RPM(RPM) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited consolidated financial statements for the periods ended November 30, 2023, and 2022 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (November 30, 2023 vs. May 31, 2023) | Metric (in thousands) | Nov 30, 2023 | May 31, 2023 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Total Current Assets | $2,919,007 | $3,184,168 | $(265,161) | -8.3% | | Total Assets | $6,537,377 | $6,782,004 | $(244,627) | -3.6% | | Total Current Liabilities | $1,254,355 | $1,490,801 | $(236,446) | -15.9% | | Total Long-Term Liabilities | $2,920,468 | $3,148,203 | $(227,735) | -7.2% | | Total Equity | $2,362,554 | $2,143,000 | $219,554 | 10.2% | Consolidated Statements of Income Consolidated Statements of Income Highlights (Three Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Net Sales | $1,792,275 | $1,791,708 | $567 | 0.0% | | Gross Profit | $748,228 | $690,391 | $57,837 | 8.4% | | Income Before Income Taxes | $195,824 | $175,135 | $20,689 | 11.8% | | Net Income | $145,815 | $131,542 | $14,273 | 10.8% | | Diluted EPS | $1.13 | $1.02 | $0.11 | 10.8% | Consolidated Statements of Income Highlights (Six Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Net Sales | $3,804,132 | $3,724,028 | $80,104 | 2.2% | | Gross Profit | $1,576,845 | $1,434,862 | $141,983 | 9.9% | | Income Before Income Taxes | $464,978 | $400,256 | $64,722 | 16.2% | | Net Income | $347,128 | $300,821 | $46,307 | 15.4% | | Diluted EPS | $2.69 | $2.33 | $0.36 | 15.5% | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (Three Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Net Income | $145,815 | $131,542 | $14,273 | 10.8% | | Total Other Comprehensive Income (Loss) | $3,496 | $11,883 | $(8,387) | -70.6% | | Total Comprehensive Income | $149,311 | $143,425 | $5,886 | 4.1% | Consolidated Statements of Comprehensive Income Highlights (Six Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Net Income | $347,128 | $300,821 | $46,307 | 15.4% | | Total Other Comprehensive Income (Loss) | $15,256 | $(63,747) | $79,003 | -123.9% | | Total Comprehensive Income | $362,384 | $237,074 | $125,310 | 52.9% | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Six Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Cash Provided by Operating Activities | $767,781 | $190,915 | $576,866 | 302.2% | | Cash (Used for) Investing Activities | $(111,639) | $(164,007) | $52,368 | -31.9% | | Cash (Used for) Provided by Financing Activities | $(610,294) | $14,193 | $(624,487) | -4400.0% | | Net Change in Cash and Cash Equivalents | $46,959 | $30,446 | $16,513 | 54.2% | | Cash and Cash Equivalents at End of Period | $262,746 | $232,118 | $30,628 | 13.2% | Consolidated Statements of Stockholders' Equity Consolidated Stockholders' Equity Highlights (November 30, 2023 vs. June 1, 2023) | Metric (in thousands) | Nov 30, 2023 | June 1, 2023 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Total RPM International Inc. Stockholders' Equity | $2,360,554 | $2,140,840 | $219,714 | 10.3% | | Total Equity | $2,362,554 | $2,143,000 | $219,554 | 10.2% | Notes to Consolidated Financial Statements NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION - The unaudited Consolidated Financial Statements are prepared in accordance with GAAP for interim financial information, including normal, recurring accruals[24][25] - The Company's business is subject to external weather factors, historically showing stronger sales and net income in the first, second, and fourth fiscal quarters and weaker performance in the third fiscal quarter[27] NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS - The Company has not adopted any Accounting Standard Updates (ASU) in fiscal 2024 that materially impact its Consolidated Financial Statements[28] - The FASB issued ASU 2023-09 (Income Taxes) and ASU 2023-07 (Segment Reporting), and the Company is currently evaluating the impact of these ASUs on its disclosures[29][30] NOTE 3 — RESTRUCTURING - The Company's multi-year restructuring plan, MAP 2025, aims to improve margins and is expected to be completed by the end of fiscal 2025[33] - Total expected costs for MAP 2025 increased by approximately $16.5 million due to higher expected