# RPM INTERNATIONAL INC/DE/ (RPM) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RPM INTERNATIONAL INC/DE/'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/110621/000095017024086386/rpm-20240531.htm
Accession: 0000950170-24-086386
Filing date: 2024-07-25
Report date: 2024-05-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/RPM/
All MD&A years: /company/RPM/mda/
Previous year: /company/RPM/mda/fy2023/ (FY 2023)
Next year: /company/RPM/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements include all 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.

We have identified below the accounting policies and estimates that are the most critical to our financial statements.

Goodwill

We test our goodwill balances at least annually, or more frequently as impairment indicators arise, at the reporting unit level. Our annual impairment assessment date has been designated as the first day of our fourth fiscal quarter. Our reporting units have been identified at the component level, which is one level below our operating segments.

We follow the Financial Accounting Standards Board (“FASB”) guidance found in ASC 350 that simplifies how an entity tests goodwill for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform a quantitative goodwill impairment test.

We assess qualitative factors in each of our reporting units that carry goodwill. Among other relevant events and circumstances that affect the fair value of our reporting units, we assess individual factors such as:

•
a significant adverse change in legal factors or the business climate;

•
an adverse action or assessment by a regulator;

•
unanticipated competition;

•
a loss of key personnel; and

•
a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed.

We assess these qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The quantitative process is required only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. However, we have an unconditional option to bypass a qualitative assessment and proceed directly to performing the quantitative analysis. We applied the quantitative process during our annual goodwill impairment assessments performed during the fourth quarters of fiscal 2024, 2023 and 2022.

In applying the quantitative test, we compare the fair value of a reporting unit to its carrying value. If the calculated fair value is less than the current carrying value, then impairment of the reporting unit exists. Calculating the fair value of a reporting unit requires our use of estimates and assumptions. We use significant judgment in determining the most appropriate method to establish the fair value of a reporting unit. We estimate the fair value of a reporting unit by employing various valuation techniques, depending on the availability and reliability of comparable market value indicators, and employ methods and assumptions that include the application of third-party market value indicators and the computation of discounted future cash flows determined from estimated cashflow adjustments to a reporting unit’s annual projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), or adjusted EBITDA, which adjusts for one-off items impacting revenues and/or expenses that are not considered by management to be indicative of ongoing operations. Our fair value estimations may include a combination of value indications from both the market and income approaches, as the income approach considers the future cash flows from a reporting unit’s ongoing operations as a going concern, while the market approach considers the current financial environment in establishing fair value.

In applying the market approach, we use market multiples derived from a set of similar companies. In applying the income approach, we evaluate discounted future cash flows determined from estimated cashflow adjustments to a reporting unit’s projected EBITDA. Under this approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. In applying the discounted cash flow methodology utilized in the income approach, we rely on a number of factors, including future business plans, actual and forecasted operating results, and market data. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s

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assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable.

Conclusion on Annual Goodwill Impairment Tests

As a result of the annual impairment assessments performed for fiscal 2024, 2023 and 2022, there were no goodwill impairments. Our fiscal 2024 annual impairment test for our Color Group reporting unit in our SPG Segment, which has approximately $11.0 million of goodwill, resulted in an excess of fair value over carrying value of approximately 18%. The lower fair value of this reporting unit is related to declining volumes in OEM markets. If planned sales growth initiatives for this business are not achieved, impairment of intangible assets, including goodwill, and other long-lived assets, could result.

Changes in the Composition of our Segments and Reporting Units in the First Quarter of Fiscal 2024

Effective June 1, 2023, in connection with our MAP 2025 operating improvement program, we realigned certain businesses and management structures within our CPG, PCG and SPG segments. As outlined in Note R, “Segment Information,” our CPG APAC and CPG India businesses, formerly of our Sealants reporting unit within our CPG segment, were transferred to our Platform component within our PCG segment. As a result of this change, we designated the Platform component as a separate reporting unit within our PCG segment. Within our SPG segment, two new reporting units were formed as our former DayGlo and Kirker reporting units were combined into one reporting unit: The Color Group, and our former Wood Finishes, Kop-Coat Protection Products, TCI and Modern Recreational Technologies reporting units were combined into one reporting unit: The Industrial Coatings Group.

Additionally, effective June 1, 2023, certain businesses of our Universal Sealants ("USL") reporting unit were transferred to our Fibergrate, Carboline and Stonhard reporting units within our PCG segment. As a result of this change, USL was no longer designated as a separate reporting unit and any remaining goodwill was transferred to the reporting units noted above.

During the first quarter of fiscal 2024, we performed a goodwill impairment test for the reporting units affected by the USL restructuring and the changes in the composition of our segments and reporting units using either a qualitative or a quantitative assessment. We concluded that the estimated fair values exceeded the carrying values for these reporting units, and accordingly, no indications of impairment were identified as a result of these changes.

Given these USL restructuring actions, we performed an interim impairment assessment of a remaining USL indefinite-lived tradename. Calculating the fair value of the tradename required the use of various estimates and assumptions. We estimated the fair value by applying a relief-from-royalty calculation, which included discounted future cash flows related to projected revenues impacted by this decision. In applying this methodology, we relied on a number of factors, including actual and forecasted revenues and market data. As the carrying amount of the tradename exceeded its fair value, an impairment loss of $3.3 million was recorded for the three months ended August 31, 2023. This impairment loss was classified as restructuring expense within our PCG segment.

