RPM INTERNATIONAL INC. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements include all of our majority-owned and controlled subsidiaries. Investments in less-than-majority-owned joint ventures over which we have the ability to exercise significant influence are accounted for under the equity method. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our allowances for doubtful accounts; reserves for excess and obsolete inventories; allowances for recoverable sales and/or value-added taxes; uncertain tax positions; useful lives of property, plant and equipment; goodwill and other intangible assets; environmental, warranties and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, may differ materially from our estimates.
Our annual goodwill impairment analysis for fiscal 2022 did not result in any indicators of impairment. Should future earnings and cash flows at our reporting units decline, discount rates increase, and/or other relevant events and circumstances change that affect the fair value of our reporting units, future impairment charges to goodwill and other intangible assets may be required. InAugust 2022 , we announced our Margin Achievement Plan 2025 ("MAP 2025") operational improvement initiative. Initial phases of the plan have focused on commercial initiatives, operational efficiencies, and procurement. However, due to the challenged macroeconomic environment, we are currently evaluating certain business restructuring actions, specifically our go to market strategy for certain businesses operating inEurope . As a result of these potential improvements and business restructuring actions, impairment of intangible assets, including goodwill, and other long-lived assets, could be incurred. 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, 2022 . 22 --------------------------------------------------------------------------------
BUSINESS SEGMENT INFORMATION
The following tables reflect the results of our reportable segments consistent
with our management philosophy, and represent the information we utilize, in
conjunction with various strategic, operational and other financial performance
criteria, in evaluating the performance of our portfolio of businesses.
Three Months Ended Six Months Ended
November 30, November 30, November 30, November 30,
(In thousands) 2022 2021 2022 2021
Net Sales
CPG Segment $ 634,114 $ 614,190 $ 1,363,811 $ 1,258,552
PCG Segment 335,151 302,527 675,585 588,122
Consumer Segment 610,359 529,197 1,269,851 1,067,606
SPG Segment 212,084 193,624 414,781 375,679
Consolidated $ 1,791,708 $ 1,639,538 $ 3,724,028 $ 3,289,959
Income Before
Income Taxes (a)
CPG Segment
Income Before
Income Taxes (a) $ 75,453 $ 130,368 $ 184,655 $ 244,725
Interest
(Expense), Net (b) (3,756 ) (1,649 ) (4,523 ) (3,519 )
EBIT (c) $ 79,209 $ 132,017 $ 189,178 $ 248,244
PCG Segment
Income Before
Income Taxes (a) $ 45,294 $ 37,854 $ 92,248 $ 72,932
Interest Income,
Net (b) 292 247 473 331
EBIT (c) $ 45,002 $ 37,607 $ 91,775 $ 72,601
Consumer Segment
Income Before
Income Taxes (a) $ 93,873 $ 33,104 $ 210,562 $ 79,019
Interest Income,
Net (b) 1 73 27 149
EBIT (c) $ 93,872 $ 33,031 $ 210,535 $ 78,870
SPG Segment
Income Before
Income Taxes (a) $ 27,431 $ 20,591 $ 55,316 $ 45,147
Interest
(Expense), Net (b) (7 ) (29 ) (5 ) (64 )
EBIT (c) $ 27,438 $ 20,620 $ 55,321 $ 45,211
Corporate/Other
(Loss) Before
Income Taxes (a) $ (66,916 ) $ (58,763 ) $ (142,525 ) $ (97,198 )
Interest
(Expense), Net (b) (17,597 ) (22,460 ) (47,414 ) (36,074 )
EBIT (c) $ (49,319 ) $ (36,303 ) $ (95,111 ) $ (61,124 )
Consolidated
Net Income $ 131,542 $ 125,116 $ 300,821 $ 259,911
Add: Provision for
Income Taxes 43,593 38,038 99,435 84,714
Income Before
Income Taxes (a) 175,135 163,154 400,256 344,625
Interest (Expense) (27,918 ) (21,002 ) (54,629 ) (42,111 )
Investment Income
(Expense), Net 6,851 (2,816 ) 3,187 2,934
EBIT (c) $ 196,202 $ 186,972 $ 451,698 $ 383,802
(a) The presentation includes a reconciliation of Income (Loss) Before Income
Taxes, a measure defined by GAAP, to EBIT.
