RPM INTERNATIONAL INC/DE/ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
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 . 28 --------------------------------------------------------------------------------
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 Nine Months Ended February 28, February 28, February 28, February 28, (In thousands) 2022 2021 2022 2021Net Sales CPG Segment$ 482,026 $ 395,969 $ 1,740,578 $ 1,447,179 PCG Segment 270,865 226,523 858,987 745,145 Consumer Segment 491,617 477,742 1,559,223 1,666,418 SPG Segment 189,371 169,161 565,050 503,239 Consolidated$ 1,433,879 $ 1,269,395 $ 4,723,838 $ 4,361,981 Income Before Income Taxes (a) CPG Segment Income Before Income Taxes (a)$ 31,498 $ 14,431 $ 276,223 $ 184,613 Interest (Expense), Net (b) (1,735 ) (2,074 ) (5,254 ) (6,325 ) EBIT (c)$ 33,233 $ 16,505 $ 281,477 $ 190,938 PCG Segment Income Before Income Taxes (a)$ 24,917 $ 12,158 $ 97,849 $ 64,719 Interest Income (Expense), Net (b) 76 75 407 53 EBIT (c)$ 24,841 $ 12,083 $ 97,442 $ 64,666 Consumer Segment Income Before Income Taxes (a)$ 16,893 $ 42,724 $ 95,912 $ 263,813 Interest Income (Expense), Net (b) 62 (60 ) 211 (187 ) EBIT (c)$ 16,831 $ 42,784 $ 95,701 $ 264,000 SPG Segment Income Before Income Taxes (a)$ 25,881 $ 24,560 $ 71,028 $ 73,415 Interest (Expense), Net (b) (18 ) (64 ) (82 ) (219 ) EBIT (c)$ 25,899 $ 24,624 $ 71,110 $ 73,634 Corporate/Other (Loss) Before Income Taxes (a)$ (58,692 ) $ (38,013 ) $ (155,890 ) $ (122,375 ) Interest (Expense), Net (b) (24,756 ) (7,387 ) (60,830 ) (23,562 ) EBIT (c)$ (33,936 ) $ (30,626 ) $ (95,060 ) $ (98,813 ) Consolidated Net Income$ 33,249 $ 38,466 $ 293,160 $ 347,136 Add: Provision for Income Taxes 7,248 17,394 91,962 117,049 Income Before Income Taxes (a) 40,497 55,860 385,122 464,185 Interest (Expense) (22,016 ) (20,964 ) (64,127 ) (63,975 ) Investment Income (Expense), Net (4,355 ) 11,454 (1,421 ) 33,735 EBIT (c)$ 66,868 $ 65,370 $ 450,670 $ 494,425 (a) The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by generally accepted accounting principles ("GAAP") in theU.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. 29 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended
Net Sales Three months ended (in millions, February February Total Organic Acquisition Foreign Currency except percentages) 28, 2022 28, 2021 Growth
Growth(1) Growth Exchange Impact CPG Segment$ 482.0 $ 396.0 21.7 % 23.2 % 2.2 % -3.7 % PCG Segment 270.9 226.5 19.6 % 17.8 % 3.4 % -1.6 % Consumer Segment 491.6 477.7 2.9 % 3.6 % 0.0 % -0.7 % SPG Segment 189.4 169.2 11.9 % 11.9 % 0.8 % -0.8 % Consolidated$ 1,433.9 $ 1,269.4 13.0 % 13.4 % 1.4 % -1.8 % (1) Organic growth includes the impact of price and volume. Our CPG segment experienced significant organic growth during the third 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 most international markets also generated strong top-line growth. Our PCG segment experienced significant sales growth during the third quarter of fiscal 2022 in nearly all the major business units in the segment when compared to the same quarter in the prior year, particularly businesses that provide polymer flooring systems, corrosion control coatings and raised flooring systems. Driving the strong top-line were increased industrial maintenance spending, recovery in energy markets and price increases. Our Consumer segment experienced organic growth 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 continued to be impacted by raw material shortages and supply chain disruptions. Despite these disruptions, underlying demand for these products remains strong, which resulted in fiscal 2022 third quarter sales that were still above the pre-pandemic levels of the third quarter in fiscal 2020. Our SPG segment experienced significant sales growth due to strong demand for nearly all its businesses, especially those serving the OEM and food additives markets. Additionally, the segment's disaster restoration equipment business rebounded after securing a supply of semiconductor chips and reconfiguring its products to accommodate them. Gross Profit Margin Our consolidated gross profit margin of 34.8% of net sales for the third quarter of fiscal 2022 compares to a consolidated gross profit margin of 37.2% for the comparable period a year ago. The current quarter gross profit margin decrease of approximately 2.4%, or 240 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 labor shortages due to the Omicron variant and supply chain disruptions. 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 third 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 the remainder of fiscal 2022 and into fiscal 2023. 