Impairment Charge Recorded in the Third Quarter of Fiscal 2023

Although no impairment charge was recorded during fiscal 2024, 2023 and 2022 related to the annual impairment test, we did record a goodwill impairment charge in fiscal 2023. We announced our MAP 2025 operational improvement initiative in August 2022. Due to the challenged macroeconomic environment, we evaluated certain business restructuring actions, specifically our go to market strategy for operating in Europe. During the third quarter ended February 28, 2023, due to declining profitability and regulatory headwinds, management decided to restructure the USL reporting unit within our PCG segment and explored strategic alternatives for our infrastructure services business within the U.K., which represented approximately 30% of annual revenues of the reporting unit.

Due to this decision, we determined that an interim goodwill impairment assessment was required, as well as an impairment assessment for our other long-lived assets. Accordingly, we recorded an impairment loss totaling $36.7 million for the impairment of goodwill in our USL reporting unit during fiscal 2023. Refer to Note C, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements for additional details on this goodwill impairment charge.

Changes in the Composition of Reporting Units in the Fourth Quarter of Fiscal 2023

Subsequent to our annual impairment assessment, in the fourth quarter of fiscal 2023 and in connection with our MAP 2025 initiative, the Viapol business within our CPG segment was realigned from our Sealants reporting unit to our Euclid reporting unit. We performed an interim goodwill impairment assessment for both of the impacted reporting units using a quantitative assessment. Based on this assessment, we concluded that the estimated fair values exceeded the carrying values for these reporting units, and accordingly, no goodwill impairment was identified as a result of this realignment.

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Other Long-Lived Assets

We assess identifiable, amortizable intangible and other long-lived assets for impairment whenever events or changes in facts and circumstances indicate the possibility that the carrying values of these assets may not be recoverable over their estimated remaining useful lives. Factors considered important in our assessment, which might trigger an impairment evaluation, include the following:

•
significant under-performance relative to historical or projected future operating results;

•
significant changes in the manner of our use of the acquired assets;

•
significant changes in the strategy for our overall business; and

•
significant negative industry or economic trends.

Measuring a potential impairment of amortizable intangible and other long-lived assets requires the use of various estimates and assumptions, including the determination of which cash flows are directly related to the assets being evaluated, the respective useful lives over which those cash flows will occur and potential residual values, if any. If we determine that the carrying values of these assets may not be recoverable based upon the existence of one or more of the above-described indicators or other factors, any impairment amounts would be measured based on the projected net cash flows expected from these assets, including any net cash flows related to eventual disposition activities. The determination of any impairment losses would be based on the best information available, including internal estimates of discounted cash flows; market participant assumptions; quoted market prices, when available; and independent appraisals, as appropriate, to determine fair values. Cash flow estimates would be based on our historical experience and our internal business plans, with appropriate discount rates applied.

Additionally, we test all indefinite-lived intangible assets for impairment at least annually during our fiscal fourth quarter. We follow the guidance provided by ASC 350 that simplifies how an entity tests indefinite-lived intangible assets for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before applying traditional quantitative tests. We applied quantitative processes during our annual indefinite-lived intangible asset impairment assessments performed during the fourth quarters of fiscal 2024, 2023 and 2022.

The annual impairment assessment involves estimating the fair value of each indefinite-lived asset and comparing it with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we record an impairment loss equal to the difference. Calculating the fair value of the indefinite-lived assets requires our significant use of estimates and assumptions. We estimate the fair values of our intangible assets by applying a relief-from-royalty calculation, which includes discounted future cash flows related to each of our intangible asset’s projected revenues. In applying this methodology, we rely on a number of factors, including actual and forecasted revenues and market data.

Our annual impairment test of our indefinite-lived intangible assets performed during fiscal 2024 resulted in a $1.0 million impairment charge for an indefinite-lived tradename in our Consumer segment. This impairment loss was classified as selling, general and administrative ("SG&A") expenses within our Consumer segment. Our annual impairment test of our indefinite-lived intangible assets performed during fiscal 2023 and 2022 did not result in an impairment charge.

Although no impairment losses were recorded during fiscal 2023 and 2022 related to the annual impairment test, we did record an intangible asset impairment charge during the third quarter of fiscal 2023. In connection with MAP 2025 and related to the goodwill impairment charge noted above, we determined that an interim impairment assessment for our other long-lived assets was required following management's decision to restructure the USL reporting unit within our PCG segment. Accordingly, we recorded an impairment loss totaling $2.5 million for the impairment of an indefinite-lived tradename in our USL reporting unit during fiscal 2023. We did not record any impairments for our definite-lived long-lived assets as a result of this assessment. Refer to Note C, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements for further discussion.

Income Taxes

Our provision for income taxes is calculated using the asset and liability method, which requires the recognition of deferred income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in valuation allowances. We provide valuation allowances against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In determining the adequacy of valuation allowances, we consider cumulative and anticipated amounts of domestic and international earnings or losses of the appropriate character, anticipated amounts of foreign source income, as well as the anticipated taxable income resulting from the reversal of future taxable temporary differences. We intend to maintain any recorded valuation allowances until sufficient positive evidence (for example, cumulative positive foreign earnings or capital gain income) exists to support a reversal of the tax valuation allowances.

Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the

25

jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual effective income tax rates and related income tax liabilities may differ materially from our estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

Additionally, our operations are subject to various federal, state, local and foreign tax laws and regulations that govern, among other things, taxes on worldwide income. The calculation of our income tax expense is based on the best information available, including the application of currently enacted income tax laws and regulations, and involves our significant judgment. The actual income tax liability for each jurisdiction in any year can ultimately be determined, in some instances, several years after the financial statements have been published.

Our provision for income tax expense is allocated between continuing operations and other income categories, such as other comprehensive income (loss). We release the income tax effects from accumulated other comprehensive income ("AOCI") to income from continuing operations at the current tax rates when the related pretax changes are recognized. Disproportionate tax effects in AOCI are released to income tax expense only when circumstances upon which they are based cease to exist.

We also maintain accruals for estimated income tax exposures for many different jurisdictions. Tax exposures are settled primarily through the resolution of audits within each tax jurisdiction or the closing of a statute of limitation. Tax exposures and actual income tax liabilities can also be affected by changes in applicable tax laws, retroactive tax law changes or other factors, which may cause us to believe revisions of past estimates are appropriate. Although we believe that appropriate liabilities have been recorded for our income tax expense and income tax exposures, actual results may differ materially from our estimates.

Contingencies

We are party to various claims and lawsuits arising in the normal course of business. Although we cannot precisely predict the amount of any liability that may ultimately arise with respect to any of these matters, we record provisions when we consider the liability probable and estimable. Our provisions are based on historical experience and legal advice, reviewed quarterly and adjusted according to developments. In general, our accruals, including our accruals for environmental and warranty liabilities, discussed further below, represent the best estimate of a range of probable losses. Estimating probable losses requires the analysis of multiple factors that often depend on judgments about potential actions by third parties, such as regulators, courts, and state and federal legislatures. Changes in the amounts of our loss provisions, which can be material, affect our Consolidated Statements of Income. To the extent there is a reasonable possibility that potential losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterial to our results of operations, liquidity and consolidated financial position. We evaluate our accruals at the end of each quarter, or sometimes more frequently, based on available facts, and may revise our estimates in the future based on any new information that becomes available.

Our environmental-related accruals are similarly established and/or adjusted as more information becomes available upon which costs can be reasonably estimated. Actual costs may vary from these estimates because of the inherent uncertainties involved, including the identification of new sites and the development of new information about contamination. Certain sites are still being investigated; therefore, we have been unable to fully evaluate the ultimate costs for those sites. As a result, accruals have not been estimated for certain of these sites and costs may ultimately exceed existing estimated accruals for other sites. We have received indemnities for potential environmental issues from purchasers of certain of our properties and businesses and from sellers of some of the properties or businesses we have acquired. If the indemnifying party fails to, or becomes unable to, fulfill its obligations under those agreements, we may incur environmental costs in addition to any amounts accrued, which may have a material adverse effect on our financial condition, results of operations or cash flows.

We offer warranties on many of our products, as well as long-term warranty programs at certain of our businesses, and thus have established corresponding warranty liabilities. Warranty expense is impacted by variations in local construction practices, installation conditions, and geographic and climate differences. Although we believe that appropriate liabilities have been recorded for our warranty expense, actual results may differ materially from our estimates.

Pension and Postretirement Plans

We sponsor qualified defined benefit pension plans and various other nonqualified postretirement plans. The qualified defined benefit pension plans are funded with trust assets invested in a diversified portfolio of debt and equity securities and other investments. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding, (ii) cause volatility in the net periodic pension cost and (iii) increase our future contribution requirements. A significant decrease in investment returns or the market value of plan assets or a significant change in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plans could have an adverse impact on our cash flow.

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Changes in our key plan assumptions would impact net periodic benefit expense and the projected benefit obligation for our defined benefit and various postretirement benefit plans. Based upon May 31, 2024 information, the following tables reflect the impact of a 1% change in the key assumptions applied to our defined benefit pension plans in the United States and internationally:

[[GREPCENT_TABLE]]
[["","","U.S.","","","International"],["","","1% Increase","","","1% Decrease","","","1% Increase","","","1% Decrease"],["(In millions)"],["Discount Rate"],["(Decrease) increase in expense in FY 2024","","$","(4.9",")","","$","5.8","","","$","(1.1",")","","$","1.5"],["(Decrease) increase in obligation as of May 31, 2024","","$","(51.6",")","","$","60.0","","","$","(18.3",")","","$","22.5"],["Expected Return on Plan Assets"],["(Decrease) increase in expense in FY 2024","","$","(6.0",")","","$","6.0","","","$","(1.7",")","","$","1.7"],["(Decrease) increase in obligation as of May 31, 2024","","N/A","","","N/A","","","N/A","","","N/A"],["Compensation Increase"],["Increase (decrease) in expense in FY 2024","","$","5.5","","","$","(4.9",")","","$","1.0","","","$","(0.9",")"],["Increase (decrease) in obligation as of May 31, 2024","","$","22.7","","","$","(20.5",")","","$","3.3","","","$","(3.0",")"]]
[[/GREPCENT_TABLE]]

