

02-0642224

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

2628 PEARL ROAD;

MEDINA, Ohio

(Address of principal executive offices)

 

44256

(Zip Code)

 

 

(330) 273-5090

(Registrant’s telephone number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01

 

RPM

 

New York Stock Exchange

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No .

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No .

As of September 28, 2022, the registrant had 129,098,924 shares of common stock, $0.01 par value per share, outstanding.

 

 

 


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES*

INDEX

 

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

3

 

 

Consolidated Balance Sheets

 

3

 

 

Consolidated Statements of Income

 

4

 

 

Consolidated Statements of Comprehensive Income

 

5

 

 

Consolidated Statements of Cash Flows

 

6

 

 

Consolidated Statements of Stockholders’ Equity

 

7

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 4.

 

Controls and Procedures

 

26

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

27

Item 1A.

 

Risk Factors

 

27

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

27

Item 6.

 

Exhibits

 

28

Signatures

 

29

 

* As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise.

 

 

2


 

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

August 31, 2022

 

 

May 31, 2022

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

197,574

 

 

$

201,672

 

Trade accounts receivable (less allowances of $46,775 and $46,669, respectively)

 

 

1,407,866

 

 

 

1,432,632

 

Inventories

 

 

1,339,954

 

 

 

1,212,618

 

Prepaid expenses and other current assets

 

 

342,294

 

 

 

304,887

 

Total current assets

 

 

3,287,688

 

 

 

3,151,809

 

Property, Plant and Equipment, at Cost

 

 

2,135,573

 

 

 

2,132,915

 

Allowance for depreciation

 

 

(1,036,199

)

 

 

(1,028,932

)

Property, plant and equipment, net

 

 

1,099,374

 

 

 

1,103,983

 

Other Assets

 

 

 

 

 

 

Goodwill

 

 

1,333,066

 

 

 

1,337,868

 

Other intangible assets, net of amortization

 

 

586,204

 

 

 

592,261

 

Operating lease right-of-use assets

 

 

296,101

 

 

 

307,797

 

Deferred income taxes

 

 

16,450

 

 

 

18,914

 

Other

 

 

184,105

 

 

 

195,074

 

Total other assets

 

 

2,415,926

 

 

 

2,451,914

 

Total Assets

 

$

6,802,988

 

 

$

6,707,706

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$

785,984

 

 

$

800,369

 

Current portion of long-term debt

 

 

303,387

 

 

 

603,454

 

Accrued compensation and benefits

 

 

165,796

 

 

 

262,445

 

Accrued losses

 

 

26,160

 

 

 

24,508

 

Other accrued liabilities

 

 

367,920

 

 

 

325,632

 

Total current liabilities

 

 

1,649,247

 

 

 

2,016,408

 

Long-Term Liabilities

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

2,534,108

 

 

 

2,083,155

 

Operating lease liabilities

 

 

255,625

 

 

 

265,139

 

Other long-term liabilities

 

 

285,634

 

 

 

276,990

 

Deferred income taxes

 

 

80,772

 

 

 

82,186

 

Total long-term liabilities

 

 

3,156,139

 

 

 

2,707,470

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

Preferred stock, par value $0.01; authorized 50,000 shares; none issued

 

 

 

 

 

 

Common stock, par value $0.01; authorized 300,000 shares;
   issued
145,079 and outstanding 129,099 as of August 31, 2022;
   issued
144,685 and outstanding 129,199 as of May 31, 2022

 

 

1,291

 

 

 

1,292

 

Paid-in capital

 

 

1,105,211

 

 

 

1,096,147

 

Treasury stock, at cost

 

 

(754,477

)

 

 

(717,019

)

Accumulated other comprehensive (loss)

 

 

(612,905

)

 

 

(537,337

)

Retained earnings

 

 

2,256,939

 

 

 

2,139,346

 

Total RPM International Inc. stockholders' equity

 

 

1,996,059

 

 

 

1,982,429

 

Noncontrolling Interest

 

 

1,543

 

 

 

1,399

 

Total equity

 

 

1,997,602

 

 

 

1,983,828

 

Total Liabilities and Stockholders' Equity

 

$

6,802,988

 

 

$

6,707,706

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

3


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2022

 

 

2021

 

Net Sales

 

$

1,932,320

 

 

$

1,650,420

 

Cost of Sales

 

 

1,187,849

 

 

 

1,037,069

 

Gross Profit

 

 

744,471

 

 

 

613,351

 

Selling, General and Administrative Expenses

 

 

485,205

 

 

 

418,850

 

Restructuring Expense

 

 

1,354

 

 

 

1,010

 

Interest Expense

 

 

26,711

 

 

 

21,109

 

Investment Expense (Income), Net

 

 

3,664

 

 

 

(5,750

)

Other Expense (Income), Net

 

 

2,416

 

 

 

(3,339

)

Income Before Income Taxes

 

 

225,121

 

 

 

181,471

 

Provision for Income Taxes

 

 

55,842

 

 

 

46,676

 

Net Income

 

 

169,279

 

 

 

134,795

 

Less: Net Income Attributable to Noncontrolling Interests

 

 

266

 

 

 

213

 

Net Income Attributable to RPM International Inc. Stockholders

 

$

169,013

 

 

$

134,582

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

Basic

 

 

127,617

 

 

 

128,083

 

Diluted

 

 

128,161

 

 

 

128,570

 

Earnings per Share of Common Stock Attributable to RPM International Inc. Stockholders:

 

 

 

 

 

 

Basic

 

$

1.31

 

 

$

1.04

 

Diluted

 

$

1.31

 

 

$

1.04

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

4


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2022

 

 

2021

 

Net Income

 

$

169,279

 

 

$

134,795

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Foreign currency translation adjustments (net of tax of $1,621 and $2,337, respectively)

 

 

(78,956

)

 

 

(38,980

)

Pension and other postretirement benefit liability adjustments (net of tax of $1,431 and $1,466, respectively)

 

 

4,272

 

 

 

4,442

 

Unrealized (loss) gain on securities and other (net of tax of $89 and $145, respectively)

 

 

(340

)

 

 

274

 

Unrealized (loss) gain on derivatives (net of tax of zero and $2,571, respectively)

 

 

(606

)

 

 

8,610

 

Total other comprehensive (loss)

 

 

(75,630

)

 

 

(25,654

)

Total Comprehensive Income

 

 

93,649

 

 

 

109,141

 

Less: Comprehensive Income Attributable to Noncontrolling Interests

 

 

204

 

 

 

183

 

Comprehensive Income Attributable to RPM International Inc. Stockholders

 

$

93,445

 

 

$

108,958

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

5


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2022

 

 

2021

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

169,279

 

 

$

134,795

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

38,416

 

 

 

37,944

 

Restructuring charges, net of payments

 

 

-

 

 

 

(2,004

)

Fair value adjustments to contingent earnout obligations

 

 

-

 

 

 

1,027

 

Deferred income taxes

 

 

(1,919

)

 

 

(3,452

)

Stock-based compensation expense

 

 

9,062

 

 

 

5,763

 

Net loss (gain) on marketable securities

 

 

6,606

 

 

 

(3,476

)

Other

 

 

111

 

 

 

(76

)

Changes in assets and liabilities, net of effect from purchases and sales of businesses:

 

 

 

 

 

 

(Increase) decrease in receivables

 

 

(266

)

 

 

98,166

 

(Increase) in inventory

 

 

(148,188

)

 

 

(68,155

)

(Increase) in prepaid expenses and other current and long-term assets

 

 

(36,021

)

 

 

(15,648

)

Increase (decrease) in accounts payable

 

 

15,113

 

 

 

(42,912

)

(Decrease) in accrued compensation and benefits

 

 

(92,970

)

 

 

(100,201

)

Increase (decrease) in accrued losses

 

 

1,873

 

 

 

(3,530

)

Increase in other accrued liabilities

 

 

62,459

 

 

 

37,866

 

Cash Provided by Operating Activities

 

 

23,555

 

 

 

76,107

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

Capital expenditures

 

 

(57,818

)

 

 

(51,888

)

Acquisition of businesses, net of cash acquired

 

 

(36,373

)

 

 

(35,802

)

Purchase of marketable securities

 

 

(6,440

)

 

 

(5,843

)

Proceeds from sales of marketable securities

 

 

4,116

 

 

 

2,766

 

Other

 

 

80

 

 

 

250

 

Cash (Used for) Investing Activities

 

 

(96,435

)

 

 

(90,517

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

250,051

 

 

 

60,547

 

Reductions of long-term and short-term debt

 

 

(75,264

)

 

 

(471

)

Cash dividends

 

 

(51,420

)

 

 

(48,901

)

Repurchases of common stock

 

 

(25,000

)

 

 

(12,500

)

Shares of common stock returned for taxes

 

 

(12,430

)

 

 

(5,802

)

Payments of acquisition-related contingent consideration

 

 

(3,705

)

 

 

(60

)

Other

 

 

(2,487

)

 

 

-

 

Cash Provided by (Used for) Financing Activities

 

 

79,745

 

 

 

(7,187

)

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(10,963

)

 

 

(11,895

)

Net Change in Cash and Cash Equivalents

 

 