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) strained supply chains as inventories have not fully recovered from Winter Storm Uri inFebruary 2021 ; (ii) intermittent supplier plant shutdowns due to the Covid pandemic; (iii) significant worldwide demand during the Covid pandemic for key items such as packaging, solvents, and chemicals; (iv) availability of transportation and elevated costs to transport products, which has been exacerbated as a result of increased Covid infections and associated restrictions and (v) high global demand as markets reopen and economic stimulus drives growth. 30 -------------------------------------------------------------------------------- SG&A Our consolidated SG&A expense during the period was$31.4 million higher versus the same period last year but decreased to 30.2% of net sales from 31.7% of net sales for the prior year quarter. Additional SG&A expense recognized by companies we recently acquired approximated$6.9 million during the third quarter of fiscal 2022. Our CPG segment SG&A was approximately$15.5 million higher for the third 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, continued investment in growth initiatives, restoration of travel expenses, and higher incentive compensation accruals directly related to performance. Additionally, companies recently acquired generated approximately$4.1 million of additional SG&A expense. Our PCG segment SG&A was approximately$10.9 million higher for the third 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, higher distribution costs, as well as restoration of travel expenses. Additionally, companies recently acquired generated approximately$2.3 million of additional SG&A expense. Our Consumer segment SG&A decreased by approximately$5.7 million during the third quarter of fiscal 2022 versus the same period last year, and decreased as a percentage of net sales. The quarter-over-quarter decrease in SG&A was attributable to decreases in advertising and promotional expense, as well as reduced incentives when compared to the prior year quarter. These decreases were partially offset by merit increases and the restoration of travel expenses. Our SPG segment SG&A was approximately$3.6 million higher during the third quarter of fiscal 2022 versus the comparable prior year period but decreased as a percentage of net sales. The increase in SG&A expense is attributable to investments in growth initiatives and restoring travel spending curtailed in the prior year. Additionally, companies recently acquired generated approximately$0.5 million of additional SG&A expense. SG&A expenses in our corporate/other category increased by$7.1 million during the third quarter of fiscal 2022 as compared to last year's third quarter mainly due to higher hospitalization, insurance and consulting expenses. The following table summarizes the retirement-related benefit plans' impact on income before income taxes for the three months endedFebruary 28, 2022 and 2021, as the service cost component has a significant impact on our SG&A expense: Three months ended February 28, February 28, 2021 Change (in millions) 2022 Service cost$ 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. 31 --------------------------------------------------------------------------------
Restructuring Charges Three months ended (in millions) February 28, 2022 February 28, 2021 Severance and benefit costs $ 0.1 $ 0.6 Facility closure and other related costs 1.0 2.6 Other restructuring (credits) - (0.1 ) Total Restructuring Costs $ 1.1 $ 3.1 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. Our current expectation of future additional restructuring costs is summarized in the table below. As of February 28, (in millions) 2022 Severance and benefit costs $ 1.2 Facility closure and other related costs 1.5 Other restructuring costs - Future Expected Restructuring Costs $ 2.7 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 ofDecember 31, 2020 . We utilized the remainder of fiscal 2021 to drive toward achieving the goals originally set forth in our MAP to Growth. OnMay 31, 2021 , we formally concluded our MAP to Growth. However, certain projects identified prior toMay 31, 2021 are not yet complete. 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) February 28, 2022 February 28, 2021 Interest expense $ 22.0 $ 21.0 Average interest rate (a) 3.20 % 3.32 %
(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 $ 0.6 Non-acquisition-related average borrowings 0.4 Total Change in Interest Expense $ 1.0
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.
