RPM INTERNATIONAL INC. 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 endedMay 31, 2021 . 27 --------------------------------------------------------------------------------
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 Six Months Ended
November 30, November 30, November 30, November 30,
(In thousands) 2021 2020 2021 2020
Net Sales
CPG Segment $ 614,190 $ 503,520 $ 1,258,552 $ 1,051,210
PCG Segment 302,527 258,833 588,122 518,622
Consumer Segment 529,197 547,508 1,067,606 1,188,676
SPG Segment 193,624 176,054 375,679 334,078
Consolidated $ 1,639,538 $ 1,485,915 $ 3,289,959 $ 3,092,586
Income Before Income Taxes
(a)
CPG Segment
Income Before Income Taxes
(a) $ 130,368 $ 71,832 $ 244,725 $ 170,182
Interest (Expense), Net
(b) (1,649 ) (2,141 ) (3,519 ) (4,251 )
EBIT (c) $ 132,017 $ 73,973 $ 248,244 $ 174,433
PCG Segment
Income Before Income Taxes
(a) $ 37,854 $ 24,047 $ 72,932 $ 52,561
Interest Income (Expense),
Net (b) 247 9 331 (22 )
EBIT (c) $ 37,607 $ 24,038 $ 72,601 $ 52,583
Consumer Segment
Income Before Income Taxes
(a) $ 33,104 $ 88,368 $ 79,019 $ 221,089
Interest Income (Expense),
Net (b) 73 (64 ) 149 (127 )
EBIT (c) $ 33,031 $ 88,432 $ 78,870 $ 221,216
SPG Segment
Income Before Income Taxes
(a) $ 20,591 $ 28,406 $ 45,147 $ 48,855
Interest (Expense), Net
(b) (29 ) (73 ) (64 ) (155 )
EBIT (c) $ 20,620 $ 28,479 $ 45,211 $ 49,010
Corporate/Other
(Loss) Before Income Taxes
(a) $ (58,763 ) $ (45,697 ) $ (97,198 ) $ (84,362 )
Interest (Expense), Net
(b) (22,460 ) (9,478 ) (36,074 ) (16,175 )
EBIT (c) $ (36,303 ) $ (36,219 ) $ (61,124 ) $ (68,187 )
Consolidated
Net Income $ 125,116 $ 127,884 $ 259,911 $ 308,670
Add: Provision for Income
Taxes 38,038 39,072 84,714 99,655
Income Before Income Taxes
(a) 163,154 166,956 344,625 408,325
Interest (Expense) (21,002 ) (21,266 ) (42,111 ) (43,011 )
Investment Income
(Expense), Net (2,816 ) 9,519 2,934 22,281
EBIT (c) $ 186,972 $ 178,703 $ 383,802 $ 429,055
(a) The presentation includes a reconciliation of Income (Loss) Before Income
Taxes, a measure defined by generally accepted accounting principles ("GAAP") in
the U.S. , to EBIT.
(b) Interest Income (Expense), Net includes the combination of Interest (Expense) and Investment Income, 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.
