UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2024,
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 1-14187
RPM International Inc.
(Exact name of Registrant as specified in its charter)
Delaware
02-0642224
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
2628 PEARL ROAD;
MEDINA, Ohio
(Address of principal executive offices)
44256
(Zip Code)
(330) 273-5090
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01
RPM
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☒.
As of March 27, 2024, the registrant had 128,762,983 shares of common stock, $0.01 par value per share, outstanding.
RPM INTERNATIONAL INC. AND SUBSIDIARIES*
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements:
3
Consolidated Balance Sheets
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Cash Flows
6
Consolidated Statements of Stockholders’ Equity
7
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
37
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
38
Item 1A.
Risk Factors
Unregistered Sale of Equity Securities and Use of Proceeds
Item 6.
Exhibits
39
Signatures
40
* As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise.
2
PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
February 29, 2024
May 31, 2023
Assets
Current Assets
Cash and cash equivalents
$
248,905
215,787
Trade accounts receivable (less allowances of $58,377 and $49,482, respectively)
1,072,032
1,503,040
Inventories
1,080,698
1,135,496
Prepaid expenses and other current assets
344,948
329,845
Total current assets
2,746,583
3,184,168
Property, Plant and Equipment, at Cost
2,459,045
2,332,916
Allowance for depreciation
(1,172,164
)
(1,093,440
Property, plant and equipment, net
1,286,881
1,239,476
Other Assets
Goodwill
1,309,744
1,293,588
Other intangible assets, net of amortization
523,677
554,991
Operating lease right-of-use assets
326,998
329,582
Deferred income taxes
17,517
15,470
Other
171,004
164,729
Total other assets
2,348,940
2,358,360
Total Assets
6,382,404
6,782,004
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable
577,861
680,938
Current portion of long-term debt
6,225
178,588
Accrued compensation and benefits
237,951
257,328
Accrued losses
30,897
26,470
Other accrued liabilities
349,015
347,477
Total current liabilities
1,201,949
1,490,801
Long-Term Liabilities
Long-term debt, less current maturities
2,187,140
2,505,221
Operating lease liabilities
278,009
285,524
Other long-term liabilities
268,940
267,111
98,153
90,347
Total long-term liabilities
2,832,242
3,148,203
Contingencies and Accrued Losses (Note 16)
Stockholders' Equity
Preferred stock, par value $0.01; authorized 50,000 shares; none issued
—
Common stock, par value $0.01; authorized 300,000 shares; issued 145,729 and outstanding 128,763 as of February 29, 2024; issued 145,124 and outstanding 128,766 as of May 31, 2023
1,288
Paid-in capital
1,144,282
1,124,825
Treasury stock, at cost
(844,345
(784,463
Accumulated other comprehensive (loss)
(593,729
(604,935
Retained earnings
2,639,310
2,404,125
Total RPM International Inc. stockholders' equity
2,346,806
2,140,840
Noncontrolling Interest
1,407
2,160
Total equity
2,348,213
2,143,000
Total Liabilities and Stockholders' Equity
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
Nine Months Ended
February 29,
February 28,
2024
2023
Net Sales
1,522,982
1,516,176
5,327,114
5,240,204
Cost of Sales
915,818
978,142
3,143,105
3,267,308
Gross Profit
607,164
538,034
2,184,009
1,972,896
Selling, General and Administrative Expenses
504,760
450,019
1,559,081
1,425,969
Restructuring Expense
6,359
4,154
14,096
6,780
Goodwill Impairment
-
36,745
Interest Expense
28,527
30,756
90,693
85,385
Investment (Income), Net
(18,665
(2,723
(36,393
(5,910
(Gain) on Sales of Assets and Business, Net
(25,743
(25,881
Other Expense, Net
2,602
2,339
7,973
7,065
Income Before Income Taxes
83,581
42,487
548,559
442,743
Provision for Income Taxes
22,103
15,248
139,953
114,683
Net Income
61,478
27,239
408,606
328,060
Less: Net Income Attributable to Noncontrolling Interests
279
265
820
729
Net Income Attributable to RPM International Inc. Stockholders
61,199
26,974
407,786
327,331
Average Number of Shares of Common Stock Outstanding:
Basic
127,781
127,495
127,803
127,564
Diluted
128,334
128,035
128,315
128,789
Earnings per Share of Common Stock Attributable to RPM International Inc. Stockholders:
0.48
0.21
3.18
2.55
0.47
3.16
2.54
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax
(7,591
(6,935
1,218
(76,719
Pension and other postretirement benefit liability adjustments, net of tax
3,356
3,606
9,966
11,427
Unrealized gain (loss) on securities, net of tax
197
107
34
(467
Unrealized (loss) on derivatives, net of tax
(555
(1,765
Total other comprehensive (loss) income
(4,038
(3,777
11,218
(67,524
Total Comprehensive Income
57,440
23,462
419,824
260,536
Less: Comprehensive Income Attributable to Noncontrolling Interests
280
263
832
689
Comprehensive Income Attributable to RPM International Inc. Stockholders
57,160
23,199
418,992
259,847
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
126,656
115,186
Goodwill impairment
2,190
8,506
Stock-based compensation expense
19,457
23,636
Net (gain) loss on marketable securities
(16,496
3,241
Net loss (gain) on sales of assets and businesses
2,576
1,244
684
Changes in assets and liabilities, net of effect from purchases and sales of businesses:
Decrease in receivables
430,512
202,742
Decrease (increase) in inventory
55,118
(142,069
Decrease in prepaid expenses and other current and long-term assets
30,349
4,807
(Decrease) in accounts payable
(83,960
(195,093
(Decrease) in accrued compensation and benefits
(20,049
(54,747
Increase (decrease) in accrued losses
4,366
(2,119
(Decrease) in other accrued liabilities
(19,424
(40,690
Cash Provided by Operating Activities
941,145
263,008
Cash Flows from Investing Activities:
Capital expenditures
(138,093
(179,725
Acquisition of businesses, net of cash acquired
(15,549
(47,542
Purchase of marketable securities
(30,591
(13,173
Proceeds from sales of marketable securities
22,130
9,596
Proceeds from sales of assets and businesses, net
5,749
53,318
2,485
2,127
Cash (Used for) Investing Activities
(153,869
(175,399
Cash Flows from Financing Activities:
Additions to long-term and short-term debt
489,881
Reductions of long-term and short-term debt
(516,086
(354,135
Cash dividends
(172,601
(159,841
Repurchases of common stock
(37,488
(37,500
Shares of common stock returned for taxes
(21,949
(15,252
Payments of acquisition-related contingent consideration
(1,082
(3,765
(1,586
(2,689
Cash (Used for) Financing Activities
(750,792
(83,301
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(3,366
(12,110
Net Change in Cash and Cash Equivalents
33,118
(7,802
Cash and Cash Equivalents at Beginning of Period
201,672
Cash and Cash Equivalents at End of Period
193,870
Supplemental Disclosures of Cash Flows Information:
Cash paid during the period for:
Interest
90,770
83,248
Income Taxes, net of refunds
172,008
133,753
Supplemental Disclosures of Noncash Investing Activities:
Capital expenditures accrued within accounts payable at quarter-end
12,621
12,147
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Accumulated
Number
Total RPM
of
Par/Stated
Paid-In
Treasury
Comprehensive
Retained
International
Noncontrolling
Total
Shares
Value
Capital
Stock
(Loss) Income
Earnings
Inc. Equity
Interests
Equity
Balance at June 1, 2023
128,766
201,082
231
201,313
Other comprehensive income
11,746
14
11,760
Dividends declared and paid ($0.42 per share)
(54,065
Other noncontrolling interest activity
(712
Share repurchases under repurchase program
(122
(1
1
(12,500
Stock compensation expense and other deferred compensation, shares granted less shares returned for taxes
318
9,115
(15,078
(5,960
Balance at August 31, 2023
128,962
1,290
1,133,941
(812,041
(593,189
2,551,142
2,281,143
1,693
2,282,836
145,505
310
145,815
Other comprehensive income (loss)
3,499
(3
3,496
Dividends declared and paid ($0.46 per share)
(59,260
(132
42
8,028
(5,861
2,167
Balance at November 30, 2023
128,872
1,289
1,141,970
(830,402
(589,690
2,637,387
2,360,554
2,000
2,362,554
(4,039
Dividends paid ($0.46 per share)
(59,276
(873
(115
(12,488
2,311
(1,455
856
Balance at February 29, 2024
128,763
Balance at June 1, 2022
129,199
1,292
1,096,147
(717,019
(537,337
2,139,346
1,982,429
1,399
1,983,828
169,013
266
169,279
Other comprehensive (loss)
(75,568
(62
(75,630
Dividends declared and paid ($0.40 per share)
(51,420
(60
(303
(25,000
203
9,061
(12,458
(3,395
Balance at August 31, 2022
129,099
1,291
1,105,211
(754,477
(612,905
2,256,939
1,996,059
1,543
1,997,602
131,344
198
131,542
11,859
24
11,883
(54,220
(141
(9
7,814
(2,395
5,419
Balance at November 30, 2022
129,090
1,113,025
(756,872
(601,046
2,334,063
2,090,461
1,624
2,092,085
(3,775
(2
Dividends paid ($0.42 per share)
(54,201
(143
(14
6,759
(561
6,198
Balance at February 28, 2023
128,933
1,119,786
(769,933
(604,821
2,306,836
2,053,157
1,825
2,054,982
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”) for interim financial information and the instructions to Form 10-Q. In our opinion, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three- and nine-month periods ended February 29, 2024, and February 28, 2023. For further information, refer to the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended May 31, 2023.
Our financial statements include all of our majority-owned subsidiaries. We account for our investments in less-than-majority-owned joint ventures, for which we have the ability to exercise significant influence, under the equity method. Effects of transactions between related companies are eliminated in consolidation.
