RPM INTERNATIONAL INC. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements include all of our majority-owned subsidiaries. Investments in less-than-majority-owned joint ventures for which we have the ability to exercise significant influence over are accounted for under the equity method. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our allowances for doubtful accounts; inventories; allowances for recoverable taxes; uncertain tax positions; useful lives of property, plant and equipment; goodwill and other intangible assets; environmental, warranties and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, may differ materially from our estimates. A comprehensive discussion of the accounting policies and estimates that are the most critical to our financial statements are set forth in our Annual Report on Form 10-K for the year endedMay 31, 2019 .
BUSINESS SEGMENT INFORMATION
EffectiveJune 1, 2019 , we realigned certain businesses and management structure to recognize how we allocate resources and analyze the operating performance of our businesses. Among other things, the realignment of certain businesses occurred as a result of the 2020 MAP to Growth plan that was approved and initiated between May andAugust 2018 . As we began to execute on our operating improvement initiatives, we identified ways to realign certain businesses, and concluded that moving to an expanded reporting structure could help us to better manage our assets and improve synergies across the enterprise. This realignment changed our reportable segments beginning with our first quarter of fiscal 2020. As such, as ofJune 1, 2019 , we began reporting under four reportable segments instead of our three previous reportable segments. See Note 17, "Segment Information," to the Consolidated Financial Statements for further detail. 31
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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.
Information for all periods presented has been recast to reflect the current
year change in reportable segments.
Three Months Ended Six Months Ended
November 30, November 30, November 30, November 30,
2019 2018 2019 2018
(In thousands)
Net Sales
CPG Segment $ 499,510 $ 467,298 $ 1,035,615 $ 984,790
PCG Segment 292,712 291,960 589,953 588,379
Consumer Segment 450,900 425,255 930,230 902,618
Specialty Segment 158,170 178,018 318,258 346,733
Consolidated $ 1,401,292 $ 1,362,531 $ 2,874,056 $ 2,822,520
Income Before Income Taxes (a)
CPG Segment
Income Before Income Taxes (a) $ 57,123 $ 35,357 $ 139,803 $ 100,401
Interest (Expense), Net (b) (2,074 ) (2,189 ) (4,101 ) (4,479 )
EBIT (c) $ 59,197 $ 37,546 $ 143,904 $ 104,880
PCG Segment
Income Before Income Taxes (a) $ 33,320 $ 22,299 $ 61,377 $ 30,624
Interest (Expense), Net (b) 25 (223 ) (104 ) (341 )
EBIT (c) $ 33,295 $ 22,522 $ 61,481 $ 30,965
Consumer Segment
Income Before Income Taxes (a) $ 34,456 $ 41,836 $ 93,614 $ 92,805
Interest (Expense), Net (b) (56 ) (123 ) (161 ) (297 )
EBIT (c) $ 34,512 $ 41,959 $ 93,775 $ 93,102
Specialty Segment
Income Before Income Taxes (a) $ 18,762 $ 26,119 $ 42,089 $ 49,935
Interest Income, Net (b) (7 ) 105 19 198
EBIT (c) $ 18,769 $ 26,014 $ 42,070 $ 49,737
Corporate/Other
(Expense) Before Income Taxes (a) $ (41,908 ) $ (59,018 ) $ (92,281 ) $ (115,234 )
Interest (Expense), Net (b) (15,424 ) (27,730 ) (36,121 ) (47,214 )
EBIT (c) $ (26,484 ) $ (31,288 ) $ (56,160 ) $ (68,020 )
Consolidated
Net Income $ 77,322 $ 49,173 $ 183,818 $ 119,359
Add: (Provision) for Income Taxes (24,431 ) (17,420 ) (60,784 ) (39,172 )
Income Before Income Taxes (a) 101,753 66,593 244,602 158,531
Interest (Expense) (26,341 ) (23,127 ) (54,658 ) (47,533 )
Investment Income (Expense), Net 8,805 (7,033 ) 14,190 (4,600 )
EBIT (c) $ 119,289 $ 96,753 $ 285,070 $ 210,664 (a) The presentation includes a reconciliation of Income (Loss) Before Income
Taxes, a measure defined by generally accepted accounting principles ("GAAP")
in the
(b) Interest (expense), net includes the combination of interest (expense) and
investment income/(expense), net.
(c) EBIT is a non-GAAP measure, and is defined as earnings (loss) before interest
and taxes. We evaluate the profit performance of our segments based on income
before income taxes, but also look to EBIT as a performance evaluation
measure because interest expense is essentially related to acquisitions, as
opposed to segment operations. We believe EBIT is useful to investors for
this purpose as well, using EBIT as a metric in their investment
decisions. EBIT should not be considered an alternative to, or more
meaningful than, income before income taxes as determined in accordance with
GAAP, since EBIT omits the impact of interest in determining operating
performance, which represent items necessary to our continued operations,
given our level of indebtedness. Nonetheless, EBIT is a key measure expected
by and useful to our fixed income investors, rating agencies and the banking
community all of whom believe, and we concur, that this measure is critical
to the capital markets' analysis of our segments' core operating
performance. We also evaluate EBIT because it is clear that movements in EBIT
impact our ability to attract financing. Our underwriters and bankers
consistently require inclusion of this measure in offering memoranda in
conjunction with any debt underwriting or bank financing. EBIT may not be
indicative of our historical operating results, nor is it meant to be
predictive of potential future results.
