CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements include all of our majority-owned
subsidiaries. Investments in less-than-majority-owned joint ventures for which
we have the ability to exercise significant influence over are accounted for
under the equity method. Preparation of our financial statements requires the
use of estimates and assumptions that affect the reported amounts of our assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. We continually evaluate
these estimates, including those related to our allowances for doubtful
accounts; reserves for excess and obsolete inventories; allowances for
recoverable sales and/or value-added taxes; uncertain tax positions; useful
lives of property, plant and equipment; goodwill and other intangible assets;
environmental, warranties and other contingent liabilities; income tax valuation
allowances; pension plans; and the fair value of financial instruments. We base
our estimates on historical experience, our most recent facts, and other
assumptions that we believe to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying values of our
assets and liabilities. Actual results, which are shaped by actual market
conditions, may differ materially from our estimates.
A comprehensive discussion of the accounting policies and estimates that are the
most critical to our financial statements are set forth in our Annual Report on
Form 10-K for the year ended May 31, 2020.
24
--------------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION
The following tables reflect the results of our reportable segments consistent
with our management philosophy, and represent the information we utilize, in
conjunction with various strategic, operational and other financial performance
criteria, in evaluating the performance of our portfolio of businesses.
Three Months Ended
August 31, August 31,
(In thousands) 2020 2019
Net Sales
CPG Segment $ 547,690 $ 536,105
PCG Segment 259,788 297,241
Consumer Segment 641,168 479,330
SPG Segment 158,024 160,088
Consolidated $ 1,606,670 $ 1,472,764
Income Before Income Taxes (a)
CPG Segment
Income Before Income Taxes (a) $ 98,349 $ 82,680
Interest (Expense), Net (b) (2,110 ) (2,027 )
EBIT (c) $ 100,459 $ 84,707PCG Segment
Income Before Income Taxes (a) $ 28,514 $ 28,057
Interest (Expense), Net (b)
(31 ) (129 )
EBIT (c) $ 28,545 $ 28,186Consumer Segment
Income Before Income Taxes (a) $ 132,722 $ 59,158
Interest (Expense), Net (b)
(62 ) (105 )
EBIT (c) $ 132,784 $ 59,263SPG Segment
Income Before Income Taxes (a) $ 20,449 $ 23,327
Interest Income (Expense), Net (b)
(82 ) 26
EBIT (c) $ 20,531 $ 23,301Corporate/Other
(Loss) Before Income Taxes (a) $ (38,665 ) $ (50,373 )
Interest (Expense), Net (b)
(6,697 ) (20,697 )
EBIT (c) $ (31,968 ) $ (29,676 )Consolidated
Net Income $ 180,785 $ 106,496
Add: Provision for Income Taxes 60,584 36,353
Income Before Income Taxes (a) 241,369 142,849
Interest (Expense) (21,745 ) (28,317 )
Investment Income, Net 12,763 5,385
EBIT (c) $ 250,351 $ 165,781
(a) The presentation includes a reconciliation of Income (Loss) Before Income
Taxes, a measure defined by generally accepted accounting principles ("GAAP")
in the U.S., 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 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.
25
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Three Months Ended August 31, 2020
Net Sales Consolidated net sales of $1,606.7 million for the first quarter of
fiscal 2021 grew by approximately 9.1% from net sales of $1,472.8 million for
last year's first quarter. Organic sales, which include the impact of price and
volume, contributed 9.3% to consolidated net sales while acquisitions added
0.5%. Unfavorable foreign currency exchange impacted consolidated net sales
during the current quarter by 0.7%.
CPG segment net sales for the current quarter grew by 2.2% to $547.7 million
from net sales of $536.1 million during the same period a year ago. Organic
growth contributed 3.6% during the quarter, mainly driven by market share gains
and the introduction of new products, with the fastest growth being generated in
our roofing business, which experienced better weather in the current year than
the prior year when unfavorable conditions caused a delay in North American
construction activity, and our commercial sealants business, which experienced
sales during the first quarter of fiscal 2021 from distributors who did not
order in April and May due to Covid-19 lockdown restrictions. Unfavorable
foreign currency exchange negatively impacted the segment's net sales by 1.4%
during the current quarter.