28
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Three Months Ended
Net Sales Three months ended (in millions, November November Total Organic Acquisition Foreign Currency except 30, 2021 30, 2020 Growth Growth(1) Growth Exchange Impact percentages) CPG Segment$ 614.2 $ 503.5 22.0 % 19.9 % 1.8 % 0.3 % PCG Segment 302.5 258.8 16.9 % 12.2 % 3.9 % 0.8 % Consumer Segment 529.2 547.5 -3.3 % -3.5 % 0.0 % 0.2 % SPG Segment 193.6 176.1 10.0 % 9.0 % 0.4 % 0.6 % Consolidated$ 1,639.5 $ 1,485.9 10.3 % 8.6 % 1.3 % 0.4 % (1) Organic growth includes the impact of price and volume. Our CPG segment experienced significant organic growth during the second quarter of fiscal 2022 in nearly all business units in the segment when compared to the same quarter in the prior year. The increase is primarily driven by strong demand inNorth America for its construction and maintenance products, including insulated concrete forms, roofing systems, concrete admixtures and repair products, and commercial sealants. Performance in international markets was mixed withEurope fairly flat, while emerging markets showed signs of recovery. Our PCG segment experienced sales growth during the second quarter of fiscal 2022 in nearly all the major business units in the segment when compared to the same quarter in the prior year. This growth was partially aided by the prior year comparison, where there was a significant amount of deferrals of flooring and coating projects by our customers as a result of restrictions associated with Covid, which impacted the ability of contractors to gain access to the facilities of our end customers. Sales growth was also facilitated by price increases and improved product mix, driven by new decision support tools that helped improve salesforce efficiencies and product mix. Our Consumer segment experienced organic declines in comparison to the prior year, which benefitted from unprecedented demand worldwide for its "do-it-yourself" home improvement and cleaning products, as a result of the Covid pandemic. Current quarter sales were also impacted by the lack of availability of raw materials, due to supply chain disruptions. Despite these disruptions, underlying demand for these products remains strong, which resulted in fiscal 2022 second quarter sales that were still above the pre-pandemic levels of the second quarter in fiscal 2020. Our SPG segment experienced strong demand for our businesses serving the OEM, outdoor recreation and furniture markets. Additionally, the segment's fluorescent pigments business generated good top-line growth as compared to the prior year quarter. The sales growth in this segment was slightly offset by declines in the disaster restoration equipment business, which struggled to meet customer demand due to the global semiconductor chip shortage. Gross Profit Margin Our consolidated gross profit margin of 35.5% of net sales for the second quarter of fiscal 2022 compares to a consolidated gross profit margin of 39.4% for the comparable period a year ago. The current quarter gross profit margin decrease of approximately 3.9%, or 390 basis points ("bps"), resulted primarily from lower absorption, inflationary pressures on raw materials versus the same period a year ago, higher freight costs, and production inefficiencies as a result of supply chain disruption and lack of availability of raw materials. Partially offsetting these decreases were the impact of selling price increases and MAP to Growth savings. Overall, we experienced inflation in raw materials, freight and wages during the second quarter of fiscal 2022. 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 fiscal 2022. We plan to continue working to offset these increased costs with commensurate increases in selling prices. Furthermore, "force majeures" remain in effect from many of our major 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) strained supply chains as inventories have not fully recovered from Winter Storm Uri inFebruary 2021 ; (ii) additional significant weather events causing further supply chain disruption, such as Hurricane Ida inAugust 2021 ; (iii) intermittent supplier plant shutdowns due to catastrophic failures or as a result of the Covid pandemic; (iv) significant worldwide demand during the Covid pandemic for key items such as packaging, solvents, and chemicals; (v) availability of transportation and elevated costs to transport products, which has been exacerbated as a result of increased Covid infections and associated restrictions; (vi) reduction of global supply of materials as a result of power curtailments inChina ; and (vii) high global demand as markets reopen and economic stimulus drives growth. 29 -------------------------------------------------------------------------------- SG&A Our consolidated SG&A expense during the period was$38.3 million higher versus the same period last year but decreased to 26.7% of net sales from 26.9% of net sales for the prior year quarter. Additional SG&A expense recognized by companies we recently acquired approximated$5.6 million during the second quarter of fiscal 2022. During the second quarter of fiscal 2022, our MAP to Growth generated incremental savings of approximately$3.1 million . Our CPG segment SG&A was approximately$18.0 million higher for the second quarter of fiscal 2022 versus the comparable prior year period but decreased as a percentage of net sales. The increase in expense was mainly due to higher variable costs as a result of higher sales volumes, higher IT costs associated with ongoing ERP implementations, as well as increases in discretionary spending (i.e. meetings, travel, etc.) and restoring salaries which were reduced in the prior year in response to the impact of the Covid pandemic. Additionally, companies recently acquired generated approximately$2.4 million of additional SG&A expense. Our PCG segment SG&A was approximately$8.5 million higher for the second quarter of fiscal 2022 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 variable expenses as a result of higher sales volumes, an additional earn-out provision, as well as increases in discretionary spending. Additionally, companies recently acquired generated approximately$2.9 million of additional SG&A expense. Our Consumer segment SG&A increased by approximately$1.4 million during the second quarter of fiscal 2022 versus the same period last year, and increased as a percentage of net sales. The quarter-over-quarter increase in SG&A was attributable to merit increases and slight increases in discretionary spending. These increases were partially offset by decreases in advertising and reduced incentives compared to the prior year quarter. Our SPG segment SG&A was approximately$6.6 million higher during the second quarter of fiscal 2022 versus the comparable prior year period and increased as a percentage of net sales. The increase in SG&A expense is attributable to investments in growth initiatives, restoring discretionary spending curtailed in the prior year, and a charge recorded during the second quarter of fiscal 2022 related to the legal matter described above in Note 14, "Contingencies and Accrued Losses," to the Consolidated Financial Statements. Additionally, companies recently acquired generated approximately$0.3 million of additional SG&A expense.
