Attached files

file filename
EX-32.1 - EX-32.1 - RPM INTERNATIONAL INC/DE/rpm-ex321_6.htm
EX-32.2 - EX-32.2 - RPM INTERNATIONAL INC/DE/rpm-ex322_9.htm
EX-12 - EX-12 - RPM INTERNATIONAL INC/DE/rpm-ex12_12.htm
EX-31.2 - EX-31.2 - RPM INTERNATIONAL INC/DE/rpm-ex312_10.htm
EX-31.1 - EX-31.1 - RPM INTERNATIONAL INC/DE/rpm-ex311_11.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

R

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2016,

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    .

Commission File No. 1-14187

 

 

RPM International Inc.

(Exact name of Registrant as specified in its charter)

 

 

DELAWARE

 

02-0642224

(State or other jurisdiction of

incorporation or organization)

 

(IRS. Employer

Identification No)

 

 

 

P.O. BOX 777;

2628 PEARL ROAD;

MEDINA, OHIO

 

44258

(Address of principal executive offices)

 

(Zip Code)

 

(330) 273-5090

(Registrant’s telephone number including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  R   No  o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  R    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

R

 

Accelerated filer

 

o

 

 

 

 

 

 

 

Non-accelerated filer

 

o  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  R.

As of April 1, 2016

132,845,726 Shares of RPM International Inc. Common Stock were outstanding.

 

 

 

 

 


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES*

INDEX

 

 

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets

 

3

 

 

Consolidated Statements of Income

 

4

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

Consolidated Statements of Cash Flows

 

6

 

 

Notes to Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

Item 4.

 

Controls and Procedures

 

44

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

45

Item 1A.

 

Risk Factors

 

45

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

45

Item 6.

 

Exhibits

 

46

Signatures

 

47

 

*

As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise.

2


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

February 29, 2016

 

 

May 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

220,712

 

 

$

174,711

 

Trade accounts receivable (less allowances of

 

 

 

 

 

 

 

 

  $22,450 and $24,526, respectively)

 

 

746,553

 

 

 

956,211

 

Inventories

 

 

739,716

 

 

 

674,205

 

Deferred income taxes

 

 

29,042

 

 

 

29,892

 

Prepaid expenses and other current assets

 

 

194,285

 

 

 

264,827

 

Total current assets

 

 

1,930,308

 

 

 

2,099,846

 

Property, Plant and Equipment, at Cost

 

 

1,278,553

 

 

 

1,258,304

 

Allowance for depreciation

 

 

(698,902

)

 

 

(668,658

)

Property, plant and equipment, net

 

 

579,651

 

 

 

589,646

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,182,293

 

 

 

1,215,688

 

Other intangible assets, net of amortization

 

 

566,977

 

 

 

604,130

 

Deferred income taxes, non-current

 

 

2,237

 

 

 

5,685

 

Other

 

 

186,623

 

 

 

179,245

 

Total other assets

 

 

1,938,130

 

 

 

2,004,748

 

Total Assets

 

$

4,448,089

 

 

$

4,694,240

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

367,038

 

 

$

512,165

 

Current portion of long-term debt

 

 

3,405

 

 

 

2,038

 

Accrued compensation and benefits

 

 

129,105

 

 

 

169,370

 

Accrued losses

 

 

27,581

 

 

 

22,016

 

Other accrued liabilities

 

 

255,274

 

 

 

197,647

 

Total current liabilities

 

 

782,403

 

 

 

903,236

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

1,749,823

 

 

 

1,654,037

 

Other long-term liabilities

 

 

609,952

 

 

 

752,821

 

Deferred income taxes

 

 

65,391

 

 

 

90,681

 

Total long-term liabilities

 

 

2,425,166

 

 

 

2,497,539

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01; authorized 50,000 shares; none issued

 

 

-

 

 

 

-

 

Common stock, par value $0.01; authorized 300,000 shares; issued 139,999 and outstanding 132,846 as of  February 29, 2016;  issued 138,828 and outstanding 133,203 as of  May 31, 2015

 

 

1,328

 

 

 

1,332

 

Paid-in capital

 

 

895,131

 