PCG segment net sales for the current quarter declined by 12.6% to $259.8
million from net sales of $297.3 million during the same period a year ago. The
organic decline was 12.2% during the quarter as restrictions associated with
Covid-19 impacted the ability of contractors to gain access to the facilities of
our end customers. Furthermore, our customers in the energy sector are facing
poor economic conditions, which is causing deferrals in industrial maintenance
spending. Recent acquisitions contributed 0.3% to net sales during the current
quarter, while unfavorable foreign currency exchange negatively impacted the
segment's net sales by 0.7% during the current quarter.
Consumer segment net sales for the quarter grew by 33.8% to $641.2 million from
$479.3 million during last year's first quarter. Organic growth provided 34.0%,
while unfavorable foreign currency exchange negatively impacted net sales in the
segment by 0.2% during the current quarter versus the same period a year
ago. The significant increase in sales volume resulted from a combination of
higher "do-it-yourself" demand as consumers are spending more time at home
during the Covid-19 shutdowns and an easier comparison to the prior year, when
sales were very low due to extremely wet weather.
SPG segment net sales for the quarter decreased by 1.3% to $158.0 million from
$160.1 million during last year's first quarter. Organic sales declined 5.7%
during the current quarter, as a result of supply chain difficulties and
operating disruptions in our water damage restoration business and decreased
demand in our fluorescent pigments and edible coatings businesses, all resulting
from the Covid-19 pandemic. These declines were somewhat offset by favorable
market conditions in our marine business, as Covid-19 has increased demand for
outdoor recreation, our wood coatings business, which benefited from increased
lumber sales, and our nail polish business, as Covid-19 has led to more demand
for our product offering with nails being done at home instead of at
salons. Additionally, foreign currency exchange had a favorable impact on the
segment's net sales of 0.3% during the quarter, while recent acquisitions added
4.1% of net sales during the quarter.
As demonstrated above, Covid-19 has had a mixed impact on our businesses,
impacting some unfavorably and others favorably. RPM continues to be well-served
by the strategic balance in its portfolio of businesses. It continues to be
difficult to predict the future financial impact on net sales, as we cannot
predict the duration or scope of the pandemic, but the impact could be
material. Future performance in net sales is dependent on several factors,
including but not limited to: (i) the ability of our customers to continue
operations; (ii) continued organic growth in DIY sales, as people spend more
time at home; (iii) a potential for organic growth in professional and consumer
cleaning and disinfectant brands, some of which are effective against Covid-19;
(iv) the nature and extent of facility closures as a result of Covid-19; and (v)
the length and severity of the downturn in energy markets and associated
unfavorable impact on maintenance spending in this sector. With that being said,
we expect to generate consolidated sales growth in the low- to mid-single
digits, which is more in line with recent quarters prior to the outbreak of
Covid-19.
Gross Profit Margin Our consolidated gross profit margin of 40.7% of net sales
for the first quarter of fiscal 2021 compares to a consolidated gross profit
margin of 39.0% for the comparable period a year ago. The current quarter gross
profit margin increase of approximately 1.7% of net sales, or 170 basis points
("bps"), resulted primarily from a combination of increases in selling prices,
MAP to Growth savings, which include raw material savings due to our centralized
procurement initiatives, and higher sales volume versus the same period a year
ago.
Raw material costs inflation seems to be moderating in a number of our key
product categories. Our global supply chain remains strong, despite some
challenges at specific businesses in our portfolio. While we have had to
temporarily shut down certain plants in response to Covid-19, we have generally
been able to maintain our principal operations. While we have not yet
experienced a material impact, we do anticipate that certain raw materials and
packaging components are likely to create future cost pressure, as our
26
--------------------------------------------------------------------------------
suppliers are struggling to meet demand in light of Covid-19. Despite these
facts, as we cannot predict the duration or scope of the Covid-19 pandemic, the
future financial impact to gross profit margin cannot be reasonably estimated,
but could be material.