Based upon May 31, 2024 information, the following table reflects the impact of a 1% change in the key assumptions applied to our various postretirement health care plans:

[[GREPCENT_TABLE]]
[["","","U.S.","","","International"],["","","1% Increase","","","1% Decrease","","","1% Increase","","","1% Decrease"],["(In millions)"],["Discount Rate"],["(Decrease) increase in expense in FY 2024","","$","-","","","$","-","","","$","(0.7",")","","$","0.7"],["(Decrease) increase in obligation as of May 31, 2024","","$","(0.1",")","","$","0.1","","","$","(3.7",")","","$","4.7"]]
[[/GREPCENT_TABLE]]

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BUSINESS SEGMENT INFORMATION

We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings, roofing systems, flooring solutions, sealants, cleaners and adhesives. We manage our portfolio by organizing our businesses and product lines into four reportable segments as outlined below, which also represent our operating segments. Within each operating segment, we manage product lines and businesses which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our four operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief operating decision maker in determining how to allocate the assets of the company and evaluate performance. These four operating segments are each managed by an operating segment manager, who is responsible for the day-to-day operating decisions and performance evaluation of the operating segment’s underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to earnings (loss) before interest and taxes (“EBIT”), and/or adjusted EBIT, which adjusts for one-off items impacting revenues and/or expenses that are not considered by management to be indicative of ongoing operations, as a performance evaluation measure because interest income (expense), net is essentially related to corporate functions, as opposed to segment operations.

Effective June 1, 2023, certain Asia Pacific businesses and management structure, formerly of our CPG segment, were transferred to our PCG segment to create operating efficiencies and a more unified go-to-market strategy in Asia Pacific. This realignment is reflected in our reportable segments beginning with fiscal 2022. As such, historical segment results have been recast to reflect the impact of this change.

Our CPG reportable segment products and services are sold throughout North America and also account for a significant portion of our international sales. Our construction product lines are sold directly to manufacturers, contractors, distributors and end-users, including industrial manufacturing facilities, concrete and cement producers, public institutions and other commercial customers. Products and services within this reportable segment include construction sealants and adhesives, coatings and associated chemicals, roofing systems, concrete admixture and repair products, building envelope solutions, parking decks, insulated cladding, firestopping, flooring systems, and weatherproofing solutions.

Our PCG reportable segment products and services are sold throughout North America, as well as internationally, and are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include high-performance flooring solutions, corrosion control and fireproofing coatings, infrastructure repair systems and FRP structures.

Our Consumer reportable segment manufactures and markets professional use and DIY products for a variety of mainly residential applications, including home improvement and personal leisure activities. Our Consumer reportable segment’s major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe, Australia and South America. Our Consumer reportable segment products are primarily sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops and to other customers through distributors. The Consumer reportable segment offers products that include specialty, hobby and professional paints; caulks; adhesives; cleaners, sandpaper and other abrasives; silicone sealants and wood stains.

Our SPG reportable segment products are sold throughout North America and internationally, primarily in Europe. Our SPG product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. The SPG reportable segment offers products that include restoration services equipment, colorants, nail enamels, factory applied industrial coatings, preservation products, and edible coatings and specialty glazes for pharmaceutical and food industries.

In addition to our four reportable segments, there is a category of certain business activities and expenses, referred to as corporate/other, that does not constitute an operating segment. This category includes our corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on investments and other expenses not directly associated with any reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses and headquarters’ property and equipment. These corporate and other assets and expenses reconcile reportable segment data to total consolidated income before income taxes and identifiable assets.

We reflect income from our joint ventures on the equity method and receive royalties from our licensees.

The following table reflects the results of our reportable segments consistent with our management philosophy, and represents the information we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of product lines.

