RPM INTERNATIONAL INC. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements include all of our majority-owned subsidiaries. Investments in less-than-majority-owned joint ventures for which we have the ability to exercise significant influence over 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, 2020 . 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 Six Months Ended
November 30, November 30, November 30, November 30,
(In thousands) 2020 2019 2020 2019
Net Sales
CPG Segment $ 503,520 $ 499,510 $ 1,051,210 $ 1,035,615
PCG Segment 258,833 292,712 518,622 589,953
Consumer Segment 547,508 450,900 1,188,676 930,230
SPG Segment 176,054 158,170 334,078 318,258
Consolidated $ 1,485,915 $ 1,401,292 $ 3,092,586 $ 2,874,056
Income Before Income Taxes
(a)
CPG Segment
Income Before Income Taxes
(a) $ 71,832 $ 57,123 $ 170,182 $ 139,803
Interest (Expense), Net (b) (2,141 ) (2,074 ) (4,251 ) (4,101 )
EBIT (c) $ 73,973 $ 59,197 $ 174,433 $ 143,904
PCG Segment
Income Before Income Taxes
(a) $ 24,047 $ 33,320 $ 52,561 $ 61,377
Interest Income (Expense),
Net (b) 9 25 (22 ) (104 )
EBIT (c) $ 24,038 $ 33,295 $ 52,583 $ 61,481
Consumer Segment
Income Before Income Taxes
(a) $ 88,368 $ 34,456 $ 221,089 $ 93,614
Interest (Expense), Net (b) (64 ) (56 ) (127 ) (161 )
EBIT (c) $ 88,432 $ 34,512 $ 221,216 $ 93,775
SPG Segment
Income Before Income Taxes
(a) $ 28,406 $ 18,762 $ 48,855 $ 42,089
Interest Income (Expense),
Net (b) (73 ) (7 ) (155 ) 19
EBIT (c) $ 28,479 $ 18,769 $ 49,010 $ 42,070
Corporate/Other
(Loss) Before Income Taxes
(a) $ (45,697 ) $ (41,908 ) $ (84,362 ) $ (92,281 )
Interest (Expense), Net (b) (9,478 ) (15,424 ) (16,175 ) (36,121 )
EBIT (c) $ (36,219 ) $ (26,484 ) $ (68,187 ) $ (56,160 )
Consolidated
Net Income $ 127,884 $ 77,322 $ 308,670 $ 183,818
Add: Provision for Income
Taxes 39,072 24,431 99,655 60,784
Income Before Income Taxes
(a) 166,956 101,753 408,325 244,602
Interest (Expense) (21,266 ) (26,341 ) (43,011 ) (54,658 )
Investment Income, Net 9,519 8,805 22,281 14,190
EBIT (c) $ 178,703 $ 119,289 $ 429,055 $ 285,070 (a) The presentation includes a reconciliation of Income (Loss) Before Income
Taxes, a measure defined by generally accepted accounting principles ("GAAP")
in the
(b) Interest Income (Expense), Net includes the combination of interest income
(expense) and investment income (expense), net.