SG&A Our consolidated SG&A expense during the current period was $4.6 million
lower versus the same period last year and decreased to 24.6% of net sales from
27.2% of net sales for the prior year quarter. During the first quarter of
fiscal 2021, we continued our MAP to Growth and have generated incremental
savings of approximately $6.4 million. Additional SG&A expense recognized by
companies we recently acquired approximated $1.3 million during the first
quarter of fiscal 2021.
Our CPG segment SG&A was approximately $9.4 million lower for the first quarter
of fiscal 2021 versus the comparable prior year period and decreased as a
percentage of net sales. This decrease was mainly due to minimizing
discretionary spending (i.e., meetings, travel, etc.), salary cuts taken in
response to the economic downturn, and MAP to Growth savings.
Our PCG segment SG&A was approximately $8.6 million lower for the first quarter
of fiscal 2021 versus the comparable prior year period, but increased as a
percentage of net sales, mainly due to the decrease in sales for the
quarter. The decrease in SG&A was primarily attributable to a reduction in
discretionary spending, as well as MAP to Growth savings. Additionally,
companies we recently acquired contributed approximately $0.2 million of
additional SG&A expense during the current quarter.
Our Consumer segment SG&A increased by approximately $13.7 million during the
first quarter of fiscal 2021 versus the same period last year, but significantly
decreased as a percentage of net sales. The year-over-year increase in SG&A was
primarily attributable to increases in distribution and incentives as a result
of higher volume, offset somewhat by minimizing discretionary spending. There
were also slight increases in advertising and promotional expense when compared
to the prior year quarter.
Our SPG segment SG&A was approximately $0.7 million lower during the first
quarter of fiscal 2021 versus the comparable prior year period and decreased as
a percentage of net sales. The slight decrease in SG&A expense is attributable
to cost control measures associated with lower sales volumes and savings
resulting from actions taken during the past year associated with our MAP to
Growth. Additionally, companies we recently acquired contributed approximately
$1.1 million of additional SG&A expense during the current quarter.
SG&A expenses in our corporate/other category increased slightly to $29.0
million during the first quarter of fiscal 2021 as compared to $28.5 million
recorded during last year's first quarter.
We recorded total net periodic pension and postretirement benefit costs of
$16.4 million and $13.1 million for the first quarter of fiscal 2021 and 2020,
respectively. The $3.3 million increase in pension expense resulted from the
combination of higher net actuarial losses recognized during the current quarter
versus last year's first quarter for approximately $2.9 million and a higher
service costs of approximately $1.3 million during the current quarter versus
the same period a year ago. These increases were partially offset by a decrease
of approximately $1.4 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, both of which are difficult
to predict in light of the lingering macroeconomic uncertainties associated with
Covid-19, but which may have a material impact on our consolidated financial
results in the future.
As we cannot predict the duration or scope of the Covid-19 pandemic, the future
financial impact to SG&A cannot be reasonably estimated, but could be
material. As previously disclosed, the disruption caused by the outbreak of
Covid-19 is expected to delay the finalization of our MAP to Growth past the
original target completion date of December 31, 2020, which may impact our
near-term ability to drive further reduction in SG&A as a percentage of
sales. However, this will be offset to some degree by lower variable SG&A, such
as reduced travel-related expenses incurred by our associates, due to travel
restrictions in place because of the Covid-19 outbreak.