Noncontrolling interests are presented in our Consolidated Financial Statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our Consolidated Financial Statements. Additionally, our Consolidated Financial Statements include 100% of a controlled subsidiary’s earnings, rather than only our share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.
Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprising the three-month periods ending August 31, November 30, and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).
NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS
New Pronouncements Adopted
We have not adopted any Accounting Standard Updates (“ASU”) during fiscal 2024 that have a material impact on our Consolidated Financial Statements.
New Pronouncements Issued
In December 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," which requires a public business entity to disclose specific categories in its annual effective tax rate reconciliation and disaggregated information about significant reconciling items by jurisdiction and by nature. The ASU also requires entities to disclose their income tax payments (net of refunds) to international, federal, and state and local jurisdictions. The guidance makes several other changes to income tax disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively. Early adoption is permitted. We are currently evaluating this ASU to determine its impact on our disclosures.
In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which expands disclosures about a public business entity's reportable segments and provides for more detailed information about a reportable segment's expenses. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. Early adoption is permitted. We are currently evaluating this ASU to determine its impact on our disclosures.
NOTE 3 — RESTRUCTURING
We record restructuring charges associated with management-approved restructuring plans to either reorganize one or more of our business segments, or to remove duplicative headcount and infrastructure associated with our businesses. Restructuring charges can include severance costs to eliminate a specified number of associates, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other costs. We record the short-term portion of our restructuring liability in other accrued liabilities and the long-term portion, if any, in other long-term liabilities in our Consolidated Balance Sheets.
During 2018, we approved and implemented the initial phases of a multi-year restructuring plan, which is referred to as the 2020 Margin Acceleration Plan (“MAP to Growth”). We incurred $0.7 million and $3.3 million of restructuring costs associated with this plan for the three and nine months ended February 28, 2023, respectively. We did not incur any restructuring costs for the three and nine months ended February 29, 2024, and we do not expect to incur any further costs associated with this plan.
In August 2022, we approved and announced our Margin Achievement Plan 2025 (“MAP 2025”), which is a multi-year restructuring plan to build on the achievements of MAP to Growth and designed to improve margins by streamlining business processes, reducing working capital, implementing commercial initiatives to drive improved mix and salesforce effectiveness and improving operating efficiency. Most activities under MAP 2025 are anticipated to be completed by the end of fiscal 2025; however, we expect some costs to extend beyond this date.
The current total expected costs associated with this plan are outlined below and increased approximately $8.4 million compared to our previous estimate, attributable to increases in expected severance and benefit charges of $4.9 million and expected facility closure and other related costs of $3.5 million. Throughout our MAP 2025 initiative, we will continue to assess and find areas of improvement and cost savings. As such, the final implementation of the aforementioned phases and total expected costs are subject to change.
Following is a summary of the charges recorded in connection with MAP 2025 by reportable segment for the three- and nine-month periods ending February 29, 2024, as well as the total expected costs related to projects identified to date:
Three MonthsEnded
Nine MonthsEnded
CumulativeCosts
TotalExpected
to Date
Costs
Construction Products Group ("CPG") Segment:
Severance and benefit costs
4,034
4,836
10,928
16,698
Facility closure and other related costs
163
16,435
Total Charges
4,197
4,999
11,091
33,133
Performance Coatings Group ("PCG") Segment:
579
1,623
2,771
5,339
125
1,557
Other restructuring costs (a)
4,555
7,092
581
6,303
9,988
13,988
Consumer Segment:
817
852
1,359
1,598
18
32
653
693
835
884
2,012
2,291
Specialty Products Group ("SPG") Segment:
639
1,774
2,579
3,562
136
6,688
746
1,910
2,715
10,250
Corporate/Other Segment:
Severance and benefit (credits)
(50
Consolidated:
6,069
9,085
17,587
27,147
290
456
1,077
25,373
Other restructuring costs
25,756
59,612
10
Following is a summary of the charges recorded in connection with MAP 2025 by reportable segment for the three- and nine-month periods ending February 28, 2023:
February 28, 2023
CPG Segment:
324
PCG Segment:
573
Other restructuring costs (b)
2,537
3,110
13
910
3,447
A summary of the activity in the restructuring reserves related to MAP 2025 is as follows:
(in thousands)
Severance andBenefits Costs
FacilityClosure andOther RelatedCosts
Other AssetWrite-Offs
2,805
Additions charged to expense
Cash payments charged against reserve
(1,863
(288
(2,151
Non-cash charges and other adjustments
7,010
7,012
2,717
(4,808
(454
(5,262
16
(4,555
(4,539
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by reportable segment, for the nine months ended February 29, 2024 and February 28, 2023, are as follows:
CPG
PCG
Consumer
SPG
Segment
Balance as of May 31, 2023
450,555
161,732
531,227
150,074
Acquisitions
11,993
Transfers
(11,414
11,414
Translation adjustments & other
2,244
491
1,105
323
4,163
Balance as of February 29, 2024
453,378
173,637
532,332
150,397
11
Balance as of May 31, 2022
453,651
201,815
515,597
166,805
1,337,868
7,306
907
16,952
281
25,446
Divestitures
(15,723
Impairments
(36,745
(14,452
(3,737
(3,364
(1,222
(22,775
Balance as of February 28, 2023
446,505
162,240
529,185
150,141
1,288,071
Total accumulated goodwill impairment losses were $193.0 million at February 29, 2024 and February 28, 2023. Of the accumulated balance, $141.4 million is included in our SPG segment, $14.9 million is included in our CPG segment, and $36.7 million is included in our PCG segment. There were no impairment losses recorded during fiscal 2024.
Changes in the Composition of our Segments in the First Quarter of Fiscal 2024
Effective June 1, 2023, certain Asia Pacific businesses and management structure, formerly of our CPG segment, were transferred to our PCG segment to create operating efficiencies and a more unified go-to-market strategy in Asia Pacific. As a result of this business realignment, $11.4 million of goodwill was reassigned from the CPG segment to the PCG segment using a relative fair value allocation approach.
USL Restructuring in the First Quarter of Fiscal 2024
Effective June 1, 2023, certain businesses of our USL reporting unit were transferred to our Fibergrate, Carboline and Stonhard reporting units within our PCG segment. As a result of this change, USL was no longer designated as a separate reporting unit and any remaining goodwill was transferred to the reporting units noted above. Additionally, during the three-month period ended August 31, 2023, we recognized a loss on sale of $4.5 million in connection with the divestiture of Universal Sealants' (USL) Bridgecare services division, which is a contracting business focused on the installation of joints and waterproofing in the U.K. The loss on this sale is included in selling, general and administrative ("SG&A") expenses in our Consolidated Statements of Income and net loss (gain) on sales of assets and businesses in our Consolidated Statements of Cash Flows.
Given these USL restructuring actions, we performed an interim impairment assessment of a remaining USL indefinite-lived tradename. Calculating the fair value of the tradename required the use of various estimates and assumptions. We estimated the fair value by applying a relief-from-royalty calculation, which included discounted future cash flows related to projected revenues impacted by this decision. In applying this methodology, we relied on a number of factors, including actual and forecasted revenues and market data. As the carrying amount of the tradename exceeded its fair value, an impairment loss of $3.3 million was recorded for the three months ended August 31, 2023. This impairment loss was classified as restructuring expense within our PCG segment.
USL Impairment Charges Recorded in the Third Quarter of Fiscal 2023
For the three and nine months ended February 28, 2023, we recognized $36.7 million of goodwill impairment losses, which was recorded by our PCG segment.
As part of our MAP 2025 operational improvement initiative and given the challenged macroeconomic environment, we evaluated certain business restructuring actions, specifically our go to market strategy for operating in Europe. During the third quarter ended February 28, 2023, due to declining profitability and regulatory headwinds, management decided to restructure the USL reporting unit within our PCG segment and correspondingly explored strategic alternatives for our USL infrastructure services business within the U.K., which represented approximately 30% of annual revenues of the reporting unit.
Due to this decision, we determined that an interim goodwill impairment assessment was required, as well as an impairment assessment for our other long-lived assets. Accordingly, for the three and nine months ended February 28, 2023, we recorded an impairment loss totaling $36.7 million for the impairment of goodwill and $2.5 million for the impairment of an indefinite-lived tradename in our USL reporting unit. We did not record any impairments for our definite-lived long-lived assets as a result of this assessment.
Our goodwill impairment assessment included estimating the fair value of our USL reporting unit and comparing it with its carrying amount at February 28, 2023. Since the carrying amount of the USL reporting unit exceeded its fair value, we recognized an impairment loss. We estimated the fair value of the USL reporting unit using both the income and the market approaches. For the income approach, we estimated the fair value of our USL reporting unit by applying a discounted future cash flow calculation to USL’s projected earnings before interest, taxes, depreciation and amortization (“EBITDA”). In applying this methodology, we relied on a number of factors, including actual and forecasted operating results, future operating margins, and market data. The discounted cash flow used in the goodwill impairment test for USL assumed discrete period revenue growth through fiscal 2027 for the ongoing USL businesses in the U.K. and North America as well as probability-weighted cash flows that were dependent on the methodology utilized in determining strategic alternatives for the U.K. infrastructure services business. In applying the market approach, we used market multiples derived from a set of companies similar to USL.
12
After recording the goodwill impairment charge of $36.7 million, $1.1 million of goodwill remained on the USL balance sheets as of February 28, 2023.
Calculating the fair value of USL’s indefinite-lived tradenames required the use of various estimates and assumptions. We estimated the fair value of USL’s indefinite-lived tradenames by applying a relief-from-royalty calculation, which included discounted future cash flows related to projected revenues for the USL tradenames impacted by this decision. In applying this methodology, we relied on a number of factors, including actual and forecasted revenues and market data. As the carrying amount of one of the tradenames exceeded its fair value, an impairment loss of $2.5 million was recorded for the three and nine months ended February 28, 2023. This impairment loss was classified in restructuring expense within our PCG segment.