(c) EBIT is a non-GAAP measure, and is defined as earnings (loss) before interest
and taxes. We evaluate the profit performance of our segments based on income
before income taxes, but also look to EBIT, as a performance evaluation
measure because interest expense is essentially related to acquisitions, 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
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RESULTS OF OPERATIONS
Three Months Ended
Net Sales Three months ended (in millions, except November 30, November 30, Total Organic Acquisition Foreign Currency percentages) 2020 2019 Growth Growth(1) Growth Exchange Impact CPG Segment $ 503.5$ 499.5 0.8 % 1.2 % - -0.4 % PCG Segment 258.8 292.7 -11.6 % -12.2 % 0.2 % 0.4 % Consumer Segment 547.5 450.9 21.4 % 15.2 % 5.8 % 0.4 % SPG Segment 176.1 158.2 11.3 % 6.6 % 3.8 % 0.9 % Consolidated$ 1,485.9 $ 1,401.3 6.0 % 3.5 % 2.3 % 0.2 % (1) Organic sales include the impact of price and volume Our CPG segment experienced modest organic growth quarter over quarter, despite commercial and institutional construction markets that continue to be soft inNorth America andEurope . The growth that was achieved during the second quarter of fiscal 2021 was mainly driven by a focus on renovation and restoration projects, which allowed CPG to expand its position as a single-source provider of building envelope systems. The segment also continued to gain market share during the quarter in construction technologies, led by its insulated concrete form business. Our PCG segment experienced organic sales declines during the quarter as restrictions associated with Covid impacted the ability of contractors to gain access to the facilities of our end customers. Furthermore, our customers in the energy sector are facing poor economic conditions, which is causing deferrals in industrial maintenance spending. The segment was particularly challenged in emerging markets. Lastly, a series of hurricanes throughout the Gulf region of theU.S. temporarily disrupted our coatings business. Our Consumer segment experienced significant organic growth as it benefitted from unprecedented demand worldwide for its "do-it-yourself" home improvement products, as consumers are spending more time at home during the Covid shutdowns. Additionally, cleaning product sales continue to grow with the increased emphasis during the Covid pandemic. Our SPG segment experienced organic sales growth resulting from more significant hurricane and wildfire activity, which drove demand for our water restoration equipment, as well as fluorescent pigments, which are used in fire retardant tracer dyes. Additionally, we experienced strong demand for our disinfectants, air purification equipment, and HEPA filters. Sales of our industrial wood protection products also increased during the period, a result of a stronger residential market, which has driven demand for lumber, furniture and cabinets in theU.S. We also expanded sales in our forestry chemicals business inAustralia and New Zealand . As demonstrated above, Covid has had a mixed impact on our businesses, impacting some unfavorably and others favorably. RPM continues to be well-served by the strategic balance in its portfolio of businesses. It continues to be difficult to predict the future financial impact on net sales, as we cannot predict the duration or scope of the pandemic, but the impact could be material. Future performance in net sales is dependent on several factors, including but not limited to: (i) the ability of our customers to continue operations; (ii) continued organic growth in DIY sales, as people spend more time at home; (iii) continued organic growth in professional and consumer cleaning and disinfectant brands, some of which are effective against Covid; (iv) the nature and extent of facility closures as a result of Covid; (v) the length and severity of the downturn in energy and construction markets and associated unfavorable impact on maintenance spending in these sectors; and (vi) the ability for our suppliers to meet demand requirements. With that being said, we expect to generate consolidated sales growth in the mid-single digits during the third quarter of fiscal 2021, which is more in line with recent quarters prior to the outbreak of Covid. Gross Profit Margin Our consolidated gross profit margin of 39.4% of net sales for the second quarter of fiscal 2021 compares to a consolidated gross profit margin of 37.8% for the comparable period a year ago. The current quarter gross profit margin increase of approximately 1.6%, or 160 basis points ("bps"), resulted primarily from a combination of increases in selling prices, MAP to Growth savings, which include raw material savings due to our centralized procurement initiatives, and higher sales volume versus the same period a year ago. Raw material cost inflation was neutral during the second quarter of fiscal 2021 overall, but has been recently rising fairly broadly across our key product categories. Our global supply chain remains strong, despite some challenges at specific businesses in our portfolio. While we have had to temporarily shut down certain plants in response to Covid, we have generally been able to maintain our principal operations. While we have not yet experienced a material impact, we do anticipate that certain raw materials are likely 30 -------------------------------------------------------------------------------- to create future cost pressure as our suppliers are struggling to meet demand in light of Covid. Despite these facts, as we cannot predict the duration or scope of the Covid pandemic, the future financial impact to gross profit margin cannot be reasonably estimated, but could be material. SG&A Our consolidated SG&A