Restructuring Charges We recorded restructuring charges of $4.2 million during
the first quarter of fiscal 2021, which compares with $6.6 million during the
first quarter of fiscal 2020. These charges were the result of the continued
implementation of our MAP to Growth, which focuses upon strategic shifts in
operations across our entire business. On a consolidated basis, we recognized
$2.5 million of severance and benefit costs during the first quarter of fiscal
2021 compared with $3.8 million during the same period a year ago. Facility
closure and other related costs totaled $1.5 million during the first quarter of
fiscal 2021 versus $2.8 million during the first quarter of fiscal
2020. Finally, $0.2 million of other restructuring costs during the current
period compared with $0.1 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 $18.6 million of future additional
charges in relation to implementation of our MAP to Growth. These additional
charges include approximately $9.7 million of severance and benefit costs, $8.2
million of facility closure and other related charges, as well as $0.7 million
of other restructuring costs. We previously expected these charges to be
incurred by the end of calendar year 2020, upon which we expected to achieve an
annualized pretax savings of approximately $290 million per year.
27
--------------------------------------------------------------------------------
Recently, however, the disruption caused by the outbreak of Covid-19 is expected
to delay our implementation of our MAP to Growth past the original target
completion date of December 31, 2020. We will provide an update on the revised
target completion timeline at a later date. However, by May 31, 2021, we now
expect we will have achieved our annualized pretax savings goal of approximately
$290 million and made substantial progress on our $230 million working capital
improvement goal. See Note 3, "Restructuring," to the Consolidated Financial
Statements, for further details surrounding our MAP to Growth.
Interest Expense Interest expense was $21.7 million for the first quarter of
fiscal 2021 versus $28.3 million for the same period a year ago. Excluding
acquisition-related borrowings, lower average borrowings quarter over quarter
decreased interest expense by approximately $2.3 million during the first
quarter of fiscal 2021 when compared to the prior year quarter. Higher average
borrowings, related to recent acquisitions, increased interest expense during
this year's first quarter by approximately $0.2 million versus the same period a
year ago. Lower interest rates, which averaged 3.38% overall for the first
quarter of fiscal 2021 compared with 4.13% for the same period of fiscal 2020,
decreased interest expense by approximately $4.5 million during the current
quarter versus the same period last year. The interest rate decrease was a
result of lower market rates on the variable cost borrowings.
Investment (Income)Expense, Net Net investment income of approximately
$12.8 million for the first quarter of fiscal 2021 compares to net investment
income of $5.4 million during the same period last year. Dividend and interest
income totaled $1.0 million and $1.8 million for the first quarter of fiscal
2021 and 2020, respectively. Net gains on marketable securities totaled $11.8
million during the first quarter of fiscal 2021 compared to $3.5 million during
the same period a year ago.
Income Before Income Taxes ("IBT") Our consolidated IBT for the first quarter of
fiscal 2021 of $241.4 million compares with IBT of $142.8 million for the same
period a year ago. Our CPG segment had IBT of $98.3 million, or 18.0% of net
sales, for the quarter ended August 31, 2020, versus IBT of $82.7 million, or
15.4% of net sales, for the same period a year ago. Our CPG segment results
reflect selling price increases, moderating raw material costs, MAP to Growth
savings and cost control measures. Our PCG segment had IBT of $28.5 million, or
11.0% of net sales, for the quarter ended August 31, 2020, versus IBT of
$28.1 million, or 9.4% of net sales, for the same period a year ago. Our PCG
segment results reflect proactively managing a favorable product and service mix
with a focus on higher margins, as well as MAP to Growth business
rationalization efforts. Our Consumer segment IBT approximated $132.7 million,
or 20.7% of net sales, for the first quarter of fiscal 2021, versus the prior
year first quarter IBT of $59.2 million, or 12.3% of net sales. Our Consumer
segment results reflect the large increase in sales and related volume
leveraging impact on margins, along with savings from MAP to Growth. Our SPG
segment had IBT of $20.4 million, or 12.9% of net sales for the quarter ended
August 31, 2020, versus IBT of $23.3 million, or 14.6% of net sales, for the
same period a year ago, reflecting declines in sales volume in our water damage
restoration products, fluorescent pigments and edible coatings businesses, which
were somewhat mitigated by savings from MAP to Growth and other cost cutting
measures.