32
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RESULTS OF OPERATIONS
Three Months Ended
Net Sales Consolidated net sales of$1,401.3 million for the second quarter of fiscal 2020 grew by approximately 2.8% from net sales of$1,362.5 million for last year's second quarter. Organic sales, which include the impact of price and volume, contributed 3.5% to consolidated net sales while acquisitions added 0.6%. Unfavorable foreign exchange impacted consolidated net sales during the current quarter by 1.3%. CPG segment net sales for the current quarter grew by 6.9% to$499.5 million , from net sales of$467.3 million during the same period a year ago. Organic growth contributed 7.4% during the quarter, mainly driven by volume, while recent acquisitions contributed 1.2% to net sales during the current quarter. Unfavorable foreign exchange impacted CPG segment net sales by 1.7% during the current quarter. Construction activity picked up due to favorable weather early in this year's second quarter, reducing some of the backlog that grew during the rainy spring and early summer months. Partially offsetting this segment's 7.4% organic growth during the quarter was the impact of strategic decisions to exit low-margin and/or high-risk working capital operations within certain international product offerings. Discontinued product lines reduced sales by approximately 0.7%. Significant top-line growth was recognized at our roofing and concrete admixture businesses as well as our business inLatin America . PCG segment net sales for the current quarter grew by 0.3% to$292.7 million , from net sales of$292.0 million during the same period a year ago. Organic growth was 1.7% during the quarter, driven mainly by selling price increases over the comparable period last year while recent acquisitions contributed 0.1% to net sales during the current quarter. Unfavorable foreign exchange impacted the PCG segment net sales by 1.5% during the current quarter. Strong growth was recognized at our industrial coatings business, both inNorth America andEurope , but was offset by sales declines at other units. Our expansion joint and highway maintenance sales were soft in theU.K due to Brexit uncertainty and also in key North American regions stemming from government budget constraints. While polymer flooring sales were fairly flat inNorth America , they grew by double digits inEurope . Organic growth has slowed due to recent strategic decisions to exit certain international businesses and discontinued product lines reduced sales by approximately 1.0%. Consumer segment net sales for the quarter grew by 6.0% to$450.9 million , from$425.3 million during last year's second quarter. Organic growth provided 6.4% during the current quarter while recent acquisitions provided 0.6% of the growth in net sales. Unfavorable foreign currency impacted net sales in the Consumer segment by 1.0% during the current quarter versus the same period a year ago. Increased sales volume resulting from more favorable weather early in this year's second quarter were slightly dampened due to the soft economy in theU.K. related to Brexit. Specialty segment net sales for the quarter decreased by 11.1% to$158.2 million , from$178.0 million during last year's second quarter. Organic sales declined 10.5% during the current quarter. Nearly all of the decline can be traced to natural disasters which elevated sales in the prior year at our water damage restoration business, due to the heavier hurricane activity in the prior year, and in our fluorescent pigments, which are used in fire retardant tracer dyes and experienced more rampant wild fires last year. Our OEM-related businesses have experienced soft sales in line with declining global industrial production. Additionally, foreign currency had an unfavorable impact on Specialty segment net sales for the quarter of 0.6%. Gross Profit Margin Our consolidated gross profit margin of 37.8% of net sales for the second quarter of fiscal 2020 compares to a consolidated gross profit margin of 36.2% for the comparable period a year ago, after giving effect to the change in classification of shipping and handling costs. Last year's reported gross profit margin of 39.5% has been recast to 36.2% in order to reflect the current year change in accounting principle related to shipping costs, which were previously recognized in SG&A expenses and are now recognized in cost of sales. The current quarter gross profit margin increase of approximately 1.6% of net sales, or 160 basis points ("bps"), resulted primarily from a combination of increases in selling prices and 2020 MAP to Growth savings, along with higher sales volume versus the same period a year ago. Recent changes in international trade duties, tariffs, and policies could materially impact the cost of our raw materials. Specifically, recently imposed tariffs, including tariffs on steel imports into theU.S. , have had an unfavorable impact on the cost of our cans and packaging. SG&A Our consolidated SG&A expense during the current period was$17.5 million higher versus the same period last year, and increased to 28.8% of net sales from 28.3% of net sales for the prior year quarter. Last year's reported SG&A percentage of net sales of 31.6% has been recast to 28.3% in order to reflect the current year change in accounting principle related to shipping and handling costs, which were previously recognized in SG&A expenses and are now recognized in cost of sales. During the second quarter of fiscal 2020, we continued our 2020 MAP to Growth initiatives and have generated incremental savings of approximately$5.1 million , which is net of implementation costs for ERP systems, consolidation expenses and professional fees in connection with implementing our 2020 MAP to Growth initiative. Additional SG&A expense incurred from companies we acquired during the last 12 months approximated$2.1 million during the second quarter of fiscal 2020. 33 -------------------------------------------------------------------------------- Our CPG segment SG&A was approximately$7.6 million higher for the second quarter of fiscal 2020 versus the comparable prior year period but decreased as a percentage of net sales, mainly due to additional commissions directly associated with higher sales volume. Additionally, companies acquired during the past 12 months contributed approximately$1.6 million of additional SG&A expense. Our PCG segment SG&A was approximately$0.2 million higher for the second quarter of fiscal 2020 versus the comparable prior year period and increased as a percentage of net sales, mainly due to transactional FX, as well as increases in bonus and commission expense versus the prior year. These increases were partially offset by 2020 MAP to Growth savings. Our Consumer segment SG&A increased by approximately$10.1 million during the second quarter of fiscal 2020 versus the same period last year and increased as a percentage of net sales. This was primarily attributable to increases in commissions, distribution and interplant freight expenses as a result of higher volume. In addition, during the current quarter, we decided to no longer pursue a product line targeted for OEM markets. We performed a recoverability assessment for certain prepaid assets associated with this product line, which resulted in the recognition of a$6.9 million charge this quarter. Lastly, companies acquired during the past 12 months contributed approximately$0.4 million of additional SG&A expense.