severance, benefit, and facility closure costs[34] - During the three months ended August 31, 2023, the Company recognized a $4.5 million loss on divestiture and a $3.3 million impairment loss related to its USL business[35][36] MAP 2025 Restructuring Charges (Six Months Ended Nov 30, 2023) | Category (in thousands) | Total Charges (Six Months Ended Nov 30, 2023) | Total Expected Costs | | :---------------------- | ---------------------------------------------: | -------------------: | | Severance and benefit costs | $3,016 | $22,261 | | Facility closure and other related costs | $166 | $21,890 | | Other restructuring costs | $4,555 | $7,092 | | Consolidated Total Charges | $7,737 | $51,243 | NOTE 4 — FAIR VALUE MEASUREMENTS - The Company's financial instruments' fair values are determined using a three-level hierarchy based on input observability[41][43][44] - As of November 30, 2023, the carrying value of long-term debt was $2,252.4 million, with a fair value of $2,064.1 million[48] Fair Value of Assets and Liabilities (November 30, 2023) | Category (in thousands) | Level 1 | Level 2 | Level 3 | Fair Value at Nov 30, 2023 | | :---------------------- | ------: | ------: | ------: | -------------------------: | | Available-for-sale debt securities | $0 | $27,018 | $0 | $27,018 | | Marketable equity securities | $10,937 | $124,128 | $0 | $135,065 | | Contingent consideration | $0 | $0 | $(2,298) | $(2,298) | | Total | $10,937 | $151,146 | $(2,298) | $159,785 | NOTE 5 — INVESTMENT (INCOME), NET Investment (Income), Net (Three Months Ended Nov 30) | Component (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :----------------------- | -----------: | -----------: | -----: | | Interest (income) | $(4,897) | $(2,389) | $(2,508) | | Net loss (gain) on marketable securities | $225 | $(3,794) | $4,019 | | Dividend (income) | $(617) | $(668) | $51 | | Investment (income), net | $(5,289) | $(6,851) | $1,562 | Investment (Income), Net (Six Months Ended Nov 30) | Component (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :----------------------- | -----------: | -----------: | -----: | | Interest (income) | $(10,348) | $(4,539) | $(5,809) | | Net loss (gain) on marketable securities | $(6,226) | $2,812 | $(9,038) | | Dividend (income) | $(1,154) | $(1,460) | $306 | | Investment (income), net | $(17,728) | $(3,187) | $(14,541) | NOTE 6 — OTHER EXPENSE, NET Other Expense, Net (Three Months Ended Nov 30) | Component (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :----------------------- | -----------: | -----------: | -----: | | Pension non-service costs | $2,785 | $2,486 | $299 | | Other | $32 | $(176) | $208 | | Other expense, net | $2,817 | $2,310 | $507 | Other Expense, Net (Six Months Ended Nov 30) | Component (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :----------------------- | -----------: | -----------: | -----: | | Pension non-service costs | $5,566 | $5,002 | $564 | | Other | $(195) | $(276) | $81 | | Other expense, net | $5,371 | $4,726 | $645 | NOTE 7 — INCOME TAXES - The effective income tax rate for the three months ended November 30, 2023, was 25.5%, up from 24.9% in the prior year[52] - For the six months ended November 30, 2023, the effective income tax rate was 25.3%, up from 24.8% in the prior year[53] - As of November 30, 2023, the deferred tax liability for unremitted foreign earnings was $5.4 million, related to $290.3 million of foreign earnings not considered permanently reinvested[54] NOTE 8 — INVENTORIES Inventories, Net of Reserves (in thousands) | Category | Nov 30, 2023 | May 31, 2023 | | :------------------ | -----------: | -----------: | | Raw material and supplies | $405,098 | $451,504 | | Finished goods | $697,717 | $683,992 | | Total Inventory, Net of Reserves | $1,102,815 | $1,135,496 | NOTE 9 — STOCK REPURCHASE PROGRAM - The Company repurchased 131,858 shares for approximately $12.5 million during the three months ended November 30, 2023[59] - For the six months ended November 30, 2023, 254,283 shares were repurchased for approximately $25.0 million[59] - As of November 30, 2023, approximately $292.3 million remained available for repurchase under the stock repurchase program[59] NOTE 10 