The impairment assessment for our long-lived assets, such as property and equipment and purchased intangibles subject to amortization, involved estimating the fair value of USL’s long-lived assets and comparing it with its carrying amount. Measuring a potential impairment of long-lived assets requires the use of various estimates and assumptions, including the determination of which cash flows are directly related to the assets being evaluated, the respective useful lives over which those cash flows will occur and potential residual values, if any. The results of our testing indicated that the carrying values of these assets were recoverable, as such we did not record an impairment of our long-lived assets for the three and nine months ended February 28, 2023.
NOTE 5 — FAIR VALUE MEASUREMENTS
Financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.
An allowance for credit losses is established for trade accounts receivable using assessments of current creditworthiness of customers, historical collection experience, the aging of receivables and other currently available evidence. Trade accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowance for doubtful collection of accounts are included in SG&A expense.
The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:
Level 1 Inputs — Quoted prices for identical instruments in active markets.
Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs — Instruments with primarily unobservable value drivers.
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)
SignificantOtherObservableInputs (Level 2)
SignificantUnobservableInputs (Level 3)
Fair Value atFebruary 29, 2024
Available-for-sale debt securities:
U.S. Treasury and other government
27,231
Corporate bonds
140
Total available-for-sale debt securities
27,371
Marketable equity securities:
Stocks – foreign
1,319
Stocks – domestic
10,794
Mutual funds – foreign
45,225
Mutual funds – domestic
88,215
Total marketable equity securities
12,113
133,440
145,553
Contingent consideration
(2,281
160,811
170,643
Fair Value atMay 31,2023
27,021
141
27,162
786
5,009
40,074
75,284
5,795
115,358
121,153
(2,686
142,520
145,629
Our investments in available-for-sale debt securities and marketable equity securities are valued using a market approach. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors, including the type of instrument, whether the instrument is actively traded and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with recent acquisitions that is contingent upon the achievement of certain performance milestones. We estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled which is considered to be a Level 3 input. During the first nine months of fiscal 2024, we paid approximately $1.1 million to satisfy contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current year. During the first nine months of fiscal 2023, we recorded an increase in the accrual for approximately $2.1 million related to acquisitions and paid approximately $10.4 million to satisfy contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during fiscal 2023. In the Consolidated Statements of Cash Flows, payments of acquisition-related contingent consideration for the amount recognized at fair value as of the acquisition date are reported in cash flows from financing activities, while payments of contingent consideration in excess of fair value as of the acquisition date, are reported in cash flows from operating activities within other accrued liabilities.
The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable and short-term debt approximates fair value because of the short-term maturity of these financial instruments. At February 29, 2024 and May 31, 2023, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our cash and cash equivalents and long-term debt as of February 29, 2024 and May 31, 2023 are as follows:
At February 29, 2024
Carrying Value
Fair Value
Long-term debt, including current portion
2,193,365
2,046,904
At May 31, 2023
2,683,809
2,490,863
NOTE 6 — INVESTMENT (INCOME), NET
Investment (income), net, consists of the following components:
Interest (income)
(5,914
(2,266
(16,262
(6,805
(10,270
429
Dividend (income)
(2,481
(886
(3,635
(2,346
Investment (income), net
Net (Gain) Loss on Marketable Securities
Unrealized (gains) losses on marketable equity securities
(12,015
946
(18,439
3,704
Realized losses (gains) on marketable equity securities
1,742
(525
1,874
(435
Realized losses (gains) on available-for-sale debt securities
69
(28
NOTE 7 — (GAIN) ON SALES OF ASSETS AND BUSINESS, NET
During the three and nine months ended February 28, 2023, we recognized net gains of $25.7 million and $25.9 million, respectively, on the sale of certain real property assets and a business divestiture. On January 20, 2023, we completed the divestiture of our Guardian Protection Products, Inc ("Guardian") business for proceeds of approximately $49.2 million, net of cash disposed. In connection with the divestiture, we recognized a gain of $24.7 million for the quarter ended February 28, 2023, which is included in (gain) on sales of assets and business, net in our Consolidated Statements of Income. As of November 30, 2022, the criteria necessary to be classified as held for sale on the accompanying Consolidated Balance Sheets had not been met.
Guardian, headquartered in Hickory, North Carolina, was a reporting unit included in our SPG segment and is a seller of furniture protection plans and protection products for fabric, leather, and wood applications. The sale of Guardian did not represent a strategic shift that had a major effect on our operations and therefore was not presented as discontinued operations in our fiscal 2023 financial results.
NOTE 8 — OTHER EXPENSE, NET
Other expense, net, consists of the following components:
Pension non-service costs
2,793
2,648
8,359
7,650
(191
(309
(386
(585
Other expense, net
NOTE 9 — INCOME TAXES
The effective income tax rate of 26.4% for the three months ended February 29, 2024 compares to the effective income tax rate of 35.9% for the three months ended February 28, 2023. The effective income tax rates for the three-month periods ended February 29, 2024 and February 28, 2023 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. Further, the effective income tax rate for the three-month period ended February 29, 2024, reflects incremental tax expense related to increases to our net deferred income tax liability for unremitted earnings, unfavorable changes in valuation allowances for certain foreign tax attribute carryforwards, and an adjustment for the tax related to the prior year sale of the furniture warranty business. Additionally, the effective tax rate for the three-month period ended February 28, 2023, reflects the unfavorable impact of a noncash impairment charge for goodwill that was nondeductible for tax purposes.
15
The effective income tax rate of 25.5% for the nine months ended February 29, 2024 compares to the effective income tax rate of 25.9% for the nine months ended February 28, 2023. The effective income tax rates for the nine-month periods ended February 29, 2024 and February 28, 2023 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 effective tax rate for the nine-month period ended February 29, 2024 reflects incremental tax expense related to increases to our net deferred income tax liability for unremitted earnings, unfavorable changes in valuation allowances for certain foreign attribute tax carryforwards, and an adjustment for the tax related to the prior year sale of the furniture warranty business. Additionally, the effective tax rate for the nine-month period ended February 28, 2023 reflects the unfavorable impact of a noncash impairment charge for goodwill that was nondeductible for tax purposes.
Our deferred tax liability for unremitted foreign earnings was $7.3 million as of February 29, 2024, which represents our estimate of the net tax cost associated with the remittance of $298.0 million of foreign earnings that are not considered to be permanently reinvested. We have not provided for foreign withholding or income taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of February 29, 2024. Accordingly, no provision has been made for foreign withholding or income taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were remitted to us as dividends.
NOTE 10 — INVENTORIES
Inventories, net of reserves, were composed of the following major classes:
Raw material and supplies
390,708
451,504
Finished goods
689,990
683,992
Total Inventory, Net of Reserves
NOTE 11 — BORROWINGS
Term Loan Facility Credit Agreement
On December 27, 2023, we prepaid the $250.0 million of principal outstanding on our term loan which had a maturity date of August 1, 2025.
NOTE 12 — STOCK REPURCHASE PROGRAM
On January 8, 2008, we announced our authorization of a stock repurchase program under which we may repurchase shares of RPM International Inc. common stock at management’s discretion. As announced on November 28, 2018, our goal was to return $1.0 billion in capital to stockholders by May 31, 2021 through share repurchases and the retirement of our convertible note during fiscal 2019. On April 16, 2019, after taking into account share repurchases under our existing stock repurchase program to date, our Board of Directors authorized the repurchase of the remaining $600.0 million in value of RPM International Inc. common stock by May 31, 2021.
As previously announced, given macroeconomic uncertainty resulting from the Covid pandemic, we had suspended stock repurchases under the program, but in January 2021, our Board of Directors authorized the resumption of our stock repurchase program. At the time of resuming the program, $469.7 million of shares of common stock remained available for repurchase. The Board of Directors also extended the stock repurchase program beyond its original May 31, 2021 expiration date until such time that the remaining $469.7 million of capital has been returned to our stockholders.
As a result, we may repurchase shares from time to time in the open market or in private transactions at various times and in amounts and for prices that our management deems appropriate, subject to insider trading rules and other securities law restrictions. The timing of our purchases will depend upon prevailing market conditions, alternative uses of capital and other factors. We may limit or terminate the repurchase program at any time.
During the three months ended February 29, 2024, we repurchased 114,588 shares of our common stock at a cost of approximately $12.5 million, or an average of $108.98 per share. During the three months ended February 28, 2023, we repurchased 143,096 shares of our common stock at a cost of $12.5 million, or an average of $87.35 per share. During the nine months ended February 29, 2024, we repurchased 368,871 shares of our common stock at a cost of approximately $37.5 million, or an average of $101.63 per share. During the nine months ended February 28, 2023, we repurchased 446,175 shares of our common stock at a cost of approximately $37.5 million, or an average of $84.05 per share. The maximum dollar amount that may yet be repurchased under our stock repurchase program was approximately $279.8 million at February 29, 2024.
NOTE 13 — ACCUMULATED OTHER COMPREHENSIVE (LOSS)
Accumulated other comprehensive (loss) consists of the following components:
Pension And
Foreign
Postretirement
Unrealized
Currency
Benefit
Gain
Gain (Loss)
Three Months Ended February 29, 2024
Translation
Liability
(Loss) On
On
Adjustments
Derivatives
Securities
(456,577
(142,154
11,405
(2,364
Current period comprehensive (loss) income
(6,720
211
(6,509
Income taxes associated with current period comprehensive (loss) income
(872
(8
(880
Amounts reclassified from accumulated other comprehensive income (loss)
4,391
(7
4,384
Income taxes reclassified into earnings
(1,035
(1,034
(464,169
(138,798
(2,167
Three Months Ended February 28, 2023
(465,218
(145,562
11,960
(2,226
(7,006
(55
(7,061
72
270
4,738
(554
(37
4,147
(1,132
(1,131
(472,152
(141,956
11,406
Nine Months Ended February 29, 2024
(465,375
(148,764
(2,201
2,397
289
2,686
(1,191
(70
(1,261
13,013
(197
12,816
(3,047
(3,035
Nine Months Ended February 28, 2023
(395,473
(153,383
13,171
(1,652
(78,942
(863
(79,805
2,263
409
2,672
15,064
13,290
(3,637
(4
(3,641
17
NOTE 14 — EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share ("EPS") for the three- and nine-month periods ended February 29, 2024 and February 28, 2023.