(4,098

)

 

 

(33,492

)

Cash and Cash Equivalents at Beginning of Period

 

 

201,672

 

 

 

246,704

 

Cash and Cash Equivalents at End of Period

 

$

197,574

 

 

$

213,212

 

Supplemental Disclosures of Cash Flows Information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

24,493

 

 

$

17,301

 

Income Taxes, net of refunds

 

$

15,813

 

 

$

28,016

 

Supplemental Disclosures of Noncash Investing Activities:

 

 

 

 

 

 

Capital expenditures accrued within accounts payable at quarter-end

 

$

8,733

 

 

$

8,442

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

6


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

Other

 

 

 

Total RPM

 

 

 

 

 

 

of

 

Par/Stated

 

Paid-In

 

Treasury

 

Comprehensive

 

Retained

 

International

 

Noncontrolling

 

Total

 

 

Shares

 

Value

 

Capital

 

Stock

 

Income (Loss)

 

Earnings

 

Inc. Equity

 

Interests

 

Equity

 

Balance at June 1, 2022

 

129,199

 

$

1,292

 

$

1,096,147

 

$

(717,019

)

$

(537,337

)

$

2,139,346

 

$

1,982,429

 

$

1,399

 

$

1,983,828

 

Net income

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

169,013

 

 

169,013

 

 

266

 

 

169,279

 

Other comprehensive (loss)

 

-

 

 

-

 

 

-

 

 

-

 

 

(75,568

)

 

-

 

 

(75,568

)

 

(62

)

 

(75,630

)

Dividends declared and paid ($0.40 per share)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(51,420

)

 

(51,420

)

 

-

 

 

(51,420

)

Other noncontrolling interest activity

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(60

)

 

(60

)

Share repurchases under repurchase program

 

(303

)

 

(3

)

 

3

 

 

(25,000

)

 

-

 

 

-

 

 

(25,000

)

 

-

 

 

(25,000

)

Stock compensation expense and other deferred compensation, shares granted less shares returned for taxes

 

203

 

 

2

 

 

9,061

 

 

(12,458

)

 

-

 

 

-

 

 

(3,395

)

 

-

 

 

(3,395

)

Balance at August 31, 2022

 

129,099

 

$

1,291

 

$

1,105,211

 

$

(754,477

)

$

(612,905

)

$

2,256,939

 

$

1,996,059

 

$

1,543

 

$

1,997,602

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

Other

 

 

 

Total RPM

 

 

 

 

 

 

of

 

Par/Stated

 

Paid-In

 

Treasury

 

Comprehensive

 

Retained

 

International

 

Noncontrolling

 

Total

 

 

Shares

 

Value

 

Capital

 

Stock

 

Income (Loss)

 

Earnings

 

Inc. Equity

 

Interests

 

Equity

 

Balance at June 1, 2021

 

129,573

 

$

1,295

 

$

1,055,400

 

$

(653,006

)

$

(514,884

)

$

1,852,259

 

$

1,741,064

 

$

1,961

 

$

1,743,025

 

Net income

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

134,582

 

 

134,582

 

 

213

 

 

134,795

 

Other comprehensive (loss)

 

-

 

 

-

 

 

-

 

 

-

 

 

(25,624

)

 

-

 

 

(25,624

)

 

(30

)

 

(25,654

)

Dividends declared and paid ($0.38 per share)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(48,901

)

 

(48,901

)

 

-

 

 

(48,901

)

Share repurchases under repurchase program

 

(133

)

 

(1

)

 

1

 

 

(12,500

)

 

-

 

 

 

 

(12,500

)

 

-

 

 

(12,500

)

Stock compensation expense and other deferred compensation, shares granted less shares returned for taxes

 

303

 

 

3

 

 

5,760

 

 

(5,808

)

 

-

 

 

-

 

 

(45

)

 

-

 

 

(45

)

Balance at August 31, 2021

 

129,743

 

$

1,297

 

$

1,061,161

 

$

(671,314

)

$

(540,508

)

$

1,937,940

 

$

1,788,576

 

$

2,144

 

$

1,790,720

 

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

7


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”) for interim financial information and the instructions to Form 10-Q. In our opinion, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three-month periods ended August 31, 2022, and August 31, 2021. For further information, refer to the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended May 31, 2022.

Our financial statements include all of our majority-owned subsidiaries. We account for our investments in less-than-majority-owned joint ventures, for which we have the ability to exercise significant influence, under the equity method. Effects of transactions between related companies are eliminated in consolidation.

Noncontrolling interests are presented in our Consolidated Financial Statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our Consolidated Financial Statements. Additionally, our Consolidated Financial Statements include 100% of a controlled subsidiary’s earnings, rather than only our share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.

Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprising the three-month periods ending August 31, November 30 and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).

 

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

 

New Pronouncements Adopted

The Company did not adopt any Accounting Standard Updates (“ASU”) during fiscal 2023 that have a material impact on our Consolidated Financial Statements.

 

New Pronouncements Issued

In September 2022, the FASB issued ASU 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,” which makes a number of changes meant to add certain disclosure requirements for a buyer in a supplier finance program. The amendments require a buyer that uses supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period, and associated rollforward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. The amendments are effective for all entities for fiscal years beginning after December 15, 2022 on a retrospective basis, including interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective prospectively for fiscal years beginning after December 15, 2023. Early adoption is permitted upon issuance of the update. We are currently reviewing the provisions of this new pronouncement, but do not expect this guidance will have a material impact on our Consolidated Financial Statements.

 

NOTE 3 — RESTRUCTURING

We record restructuring charges associated with management-approved restructuring plans to either reorganize one or more of our business segments, or to remove duplicative headcount and infrastructure associated with our businesses. Restructuring charges can include severance costs to eliminate a specified number of associates, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other costs. We record the short-term portion of our restructuring liability in Other Accrued Liabilities and the long-term portion, if any, in Other Long-Term Liabilities in our Consolidated Balance Sheets.

Between May and August 2018, we approved and implemented the initial phases of a multi-year restructuring plan, which was originally referred to as the 2020 Margin Acceleration Plan (“MAP to Growth”). On May 31, 2021, we formally concluded our MAP to Growth, however, certain projects identified prior to that date will be completed throughout fiscal 2023.

We incurred $1.4 and $1.0 million of restructuring costs for the three months ended August 31, 2022 and 2021, respectively. The current total expected costs associated with this plan are $120.2 million, of which $118.7 million has been incurred to date.

 

8


 

NOTE 4 — FAIR VALUE MEASUREMENTS

Financial instruments recorded in the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.

An allowance for credit losses is established for trade accounts receivable using assessments of current creditworthiness of customers, historical collection experience, the aging of receivables and other currently available evidence. Trade accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowance for doubtful collection of accounts are included in selling, general and administrative ("SG&A") expense.

The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:

Level 1 Inputs — Quoted prices for identical instruments in active markets.

Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs — Instruments with primarily unobservable value drivers.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

 

(In thousands)

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs (Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

Fair Value at
August 31, 2022

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

U.S. Treasury and other government

$

-

 

$

24,949

 

$

-

 

$

24,949

 

Corporate bonds

 

-

 

 

146

 

 

-

 

 

146

 

Total available-for-sale debt securities

 

-

 

 

25,095

 

 

-

 

 

25,095

 

Marketable equity securities:

 

 

 

 

 

 

 

 

Stocks - foreign

 

603

 

 

-

 

 

-

 

 

603

 

Stocks - domestic

 

4,724

 

 

-

 

 

-

 

 

4,724

 

Mutual funds - foreign

 

-

 

 

36,353

 

 

-

 

 

36,353

 

Mutual funds - domestic

 

-

 

 

72,505

 

 

-

 

 

72,505

 

Total marketable equity securities

 

5,327

 

 

108,858

 

 

-

 

 

114,185

 

Contingent consideration

 

-

 

 

-

 

 

(3,196

)

 

(3,196

)

Total

$

5,327

 

$

133,953

 

$

(3,196

)

$

136,084

 

 

(In thousands)

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs (Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

Fair Value at
May 31,
2022

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

U.S. Treasury and other government

$

-

 

$

25,239

 

$

-

 

$

25,239

 

Corporate bonds

 

-

 

 

155

 

 

-

 

 

155

 

Total available-for-sale debt securities

 

-

 

 

25,394

 

 

-

 

 

25,394

 

Marketable equity securities:

 

 

 

 

 

 

 

 

Stocks - foreign

 

598

 

 

-

 

 

-

 

 

598

 

Stocks - domestic

 

5,085

 

 

-

 

 

-

 

 

5,085

 

Mutual funds - foreign

 

-

 

 

39,139

 

 

-

 

 

39,139

 

Mutual funds - domestic

 

-

 

 

74,227

 

 

-

 

 

74,227

 

Total marketable equity securities

 

5,683

 

 

113,366

 

 

-

 

 

119,049

 

Contingent consideration

 

-

 

 

-

 

 

(10,529

)

 

(10,529

)

Total

$

5,683

 

$

138,760

 

$

(10,529

)

$

133,914

 

 

9


 

Our investments in available-for-sale debt securities and marketable equity securities are valued using a market approach. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors, including the type of instrument, whether the instrument is actively traded and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with recent acquisitions that is contingent upon the achievement of certain performance milestones. We estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled which is considered to be a Level 3 input. During the first three months of fiscal 2023, we recorded an increase in the contingent consideration accrual related to acquisitions of $3.0 million and paid approximately $10.3 million to satisfy contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current year. During the first three months of fiscal 2022, we recorded an increase in the accrual for approximately $1.0 million related to fair value adjustments. In the Consolidated Statements of Cash Flows, payments of acquisition-related contingent consideration for the amount recognized at fair value as of the acquisition date are reported in cash flows from financing activities, while payments of contingent consideration in excess of fair value as of the acquisition date, are reported in cash flows from operating activities.