expense during the period was$3.9 million lower versus the same period last year and decreased to 26.9% of net sales from 28.8% of net sales for the prior year quarter. During the second quarter of fiscal 2021, we continued our MAP to Growth and have generated incremental savings of approximately$5.7 million . Additional SG&A expense recognized by companies we recently acquired approximated$5.2 million during the second quarter of fiscal 2021. Our CPG segment SG&A was approximately$10.2 million lower for the second quarter of fiscal 2021 versus the comparable prior year period and decreased as a percentage of net sales. The decrease was mainly due to reducing discretionary spending (i.e., meetings, travel, etc.), temporary salary cuts taken in response to the economic downturn, and MAP to Growth savings. Our PCG segment SG&A was approximately$2.8 million lower for the second quarter of fiscal 2021 versus the comparable prior year period but increased as a percentage of net sales, mainly due to the deleveraging effect from lower sales volume compared to the prior comparable quarter. Additionally, the quarter over quarter PCG segment SG&A decrease was primarily attributable to a reduction in discretionary spending and MAP to Growth savings. Finally, the company we recently acquired contributed approximately$0.1 million of additional SG&A expense during the current quarter. Our Consumer segment SG&A increased by approximately$3.5 million during the second quarter of fiscal 2021 versus the same period last year but decreased as a percentage of net sales. The quarter-over-quarter increase in SG&A was primarily attributable to the SG&A added from the company acquired during the second quarter of fiscal 2021, which totaled$4.0 million . Additionally, there were increases in distribution costs and incentive compensation costs as a result of higher volume, but these increases were completely offset by a reduction in discretionary spending during the quarter. Our SPG segment SG&A was approximately$2.4 million lower during the second quarter of fiscal 2021 versus the comparable prior year period and decreased as a percentage of net sales. The decrease in SG&A expense is attributable to cost control measures and savings resulting from actions taken during the past year associated with our MAP to Growth and lower year-over-year spending on ERP implementations. Additionally, the company we recently acquired contributed approximately$1.1 million of additional SG&A expense during the current quarter. SG&A expenses in our corporate/other category increased by$8.0 million during the second quarter of fiscal 2021 as compared to last year's second quarter due mainly to higher incentives related to performance and pension costs. Three months ended November 30, November 30, Change (in millions) 2020 2019 Service cost$ 13.0 $ 11.7 $ 1.3 Interest cost 5.2 6.6 (1.4 ) Expected return on plan assets (9.9 ) (10.4 ) 0.5 Amortization of: Prior service (credit) (0.1 ) (0.1 ) - Net actuarial losses recognized 8.2 5.3 2.9 Total Net Periodic Pension & Postretirement Benefit Costs$ 16.4 $ 13.1 $ 3.3 We expect that pension expense will fluctuate on 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 in light of the lingering macroeconomic uncertainties associated with Covid, but which may have a material impact on our consolidated financial results in the future. As we cannot predict the duration or scope of the Covid pandemic, the future financial impact to SG&A cannot be reasonably estimated, but could be material. The disruption caused by the outbreak of Covid may impact our near-term ability to drive further reduction in SG&A as a percentage of sales. However, this will be offset to some degree by lower variable SG&A, such as reduced travel-related expenses incurred by our associates, due to travel restrictions in place because of the Covid outbreak. 31
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Restructuring Charges
Three months ended
November 30, November 30,
(in millions) 2020 2019
Severance and benefit costs $ 2.1 $ 2.7
Facility closure and other related costs 2.3 1.8
Other restructuring costs 0.5 0.3
Total Restructuring Costs $ 4.9 $ 4.8
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 the continued implementation 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 shown in the
table below.
As of November 30,
(in millions) 2020
Severance and benefit costs $ 3.0
Facility closure and other related costs 6.6
Other restructuring costs 0.7
Total Future Expected Restructuring Costs $ 10.3
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 Covid delayed the finalization of our MAP to Growth past the
original target completion date of December 31, 2020 . We now expect to utilize
the remainder of fiscal year 2021 to achieve the goals originally set forth in
our MAP to Growth. Certain of these projects may not be finalized until fiscal
year 2022 and we would expect to continue to recognize restructuring expense
throughout fiscal year 2022, as projects related to our MAP to Growth are
executed and completed.
Despite the delay in finalizing our MAP to Growth past the original target
completion date, we expect we will have achieved our annualized pretax savings
goal of approximately $290 million and made substantial progress on our $230
million working capital improvement goal by May 31, 2021 . See Note 3,
"Restructuring," to the Consolidated Financial Statements, for further details
surrounding our MAP to Growth.
Interest Expense
Three months ended
November 30, November 30,
(in millions, except percentages) 2020 2019
Interest expense $ 21.3 $ 26.3
Average interest rate 3.31 % 3.88 %
The interest rate decrease was a result of lower market rates on the variable
cost borrowings.