 

 

872,127

 

Treasury stock, at cost

 

 

(191,693

)

 

 

(124,928

)

Accumulated other comprehensive (loss)

 

 

(497,754

)

 

 

(394,135

)

Retained earnings

 

 

1,031,020

 

 

 

936,996

 

Total RPM International Inc. stockholders' equity

 

 

1,238,032

 

 

 

1,291,392

 

Noncontrolling Interest

 

 

2,488

 

 

 

2,073

 

Total equity

 

 

1,240,520

 

 

 

1,293,465

 

Total Liabilities and Stockholders' Equity

 

$

4,448,089

 

 

$

4,694,240

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

3


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Sales

 

$

988,555

 

 

$

946,367

 

 

$

3,387,065

 

 

$

3,221,391

 

Cost of Sales

 

 

575,593

 

 

 

566,629

 

 

 

1,947,211

 

 

 

1,879,317

 

Gross Profit

 

 

412,962

 

 

 

379,738

 

 

 

1,439,854

 

 

 

1,342,074

 

Selling, General and Administrative Expenses

 

 

370,913

 

 

 

346,171

 

 

 

1,096,361

 

 

 

1,027,585

 

Interest Expense

 

 

23,140

 

 

 

21,493

 

 

 

68,078

 

 

 

60,312

 

Investment (Income), Net

 

 

(2,909

)

 

 

(7,693

)

 

 

(8,077

)

 

 

(16,554

)

Other (Income), Net

 

 

(88

)

 

 

(660

)

 

 

(876

)

 

 

(3,524

)

Income Before Income Taxes

 

 

21,906

 

 

 

20,427

 

 

 

284,368

 

 

 

274,255

 

Provision for Income Taxes

 

 

2,613

 

 

 

99,379

 

 

 

80,564

 

 

 

174,512

 

Net Income (Loss)

 

 

19,293

 

 

 

(78,952

)

 

 

203,804

 

 

 

99,743

 

Less:  Net Income (Loss) Attributable to Noncontrolling Interests

 

 

711

 

 

 

(21,604

)

 

 

1,974

 

 

 

(11,754

)

Net Income (Loss) Attributable to RPM International Inc.

   Stockholders

 

$

18,582

 

 

$

(57,348

)

 

$

201,830

 

 

$

111,497

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

129,068

 

 

 

129,795

 

 

 

129,506

 

 

 

130,039

 

Diluted

 

 

129,068

 

 

 

129,795

 

 

 

136,848

 

 

 

134,995

 

Earnings (Loss) per Share of Common Stock Attributable to

   RPM International Inc. Stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

 

$

(0.44

)

 

$

1.53

 

 

$

0.84

 

Diluted

 

$

0.14

 

 

$

(0.44

)

 

$

1.50

 

 

$

0.84

 

Cash Dividends Declared per Share of Common Stock

 

$

0.275

 

 

$

0.260

 

 

$

0.810

 

 

$

0.760

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

4


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Net Income (Loss)

 

$

19,293

 

 

$

(78,952

)

 

$

203,804

 

 

$

99,743

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(16,214

)

 

 

(79,275

)

 

 

(100,634

)

 

 

(191,763

)

Pension and other postretirement benefit liability

   adjustments (net of tax of $1,827; $2,497; $5,645;

   $6,225, respectively)

 

 

3,264

 

 

 

6,511

 

 

 

11,064

 

 

 

14,425

 

Unrealized (loss) on securities (net of tax of $(3,376);

   $(1,560); $(5,971); $(2,715), respectively)

 

 

(7,334

)

 

 

(3,488

)

 

 

(14,049

)

 

 

(5,979

)

Unrealized gain on derivatives (net of tax of $0; $85;

   $0; $119, respectively)

 

 

-

 

 

 

420

 

 

 

-

 

 

 

637

 

Total other comprehensive (loss)

 

 

(20,284

)

 

 

(75,832

)

 

 

(103,619

)

 

 

(182,680

)

Total Comprehensive Income (Loss)

 

 

(991

)

 

 

(154,784

)

 

 

100,185

 

 

 

(82,937

)