The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable and short-term debt approximates fair value because of the short-term maturity of these financial instruments. At August 31, 2022 and May 31, 2022, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of August 31, 2022 and May 31, 2022 are as follows:

 

 

 

At August 31, 2022

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Cash and cash equivalents

 

$

197,574

 

$

197,574

 

Marketable equity securities

 

 

114,185

 

 

114,185

 

Available-for-sale debt securities

 

 

25,095

 

 

25,095

 

Long-term debt, including current portion

 

 

2,837,495

 

 

2,676,538

 

 

 

 

 

 

 

 

 

At May 31, 2022

 

(In thousands)

 

Carrying Value

 

Fair Value

 

Cash and cash equivalents

 

$

201,672

 

$

201,672

 

Marketable equity securities

 

 

119,049

 

 

119,049

 

Available-for-sale debt securities

 

 

25,394

 

 

25,394

 

Long-term debt, including current portion

 

 

2,686,609

 

 

2,618,978

 

 

NOTE 5 — INVESTMENT EXPENSE (INCOME), NET

Investment expense (income), net, consists of the following components:

 

 

 

Three Months Ended

 

 

 

August 31,

 

August 31,

 

(In thousands)

 

2022

 

2021

 

Interest (income)

 

$

(2,150

)

$

(1,153

)

Net loss (gain) on marketable securities

 

 

6,606

 

 

(3,476

)

Dividend (income)

 

 

(792

)

 

(1,121

)

Investment expense (income), net

 

$

3,664

 

$

(5,750

)

Net Loss (Gain) on Marketable Securities

 

 

 

Three Months Ended

 

 

 

August 31,

 

August 31,

 

(In thousands)

 

2022

 

2021

 

Unrealized losses (gains) on marketable equity securities

 

$

6,513

 

$

(3,218

)

Realized losses (gains) on marketable equity securities

 

 

129

 

 

(269

)

Realized (gains) losses on available-for-sale debt securities

 

 

(36

)

 

11

 

Net loss (gain) on marketable securities

 

$

6,606

 

$

(3,476

)

 

10


 

 

NOTE 6 — OTHER EXPENSE (INCOME), NET

Other expense (income), net, consists of the following components:

 

 

Three Months Ended

 

 

August 31,

 

August 31,

 

(In thousands)

2022

 

2021

 

Pension non-service costs (credits)

 

2,516

 

$

(2,723

)

Other

 

(100

)

 

(616

)

Other expense (income), net

$

2,416

 

$

(3,339

)

 

NOTE 7 — INCOME TAXES

The effective income tax rate of 24.8% for the three months ended August 31, 2022 compares to the effective income tax rate of 25.7% for the three months ended August 31, 2021. The effective income tax rates for the three-month periods ended August 31, 2022 and 2021 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes, non-deductible business expenses, and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions. Additionally, the effective income tax rate for the three-month period ended August 31, 2022 reflects an incremental favorable period-over-period tax benefit associated with equity compensation.

Our deferred tax liability for unremitted foreign earnings was $1.4 million as of August 31, 2022, which represents our estimate of the net tax cost associated with the remittance of $196.5 million of foreign earnings that are not considered to be permanently reinvested. We have not provided for foreign withholding or income taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of August 31, 2022. Accordingly, no provision has been made for foreign withholding or income taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were remitted to us as dividends.

On August 16, 2022, Public Law No: 117-169, also known as the Inflation Reduction Act of 2022 ("IRA"), was signed into law. Included in the IRA, amongst other income tax provisions, is a new 15% corporate alternative minimum tax imposed on certain large corporations. Currently, we do not believe that this new minimum tax or the other income tax provisions of the IRA will have a material impact on our consolidated financial statements.


 

NOTE 8 — INVENTORIES

Inventories, net of reserves, were composed of the following major classes:

 

(In thousands)

 

August 31, 2022

 

May 31, 2022

 

Raw material and supplies

 

$

607,697

 

$

560,886

 

Finished goods

 

 

732,257

 

 

651,732

 

Total Inventory, Net of Reserves

 

$

1,339,954

 

$

1,212,618

 

 

NOTE 9 — BORROWINGS

Revolving Credit Agreement

During the quarter ended August 31, 2022, we amended our $1.3 billion unsecured syndicated revolving credit facility (the "Revolving Credit Facility"), which was set to expire on October 31, 2023. The amendment extended the expiration date to August 1, 2027 and increased the borrowing capacity to $1.35 billion. The Revolving Credit Facility bears interest at either the base rate or the adjusted Secured Overnight Financing Rate (SOFR), as defined, at our option, plus a spread determined by our debt rating. The amount outstanding on the Revolving Credit Facility adjusted for deferred financing fees, net of amortization as of August 31, and May 31, 2022, was $393.1 and $442.2 million, respectively. The Revolving Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditures, and for general corporate purposes.

Term Loan Credit Facility Agreement

On August 1, 2022, we amended the term loan credit facility, which was set to expire on February 21, 2023, to extend the maturity date to August 1, 2025, and paid down the borrowings outstanding on the term loan to $250 million. The term loan bears interest at either the base rate or the adjusted SOFR, as defined, at our option, plus a spread determined by our debt rating. The amount outstanding on the term loan adjusted for deferred financing fees, net of amortization as of August 31, and May 31, 2022, was $249.7 and $299.8 million, respectively.

11


 

 

NOTE 10 — STOCK REPURCHASE PROGRAM

On January 8, 2008, we announced our authorization of a stock repurchase program under which we may repurchase shares of RPM International Inc. common stock at management’s discretion. As announced on November 28, 2018, our goal was to return $1.0 billion in capital to stockholders by May 31, 2021 through share repurchases and the retirement of our convertible note during fiscal 2019. On April 16, 2019, after taking into account share repurchases under our existing stock repurchase program to date, our Board of Directors authorized the repurchase of the remaining $600.0 million in value of RPM International Inc. common stock by May 31, 2021.

As previously announced, given macroeconomic uncertainty resulting from the Covid pandemic, we had suspended stock repurchases under the program, but in January 2021, our Board of Directors authorized the resumption of the stock repurchases. At the time of resuming the program, $469.7 million of shares of common stock remained available for repurchase. The Board of Directors also extended the stock repurchase program beyond its original May 31, 2021 expiration date until such time that the remaining $469.7 million of capital has been returned to our stockholders.

As a result, we may repurchase shares from time to time in the open market or in private transactions at various times and in amounts and for prices that our management deems appropriate, subject to insider trading rules and other securities law restrictions. The timing of our purchases will depend upon prevailing market conditions, alternative uses of capital and other factors. We may limit or terminate the repurchase program at any time.

During the three months ended August 31, 2022, we repurchased 303,079 shares of our common stock at a cost of approximately $25.0 million, or an average of $82.49 per share. During the three months ended August 31, 2021, we repurchased 133,388 shares of our common stock at a cost of approximately $12.5 million, or an average of $93.71 per share. The maximum dollar amount that may yet be repurchased under our stock repurchase program was approximately $342.3 million at August 31, 2022.

 

NOTE 11 — EARNINGS PER SHARE

The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share for the three-month periods ended August 31, 2022 and 2021.

 

 

Three Months Ended

 

 

August 31,

 

August 31,

 

(In thousands, except per share amounts)

2022

 

2021

 

Numerator for earnings per share:

 

 

 

 

Net income attributable to RPM International Inc. stockholders

$

169,013

 

$

134,582

 

Less: Allocation of earnings and dividends to participating securities

 

(1,312

)

 

(1,142

)

Net income available to common shareholders - basic

 

167,701

 

 

133,440

 

Add: Undistributed earnings reallocated to unvested shareholders

 

4

 

 

4

 

Net income available to common shareholders - diluted

$

167,705

 

$

133,444

 

Denominator for basic and diluted earnings per share:

 

 

 

 

Basic weighted average common shares

 

127,617

 

 

128,083

 

Average diluted options and awards

 

544

 

 

487

 

Total shares for diluted earnings per share (1)

 

128,161

 

 

128,570

 

Earnings Per Share of Common Stock Attributable to

 

 

 

 

RPM International Inc. Stockholders:

 

 

 

 

Basic Earnings Per Share of Common Stock

$

1.31

 

$

1.04

 

Method used to calculate basic earnings per share

Two-class

 

Two-class

 

Diluted Earnings Per Share of Common Stock

$

1.31

 

$

1.04

 

Method used to calculate diluted earnings per share

Two-class

 

Two-class

 

(1) For the three months ended August 31, 2022 and 2021, approximately 715,000 and 837,700 shares of stock, respectively, granted under stock-based compensation plans were excluded from the calculation of diluted EPS, as the effect would have been anti-dilutive.