Change in interest
(in millions) expense
Non-acquisition-related average borrowings $ (2.9 )
Acquisition-related borrowings 0.6
Change in average interest rate (2.7 )
Total Change in Interest Expense $ (5.0 )
32
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Investment (Income), Net
Three months ended
November 30, November 30,
(in millions) 2020 2019
Dividend & Interest (Income)
(8.4 ) (6.9 )
Investment (Income), Net $ (9.5 ) $ (8.8 ) Income Before Income Taxes ("IBT")
Three months ended
(in millions, except November 30, % of net sales November 30, % of net sales
percentages) 2020 2019
CPG Segment $ 71.8 14.3 % $ 57.1 11.4 %
PCG Segment 24.0 9.3 % 33.3 11.4 %
Consumer Segment 88.4 16.1 % 34.5 7.6 %
SPG Segment 28.4 16.1 % 18.8 11.9 %
Non-Op Segment (45.6 ) - (41.9 ) -
Consolidated $ 167.0 $ 101.8
Our CPG segment results reflect proactive management to improve its product mix,
MAP to Growth savings and cost control measures. Our PCG segment results reflect
the impact of the Covid pandemic restrictions, challenges in emerging markets,
as well as disruptions in our coatings business caused by the series of
hurricanes throughout the Gulf region in the U.S. Our Consumer segment results
reflect the large increase in sales and related volume leveraging impact on
margins, along with savings from our MAP to Growth. Our SPG segment results
reflect sales increases in our fluorescent pigment, water damage restoration,
and our industrial wood protection products businesses, and strong demand for
our disinfectants, air purification equipment, and HEPA filters, in addition to
savings from our MAP to Growth and other cost cutting measures.
Income Tax Rate The effective income tax rate of 23.4% for the three months
ended November 30, 2020 compares to the effective income tax rate of 24.0% for
the three months ended November 30, 2019 . The effective income tax rates for the
three months ended November 30, 2020 and 2019 reflect variances from the 21%
statutory rate due primarily to the unfavorable impact of state and local income
taxes 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 per November 30, % of net November 30, % of net
share amounts) 2020 sales 2019 sales
Net income $ 127.9 8.6 % $ 77.3 5.5 %
Net income attributable to RPM
International Inc. stockholders 127.7 8.6 % 77.0 5.5 %
Diluted earnings per share 0.98 0.59
33
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Six Months Ended
Net Sales Six months ended (in millions, except November 30, November 30, Total Organic Acquisition Foreign Currency percentages) 2020 2019 Growth Growth(1) Growth Exchange Impact CPG Segment$ 1,051.2 $ 1,035.6 1.5 % 2.4 % - -0.9 % PCG Segment 518.6 590.0 -12.1 % -12.2 % 0.2 % -0.1 % Consumer Segment 1,188.7 930.2 27.8 % 24.9 % 2.8 % 0.1 % SPG Segment 334.1 318.3 5.0 % 0.4 % 4.0 % 0.6 % Consolidated$ 3,092.6 $ 2,874.1 7.6 % 6.5 % 1.4 % -0.3 % (1) Organic sales include the impact of price and volume Our CPG segment experienced modest organic growth driven mainly by market share gains in our construction technologies, led by our insulated concrete form business. In addition, our roofing business grew as we experienced better weather in the current year than the prior year when unfavorable conditions caused a delay in North American construction activity. Additionally, our commercial sealants business experienced sales increases during the first half of fiscal 2021 from distributors who did not order in April and May due to Covid lockdown restrictions. Our PCG segment experienced organic declines during the period as restrictions associated with Covid impacted the ability of contractors to gain access to the facilities of our end customers. Furthermore, our customers in the energy sector are facing poor economic conditions, which is causing deferrals in industrial maintenance spending. The segment was particularly challenged in emerging markets. Lastly, a series of hurricanes throughout the Gulf region of theU.S. temporarily disrupted our coatings business. Our Consumer segment experienced significant organic growth resulting from a combination of higher "do-it-yourself" demand as consumers are spending more time at home during the Covid shutdowns and an easier comparison to the prior year, when sales were very low due to extremely wet weather. In addition, growth in our cleaning product businesses contributed to sales growth for the current period. Our SPG segment experienced organic growth resulting from more significant wildfire activity, which drove demand for our fluorescent pigments, which are used in fire retardant tracer dyes. Additionally, sales of our industrial wood protection products increased during the period, a result of a stronger residential market, which has driven demand for lumber, furniture and cabinets in