(b) Interest Income (Expense), Net includes the combination of Interest Income
(Expense) and Investment Income (Expense), Net.
(c) EBIT is a non-GAAP measure, and is defined as Earnings (Loss) Before
Interest and Taxes. We evaluate the profit performance of our segments based on
income before income taxes, but also look to EBIT, as a performance evaluation
measure because Interest (Income) Expense, Net is essentially related to
corporate functions, as opposed to segment operations. We believe EBIT is useful
to investors for this purpose as well, using EBIT as a metric in their
investment decisions. EBIT should not be considered an alternative to, or more
meaningful than, income before income taxes as determined in accordance with
GAAP, since EBIT omits the impact of interest in determining operating
performance, which represent items necessary to our continued operations,
23
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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.
RESULTS OF OPERATIONS
Three Months Ended
Net Sales Three months ended (in millions, Total Organic Acquisition Foreign Currency except November 30, 2022 November 30, 2021 Growth Growth(1) Growth Exchange Impact percentages) CPG Segment $ 634.1 $ 614.2 3.2 % 6.9 % 1.5 % -5.2 % PCG Segment 335.1 302.5 10.8 % 15.4 % 0.6 % -5.2 % Consumer Segment 610.4 529.2 15.3 % 17.5 % 0.4 % -2.6 % SPG Segment 212.1 193.6 9.5 % 11.5 % 0.9 % -2.9 % Consolidated $ 1,791.7 $ 1,639.5 9.3 % 12.4 % 1.0 % -4.1 %
(1) Organic growth includes the impact of price and volume.
Our CPG segment generated organic sales growth during the second quarter of fiscal 2023 when compared to the same quarter in the prior year driven by strength in restoration systems for commercial roofing, facades, and parking structures. Additionally, the segment's concrete admixtures and repair business continued to benefit from market share gains. Improved pricing in response to continued cost inflation also contributed to sales growth during the quarter. This growth was partially offset by deteriorating economic conditions inEurope and reduced demand for businesses that serve the new residential home construction market. Our PCG segment generated significant organic sales growth during the second quarter of fiscal 2023 in nearly all the major business units in the segment when compared to the same quarter in the prior year. Performing particularly well were businesses that provide flooring systems, protective coatings and fiberglass reinforced plastic grating, all of which were strategically well-positioned to benefit from growing vertical markets such as semiconductor chip manufacturing, pharmaceuticals, as well as energy. This increase was also facilitated by improved pricing in response to continued cost inflation. Our Consumer segment generated significant organic sales growth in comparison to the prior year due to improved pricing to catch up with continued cost inflation and strong sales growth inNorth America . The prior year comparison was negatively impacted by supply chain disruptions as a result of reduced raw material supply, particularly of alkyd-based resins. Our SPG segment generated significant organic sales growth during the second quarter of fiscal 2023, particularly those businesses serving the food coatings and additives market, as a result of strategically refocusing sales management and selling efforts. The segment's disaster restoration business benefited from the response to Hurricane Ian and improved material supply compared to a low prior year comparison when semiconductor chip shortages prevented the business from meeting customer demand. Gross Profit Margin Our consolidated gross profit margin of 38.5% of net sales for the second quarter of fiscal 2023 compares to a consolidated gross profit margin of 35.5% for the comparable period a year ago. The current quarter gross profit margin increase of approximately 3.0%, or 300 basis points ("bps"), resulted primarily from the realization of production efficiencies due to improved raw material supply and higher selling prices in response to continued cost inflation. In addition, our Map to Growth and MAP 2025, together MAP initiatives, resulted in incremental savings that favorably impacted our gross margin. Partially offsetting these improvements were continued inflation in raw materials and wages. We expect that these increased costs will continue to be reflected in our results throughout the remainder of fiscal 2023. In addition, rising interest rates have negatively impacted construction activity, existing home sales, and overall economic activity, resulting in reduced customer demand which we expect