Less:  Comprehensive Income (Loss) Attributable to

   Noncontrolling Interests

 

 

711

 

 

 

(21,728

)

 

 

1,974

 

 

 

(16,340

)

Comprehensive Income (Loss) Attributable to

   RPM International Inc. Stockholders

 

$

(1,702

)

 

$

(133,056

)

 

$

98,211

 

 

$

(66,597

)

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

5


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

February 29,

 

 

February 28,

 

 

 

 

2016

 

 

 

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

203,804

 

 

$

99,743

 

Adjustments to reconcile net income to net cash provided by (used for) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

49,980

 

 

 

45,870

 

Amortization

 

 

33,151

 

 

 

25,961

 

Reversal of contingent consideration obligations

 

 

(14,500

)

 

 

(19,180

)

Deferred income taxes

 

 

(18,556

)

 

 

93,274

 

Stock-based compensation expense

 

 

23,000

 

 

 

22,443

 

Other non-cash interest expense

 

 

7,305

 

 

 

3,182

 

Other

 

 

1,994

 

 

 

(4,961

)

Changes in assets and liabilities, net of effect from purchases and sales of businesses:

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

179,003

 

 

 

72,633

 

(Increase) in inventory

 

 

(81,837

)

 

 

(83,257

)

(Increase) decrease in prepaid expenses and other current and long-term assets

 

 

(13,347

)

 

 

435

 

(Decrease) in accounts payable

 

 

(133,841

)

 

 

(147,979

)

(Decrease) in accrued compensation and benefits

 

 

(35,202

)

 

 

(53,593

)

Increase (decrease) in accrued losses

 

 

5,948

 

 

 

(7,579

)

Increase in other accrued liabilities

 

 

4,696

 

 

 

18,801

 

Other

 

 

12,221

 

 

 

(41,678

)

Cash Provided By Operating Activities

 

 

223,819

 

 

 

24,115

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(54,819

)

 

 

(47,293

)

Acquisition of businesses, net of cash acquired

 

 

(28,926

)

 

 

(433,885

)

Purchase of marketable securities

 

 

(21,981

)

 

 

(35,033

)

Proceeds from sales of marketable securities

 

 

18,722

 

 

 

41,308

 

Other

 

 

7,430

 

 

 

13,126

 

Cash (Used For) Investing Activities

 

 

(79,574

)

 

 

(461,777

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

116,578

 

 

 

526,585

 

Reductions of long-term and short-term debt

 

 

(19,419

)

 

 

(10,609

)

Cash dividends

 

 

(107,806

)

 

 

(101,541

)

Shares repurchased and returned for taxes

 

 

(66,765

)

 

 

(35,912

)

Payments of acquisition-related contingent consideration

 

 

(2,006

)

 

 

(24,750

)

Other

 

 

(1,239

)

 

 

1,969

 

Cash (Used For) Provided By Financing Activities

 

 

(80,657

)

 

 

355,742

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(17,587

)

 

 

(30,558

)

Net Change in Cash and Cash Equivalents

 

 

46,001

 

 

 

(112,478

)

Cash and Cash Equivalents at Beginning of Period

 

 

174,711

 

 

 

332,868

 

Cash and Cash Equivalents at End of Period

 

$

220,712

 

 

$

220,390

 

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

 

6


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

 

NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION

Our financial statements include all of our majority-owned subsidiaries, except for certain subsidiaries that were deconsolidated during the period from May 31, 2010 through December 31, 2014.  We reconsolidated such subsidiaries as of January 1, 2015 (refer to Note 2). We account for our investments in less-than-majority-owned joint ventures, for which we have the ability to exercise significant influence, under the equity method. Effects of transactions between related companies are eliminated in consolidation.

Noncontrolling interests are presented in our consolidated financial statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our consolidated financial statements. Additionally, our consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only our share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”) for interim financial information and the instructions to Form 10-Q. In our opinion, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three and nine months ended February 29, 2016 and February 28, 2015.  For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended May 31, 2015.

Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprising the three month periods ending August 31, November 30 and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).