SG&A expenses in our corporate/other category increased by
The following table summarizes the retirement-related benefit plans' impact on
income before income taxes for the three months ended
Three months ended
November 30, November 30, 2020 Change
(in millions) 2021
Service cost $ 13.7 $ 13.0 $ 0.7
Interest cost 5.4 5.2 0.2
Expected return on plan assets (12.4 ) (9.9 ) (2.5 )
Amortization of:
Prior service (credit) (0.1 ) (0.1 ) -
Net actuarial losses recognized 4.4 8.2 (3.8 )
Total Net Periodic Pension & Postretirement
Benefit Costs $ 11.0 $ 16.4 $ (5.4 )
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
Three months ended
(in millions) November 30, 2021 November 30, 2020
Severance and benefit costs (credits) $ 1.8 $ 2.1
Facility closure and other related costs 1.2 2.3
Other restructuring costs - 0.5
Total Restructuring Costs $ 3.0 $ 4.9
These charges are associated with closures of certain facilities as well as the
elimination of duplicative headcount and infrastructure associated with certain
of our businesses and are the result of our MAP to Growth, which focuses upon
strategic shifts in operations across our entire business.
30
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Our current expectation of future additional restructuring costs is summarized
in the table below.
As of November 30,
(in millions) 2021
Severance and benefit costs $ 1.0
Facility closure and other related costs 2.7
Other restructuring costs -
Future Expected Restructuring Costs $ 3.7
We previously expected these charges to be incurred by the end of calendar year
2020, upon which we expected to achieve an annualized pretax savings of
approximately $290 million per year. However, the disruption caused by the
outbreak of the Covid pandemic delayed the finalization of our MAP to Growth
past the original target completion date of December 31, 2020 . We utilized the
remainder of fiscal 2021 to drive toward achieving the goals originally set
forth in our MAP to Growth. On May 31, 2021 , we formally concluded our MAP to
Growth. However, certain projects identified prior to May 31, 2021 are not yet
completed. Accordingly, we expect to incur restructuring expense throughout
fiscal 2022, as projects related to our MAP to Growth are executed and
completed.
See Note 3, "Restructuring," to the Consolidated Financial Statements, for further details surrounding our MAP to Growth.
Interest Expense
Three months ended
(in millions, except percentages) November 30, 2021 November 30, 2020
Interest expense $ 21.0 $ 21.3
Average interest rate (a) 3.07 % 3.31 %
(a) The interest rate decrease was a result of lower market rates on the
variable cost borrowings.
Change in interest
(in millions) expense
Acquisition-related borrowings $ 0.5
Non-acquisition-related average borrowings 0.1
Change in average interest rate (0.9 )
Total Change in Interest Expense $ (0.3 )
Investment (Income) Expense, Net
See Note 6, "Investment (Income) Expense, Net," to the Consolidated Financial Statements for details.
(Gain) on Sales of Assets, Net
See Note 7, "(Gain) on Sales of Assets, Net," to the Consolidated Financial Statements for details.
Other (Income) Expense, Net
See Note 8, "Other (Income) Expense, Net," to the Consolidated Financial Statements for details.