Numerator for earnings per share:
Net income attributable to RPM International Inc. stockholders
Less: Allocation of earnings and dividends to participating securities
(279
(274
(1,840
(1,593
Net income available to common shareholders - basic
60,920
26,700
405,946
325,738
Reverse: Allocation of earnings and dividends to participating securities
1,593
Add: Undistributed earnings reallocated to unvested shareholders
Net income available to common shareholders - diluted
405,951
Denominator for basic and diluted earnings per share:
Basic weighted average common shares
Average diluted options and awards
553
540
512
1,225
Total shares for diluted earnings per share (1)
Earnings Per Share of Common Stock Attributable to
RPM International Inc. Stockholders:
Basic Earnings Per Share of Common Stock
Method used to calculate basic earnings per share
Two-class
Diluted Earnings Per Share of Common Stock
Method used to calculate diluted earnings per share
(1)For the three and nine months ended February 29, 2024, approximately 300,000 and 250,000 shares of stock granted under stock-based compensation plans were excluded from the calculation of diluted EPS, as the effect would have been anti-dilutive. For the three and nine months ended February 28, 2023, approximately 680,000 shares of stock granted under stock-based compensation plans were excluded from the calculation of diluted EPS, as the effect would have been anti-dilutive.
NOTE 15 — PENSION PLANS
We offer defined benefit pension plans, defined contribution pension plans, and various postretirement benefit plans. The following tables provide the retirement-related benefit plans’ impact on income before income taxes for the three- and nine-month periods ended February 29, 2024 and February 28, 2023:
U.S. Plans
Non-U.S. Plans
Pension Benefits
Service cost
10,913
10,890
887
951
Interest cost
8,992
7,173
1,935
1,728
Expected return on plan assets
(10,518
(9,536
(2,400
(1,727
Amortization of:
Prior service cost (credit)
(31
(27
Net actuarial losses recognized
4,205
4,487
209
Net Periodic Benefit Cost
13,593
13,014
600
1,050
Postretirement Benefits
569
287
22
21
390
368
Prior service (credit)
(30
Net actuarial (gains) losses recognized
(12
947
641
32,739
32,670
2,661
2,853
26,976
21,519
5,805
5,184
(31,554
(28,608
(7,200
(5,181
(93
(81
12,615
13,461
627
375
40,779
39,042
1,800
3,150
1,707
861
66
63
1,170
1,104
(90
33
(36
(42
54
2,841
1,923
19
Net periodic pension cost for fiscal 2024 is similar to our fiscal 2023 cost due to higher interest costs, which are partially offset by an increase in expected return on plan assets. We expect that pension expense will fluctuate on a year-to-year basis, depending upon the investment performance of plan assets and potential changes in interest rates, and these fluctuations may have a material impact on our consolidated financial results in the future. We previously disclosed in our financial statements for the fiscal year ended May 31, 2023 that we are required and expect to contribute approximately $0.7 million to our retirement plans in the U.S. and approximately $5.7 million to plans outside the U.S. during the current fiscal year and that we will evaluate whether to make additional contributions throughout fiscal 2024. As a result of this evaluation, we contributed $41.2 million to the main pension plan in the U.S. during the current quarter, which will increase our total expected U.S. contributions to $41.9 million during fiscal year 2024.
NOTE 16 — CONTINGENCIES AND ACCRUED LOSSES
Product Liability Matters
We provide, through our wholly-owned insurance subsidiaries, certain insurance coverage, primarily product liability coverage, to our other subsidiaries. Excess coverage is provided by third-party insurers. Our product liability accruals provide for these potential losses as well as other uninsured claims. Product liability accruals are established based upon actuarial calculations of potential liability using industry experience, actual historical experience and actuarial assumptions developed for similar types of product liability claims, including development factors and lag times. To the extent there is a reasonable possibility that potential losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterial to our results of operations, liquidity and consolidated financial position.
Warranty Matters
We also offer warranties on many of our products, as well as long-term warranty programs at certain of our businesses, and have established product warranty liabilities. We review these liabilities for adequacy on a quarterly basis and adjust them as necessary. The primary factors that could affect these liabilities may include changes in performance rates as well as costs of replacement. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted, as required, to reflect actual experience. It is probable that we will incur future losses related to warranty claims we have received but that have not been fully investigated and related to claims not yet received. While our warranty liabilities represent our best estimates at February 29, 2024, we can provide no assurances that we will not experience material claims in the future or that we will not incur significant costs to resolve such claims beyond the amounts accrued or beyond what we may recover from our suppliers. Based upon the nature of the expense, product warranty expense is recorded as a component of cost of sales or within SG&A.
Also, due to the nature of our businesses, the amount of claims paid can fluctuate from one period to the next. While our warranty liabilities represent our best estimates of our expected losses at any given time, from time-to-time we may revise our estimates based on our experience relating to factors such as weather conditions, specific circumstances surrounding product installations and other factors.
The following table includes the changes in our accrued warranty balances:
Beginning Balance
12,651
11,509
11,776
10,905
Deductions (1)
(7,479
(5,620
(24,863
(20,124
Provision charged to expense
7,297
5,558
25,556
20,666
Ending Balance
12,469
11,447
(1)Primarily claims paid during the period.
Environmental Matters
Like other companies participating in similar lines of business, some of our subsidiaries are involved in environmental remediation matters. It is our policy to accrue remediation costs when the liability is probable and the costs are reasonably estimable, which generally is not later than at completion of a feasibility study or when we have committed to an appropriate plan of action. We also take into consideration the estimated period of time over which payments may be required. The liabilities are reviewed periodically and, as investigation and remediation activities continue, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not offset by possible recoveries from insurance carriers or other third parties but do reflect anticipated allocations among potentially responsible parties at federal superfund sites or similar state-managed sites, third-party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.
20
Other Contingencies
One of our former subsidiaries in our SPG reportable segment has been the subject of a proceeding in which one of its former distributors brought suit against the subsidiary for breach of contract. Following a June 2017 trial, a jury determined that the distributor was not entitled to any damages on the distributor’s claims. On appeal, the Ninth Circuit Court of Appeals ordered a new trial with respect to certain issues. On December 10, 2021, a new jury awarded $6.0 million in damages to the distributor. Per the parties’ contracts, the distributor was also entitled to seek recovery of some portion of its attorneys’ fees and costs. On July 3, 2023, the Ninth Circuit Court of Appeals issued its decision rejecting the distributor's arguments and denying all appellate relief to the distributor, which also rendered our cross-appeal moot. On November 15, 2023, the U.S. District Court for the Eastern District of California issued an order awarding the distributor approximately $4.4 million in connection with attorney's fees and costs the distributor allegedly incurred throughout the duration of this legal action. As a result of this order, we increased our accrual to $10.4 million as of November 30, 2023. On December 27, 2023, we paid the $6.0 million judgment, and then decreased our accrual to approximately $4.4 million. However, because we strongly disagree with the District Court's order awarding attorneys’ fees and costs to the distributor, we timely filed an appeal of this order with the Ninth Circuit Court of Appeals, which remains pending. We did not incur SG&A expense for the three-month period ending February 29, 2024, related to this matter. We incurred SG&A expense of $4.4 million for the nine-month period ending February 29, 2024, related to this matter. This contingency remains a liability of the Company.
Gain on Business Interruption Insurance
In April 2021, there was a significant plant explosion at a key alkyd resin supplier which caused severe supply chain disruptions. As a result of this disruption, the Consumer segment incurred incremental costs and lost sales during fiscal 2021 and 2022. A claim for these losses was submitted under our business interruption insurance policy. The Consumer segment recovered $10.3 million from insurance during the first quarter of fiscal 2024 and $0.8 million during the second quarter of fiscal 2024. These proceeds were recorded as a gain of $11.1 million for the nine-month period ending February 29, 2024. No such proceeds were received during the three-month period ending February 29, 2024. The Consumer segment also recovered $20.0 million of insurance proceeds during the third quarter of fiscal 2023, which were recorded as a gain for the three- and nine-month periods ending February 28, 2023. The insurance gains are recorded as a reduction to SG&A expenses in our Consolidated Statements of Income, and the proceeds are included within cash flows from operating activities in our Consolidated Statement of Cash Flows.
NOTE 17 — REVENUE
We operate a portfolio of businesses that manufacture and sell a variety of product lines that include specialty paints, protective coatings, roofing systems, sealants and adhesives, among other things. We disaggregate revenues from the sales of our products and services based upon geographical location by each of our reportable segments, which are aligned by similar economic factors, trends and customers, which best depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. See Note 18, “Segment Information,” to the Consolidated Financial Statements for further details regarding our disaggregated revenues, as well as a description of each of the unique revenue streams related to each of our four reportable segments.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The majority of our revenue is recognized at a point in time. However, we also record revenues generated under construction contracts, mainly in connection with the installation of specialized roofing and flooring systems and related services. For certain polymer flooring installation projects, we account for our revenue using the output method, as we consider square footage of completed flooring to be the best measure of progress toward the complete satisfaction of the performance obligation. In contrast, for certain of our roofing installation projects, we account for our revenue using the input method, as that method is the best measure of performance as it considers costs incurred in relation to total expected project costs, which essentially represents the transfer of control for roofing systems to the customer. In general, for our construction contracts, we record contract revenues and related costs as our contracts progress on an over-time model.
We have elected to apply the practical expedient to recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Payment terms and conditions vary by contract type, although our customers’ payment terms generally include a requirement to pay within 30 to 60 days of fulfilling our performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. We have elected to apply the practical expedient to treat all shipping and handling costs as fulfillment costs, as a significant portion of these costs are incurred prior to control transfer.