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Income (Loss) Before Income Taxes (“IBT”)
Three months ended (in millions, except percentages) February 28, 2022 % of net sales February 28, 2021 % of net sales CPG Segment $ 31.5 6.5 % $ 14.4 3.6 % PCG Segment 24.9 9.2 % 12.2 5.4 % Consumer Segment 16.9 3.4 % 42.7 8.9 % SPG Segment 25.9 13.7 % 24.6 14.5 % Non-Op Segment (58.7 ) - (38.0 ) - Consolidated $ 40.5 $ 55.9 Our CPG segment results reflect market share gains, operational improvements, proactive cost controls, and selling price increases, 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 inflation in materials, freight and labor, as well as the unfavorable impact of supply shortages on productivity. Our SPG segment results reflect higher sales and operational improvements, partially offset by raw material inflation, inefficiencies due to supply chain disruption, and investments in future growth initiatives. Our Non-Op segment results reflect the unfavorable swing in investment income. Income Tax Rate The effective income tax rate of 17.9% for the three months endedFebruary 28, 2022 compares to the effective income tax rate of 31.1% for the three months endedFebruary 28, 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, and the impact of tax benefits related to equity compensation. Additionally, the effective income tax rate for the three month period endedFebruary 28, 2022 reflects net favorable period-over-period changes in foreign tax credit valuation allowances. Further, the effective tax rate for the three-month period endedFebruary 28, 2021 , includes a$5.3 million discrete charge for an increase to the deferred tax liability for withholding taxes on additional foreign earnings that were no longer considered to be permanently reinvested. Net Income Three months ended (in millions, except percentages and per February 28, % of net February 28, % of net share amounts) 2022 sales 2021 sales Net income$ 33.2 2.3 %$ 38.5 3.0 % Net income attributable to RPM International Inc. stockholders 33.0 2.3 % 38.2 3.0 % Diluted earnings per share 0.25 0.29
Nine Months Ended
Nine Months Ended (in millions, February February Total Organic Acquisition Foreign Currency except percentages) 28, 2022 28, 2021 Growth Growth(1) Growth Exchange Impact CPG Segment$ 1,740.6 $ 1,447.2 20.3 % 19.0 % 1.4 % -0.1 % PCG Segment 859.0 745.2 15.3 % 11.0 % 3.6 % 0.7 % Consumer Segment 1,559.2 1,666.4 -6.4 % -7.9 % 1.3 % 0.2 % SPG Segment 565.0 503.2 12.3 % 11.4 % 0.6 % 0.3 % Consolidated$ 4,723.8 $ 4,362.0 8.3 % 6.5 % 1.6 % 0.2 % (1) Organic growth includes the impact of price and volume. Our CPG segment experienced significant organic growth during the first nine months 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 period, when shelter-in-place requirements were most severe. Our PCG segment experienced sales growth during the first nine months 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 number 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 more favorable product mix. 33 -------------------------------------------------------------------------------- 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 nine-month sales that were still above the pre-pandemic levels in the comparable period of fiscal 2020. Our SPG segment experienced strong demand for our businesses serving the marine, powder coatings and wood stains & sealers markets. 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 slowed by disruptions 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 35.9% of net sales for the first nine months of fiscal 2022 compares to a consolidated gross profit margin of 39.2% for the comparable period a year ago. The current period gross profit margin decrease of approximately 3.3%, or 330 bps, resulted primarily from inflationary pressures on raw materials, freight and labor versus the same period a year ago, 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 nine months 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 the remainder of fiscal 2022 and into fiscal 2023. 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. SG&A Our consolidated SG&A expense during the period was$92.7 million higher versus the same period last year but decreased slightly to 27.3% of net sales from 27.4% of net sales for the prior year period. Additional SG&A expense recognized by companies we recently acquired approximated$19.8 million during the first nine months of fiscal 2022. Our CPG segment SG&A was approximately$55.2 million higher for the first nine months 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, continued investment in growth and operating improvement initiatives, and restoring travel spending and salaries which were reduced in the prior year in response to the impact of the Covid pandemic. Additionally, companies recently acquired generated approximately$7.1 million of additional SG&A