Income (Loss) Before Income Taxes ("IBT")
Three months ended
(in millions, except percentages) November 30, 2021 % of net sales November 30, 2020 % of net sales
CPG Segment $ 130.4 21.2 % $ 71.8 14.3 %
PCG Segment 37.9 12.5 % 24.0 9.3 %
Consumer Segment 33.1 6.3 % 88.4 16.1 %
SPG Segment 20.6 10.6 % 28.4 16.1 %
Non-Op Segment (58.8 ) - (45.6 ) -
Consolidated $ 163.2 $ 167.0
31
-------------------------------------------------------------------------------- Our CPG segment results reflect market share gains, operational improvements, proactive cost controls, selling price increases and the$41.9 million gain on the sale of certain real property assets for theToronto, Ontario location, which more than offset production inefficiencies due to supply chain disruptions and material cost inflation. Our PCG segment results reflect improved pricing, incremental savings from operating improvement initiatives and recent acquisitions. Our Consumer segment results reflect the decrease in sales, inflation in materials, freight and labor, as well as the unfavorable impact of supply shortages on productivity. Our SPG segment results reflect raw material inflation, inefficiencies due to supply chain disruption, investments in future growth initiatives, and the charge related to the legal matter described above in Note 14, "Contingencies and Accrued Losses," to the Consolidated Financial Statements, partially offset by operational improvements. Income Tax Rate The effective income tax rate of 23.3% for the three months endedNovember 30, 2021 , compares to the effective income tax rate of 23.4% for the three months endedNovember 30, 2020 . The effective income tax rates for the three months endedNovember 30, 2021 , and 2020 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes, non-deductible business expenses and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions, partially offset by tax benefits related to equity compensation. Net Income Three months ended (in millions, except percentages and November 30, % of net November 30, % of net per share amounts) 2021 sales 2020 sales Net income$ 125.1 7.6 %$ 127.9 8.6 % Net income attributable to RPM International Inc. stockholders 124.9 7.6 % 127.7 8.6 % Diluted earnings per share 0.96 0.98
Six Months Ended
Six Months Ended
(in millions, November November Total Organic
Acquisition Foreign Currency
except 30, 2021 30, 2020 Growth Growth(1) Growth Exchange Impact
percentages)
CPG Segment $ 1,258.6 $ 1,051.2 19.7 % 17.4 % 1.0 % 1.3 %
PCG Segment 588.1 518.6 13.4 % 8.0 % 3.8 % 1.6 %
Consumer Segment 1,067.6 1,188.7 -10.2 % -12.5 % 1.8 % 0.5 %
SPG Segment 375.7 334.1 12.5 % 11.2 % 0.4 % 0.9 %
Consolidated $ 3,290.0 $ 3,092.6 6.4 % 3.7 % 1.7 % 1.0 %
(1) Organic growth includes the impact of price
and volume.
Our CPG segment experienced significant organic growth during the first half of
fiscal 2022 in nearly all business units in the segment when compared to the
same period in the prior year. Business units performing particularly well
during the period were providers of commercial roofing systems, concrete
admixtures and repair products, and our insulated concrete forms business.
Additionally, European operations generated strong sales growth, due in part to
an easier comparison to the prior year first half, when shelter-in-place
requirements were most severe.
Our PCG segment experienced sales growth during the first half of fiscal 2022 in
nearly all the major business units in the segment when compared to the same
period in the prior year. This growth was partially aided by the prior year
comparison, where there was a significant amount of deferrals of flooring and
coating projects as a result of restrictions associated with Covid, which
impacted the ability of contractors to gain access to the facilities of our end
customers. Sales growth was also facilitated by price increases and improved
product mix, driven by new decision support tools that helped improve salesforce
efficiencies and product mix.
Our Consumer segment experienced significant organic declines in comparison to
the prior year, which benefitted from unprecedented demand worldwide for its
"do-it-yourself" home improvement and cleaning products, as a result of the
Covid pandemic. Current period sales were also impacted by the lack of
availability of raw materials, due to supply chain disruptions. Despite these
disruptions, underlying demand for these products remains strong, which resulted
in fiscal 2022 first half sales that were still above the pre-pandemic levels of
the first half of fiscal 2020.
32
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Our SPG segment experienced strong demand for our businesses serving the marine,
powder coatings and wood stains & sealers. Additionally, our new business
development efforts have accelerated as a result of a number of recent
management changes. The sales growth in this segment was slightly offset by
declines in the disaster restoration equipment business, which struggled to meet
customer demand due to the global semiconductor chip shortage.