 

12


 

NOTE 12 — PENSION PLANS

We offer defined benefit pension plans, defined contribution pension plans, and various postretirement benefit plans. The following tables provide the retirement-related benefit plans’ impact on income before income taxes for the three months ended August 31, 2022 and 2021:

 

 

U.S. Plans

 

Non-U.S. Plans

 

 

Three Months Ended

 

Three Months Ended

 

(In thousands)

August 31,

 

August 31,

 

August 31,

 

August 31,

 

Pension Benefits

2022

 

2021

 

2022

 

2021

 

Service cost

$

10,890

 

$

11,914

 

$

951

 

$

1,348

 

Interest cost

 

7,173

 

 

3,842

 

 

1,728

 

 

1,282

 

Expected return on plan assets

 

(9,536

)

 

(10,386

)

 

(1,727

)

 

(2,073

)

Amortization of:

 

 

 

 

 

 

 

 

Prior service cost (credit)

 

-

 

 

1

 

 

(27

)

 

(38

)

Net actuarial losses recognized

 

4,487

 

 

4,225

 

 

125

 

 

114

 

Net Periodic Benefit Cost

$

13,014

 

$

9,596

 

$

1,050

 

$

633

 

 

 

U.S. Plans

 

Non-U.S. Plans

 

 

Three Months Ended

 

Three Months Ended

 

(In thousands)

August 31,

 

August 31,

 

August 31,

 

August 31,

 

Postretirement Benefits

2022

 

2021

 

2022

 

2021

 

Service cost

$

-

 

$

-

 

$

287

 

$

432

 

Interest cost

 

21

 

 

10

 

 

368

 

 

299

 

Amortization of:

 

 

 

 

 

 

 

 

Prior service (credit)

 

(30

)

 

(40

)

 

-

 

 

-

 

Net actuarial losses (gains) recognized

 

11

 

 

15

 

 

(14

)

 

32

 

Net Periodic Benefit Cost (Credit)

$

2

 

$

(15

)

$

641

 

$

763

 

Due to a reduction in return on plan assets and higher interest costs which are only partially offset by a reduction in service cost due to higher discount rates, net periodic pension cost for fiscal 2023 is higher than our fiscal 2022 expense. We expect that pension expense will fluctuate on a year-to-year basis, depending upon the investment performance of plan assets and potential changes in interest rates, and these fluctuations may have a material impact on our consolidated financial results in the future. We previously disclosed in our financial statements for the fiscal year ended May 31, 2022 that we are required to contribute approximately $1.3 million to our retirement plans in the U.S. and approximately $4.9 million to plans outside the U.S. during the current fiscal year. Throughout fiscal 2023, we will evaluate whether to make additional contributions.

 

NOTE 13 — CONTINGENCIES AND ACCRUED LOSSES

Product Liability Matters

We provide, through our wholly-owned insurance subsidiaries, certain insurance coverage, primarily product liability coverage, to our other subsidiaries. Excess coverage is provided by third-party insurers. Our product liability accruals provide for these potential losses as well as other uninsured claims. Product liability accruals are established based upon actuarial calculations of potential liability using industry experience, actual historical experience and actuarial assumptions developed for similar types of product liability claims, including development factors and lag times. To the extent there is a reasonable possibility that potential losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterial to our results of operations, liquidity and consolidated financial position.

Warranty Matters

We also offer warranties on many of our products, as well as long-term warranty programs at certain of our businesses, and have established product warranty liabilities. We review these liabilities for adequacy on a quarterly basis and adjust them as necessary. The primary factors that could affect these liabilities may include changes in performance rates as well as costs of replacement. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted, as required, to reflect actual experience. It is probable that we will incur future losses related to warranty claims we have received but that have not been fully investigated and related to claims not yet received. While our warranty liabilities represent our best estimates at August 31, 2022, we can provide no assurances that we will not experience material claims in the future or that we will not incur significant costs to resolve such claims beyond the amounts accrued or beyond what we may recover from our suppliers. Based upon the nature of the expense, product warranty expense is recorded as a component of cost of sales or within SG&A.

13


 

Also, due to the nature of our businesses, the amount of claims paid can fluctuate from one period to the next. While our warranty liabilities represent our best estimates of our expected losses at any given time, from time-to-time we may revise our estimates based on our experience relating to factors such as weather conditions, specific circumstances surrounding product installations and other factors.

The following table includes the changes in our accrued warranty balances:

 

 

 

Three Months Ended

 

 

 

August 31,

 

August 31,

 

(In thousands)

 

2022

 

2021

 

Beginning Balance

 

$

10,905

 

$

13,175

 

Deductions (1)

 

 

(6,344

)

 

(6,258

)

Provision charged to expense

 

 

7,939

 

 

6,115

 

Ending Balance

 

$

12,500

 

$

13,032

 

 

(1) Primarily claims paid during the period.

Environmental Matters

Like other companies participating in similar lines of business, some of our subsidiaries are involved in environmental remediation matters. It is our policy to accrue remediation costs when the liability is probable and the costs are reasonably estimable, which generally is not later than at completion of a feasibility study or when we have committed to an appropriate plan of action. We also take into consideration the estimated period of time over which payments may be required. The liabilities are reviewed periodically and, as investigation and remediation activities continue, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not offset by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal superfund sites or similar state-managed sites, third-party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.

Other Contingencies

One of our subsidiaries has been the subject of a proceeding in which one of its former distributors brought suit against our subsidiary for breach of contract. Following a June 2017 trial, a jury determined that the distributor was not entitled to any damages on the distributor’s claims against our subsidiary. On appeal, the Ninth Circuit Court of Appeals ordered a new trial with respect to certain issues. On December 10, 2021, a new jury awarded $6.0 million in damages to the distributor. Per the parties’ contracts, the distributor may also be entitled to recover some portion of its attorneys’ fees from our subsidiary. The distributor timely filed an appeal of the new jury's verdict, and our subsidiary timely filed a cross-appeal. The appeal action remains pending before the Ninth Circuit Court of Appeals. As a result of the jury’s award and in consideration of our subsidiary’s appeal, we accrued $2.6 million for this matter in the second quarter of fiscal 2022, which we believe to be the low end of the range of loss. While an ultimate loss in excess of the accrued amount is reasonably possible, we believe that the high end of the range of loss would not be materially more than the $6.0 million noted above.

 

14


 

NOTE 14 — REVENUE

We operate a portfolio of businesses that manufacture and sell a variety of product lines that include specialty paints, protective coatings, roofing systems, sealants and adhesives, among other things. We disaggregate revenues from the sales of our products and services based upon geographical location by each of our reportable segments, which are aligned by similar economic factors, trends and customers, which best depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. See Note 15, “Segment Information,” to the Consolidated Financial Statements for further details regarding our disaggregated revenues, as well as a description of each of the unique revenue streams related to each of our four reportable segments.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The majority of our revenue is recognized at a point in time. However, we also record revenues generated under construction contracts, mainly in connection with the installation of specialized roofing and flooring systems and related services. For certain polymer flooring installation projects, we account for our revenue using the output method, as we consider square footage of completed flooring to be the best measure of progress toward the complete satisfaction of the performance obligation. In contrast, for certain of our roofing installation projects, we account for our revenue using the input method, as that method was the best measure of performance as it considers costs incurred in relation to total expected project costs, which essentially represents the transfer of control for roofing systems to the customer. In general, for our construction contracts, we record contract revenues and related costs as our contracts progress on an over-time model.

We have elected to apply the practical expedient to recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Payment terms and conditions vary by contract type, although our customers’ payment terms generally include a requirement to pay within 30 to 60 days of fulfilling our performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. We have elected to apply the practical expedient to treat all shipping and handling costs as fulfillment costs, as a significant portion of these costs are incurred prior to control transfer.

Significant Judgments

Our contracts with customers may include promises to transfer multiple products and/or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For example, judgment is required to determine whether products sold in connection with the sale of installation services are considered distinct and accounted for separately, or not distinct and accounted for together with installation services and recognized over time.

We provide customer rebate programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration and recognized as a reduction of net sales. Up-front consideration provided to customers is capitalized as a component of other assets and amortized over the estimated life of the contractual arrangement. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. In general, this determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. Certain of our contracts include contingent consideration that is receivable only upon the final inspection and acceptance of a project. We include estimates of such variable consideration in our transaction price. Based on historical experience, we consider the probability-based expected value method appropriate to estimate the amount of such variable consideration.

Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. We record a right of return liability to accrue for expected customer returns. Historical actual returns are used to estimate future returns as a percentage of current sales. Obligations for returns and refunds were not material individually or in the aggregate.

We offer assurance type warranties on our products as well as separately sold warranty contracts. Revenue related to warranty contracts that are sold separately is recognized over the life of the warranty term. Warranty liabilities for our assurance type warranties are discussed further in Note 13, “Contingencies and Accrued Losses,” to the Consolidated Financial Statements.