Significant Judgments
Our contracts with customers may include promises to transfer multiple products and/or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For example, judgment is required to determine whether products sold in connection with the sale of installation services are considered distinct and accounted for separately, or not distinct and accounted for together with installation services and recognized over time.
We provide customer rebate programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration and recognized as a reduction of net sales. Up-front consideration provided to customers is capitalized as a component of other assets and amortized over the estimated life of the contractual arrangement. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. In general, this determination is made based upon known customer program and incentive offerings at the time of sale and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. Certain of our contracts include contingent consideration that is receivable only upon the final inspection and acceptance of a project. We include estimates of such variable consideration in our transaction price. Based on historical experience, we consider the probability-based expected value method appropriate to estimate the amount of such variable consideration.
Our products are generally sold with a right of return, and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. We record a right of return liability to accrue for expected customer returns. Historical actual returns are used to estimate future returns as a percentage of current sales. Obligations for returns and refunds were not material individually or in the aggregate.
We offer assurance type warranties on our products as well as separately sold warranty contracts. Revenue related to warranty contracts that are sold separately is recognized over the life of the warranty term. Warranty liabilities for our assurance type warranties are discussed further in Note 16, “Contingencies and Accrued Losses,” to the Consolidated Financial Statements.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing customers. Our contract assets are recorded for products and services that have been provided to our customer but have not yet been billed and are included in prepaid expenses and other current assets in our Consolidated Balance Sheets. Our short-term contract liabilities consist of advance payments, or deferred revenue, and are included in other accrued liabilities in our Consolidated Balance Sheets.
Trade accounts receivable, net of allowances, and net contract assets consisted of the following:
(In thousands, except percentages)
$ Change
% Change
Trade accounts receivable, less allowances
(431,008
(28.7
%)
Contract assets
49,776
49,188
588
1.2
%
Contract liabilities - short-term
(38,090
(42,396
4,306
(10.2
Net Contract Assets
11,686
6,792
4,894
The $4.9 million increase in our net contract assets from May 31, 2023 to February 29, 2024, resulted primarily due to the timing of construction jobs in progress at February 29, 2024 versus May 31, 2023. During the three- and nine-month periods ending February 29, 2024 we recognized $6.4 million and $34.9 million of revenue, which is included in contract liabilities as of May 31, 2023. During the three- and nine-month periods ending February 28, 2023 we recognized $4.4 million and $22.8 million of revenue, which is included in contract liabilities as of May 31, 2022.
We also record long-term deferred revenue, which amounted to $80.5 million and $76.6 million as of February 29, 2024 and May 31, 2023, respectively. The long-term portion of deferred revenue is related to warranty contracts and is included in other long-term liabilities in our Consolidated Balance Sheets.
We have elected to adopt the practical expedient to not disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied as of the end of the reporting period for performance obligations that are part of a contract with an original expected duration of one year or less.
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. As our contract terms are primarily one year or less in duration, we have elected to apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain incentive programs as we have determined annual compensation is commensurate with annual sales activities.
Allowance for Credit Losses
Our primary allowance for credit losses is the allowance for doubtful accounts. The allowance for doubtful accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected. The allowance was based on assessments of current creditworthiness of customers, historical collection experience, the aging of receivables and other currently available evidence. Trade accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful collection of accounts are included in SG&A expenses.
The following tables summarize the activity for the allowance for credit losses for the three and nine months ended February 29, 2024 and February 28, 2023:
57,448
48,041
49,482
46,669
Bad debt provision
3,608
1,950
14,197
9,473
Uncollectible accounts written off, net of recoveries
(2,471
(2,667
(5,285
(7,573
Translation adjustments
(208
(17
(1,247
58,377
47,322
NOTE 18 — SEGMENT INFORMATION
We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings, roofing systems, flooring solutions, sealants, cleaners and adhesives. We manage our portfolio by organizing our businesses and product lines into four reportable segments as outlined below, which also represent our operating segments. Within each operating segment, we manage product lines and businesses which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our four operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief operating decision maker in determining how to allocate the assets of the company and evaluate performance. These four operating segments are each managed by an operating segment manager, who is responsible for the day-to-day operating decisions and performance evaluation of the operating segment’s underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to earnings (loss) before interest and taxes (“EBIT”), as a performance evaluation measure because interest (income) expense, net is essentially related to corporate functions, as opposed to segment operations.
Effective June 1, 2023, certain Asia Pacific businesses and management structure, formerly of our CPG segment, were transferred to our PCG segment to create operating efficiencies and a more unified go-to-market strategy in Asia Pacific. As a result of this business realignment, $11.4 million of goodwill was transferred from the CPG segment to the PCG segment. Additionally, this realignment is reflected in our reportable segments beginning with our first quarter of fiscal 2024. As such, historical segment results have been recast to reflect the impact of this change.
Our CPG reportable segment products are sold throughout North America and also account for a significant portion of our international sales. Our construction product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include construction sealants and adhesives, coatings and chemicals, roofing systems, concrete admixture and repair products, building envelope solutions, insulated cladding, flooring systems, and weatherproofing solutions.
Our PCG reportable segment products are sold throughout North America, as well as internationally, and are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include high-performance flooring solutions, corrosion control and fireproofing coatings, infrastructure repair systems and fiberglass reinforced plastic structures.
Our Consumer reportable segment manufactures and markets professional use and do-it-yourself (“DIY”) products for a variety of mainly consumer applications, including home improvement and personal leisure activities. Our Consumer reportable segment’s major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe, Australia and South America. Our Consumer reportable segment products are primarily sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops and through distributors. The Consumer reportable segment offers products that include specialty, hobby and professional paints; caulks; adhesives; cleaners; sandpaper and other abrasives; silicone sealants and wood stains.
Our SPG reportable segment products are sold throughout North America and internationally, primarily in Europe. Our specialty product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. The SPG reportable segment offers products that include industrial cleaners, restoration services equipment, colorants, nail enamels, exterior finishes, edible coatings and specialty glazes for pharmaceutical and food industries, and other specialty original equipment manufacturer (“OEM”) coatings.
In addition to our four reportable segments, there is a category of certain business activities and expenses, referred to as corporate/other, that does not constitute an operating segment. This category includes our corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets and other expenses not directly associated with any reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses and headquarters’ property and equipment. These corporate and other assets and expenses reconcile reportable segment data to total consolidated income before income taxes and identifiable assets.
23
We reflect income from our joint ventures on the equity method and receive royalties from our licensees.
The following tables present a disaggregation of revenues by geography, and the results of our reportable segments consistent with our management philosophy, by representing the information we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of businesses.
CPGSegment
PCG Segment
ConsumerSegment
SPG Segment
Consolidated
Net Sales (based on shipping location)
United States
289,042
202,857
415,607
149,908
1,057,414
Canada
41,353
20,032
32,609
1,267
95,261
Europe
105,617
55,481
47,780
18,147
227,025
Latin America
59,741
10,321
6,447
582
77,091
Asia Pacific
30,231
4,756
6,590
41,577
Other Foreign
24,614
Total Foreign
206,711
140,679
91,592
26,586
465,568
495,753
343,536
507,199
176,494
280,916
189,913
431,829
163,056
1,065,714
34,934
18,662
37,957
898
92,451
107,609
56,192
47,613
19,084
230,498
51,728
9,047
6,666
455
67,896
27,611
4,466
7,511
39,588
20,029
194,271
131,541
96,702
27,948
450,462
475,187
321,454
528,531
191,004
1,194,335
650,672
1,435,713
449,629
3,730,349
190,695
69,579
118,551
3,698
382,523
360,488
177,603
166,292
59,528
763,911
194,774
28,034
20,588
1,898
245,294
93,415
14,346
19,674
127,435
77,602
745,957
446,233
319,777
84,798
1,596,765
1,940,292
1,096,905
1,755,490
534,427
1,124,047
628,320
1,486,556
515,078
3,754,001
170,415
63,636
127,039
2,946
364,036
340,589
169,912
150,738
61,242
722,481
158,992
29,168
20,217
1,195
209,572
84,723
13,832
25,324
123,879
66,235
669,996
413,674
311,826
90,707
1,486,203
1,794,043
1,041,994
1,798,382
605,785
Income (Loss) Before Income Taxes
CPG Segment
15,060
6,886
253,910
187,679
47,039
(7,057
153,362
89,053
Consumer Segment
65,159
68,146
295,054
278,708
9,803
39,482
36,345
94,798
Corporate/Other
(53,480
(64,970
(190,112
(207,495
May 31,
Identifiable Assets
2,000,047
2,206,403
1,185,432
1,209,819
2,165,090
2,384,782
756,591
804,762
275,244
176,238
25
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements include all of our majority-owned and controlled subsidiaries. Investments in less-than-majority-owned joint ventures over which we have the ability to exercise significant influence are accounted for under the equity method. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our allowances for doubtful accounts; reserves for excess and obsolete inventories; allowances for recoverable sales and/or value-added taxes; uncertain tax positions; useful lives of property, plant and equipment; goodwill and other intangible assets; environmental, warranties and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, may differ materially from our estimates.
Effective June 1, 2023, in connection with our MAP 2025 operating improvement program, we realigned certain businesses and management structures within our CPG, PCG and SPG segments. As outlined in Note 18, “Segment Information,” our CPG APAC and CPG India businesses, formerly of our Sealants reporting unit within our CPG segment, were transferred to our Platform component within our PCG segment. As a result of this change, we designated the Platform component as a separate reporting unit within our PCG segment. Additionally, within our PCG segment, certain businesses of our USL reporting unit were transferred to our Fibergrate, Carboline and Stonhard reporting units. As a result of this change, USL was no longer designated as a separate reporting unit. Within our SPG segment, two new reporting units were formed as our former DayGlo and Kirker reporting units were combined into one reporting unit: The Color Group, and our former Wood Finishes, Kop-Coat Protection Products, TCI and Modern Recreational Technologies reporting units were combined into one reporting unit: The Industrial Coatings Group.