Income Tax Rate The effective income tax rate of 25.1% for the three months
ended August 31, 2020 compares to the effective income tax rate of 25.5% for the
three months ended August 31, 2019. The effective income tax rates for the three
months ended August 31, 2020 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 $180.8 million for the quarter ended August 31, 2020
compares to net income of $106.5 million for the comparable prior year
period. Net income attributable to RPM International Inc. stockholders for the
first quarter of fiscal 2021 was $180.6 million, or 11.2% of consolidated net
sales, which compared to net income of $106.2 million, or 7.2% of consolidated
net sales for the comparable prior year period.
Diluted earnings per share of common stock for the quarter ended August 31, 2020
of $1.39 compares with diluted earnings per share of common stock of $0.82 for
the quarter ended August 31, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Fiscal 2021 Compared with Fiscal 2020
Approximately $318.1 million of cash was provided by operating activities during
the first three months of fiscal 2021, compared with $145.1 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 $74.3 million during the first three months of fiscal 2021 versus
the same period during fiscal 2020. During the first three months of fiscal
2021, we recorded $4.2 million in restructuring charges and made cash payments
of $6.2 million related to our MAP to Growth, as further described in Note 3,
"Restructuring."
28
--------------------------------------------------------------------------------
Additionally, certain government entities located where we have operations have
enacted various pieces of legislation designed to help businesses weather the
economic impact of Covid-19 and ultimately preserve jobs. Some of this
legislation, such as the Coronavirus Aid, Relief, and Economic Security (CARES)
Act here in the U.S., enables employers to postpone the payment of various types
of taxes over varying time horizons. As of May 31, 2020, we had deferred $17.7
million of such government payments that would have normally been paid during
our fourth quarter of fiscal 2020, but which will be paid in future
periods. During the first quarter ended August 31, 2020, we deferred an
additional $14.8 million of such government payments that would have normally
been paid during our first quarter of fiscal 2021, but which will be paid in
future periods. The $14.8 million of deferrals generated during the first
quarter of fiscal 2021 is presented net of payments that occurred during the
quarter but which normally would have been paid in prior periods.
The change in accounts receivable during the first three months of fiscal 2021
provided approximately $115.7 million less cash than during the same period a
year ago. This resulted from the timing of sales, which dipped sharply in the
fourth quarter of last year, but rebounded sharply in the first quarter of this
year. Days sales outstanding ("DSO") at August 31, 2020 decreased to 60.4 days
from 63.7 days at August 31, 2019. Our CPG, Consumer and SPG segments achieved
decreases in DSO during the current period versus last year. Those improvements
were partially offset by increased DSO at our PCG segment.
During the first three months of fiscal 2021, we spent approximately $66.0
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 74.0 and 86.2
days at August 31, 2020 and 2019, respectively. The improvement in DIO was
driven mainly by the Consumer segment, which was due to a significant increase
in demand as well as our MAP to Growth efforts to improve our manufacturing and
operational planning processes.
The change in accounts payable during the first three months of fiscal 2021 used
approximately $68.8 million less cash than during the first three months of
fiscal 2020 due principally to the timing of purchases, but also longer days
payables outstanding ("DPO") which increased by approximately 3.5 days from 72.3
days at August 31, 2019 to 75.8 days at August 31, 2020. The longer DPO is a
direct result of moving toward a center-led procurement process that includes
negotiating modified payment terms. Cash provided from operations, along with
the use of available credit lines, as required, remain our primary sources of
liquidity.
As we cannot predict the duration or scope of the Covid-19 pandemic and its
impact on our customers and suppliers, the negative financial impact to our
results cannot be reasonably estimated, but could be material. We are actively
managing the business to maintain cash flow and we have significant
liquidity. We believe that these factors will allow us to meet our anticipated
funding requirements.
Investing Activities
For the first quarter of fiscal 2021, cash used for investing activities
decreased by $32.2 million to $42.3 million as compared to $74.5 million in the
prior year period. This year-over-year decrease in cash used for investing
activities was mainly driven by $30.6 million in less cash spent on acquisitions
as we did not acquire any businesses during the first quarter of fiscal 2021 as
compared to one acquisition during the first quarter of 2020.