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[[GREPCENT_TABLE]]
[["SEGMENT INFORMATION"],["(In thousands)"],["Year Ended May 31,","","2024","","","2023","","","2022"],["Net Sales"],["CPG Segment","","$","2,702,466","","","$","2,508,805","","","$","2,402,497"],["PCG Segment","","","1,462,460","","","","1,433,634","","","","1,272,368"],["Consumer Segment","","","2,457,949","","","","2,514,770","","","","2,242,047"],["SPG Segment","","","712,402","","","","799,205","","","","790,816"],["Total","","$","7,335,277","","","$","7,256,414","","","$","6,707,728"],["Income Before Income Taxes (a)"],["CPG Segment"],["Income Before Income Taxes (a)","","$","385,339","","","$","300,971","","","$","389,443"],["Interest (Expense), Net (b)","","","(5,170",")","","","(8,580",")","","","(6,540",")"],["EBIT (c)","","$","390,509","","","$","309,551","","","$","395,983"],["PCG Segment"],["Income Before Income Taxes (a)","","$","199,951","","","$","142,469","","","$","146,134"],["Interest Income, Net (b)","","","4,642","","","","1,630","","","","442"],["EBIT (c)","","$","195,309","","","$","140,839","","","$","145,692"],["Consumer Segment"],["Income Before Income Taxes (a)","","$","408,200","","","$","378,157","","","$","175,084"],["Interest Income (Expense), Net (b)","","","2,561","","","","(3,372",")","","","266"],["EBIT (c)","","$","405,639","","","$","381,529","","","$","174,818"],["SPG Segment"],["Income Before Income Taxes (a)","","$","43,784","","","$","103,279","","","$","121,937"],["Interest Income (Expense), Net (b)","","","204","","","","68","","","","(86",")"],["EBIT (c)","","$","43,580","","","$","103,211","","","$","122,023"],["Corporate/Other"],["(Loss) Before Income Taxes (a)","","$","(249,437",")","","$","(275,494",")","","$","(225,799",")"],["Interest (Expense), Net (b)","","","(75,232",")","","","(99,013",")","","","(89,605",")"],["EBIT (c)","","$","(174,205",")","","$","(176,481",")","","$","(136,194",")"],["Consolidated"],["Net Income","","$","589,442","","","$","479,731","","","$","492,466"],["Add: (Provision) for Income Taxes","","","(198,395",")","","","(169,651",")","","","(114,333",")"],["Income Before Income Taxes (a)","","","787,837","","","","649,382","","","","606,799"],["Interest (Expense)","","","(117,969",")","","","(119,015",")","","","(87,928",")"],["Investment Income (Expense), Net","","","44,974","","","","9,748","","","","(7,595",")"],["EBIT (c)","","$","860,832","","","$","758,649","","","$","702,322"]]
[[/GREPCENT_TABLE]]

(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 (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, or adjusted EBIT, as a performance evaluation measure because interest expense is essentially related to corporate functions, as opposed to segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, income before income taxes as determined in accordance with GAAP, since EBIT omits the impact of interest in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community, all of whom believe, and we concur, that this measure is critical to the capital markets' analysis of our segments' core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results.

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RESULTS OF OPERATIONS

The following discussion includes a comparison of Results of Operations and Liquidity and Capital Resources for the years ended May 31, 2024 and 2023. For comparisons of the years ended May 31, 2023 and 2022, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2023 as filed on July 26, 2023.

Net Sales

[[GREPCENT_TABLE]]
[["","","Fiscal year ended May 31,"],["(In millions, except percentages)","","2024","","","2023","","","Total Growth (Decline)","","Organic Growth (Decline)(1)","","Acquisition & Divestiture Impact","","Foreign Currency Exchange Impact"],["CPG Segment","","$","2,702.5","","","$","2,508.8","","","","7.7","%","","6.6","%","","0.6","%","","0.5","%"],["PCG Segment","","","1,462.5","","","","1,433.6","","","","2.0","%","","3.4","%","","(0.4","%)","","(1.0","%)"],["Consumer Segment","","","2,457.9","","","","2,514.8","","","","(2.3","%)","","(1.8","%)","","0.0","%","","(0.5","%)"],["SPG Segment","","","712.4","","","","799.2","","","","(10.9","%)","","(9.6","%)","","(1.6","%)","","0.3","%"],["Consolidated","","$","7,335.3","","","$","7,256.4","","","","1.1","%","","1.3","%","","(0.1","%)","","(0.1","%)"],["(1) Organic growth includes the impact of price and volume."]]
[[/GREPCENT_TABLE]]

Our CPG segment generated significant organic sales growth during the current year in all the major business units in the segment when compared to the prior year. Performing particularly well were providers of restoration systems for roofing, facades and parking structures, which benefited from a strategic focus on repair and maintenance and its differentiated service model. Concrete admixtures and repair businesses also generated growth from increased demand for engineered solutions serving infrastructure and reshoring-related projects, including those that lower the carbon footprint of projects, in addition to businesses serving high-performance building construction and remodeling. This increase was also facilitated by growth in Latin America.

Our PCG segment generated sales growth during fiscal 2024 when compared to the prior year. Performing particularly well were businesses that provide engineered solutions for reshoring-related projects. This increase was also facilitated by improved pricing and strong demand in emerging markets, which was partially offset by unfavorable foreign exchange translation and the divestiture of USL's Bridgecare services division in the first quarter of fiscal 2024.

Our Consumer segment experienced organic sales declines in the current year driven by reduced inventory levels at retailers, the rationalization of lower-margin products and reduced DIY takeaway at retail as consumers focused spending on travel and entertainment and housing turnover hit multi-year lows. This decline is in comparison to a strong prior year, when sales grew 12.2%. These pressures were partially offset by market share gains, strength in international markets and improved pricing to catch up with cost inflation.

Our SPG segment experienced sales declines during the current year, driven by lower volumes at businesses supplying OEM markets which have been negatively impacted by a slowdown in the residential housing market. The divestiture of the non-core furniture warranty business in the third quarter of fiscal year 2023 also reduced sales versus the prior year. Finally, the segment's disaster restoration business declined due to a lack of inclement weather in comparison to the strong prior year results, which included the response to Hurricane Ian and other inclement weather. Improved pricing partially offset these volume declines.

Gross Profit Margin Our consolidated gross profit margin of 41.1% of net sales for fiscal 2024 compares to a consolidated gross profit margin of 37.9% for the comparable period a year ago. This gross profit margin increase of approximately 320 basis points ("bps") resulted primarily from our MAP 2025 initiatives, which resulted in incremental benefits in procurement, manufacturing and commercial excellence that favorably impacted our gross margin, in conjunction with benefits generated from the commodity cycle. Selling price increases also aided in the margin expansion.