Gross Profit Margin Our consolidated gross profit margin of 36.4% of net sales
for the first half of fiscal 2022 compares to a consolidated gross profit margin
of 40.1% for the comparable period a year ago. The current period gross profit
margin decrease of approximately 3.7%, or 370 basis points ("bps"), resulted
primarily from lower sales volume, inflationary pressures on raw materials
versus the same period a year ago, higher freight costs, and production
inefficiencies as a result of supply chain disruption and availability of raw
materials. Partially offsetting these decreases were the impact of selling price
increases and MAP to Growth savings.
Overall, raw material costs were inflationary during the first half of fiscal
2022. 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 fiscal
2022. We plan to continue working to offset these increased costs with
commensurate increases in selling prices. Furthermore, "force majeures" remain
in effect from many of our major material suppliers, which may impact our
ability to timely meet customer demand in certain of our businesses and across
certain product categories.
SG&A Our consolidated SG&A expense during the period was $61.3 million higher
versus the same period last year and increased to 26.0% of net sales from 25.7%
of net sales for the prior year period. Additional SG&A expense recognized by
companies we recently acquired approximated $13.0 million during the first half
of fiscal 2022. During the first half of fiscal 2022, our MAP to Growth
generated incremental savings of approximately $6.0 million .
Our CPG segment SG&A was approximately $39.7 million higher for the first half
of fiscal 2022 versus the comparable prior year period but decreased as a
percentage of net sales. The increase was mainly due to higher variable expense
as a result of higher sales volumes, higher IT costs associated with ongoing ERP
implementations, as well as increases in discretionary spending (i.e. meetings,
travel, etc.) and restoring salaries which were reduced in the prior year in
response to the impact of the Covid pandemic. Additionally, companies recently
acquired generated approximately $3.0 million of additional SG&A expense.
Our PCG segment SG&A was approximately $15.1 million higher for the first half
of fiscal 2022 versus the comparable prior year period but decreased as a
percentage of net sales. The period over period increase is mainly due to
increased variable expenses as a result of higher sales volumes, higher
distribution costs, as well as increases in commissions and discretionary
spending. Additionally, companies recently acquired generated approximately $5.3
million of additional SG&A expense.
Our Consumer segment SG&A decreased by approximately $5.4 million during the
first half of fiscal 2022 versus the same period last year, but increased as a
percentage of net sales. The period over period decrease in SG&A was
attributable to lower advertising and promotional costs and reduced incentives.
Partially offsetting these decreases was approximately $4.3 million of
additional SG&A expense generated from the company recently acquired.
Our SPG segment SG&A was approximately $10.0 million higher during the first
half of fiscal 2022 versus the comparable prior year period but decreased
slightly as a percentage of net sales. The increase in SG&A expense is
attributable to investments in growth initiatives, merit increases, as well as a
charge recorded during the second quarter of fiscal 2022 related to the legal
matter described above in Note 14, "Contingencies and Accrued Losses," to the
Consolidated Financial Statements. Additionally, companies recently acquired
generated approximately $0.4 million of additional SG&A expense.
SG&A expenses in our corporate/other category increased by $1.9 million during
the first half of fiscal 2022 as compared to last year's first half mainly due
to higher hospitalization, legal and consulting expenses.
The following table summarizes the retirement-related benefit plans' impact on
income before income taxes for the six months ended November 30, 2021 and 2020,
as this activity has a significant impact on our SG&A expense:
Six Months Ended
November 30, 2021 November 30, Change
(in millions) 2020
Service cost $ 27.4 $ 25.9 $ 1.5
Interest cost 10.9 10.5 0.4
Expected return on plan assets (24.9 ) (19.8 ) (5.1 )
Amortization of:
Prior service (credit) (0.2 ) (0.1 ) (0.1 )
Net actuarial losses recognized 8.8 16.3 (7.5 )
Total Net Periodic Pension & Postretirement
Benefit Costs $ 22.0 $ 32.8 $ (10.8 )
33
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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
Six Months Ended
(in millions) November 30, 2021 November 30, 2020
Severance and benefit costs $ 1.5 $ 4.6
Facility closure and other related costs 2.5 3.8
Other restructuring costs - 0.8
Total Restructuring Costs $ 4.0 $ 9.2
For further information and detail about our MAP to Growth, see "Restructuring
Charges" in Results of Operations - Three Months Ended November 30, 2021 , and
Note 3, "Restructuring" to the Consolidated Financial Statements.