Our Specialty segment SG&A was approximately
SG&A expenses in our corporate/other category of$25.3 million during the second quarter of fiscal 2020 decreased by$1.5 million from$26.8 million recorded during last year's second quarter, resulting primarily from a decrease in professional fees in connection with our 2020 MAP to Growth, which approximated$3.3 million , compared to$5.2 million in the prior comparable quarter. We recorded total net periodic pension and postretirement benefit costs of$13.1 million and$11.4 million for the second quarter of fiscal 2020 and 2019, respectively. The$1.7 million increase in pension expense resulted from the combination of higher net actuarial losses recognized during the current quarter versus last year's second quarter for approximately$1.6 million and a higher service costs of approximately$0.7 million during the current quarter versus the same period a year ago. These increases were partially offset by a decrease of approximately$0.6 million in interest costs during the current quarter, when compared to the same period a year ago. 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, but such changes are not expected to be material to our consolidated financial results. Restructuring Charges We recorded restructuring charges of$4.8 million during the second quarter of fiscal 2020, which compares with$7.7 million during the second quarter of fiscal 2019. These charges were the result of our continued implementation of our 2020 MAP to Growth, which focuses upon strategic shifts in operations across our entire business. On a consolidated basis, we incurred$2.7 million of severance and benefit costs during the second quarter of fiscal 2020 compared with$6.5 million during the same period a year ago. Facility closure and other related costs totaled$1.8 million during the second quarter of fiscal 2020 versus$1.0 million during the second quarter of fiscal 2019. Finally,$0.3 million of other asset write-offs during the period compared with$0.2 million during the same period a year ago. These charges were associated with closures of certain facilities as well as the elimination of duplicative headcount and infrastructure associated with certain of our businesses. We currently expect to incur approximately$32.2 million of future additional charges in relation to this initiative. These additional charges include approximately$23.1 million of severance and benefit costs,$8.3 million of facility closure and other related charges, as well as$0.8 million of other asset write-offs. We expect these charges to be incurred by the end of calendar year 2020, upon which we expect to achieve an annualized pretax savings of approximately$290 million per year. Additionally, upon the completion of this initiative, we have targeted$230.0 million of improvement of working capital, and believe that, assuming 3% organic growth and approximately$150 million to$200 million annually in acquisitions of businesses, our fiscal year 2021 cash flow from operations will improve to approximately$872.0 million . In addition, we have continued to assess and find areas of improvement and cost savings as part of our 2020 MAP to Growth. As such, the final implementation and expected costs of our plan are subject to change. Most notably, we have broadened the scope of our announced plan to include the consolidation of the general and administrative areas, potential outsourcing, as well as additional future plant closures and consolidations, the estimated future costs of which have not yet been established. See Note 4, "Restructuring," to the Consolidated Financial Statements, for further detail surrounding our 2020 MAP to Growth. Interest Expense Interest expense was$26.3 million for the second quarter of fiscal 2020 versus$23.1 million for the same period a year ago. Excluding acquisition-related borrowings, higher average borrowings quarter over quarter increased interest expense by approximately$1.1 million during the second quarter of fiscal 2020 when compared to the prior year quarter. The reversal of the convertible bond interest accrual during the second quarter of fiscal 2019 increased interest expense by approximately$2.1 million versus the same period a year ago. Higher average borrowings, related to recent acquisitions, increased interest expense during this year's second quarter by approximately$0.6 million versus the same period a year ago. Lower interest rates, which averaged 3.88% overall for the second quarter of fiscal 2020 compared with 3.99% for the same period of fiscal 2019, decreased interest expense by approximately$0.6 million during the current quarter versus the same period last year. 34 -------------------------------------------------------------------------------- Investment (Income), Net Net investment income of approximately$8.8 million for the second quarter of fiscal 2020 compares to net investment loss of$7.0 million during the same period last year. Dividend and interest income totaled$1.9 million and$1.5 million for the second quarter of fiscal 2020 and 2019, respectively. Net gains on marketable securities totaled$6.9 million during the second quarter of fiscal 2020, while there were net realized losses of$8.5 million during the same period a year ago. Income Before Income Taxes ("IBT") Our consolidated pretax income for the second quarter of fiscal 2020 of$101.8 million compares with pretax income of$66.6 million for the same period a year ago. Our CPG segment had IBT of$57.1 million , or 11.4% of net sales, for the quarter endedNovember 30, 2019 , versus IBT of$35.4 million , or 7.6% of net sales, for the same period a year ago. Our CPG segment results reflect 2020 MAP to Growth savings, selling price increases and increased earnings from recent acquisitions. Our PCG segment had IBT of$33.3 million , or 11.4% of net sales, for the quarter endedNovember 30, 2019 , versus IBT of$22.3 million , or 7.6% of net sales, for the same period a year ago. Our PCG segment results reflect 2020 MAP to Growth