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) Accumulated Other Comprehensive (Loss) (November 30, 2023) | Component (in thousands) | Balance at Nov 30, 2023 | | :----------------------- | ----------------------: | | Foreign Currency Translation Adjustments | $(456,577) | | Pension And Other Postretirement Benefit Liability Adjustments | $(142,154) | | Unrealized Gain (Loss) On Derivatives | $11,405 | | Unrealized Gain (Loss) On Securities | $(2,364) | | Total | $(589,690) | NOTE 11 — EARNINGS PER SHARE - Approximately 360,000 and 280,000 shares for the three and six months ended November 30, 2023, respectively, were excluded from diluted EPS calculation as their effect would have been anti-dilutive[63] Earnings Per Share (Three Months Ended Nov 30) | Metric | Nov 30, 2023 | Nov 30, 2022 | Change | | :----- | -----------: | -----------: | -----: | | Basic EPS | $1.13 | $1.02 | $0.11 | | Diluted EPS | $1.13 | $1.02 | $0.11 | Earnings Per Share (Six Months Ended Nov 30) | Metric | Nov 30, 2023 | Nov 30, 2022 | Change | | :----- | -----------: | -----------: | -----: | | Basic EPS | $2.70 | $2.34 | $0.36 | | Diluted EPS | $2.69 | $2.33 | $0.36 | NOTE 12 — PENSION PLANS - Net periodic pension cost for fiscal 2024 is similar to fiscal 2023, and the Company expects to contribute approximately $0.7 million to U.S. plans and $5.7 million to non-U.S. plans[64] Net Periodic Pension & Postretirement Benefit Cost (Six Months Ended Nov 30) | Component (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :----------------------- | -----------: | -----------: | -----: | | U.S. Pension Benefits | $27,186 | $26,028 | $1,158 | | Non-U.S. Pension Benefits | $1,200 | $2,100 | $(900) | | U.S. Postretirement Benefits | $36 | $4 | $32 | | Non-U.S. Postretirement Benefits | $1,894 | $1,282 | $612 | | Total Net Periodic Benefit Cost | $30,316 | $29,414 | $902 | NOTE 13 — CONTINGENCIES AND ACCRUED LOSSES - Product liability accruals are based on actuarial calculations, and any additional losses beyond accrued amounts are expected to be immaterial[66] - The Company increased its accrual by $10.4 million due to an adverse legal ruling, resulting in SG&A expense of $4.4 million for the six months ended November 30, 2023[70] - The Consumer segment recovered $11.1 million from business interruption insurance during the first half of fiscal 2024, recorded as a gain reducing SG&A expenses[71] Accrued Warranty Balances (Six Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :-------------------- | -----------: | -----------: | -----: | | Beginning Balance | $11,776 | $10,905 | $871 | | Deductions (claims paid) | $(17,384) | $(14,504) | $(2,880) | | Provision charged to expense | $18,259 | $15,108 | $3,151 | | Ending Balance | $12,651 | $11,509 | $1,142 | NOTE 14 — REVENUE - Revenue is recognized when control of products or services is transferred to customers, with most revenue recognized at a point in time[73] Trade Accounts Receivable and Contract Balances (in thousands) | Metric (in thousands) | Nov 30, 2023 | May 31, 2023 | $ Change | % Change | | :-------------------- | -----------: | -----------: | -------: | -------: | | Trade accounts receivable, less allowances | $1,233,340 | $1,503,040 | $(269,700) | -17.9% | | Contract assets | $52,603 | $49,188 | $3,415 | 6.9% | | Contract liabilities - short-term | $(42,855) | $(42,396) | $(459) | 1.1% | | Net Contract Assets | $9,748 | $6,792 | $2,956 | | Allowance for Credit Losses Activity (Six Months Ended Nov 30) | Metric (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | | :-------------------- | -----------: | -----------: | -----: | | Beginning Balance | $49,482 | $46,669 | $2,813 | | Bad debt provision | $10,588 | $7,523 | $3,065 | | Uncollectible accounts written off, net of recoveries | $(2,815) | $(4,905) | $2,090 | | Translation adjustments | $193 | $(1,246) | $1,439 | | Ending Balance | $57,448 | $48,041 | $9,407 | NOTE 15 — SEGMENT INFORMATION - Effective June 1, 2023, certain Asia Pacific businesses were transferred from the CPG segment to the PCG segment, and historical results have been recast[88][105] - The Company operates four reportable segments: Construction Products Group (CPG), Performance Coatings Group (PCG), Consumer, and Specialty Products Group (SPG)[87] Net Sales by Segment (Three Months Ended Nov 30) | Segment (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :--------------------- | -----------: | -----------: | -----: | -------: | | CPG Segment | $661,750 | $612,443 | $49,307 | 8.1% | | PCG Segment | $374,856 | $356,822 | $18,034 | 5.1% | | Consumer Segment | $578,687 | $610,359 | $(31,672) | -5.2% | | SPG Segment | $176,982 | $212,084 | $(35,102) | -16.6% | | Consolidated | $1,792,275 | $1,791,708 | $567 | 0.0% | Income Before Income Taxes by Segment (Six Months Ended Nov 30) | Segment (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :--------------------- | -----------: | -----------: | -----: | -------: | | CPG Segment | $238,850 | $180,793 | $58,057 | 32.1% | | PCG Segment | $106,323 | $96,110 | $10,213 | 10.6% | | Consumer Segment | $229,895 | $210,562 | $19,333 | 9.2% | | SPG Segment | $26,542 | $55,316 | $(28,774) | -52.0% | | Corporate/Other | $(136,632) | $(142,525) | $5,893 | -4.1% | | Consolidated | $464,978 | $400,256 | $64,722 | 16.2% | NOTE 16 — SUBSEQUENT EVENT - On December 27, 2023, the Company prepaid the $250.0 million principal outstanding on its term loan[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance for the six months ended November 30, 2023, covering segment results, operations, and liquidity CRITICAL ACCOUNTING POLICIES AND ESTIMATES - The Company's financial statements rely on estimates for areas like doubtful accounts, inventory reserves, tax positions, and asset valuations[100] - Following a business realignment effective June 1, 2023, goodwill impairment tests for affected reporting units found no impairment[101][102] BUSINESS SEGMENT INFORMATION - Effective June 1, 2023, certain Asia Pacific businesses were transferred from the CPG segment to the PCG segment to enhance operating efficiencies[105] Net Sales by Segment (Three Months Ended Nov 30) | Segment (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :--------------------- | -----------: | -----------: | -----: | -------: | | CPG Segment | $661,750 | $612,443 | $49,307 | 8.1% | | PCG Segment | $374,856 | $356,822 | $18,034 | 5.1% | | Consumer Segment | $578,687 | $610,359 | $(31,672) | -5.2% | | SPG Segment | $176,982 | $212,084 | $(35,102) | -16.6% | | Consolidated | $1,792,275 | $1,791,708 | $567 | 0.0% | EBIT by Segment (Six Months Ended Nov 30) | Segment (in thousands) | Nov 30, 2023 | Nov 30, 2022 | Change | % Change | | :--------------------- | -----------: | -----------: | -----: | -------: | | CPG Segment | $242,801 | $185,369 | $57,432 | 31.0% | | PCG Segment | $103,774 | $95,584 | $8,190 | 8.6% | | Consumer Segment | $228,276 | $210,535 | $17,741 | 8.4% | | SPG Segment | $26,339 | $55,321 | $(28,982) | -52.4% | | Corporate/Other | $(91,774) | $(95,111) | $3,337 | -3.5% | | Consolidated | $509,416 | $451,698 | $57,720 | 12.8% | RESULTS OF OPERATIONS Three Months Ended November 30, 2023 - Consolidated gross profit margin increased by 320 basis points to 41.7% for the second quarter, driven by price increases and MAP 2025 initiatives[116] - Consolidated SG&A expenses increased by $32.7 million, rising to 29.2% of net sales from 27.3% in the prior year[118] - Interest expense increased by $2.4 million to $30.3 million, with the average interest rate rising to 4.81% from 3.90%[127][128] Net Sales Growth (Three Months Ended Nov 30, 2023 vs. 2022) | Segment | Total Growth | Organic Growth | Acquisition & Divestiture Impact | Foreign Currency Exchange Impact | | :------ | -----------: | -------------: | -------------------------------: | -------------------------------: | | CPG | 8.1% | 6.1% | 0.6% | 1.4% | | PCG | 5.1% | 5.6% | (0.5%) | 0.0% | | Consumer | (5.2%) | (5.1%) | 0.0% | (0.1%) | | SPG | (16.6%) | (14.6%) | (2.7%) | 0.7% | | Consolidated | 0.0% | (0.3%) | (0.2%) | 0.5% | Six Months Ended November 30, 2023 - Consolidated gross profit margin increased by 300 basis points to 41.5% for the first half, driven by price increases and MAP 2025 initiatives[139] - Consolidated SG&A expenses increased by $78.5 million, rising to 27.7% of net sales from 26.2% in the prior year[141] - Interest expense increased by $7.6 million to $62.2 