Interest Expense
Six Months Ended
(in millions, except percentages) November 30, 2021 November 30, 2020
Interest expense $ 42.1 $ 43.0
Average interest rate (a) 3.11 % 3.38 %
(a) The interest rate decrease was a result of lower market rates on the
variable cost borrowings.
Change in interest
(in millions) expense
Acquisition-related borrowings $ 1.2
Non-acquisition-related average borrowings (0.3 )
Change in average interest rate (1.8 )
Total Change in Interest Expense $ (0.9 )
Investment (Income) Expense, Net
See Note 6, "Investment (Income) Expense, Net," to the Consolidated Financial Statements for details.
(Gain) on Sales of Assets, Net
See Note 7, "(Gain) on Sales of Assets, Net," to the Consolidated Financial Statements for details.
Other (Income) Expense, Net
See Note 8, "Other (Income) Expense, Net," to the Consolidated Financial Statements for details.
Income (Loss) Before Income Taxes ("IBT")
Six Months Ended
November 30, % of net November % of net
(in millions, except percentages) 2021 sales 30, 2020 sales
CPG Segment $ 244.7 19.4 % $ 170.2 16.2 %
PCG Segment 72.9 12.4 % 52.6 10.1 %
Consumer Segment 79.0 7.4 % 221.1 18.6 %
SPG Segment 45.2 12.0 % 48.9 14.6 %
Non-Op Segment (97.2 ) - (84.5 ) -
Consolidated $ 344.6 $ 408.3
34
-------------------------------------------------------------------------------- Our CPG segment results reflect market share gains, operational improvements, proactive cost controls, selling price increases and the$41.9 million gain on the sale of certain real property assets for theToronto, Ontario location, which more than offset production inefficiencies due to supply chain disruptions and material cost inflation. Our PCG segment results reflect improved pricing, incremental savings from operating improvement initiatives and recent acquisitions. Our Consumer segment results reflect the decrease in sales, inflation in materials, freight and labor, as well as the unfavorable impact of supply shortages on productivity. Our SPG segment results reflect raw material inflation, inefficiencies due to supply chain disruption and investments in future growth initiatives, somewhat offset by higher sales volume and incremental operating improvement program savings. Income Tax Rate The effective income tax rate of 24.6% for the six months endedNovember 30, 2021 , compares to the effective income tax rate of 24.4% for the six months endedNovember 30, 2020 . The effective income tax rates for the three months endedNovember 30, 2021 , and 2020 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes, non-deductible business expenses and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions, partially offset by tax benefits related to equity compensation. Net Income Six Months Ended (in millions, except percentages and per November 30, % of net November 30, % of net share amounts) 2021 sales 2020 sales Net income$ 259.9 7.9 %$ 308.7 10.0 % Net income attributable to RPM International Inc. stockholders 259.5 7.9 % 308.3 10.0 % Diluted earnings per share 2.00 2.37
LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2022 Compared with Fiscal 2021
Operating Activities
Approximately$159.4 million of cash was provided by operating activities during the first six months of fiscal 2022, compared with$579.5 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 decreased by$48.8 million during the first six months of fiscal 2022 versus the same period during fiscal 2021. Cash provided from operations, along with the use of available credit lines, as required, remain our primary sources of liquidity. The change in accounts receivable during the first six months of fiscal 2022 provided approximately$10.5 million less cash than during the same period a year ago. This resulted primarily from the year-over-year change in the timing and volume of sales, particularly in our Consumer segment. Days sales outstanding ("DSO") atNovember 30, 2021 decreased to 59.6 days from 60.6 days atNovember 30, 2020 . During the first six months of fiscal 2022, the change in inventory used approximately$146.6 million more cash compared to our spending during the same period a year ago, which resulted primarily from the response to the supply chain issues and timing of purchases by retail customers. Days of inventory outstanding ("DIO") was approximately 88.6 and 83.0 days atNovember 30, 2021 and 2020, respectively. The increase in DIO was driven mainly by the Consumer segment, which resulted from material price inflation and build-up of raw material inventory in order to mitigate supply chain disruptions. The change in accounts payable during the first six months of fiscal 2022 used approximately$37.6 million more cash than during the first six months of fiscal 2021 due principally to the timing of purchases, which were restrained at the beginning of fiscal 2021 due to the sharp business downturn caused by pandemic lockdown restrictions. However, days payables outstanding ("DPO") increased by approximately 0.9 days to 82.3 days atNovember 30, 2021 from 81.4 days atNovember 30, 2020 . The longer DPO is