15


 

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing customers. Our contract assets are recorded for products and services that have been provided to our customer but have not yet been billed and are included in prepaid expenses and other current assets in our consolidated balance sheets. Our short-term contract liabilities consist of advance payments, or deferred revenue, and are included in other accrued liabilities in our consolidated balance sheets.

Trade accounts receivable, net of allowances, and net contract assets consisted of the following:

 

(In thousands, except percentages)

 

August 31, 2022

 

 

May 31, 2022

 

 

$ Change

 

 

% Change

 

Trade accounts receivable, less allowances

 

$

1,407,866

 

 

$

1,432,632

 

 

$

(24,766

)

 

 

-1.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract assets

 

$

80,155

 

 

$

57,234

 

 

$

22,921

 

 

 

40.0

%

Contract liabilities - short-term

 

 

(49,850

)

 

 

(44,938

)

 

 

(4,912

)

 

 

10.9

%

Net Contract Assets

 

$

30,305

 

 

$

12,296

 

 

$

18,009

 

 

 

146.5

%

The $18.0 million increase in our net contract assets from May 31, 2022 to August 31, 2022, resulted primarily due to the timing and volume of construction jobs in progress at August 31, 2022 versus May 31, 2022.

We also record long-term deferred revenue, which amounted to $62.1 million and $62.5 million as of August 31, 2022 and May 31, 2022, respectively. The long-term portion of deferred revenue is related to warranty contracts and is included in other long-term liabilities in our consolidated balance sheets.

We have elected to adopt the practical expedient to not disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied as of the end of the reporting period for performance obligations that are part of a contract with an original expected duration of one year or less.

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. As our contract terms are primarily one year or less in duration, we have elected to apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain incentive programs as we have determined annual compensation is commensurate with annual sales activities.

Allowance for Credit Losses

Our primary allowance for credit losses is the allowance for doubtful accounts. The allowance for doubtful accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected. The allowance was based on assessments of current creditworthiness of customers, historical collection experience, the aging of receivables and other currently available evidence. Trade accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful collection of accounts are included in selling, general and administrative expenses.

The following tables summarize the activity for the allowance for credit losses for the three months ended August 31, 2022 and 2021:

 

 

Three Months Ended

 

 

August 31,

 

August 31,

 

(In thousands)

2022

 

2021

 

Beginning Balance

$

46,669

 

$

55,922

 

Bad debt provision

 

2,407

 

 

1,205

 

Uncollectible accounts written off, net of recoveries

 

(667

)

 

(4,087

)

Translation adjustments

 

(1,634

)

 

(859

)

Ending Balance

$

46,775

 

$

52,181

 

 

 

16


 

NOTE 15 — SEGMENT INFORMATION

We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings, roofing systems, flooring solutions, sealants, cleaners and adhesives. We manage our portfolio by organizing our businesses and product lines into four reportable segments as outlined below, which also represent our operating segments. Within each operating segment, we manage product lines and businesses which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our four operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief operating decision maker in determining how to allocate the assets of the company and evaluate performance. These four operating segments are each managed by an operating segment manager, who is responsible for the day-to-day operating decisions and performance evaluation of the operating segment’s underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to earnings (loss) before interest and taxes (“EBIT”), as a performance evaluation measure because interest (income) expense, net is essentially related to corporate functions, as opposed to segment operations.

Our CPG reportable segment products are sold throughout North America and also account for the majority of our international sales. Our construction product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include construction sealants and adhesives, coatings and chemicals, roofing systems, concrete admixture and repair products, building envelope solutions, insulated cladding, flooring systems, and weatherproofing solutions.

Our PCG reportable segment products are sold throughout North America, as well as internationally, and are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include high-performance flooring solutions, corrosion control and fireproofing coatings, infrastructure repair systems, fiberglass reinforced plastic gratings and drainage systems.

Our Consumer reportable segment manufactures and markets professional use and do-it-yourself (“DIY”) products for a variety of mainly consumer applications, including home improvement and personal leisure activities. Our Consumer reportable segment’s major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe and other parts of the world. Our Consumer reportable segment products are primarily sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops and through distributors. The Consumer reportable segment offers products that include specialty, hobby and professional paints; caulks; adhesives; cleaners; sandpaper and other abrasives; silicone sealants and wood stains.

Our SPG reportable segment products are sold throughout North America and a few international locations, primarily in Europe. Our specialty product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. The SPG reportable segment offers products that include industrial cleaners, restoration services equipment, colorants, nail enamels, exterior finishes, edible coatings and specialty glazes for pharmaceutical and food industries, and other specialty original equipment manufacturer (“OEM”) coatings.

In addition to our four reportable segments, there is a category of certain business activities and expenses, referred to as corporate/other, that does not constitute an operating segment. This category includes our corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets and other expenses not directly associated with any reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses and headquarters’ property and equipment. These corporate and other assets and expenses reconcile reportable segment data to total consolidated income before income taxes and identifiable assets.

We reflect income from our joint ventures on the equity method and receive royalties from our licensees.

17


 

The following tables present a disaggregation of revenues by geography, and the results of our reportable segments consistent with our management philosophy, by representing the information we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of businesses.

 

Three Months Ended August 31, 2022

 

CPG
Segment

 

 

PCG
Segment

 

 

Consumer
Segment

 

 

SPG
Segment

 

 

Consolidated

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales (based on shipping location)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

463,408

 

 

$

223,669

 

 

$

550,619

 

 

$

172,863

 

 

$

1,410,559

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

 

70,138

 

 

 

22,663

 

 

 

44,250

 

 

 

986

 

 

 

138,037

 

Europe

 

 

117,195

 

 

 

56,708

 

 

 

53,618

 

 

 

22,125

 

 

 

249,646

 

Latin America

 

 

55,672

 

 

 

9,482

 

 

 

6,186

 

 

 

406

 

 

 

71,746

 

Asia Pacific

 

 

23,284

 

 

 

5,769

 

 

 

4,819

 

 

 

6,317

 

 

 

40,189

 

Other Foreign

 

 

-

 

 

 

22,143

 

 

 

-

 

 

 

-

 

 

 

22,143

 

Total Foreign

 

 

266,289

 

 

 

116,765

 

 

 

108,873

 

 

 

29,834

 

 

 

521,761

 

Total

 

$

729,697

 

 

$

340,434

 

 

$

659,492

 

 

$

202,697

 

 

$

1,932,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended August 31, 2021

 

CPG
Segment

 

 

PCG
Segment

 

 

Consumer
Segment

 

 

SPG
Segment

 

 

Consolidated

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales (based on shipping location)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

372,313

 

 

$

176,194

 

 

$

432,399

 

 

$

149,411

 

 

$

1,130,317

 

Foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada

 

 

76,559

 

 

 

18,452

 

 

 

33,942

 

 

 

2,140

 

 

 

131,093

 

Europe

 

 

130,418

 

 

 

57,835

 

 

 

60,267

 

 

 

24,335

 

 

 

272,855

 

Latin America

 

 

47,422

 

 

 

6,390

 

 

 

7,318

 

 

 

494

 

 

 

61,624

 

Asia Pacific

 

 

17,605

 

 

 

6,661

 

 

 

4,482

 

 

 

5,675

 

 

 

34,423

 

Other Foreign

 

 

45

 

 

 

20,063

 

 

 

-

 

 

 

-

 

 

 

20,108

 

Total Foreign

 

 

272,049

 

 

 

109,401

 

 

 

106,009

 

 

 

32,644

 

 

 

520,103

 

Total

 

$

644,362

 

 

$

285,595

 

 

$

538,408

 

 

$

182,055

 

 

$

1,650,420

 

 

 

Three Months Ended

 

(In thousands)

August 31,

 

August 31,

 

Income (Loss) Before Income Taxes

2022

 

2021

 

CPG Segment

$

109,202

 

$

114,357

 

PCG Segment

 

46,954

 

 

35,077

 

Consumer Segment

 

116,689

 

 

45,915

 

SPG Segment

 

27,885

 

 

24,556

 

Corporate/Other

 

(75,609

)

 

(38,434

)

Consolidated

$

225,121

 

$

181,471

 

 

 

 

(In thousands)

 

August 31,

 

 

May 31,

 

Identifiable Assets

 

2022

 

 

2022

 

CPG Segment

 

$

2,205,904

 

 

$

2,160,071

 

PCG Segment

 

 

1,133,869

 

 

 

1,115,780

 

Consumer Segment

 

 

2,378,105

 

 

 

2,405,764

 

SPG Segment

 

 

849,352

 

 

 

839,419

 

Corporate/Other

 

 

235,758

 

 

 

186,672

 

Consolidated

 

$

6,802,988

 

 

$

6,707,706

 

 

18


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements include all of our majority-owned and controlled subsidiaries. Investments in less-than-majority-owned joint ventures over which we have the ability to exercise significant influence are accounted for under the equity method. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our allowances for doubtful accounts; reserves for excess and obsolete inventories; allowances for recoverable sales and/or value-added taxes; uncertain tax positions; useful lives of property, plant and equipment; goodwill and other intangible assets; environmental, warranties and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, may differ materially from our estimates.

A comprehensive discussion of the accounting policies and estimates that are the most critical to our financial statements are set forth in our Annual Report on Form 10-K for the year ended May 31, 2022.