 

 

NOTE 2 — SPECIALTY PRODUCTS HOLDING CORP. (“SPHC”)

Prior to May 31, 2010, Bondex International, Inc. (“Bondex”) and its parent, SPHC, were defendants in various asbestos-related bodily injury lawsuits filed in various state courts. These cases generally sought unspecified damages for asbestos-related diseases based on alleged exposures to asbestos-containing products.  On May 31, 2010, Bondex and SPHC, filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to reorganize under chapter 11 of the Bankruptcy Code.  SPHC and Bondex took this action in an effort to permanently and comprehensively resolve all pending and future asbestos-related liability claims associated with Bondex and SPHC.

Similarly, Republic Powdered Metals, Inc. (“Republic”) and NMBFiL, Inc. (“NMBFiL”), both of which are indirect wholly owned subsidiaries of RPM International Inc. (“RPM”), filed to reorganize under chapter 11 of the Bankruptcy Code in August 2014 to resolve all their pending and future asbestos-related liability claims.  Both Republic and NMBFiL remained consolidated subsidiaries of RPM, considering the short-term nature of the bankruptcy and that RPM maintained control of them from a participating rights perspective.

On December 10, 2014 a plan of reorganization was confirmed (the “Bankruptcy Plan”), and, effective as of December 23, 2014 (the “Effective Date”), Bondex, SPHC, Republic and NMBFiL emerged from bankruptcy.  In accordance with the Bankruptcy Plan, trusts were established under Section 524(g) of the United States Bankruptcy Code (together, the “Trust”) and funded with first installments.  Pursuant to the Bankruptcy Plan, the Trust assumed all liability and responsibility for current and future asbestos personal injury claims of Bondex, SPHC, Republic and NMBFiL, and such entities will have no further liability or responsibility for, and will (along with affiliates) be permanently protected from, such asbestos claims.

7


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

The Trust was funded with $450.0 million in cash and a promissory note, bearing no interest and maturing on or before the fourth anniversary of the Effective Date (the “Bankruptcy Note”). The net present value of the Bankruptcy Note, or $333.2 million, is classified as other accrued liabilities and other long-term liabilities for approximately $101.0 million and $232.2 million, respectively, in our consolidated financial statements at February 29, 2016.  Borrowings under our $800.0 million revolving credit facility were used to fund the initial payment of $450.0 million, which is classified as long-term debt in our Consolidated Balance Sheets.  A portion of the payments due under the Bankruptcy Note is secured by a right to the equity of SPHC, Republic and Bondex.  The Bankruptcy Plan, and Bankruptcy Note, provide for the following additional contributions to the Trust:

 

·

On or before the second anniversary of the Effective Date, an additional $102.5 million in cash, RPM stock or a combination thereof (at our discretion in this and all subsequent cases) will be deposited into the Trust;

 

·

On or before the third anniversary of the Effective Date, an additional $120.0 million in cash, RPM stock or a combination thereof will be deposited into the Trust; and

 

·

On or before the fourth anniversary of the Effective Date, a final payment of $125.0 million in cash, RPM stock or a combination thereof will be deposited into the Trust.

Total current and future contributions to the Trust are deductible for U.S. income tax purposes.

Effective with the filing of the Notice of Entry of Order confirming the Bankruptcy Plan, which required the funding of the Trust, we regained control of SPHC and its subsidiaries, and accordingly, we have accounted for the event as a business combination. The funding of the Trust represents the total consideration transferred in the transaction, or $772.6 million.  The opening balance sheets are based upon closing balances as of December 31, 2014 and results of operations have been included in our consolidated financial statements beginning on January 1, 2015 (the “Accounting Effective Date”) forward, as we concluded that the activity occurring between the date control was obtained (December 23, 2014) and the Accounting Effective Date was not significant.