Capital expenditures, other than for ordinary repairs and replacements, are made
to accommodate our continued growth to achieve production and distribution
efficiencies, expand capacity, introduce new technology, improve environmental
health and safety capabilities, improve information systems, and enhance our
administration capabilities. We paid for capital expenditures of $41.5 million
and $36.6 million during the first quarters of fiscal 2021 and fiscal 2020,
respectively. Depreciation is relatively flat year-over-year, as we incurred
$23.8 million in the current year as compared to $23.6 million in the prior
year. We have continued to increase our capital spending in fiscal 2021, in an
effort to consolidate ERP systems and our plant footprint, as part of our MAP to
Growth.
Our captive insurance companies invest their excess cash in marketable
securities in the ordinary course of conducting their operations, and this
activity will continue. Differences in the amounts related to these activities
on a year-over-year basis are primarily attributable to differences in the
timing and performance of their investments balanced against amounts required to
satisfy claims. At August 31, 2020 and May 31, 2020, the fair value of our
investments in marketable securities totaled $133.6 million and $114.0 million,
respectively. The fair value of our portfolio of marketable securities is based
on quoted market prices for identical, or similar, instruments in active or
non-active markets or model-derived-valuations with observable inputs. We have
no marketable securities whose fair value is subject to unobservable inputs.
As of August 31, 2020, approximately $217.6 million of our consolidated cash and
cash equivalents were held at various foreign subsidiaries, compared with $199.6
million at May 31, 2020. Undistributed earnings held at our foreign subsidiaries
that are considered permanently reinvested will be used, for instance, to expand
operations organically or for acquisitions in foreign jurisdictions. Further,
our operations in the U.S. generate sufficient cash flow to satisfy U.S.
operating requirements. Refer to Note 8, "Income Taxes," to the Consolidated
Financial Statements for additional information regarding unremitted foreign
earnings.
29
--------------------------------------------------------------------------------
Financing Activities
For the first quarter of fiscal 2021, cash used for financing activities
increased by $191.9 million to $268.9 million as compared to $77.0 million in
the prior year period. The overall increase in cash used for financing
activities was driven principally by debt-related activities, as we received
$75.6 million less cash related to new debt and used $212.2 million more cash to
paydown existing debt in the first quarter of fiscal 2021 as compared to the
prior year. See below for further details on the significant components of our
debt.
The increase in cash used for financing activities generated by debt-related
activities was somewhat offset by a $100.0 million decrease in cash used for the
repurchase of common stock during the first quarter of fiscal 2021, as compared
to the prior year, as we suspended our stock repurchase program during the
fourth quarter of fiscal 2020, given recent macroeconomic uncertainty resulting
from the Covid-19 pandemic.
Our available liquidity, including our cash and cash equivalents and amounts
available under our committed credit facilities, stood at $1.50 billion at
August 31, 2020, compared with $1.28 billion at May 31, 2020. Significant
components of our debt include (refer to "Note G - Borrowings" in our Annual
Report on Form 10-K for the fiscal year ended May 31, 2020 for more
comprehensive details):
Term Loan Facility Credit Agreement
On February 21, 2020, we and our subsidiary, RPM New Horizons Netherlands, B.V.
(the "Foreign Borrower"), entered into an unsecured syndicated term loan
facility credit agreement (the "New Credit Facility") with the lenders party
thereto and PNC Bank, National Association, as administrative agent for the
lenders. The New Credit Facility provides for a $300 million term loan to the
Company and a $100 million term loan to the Foreign Borrower (together, the
"Term Loans"), each of which was fully advanced on the closing date. The Term
Loans mature on February 21, 2023, with no scheduled amortization before that
date, and the Term Loans may be prepaid at any time without penalty or premium.