a direct result of moving toward a center-led procurement process that includes negotiating modified payment terms. The change in accrued compensation and benefits during the first six months of fiscal 2022 used approximately$44.5 million more cash than during the first six months of fiscal 2021 due to higher incentive compensation earned during fiscal 2021 (which was paid out in the first quarter of fiscal 2022) as compared to fiscal 2020 (which was paid out in the first quarter of fiscal 2021). The change in other accrued liabilities during the first six months of fiscal 2022 provided approximately$70.7 million less cash than during the first six months of fiscal 2021 due principally to the timing of income taxes payable and the increase in customer rebate accruals in the prior year. Additionally, certain government entities located where we have operations have enacted various pieces of legislation designed to help businesses weather the economic impact of Covid and ultimately preserve jobs. Some of this legislation, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act inthe United States , enables employers to defer the payment of various types of taxes 35 -------------------------------------------------------------------------------- over varying time horizons. As ofMay 31, 2021 , we had a remaining deferral of$27.1 million of such government payments that would have normally been paid during fiscal 2020 and fiscal 2021, but which will be paid in future periods. During the first half of fiscal 2022, we did not defer any additional government payments that would have normally been paid during our first half of fiscal 2022. During the prior year first half endedNovember 30, 2020 , we deferred$10.7 million of such government payments that would have normally been paid during our first half of fiscal 2021. Of the remaining$27.1 million atNovember 31, 2021 , we expect to pay approximately half of the balance during our third quarter of fiscal 2022 and approximately half of the balance during our third quarter of fiscal 2023. Investing Activities For the first six months of fiscal 2022, cash used for investing activities decreased by$17.6 million to$168.4 million as compared to$186.0 million in the prior year period. This year-over-year decrease in cash used for investing activities was mainly driven by the sales of assets, whose proceeds provided$50.6 million in the current year. Capital expenditures, other than for ordinary repairs and replacements, are made to 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 paid for capital expenditures of$101.4 million and$70.9 million during the first six months of fiscal 2022 and fiscal 2021, respectively. We have increased capital spending in fiscal 2022, to respond to brisk demand and to finalize our MAP to Growth by consolidating ERP systems and our plant footprint. 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. AtNovember 30, 2021 andMay 31, 2021 , the fair value of our investments in available-for-sale debt securities and marketable equity securities, which includes captive insurance-related assets, totaled$170.3 million and$168.8 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 ofNovember 30, 2021 , approximately$175.4 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with$221.1 million atMay 31, 2021 . 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 theU.S. generate sufficient cash flow to satisfyU.S. operating requirements. Refer to Note 9, "Income Taxes," to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings. Financing Activities For the first six months of fiscal 2022, cash used for financing activities decreased by$344.1 million to$26.0 million as compared to$370.0 million in the prior year period. The overall decrease in cash used for financing activities was driven principally by debt-related activities, as we used approximately$255.4 million less cash to paydown existing debt and provided approximately$104.4 million more cash from additions to short and long-term debt during the first six months of fiscal 2022 as compared to the prior year. See below for further details on the significant components of our debt. The decrease in cash used for debt-related activities was partially offset by a$12.5 million increase in cash used for the repurchase of common stock during the first six months of fiscal 2022, as compared to the prior year. This increase was a result of the macroeconomic uncertainty in the prior year caused by the Covid pandemic, which led to the temporary suspension of our stock repurchase program during the fourth quarter of fiscal 2020, which lasted through the second quarter of fiscal 2021. Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at$1.32 billion atNovember 30, 2021 , compared with$1.46 billion atMay 31, 2021 . Refer to Note G, "Borrowings," to the Consolidated Financial Statements, in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 for more comprehensive details on the significant components of our debt, which includes: Revolving Credit Agreement During the quarter endedNovember 30, 2018 , we replaced our previous$800.0 million revolving credit agreement, which was set to expire onDecember 5, 2019 , with a$1.3 billion unsecured syndicated revolving credit facility (the "Revolving Credit Facility"), which expires onOctober 31, 2023 . 