savings, selling price increases and improved product mix. Our Consumer segment IBT approximated$34.5 million , or 7.6% of net sales, for the second quarter of fiscal 2020, versus the prior year second quarter pretax income of$41.8 million , or 9.8% of net sales. Our Consumer segment results reflect the cost incurred to shut down a product line and inventory-related charges, partially offset by selling price increases as well as 2020 MAP to Growth savings. Our Specialty segment had pretax income of$18.8 million , or 11.9% of net sales for the quarter endedNovember 30, 2019 , versus pretax income of$26.1 million , or 14.7% of net sales, for the same period a year ago, reflecting declines in sales volume in our fluorescent pigment, restoration equipment and OEM businesses. Income Tax Rate The effective income tax rate of 24.0% for the three months endedNovember 30, 2019 compares to the effective income tax rate of 26.2% for the three months endedNovember 30, 2018 . The effective income tax rates for the three months endedNovember 30, 2019 and 2018 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions, partially offset by tax benefits related to equity compensation. Additionally, the effective income tax rate for the three months endedNovember 30, 2019 reflects favorable adjustments related to certain valuation allowances and reserves for uncertain tax positions. Net Income Net income of$77.3 million for the quarter endedNovember 30, 2019 compares to net income of$49.2 million for the comparable prior year period. Net income attributable toRPM International Inc. stockholders for the second quarter of fiscal 2020 was$77.0 million , or 5.5% of consolidated net sales, which compared to net income of$49.2 million , or 3.6% of consolidated net sales for the comparable prior year period. Diluted earnings per share of common stock for the quarter endedNovember 30, 2019 of$0.59 compares with diluted earnings per share of common stock of$0.37 for the quarter endedNovember 30, 2018 .
Six Months Ended
Net Sales Consolidated net sales of$2,874.1 million for the first half of fiscal 2020 grew by approximately 1.8% from net sales of$2,822.5 million for last year's first half. Acquisitions added 1.5%, while organic sales, which include the impact of price and volume, reduced consolidated net sales by 1.6%. Consolidated net sales for the period also reflect an unfavorable foreign exchange impact of 1.3%. CPG segment net sales for the first half of fiscal 2020 grew by 5.2% to$1,035.6 million , from net sales of$984.8 million during the same period a year ago. The improvement resulted from recent acquisitions, which contributed 2.9% to net sales during the current period, and organic growth, which contributed 3.9% during the period, driven mainly by increases in selling prices. Unfavorable foreign exchange impacted construction segment net sales by 1.6% during the current period. Sales growth was highest in our roofing and Brazilian businesses, but was partially offset by weakening sales inEurope . PCG segment net sales for the first half of fiscal 2020 grew by 0.3% to$590.0 million , from net sales of$588.4 million during the same period a year ago. The improvement resulted from recent acquisitions, which contributed 1.0% to net sales during the current period, and organic growth, which contributed 1.0% during the period, driven mainly by the increases of selling prices over the comparable period last year. Unfavorable foreign exchange impacted PCG segment net sales by 1.7% during the current period. Sales growth was dampened by strategic decisions to exit low-margin businesses. Consumer segment net sales for the first half of fiscal 2020 grew by 3.1% to$930.2 million , from$902.6 million during the same period a year ago. Recent acquisitions provided 1.0% of the growth in net sales, while organic growth provided 3.1%, during the current period, driven primarily by price increases. Unfavorable foreign currency impacted net sales in the Consumer segment by 1.0% during the current period versus the same period a year ago. Sales improved in theU.S. but were slightly offset due to soft economy in theU.K. related to Brexit. 35
-------------------------------------------------------------------------------- Specialty segment net sales for the first half of fiscal 2020 decreased by 8.2% to$318.3 million , from$346.7 million during last year's first half. Organic sales declines of 7.5%, during the current period, resulted from decreases in fluorescent pigments and restoration equipment businesses, as a result of elevated natural disaster activity in the prior year. Additionally, foreign currency had an unfavorable impact on Specialty segment net sales for the period of 0.7%. Gross Profit Margin Our consolidated gross profit margin of 38.4% of net sales for the first half of fiscal 2020 compares to a consolidated gross profit margin of 37.0% for the comparable period a year ago, after giving effect to the change in classification of shipping and handling costs. Last year's reported gross profit margin of 40.1% has been recast to 37.0% in order to reflect the current year change in accounting principle related to shipping and handling costs, which were previously recognized in SG&A expenses and are now recognized in cost of sales. This gross profit increase of approximately 1.4% of net sales reflects an improvement of approximately 340 bps resulting from a combination of increases in selling prices and 2020 MAP to Growth savings, partially offset by the impact of labor cost inflation and unfavorable mix of product sold versus last year for approximately 40 bps, in addition to higher raw material costs for approximately 40 bps and supply chain challenges throughout the period for approximately 40 bps. Recent changes in international trade duties and policies could materially impact the cost of our raw materials. Specifically, recently imposed tariffs, including tariffs on steel imports into theU.S. , have had an unfavorable impact on the cost of our cans and packaging. SG&A