19


 

BUSINESS SEGMENT INFORMATION

The following tables reflect the results of our reportable segments consistent with our management philosophy, and represent the information we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of businesses.

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

(In thousands)

 

2022

 

 

2021

 

Net Sales

 

 

 

 

 

 

CPG Segment

 

$

729,697

 

 

$

644,362

 

PCG Segment

 

 

340,434

 

 

 

285,595

 

Consumer Segment

 

 

659,492

 

 

 

538,408

 

SPG Segment

 

 

202,697

 

 

 

182,055

 

Consolidated

 

$

1,932,320

 

 

$

1,650,420

 

Income Before Income Taxes (a)

 

 

 

 

 

 

CPG Segment

 

 

 

 

 

 

Income Before Income Taxes (a)

 

$

109,202

 

 

$

114,357

 

Interest (Expense), Net (b)

 

 

(767

)

 

 

(1,870

)

EBIT (c)

 

$

109,969

 

 

$

116,227

 

PCG Segment

 

 

 

 

 

 

Income Before Income Taxes (a)

 

$

46,954

 

 

$

35,077

 

Interest Income, Net (b)

 

 

181

 

 

 

82

 

EBIT (c)

 

$

46,773

 

 

$

34,995

 

Consumer Segment

 

 

 

 

 

 

Income Before Income Taxes (a)

 

$

116,689

 

 

$

45,915

 

Interest Income, Net (b)

 

 

26

 

 

 

75

 

EBIT (c)

 

$

116,663

 

 

$

45,840

 

SPG Segment

 

 

 

 

 

 

Income Before Income Taxes (a)

 

$

27,885

 

 

$

24,556

 

Interest Income (Expense), Net (b)

 

 

2

 

 

 

(35

)

EBIT (c)

 

$

27,883

 

 

$

24,591

 

Corporate/Other

 

 

 

 

 

 

(Loss) Before Income Taxes (a)

 

$

(75,609

)

 

$

(38,434

)

Interest (Expense), Net (b)

 

 

(29,817

)

 

 

(13,611

)

EBIT (c)

 

$

(45,792

)

 

$

(24,823

)

Consolidated

 

 

 

 

 

 

Net Income

 

$

169,279

 

 

$

134,795

 

Add: Provision for Income Taxes

 

 

55,842

 

 

 

46,676

 

Income Before Income Taxes (a)

 

 

225,121

 

 

 

181,471

 

Interest (Expense)

 

 

(26,711

)

 

 

(21,109

)

Investment (Expense) Income, Net

 

 

(3,664

)

 

 

5,750

 

EBIT (c)

 

$

255,496

 

 

$

196,830

 

(a) The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by GAAP, to EBIT.

(b) Interest Income (Expense), Net includes the combination of Interest Income (Expense) and Investment Income (Expense), Net.

(c) EBIT is a non-GAAP measure, and is defined as Earnings (Loss) Before Interest and Taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT, as a performance evaluation measure because Interest (Income) Expense, Net is essentially related to corporate functions, as opposed to segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, income before income taxes as determined in accordance with GAAP, since EBIT omits the impact of interest in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets' analysis of our segments' core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results.

20


 

RESULTS OF OPERATIONS

Three Months Ended August 31, 2022

Net Sales

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

(in millions, except percentages)

 

August 31, 2022

 

 

August 31, 2021

 

 

Total
Growth

 

Organic
Growth
(1)

 

Acquisition
Growth

 

Foreign Currency
Exchange Impact

 

CPG Segment

 

$

729.7

 

 

$

644.4

 

 

 

13.2

%

 

15.8

%

 

1.9

%

 

-4.5

%

PCG Segment

 

 

340.4

 

 

 

285.6

 

 

 

19.2

%

 

23.6

%

 

0.0

%

 

-4.4

%

Consumer Segment

 

 

659.5

 

 

 

538.4

 

 

 

22.5

%

 

24.1

%

 

0.4

%

 

-2.0

%

SPG Segment

 

 

202.7

 

 

 

182.0

 

 

 

11.3

%

 

12.8

%

 

0.6

%

 

-2.1

%

Consolidated

 

$

1,932.3

 

 

$

1,650.4

 

 

 

17.1

%

 

19.5

%

 

1.0

%

 

-3.4

%

(1) Organic growth includes the impact of price and volume.

 

 

 

 

 

 

 

 

 

 

Our CPG segment generated significant organic growth during the first quarter of fiscal 2023 when compared to the same quarter in the prior year due to increased demand and improved pricing to catch up with continued cost inflation. Performing particularly well were providers of commercial roofing systems, which benefitted from increased public sector spending, its turn-key service model, and focus on renovations. Additionally, the segment's concrete admixtures business benefited from market share gains.

Our PCG segment generated significant sales growth during the first quarter of fiscal 2023 in nearly all the major business units in the segment when compared to the same quarter in the prior year, particularly businesses that provide flooring systems, protective coatings and fiberglass reinforced plastic grating, all of which were strategically well-positioned to benefit from continued reshoring of manufacturing to the United States. This increase was also facilitated by strong demand in energy markets and price increases.

Our Consumer segment generated significant organic growth in comparison to the prior year due to improved raw material supply, particularly of alkyd-based resins secured through strategic investment in its supply chain, insourcing, and qualifying new suppliers, resulting in improved product availability. In addition, sales growth benefitted from price increases to catch up with continued inflation and the prior year comparison when supply chain disruptions impacted raw material supply.

Our SPG segment generated significant sales growth during the first quarter of fiscal 2023, particularly those businesses serving the food coatings and additives market, which benefited from a new management team that has positioned the business to profit from increased institutional demand as pandemic-related restrictions eased. The segment's disaster restoration business also continued to benefit as it worked through backlog after resolving previous semiconductor chip supply shortages.

Gross Profit Margin Our consolidated gross profit margin of 38.5% of net sales for the first quarter of fiscal 2023 compares to a consolidated gross profit margin of 37.2% for the comparable period a year ago. The current quarter gross profit margin increase of approximately 1.3%, or 130 basis points (“bps”), resulted primarily from the realization of production efficiencies due to improved raw material supply, MAP to Growth savings, and improved sales volume and pricing. Partially offsetting these improvements were continued inflation in raw materials, freight, and wages.

As indicated previously, several macroeconomic factors resulted in inflation, beginning in the fourth quarter of fiscal 2021. We expect that these increased costs will continue to be reflected in our results throughout the remainder of fiscal 2023 and into fiscal 2024. We plan to continue working to offset these increased costs with commensurate increases in selling prices. Furthermore, “force majeures” remain in effect from some of our material suppliers, which may impact our ability to timely meet customer demand in certain of our businesses and across certain product categories.

The macroeconomic factors identified above include, but are not limited to, the following: (i) availability of specialized transportation and elevated costs to transport products, (ii) strained supply chains leading to shortages in some areas, and (iii) the Russian invasion of Ukraine and subsequent boycott of materials and energy of Russian origin.

SG&A Our consolidated SG&A expense during the period was $66.4 million higher versus the same period last year but decreased to 25.1% of net sales from 25.4% of net sales for the prior year quarter. Additional SG&A expense recognized by companies we recently acquired approximated $3.9 million during the first quarter of fiscal 2023.

Our CPG segment SG&A was approximately $15.7 million higher for the first quarter of fiscal 2023 versus the comparable prior year period but decreased as a percentage of net sales. The increase in expense was mainly due to higher distribution costs, higher commission expense associated with higher roofing sales, pay inflation, as well as increases in discretionary spending (i.e. meetings, travel, etc.) and investments in growth initiatives. Additionally, companies recently acquired generated approximately $2.7 million of additional SG&A expense.

21


 

Our PCG segment SG&A was approximately $11.1 million higher for the first quarter of fiscal 2023 versus the comparable prior year period but decreased as a percentage of net sales. The increase in expense as compared to the prior year period is mainly due to increased commissions, higher distribution costs, pay inflation, along with restoration of travel expenses and investments in growth initiatives for diversification of its industrial coatings business.

Our Consumer segment SG&A increased by approximately $17.7 million during the first quarter of fiscal 2023 versus the same period last year, but decreased as a percentage of net sales. The quarter-over-quarter increase in SG&A was attributable to increases in advertising and promotional expense, increased distribution costs, pay inflation, and the restoration of travel expenses. Additionally, companies recently acquired generated approximately $0.9 million of additional SG&A expense.

Our SPG segment SG&A was approximately $5.4 million higher during the first quarter of fiscal 2023 versus the comparable prior year period and increased slightly as a percentage of net sales. The increase in SG&A expense is attributable to pay inflation and investments in growth initiatives across each of its business units. Additionally, companies recently acquired generated approximately $0.3 million of additional SG&A expense.

SG&A expenses in our corporate/other category increased by $16.5 million during the first quarter of fiscal 2023 as compared to last year’s first quarter mainly due to higher professional fees related to operational improvement initiatives.