expense. Our PCG segment SG&A was approximately$26.0 million higher for the first nine months 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 increases in commissions resulting from higher sales volume, restored travel expenses, and higher distribution costs. Additionally, companies recently acquired generated approximately$7.6 million of additional SG&A expense. Our Consumer segment SG&A decreased by approximately$11.0 million during the first nine months 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$13.6 million higher during the first nine months 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 15, "Contingencies and Accrued Losses," to the Consolidated Financial Statements. Additionally, companies recently acquired generated approximately$0.8 million of additional SG&A expense. SG&A expenses in our corporate/other category increased by$8.9 million during the first nine months of fiscal 2022 as compared to last year's first nine months mainly due to higher hospitalization, insurance, legal and consulting expenses. 34 -------------------------------------------------------------------------------- The following table summarizes the retirement-related benefit plans' impact on income before income taxes for the nine months endedFebruary 28, 2022 and 2021, as the service cost component has a significant impact on our SG&A expense: Nine Months Ended February 28, 2022 February 28, Change (in millions) 2021 Service cost $ 41.1$ 38.9 $ 2.2 Interest cost 16.3 15.7 0.6 Expected return on plan assets (37.4 ) (29.7 ) (7.7 ) Amortization of: Prior service (credit) (0.2 ) (0.2 ) - Net actuarial losses recognized 13.1 24.5 (11.4 ) Total Net Periodic Pension & Postretirement Benefit Costs $ 32.9 $
49.2
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 Nine Months Ended (in millions) February 28, 2022 February 28, 2021 Severance and benefit costs $ 1.6 $ 5.2 Facility closure and other related costs 3.5 6.4 Other restructuring costs - 0.7 Total Restructuring Costs $ 5.1 $ 12.3 For further information and detail about our MAP to Growth, see "Restructuring Charges" in Results of Operations - Three Months EndedFebruary 28, 2022 , and Note 3, "Restructuring" to the Consolidated Financial Statements.
Interest Expense
Nine Months Ended (in millions, except percentages) February 28, 2022 February 28, 2021 Interest expense $ 64.1 $ 64.0 Average interest rate (a) 3.14 % 3.34 %
(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 $ 1.7 Non-acquisition-related average borrowings (0.2 ) Change in average interest rate (1.4 ) Total Change in Interest Expense $ 0.1
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.
35 --------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (“IBT”)
Nine Months
Ended
February 28, % of net February % of net (in millions, except percentages) 2022 sales 28, 2021 sales CPG Segment$ 276.2 15.9 %$ 184.6 12.8 % PCG Segment 97.8 11.4 % 64.7 8.7 % Consumer Segment 95.9 6.2 % 263.8 15.8 % SPG Segment 71.0 12.6 % 73.4 14.6 % Non-Op Segment (155.8 ) - (122.3 ) - Consolidated$ 385.1 $ 464.2 Our CPG segment results reflect market share gains, operational improvements, proactive cost controls, selling price increases and the$41.9 million gain on the sale of certain real property assets for theToronto, Ontario location, which more than offset production inefficiencies due to supply chain disruptions and material cost inflation. Our PCG segment results reflect improved pricing, incremental savings from operating improvement initiatives and recent acquisitions. Our Consumer segment results reflect the decrease in sales, inflation in materials, freight and labor, as well as the unfavorable impact of supply shortages on productivity. Our SPG segment results reflect raw material inflation, inefficiencies due to supply chain disruption and investments in future growth initiatives, somewhat offset by higher sales volume and incremental operating improvement program savings. Our Non-Op segment results reflect the unfavorable swing in investment income. Income Tax Rate The effective income tax rate of 23.9% for the nine months endedFebruary 28, 2022 compares to the effective income tax rate of 25.2% for the nine months endedFebruary 28, 2021 . The effective income tax rates for the nine-month periods endedFebruary 28, 2022 and 2021 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes, non-deductible business expenses and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions, partially offset by tax benefits related to equity compensation. Additionally, the nine month period endedFebruary 28, 2022 reflects net favorable period-over-period changes in foreign tax credit valuation allowances. The nine month period endedFebruary 28, 2021 includes, as noted above, a charge related to an increase in the deferred tax liability for withholding taxes on foreign earnings not considered permanently reinvested.