While costs of raw materials have generally stabilized, we expect that inflation of some materials will potentially create headwinds impacting our results in fiscal 2025.

SG&A Expenses Our consolidated SG&A expense increased by approximately $157.5 million during fiscal 2024 versus fiscal 2023 and increased to 28.8% of net sales for fiscal 2024 from 27.0% of net sales for fiscal 2023. Variable costs associated with improved results, such as commission expense and bonuses, were primary drivers, along with merit increases, investments in growth initiatives and increased benefits, insurance and healthcare costs. In addition, as described further below in Note P, "Contingencies and Other Accrued Losses," to the Consolidated financial statements, there was an $8.9 million decrease in the gain on business interruption insurance proceeds received during the current year at our Consumer segment compared to the prior year. These were partially offset by reduced professional fees and reduced SG&A related to divestitures.

Our CPG segment SG&A was approximately $108.2 million higher for fiscal 2024 versus fiscal 2023 and increased by 210 bps as a percentage of net sales. The increase in expense was mainly due to variable costs associated with improved results such as commissions and bonuses, along with merit increases, increased benefits and investments in growth initiatives.

30

Our PCG segment SG&A was approximately $35.0 million higher for fiscal 2024 versus fiscal 2023 and increased by 180 bps as a percentage of net sales. The increase in expense as compared to the prior year period is mainly due to increased commissions as a result of improved results as well as merit increases, increased insurance costs and bad debt expense and the $4.5 million loss on the sale of USL's Bridgecare services division during the period as described below in Note C, "Goodwill and Other Intangible Assets," to the Consolidated Financial Statements.

Our Consumer segment SG&A increased by approximately $17.3 million during fiscal 2024 versus fiscal 2023 and increased by 110 bps as a percentage of net sales. The year-over-year increase in SG&A was primarily attributable to merit increases and insurance costs, in addition to the $8.9 million decrease in gain on business interruption insurance proceeds received in the current year, partially offset by a reduction in variable distribution costs and a $3.6 million gain that is associated with the sale of a facility.

Our SPG segment SG&A was approximately $1.6 million higher during fiscal 2024 versus fiscal 2023 and increased by 340 bps as a percentage of sales. The increase in SG&A expense is attributable to higher research and development costs, pay inflation and investments in strategic growth initiatives, partially offset by the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023, along with a reduction in incentive compensation.

SG&A expenses in our corporate/other category of $163.4 million during fiscal 2024 decreased by $4.6 million from $168.0 million recorded during fiscal 2023. This was mainly due to reduced professional fees related to our MAP 2025 operational improvement initiatives and reduced stock compensation, partially offset by increased compensation, healthcare costs and IT expenses.

The following table summarizes the retirement-related benefit plans’ impact on income before income taxes for the fiscal years ended May 31, 2024 and 2023, as the service cost component has a significant impact on our SG&A expense:

[[GREPCENT_TABLE]]
[["","","Fiscal year ended May 31,"],["(In millions)","","2024","","","2023","","","Change"],["Service cost","","$","49.4","","","$","49.1","","","$","0.3"],["Interest cost","","","45.3","","","","36.8","","","","8.5"],["Expected return on plan assets","","","(51.6",")","","","(44.7",")","","","(6.9",")"],["Amortization of:"],["Prior service (credit)","","","(0.1",")","","","(0.2",")","","","0.1"],["Net actuarial losses recognized","","","17.6","","","","18.4","","","","(0.8",")"],["Curtailment/settlement losses","","","(0.1",")","","","0.1","","","","(0.2",")"],["Total Net Periodic Pension & Postretirement Benefit Costs","","$","60.5","","","$","59.5","","","$","1.0"]]
[[/GREPCENT_TABLE]]

We expect that pension and postretirement 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 inflation, but which may have a material impact on our consolidated financial results in the future. A decrease of 1% in the discount rate or the expected return on plan assets assumptions would result in $8.0 million and $7.7 million higher expense, respectively. The assumptions and estimates used to determine the discount rate and expected return on plan assets are more fully described in Note N, “Pension Plans,” and Note O, “Postretirement Benefits,” to our Consolidated Financial Statements. Further discussion and analysis of the sensitivity surrounding our most critical assumptions under our pension and postretirement plans is discussed above in “Critical Accounting Policies and Estimates — Pension and Postretirement Plans.”

Restructuring Expense

The following table summarizes restructuring charges recorded during the years ended May 31, 2024 and 2023, related to our MAP 2025 initiative, which is a multi-year restructuring plan to build on the achievements of MAP to Growth and designed to improve margins by streamlining business processes, reducing working capital, implementing commercial initiatives to drive improved mix, pricing discipline and salesforce effectiveness and improving operating efficiency:

[[GREPCENT_TABLE]]
[["","","Fiscal year ended May 31,"],["(In millions)","","2024","","","2023"],["Severance and benefit costs","","$","24.0","","","$","8.5"],["Facility closure and other related costs","","","1.4","","","","0.7"],["Other restructuring costs","","","4.6","","","","2.5"],["Total Restructuring Costs","","$","30.0","","","$","11.7"]]
[[/GREPCENT_TABLE]]

Most activities under MAP 2025 are anticipated to be completed by the end of fiscal 2025; however, we expect some costs to extend beyond this date. We currently expect to incur approximately $39.8 million of future additional charges related to the implementation of MAP 2025. In addition, we incurred $3.8 million of restructuring costs associated with MAP to Growth for the year ended May 31, 2023.