During the first quarter of fiscal 2024, we performed a goodwill impairment test for the reporting units affected by the business realignment and change in management structure using either a qualitative or a quantitative assessment. We concluded that the estimated fair values exceeded the carrying values for these reporting units, and accordingly, no indications of impairment were identified as a result of these changes.
A comprehensive discussion of the accounting policies and estimates that are the most critical to our financial statements are set forth in our Annual Report on Form 10-K for the year ended May 31, 2023.
BUSINESS SEGMENT INFORMATION
Effective June 1, 2023, certain Asia Pacific businesses and management structure, formerly of our CPG segment, were transferred to our PCG segment to create operating efficiencies and a more unified go-to-market strategy in Asia Pacific. This realignment is reflected in our reportable segments beginning with our first quarter of fiscal 2024. As such, historical segment results have been recast to reflect the impact of this realignment.
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.
Income Before Income Taxes (a)
Interest (Expense), Net (b)
(668
(3,513
(4,619
(8,090
EBIT (c)
15,728
10,399
258,529
195,769
Income (Loss) Before Income Taxes (a)
Interest Income, Net (b)
1,204
531
3,753
1,058
45,835
(7,588
149,609
87,995
1,000
2,619
45
64,159
68,128
292,435
278,663
90
28
293
9,713
39,454
36,052
94,775
(Loss) Before Income Taxes (a)
(11,488
(25,097
(56,346
(72,511
(41,992
(39,873
(133,766
(134,984
Add: Provision for Income Taxes
Interest (Expense)
(28,527
(30,756
(90,693
(85,385
Investment Income, Net
18,665
2,723
36,393
5,910
93,443
70,520
602,859
522,218
(a) The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by GAAP, to EBIT.
(b) Interest Income (Expense), Net includes the combination of Interest Income (Expense) and Investment Income (Expense), Net.
(c) EBIT is a non-GAAP measure and is defined as Earnings (Loss) Before Interest and Taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT, as a performance evaluation measure because Interest Income (Expense), Net is essentially related to corporate functions, as opposed to segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, income before income taxes as determined in accordance with GAAP, since EBIT omits the impact of interest in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets' analysis of our segments' core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results.
27
RESULTS OF OPERATIONS
Three months ended
(in millions, except percentages)
TotalGrowth (Decline)
OrganicGrowth (Decline)(1)
Acquisition &Divestiture Impact
Foreign CurrencyExchange Impact
495.8
475.1
4.3
3.1
0.7
0.5
343.5
321.5
6.9
9.2
(0.7
(1.6
507.2
528.5
(4.0
(3.2
0.0
(0.8
176.5
191.1
(7.6
(6.4
(1.4
0.2
1,523.0
1,516.2
0.4
0.9
(0.1
(0.4
(1) Organic growth (decline) includes the impact of price and volume.
Our CPG segment generated organic sales growth during the third quarter of fiscal 2024 in nearly all the major business units in the segment when compared to the same quarter in the prior year. Performing particularly well were concrete admixtures and repair businesses which generated growth from increased demand for engineered solutions serving infrastructure and reshoring-related projects. Businesses serving high-performance building construction and remodeling also performed well. International growth was driven by infrastructure-related demand in Latin America.
Our PCG segment generated significant organic sales growth during the third quarter of fiscal 2024 when compared to the same quarter in the prior year. Performing particularly well were businesses that provide engineered solutions for reshoring-related projects. This increase was also facilitated by favorable timing of project completions and strong demand in emerging markets for engineered solutions serving infrastructure projects, partially offset by the divestiture of USL's Bridgecare services division in the first quarter of fiscal 2024.
Our Consumer segment experienced organic sales declines in the third quarter of fiscal 2024 driven by reduced DIY takeaway at retail, destocking by customers and the rationalization of certain lower-margin products. This was partially offset by market share gains.
Our SPG segment experienced sales declines during the third quarter of fiscal 2024, which were driven by several factors. The segment's disaster restoration business benefited from the response to inclement weather in the prior period, compared to limited weather activity in the current period. The divestiture of the non-core furniture warranty business in the third quarter of fiscal year 2023 also reduced sales versus the prior period. Finally, although end markets showed signs of stabilization during the quarter, businesses supplying specialty OEM markets were negatively impacted by lower volumes.
Gross Profit Margin Our consolidated gross profit margin of 39.9% of net sales for the third quarter of fiscal 2024 compares to a consolidated gross profit margin of 35.5% for the comparable period a year ago. The current quarter gross profit margin increase of approximately 4.4%, or 440 basis points (“bps”), resulted primarily from selling price increases and our MAP 2025 initiatives, which resulted in incremental savings in procurement, manufacturing and commercial excellence that favorably impacted our gross margin, in conjunction with benefits generated from the commodity cycle.
We expect year-over-year gross margins to continue improving in the fourth quarter of fiscal 2024 due to MAP 2025 initiatives, including benefits generated from the commodity cycle.
SG&A Our consolidated SG&A expense during the period was $54.7 million higher versus the same period last year and increased to 33.1% of net sales from 29.7% of net sales for the prior year quarter. Variable costs associated with improved results, such as commission expense and incentives, were primary drivers, along with merit increases, higher benefits and insurance costs and investments in growth initiatives, partially offset by reduced professional fees and reduced stock compensation. In addition, the prior period includes the $20.0 million gain on business interruption insurance proceeds as described above in Note 16, "Contingencies and Other Accrued Losses," to the Consolidated Financial Statements.
Our CPG segment SG&A was approximately $24.2 million higher for the third quarter of fiscal 2024 versus the comparable prior year period and increased as a percentage of net sales. The increase in expense was mainly due to variable costs associated with improved results such as commissions, along with merit increases, increased benefits, and increased bad debt and warranty expenses.
Our PCG segment SG&A was approximately $7.6 million higher for the third quarter of fiscal 2024 versus the comparable prior year period and increased slightly as a percentage of net sales. The increase in expense was mainly due to increased commissions as a result of improved results as well as merit increases and increased insurance costs.
Our Consumer segment SG&A increased by approximately $21.6 million during the third quarter of fiscal 2024 versus the same period last year and increased as a percentage of net sales. The quarter-over-quarter increase in SG&A was primarily attributable to the $20.0 million gain on business interruption insurance proceeds received in the prior period, along with merit increases and increased advertising costs, partially offset by a decrease in distribution costs.
Our SPG segment SG&A decreased approximately $0.3 million during the third quarter of fiscal 2024 versus the comparable prior year period but increased as a percentage of net sales. The decrease in SG&A expense is attributable to the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023, partially offset by investments in strategic growth initiatives.
SG&A expenses in our corporate/other category during the third quarter of fiscal 2024 increased approximately $1.6 million versus last year’s third quarter. This was mainly due to increased healthcare, benefits and insurance costs, higher IT expenses and merit increases, partially offset by reduced professional fees related to our MAP 2025 operational improvement initiatives and reduced stock compensation.
The following table summarizes the retirement-related benefit plans’ impact on income before income taxes for the three months ended February 29, 2024 and February 28, 2023, as the service cost component has a significant impact on our SG&A expense:
(in millions)
Change
12.4
12.2
11.3
9.3
2.0
(12.9
(11.3
0.1
4.4
4.6
(0.2
Total Net Periodic Pension & Postretirement Benefit Costs
15.2
14.7
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
The following table summarizes restructuring charges recorded during the three months ended February 29, 2024 and February 28, 2023, related to our MAP 2025 initiative, which is a multi-year restructuring plan to build on the achievements of MAP to Growth and designed to improve margins by streamlining business processes, reducing working capital, implementing commercial initiatives to drive improved mix and salesforce effectiveness and improving operating efficiency:
6.1
0.3
2.5
Total Restructuring Costs
6.4
3.4
Most activities under MAP 2025 are anticipated to be completed by the end of fiscal 2025; however, we expect some costs to extend beyond this date. We currently expect to incur approximately $33.9 million of future additional charges related to the implementation of MAP 2025. In addition, we incurred $0.7 million of restructuring costs associated with MAP to Growth for the three months ended February 28, 2023.
For further information and details about MAP 2025, see Note 3, “Restructuring,” to the Consolidated Financial Statements.
Interest expense
28.5
30.8
Average interest rate (a)
4.75
4.34
(a) The interest rate increase was a result of higher market rates on the variable cost borrowings.
Change in interestexpense
Acquisition-related borrowings
Non-acquisition-related average debt reduction
(4.9
Change in average interest rate
2.4
Total Change in Interest Expense
(2.3
29
See Note 6, “Investment (Income), Net,” to the Consolidated Financial Statements for details.
See Note 8, “Other Expense, Net,” to the Consolidated Financial Statements for details.
Income (Loss) Before Income Taxes (“IBT”)
% of net sales
15.1
3.0
1.4
47.0
13.7
(7.0
(2.2
65.2
12.8
68.1
12.9
9.8
5.6
39.5
20.7
Non-Op Segment
(53.5
(65.0
83.6
42.5
On a consolidated basis, our results reflect MAP 2025 benefits, including benefits generated from the commodity cycle. Our CPG segment results reflect volume growth, which resulted in improved fixed-cost utilization, favorable mix and MAP 2025 benefits. Our PCG segment results reflect positive volumes, favorable mix and improved fixed-cost leverage, which were enhanced by MAP 2025 initiatives. In addition, our prior period PCG segment results include the $39.2 million goodwill and intangible asset impairment charges as described above in Note 4, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements. Our Consumer segment results reflect gross margin expansion as a result of improved operating efficiencies related to MAP 2025 and rationalization of lower margin products, partially offset by negative fixed-cost absorption. In addition, our prior period Consumer segment results include the $20.0 million gain on business interruption insurance proceeds. Our SPG segment results reflect sales declines, the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023, incremental costs from investments in growth initiatives and reduced fixed cost leverage at plants. In addition, our prior period SPG segment results reflect the $24.7 million gain on the sale of its Guardian business as described above in Note 7, "(Gain) on Sales of Assets and Other Businesses, Net," to the Consolidated Financial Statements. Our Non-Op segment results reflect the favorable swing in investment returns, reduced professional fees related to our MAP 2025 operational improvement initiatives and reduced stock compensation, partially offset by increased benefit costs.