Our consolidated SG&A expense during the first half of fiscal 2020 was$3.0 million higher versus the same period last year, but decreased to 28.0% of net sales from 28.4% of net sales for the comparable period. Last year's first half reported SG&A percentage of net sales of 31.5% has been recast to 28.4% in order to reflect the current year change in accounting principle related to shipping and handling costs, which were previously recognized in SG&A expenses and are now recognized in cost of sales. During the first half of fiscal 2020, we continued our 2020 MAP to Growth and have generated$11.4 million of incremental savings, which is net of implementation costs for ERP systems, consolidation expenses and professional fees in connection with implementing our 2020 MAP to Growth initiative. Additional SG&A expense incurred from companies acquired during the previous 12 months approximated$7.5 million during the first half of fiscal 2020. Our CPG segment SG&A was approximately$6.1 million higher for the first half of fiscal 2020 versus the comparable prior year period but decreased as a percentage of net sales, mainly due to increased commissions directly associated with higher sales volume, partially offset by 2020 MAP to Growth savings in the current period. Additionally, companies acquired during the past 12 months contributed approximately$5.3 million of additional SG&A expense. Our PCG segment SG&A was approximately$8.2 million lower for the first half of fiscal 2020 versus the comparable prior year period and decreased as a percentage of net sales, mainly due to 2020 MAP to Growth savings in the current period, decreased allowance for doubtful accounts associated with accounts deemed uncollectible as a result of changes in our market and leadership strategy and unfavorable transactional foreign exchange that occurred in the prior comparable period. These decreases were slightly offset by approximately$0.4 million of additional SG&A expense generated from companies acquired during the past 12 months. Our Consumer segment SG&A increased by approximately$4.3 million during the first half of fiscal 2020 versus the same period last year but decreased as a percentage of net sales. This was primarily attributable to increases in distribution costs. In addition, during the current period, we decided to no longer pursue a product line targeted for OEM markets. We performed a recoverability assessment for certain prepaid assets associated with this product line, which resulted in the recognition of a$6.9 million charge this period. These increases were partially offset by 2020 MAP to Growth savings. Lastly, companies acquired during the past 12 months contributed approximately$1.8 million of additional SG&A expense.
Our Specialty segment SG&A was approximately
SG&A expenses in our corporate/other category of$53.8 million during the first half of fiscal 2020 decreased by$0.4 million from$54.2 million recorded during last year's first half, as higher professional fees in connection with our 2020 MAP to Growth were offset by lower hospitalization costs. We recorded total net periodic pension and postretirement benefit costs of$26.2 million and$22.8 million for the first half of fiscal 2020 and 2019, respectively. The$3.5 million increase in pension expense resulted from the combination of higher net actuarial losses recognized during the current first half versus last year's first half for approximately$3.2 million and a higher service costs of approximately$1.4 million during the current period versus the same period a year ago. These increases were partially offset by a decrease of approximately$1.2 million in interest costs during the current period, when compared to the same period a year ago. 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, but such changes are not expected to be material to our consolidated financial results. 36 -------------------------------------------------------------------------------- Restructuring Charges We recorded restructuring charges of$11.4 million during the first half of fiscal 2020, which compares with$27.8 million during the first half of fiscal 2019. These charges were the result of our continued implementation of our 2020 MAP to Growth, which focuses upon strategic shifts in operations across our entire business. On a consolidated basis, we incurred$6.5 million of severance and benefit costs during the first half of fiscal 2020 compared with$25.6 million during the same period a year ago. Facility closure and other related costs totaled$4.6 million during the first half of fiscal 2020 versus$1.5 million during the first half of fiscal 2019. Finally,$0.3 million of other asset write-offs during the period compared with$0.7 million during the same period a year ago. These charges were associated with closures of certain facilities as well as the elimination of duplicative headcount and infrastructure associated with certain of our businesses. For further information and detail about the 2020 MAP to Growth restructuring plan, see "Restructuring Charges" in Results of Operations - Three Months EndedNovember 30, 2019 , and Note 4, "Restructuring," to the Consolidated Financial Statements. Interest Expense Interest expense was$54.7 million for the first half of fiscal 2020 versus$47.5 million for the same period a year ago. The reversal of the convertible bond interest accrual during the first half of fiscal 2019 increased interest expense by approximately$2.1 million versus the same period a year ago. Excluding acquisition-related borrowings, higher average borrowings period over period increased interest expense by approximately$3.4 million during the first half of fiscal 2020 versus the comparable period a year ago. Higher average borrowings, related to recent acquisitions, increased interest expense during this year's first half by approximately$1.3 million versus the same period a year ago. Higher interest rates, which averaged 4.00% overall for the first half of fiscal 2020 compared with 