theU.S. Lastly, we experienced increases in sales due to favorable market conditions in our nail polish business, as Covid has led to more demand for our product offering with nails being done at home instead of at salons. As demonstrated above, Covid has had a mixed impact on our businesses, impacting some unfavorably and others favorably. RPM continues to be well-served by the strategic balance in its portfolio of businesses. It continues to be difficult to predict the future financial impact on net sales, as we cannot predict the duration or scope of the pandemic, but the impact could be material. Future performance in net sales is dependent on several factors, including but not limited to: (i) the ability of our customers to continue operations; (ii) continued organic growth in DIY sales, as people spend more time at home; (iii) continued organic growth in professional and consumer cleaning and disinfectant brands, some of which are effective against Covid; (iv) the nature and extent of facility closures as a result of Covid; and (v) the length and severity of the downturn in energy markets and associated unfavorable impact on maintenance spending in this sector. With that being said, we expect to generate consolidated sales growth in the mid-single digits, which is more in line with recent quarters prior to the outbreak of Covid. Gross Profit Margin Our consolidated gross profit margin of 40.1% of net sales for the first half of fiscal 2021 compares to a consolidated gross profit margin of 38.4% for the comparable period a year ago. The current period gross profit margin increase of approximately 1.7%, or 170 bps, resulted primarily from a combination of increases in selling prices, MAP to Growth savings, which include raw material savings due to our centralized procurement initiatives, and higher sales volume versus the same period a year ago. Raw material costs inflation was neutral during the first half of fiscal 2021, but has been recently rising broadly across our key product categories. Our global supply chain remains strong, despite some challenges at specific businesses in our portfolio. While we have had to temporarily shut down certain plants in response to Covid, we have generally been able to maintain our principal operations. While we have not yet experienced a material impact, we do anticipate that certain raw materials and packaging components are likely to create future cost pressure, as our suppliers are struggling to meet demand in light of Covid. Despite these facts, as we cannot predict the duration or scope of the Covid pandemic, the future financial impact to gross profit margin cannot be reasonably estimated, but could be material. 34 -------------------------------------------------------------------------------- SG&A Our consolidated SG&A expense during the current period was$8.6 million lower versus the same period last year and decreased to 25.7% of net sales from 28.0% of net sales for the prior year period. During the first half of fiscal 2021, we continued our MAP to Growth and have generated incremental savings of approximately$12.5 million . Additional SG&A expense recognized by companies we recently acquired approximated$6.4 million during the first half of fiscal 2021. Our CPG segment SG&A was approximately$19.6 million lower for the first half of fiscal 2021 versus the comparable prior year period and decreased as a percentage of net sales when compared to the prior comparable period. The decrease in SG&A expense was mainly due to reducing discretionary spending (i.e., meetings, travel, etc.), temporary salary cuts taken in response to the economic downturn, and MAP to Growth savings. Our PCG segment SG&A was approximately$11.4 million lower for the first half of fiscal 2021 versus the comparable prior year period, but increased as a percentage of net sales, mainly due to the decrease in sales for the period. The decrease in SG&A was primarily attributable to a reduction in discretionary spending, as well as MAP to Growth savings. Additionally, the company we recently acquired contributed approximately$0.2 million of additional SG&A expense during the current period. Our Consumer segment SG&A increased by approximately$17.2 million during the first half of fiscal 2021 versus the same period last year but decreased as a percentage of net sales. The period-over-period increase in SG&A was primarily attributable to increases in distribution costs and incentives compensation costs as a result of higher volume, offset somewhat by a reduction in discretionary spending during the period. There were also slight increases in advertising and promotional expense. Additionally, the company we recently acquired contributed approximately$4.0 million of additional SG&A expense during the