The following table summarizes the retirement-related benefit plans’ impact on income before income taxes for the three months ended August 31, 2022 and 2021, as the service cost component has a significant impact on our SG&A expense:

 

 

 

Three months ended

 

 

 

 

(in millions)

 

August 31, 2022

 

August 31, 2021

 

 

Change

 

Service cost

 

$

12.2

 

$

13.7

 

 

$

(1.5

)

Interest cost

 

 

9.3

 

 

5.4

 

 

 

3.9

 

Expected return on plan assets

 

 

(11.3

)

 

(12.5

)

 

 

1.2

 

Amortization of:

 

 

 

 

 

 

 

 

Prior service (credit)

 

 

(0.1

)

 

(0.1

)

 

 

-

 

Net actuarial losses recognized

 

 

4.6

 

 

4.4

 

 

 

0.2

 

Total Net Periodic Pension & Postretirement Benefit Costs

 

$

14.7

 

$

10.9

 

 

$

3.8

 

We expect that pension expense will fluctuate on a year-to-year basis, depending upon the investment performance of plan assets and potential changes in interest rates, both of which are difficult to predict, but which may have a material impact on our consolidated financial results in the future.

Restructuring Charges

See Note 3, “Restructuring,” to the Consolidated Financial Statements, for details.

Interest Expense

 

 

Three months ended

 

(in millions, except percentages)

 

August 31, 2022

 

August 31, 2021

 

Interest expense

 

$

26.7

 

$

21.1

 

Average interest rate (a)

 

 

3.50

%

 

3.15

%

(a) The interest rate increase was a result of higher market rates on the variable cost borrowings.

 

(in millions)

 

Change in interest
expense

 

Acquisition-related borrowings

 

$

1.1

 

Non-acquisition-related average borrowings

 

 

1.8

 

Change in average interest rate

 

 

2.7

 

Total Change in Interest Expense

 

$

5.6

 

Investment Expense (Income), Net

See Note 5, “Investment Expense (Income), Net,” to the Consolidated Financial Statements for details.

Other Expense (Income), Net

See Note 6, “Other Expense (Income), Net,” to the Consolidated Financial Statements for details.

22


 

Income (Loss) Before Income Taxes (“IBT”)

 

 

Three months ended

 

(in millions, except percentages)

 

August 31, 2022

 

% of net sales

 

 

August 31, 2021

 

% of net sales

 

CPG Segment

 

$

109.2

 

 

15.0

%

 

$

114.4

 

 

17.7

%

PCG Segment

 

 

46.9

 

 

13.8

%

 

 

35.1

 

 

12.3

%

Consumer Segment

 

 

116.7

 

 

17.7

%

 

 

45.9

 

 

8.5

%

SPG Segment

 

 

27.9

 

 

13.8

%

 

 

24.5

 

 

13.5

%

Non-Op Segment

 

 

(75.6

)

 

 

 

 

(38.4

)

 

 

Consolidated

 

$

225.1

 

 

 

 

$

181.5

 

 

 

Our CPG segment, the most internationally concentrated segment, results reflect the negative impact of a transportation strike and concrete shortages in Canada, along with deteriorated macroeconomic conditions in Europe. Our PCG segment results reflect improved pricing, volume growth and improved product mix, resulting from digital sales management tools. Our Consumer segment results reflect improved material supply which allowed for previously developed operating efficiencies to be realized and improved pricing. Our SPG segment results reflect improved pricing, operating improvement cost savings, as well as increased operating efficiencies due to improved material supply. Our Non-Op segment results reflect the unfavorable swing in pension non-service costs and returns on marketable securities, along with increased stock compensation, interest expense and professional fees.

Income Tax Rate The effective income tax rate of 24.8% for the three months ended August 31, 2022 compares to the effective income tax rate of 25.7% for the three months ended August 31, 2021. The effective income tax rates for the presented periods reflect variances from the 21% statutory rate due primarily to the impact of state and local income taxes, non-deductible business expenses and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions. Additionally, the effective income tax rate for the three-month period ended August 31, 2022 reflects an incremental favorable period-over-period tax benefit associated with equity compensation.

Net Income

 

 

Three months ended

 

(in millions, except percentages and per share amounts)

 

August 31, 2022

 

% of net
sales

 

 

August 31, 2021

 

% of net
sales

 

Net income

 

$

169.3

 

 

8.8

%

 

$

134.8

 

 

8.2

%

Net income attributable to RPM International Inc. stockholders

 

 

169.0

 

 

8.8

%

 

 

134.6

 

 

8.2

%

Diluted earnings per share

 

 

1.31

 

 

 

 

 

1.04

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

Fiscal 2023 Compared with Fiscal 2022

Operating Activities

Approximately $23.6 million of cash was provided by operating activities during the first three months of fiscal 2023, compared with $76.1 million of cash provided by operating activities during the same period last year. The net change in cash from operations includes the change in net income, which increased by $34.5 million during the first three months of fiscal 2023 versus the same period during fiscal 2022.

During the first three months of fiscal 2023, the change in accounts receivable provided approximately $98.4 million less cash than the first three months of fiscal 2022. This resulted from the timing of sales in our Consumer segment, which saw lower sales growth due to supply chain constraints in the prior year quarter. The Consumer segment also had significant cash collections in the prior year quarter as a result of strong sales in the fourth quarter of fiscal 2021. Average days sales outstanding (“DSO”) at August 31, 2022, increased to 64.0 days from 63.6 days at August 31, 2021.

During the first three months of fiscal 2023, the change in inventory used approximately $80.0 million more cash compared to our spending during the same period a year ago, as a result of material price inflation and increased purchases to secure price and availability where possible. Average days of inventory outstanding (“DIO”) was approximately 96.5 and 84.7 days at August 31, 2022 and 2021, respectively. The increase in DIO was driven mainly by material price inflation and strategic build-up of inventory in order to mitigate supply chain disruptions.

The change in accounts payable during the first three months of fiscal 2023 used approximately $58.0 million less cash than during the first three months of fiscal 2022 due principally to the timing of purchases and raw material inflation. Average days payables outstanding (“DPO”) increased by approximately 5.2 days to 86.3 days at August 31, 2022 from 81.1 days at August 31, 2021.

The change in other accrued liabilities during the first three months of fiscal 2023 provided approximately $24.6 million more cash than during the first three months of fiscal 2022 due principally to changes in the taxes payable balances and timing of income tax payments.

23


 

Investing Activities

For the first three months of fiscal 2023, cash used for investing activities increased by $5.9 million to $96.4 million as compared to $90.5 million in the prior year period. This year-over-year increase in cash used for investing activities was mainly driven by capital expenditures.

We paid for capital expenditures of $57.8 million and $51.9 million during the first three months of fiscal 2023 and fiscal 2022, respectively. Our capital expenditures accommodate our continued growth to achieve production and distribution efficiencies, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. We continue to increase capital spending in fiscal 2023, to expand capacity to respond to brisk product demand and to continue our growth initiatives.

Our captive insurance companies invest their excess cash in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are primarily attributable to differences in the timing and performance of their investments balanced against amounts required to satisfy claims. At August 31, 2022 and May 31, 2022, the fair value of our investments in available-for-sale debt securities and marketable equity securities, which includes captive insurance-related assets, totaled $139.3 million and $144.4 million, respectively. The fair value of our portfolio of marketable securities is based on quoted market prices for identical, or similar, instruments in active or non-active markets or model-derived-valuations with observable inputs. We have no marketable securities whose fair value is subject to unobservable inputs.

As of August 31, 2022, approximately $180.3 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with $187.1 million at May 31, 2022. Undistributed earnings held at our foreign subsidiaries that are considered permanently reinvested will be used, for instance, to expand operations organically or for acquisitions in foreign jurisdictions. Further, our operations in the U.S. generate sufficient cash flow to satisfy U.S. operating requirements. Refer to Note 7, “Income Taxes,” to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings.

Financing Activities

For the first three months of fiscal 2023, financing activities provided $79.7 million of cash, which compares to cash used for financing activities of $7.2 million during the first three months of fiscal 2022. The overall increase in cash provided by financing activities was driven principally by debt-related activities. During the first three months of fiscal 2023, we provided approximately $189.5 million more cash from additions to short and long-term debt, as a result of utilizing our $250 million AR Program. We also used approximately $74.8 million more cash to paydown existing debt during the first three months of fiscal 2023, compared to the same period in fiscal 2022. See below for further details on the significant components of our debt.

Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at $1.15 billion and $1.31 billion as of August 31, 2022 and May 31, 2022, respectively.

Revolving Credit Agreement

During the quarter ended August 31, 2022, we amended our $1.3 billion unsecured syndicated revolving credit facility (the "Revolving Credit Facility"), which was set to expire on October 31, 2023. The amendment extended the expiration date to August 1, 2027 and increased the borrowing capacity to $1.35 billion. The Revolving Credit Facility bears interest at either the base rate or the adjusted Secured Overnight Financing Rate (SOFR), as defined, at our option, plus a spread determined by our debt rating. The Revolving Credit Facility includes sublimits for the issuance of swingline loans, which are comparatively short-term loans used for working capital purposes and letters of credit. The aggregate maximum principal amount of the commitments under the Revolving Credit Facility may be expanded upon our request, subject to certain conditions, up to $1.5 billion. The Revolving Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditures, and for general corporate purposes.