to continue into the third quarter. SG&A Our consolidated SG&A expense during the period was$52.9 million higher versus the same period last year and increased to 27.3% of net sales from 26.7% of net sales for the prior year quarter. Variable costs associated with improved results such as commission expense and bonuses were contributing factors. In addition, pay inflation and professional fees associated with our MAP 2025 initiatives contributed to this increase. Additional SG&A expense recognized by companies we recently acquired approximated$3.5 million during the second quarter of fiscal 2023. Our CPG segment SG&A was approximately$12.2 million higher for the second quarter of fiscal 2023 versus the comparable prior year period and increased as a percentage of net sales. The increase in expense was mainly due to higher distribution costs, pay inflation, as well as restoration of travel expenses compared to the prior year and investments in growth initiatives. Additionally, companies recently acquired generated approximately$1.8 million of additional SG&A expense. 24 -------------------------------------------------------------------------------- Our PCG segment SG&A was approximately$12.4 million higher for the second quarter of fiscal 2023 versus the comparable prior year period and increased as a percentage of net sales. The increase in expense as compared to the prior year period is mainly due to increased commissions as a result of higher volume as well as higher incentive compensation, pay inflation, increased bad debt expense, and the restoration of travel expenses after COVID. Additionally, companies recently acquired generated approximately$0.3 million of additional SG&A expense. Our Consumer segment SG&A increased by approximately$15.4 million during the second quarter of fiscal 2023 versus the same period last year, but decreased slightly as a percentage of net sales. The quarter-over-quarter increase in SG&A was attributable to pay inflation and restoration of travel expenses, as well as increases in advertising, promotional expense, incentive compensation, and distribution costs. Additionally, companies recently acquired generated approximately$0.9 million of additional SG&A expense. Our SPG segment SG&A was approximately$2.7 million higher during the second quarter of fiscal 2023 versus the comparable prior year period but decreased slightly as a percentage of net sales. The increase in SG&A expense is attributable to pay inflation and investments in growth initiatives across each of its business units, partially offset by a charge recorded during the prior year period related to the legal matter described above in Note 13, "Contingencies and Other Accrued Losses," to the Consolidated Financial Statements. Additionally, companies recently acquired generated approximately$0.5 million of additional SG&A expense.
SG&A expenses in our corporate/other category increased by
The following table summarizes the retirement-related benefit plans' impact on income before income taxes for the three months endedNovember 30, 2022 and 2021, as the service cost component has a significant impact on our SG&A expense: Three months ended (in millions) November 30, 2022 November 30, 2021 Change Service cost $ 12.2 $ 13.7$ (1.5 ) Interest cost 9.3 5.4 3.9 Expected return on plan assets (11.3 ) (12.4 ) 1.1 Amortization of: Prior service (credit) (0.1 ) (0.1 ) - Net actuarial losses recognized 4.6 4.4 0.2 Total Net Periodic Pension & Postretirement Benefit Costs $ 14.7 $ 11.0 $ 3.7 We expect that pension expense will fluctuate on a year-to-year basis, depending upon the investment performance of plan assets and potential changes in interest rates, both of which are difficult to predict, but which may have a material impact on our consolidated financial results in the future.
Restructuring Charges
See Note 3, "Restructuring," to the Consolidated Financial Statements, for details.
Interest Expense
Three months ended
(in millions, except percentages) November 30, 2022 November 30, 2021
Interest expense $ 27.9 $ 21.0
Average interest rate (a) 3.90 % 3.07 %
(a) The interest rate increase was a result of higher market rates on the variable cost borrowings.
Change in interest
(in millions) expense
Acquisition-related borrowings $ 0.9
Non-acquisition-related average borrowings 0.4
Change in average interest rate 5.6
Total Change in Interest Expense $ 6.9
Investment (Income) Expense, Net
See Note 5, "Investment (Income) Expense, Net," to the Consolidated Financial Statements for details.
Other Expense (Income), Net
See Note 6, "Other Expense (Income), Net," to the Consolidated Financial Statements for details.