The fair values of SPHC and its subsidiaries have been determined as of January 1, 2015.  Additionally, the fair value of RPM Holdco, of which SPHC owns 21.39% of the outstanding common stock, has been determined in order to account for our increase in ownership of the noncontrolling interest as an equity transaction.  The total consideration has been allocated on a relative fair value basis between the noncontrolling interest in RPM Holdco, or approximately $208.4 million, and the net assets of SPHC, or approximately $564.2 million.  The difference between the fair value of the noncontrolling interest in RPM Holdco and the carrying value of the noncontrolling interest was recorded as an equity transaction.  The portion of the transaction accounted for as a business combination resulted in goodwill of $118.7 million and intangible assets of $176.0 million.  The acquired intangible assets totaling $176.0 million comprise the following $118.7 million of customer and distributor relationships, $2.0 million of definite-lived tradenames, $52.7 million of indefinite-lived tradenames and $2.6 million of formulas.  Income tax assets of $271.7 million were recorded in connection with the deductibility of current and future contributions to the Trust.  Additionally, deferred tax liabilities of $72.3 million were recorded for the excess of the fair value book basis of certain assets over the corresponding tax basis.  The fair values of net tangible assets, intangible assets and the noncontrolling interest were based upon valuations, which required our significant use of estimates and assumptions.  The valuations of consideration transferred and total assets acquired and liabilities assumed are complete as of February 29, 2016.

 

 

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which establishes a comprehensive revenue recognition standard for virtually all industries in GAAP. Under the original issuance, the new standard would have applied to annual periods beginning after December 15, 2016, including interim periods therein. However, in August 2015, the FASB issued ASU 2015-14, which extends the standard effective date by one year and includes an option to apply the standard on the original effective date. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements.

8


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

In April 2015, the FASB issued ASU 2015-03 "Interest-Imputation of Interest," which changes the presentation of debt issuance costs in financial statements and specifies that debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of the note. The guidance does not change the current requirements surrounding the recognition and measurement of debt issuance costs, and the amortization of debt issuance costs will continue to be reported as interest expense. The guidance is effective for years and interim periods within those fiscal years beginning after December 15, 2015. Early adoption is allowed for all entities and the new guidance shall be applied to all prior periods retrospectively. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial position and results of operations, although it will change the financial statement classification of the deferred debt cost. As of February 29, 2016, we had $3.0 million and $9.0 million of current and long-term net deferred debt costs, respectively.  As of May 31, 2015, we had $3.0 million and $11.5 million of current and long-term net deferred debt costs, respectively.  Current and long-term deferred debt costs are included in our Consolidated Balance Sheets and are reflected in prepaid expenses and other current assets, and other long-term assets, respectively.  Under the new guidance, the net deferred debt costs would offset the carrying amount of the respective debt on the Consolidated Balance Sheets.

In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments,” which simplifies the treatment of adjustments to provisional amounts recognized in the period for items in a business combination for which the accounting is incomplete at the end of the reporting period. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015 and for interim periods therein. We will apply the provisions of this ASU beginning on June 1, 2016.  We anticipate that our adoption of this ASU will not have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which will require entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet.  This guidance simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet.  ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented.  We are currently evaluating the impact this guidance will have on our consolidated financial statements.  

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which increases lease transparency and comparability among organizations.  Under the new standard, lessees will be required to recognize all assets and liabilities arising from leases on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The new standard requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply.  We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which makes a number of changes meant to simplify and improve accounting for share-based payments. The new guidance includes amendments to share based accounting for income taxes, the related classification in the statement of cash flows and share award forfeiture accounting. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those reporting periods. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements. 

 

 

9


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

NOTE 4 MARKETABLE SECURITIES

The following tables summarize marketable securities held at February 29, 2016 and May 31, 2015 by asset type:

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

February 29, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks - foreign

 

$

4,297

 

 

$

257

 

 

$

(496

)

 

$

4,058

 

Stocks - domestic

 

 

27,596

 

 

 

2,899

 

 

 

(1,952

)

 

 

28,543

 

Mutual funds - foreign

 

 

35,855

 

 

 

620

 

 

 

(7,072

)

 

 

29,403

 

Mutual funds - domestic

 

 

58,174

 

 

 

10

 

 

 

(7,310

)

 

 

50,874

 

Total equity securities

 

 

125,922

 

 

 

3,786

 

 

 

(16,830

)

 

 

112,878

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

21,777

 

 

 

232

 

 

 

(210

)

 

 

21,799

 

Corporate bonds

 

 

944

 

 

 

123

 

 

 

-

 