million, with the average interest rate rising to 4.76% from 3.70%[151] Net Sales Growth (Six Months Ended Nov 30, 2023 vs. 2022) | Segment | Total Growth | Organic Growth | Acquisition & Divestiture Impact | Foreign Currency Exchange Impact | | :------ | -----------: | -------------: | -------------------------------: | -------------------------------: | | CPG | 9.5% | 7.9% | 0.6% | 1.0% | | PCG | 4.6% | 4.8% | 0.1% | (0.3%) | | Consumer | (1.7%) | (1.6%) | 0.0% | (0.1%) | | SPG | (13.7%) | (11.8%) | (2.5%) | 0.6% | | Consolidated | 2.2% | 1.9% | 0.0% | 0.3% | LIQUIDITY AND CAPITAL RESOURCES - Cash provided by operating activities significantly increased to $767.8 million in the first half of fiscal 2024, up from $190.9 million in the prior year[158][159][160] - Cash used for investing activities decreased by $52.4 million to $111.6 million, primarily due to lower acquisition and capital expenditures[162] - Financing activities used $610.3 million of cash, a significant change from $14.2 million provided in the prior year, mainly due to debt repayments[166] - As of November 30, 2023, available liquidity stood at $1.51 billion, and the Company was in compliance with all financial covenants[167][170] - On December 27, 2023, the Company prepaid the $250.0 million principal outstanding on its term loan[175] OTHER MATTERS - Management does not anticipate that the outcome of environmental obligations will materially affect the Company's results of operations or financial condition[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risks from raw material costs, interest rates, and foreign exchange rates, with no material changes since May 31, 2023 - The Company is exposed to market risk from changes in raw materials costs, interest rates, and foreign exchange rates[182] - There were no material potential changes in the Company's exposure to these market risks since May 31, 2023[182] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective as of November 30, 2023, with no material changes in internal control over financial reporting - As of November 30, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective[183] - No changes in internal control over financial reporting occurred during the fiscal quarter that materially affected or are reasonably likely to materially affect internal control[184] PART II. OTHER INFORMATION Item 1. Legal Proceedings Environmental remediation matters are not expected to materially affect the company's financial condition, with no proceedings exceeding the $1 million threshold - Some subsidiaries are involved in environmental remediation matters, but management believes these will not have a material adverse effect on the Company's financial condition[187] - As of the filing date, no environmental proceedings exceed the quantitative threshold of $1 million for disclosure[188] Item 1A. Risk Factors Readers should consider the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2023 - Readers are advised to carefully consider the risk factors disclosed in Item 1A of the Annual Report on Form 10-K for the fiscal year ended May 31, 2023[189] Item 2. Unregistered Sale of Equity Securities and Use of Proceeds The company repurchased 192,477 shares in Q2 fiscal 2024, with $292.3 million remaining available under its repurchase program - Approximately $292.3 million remained available for repurchase under the stock repurchase program as of November 30, 2023[191] - 60,619 shares of common stock were disposed of back to the Company during the quarter to satisfy tax obligations related to the vesting of restricted stock[190] Common Stock Repurchases (Second Quarter Fiscal 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------------- | -------------------------------: | ---------------------------: | | September 1, 2023 through September 30, 2023 | 133,360 | $94.86 | | October 1, 2023 through October 31, 2023 | 21,305 | $97.06 | | November 1, 2023 through November 30, 2023 | 37,812 | $96.20 | | Total - Second Quarter | 192,477 | $95.37 | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL documents - Exhibits include Rule 13a-14(a) and Section 1350 Certifications from the CEO and CFO, as well as various Inline XBRL documents[192]