Income Tax Rate The effective income tax rate of 26.4% for the three months ended February 29, 2024 compares to the effective income tax rate of 35.9% for the three months ended February 28, 2023. The effective income tax rates for the three-month periods ended February 29, 2024, and February 28, 2023, 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. Further, the effective income tax rate for the three-month period ended February 29, 2024, reflects incremental tax expense related to increases to our net deferred income tax liability for unremitted earnings, unfavorable changes in valuation allowances for certain foreign tax attribute carryforwards, and an adjustment for the tax related to the prior year sale of the furniture warranty business. Additionally, the effective tax rate for the three-month period ended February 28, 2023, reflects the unfavorable impact of a noncash impairment charge for goodwill that was nondeductible for tax purposes.
(in millions, except percentages and per share amounts)
% of netsales
61.5
4.0
27.2
1.8
61.2
27.0
Diluted earnings per share
30
1,940.3
1,794.0
8.2
6.6
0.6
1.0
1,096.9
1,042.0
5.3
6.2
1,755.5
1,798.4
(2.4
(2.0
534.4
605.8
(11.8
(2.1
5,327.1
5,240.2
1.7
Our CPG segment generated significant organic sales growth during the first nine months of fiscal 2024 in all the major business units in the segment when compared to the same prior year period. Performing particularly well were providers of restoration systems for roofing, facades, and parking structures, which benefited from a strategic focus on repair and maintenance and its differentiated service model. Concrete admixtures and repair businesses also generated growth from increased demand for engineered solutions serving infrastructure and reshoring-related projects in addition to businesses serving high-performance building construction and remodeling. This increase was also facilitated by growth in Europe and Latin America.
Our PCG segment generated significant organic sales growth during the first nine months of fiscal 2024 when compared to the same prior year period. Performing particularly well were businesses that provide engineered solutions for reshoring-related projects. This increase was also facilitated by improved pricing, favorable timing of project completions and strong demand in emerging markets.
Our Consumer segment experienced organic sales declines in the first nine months of fiscal 2024 driven by reduced DIY takeaway at retail as consumers focused spending on travel and entertainment and housing turnover hit multi-year lows, reduced inventory levels at retailers, and the rationalization of lower-margin products. This decline is in comparison to a strong prior year, when sales grew 15.3%. These pressures were partially offset by market share gains, strength in international markets and improved pricing to catch up with cost inflation.
Our SPG segment experienced sales declines during the first nine months of fiscal 2024, driven by lower volumes at businesses supplying OEM markets which have been negatively impacted by a slowdown in the residential housing market. The divestiture of the non-core furniture warranty business in the third quarter of fiscal year 2023 also reduced sales versus the prior period. Finally, the segment's disaster restoration business benefited from the response to Hurricane Ian and other inclement weather in the prior period, compared to limited weather activity in the current period. Improved pricing partially offset these volume declines.
Gross Profit Margin Our consolidated gross profit margin of 41.0% of net sales for the first nine months of fiscal 2024 compares to a consolidated gross profit margin of 37.6% for the comparable period a year ago. The current period gross profit margin increase of approximately 3.4%, or 340 bps, resulted primarily from selling price increases and our MAP 2025 initiatives, which resulted in incremental savings in procurement, manufacturing and commercial excellence that favorably impacted our gross margin, in conjunction with benefits generated from the commodity cycle.
SG&A Our consolidated SG&A expense during the period was $133.1 million higher versus the same period last year and increased to 29.3% of net sales from 27.2% of net sales for the prior year period. Variable costs associated with improved results, such as commission expense and bonuses, were primary drivers, along with merit increases, investments in growth initiatives, increased benefits and insurance costs, and $4.4 million of expense related to the adverse legal ruling. In addition, there was an $8.9 million decrease in the gain on business interruption insurance proceeds received during the current period compared to the prior year. These were partially offset by reduced professional fees and reduced SG&A related to divestitures. See Note 16, "Contingencies and Other Accrued Losses," to the Consolidated Financial Statements for additional information regarding the business interruption proceeds and adverse legal ruling.
Our CPG segment SG&A was approximately $83.3 million higher for the first nine months of fiscal 2024 versus the comparable prior year period and increased as a percentage of net sales. The increase in expense was mainly due to variable costs associated with improved results such as commissions and bonuses, along with merit increases, increased benefits and investments in growth initiatives.
31
Our PCG segment SG&A was approximately $30.8 million higher for the first nine months of fiscal 2024 versus the comparable prior year period and increased as a percentage of net sales. The increase in expense as compared to the prior year period is mainly due to increased commissions as a result of improved results as well as merit increases, increased bad debt expense and the $4.5 million loss on the sale of USL's Bridgecare services division during the period as described above in Note 4, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements.
Our Consumer segment SG&A increased by approximately $19.1 million during the first nine months of fiscal 2024 versus the same period last year and increased slightly as a percentage of net sales. The period-over-period increase in SG&A was primarily attributable to merit increases and insurance costs, in addition to the $8.9 million decrease in gain on business interruption insurance proceeds received in the current period, partially offset by a reduction in variable distribution costs.
Our SPG segment SG&A increased approximately $2.8 million during the first nine months of fiscal 2024 versus the comparable prior year period and increased as a percentage of net sales. The increase in SG&A expense is attributable to the $4.4 million expense related to the adverse legal ruling, pay inflation and investments in strategic growth initiatives, partially offset by the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023, along with a reduction in incentive compensation.
SG&A expenses in our corporate/other category during the first nine months of fiscal 2024 decreased by approximately $2.9 million compared to the prior year period. This was mainly due to reduced professional fees related to our MAP 2025 operational improvement initiatives and reduced stock compensation, partially offset by increased compensation, healthcare costs and IT expenses.
The following table summarizes the retirement-related benefit plans’ impact on income before income taxes for the nine months ended February 29, 2024 and February 28, 2023, as the service cost component has a significant impact on our SG&A expense:
37.1
36.4
34.0
27.9
(38.7
(33.8
13.2
13.8
(0.6
45.5
44.1
The following table summarizes restructuring charges recorded during the nine months ended February 29, 2024 and February 28, 2023, related to our MAP 2025 initiative, which is a multi-year restructuring plan to build on the achievements of MAP to Growth and designed to improve margins by streamlining business processes, reducing working capital, implementing commercial initiatives to drive improved mix and salesforce effectiveness and improving operating efficiency:
9.1
4.5
14.1
Most activities under MAP 2025 are anticipated to be completed by the end of fiscal 2025; however, we expect some costs to extend beyond this date. We currently expect to incur approximately $33.9 million of future additional charges related to the implementation of MAP 2025. In addition, we incurred $3.3 million of restructuring costs associated with MAP to Growth for the nine months ended February 28, 2023.
90.7
85.4
3.91
(11.4
15.8
253.9
13.1
187.7
10.5
153.4
14.0
89.0
8.5
295.1
16.8
278.7
15.5
36.3
6.8
94.8
15.6
(190.1
(207.5
548.6
442.7
On a consolidated basis, our results reflect MAP 2025 benefits, including benefits generated from the commodity cycle. Our CPG segment results reflect volume growth, which resulted in improved fixed-cost utilization, and MAP 2025 benefits. Our PCG segment results reflect MAP 2025 benefits and improved pricing, partially offset by the $4.5 million loss on the sale of USL's Bridgecare services division during the period, the impairment of an indefinite-lived intangible asset, and increased bad debt expense. Our prior year PCG segment results include the $39.2 million goodwill and intangible asset impairment charges. Our Consumer segment results reflect improved operating efficiencies related to MAP 2025 and improved pricing, partially offset by the $8.9 million decrease in gain on business interruption insurance proceeds received during the period and negative fixed-cost absorption. Our SPG segment results reflect the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023, the $4.4 million expense related to the adverse legal ruling, unfavorable sales mix, incremental costs from investments in growth initiatives, and reduced fixed cost leverage at plants as a result of reduced volumes. In addition, our prior period SPG segment results reflect the $24.7 million gain on the sale of its Guardian business. Our Non-Op segment results reflect the favorable swing in investment returns and decreased professional fees, partially offset by increased healthcare and IT expenses.
Income Tax Rate The effective income tax rate of 25.5% for the nine months ended February 29, 2024 compares to the effective income tax rate of 25.9% for the nine months ended February 28, 2023. The effective income tax rates for the nine-month periods ended February 29, 2024, and February 28, 2023 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. Further, the effective tax rate for the nine-month period ended February 29, 2024, reflects incremental tax expense related to increases to our net deferred income tax liability for unremitted earnings, unfavorable changes in valuation allowances for certain foreign tax attribute carryforwards, and an adjustment for the tax related to the prior year sale of the furniture warranty business. Additionally, the effective tax rate for the nine-month period ended February 28, 2023, reflects the unfavorable impact of a noncash impairment charge for goodwill that was nondeductible for tax purposes.
408.6
7.7
328.1
407.8
327.3
LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2024 Compared with Fiscal 2023
Operating Activities
Approximately $941.1 million of cash was provided by operating activities during the first nine months of fiscal 2024, compared with $263.0 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 $80.5 million during the first nine months of fiscal 2024 versus the same period during fiscal 2023.
During the first nine months of fiscal 2024, the change in accounts receivable provided approximately $227.8 million more cash than the first nine months of fiscal 2023. This was primarily due to the timing of sales in our Consumer segment and improved cash collections in the current period. Average days sales outstanding (“DSO”) at February 29, 2024, decreased to 62.7 days from 65.9 days at February 28, 2023.