 

 

1,067

 

Mortgage-backed securities

 

 

18

 

 

 

22

 

 

 

-

 

 

 

40

 

Total fixed maturity securities

 

 

22,739

 

 

 

377

 

 

 

(210

)

 

 

22,906

 

Total

 

$

148,661

 

 

$

4,163

 

 

$

(17,040

)

 

$

135,784

 

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

May 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks - foreign

 

$

3,722

 

 

$

339

 

 

$

(85

)

 

$

3,976

 

Stocks - domestic

 

 

34,368

 

 

 

5,649

 

 

 

(559

)

 

 

39,458

 

Mutual funds - foreign

 

 

32,657

 

 

 

2,114

 

 

 

(230

)

 

 

34,541

 

Mutual funds - domestic

 

 

56,442

 

 

 

228

 

 

 

(2,779

)

 

 

53,891

 

Total equity securities

 

 

127,189

 

 

 

8,330

 

 

 

(3,653

)

 

 

131,866

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

21,340

 

 

 

171

 

 

 

(162

)

 

 

21,349

 

Corporate bonds

 

 

1,218

 

 

 

171

 

 

 

-

 

 

 

1,389

 

Foreign bonds

 

 

36

 

 

 

2

 

 

 

-

 

 

 

38

 

Mortgage-backed securities

 

 

81

 

 

 

47

 

 

 

-

 

 

 

128

 

Total fixed maturity securities

 

 

22,675

 

 

 

391

 

 

 

(162

)

 

 

22,904

 

Total

 

$

149,864

 

 

$

8,721

 

 

$

(3,815

)

 

$

154,770

 

 

Marketable securities, included in other current and long-term assets totaling $65.1 million and $70.7 million at February 29, 2016, respectively, and included in other current and long-term assets totaling $69.3 million and $85.5 million at May 31, 2015, respectively, are composed of available-for-sale securities and are reported at fair value.  We carry a portion of our marketable securities portfolio in long-term assets since they are generally held for the settlement of our general and product liability insurance claims processed through our wholly owned captive insurance subsidiaries.

10


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

Marketable securities are composed of available-for-sale securities and are reported at fair value. Realized gains and losses on sales of investments are recognized in net income on the specific identification basis. Changes in the fair values of securities that are considered temporary are recorded as unrealized gains and losses, net of applicable taxes, in accumulated other comprehensive income (loss) within stockholders’ equity. Other-than-temporary declines in market value from original cost are reflected in operating income in the period in which the unrealized losses are deemed other than temporary. In order to determine whether other-than-temporary declines in market value have occurred, the duration of the decline in value and our ability to hold the investment are considered in conjunction with an evaluation of the strength of the underlying collateral and the extent to which the investment’s amortized cost or cost, as appropriate, exceeds its related market value.

Gross gains realized on sales of investments were $1.1 million and $3.4 million for the quarters ended February 29, 2016 and February 28, 2015, respectively.  During the three months ended February 29, 2016, we recognized gross realized losses on sales of investments of $0.1 million, while we recognized no such losses during the three months ended February 28, 2015. During the three months ended February 29, 2016, we recognized losses of approximately $0.8 million for securities deemed to have other-than-temporary impairments, while we recognized no such losses during the third quarter of fiscal 2015.  These amounts are included in investment (income), net in the Consolidated Statements of Income.

Gross gains realized on sales of investments were $5.7 million and $8.7 million for the nine months ended February 29, 2016 and February 28, 2015, respectively.  During the first nine months of fiscal 2016, we recognized gross realized losses on sales of investments of $0.3 million, while we recognized no such losses during the first nine months of fiscal 2015.  During the nine months ended February 29, 2016, we recognized losses of approximately $3.3 million for securities deemed to have other-than-temporary impairments, while we recognized no such losses during the first nine months of fiscal 2015.