Net Income
Nine Months
Ended
(in millions, except percentages and per February 28, % of net February 28, % of net share amounts) 2022 sales 2021 sales Net income$ 293.2 6.2 %$ 347.1 8.0 % Net income attributable to RPM International Inc. stockholders 292.5 6.2 % 346.5 7.9 % Diluted earnings per share 2.26 2.66
LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2022 Compared with Fiscal 2021
Operating Activities
Approximately$156.0 million of cash was provided by operating activities during the first nine months of fiscal 2022, compared with$651.9 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$54.0 million during the first nine 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. During the first nine months of fiscal 2022, the change in inventory used approximately$215.8 million more cash compared to our spending during the same period a year ago, which resulted primarily from the response to supply chain constraints. Days of inventory outstanding ("DIO") was approximately 114.7 and 103.1 days atFebruary 28, 2022 and 2021, respectively. The increase in DIO was driven mainly by 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 nine months of fiscal 2022 used approximately$41.7 million more cash than during the first nine months of fiscal 2021 due principally to the timing of purchases, which were restrained at the end of fiscal 2020 due to the sharp business downturn caused by pandemic lockdown restrictions. Days payables outstanding ("DPO") decreased by approximately 3.5 days to 95.6 days atFebruary 28, 2022 from 99.1 days atFebruary 28, 2021 . 36 -------------------------------------------------------------------------------- The change in accrued compensation and benefits during the first nine months of fiscal 2022 used approximately$46.3 million more cash than during the first nine 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 nine months of fiscal 2022 used approximately$61.2 million more cash than during the first nine months of fiscal 2021 due to changes in pension, advertising, and customer rebate accruals and most notably due to the Coronavirus Aid, Relief, and Economic Security ("CARES") Act deferral that was paid out during the period. 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 CARES Act inthe United States , enables employers to defer the payment of various types of taxes 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 nine months of fiscal 2022, we did not defer any additional government payments that would have normally been paid during the first nine months of fiscal 2022. During the first nine months of fiscal 2021, we deferred$12.1 million of such government payments that would have normally been paid during the first nine months of fiscal 2021. During the third quarter of fiscal 2022, we paid approximately$13.5 million , which reduced the deferred government payments balance to$13.6 million atFebruary 28, 2022 . We expect to pay off the remaining balance during the third quarter of fiscal 2023.
Investing Activities
For the first nine months of fiscal 2022, cash used for investing activities increased by$3.8 million to$221.7 million as compared to$217.9 million in the prior year period. This year-over-year increase in cash used for investing activities was mainly driven by the sales of assets, whose proceeds provided$51.9 million in the current year, which was almost completely offset by the increase in capital expenditures. We paid for capital expenditures of$152.4 million and$103.2 million during the first nine months of fiscal 2022 and fiscal 2021, 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 have increased capital spending in fiscal 2022, 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. AtFebruary 28, 2022 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$163.9 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 ofFebruary 28, 2022 , approximately$175.5 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 nine months of fiscal 2022, financing activities provided$27.9 million cash, which compares to cash used for financing activities of$439.7 million during the first nine months of fiscal 2021. The overall decrease in cash used for financing activities was driven principally by debt-related activities. During the first nine months of fiscal 2022, we used approximately$177.0 million less cash to paydown existing debt and provided approximately$301.0 million more cash from additions to short and long-term debt, as a result of the issuance of our 2.95% Notes due 2032. 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$1.46 billion as of bothFebruary 28, 2022 andMay 31, 2021 . 37 --------------------------------------------------------------------------------
2.95% Notes due 2032
OnJanuary 25, 2022 , we closed an offering for$300 million aggregate principal amount of 2.95% Notes due 2032. The proceeds from the 2032 notes were used to repay a portion of the outstanding borrowings under our revolving credit facility and for general corporate purposes. Interest on the Notes accrues fromJanuary 25, 2022 and will be payable semiannually in arrears onJanuary 15 andJuly 15 of each year, beginningJuly 15, 2022 , at a rate of 2.95% per year. The notes mature onJanuary 15, 2032 . The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable.
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. 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 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 ofFebruary 28, 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 2.78 to 1.00, while our Interest Coverage Ratio was 10.64 to 1.00. As ofFebruary 28, 2022 , we had$1.06 billion 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 ofFebruary 28, 2022 , we did not have an outstanding balance under our AR Program, which compares with the maximum availability of$215.0 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. 38 --------------------------------------------------------------------------------
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 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). 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 atFebruary 28, 2022 .
Refer to Note G, “Borrowings,” to the Consolidated Financial Statements, in our
Annual Report on Form 10-K for the fiscal year ended
comprehensive details on the significant components of our debt.
Stock Repurchase Program
See Note 12, “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." 39 --------------------------------------------------------------------------------
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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