During the first nine months of fiscal 2024, the change in inventory used approximately $197.2 million less cash compared to spending during the same period a year ago as a result of our operating segments continuing to reduce inventory purchases and use safety stock built up in prior periods in response to supply chain outages and raw material inflation. Average days of inventory outstanding (“DIO”) at February 29, 2024 decreased to 93.5 days from 109.8 days at February 28, 2023.
The change in accounts payable during the first nine months of fiscal 2024 used approximately $111.1 million less cash than during the first nine months of fiscal 2023. This is associated with reduced inventory purchases driven by improved forecasting and coordination between sales and operations. Average days payables outstanding (“DPO”) decreased slightly to 83.2 days at February 29, 2024 from 83.3 days at February 28, 2023.
Investing Activities
For the first nine months of fiscal 2024, cash used for investing activities decreased by $21.5 million to $153.9 million as compared to $175.4 million in the prior year period. This year-over-year decrease in cash used for investing activities was driven by a $32.0 million decrease in cash used for business acquisitions and $41.6 million decrease in cash used for capital expenditures, partially offset by a $47.6 million decrease in proceeds from sales of assets and businesses, net.
We paid for capital expenditures of $138.1 million and $179.7 million during the first nine months of fiscal 2024 and fiscal 2023, respectively. This reduction was the result of decreased capacity expansion projects in comparison to the prior period. Our capital expenditures facilitate our continued growth, allow us to achieve production and distribution efficiencies, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. We continue to invest capital spending in growth initiatives and to improve operational efficiencies in fiscal 2024.
Our captive insurance companies invest their excess cash in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are primarily attributable to differences in the timing and performance of their investments balanced against amounts required to satisfy claims. At February 29, 2024 and May 31, 2023, the fair value of our investments in available-for-sale debt securities and marketable equity securities, which includes captive insurance-related assets, totaled $172.9 million and $148.3 million, respectively.
As of February 29, 2024, approximately $223.2 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with $196.8 million at May 31, 2023. Undistributed earnings held at our foreign subsidiaries that are considered permanently reinvested will be used, for instance, to expand operations organically or for acquisitions in foreign jurisdictions. Further, our operations in the U.S. generate sufficient cash flow to satisfy U.S. operating requirements. Refer to Note 9, “Income Taxes,” to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings.
Financing Activities
For the first nine months of fiscal 2024, financing activities used $750.8 million of cash, which compares to cash used for financing activities of $83.3 million during the first nine months of fiscal 2023. The overall increase in cash used for financing activities was driven principally by debt-related activities, as we repaid $175.0 million on our accounts receivable securitization program ("AR Program"), $250.0 million on our term loan, and $85.2 million on our revolving credit facility during the first nine months of fiscal 2024. 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 $1.29 billion and $1.03 billion as of February 29, 2024 and May 31, 2023, respectively.
Revolving Credit Agreement
During the quarter ended August 31, 2022, we amended our $1.3 billion unsecured syndicated revolving credit facility (the "Revolving Credit Facility"), which was set to expire on October 31, 2023. The amendment extended the expiration date to August 1, 2027 and increased the borrowing capacity to $1.35 billion. The Revolving Credit Facility bears interest at either the base rate or benchmark interest rate (i.e. the adjusted Secured Overnight Financing Rate (SOFR) for USD denominated debt), as defined, at our option, plus a spread determined by our debt rating. The Revolving Credit Facility includes sublimits for the issuance of swingline loans, which are comparatively short-term loans used for working capital purposes and letters of credit. The Revolving Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditures, and for general corporate purposes.
The Revolving Credit Facility requires us to comply with various customary affirmative and negative covenants, including a leverage covenant (i.e. Net Leverage Ratio) and interest coverage ratio, which are calculated in accordance with the terms as defined by the Revolving Credit Facility. Under the terms of the leverage covenant, we may not permit our leverage ratio for total indebtedness to consolidated EBITDA for the four most recent fiscal quarters to exceed 3.75 to 1.00. During certain periods and per the terms of the Revolving Credit Facility, this ratio may be increased to 4.25 to 1.00 upon delivery of a notice to our lender requesting an increase to our maximum leverage or in connection with certain “material acquisitions.” The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1.00. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended using EBITDA as defined in the Revolving Credit Facility.
As of February 29, 2024, 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 1.69 to 1.00, while our Interest Coverage Ratio was 9.49 to 1.00. As of February 29, 2024, we had $817.3 million of borrowing availability on our Revolving Credit Facility.
Our access to funds under our Revolving Credit Facility is dependent on the ability of the financial institutions that are parties to the Revolving Credit Facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our Revolving Credit Facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
Accounts Receivable Securitization Program
As of February 29, 2024, we did not have an outstanding balance under our AR Program, compared to the maximum availability of $222.7 million. The maximum availability under the AR Program is $250.0 million, but availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250.0 million of funding available under the AR Program.
The AR Program contains various customary affirmative and negative covenants, as well as customary default and termination provisions. Our failure to comply with the covenants described above and other covenants contained in the Revolving Credit Facility could result in an event of default under that agreement, entitling the lenders to, among other things, declare the entire amount outstanding under the Revolving Credit Facility to be due and payable immediately. The instruments governing our other outstanding indebtedness generally include cross-default provisions that provide that, under certain circumstances, an event of default that results in acceleration of our indebtedness under the Revolving Credit Facility will entitle the holders of such other indebtedness to declare amounts outstanding immediately due and payable. See “Revolving Credit Agreement” above for details on our compliance with all significant financial covenants at February 29, 2024.
On August 1, 2022, we amended the term loan credit facility, which was set to expire on February 21, 2023, to extend the maturity date to August 1, 2025, and paid down the borrowings outstanding on the term loan to $250 million. The term loan bears interest at either the base rate or the adjusted SOFR, as defined, at our option, plus a spread determined by our debt rating. The term loan contains customary covenants, including but not limited to, limitations on our ability, and in certain instances, our subsidiaries’ ability, to incur liens, make certain investments, or sell or transfer assets. Additionally, we may not permit (i) our consolidated interest coverage ratio to be less than 3.50 to 1.00, or (ii) our leverage ratio (defined as the ratio of total indebtedness to consolidated EBITDA for the four most recent fiscal quarters) to exceed 3.75 to 1.00. During certain periods this ratio may be increased to 4.25 to 1.0 upon delivery of a notice to our lender requesting an increase to our maximum leverage or in connection with certain “material acquisitions.” See “Revolving Credit Agreement” above for details on our compliance with all significant financial covenants at February 29, 2024.
Refer to Note G, "Borrowings," to the Consolidated Financial Statements, in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 for more comprehensive details on the significant components of our debt.
35
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 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.”
36
FORWARD-LOOKING STATEMENTS
The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital, and the viability of banks and other financial institutions; (b) the prices, supply and availability 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 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 a public health crisis similar to the Covid pandemic; (l) risks related to acts of war similar to the Russian invasion of Ukraine; (m) risks related to the transition or physical impacts of climate change and other natural disasters or meeting sustainability-related voluntary goals or regulatory requirements; (n) risks related to our use of technology, artificial intelligence, data breaches and data privacy violations; and (o) other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2023, as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in raw materials costs, interest rates and foreign exchange rates since we fund our operations through long- and short-term borrowings and conduct our business in a variety of foreign currencies. There were no material potential changes in our exposure to these market risks since May 31, 2023.
ITEM 4.CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 29, 2024 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
(b) CHANGES IN INTERNAL CONTROL.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended February 29, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
Environmental Proceedings
Like other companies participating in similar lines of business, some of our subsidiaries are identified as a “potentially responsible party” under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar local environmental statutes or are participating in the cost of certain clean-up efforts or other remedial actions relating to environmental matters. Our share of such costs to date, however, has not been material and management believes that these environmental proceedings will not have a material adverse effect on our consolidated financial condition or results of operations. See “Item 1 — Business — Environmental Matters,” in our Annual Report on Form 10-K for the year ended May 31, 2023.
As permitted by SEC rules, and given the size of our operations, we have elected to adopt a quantitative threshold for environmental proceedings of $1 million. As of the date of this filing, we are not aware of any matters that exceed this threshold and meet the definition for disclosure.
ITEM 1A.RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the other risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2023.
ITEM 2.UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information about repurchases of RPM International Inc. common stock made by us during the third quarter of fiscal 2024:
Maximum
Total Number
Dollar Amount
of Shares
that
Purchased as
May Yet be
Part of Publicly
Purchased
Average
Announced
Under the
Price Paid
Plans or
Period
Purchased(1)
Per Share
Programs
Programs(2)
December 1, 2023 through December 31, 2023
546
109.32
January 1, 2024 through January 31, 2024
11,219
106.95
February 1, 2024 through February 29, 2024
114,588
108.98
Total - Third Quarter
126,353
108.80
(1) All of the 11,765 shares of common stock that were disposed of back to us during the three-month period ended February 29, 2024 were in satisfaction of tax obligations related to the vesting of restricted stock, which was granted under RPM International Inc.'s equity and incentive plans.
(2) The maximum dollar amount that may yet be repurchased under our program was approximately $279.8 million at February 29, 2024. Refer to Note 12, “Stock Repurchase Program,” to the Consolidated Financial Statements for further information regarding our stock repurchase program.
ITEM 6.EXHIBITS
Exhibit
Description
Amended and Restated By-Laws of RPM International Inc., which are incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 30, 2024 (File No. 001-14187)
31.1
Rule 13a-14(a) Certification of the Company’s Chief Executive Officer.(x)
31.2
Rule 13a-14(a) Certification of the Company’s Chief Financial Officer.(x)
32.1
Section 1350 Certification of the Company’s Chief Executive Officer.(x)
32.2
Section 1350 Certification of the Company’s Chief Financial Officer.(x)
101.INS
Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents.
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2024, has been formatted in Inline XBRL
(x) Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ Frank C. Sullivan
Frank C. Sullivan
Chairman and Chief Executive Officer
/s/ Russell L. Gordon
Russell L. Gordon
Vice President and
Chief Financial Officer
Dated: April 4, 2024