3.99% for the same period of fiscal 2019, increased interest expense by approximately$0.3 million during the current period versus the same period last year. Investment (Income), Net Net investment income of approximately$14.2 million for the first half of fiscal 2020 compares to net investment losses of$4.6 million during the same period last year. Dividend and interest income totaled$3.7 million and$3.5 million for the first half of fiscal 2020 and 2019, respectively. Net gains on marketable securities totaled$10.5 million during the first half of fiscal 2020, while there were net realized losses of$8.1 million during the same period a year ago. IBT Our consolidated pretax income for the first half of fiscal 2020 of$244.6 million compares with pretax income of$158.5 million for the same period a year ago. Our CPG segment had IBT of$139.8 million , or 13.5% of net sales, for the six months endedNovember 30, 2019 , versus IBT of$100.4 million , or 10.2% of net sales, for the same period a year ago. Our CPG segment results reflect 2020 MAP to Growth savings, selling price increases and increased earnings from recent acquisitions. Our PCG segment had IBT of$61.4 million , or 10.4% of net sales, for the six months endedNovember 30, 2019 , versus IBT of$30.6 million , or 5.2% of net sales, for the same period a year ago. Our PCG segment results reflect 2020 MAP to Growth savings and selling price increases. Our Consumer segment IBT approximated$93.6 million , or 10.1% of net sales, for the first half of fiscal 2020, versus the prior year first half pretax income of$92.8 million , or 10.3% of net sales. The prior period results reflect the unfavorable legal settlements and related legal fees of approximately$10.0 million . Our Specialty segment had pretax income of$42.1 million , or 13.2% of net sales for the six months endedNovember 30, 2019 , versus pretax income of$49.9 million , or 14.4% of net sales, for the same period a year ago, reflecting declines in sales volume in our fluorescent pigment, restoration equipment and specialty coatings businesses. Income Tax Rate The effective income tax rate of 24.9% for the six months endedNovember 30, 2019 compares to the effective income tax rate of 24.7% for the six months endedNovember 30, 2018 . The effective income tax rates for the six months endedNovember 30, 2019 and 2018 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions, partially offset by tax benefits related to equity compensation. Net Income Net income of$183.8 million for the six months endedNovember 30, 2019 compares to net income of$119.4 million for the comparable prior year period. Net income attributable toRPM International Inc. stockholders for the first half of fiscal 2020 was$183.2 million , or 6.4% of consolidated net sales, which compared to net income of$119.0 million , or 4.2% of consolidated net sales for the comparable prior year period. Diluted earnings per share of common stock for the six months endedNovember 30, 2019 of$1.41 compares with diluted earnings per share of common stock of$0.89 for the six months endedNovember 30, 2018 .
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Fiscal 2020 Compared with Fiscal 2019
Approximately$300.2 million of cash was provided by operating activities during the first half of fiscal 2020, compared with$148.3 million of cash provided by operating activities during the same period last year. The net change in cash from operations 37
-------------------------------------------------------------------------------- includes the change in net income, which increased by$64.5 million during the first half of fiscal 2020 versus the same period during fiscal 2019. During the first half of fiscal 2020, we recorded$11.4 million in restructuring charges and made cash payments of$13.1 million related to our 2020 MAP to Growth, as further described in Note 4, "Restructuring." Changes in working capital accounts accounted for an improvement of approximately$146.2 million period over period, while all other accruals and adjustments to reconcile net income used approximately$58.8 million more cash flow during the first half of fiscal 2020 versus the same period last year. The change in accounts receivable during the first half of fiscal 2020 provided approximately$91.4 million more cash than during the same period a year ago. This resulted from improved margin initiatives that shifted approximately$100.0 million in receipts from the fourth quarter of fiscal 2019 to the first quarter of fiscal 2020. Days sales outstanding ("DSO") atNovember 30, 2019 and 2018 was 62.8 days. While many of our businesses achieved decreases in DSO during the current period versus last year, those improvements were more than offset by increased DSO at our Consumer segment resulting from a reduction of the volume of cash collections subject to early payment discounts. During the first half of fiscal 2020, we spent approximately$7.9 million less cash for inventory compared to our spending during the same period a year ago, which resulted primarily from the timing of purchases by retail customers. Days of inventory outstanding ("DIO") was approximately 91.2 and 91.1 days atNovember 30, 2019 and 2018, respectively. While many of our businesses improved their DIO by several days during the current quarter versus last year, those improvements were more than offset by inventory increases at certain of our other businesses in order to accommodate and maintain customer service levels, which are the result of plant consolidations occurring as part of our 2020 MAP to Growth. The change in accounts payable during the first half of fiscal 2020 used approximately$47.0 million less cash than during the first half of fiscal 2019, resulting principally from the timing of certain payments as we continue to move toward a center-led procurement process that includes negotiating modified payment terms. Cash provided from operations, along with the use of available credit lines, as required, remain our primary sources of liquidity.