current period. Our SPG segment SG&A was approximately$3.1 million lower during the first half of fiscal 2021 versus the comparable prior year period and decreased as a percentage of net sales. The decrease in SG&A expense is attributable to cost control measures and savings resulting from actions taken during the past year associated with our MAP to Growth and lower year-over-year spending on ERP implementations. Partially offsetting these decreases was approximately$2.2 million of additional SG&A expense contributed by the company we recently acquired. SG&A expenses in our corporate/other category increased by$8.5 million during the first half of fiscal 2021 as compared to last year's first half due mainly to higher incentives related to performance and pension costs. Six months ended November 30, November 30, Change (in millions) 2020 2019 Service cost$ 25.9 $ 23.3 $ 2.6 Interest cost 10.5 13.2 (2.7 ) Expected return on plan assets (19.8 ) (20.8 ) 1.0 Amortization of: Prior service (credit) (0.1 ) (0.1 ) - Net actuarial losses recognized 16.3 10.6 5.7 Total Net Periodic Pension & Postretirement Benefit Costs$ 32.8 $ 26.2 $ 6.6 We expect that pension expense will fluctuate on 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 in light of the lingering macroeconomic uncertainties associated with Covid, but which may have a material impact on our consolidated financial results in the future. As we cannot predict the duration or scope of the Covid pandemic, the future financial impact to SG&A cannot be reasonably estimated, but could be material. The disruption caused by the outbreak of Covid may impact our near-term ability to drive further reduction in SG&A as a percentage of sales. However, this will be offset to some degree by lower variable SG&A, such as reduced travel-related expenses incurred by our associates, due to travel restrictions in place because of the Covid outbreak. 35
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Restructuring Charges
Six months ended
November 30, November 30,
(in millions) 2020 2019
Severance and benefit costs $ 4.6 $ 6.5
Facility closure and other related costs 3.8 4.6
Other restructuring costs 0.8 0.3
Total Restructuring Costs $ 9.2 $ 11.4
For further information and detail about our MAP to Growth plan, see
"Restructuring Charges" in Results of Operations - Three Months Ended
Interest Expense
Six months ended
November 30, November 30,
(in millions, except percentages) 2020 2019
Interest expense $ 43.0 $ 54.7
Average interest rate 3.38 % 4.00 %
The interest rate decrease was a result of lower market rates on the variable
cost borrowings.
Change in interest
(in millions) expense
Non-acquisition-related average borrowings $ (5.7 )
Acquisition-related borrowings 0.8
Change in average interest rate (6.8 )
Total Change in Interest Expense $ (11.7 )
Investment (Income), Net
Six months ended
November 30, November 30,
(in millions) 2020 2019
Dividend & Interest (Income)
(20.2 ) (10.5 )
Investment (Income), Net $ (22.3 ) $ (14.2 ) Income Before Income Taxes ("IBT")
Six months ended
(in millions, except November 30, % of net sales November 30, % of net sales
percentages) 2020 2019
CPG Segment $ 170.2 16.2 % $ 139.8 13.5 %
PCG Segment 52.6 10.1 % 61.4 10.4 %
Consumer Segment 221.1 18.6 % 93.6 10.1 %
SPG Segment 48.9 14.6 % 42.1 13.2 %
Non-Op Segment (84.5 ) - (92.3 ) -
Consolidated $ 408.3 $ 244.6
36
-------------------------------------------------------------------------------- Our CPG segment results reflect proactive management to improve its product mix, MAP to Growth savings and cost control measures. Our PCG segment results reflect the impact of the Covid pandemic restrictions, challenges in emerging markets, as well as disruptions in our coatings business caused a series of hurricanes throughout the Gulf region in theU.S. Our Consumer segment results reflect the large increase in sales and related volume leveraging impact on margins, along with savings from our MAP to Growth. Our SPG segment results reflect sales increases in our fluorescent pigment, industrial wood protection products, and nail polish businesses, in addition to savings from our MAP to Growth and other cost cutting measures. Income Tax Rate The effective income tax rate of 24.4% for the six months endedNovember 30, 2020 compares to the effective income tax rate of 24.9% for the six months endedNovember 30, 2019 . The effective income tax rates for the six months endedNovember 30, 2020 and 2019 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes 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) 2020 sales 2019 sales Net income$ 308.7 10.0 %$ 183.8 6.4 % Net income attributable to RPM International Inc. stockholders 308.3 10.0 % 183.2 6.4 % Diluted earnings per share 2.37 1.41