We agreed to guarantee all obligations of the Foreign Borrower under the New
Credit Facility. The proceeds of the Term Loans were used to repay a portion of
the outstanding borrowings under our revolving credit facility. After giving
effect to such repayment, we had approximately $820 million of borrowing
availability on our Revolving Credit Facility. See "Revolving Credit Agreement"
below for further details.
The Term Loans will bear interest at either the base rate or the Eurodollar
Rate, at our option, plus a spread determined by our debt rating. We, and the
Foreign Borrower, have entered into multicurrency floating to fixed interest
rate swap agreements that effectively fix interest payment obligations on the
entire principal amount of the Term Loans through their maturity at (a) 0.612%
per annum on our Term Loan, and (b) 0.558% per annum on the Foreign Borrower's
Term Loan.
The New Credit Facility contains customary covenants, including but not limited
to, limitations on our ability, and in certain instances, our subsidiaries'
ability, to incur liens, make certain investments, or sell or transfer assets.
Additionally, we may not permit (i) our consolidated interest coverage ratio to
be less than 3.5 to 1.0, or (ii) our leverage ratio (defined as the ratio of
total indebtedness, less unencumbered cash and cash equivalents in excess of $50
million, to consolidated EBITDA for the four most recent fiscal quarters) to
exceed 3.75 to 1.0. Upon notification to the lenders, however, the maximum
permitted leverage ratio can be relaxed to 4.25 to 1.0 for a one-year period in
connection with certain material acquisitions. The covenants contained in the
New Credit Facility are substantially similar to those contained in our
Revolving Credit Facility. See "Revolving Credit Agreement" below for details on
our compliance with all significant financial covenants at August 31, 2020.
Accounts Receivable Securitization Program
As of August 31, 2020, the outstanding balance under our AR Program was $45.0
million, which compares with the maximum availability on that date of $250.0
million. The maximum availability under the AR Program is $250.0 million, but
availability is further subject to changes in the credit ratings of our
customers, customer concentration levels or certain characteristics of the
accounts receivable being transferred and, therefore, at certain times, we may
not be able to fully access the $250.0 million of funding available under the AR
Program.
The AR Program contains various customary affirmative and negative covenants, as
well as customary default and termination provisions. Our failure to comply with
the covenants described above and other covenants contained in the Revolving
Credit Facility could result in an event of default under that agreement,
entitling the lenders to, among other things, declare the entire amount
outstanding under the Revolving Credit Facility to be due and payable
immediately. The instruments governing our other outstanding indebtedness
generally include cross-default provisions that provide that, under certain
circumstances, an event of default that results in acceleration of our
indebtedness under the Revolving Credit Facility will entitle the holders of
such other indebtedness to declare amounts outstanding immediately due and
payable.
30
--------------------------------------------------------------------------------
Revolving Credit Agreement
During the quarter ended November 30, 2018, we replaced our previous $800.0
million revolving credit agreement, which was set to expire on December 5, 2019,
with a $1.3 billion unsecured syndicated revolving credit facility (the
"Revolving Credit Facility"), which expires on October 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.
On April 30, 2020, we amended both our Revolving Credit Facility and the New
Credit Facility (see "Term Loan Facility Credit Agreement" section above for
further details) to allow the maximum permitted Net Leverage Ratio to be
increased from 3.75 to 1.00 to 4.25 to 1 for four consecutive fiscal quarters
following notice to the Administrative Agent on or before June 30, 2021 and the
payment of a ten basis point fee ("Increased Net Leverage Ratio Period"). Such
increase is in addition to any increase requested by the Company in the maximum
permitted Net Leverage Ratio following a Material Acquisition (any acquisition
for which the aggregate consideration is $100.0 million or greater). During an
Increased Net Leverage Ratio Period, the Euro-Rate Spread on loans under the
Revolving Credit Facility shall be increased to 1.75% and the Base Rate Spread
shall be 0.75% until the first day of the month following the Increased Net
Leverage Ratio Period: provided, however, if at any time during an Increased Net
Leverage Ratio, all three rating agencies rate the Company as non-investment
grade, the Euro-Rate Spread shall be 2.00% and the Base Rate Spread shall be
1.0% in each case until earlier of the first day of the month after the
Increased Net Leverage Ratio or the date on which at least one rating agency
rates the Company as investment grade. As of August 31, 2020, we have not
provided any notice to the Administrative Agent to trigger this provision of the
agreement.