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. 36 -------------------------------------------------------------------------------- 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 in connection with certain "material acquisitions." The acquisition ofAli Industries, LLC occurred onSeptember 1, 2020 and qualifies as a "material acquisition," which enabled us to request an increase in the maximum permitted Net Leverage Ratio covenant. We provided such notice to our Administrative Agent to trigger this provision of the agreement during our second quarter of fiscal 2021, and therefore, our Net Leverage Ratio covenant was increased to 4.25 to 1.00 throughAugust 31, 2021 . Subsequent toAugust 31, 2021 , the leverage covenant has been reset, and as ofNovember 30, 2021 may not exceed to 3.75 to 1.00. 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 ofNovember 30, 2021 , 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 2.61 to 1.00, while our Interest Coverage Ratio was 10.92 to 1.00. As ofNovember 30, 2021 , we had$877.8 million of borrowing availability on our Revolving Credit Facility. 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 ofNovember 30, 2021 , we did not have an outstanding balance under our AR Program, which compares with the maximum availability of$250.0 million on that date. 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.
Term Loan Facility Credit Agreement
OnFebruary 21, 2020 , we and our subsidiary,RPM Europe Holdco B.V. (formerly "RPM New Horizons Netherlands, B.V. ") (the "Foreign Borrower"), entered into an unsecured syndicated term loan facility credit agreement (the "New Credit Facility") with the lenders party thereto andPNC Bank, National Association , as administrative agent for the lenders. The New Credit Facility provides for a$300 million term loan to us and a$100 million term loan to the Foreign Borrower (together, the "Term Loans"), each of which was fully advanced on the closing date. The Term Loans mature onFebruary 21, 2023 , with no scheduled amortization before that date, and the Term Loans may be prepaid at any time without penalty or premium. We agreed to guarantee all obligations of the Foreign Borrower under the New Credit Facility. The proceeds of the Term Loans were used to repay a portion of the outstanding borrowings under our Revolving Credit Facility. See "Revolving Credit Agreement" above for further details. The Term Loans will bear interest at either the base rate or the Eurodollar Rate, at our option, plus a spread determined by our debt rating. We, and the Foreign Borrower, have entered into multicurrency floating to fixed interest rate swap agreements that effectively fix interest payment obligations on the entire principal amount of the Term Loans through their maturity at (a) 0.612% per annum on our Term Loan, and (b) 0.558% per annum on the Foreign Borrower's Term Loan. The New Credit Facility 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, less unencumbered cash and cash equivalents in excess of$50 million , to consolidated EBITDA for the four most recent fiscal quarters) to 37 -------------------------------------------------------------------------------- exceed 3.75 to 1.00. Upon notification to the lenders, however, the maximum permitted leverage ratio can be relaxed to 4.25 to 1.00 for a one-year period in connection with certain material acquisitions. In addition, the agreement was amended onApril 30, 2020 to allow the maximum permitted Net Leverage Ratio to be increased to 4.25 to 1.00 during certain periods (refer to the "Revolving Credit Agreement" section above). As noted in the "Revolving Credit Agreement" section above, we provided such notice to our Administrative Agent during our second quarter of fiscal 2021, and therefore, our Net Leverage Ratio covenant was increased to 4.25 to 1.00 throughAugust 31, 2021 . Subsequent toAugust 31, 2021 , the leverage covenant has been reset, and as ofNovember 30, 2021 may not exceed to 3.75 to 1.00. The covenants contained in the New Credit Facility are substantially similar to those contained in our Revolving Credit Facility. See "Revolving Credit Agreement" above for details on our compliance with all significant financial covenants atNovember 30, 2021 . Stock Repurchase Program
See Note 11, "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." 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 effect of changes in interest rates, 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; and (m) other risks detailed in our filings with theSecurities and Exchange Commission , including the risk factors set forth in our Annual Report on Form 10-K for the year endedMay 31, 2021 , 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.
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