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Fiscal 2021 Compared with Fiscal 2020
Approximately$579.5 million of cash was provided by operating activities during the first six months of fiscal 2021, compared with$300.2 million of cash provided by operating activities during the same period last year. The net change in cash from operations includes the change in net income, which increased by$124.9 million during the first six months of fiscal 2021 versus the same period during fiscal 2020. The change in accounts receivable during the first half of fiscal 2021 provided approximately$92.8 million less cash than during the same period a year ago. This resulted from the timing of sales, which dipped sharply in the fourth quarter of last year, but rebounded sharply in the first half of this year. Days sales outstanding ("DSO") atNovember 30, 2020 decreased to 60.6 days from 62.8 days atNovember 30, 2019 . Our CPG and Consumer segments achieved decreases in DSO during the current period versus last year. Those improvements were partially offset by increased DSO at our PCG and SPG segments. During the first half of fiscal 2021, we spent approximately$62.8 million less cash for inventory compared to our spending during the same period a year ago, which resulted primarily from the timing of purchases by retail customers. Days of inventory outstanding ("DIO") was approximately 83.0 and 91.2 days atNovember 30, 2020 and 2019, respectively. The decrease in DIO was driven mainly by the Consumer and SPG segments, which was due to a significant increase in demand as well as our MAP to Growth efforts to improve our manufacturing and operational planning processes. The change in accounts payable during the first half of fiscal 2021 used approximately$79.0 million less cash than during the first half of fiscal 2020 due principally to the timing of purchases, but also longer days payables outstanding ("DPO") which increased by approximately 6.3 days from 75.1 days atNovember 30, 2019 to 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. Cash provided from operations, along with the use of available credit lines, as required, remain our primary sources of liquidity. The change in other accrued liabilities during the first half of fiscal 2021 used approximately$75.4 million less cash than during the first half of fiscal 2020 due principally to the timing of income taxes payable and the increase in customer rebate accruals. 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 here in theU.S. , enables employers to postpone the payment of various types of taxes over varying time horizons. As ofMay 31, 2020 , we had deferred$17.7 million of such government payments that would have normally been paid during our fourth quarter of fiscal 2020, but which will be paid in future periods. During the six months endedNovember 30, 2020 , we deferred an additional$10.7 million of such government payments that would have normally been paid 37
-------------------------------------------------------------------------------- during our first half of fiscal 2021, but which will be paid in future periods. The$10.7 million of deferrals generated during the first half of fiscal 2021 is presented net of payments that occurred during the first half of fiscal 2021 but which normally would have been paid in prior periods. As we cannot predict the duration or scope of the Covid pandemic and its impact on our customers and suppliers, the negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.
Investing Activities
For the first half of fiscal 2021, cash used for investing activities increased by$79.2 million to$186.0 million as compared to$106.7 million in the prior year period. This year-over-year increase in cash used for investing activities was mainly driven by$77.3 million in more cash spent on acquisitions as we made a larger acquisition during the first half of fiscal 2021 as compared to the first half of fiscal 2020. 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$70.9 million and$71.4 million during the first halves of fiscal 2021 and fiscal 2020, respectively. We have continued to maintain an elevated level of capital spending in fiscal 2021, in an effort to consolidate ERP systems and our plant footprint, as part of our MAP to Growth. 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, 2020 andMay 31, 2020 , the fair value of our investments in marketable securities, which includes captive insurance-related assets, totaled$143.5 million and$114.0 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, 2020 , approximately$232.4 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with$199.6 million atMay 31, 2020 . 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 8, "Income Taxes," to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings.