25
--------------------------------------------------------------------------------Income (Loss) Before Income Taxes ("IBT")
Three months ended
November 30, 2022 % of net November 30, 2021 % of net
(in millions, except percentages) sales sales
CPG Segment $ 75.4 11.9 % $ 130.4 21.2 %
PCG Segment 45.3 13.5 % 37.9 12.5 %
Consumer Segment 93.9 15.4 % 33.1 6.3 %
SPG Segment 27.4 12.9 % 20.6 10.6 %
Non-Op Segment (66.9 ) - (58.8 ) -
Consolidated $ 175.1 $ 163.2
Our CPG segment, the most internationally concentrated segment, results reflect
the negative impact of deteriorated macroeconomic conditions in Europe and
unfavorable foreign currency exchange. In addition, our prior year CPG segment
results include a $41.9 million gain on the sale of certain real property
assets. Our PCG segment results reflect improved pricing in response to
continued cost inflation, volume growth and improved product mix, which was
partially offset by unfavorable foreign currency exchange. Our Consumer segment
results reflect improved pricing to catch up to continued cost inflation and
improved material supply which led to improved operating efficiencies. Our SPG
segment results reflect improved pricing in response to continued cost
inflation, as well as increased operating efficiencies due to improved material
supply. Our Non-Op segment results reflect the unfavorable swing in pension
non-service costs, along with increased interest expense and professional fees.
Income Tax Rate The effective income tax rate of 24.9% for the three months
ended November 30, 2022 compares to the effective income tax rate of 23.3% for
the three months ended November 30, 2021 . The effective income tax rates for the
presented periods reflect variances from the 21% statutory rate due primarily to
the impact of state and local income taxes, non-deductible business expenses and
the net tax on foreign subsidiary income resulting from the global intangible
low-taxed income provisions, partially offset by tax benefits related to equity
compensation. Additionally, the effective tax rate for the three-month period
ended November 30, 2022 reflects an unfavorable period-over-period tax rate
differential on foreign earnings.
Net Income
Three months ended
(in millions, except percentages
sales sales
Net income $ 131.5 7.3 % $ 125.1 7.6 %
Net income attributable to RPM
International Inc. stockholders 131.3 7.3 % 124.9 7.6 %
Diluted earnings per share 1.02 0.96
Six Months Ended
Six Months Ended
(in millions, Total Organic Acquisition Foreign Currency
except November 30, 2022 November 30, 2021 Growth Growth(1) Growth Exchange Impact
percentages)
CPG Segment $ 1,363.8 $ 1,258.6 8.4 % 11.4 % 1.8 % -4.8 %
PCG Segment 675.6 588.1 14.9 % 19.4 % 0.3 % -4.8 %
Consumer
Segment 1,269.8 1,067.6 18.9 % 20.8 % 0.4 % -2.3 %
SPG Segment 414.8 375.7 10.4 % 12.2 % 0.8 % -2.6 %
Consolidated $ 3,724.0 $ 3,290.0 13.2 % 16.0 % 1.0 % -3.8 %(1) Organic growth includes the impact of price and volume.
Our CPG segment generated significant organic sales growth during the first half of fiscal 2023 when compared to the same prior year period driven by strength in restoration systems for commercial roofing, facades and parking structures. Additionally, the segment's concrete admixtures and repair business benefited from market share gains. Improved pricing in response to continued cost inflation also contributed to sales growth during the first six months of the year. This growth was partially offset by deteriorating economic conditions and unfavorable foreign exchange translation inEurope , along with reduced demand for businesses that serve the new residential home construction market. 26 -------------------------------------------------------------------------------- Our PCG segment generated significant sales growth during the first half of fiscal 2023 in nearly all the major business units in the segment when compared to the same period in the prior year. Performing particularly well were businesses that provide flooring systems, protective coatings, and fiberglass reinforced plastic grating, all of which were strategically well-positioned to benefit from growing vertical markets such as semiconductor chip manufacturing, pharmaceuticals, as well as energy. This increase was also facilitated by strong demand in energy markets and price increases in response to continued cost inflation. Internationally, unfavorable foreign exchange translation was a headwind, particularly inEurope , but growth in emerging markets was strong in local currency. Our Consumer segment generated significant organic growth during the first half of fiscal 2023 in comparison to the prior year period due to improved raw material supply, particularly of alkyd-based resins secured through strategic investment in its supply chain, insourcing, and qualifying new suppliers, resulting in improved product availability. In addition, sales growth benefitted from price increases to catch up with continued cost inflation and the prior year comparison when supply chain disruptions impacted raw material supply, which was partially offset by unfavorable foreign exchange translation, particularly inEurope . Our SPG segment generated significant sales growth during the first half of fiscal 2023, particularly those businesses serving the food coatings and additives market, as a result of