For further information and details about MAP 2025, see Note B, “Restructuring,” to the Consolidated Financial Statements.

31

Interest Expense

[[GREPCENT_TABLE]]
[["","","Fiscal year ended May 31,"],["(In millions, except percentages)","","2024","","","2023"],["Interest expense","","$","118.0","","","$","119.0"],["Average interest rate (1)","","","4.73","%","","","4.08","%"],["(1) The interest rate increase was a result of higher market rates on the variable cost borrowings."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(In millions)","","Change in interest expense"],["Acquisition-related borrowings","","$","1.2"],["Non-acquisition-related average borrowings","","","(17.9",")"],["Change in average interest rate","","","15.7"],["Total Change in Interest Expense","","$","(1.0",")"]]
[[/GREPCENT_TABLE]]

Investment (Income) Expense, Net

See Note A(15), "Summary of Significant Accounting Policies - Investment (Income) Expense, Net," to the Consolidated Financial Statements for details.

(Gain) on Sales of Assets and Business, Net

See Note A(3), "Summary of Significant Accounting Policies - Acquisitions/Divestitures," and Note M, "Leases," to the Consolidated Financial Statements for details.

Other Expense (Income), Net

See Note A(16), "Summary of Significant Accounting Policies - Other Expense (Income), Net," to the Consolidated Financial Statements for details.

Income Before Income Taxes (“IBT”)

[[GREPCENT_TABLE]]
[["","","Fiscal year ended May 31,"],["(In millions, except percentages)","","2024","","% of net sales","","","2023","","% of net sales"],["CPG Segment","","$","385.3","","","14.3","%","","$","301.0","","","12.0","%"],["PCG Segment","","","199.9","","","13.7","%","","","142.5","","","9.9","%"],["Consumer Segment","","","408.2","","","16.6","%","","","378.1","","","15.0","%"],["SPG Segment","","","43.8","","","6.1","%","","","103.3","","","12.9","%"],["Non-Op Segment","","","(249.4",")","","\u2014","","","","(275.5",")","","\u2014"],["Consolidated","","$","787.8","","","","","$","649.4"]]
[[/GREPCENT_TABLE]]

On a consolidated basis, our results reflect MAP 2025 benefits, in conjunction with benefits generated from the commodity cycle. Our CPG segment results reflect volume growth, which resulted in improved fixed-cost utilization, and MAP 2025 benefits. Our PCG segment results reflect MAP 2025 benefits and improved pricing, partially offset by the $4.5 million loss on the sale of USL's Bridgecare services division during the year, the impairment of an indefinite-lived intangible asset, and increased bad debt expense. Our prior year PCG segment results include the $39.2 million goodwill and intangible asset impairment charges. Our Consumer segment results reflect improved operating efficiencies related to MAP 2025 and improved pricing and a $3.6 million gain that is associated with the sale of a facility, partially offset by the $8.9 million decrease in gain on business interruption insurance proceeds received during the year and negative fixed-cost absorption due to lower volumes. Our SPG segment results reflect the divestiture of the non-core furniture warranty business in the third quarter of fiscal 2023, unfavorable sales mix, incremental costs from investments in growth initiatives, and reduced fixed cost leverage at plants as a result of reduced volumes. In addition, our prior year SPG segment results reflect the $24.7 million gain on the sale of its non-core furniture warranty business. Our Non-Op segment results reflect the favorable swing in investment returns and decreased professional fees, partially offset by increased healthcare and IT expenses.

Income Tax Rate The effective income tax rate was 25.2% for fiscal 2024 compared to an effective income tax rate of 26.1% for fiscal 2023. Refer to Note H, “Income Taxes,” to the Consolidated Financial Statements for the components of the effective income tax rates.

Net Income

[[GREPCENT_TABLE]]
[["","","Fiscal year ended May 31,"],["(In millions, except percentages and per share amounts)","","2024","","% of net sales","","","2023","","% of net sales"],["Net income","","$","589.4","","","8.0","%","","$","479.7","","","6.6","%"],["Net income attributable to RPM International Inc. stockholders","","","588.4","","","8.0","%","","","478.7","","","6.6","%"],["Diluted earnings per share","","","4.56","","","","","","3.72"]]
[[/GREPCENT_TABLE]]

32

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Approximately $1.12 billion of cash was provided by operating activities during fiscal 2024, compared with $577.1 million of cash provided by operating activities during fiscal 2023. The net change in cash from operations includes the change in net income, which increased by $109.7 million year over year.

The change in accounts receivable during fiscal 2024 provided approximately $177.5 million more cash than fiscal 2023. This was primarily due to the timing of sales in our PCG and Consumer segments and improved cash collections in the current period. Average days sales outstanding (“DSO”) at May 31, 2024 decreased to 63.0 days from 66.9 days at May 31, 2023.