Financing Activities
For the first half of fiscal 2021, cash used for financing activities increased by$163.5 million to$370.0 million as compared to$206.5 million in the prior year period. The overall increase in cash used for financing activities was driven principally by debt-related activities, as we received$539.3 million less cash related to new debt and used$286.6 million less cash to paydown existing debt in the first half of fiscal 2021 as compared to the prior year. See below for further details on the significant components of our debt. The increase in cash used for financing activities generated by debt-related activities was somewhat offset by a$100.0 million decrease in cash used for the repurchase of common stock during the first half of fiscal 2021, as compared to the prior year, as we suspended our stock repurchase program during the fourth quarter of fiscal 2020, given macroeconomic uncertainty resulting from the Covid pandemic. Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at$1.56 billion atNovember 30, 2020 , compared with$1.28 billion atMay 31, 2020 . Significant components of our debt include (refer to "Note G - Borrowings" in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2020 for more comprehensive details):
Term Loan Facility Credit Agreement
OnFebruary 21, 2020 , we and our subsidiary,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 38 -------------------------------------------------------------------------------- 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" below 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 3.5 to 1.0, 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 1.0. Upon notification to the lenders, however, the maximum permitted leverage ratio can be relaxed to 4.25 to 1.0 for a one-year period in connection with certain material acquisitions. The covenants contained in the New Credit Facility are substantially similar to those contained in our Revolving Credit Facility. See "Revolving Credit Agreement" below for details on our compliance with all significant financial covenants atNovember 30, 2020 .
Accounts Receivable Securitization Program
As ofNovember 30, 2020 , the outstanding balance under our AR Program was$75.0 million , which compares with the maximum availability on that date of$250.0 million . The maximum availability under the AR Program is$250.0 million , but availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the$250.0 million of funding available under the AR Program. The AR Program contains various customary affirmative and negative covenants, as well as customary default and termination provisions. Our failure to comply with the covenants described above and other covenants contained in the Revolving Credit Facility could result in an event of default under that agreement, entitling the lenders to, among other things, declare the entire amount outstanding under the Revolving Credit Facility to be due and payable immediately. The instruments governing our other outstanding indebtedness generally include cross-default provisions that provide that, under certain circumstances, an event of default that results in acceleration of our indebtedness under the Revolving Credit Facility will entitle the holders of such other indebtedness to declare amounts outstanding immediately due and payable.
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. OnApril 30, 2020 , we amended both our Revolving Credit Facility and the New Credit Facility (see "Term Loan Facility Credit Agreement" section above for further details) to allow the maximum permitted Net Leverage Ratio to be increased from 3.75 to 1.00 to 4.25 to 1 for four consecutive fiscal quarters following notice to the Administrative Agent on or beforeJune 30, 2021 and the payment of a ten basis point fee ("Increased Net Leverage Ratio Period"). Such increase is in addition to any increase requested by us in the maximum permitted Net Leverage Ratio following a Material Acquisition (any acquisition for which the aggregate consideration is$100.0 million or greater). During an Increased Net Leverage Ratio Period, the Euro-Rate Spread on loans under the Revolving Credit Facility shall be increased to 1.75% and the Base Rate Spread shall be 0.75% until the first day of the month following the Increased Net Leverage Ratio Period; provided, however, if at any time during an Increased Net Leverage Ratio, all three rating agencies rate us as non-investment grade, the Euro-Rate Spread shall be 2.00% and the Base Rate Spread shall be 1.0% in each case until earlier of the first day of the month after the Increased Net Leverage Ratio or the date on which at least one rating agency rates us as investment grade. As ofNovember 30, 2020 , we have not provided any notice to the Administrative Agent to trigger this provision. 39
-------------------------------------------------------------------------------- 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 1.0. During certain periods and per the terms of the Revolving Credit Facility, this ratio may be increased to 4.25 to 1.0 in connection with certain "material acquisitions", or under the Increased Net Leverage Ratio Period. The acquisition ofAli Industries, LLC occurred onSeptember 1, 2020 and qualifies as a "material acquisition," which enables 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 has been increased to 4.25 to 1.0. The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1. 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, 2020 , 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 2.16 to 1, while our interest coverage ratio was 11.12 to 1. As ofNovember 30, 2020 , we had$1.11 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.
Stock Repurchase Program
See Note 10, "Stock Repurchase Program" to the Consolidated Financial Statements, for further detail surrounding our stock repurchase program.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financings. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in, or relationships with, any special purpose entities that are not reflected in our financial statements. OTHER MATTERS Environmental Matters Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect our results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. For additional information, refer to "Part II, Item 1. Legal Proceedings."
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 outbreak of the coronavirus (Covid); and (l) 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, 2020 , as the same may be updated from time 40
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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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