strategically refocusing sales management and selling efforts. The segment's disaster restoration business also benefited from the response to Hurricane Ian and worked through backlog after resolving previous semiconductor chip supply shortages. This was partially offset by unfavorable foreign exchange translation. Gross Profit Margin Our consolidated gross profit margin of 38.5% of net sales for the first half of fiscal 2023 compares to a consolidated gross profit margin of 36.4% for the comparable period a year ago. The current period gross profit margin increase of approximately 2.1%, or 210 basis points ("bps"), resulted primarily from higher selling prices catching up with continued cost inflation as well as the realization of production efficiencies due to improved raw material supply, savings from MAP initiatives, and improved sales. Partially offsetting these improvements were continued inflation in raw materials and wages. We expect that these increased costs will continue to be reflected in our results throughout the remainder of fiscal 2023. In addition, rising interest rates have negatively impacted construction activity, existing home sales, and overall economic activity, resulting in reduced customer demand which we expect to continue into the third quarter. SG&A Our consolidated SG&A expense during the period was$119.1 million higher versus the same period last year and increased to 26.2% of net sales from 26.0% of net sales for the prior year period. Variable costs associated with improved results such as commission expense and bonuses were contributing factors. In addition, professional fees associated with our MAP 2025 initiatives and pay inflation contributed to this increase. Additional SG&A expense recognized by companies we recently acquired approximated$7.5 million during the first half of fiscal 2023. Our CPG segment SG&A was approximately$27.9 million higher for the first half of fiscal 2023 versus the comparable prior year period and increased slightly as a percentage of net sales. The increase in expense was mainly due to higher distribution costs, higher commission expense associated with higher sales, pay inflation, as well as restoration of discretionary spending (i.e. meetings, travel, etc.) compared to the prior year and investments in growth initiatives. Additionally, companies recently acquired generated approximately$4.6 million of additional SG&A expense. Our PCG segment SG&A was approximately$23.5 million higher for the first half of fiscal 2023 versus the comparable prior year period but decreased slightly as a percentage of net sales. The increase in expense as compared to the prior year period is mainly due to increased commissions, higher distribution costs, pay inflation, increased bad debt expense, along with restoration of travel expenses and investments in growth initiatives for diversification of its industrial coatings business. Additionally, companies recently acquired generated approximately$0.3 million of additional SG&A expense. Our Consumer segment SG&A increased by approximately$33.0 million during the first half of fiscal 2023 versus the same period last year, but decreased as a percentage of net sales. The period over period increase in SG&A was attributable to increases in advertising and promotional expense, increased distribution costs, pay inflation, and the restoration of travel expenses. Additionally, companies recently acquired generated approximately$1.8 million of additional SG&A expense. Our SPG segment SG&A was approximately$8.1 million higher during the first half of fiscal 2023 versus the comparable prior year period but decreased slightly as a percentage of net sales. The increase in SG&A expense is attributable to pay inflation and investments in growth initiatives across each of its business units, partially offset by a charge recorded during the prior year period related to the legal matter described above in Note 13, "Contingencies and Other Accrued Losses," to the Consolidated Financial Statements. Additionally, companies recently acquired generated approximately$0.8 million of additional SG&A expense. SG&A expenses in our corporate/other category increased by$26.6 million during the first half of fiscal 2023 as compared to last year's first half mainly due to higher professional fees related to operational improvement initiatives. 27 -------------------------------------------------------------------------------- The following table summarizes the retirement-related benefit plans' impact on income before income taxes for the six months endedNovember 30, 2022 and 2021, as the service cost component has a significant impact on our SG&A expense: Six Months Ended (in millions) November 30, 2022 November 30, 2021 Change Service cost $ 24.2 $ 27.4$ (3.2 ) Interest cost 18.6 10.9 7.7 Expected return on plan assets (22.5 ) (24.9 ) 2.4 Amortization of: Prior service (credit) (0.1 ) (0.2 ) 0.1 Net actuarial losses recognized 9.2 8.8 0.4 Total Net Periodic Pension & Postretirement Benefit Costs $ 29.4 $ 22.0$ 7.4 We expect that pension expense will fluctuate on a year-to-year basis, depending upon the investment performance of plan assets and potential changes in interest rates, both of which are difficult to predict, but which may have a material impact on our consolidated financial results in the future.