During fiscal 2024, the change in inventory used approximately $113.0 million less cash compared to our spending during fiscal 2023 as a result of our operating segments continuing to reduce inventory purchases and use safety stock built up in prior periods in response to supply chain outages and raw material inflation. Average days inventory outstanding (“DIO”) at May 31, 2024 decreased to 91.1 days from 106.0 days at May 31, 2023.

The change in accounts payable during fiscal 2024 used approximately $91.6 million less cash than during fiscal 2023. This is associated with significant payments made in the prior year related to inventory builds and raw material inflation. Additionally, we have reduced inventory purchases because of improved forecasting and coordination between sales and operations. Average days payables outstanding (“DPO”) at May 31, 2024 increased to 83.0 days from 80.5 days at May 31, 2023.

Investing Activities

For fiscal 2024, cash used for investing activities decreased by $43.3 million to $206.4 million as compared to $249.7 million in the prior year period. This year-over-year decrease in cash used for investing activities was mainly driven by a $40.5 million decrease in capital expenditures and a $32.0 million decrease in cash used for business acquisitions, partially offset by a $51.4 million decrease in proceeds from sales of assets and businesses, net.

We paid for capital expenditures of $214.0 million and $254.4 million during the periods ended May 31, 2024 and 2023, respectively. This reduction was the result of decreased capacity expansion projects in comparison to the prior period. Our capital expenditures facilitate our continued growth, allow us to achieve production and distribution efficiencies, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. We continued to invest capital spending in growth initiatives and to improve operational efficiencies in fiscal 2024.

Our captive insurance companies invest their excess cash in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are primarily attributable to the rebalancing of the portfolio, along with differences in the timing and performance of their investments balanced against amounts required to satisfy claims. At May 31, 2024 and 2023, the fair value of our investments in marketable securities totaled $154.3 million and $148.3 million, respectively.

As of May 31, 2024, approximately $215.2 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with approximately $196.8 million as of May 31, 2023. Undistributed earnings held at our foreign subsidiaries that are considered permanently reinvested will be used, for instance, to expand operations organically or for acquisitions in foreign jurisdictions. Further, our operations in the United States generate sufficient cash flow to satisfy U.S. operating requirements. Refer to Note H, “Income Taxes,” to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings.

Financing Activities

For fiscal 2024, cash used for financing activities increased by $588.8 million to $890.0 million as compared to $301.2 million used for financing activities in the prior year period. The overall increase in cash used for financing activities was driven principally by debt-related activities, as we repaid $273.4 million on our revolving credit facility, $250.0 million on our term loan, and $45.0 million on our accounts receivable securitization program ("AR Program") during fiscal 2024. Refer to Note G, “Borrowings,” to the Consolidated Financial Statements for a discussion of significant debt-related activity that occurred in fiscal 2024 and 2023, significant components of our debt, and our available liquidity.

33

The following table summarizes our financial obligations and their expected maturities at May 31, 2024, and the effect such obligations are expected to have on our liquidity and cash flow in the periods indicated.

[[GREPCENT_TABLE]]
[["Contractual Obligations"],["","","Total Contractual","","","Payments Due In"],["(In thousands)","","Payment Stream","","","2025","","","2026-27","","","2028-29","","","After 2029"],["Long-term debt obligations","","$","2,125,092","","","$","130,212","","","$","400,148","","","$","694,732","","","$","900,000"],["Finance lease obligations","","","14,723","","","","5,957","","","","6,269","","","","1,271","","","","1,226"],["Operating lease obligations","","","416,834","","","","78,528","","","","126,943","","","","77,201","","","","134,162"],["Other long-term liabilities (1):"],["Interest payments on long-term debt obligations","","","840,050","","","","68,275","","","","136,550","","","","106,550","","","","528,675"],["Contributions to pension and postretirement plans (2)","","","513,000","","","","5,900","","","","13,000","","","","117,000","","","","377,100"],["Total","","$","3,909,699","","","$","288,872","","","$","682,910","","","$","996,754","","","$","1,941,163"]]
[[/GREPCENT_TABLE]]

(1)
Excluded from other long-term liabilities are our gross long-term liabilities for unrecognized tax benefits, which totaled $7.5 million at May 31, 2024. Currently, we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities related to these liabilities.

(2)
These amounts represent our estimated cash contributions to be made in the periods indicated for our pension and postretirement plans, assuming no actuarial gains or losses, assumption changes or plan changes occur in any period. The projected contributions assume the required minimum amounts will be contributed.

The U.S. dollar fluctuated throughout the year and was weaker against other major currencies where we conduct operations at May 31, 2024 versus May 31, 2023, causing a favorable change in the accumulated other comprehensive income (loss) (refer to Note K, “Accumulated Other Comprehensive Income (Loss),” to the Consolidated Financial Statements) component of stockholders’ equity of $3.5 million this year versus an unfavorable change of $69.9 million last year. The change in fiscal 2024 was in addition to a favorable net change of $64.1 million related to adjustments required for minimum pension and other postretirement liabilities.

Stock Repurchase Program

Refer to Note I, “Stock Repurchase Program,” to the Consolidated Financial Statements for a discussion of 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.