Investing Activities
Capital expenditures, other than for ordinary repairs and replacements, are made to accommodate our continued growth to achieve production and distribution efficiencies, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. During the first half of fiscal 2020, we paid$36.3 million for acquisitions, net of cash acquired, versus$127.8 million during the comparable prior year period. Capital expenditures of$71.4 million during the first half of fiscal 2020 compare with depreciation of$53.1 million . In the comparable prior year period, capital expenditures were$57.8 million , which compared with depreciation of$49.6 million . We have been increasing, and will continue to increase, our capital spending in fiscal 2020, in an effort to consolidate ERP systems and our plant footprint, as part of 2020 MAP to Growth. We anticipate that additional shifts at our production facilities, coupled with the capacity added through acquisition activity and our planned increase in future capital spending levels, will enable us to meet increased demand throughout fiscal 2020 and beyond. Our captive insurance companies invest their excess cash in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are primarily attributable to differences in the timing and performance of their investments balanced against amounts required to satisfy claims. AtNovember 30, 2019 andMay 31, 2019 , the fair value of our investments in marketable securities totaled$122.5 million and$112.5 million , respectively. The fair value of our portfolio of marketable securities is based on quoted market prices for identical, or similar, instruments in active or non-active markets or model-derived-valuations with observable inputs. We have no marketable securities whose fair value is subject to unobservable inputs. As ofNovember 30, 2019 , approximately$190.5 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with$205.8 million atMay 31, 2019 . Undistributed earnings held at our foreign subsidiaries that are considered permanently reinvested will be used, for instance, to expand operations organically or for acquisitions in foreign jurisdictions. Further, our operations in theU.S. generate sufficient cash flow to satisfyU.S. operating requirements. Refer to Note 9, "Income Taxes," to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings. 38 --------------------------------------------------------------------------------
Financing Activities
Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at$822.0 million atNovember 30, 2019 , compared with$1.28 billion atMay 31, 2019 . During the current quarter, we used funds from our revolving credit facility to pay off our$450 million , 6.125% notes due inOctober 2019 .
4.550% Notes due 2029
OnFebruary 27, 2019 , we closed an offering for$350.0 million aggregate principal amount of 4.550% Notes due 2029 (the "2029 Notes"). The proceeds from the 2029 Notes were used to repay a portion of the outstanding borrowings under our revolving credit facility and for general corporate purposes. Interest on the 2029 Notes accrues fromFebruary 27, 2019 and is payable semiannually in arrears onMarch 1st andSeptember 1st of each year at a rate of 4.550% per year. The 2029 Notes mature onMarch 1, 2029 . The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable. 4.250% Notes due 2048 OnDecember 20, 2017 , we closed an offering for$300.0 million aggregate principal amount of 4.250% Notes due 2048 (the "2048 Notes"). The proceeds from the 2048 Notes were used to repay$250.0 million in principal amount of unsecured 6.50% senior notes dueFebruary 15, 2018 , and for general corporate purposes. Interest on the 2048 Notes accrues fromDecember 20, 2017 and is payable semiannually in arrears onJanuary 15th andJuly 15th of each year at a rate of 4.250% per year. The 2048 Notes mature onJanuary 15, 2048 . The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable.
5.250% Notes due 2045 and 3.750% Notes due 2027
OnMarch 2, 2017 , we issued$50.0 million aggregate principal amount of 5.250% Notes due 2045 (the "2045 Notes") and$400.0 million aggregate principal amount of 3.750% Notes due 2027 (the "2027 Notes"). The 2045 Notes are a further issuance of the$250 million aggregate principal amount of 5.250% Notes due 2045 initially issued by us onMay 29, 2015 . Interest on the 2045 Notes is payable semiannually in arrears onJune 1st andDecember 1st of each year at a rate of 5.250% per year. The 2045 Notes mature onJune 1, 2045 . Interest on the 2027 Notes is payable semiannually in arrears onMarch 15th andSeptember 15th of each year, at a rate of 3.750% per year. The 2027 Notes mature onMarch 15, 2027 . The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable.
Revolving Credit Agreement
During the quarter endedNovember 30, 2018 , we replaced our previous$800.0 million revolving credit agreement, which was set to expire onDecember 5, 2019 , with a$1.3 billion unsecured syndicated revolving credit facility (the "Revolving Credit Facility"), which expires onOctober 31, 2023 . The Revolving Credit Facility includes sublimits for the issuance of swingline loans, which are comparatively short-term loans used for working capital purposes and letters of credit. The aggregate maximum principal amount of the commitments under the Revolving Credit Facility may be expanded upon our request, subject to certain conditions, up to$1.5 billion . The Revolving Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditures, and for general corporate purposes. Accordingly, duringOctober 2019 , we utilized available funds from our Revolving Credit Facility to repay our$450 million unsecured 6.125% senior notes, which matured onOctober 15, 2019 . AtMay 31, 2019 , the outstanding balance on our 6.125% senior notes approximated$450.5 million , which is included in the current portion of long-term debt on our consolidated balance sheets. The Revolving Credit Facility requires us to comply with various customary affirmative and negative covenants, including a leverage covenant and interest coverage ratio, which are calculated in accordance with the terms as defined by the credit agreement. Under the terms of the leverage covenant, we may not permit our leverage ratio for total indebtedness to consolidated EBITDA for the four most recent fiscal quarters to exceed 3.75 to 1.0. During certain periods and per the terms of the Revolving Credit Facility, this ratio may be increased to 4.25 to 1.0 in the event of an acquisition for which the aggregate consideration is$100.0 million or greater. The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended. For purposes of these computations, EBITDA is defined in the Revolving Credit Facility. 39 -------------------------------------------------------------------------------- As ofNovember 30, 2019 , we were in compliance with all financial covenants contained in our Revolving Credit Facility, including the leverage and interest coverage ratio covenants. At that date, our leverage ratio was 2.93 to 1, while our interest coverage ratio was 7.59 to 1. Our available liquidity under our Revolving Credit Facility stood at$513.8 million atNovember 30, 2019 . 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