Restructuring Charges
See Note 3, "Restructuring," to the Consolidated Financial Statements, for details.
Interest Expense
Six Months Ended
(in millions, except percentages) November 30, 2022 November 30, 2021
Interest expense $ 54.6 $ 42.1
Average interest rate (a) 3.70 % 3.11 %
(a) The interest rate increase was a result of higher market rates on the variable cost borrowings.
Change in interest
(in millions) expense
Acquisition-related borrowings $ 2.0
Non-acquisition-related average borrowings 2.1
Change in average interest rate 8.4
Total Change in Interest Expense $ 12.5
Investment (Income) Expense, Net
See Note 5, "Investment (Income) Expense, Net," to the Consolidated Financial Statements for details.
Other Expense (Income), Net
See Note 6, "Other Expense (Income), Net," to the Consolidated Financial Statements for details.
Income (Loss) Before Income Taxes ("IBT")
Six Months Ended
November 30, 2022 % of net November 30, 2021 % of net
(in millions, except percentages) sales sales
CPG Segment $ 184.7 13.5 % $ 244.7 19.4 %
PCG Segment 92.2 13.7 % 72.9 12.4 %
Consumer Segment 210.6 16.6 % 79.0 7.4 %
SPG Segment 55.3 13.3 % 45.2 12.0 %
Non-Op Segment (142.5 ) - (97.2 ) -
Consolidated $ 400.3 $ 344.6
On a consolidated basis, our results reflect the unfavorable impact of foreign
exchange translation in Europe . Our CPG segment results reflect deteriorated
macroeconomic conditions in Europe and reduced demand for businesses that serve
the new residential home construction market. In addition, our prior year CPG
segment results include a $41.9 million gain on the sale of certain real
property assets. Our PCG segment results reflect improved pricing, volume growth
and improved product mix, resulting from digital sales management tools. Our
Consumer segment results reflect improved material supply which allowed for
previously developed operating efficiencies to be realized and improved pricing
to catch up with continued cost inflation. Our SPG segment results reflect
improved pricing, operating improvement cost savings, as well as increased
operating efficiencies due to improved material supply. Our Non-Op segment
results reflect the unfavorable swing in pension non-service costs along with
increased interest expense and professional fees.
28
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Income Tax Rate The effective income tax rate of 24.8% for the six months ended
November 30, 2022 compares to the effective income tax rate of 24.6% for the six
months ended November 30, 2021 . The effective income tax rates for the presented
periods reflect variances from the 21% statutory rate due primarily to the
impact of state and local income taxes, non-deductible business expenses and the
net tax on foreign subsidiary income resulting from the global intangible
low-taxed income provisions, partially offset by tax benefits related to equity
compensation. Additionally, the effective tax rate for the six-month period
ended November 30, 2022 reflects an unfavorable period-over-period tax rate
differential on foreign earnings.
Net Income
Six Months Ended
(in millions, except percentages
sales sales
Net income $ 300.8 8.1 % $ 259.9 7.9 %
Net income attributable to RPM
International Inc. stockholders 300.4 8.1 % 259.5 7.9 %
Diluted earnings per share 2.33 2.00
LIQUIDITY AND CAPITAL RESOURCES
Fiscal 2023 Compared with Fiscal 2022
Operating Activities
Approximately$190.9 million of cash was provided by operating activities during the first six months of fiscal 2023, compared with$159.4 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$40.9 million during the first six months of fiscal 2023 versus the same period during fiscal 2022.