Summarized below are the securities we held at February 29, 2016 and May 31, 2015 that were in an unrealized loss position and that were included in accumulated other comprehensive income (loss), aggregated by the length of time the investments had been in that position:

 

 

 

February 29, 2016

 

 

May 31, 2015

 

(In thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

Total investments with unrealized losses

 

$

98,332

 

 

$

(17,040

)

 

$

58,978

 

 

$

(3,815

)

Unrealized losses with a loss position for less

   than 12 months

 

 

50,214

 

 

 

(9,564

)

 

 

32,693

 

 

 

(1,441

)

Unrealized losses with a loss position for more

   than 12 months

 

 

48,118

 

 

 

(7,476

)

 

 

26,285

 

 

 

(2,374

)

 

We have reviewed all of the securities included in the table above and have concluded that we have the ability and intent to hold these investments until their cost can be recovered, based upon the severity and duration of the decline. Therefore, we did not recognize any other-than-temporary impairment losses on these investments. The unrealized losses generally relate to investments whose fair values at February 29, 2016 were less than 15% below their original cost. From time to time, we may experience significant volatility in general economic and market conditions.  If we were to experience unrealized losses that were to continue for longer periods of time, or arise to more significant levels of unrealized losses within our portfolio of investments in marketable securities in the future, we may recognize additional other-than-temporary impairment losses. Such potential losses could have a material impact on our results of operations in any given reporting period. As such, we continue to closely evaluate the status of our investments and our ability and intent to hold these investments.

11


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

The net carrying values of debt securities at February 29, 2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

(In thousands)

 

Amortized Cost

 

 

Fair Value

 

Due:

 

 

 

 

 

 

 

 

Less than one year

 

$

5,000

 

 

$

4,925

 

One year through five years

 

 

14,163

 

 

 

14,149

 

Six years through ten years

 

 

2,487

 

 

 

2,579

 

After ten years

 

 

1,089

 

 

 

1,253

 

 

 

$

22,739

 

 

$

22,906

 

 

 

NOTE 5 — FAIR VALUE MEASUREMENTS

Financial instruments recorded in the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.

An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved, and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in collectibility and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility.

All derivative instruments are recognized in our Consolidated Balance Sheets and measured at fair value. Changes in the fair values of derivative instruments that do not qualify as hedges and/or any ineffective portion of hedges are recognized as a gain or (loss) in our Consolidated Statements of Income in the current period. Changes in the fair value of derivative instruments used effectively as cash flow hedges are recognized in other comprehensive income (loss), along with the change in the value of the hedged item. We do not hold or issue derivative instruments for speculative purposes.

The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:

Level 1 Inputs — Quoted prices for identical instruments in active markets.

Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs — Instruments with primarily unobservable value drivers.

12


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2016

(Unaudited)

 

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.

 

(In thousands)

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

 

Fair Value at

February 29,

2016

 

U.S. Treasury and other government

 

$

-

 

 

$

21,799

 

 

$

-

 

 

$

21,799

 

Foreign bonds

 

 

 

 

 

 

-

 

 

 

 

 

 

 

-

 

Mortgage-backed securities

 

 

 

 

 

 

40

 

 

 

 

 

 

 

40

 

Corporate bonds

 

 

 

 

 

 

1,067

 

 

 

 

 

 

 

1,067

 

Stocks - foreign

 

 

4,058

 

 

 

 

 

 

 

 

 

 

 

4,058

 

Stocks - domestic

 

 

28,543

 

 

 

 

 

 

 

 

 

 

 

28,543

 

Cash and cash equivalents

 

 

1,534

 

 

 

 

 

 

 

 

 

 

 

1,534

 

Mutual funds - foreign

 

 

 

 

 

 

29,403

 

 

 

 

 

 

 

29,403

 

Mutual funds - domestic

 

 

 

 

 

 

50,874

 

 

 

 

 

 

 

50,874

 

Foreign currency forward contract

 

 

 

 

 

 

(112

)

 

 

 

 

 

 

(112

)

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(11,852

)

 

 

(11,852

)

Total

 

$

34,135

 

 

$

103,071

 

 

$

(11,852

)

 

$

125,354

 

 

(In thousands)

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs (Level 3)

 

 

Fair Value at

May 31,

2015

 

U.S. Treasury and other government

 

$

-

 

 

$

21,349

 

 

$

-

 

 

$

21,349

 

Foreign bonds

 

 

 

 

 

 

38