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 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 connection with certain
material acquisitions, or under the Increased Net Leverage Ratio Period. The
minimum required consolidated interest coverage ratio for EBITDA to interest
expense is 3.50 to 1. The interest coverage ratio is calculated at the end of
each fiscal quarter for the four fiscal quarters then ended using EBITDA as
defined in the Revolving Credit Facility.
As of August 31, 2020, 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 2.39 to 1, while
our interest coverage ratio was 9.80 to 1. As of August 31, 2020, we had $1.04
billion of borrowing availability on our Revolving Credit Facility.
Our access to funds under our Revolving Credit Facility is dependent on the
ability of the financial institutions that are parties to the Revolving Credit
Facility to meet their funding commitments. Those financial institutions may not
be able to meet their funding commitments if they experience shortages of
capital and liquidity or if they experience excessive volumes of borrowing
requests within a short period of time. Moreover, the obligations of the
financial institutions under our Revolving Credit Facility are several and not
joint and, as a result, a funding default by one or more institutions does not
need to be made up by the others.
Stock Repurchase Program
See Note 10, "Stock Repurchase Program" to the Consolidated Financial
Statements, for further detail surrounding our stock repurchase program.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financings for the year ended May 31, 2020,
other than the minimum operating lease commitments as previously disclosed in
our Form 10-K for the year ended May 31, 2020. As of June 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.
31
--------------------------------------------------------------------------------
OTHER MATTERS
Environmental Matters
Environmental obligations continue to be appropriately addressed and, based upon
the latest available information, it is not anticipated that the outcome of such
matters will materially affect our results of operations or financial condition.
Our critical accounting policies and estimates set forth above describe our
method of establishing and adjusting environmental-related accruals and should
be read in conjunction with this disclosure. For additional information, refer
to "Part II, Item 1. Legal Proceedings."
FORWARD-LOOKING STATEMENTS
The foregoing discussion includes forward-looking statements relating to our
business. These forward-looking statements, or other statements made by us, are
made based on our expectations and beliefs concerning future events impacting us
and are subject to uncertainties and factors (including those specified below),
which are difficult to predict and, in many instances, are beyond our control.
As a result, our actual results could differ materially from those expressed in
or implied by any such forward-looking statements. These uncertainties and
factors include (a) global markets and general economic conditions, including
uncertainties surrounding the volatility in financial markets, the availability
of capital and the effect of changes in interest rates, and the viability of
banks and other financial institutions; (b) the prices, supply and capacity of
raw materials, including assorted pigments, resins, solvents, and other natural
gas- and oil-based materials; packaging, including plastic and metal containers;
and transportation services, including fuel surcharges; (c) continued growth in
demand for our products; (d) legal, environmental and litigation risks inherent
in our construction and chemicals businesses and risks related to the adequacy
of our insurance coverage for such matters; (e) the effect of changes in
interest rates; (f) the effect of fluctuations in currency exchange rates upon
our foreign operations; (g) the effect of non-currency risks of investing in and
conducting operations in foreign countries, including those relating to domestic
and international political, social, economic and regulatory factors; (h) risks
and uncertainties associated with our ongoing acquisition and divestiture
activities; (i) the timing of and the realization of anticipated cost savings
from restructuring initiatives and the ability to identify additional cost
savings opportunities; (j) risks related to the adequacy of our contingent
liability reserves; (k) risks relating to the recent outbreak of the coronavirus
(Covid-19); and (l) 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, 2020, 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.
© Edgar Online, source Glimpses
RPM INTERNATIONAL INC. 