OnMay 9, 2014 , we entered into a$200.0 million accounts receivable securitization facility (the "AR Program"). The AR Program, which expires onMay 8, 2020 , was entered into pursuant to (1) a second amended and restated receivables sales agreement, dated as ofMay 9, 2014 , and subsequently amended onAugust 29, 2014 ;November 3, 2015 ;December 31, 2016 ; andMarch 31, 2017 (the "Sale Agreement"), among certain of our subsidiaries (the "Originators"), andRPM Funding Corporation , a special purpose entity (the "SPE") whose voting interests are wholly owned by us, and (2) an amended and restated receivables purchase agreement, dated as ofMay 9, 2014 and subsequently amended onFebruary 25, 2015 andMay 2, 2017 (the "Purchase Agreement"), among the SPE, certain purchasers from time to time party thereto (the "Purchasers"), andPNC Bank, National Association as administrative agent. Under the Sale Agreement, the Originators may, during the term thereof, sell specified accounts receivable to the SPE, which may in turn, pursuant to the Purchase Agreement, transfer an undivided interest in such accounts receivable to the Purchasers. Once transferred to the SPE, such receivables are owned in their entirety by the SPE and are not available to satisfy claims of our creditors or creditors of the originating subsidiaries until the obligations owing to the participating banks have been paid in full. We indirectly hold a 100% economic interest in the SPE and will, along with our subsidiaries, receive the economic benefit of the AR Program. The transactions contemplated by the AR Program do not constitute a form of off-balance sheet financing, and will be fully reflected in our financial statements. The maximum availability under the AR Program is$200.0 million . 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$200.0 million of funding available under the AR Program. As ofNovember 30, 2019 , the outstanding balance under the AR Program was$100.0 million , which compares with the maximum availability on that date of$200.0 million . The interest rate under the Purchase Agreement is based on the Alternate Base Rate, LIBOR Market Index Rate, one-month LIBOR or LIBOR for a specified tranche period, as selected by us, plus in each case a margin of 0.80%. In addition, as set forth in an Amended and RestatedFee Letter , datedMay 2, 2017 (the "Fee Letter"), the SPE is obligated to pay a monthly unused commitment fee to the Purchasers based on the daily amount of unused commitments under the Agreement, which ranges from 0.30% to 0.50% based on usage. 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.
2.25% Convertible Senior Notes due 2020
OnDecember 9, 2013 , we issued$205 million of 2.25% Convertible Senior Notes due 2020 (the "Convertible Notes"). We paid interest on the Convertible Notes semi-annually onJune 15th andDecember 15th of each year.
We completed the redemption of all
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--------------------------------------------------------------------------------Stock Repurchase Program
OnJanuary 9, 2008 , we announced our authorization of a stock repurchase program under which we may repurchase shares ofRPM International Inc. common stock at management's discretion. As announced onNovember 28, 2018 , our goal is to return$1.0 billion in capital to stockholders byMay 31, 2021 through share repurchases. OnApril 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 ofRPM International Inc. common stock byMay 31, 2021 . 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 endedNovember 30, 2019 , we did not repurchase any shares of our common stock under this program. During the three months endedNovember 30, 2018 , we repurchased 1,144,952 shares of our common stock at a cost of approximately$75.0 million , or an average cost of$65.50 per share, under this program. During the six months endedNovember 30, 2019 , we repurchased 1,655,616 shares of our common stock at a cost of approximately$100.0 million , or an average cost of$60.40 per share, under this program. During the six months endedNovember 30, 2018 , we repurchased 1,248,398 shares of our common stock at a cost of approximately$82.0 million , or an average cost of$65.68 per share, under this program.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financings for the year endedMay 31, 2019 , other than the minimum operating lease commitments as previously disclosed in our Form 10-K for the year endedMay 31, 2019 . As ofJune 1, 2019 , upon adoption of ASC 842, the minimum operating lease commitments are no longer off-balance sheet. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in, or relationships with, any special purpose entities that are not reflected in our financial statements.
OTHER MATTERS
Environmental Matters
Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect our results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. For additional information, refer to "Part II, Item 1. Legal Proceedings."
FORWARD-LOOKING STATEMENTS
The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital and the effect of changes in interest rates, and the viability of banks and other financial institutions; (b) the prices, supply and capacity of raw materials, including assorted pigments, resins, solvents, and other natural gas- and oil-based materials; packaging, including plastic containers; and transportation services, including fuel surcharges; (c) continued growth in demand for our products; (d) legal, environmental and litigation risks inherent in our construction and chemicals businesses and risks related to the adequacy of our insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon our foreign operations; (g) the effect of non-currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with our ongoing acquisition and divestiture activities; (i) the timing of and the realization of anticipated cost savings from restructuring initiatives and the ability to identify additional cost savings opportunities; (j) risks related to the adequacy of our contingent liability reserves; and (k) other risks detailed in our filings with theSecurities and Exchange Commission , including the risk factors set forth in our Annual Report on Form 10-K for the year endedMay 31, 2019 , as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.
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