The Revolving Credit Facility requires us to comply with various customary affirmative and negative covenants, including a leverage covenant (i.e., Net Leverage Ratio) and interest coverage ratio, which are calculated in accordance with the terms as defined by the Revolving Credit Facility. Under the terms of the leverage covenant, we may not permit our leverage ratio for total indebtedness to consolidated EBITDA for the four most recent fiscal quarters to exceed 3.75 to 1.00. During certain periods and per the terms of the Revolving Credit Facility, this ratio may be increased to 4.25 to 1.00 upon delivery of a notice to our lender requesting an increase to our maximum leverage or in connection with certain “material acquisitions.” The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1.00. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended using EBITDA as defined in the Revolving Credit Facility.

As of August 31, 2022, we were in compliance with all financial covenants contained in our Revolving Credit Facility, including the Net Leverage Ratio and Interest Coverage Ratio covenants. At that date, our Net Leverage Ratio was 2.69 to 1.00, while our Interest Coverage Ratio was 10.90 to 1.00. As of August 31, 2022, we had $953.6 million of borrowing availability on our Revolving Credit Facility.

24


 

Our access to funds under our Revolving Credit Facility is dependent on the ability of the financial institutions that are parties to the Revolving Credit Facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our Revolving Credit Facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.

Accounts Receivable Securitization Program

As of August 31, 2022, we had an outstanding balance under our accounts receivable securitization program (the "AR Program") of $250.0 million. The maximum availability under the AR Program is $250.0 million, but availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250.0 million of funding available under the AR Program.

The AR Program contains various customary affirmative and negative covenants, as well as customary default and termination provisions. Our failure to comply with the covenants described above and other covenants contained in the Revolving Credit Facility could result in an event of default under that agreement, entitling the lenders to, among other things, declare the entire amount outstanding under the Revolving Credit Facility to be due and payable immediately. The instruments governing our other outstanding indebtedness generally include cross-default provisions that provide that, under certain circumstances, an event of default that results in acceleration of our indebtedness under the Revolving Credit Facility will entitle the holders of such other indebtedness to declare amounts outstanding immediately due and payable. See “Revolving Credit Agreement” above for details on our compliance with all significant financial covenants at August 31, 2022.

Term Loan Facility Credit Agreement

On August 1, 2022, we amended the term loan credit facility, which was set to expire on February 21, 2023, to extend the maturity date to August 1, 2025, and paid down the borrowings outstanding on the term loan to $250 million. The term loan bears interest at either the base rate or the adjusted SOFR, as defined, at our option, plus a spread determined by our debt rating. The term loan contains customary covenants, including but not limited to, limitations on our ability, and in certain instances, our subsidiaries’ ability, to incur liens, make certain investments, or sell or transfer assets. Additionally, we may not permit (i) our consolidated interest coverage ratio to be less than 3.50 to 1.00, or (ii) our leverage ratio (defined as the ratio of total indebtedness to consolidated EBITDA for the four most recent fiscal quarters) to exceed 3.75 to 1.00. During certain periods this ratio may be increased to 4.25 to 1.0 upon delivery of a notice to our lender requesting an increase to our maximum leverage or in connection with certain “material acquisitions.” See “Revolving Credit Agreement” above for details on our compliance with all significant financial covenants at August 31, 2022.

Refer to Note G, "Borrowings," to the Consolidated Financial Statements, in our Annual Report on Form 10-K for the fiscal year ended May 31, 2022 for more comprehensive details on the significant components of our debt.

Stock Repurchase Program

See Note 10, “Stock Repurchase Program” to the Consolidated Financial Statements, for further detail surrounding our stock repurchase program.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financings. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in, or relationships with, any special purpose entities that are not reflected in our financial statements.

OTHER MATTERS

Environmental Matters

Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect our results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. For additional information, refer to “Part II, Item 1. Legal Proceedings.”

25


 

FORWARD-LOOKING STATEMENTS

The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital, and the viability of banks and other financial institutions; (b) the prices, supply and capacity of raw materials, including assorted pigments, resins, solvents, and other natural gas- and oil-based materials; packaging, including plastic and metal containers; and transportation services, including fuel surcharges; (c) continued growth in demand for our products; (d) legal, environmental and litigation risks inherent in our construction and chemicals businesses and risks related to the adequacy of our insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon our foreign operations; (g) the effect of non-currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with our ongoing acquisition and divestiture activities; (i) the timing of and the realization of anticipated cost savings from restructuring initiatives and the ability to identify additional cost savings opportunities; (j) risks related to the adequacy of our contingent liability reserves; (k) risks relating to the Covid pandemic; (l) risks related to adverse weather conditions or the impacts of climate change and natural disasters; (m) risks related to the Russian invasion of Ukraine and other wars; (n) risks related to data breaches and data privacy violations; and (o) other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2022, as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in raw materials costs, interest rates and foreign exchange rates since we fund our operations through long- and short-term borrowings and conduct our business in a variety of foreign currencies. There were no material potential changes in our exposure to these market risks since May 31, 2022. However, refer to the "Gross Profit Margin" paragraphs in the "RESULTS OF OPERATIONS" for the "Three Months Ended August 31, 2022" section above, for additional details on recent inflationary cost pressure and supply chain disruption at some of our businesses across certain product categories.

ITEM 4. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of August 31, 2022 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

(b) CHANGES IN INTERNAL CONTROL.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended August 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

26


 

PART II — OTHER INFORMATION

Environmental Proceedings

Like other companies participating in similar lines of business, some of our subsidiaries are identified as a “potentially responsible party” under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar local environmental statutes or are participating in the cost of certain clean-up efforts or other remedial actions relating to environmental matters. Our share of such costs to date, however, has not been material and management believes that these environmental proceedings will not have a material adverse effect on our consolidated financial condition or results of operations. See “Item 1 — Business — Environmental Matters,” in our Annual Report on Form 10-K for the year ended May 31, 2022.

As permitted by SEC rules, and given the size of our operations, we have elected to adopt a quantitative threshold for environmental proceedings of $1 million. As of the date of this filing, we are not aware of any matters that exceed this threshold and meet the definition for disclosure.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the other risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2022.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents information about repurchases of RPM International Inc. common stock made by us during the first quarter of fiscal 2023:

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

 

 

 

 

 

 

 

Total Number

 

 

Dollar Amount

 

 

 

 

 

 

 

 

of Shares

 

 

that

 

 

 

 

 

 

 

 

Purchased as

 

 

May Yet be

 

 

 

 

 

 

 

 

Part of Publicly

 

 

Purchased

 

 

Total Number

 

 

Average

 

 

Announced

 

 

Under the

 

 

of Shares

 

 

Price Paid

 

 

Plans or

 

 

Plans or

Period

 

Purchased(1)

 

 

Per Share

 

 

Programs

 

 

Programs(2)

June 1, 2022 through June 30, 2022

 

 

306,318

 

 

$

82.54

 

 

 

303,079

 

 

 

July 1, 2022 through July 31, 2022

 

 

92,918

 

 

$

82.70

 

 

 

-

 

 

 

August 1, 2022 through August 31, 2022

 

 

47,406

 

 

$

94.11

 

 

 

-

 

 

 

Total - First Quarter

 

 

446,642

 

 

$

83.80

 

 

 

303,079

 

 

 

(1) All of the 143,563 shares of common stock that were disposed of back to us during the three-month period ended August 31, 2022 were in satisfaction of tax obligations related to the vesting of restricted stock, which was granted under RPM International Inc.'s equity and incentive plans.

(2) The maximum dollar amount that may yet be repurchased under our program was approximately $342.3 million at August 31, 2022. Refer to Note 10 “Stock Repurchase Program” to the Consolidated Financial Statements for further information regarding our stock repurchase program.

27


 

ITEM 6. EXHIBITS

Exhibit

Number

 

Description

 

 

 

  10.1

 

Fourth Amendment to Credit Agreement among RPM International Inc., the Borrowers party thereto, the Lenders party thereto and PNC Bank, National Association, as Administrative Agent, dated August 1, 2022 (x)

 

 

 

  10.2

 

Fourth Amendment to Credit Agreement among RPM International Inc., RPM Europe Holdco B.V., the Lenders party thereto and PNC Bank, National Association, as Administrative Agent, dated August 1, 2022 (x)

 

 

 

  31.1

 

Rule 13a-14(a) Certification of the Company’s Chief Executive Officer.(x)

 

 

 

  31.2

 

Rule 13a-14(a) Certification of the Company’s Chief Financial Officer.(x)

 

 

 

  32.1

 

Section 1350 Certification of the Company’s Chief Executive Officer.(x)

 

 

 

  32.2

 

Section 1350 Certification of the Company’s Chief Financial Officer.(x)

 

 

 

101.INS

 

Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

104

 

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2022, has been formatted in Inline XBRL

 

(x) Filed herewith.

28


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

RPM International Inc.

 

 

 

 

 

By:

 

/s/ Frank C. Sullivan

 

 

 

Frank C. Sullivan

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

By:

 

/s/ Russell L. Gordon

 

 

 

Russell L. Gordon

 

 

 

Vice President and

 

 

 

Chief Financial Officer

Dated: October 5, 2022

 

29