During the first six months of fiscal 2023, the change in accounts receivable
provided approximately
During the first six months of fiscal 2023, the change in inventory used approximately$64.5 million more cash compared to our spending during the same period a year ago, as a result of material price inflation and strategic build-up of inventory to improve supply chain resiliency. Average days of inventory outstanding ("DIO") was approximately 102.3 and 85.9 days atNovember 30, 2022 and 2021, respectively. The change in accounts payable during the first six months of fiscal 2023 used approximately$66.2 million more cash than during the first six months of fiscal 2022 due principally to the timing of purchases which were suppressed by supply constraints at the end of fiscal year 2021 and reduced purchases in fiscal 2023 due to elevated inventory levels and improved supply chain conditions. Average days payables outstanding ("DPO") increased, however, by approximately 5.1 days to 86.5 days atNovember 30, 2022 from 81.4 days atNovember 30, 2021 . The change in other accrued liabilities during the first six months of fiscal 2023 provided approximately$76.0 million more cash than during the first six months of fiscal 2022 due principally to the timing of income taxes payable, increase in consulting cost accruals and the increase in customer rebate accruals.
Investing Activities
For the first six months of fiscal 2023, cash used for investing activities decreased by$4.4 million to$164.0 million as compared to$168.4 million in the prior year period. This year-over-year decrease in cash used for investing activities was mainly driven by a$66.7 million decrease in cash used for business acquisitions, and the sales of assets which provided$50.6 million of proceeds in the prior year period. We paid for capital expenditures of$113.5 million and$101.4 million during the first six months of fiscal 2023 and fiscal 2022, respectively. Our capital expenditures facilitate our continued growth, allow us to achieve production and distribution efficiencies, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. We continue to increase capital spending in fiscal 2023, to expand capacity to continue our growth initiatives. 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, 2022 andMay 31, 2022 , the fair value of our investments in available-for-sale debt securities and marketable equity securities, which includes captive insurance-related assets, totaled$143.6 million and$144.4 million , respectively. The fair value of our portfolio of 29 -------------------------------------------------------------------------------- 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, 2022 , approximately$217.2 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with$187.1 million atMay 31, 2022 . 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 7, "Income Taxes," to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings.
Financing Activities
For the first six months of fiscal 2023, financing activities provided$14.2 million of cash, which compares to cash used for financing activities of$26.0 million during the first six months of fiscal 2022. The overall increase in cash provided by financing activities was driven principally by debt-related activities. During the first six months of fiscal 2023, we provided approximately$413.4 million more cash from additions to short and long-term debt, as a result of additional net borrowings of approximately$267.7 million on our revolving credit facility and utilizing our$250 million AR Program. We also used approximately$351.1 million more cash to paydown existing debt during the first six months of fiscal 2023, compared to the same period in fiscal 2022, primarily as a result of repaying our$300 million 3.45% Notes due 2022. See below for further details on the significant components of our debt. Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at$880.0 million and$1.31 billion as ofNovember 30, 2022 andMay 31, 2022 , respectively.
Revolving Credit Agreement
During the quarter endedAugust 31, 2022 , we amended our$1.3 billion unsecured syndicated revolving credit facility (the "Revolving Credit Facility"), which was set to expire onOctober 31, 2023 . The amendment extended the expiration date toAugust 1, 2027 and increased the borrowing capacity to$1.35 billion . The Revolving Credit Facility bears interest at either the base rate or the adjusted Secured Overnight Financing Rate (SOFR), as defined, at our option, plus a spread determined by our debt rating. The Revolving Credit Facility includes sublimits for the issuance of swingline loans, which are comparatively short-term loans used for working capital purposes and letters of credit. The aggregate maximum principal amount of the commitments under the Revolving Credit Facility may be expanded upon our request, subject to certain conditions, up to$1.5 billion . The Revolving Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditures, and for general corporate purposes. The Revolving Credit Facility requires us to comply with various customary affirmative and negative covenants, including a leverage covenant (i.e., Net Leverage Ratio) and interest coverage ratio, which are calculated in accordance with the terms as defined by the Revolving Credit Facility. Under the terms of the leverage covenant, we may not permit our leverage ratio for total indebtedness to consolidated EBITDA for the four most recent fiscal quarters to exceed 3.75 to 1.00. During certain periods and per the terms of the Revolving Credit Facility, this ratio may be increased to 4.25 to 1.00 upon delivery of a notice to our lender requesting an increase to our maximum leverage or in connection with certain "material acquisitions." The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1.00. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended using EBITDA as defined in the Revolving Credit Facility. As ofNovember 30, 2022 , we were in compliance with all financial covenants contained in our Revolving Credit Facility, including the Net Leverage Ratio and Interest Coverage Ratio covenants. At that date, our Net Leverage Ratio was 2.53 to 1.00, while our Interest Coverage Ratio was 10.64 to 1.00. As ofNovember 30, 2022 , we had$647.9 million of borrowing availability on our Revolving Credit Facility. Our access to funds under our Revolving Credit Facility is dependent on the ability of the financial institutions that are parties to the Revolving Credit Facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our Revolving Credit Facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
Accounts Receivable Securitization Program
As ofNovember 30, 2022 , we had an outstanding balance under our accounts receivable securitization program (the "AR Program") 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. 30 -------------------------------------------------------------------------------- The AR Program contains various customary affirmative and negative covenants, as well as customary default and termination provisions. Our failure to comply with the covenants described above and other covenants contained in the Revolving Credit Facility could result in an event of default under that agreement, entitling the lenders to, among other things, declare the entire amount outstanding under the Revolving Credit Facility to be due and payable immediately. The instruments governing our other outstanding indebtedness generally include cross-default provisions that provide that, under certain circumstances, an event of default that results in acceleration of our indebtedness under the Revolving Credit Facility will entitle the holders of such other indebtedness to declare amounts outstanding immediately due and payable. See "Revolving Credit Agreement" above for details on our compliance with all significant financial covenants atNovember 30, 2022 .
Term Loan Facility Credit Agreement
OnAugust 1, 2022 , we amended the term loan credit facility, which was set to expire onFebruary 21, 2023 , to extend the maturity date toAugust 1, 2025 , and paid down the borrowings outstanding on the term loan to$250 million . The term loan bears interest at either the base rate or the adjusted SOFR, as defined, at our option, plus a spread determined by our debt rating. The term loan contains customary covenants, including but not limited to, limitations on our ability, and in certain instances, our subsidiaries' ability, to incur liens, make certain investments, or sell or transfer assets. Additionally, we may not permit (i) our consolidated interest coverage ratio to be less than 3.50 to 1.00, or (ii) our leverage ratio (defined as the ratio of total indebtedness to consolidated EBITDA for the four most recent fiscal quarters) to exceed 3.75 to 1.00. During certain periods this ratio may be increased to 4.25 to 1.0 upon delivery of a notice to our lender requesting an increase to our maximum leverage or in connection with certain "material acquisitions." See "Revolving Credit Agreement" above for details on our compliance with all significant financial covenants atNovember 30, 2022 .
Refer to Note G, "Borrowings," to the Consolidated Financial Statements, in our
Annual Report on Form 10-K for the fiscal year ended
Stock Repurchase Program
See Note 10, "Stock Repurchase Program" to the Consolidated Financial Statements, for further detail surrounding our stock repurchase program.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financings. We have no subsidiaries that
are not included in our financial statements, nor do we have any interests in,
or relationships with, any special purpose entities that are not reflected in
our financial statements.
OTHER MATTERS
Environmental Matters
Environmental obligations continue to be appropriately addressed and, based upon
the latest available information, it is not anticipated that the outcome of such
matters will materially affect our results of operations or financial condition.
Our critical accounting policies and estimates set forth above describe our
method of establishing and adjusting environmental-related accruals and should
be read in conjunction with this disclosure. For additional information, refer
to "Part II, Item 1. Legal Proceedings."
31
--------------------------------------------------------------------------------FORWARD-LOOKING STATEMENTS
The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital, and the viability of banks and other financial institutions; (b) the prices, supply and 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 Covid pandemic; (l) risks related to adverse weather conditions or the impacts of climate change and natural disasters; (m) risks related to the Russian invasion ofUkraine and other wars; (n) risks related to data breaches and data privacy violations; and (o) 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, 2022 , 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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