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EX-32.2 - EX-32.2 - RPM INTERNATIONAL INC/DE/rpm-ex322_120.htm
EX-32.1 - EX-32.1 - RPM INTERNATIONAL INC/DE/rpm-ex321_119.htm
EX-31.2 - EX-31.2 - RPM INTERNATIONAL INC/DE/rpm-ex312_118.htm
EX-31.1 - EX-31.1 - RPM INTERNATIONAL INC/DE/rpm-ex311_117.htm
EX-12 - EX-12 - RPM INTERNATIONAL INC/DE/rpm-ex12_6.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended August 31, 2016,

or

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;

 

44258

2628 PEARL ROAD;

MEDINA, OHIO

(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      No  .

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      No  

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

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company.)

 

Smaller reporting company

 

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

As of September 30, 2016 133,376,742 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

 

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

 

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4.

 

Controls and Procedures

 

29

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

30

Item 1A.

 

Risk Factors

 

30

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

31

Item 6.

 

Exhibits

 

32

Signatures

 

33

 

*

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)

 

 

 

August 31, 2016

 

 

May 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

194,470

 

 

$

265,152

 

Trade accounts receivable (less allowances of

 

 

 

 

 

 

 

 

  $27,940 and $24,600, respectively)

 

 

932,635

 

 

 

963,092

 

Inventories

 

 

728,597

 

 

 

685,818

 

Prepaid expenses and other current assets

 

 

239,383

 

 

 

221,286

 

Total current assets

 

 

2,095,085

 

 

 

2,135,348

 

Property, Plant and Equipment, at Cost

 

 

1,362,075

 

 

 

1,344,830

 

Allowance for depreciation

 

 

(729,584

)

 

 

(715,377

)

Property, plant and equipment, net

 

 

632,491

 

 

 

629,453

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,222,659

 

 

 

1,219,630

 

Other intangible assets, net of amortization

 

 

563,225

 

 

 

575,401

 

Deferred income taxes, non-current

 

 

20,206

 

 

 

19,771

 

Other

 

 

193,233

 

 

 

185,366

 

Total other assets

 

 

1,999,323

 

 

 

2,000,168

 

Total Assets

 

$

4,726,899

 

 

$

4,764,969

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

430,475

 

 

$

500,506

 

Current portion of long-term debt

 

 

4,201

 

 

 

4,713

 

Accrued compensation and benefits

 

 

106,145

 

 

 

183,768

 

Accrued losses

 

 

32,969

 

 

 

35,290

 

Other accrued liabilities

 

 

309,813

 

 

 

277,914

 

Total current liabilities

 

 

883,603

 

 

 

1,002,191

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

1,652,529

 

 

 

1,635,260

 

Other long-term liabilities

 

 

699,822

 

 

 

702,979

 

Deferred income taxes

 

 

53,381

 

 

 

49,791

 

Total long-term liabilities

 

 

2,405,732

 

 

 

2,388,030

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

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 140,954 and outstanding 133,377 as of  August 31, 2016;  issued 140,195 and outstanding 132,944 as of  May 31, 2016

 

 

1,334

 

 

 

1,329

 

Paid-in capital

 

 

930,123

 

 

 

921,956

 

Treasury stock, at cost

 

 

(213,379

)

 

 

(196,274

)

Accumulated other comprehensive (loss)

 

 

(506,251

)

 

 

(502,047

)

Retained earnings

 

 

1,223,611

 

 

 

1,147,371

 

Total RPM International Inc. stockholders' equity

 

 

1,435,438

 

 

 

1,372,335

 

Noncontrolling Interest

 

 

2,126

 

 

 

2,413

 

Total equity

 

 

1,437,564

 

 

 

1,374,748

 

Total Liabilities and Stockholders' Equity

 

$

4,726,899

 

 

$

4,764,969

 

 

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

 

 

 

August 31,

 

 

 

2016

 

 

2015

 

Net Sales

 

$

1,252,063

 

 

$

1,242,526

 

Cost of Sales

 

 

700,021

 

 

 

709,568

 

Gross Profit

 

 

552,042

 

 

 

532,958

 

Selling, General and Administrative Expenses

 

 

384,085

 

 

 

372,854

 

Interest Expense

 

 

22,778

 

 

 

22,460

 

Investment (Income), Net

 

 

(3,838

)

 

 

(4,068

)

Other Expense (Income), Net

 

 

542

 

 

 

(489

)

Income Before Income Taxes

 

 

148,475

 

 

 

142,201

 

Provision for Income Taxes

 

 

35,081

 

 

 

41,839

 

Net Income

 

 

113,394

 

 

 

100,362

 

Less:  Net Income Attributable to Noncontrolling Interests

 

 

625

 

 

 

547

 

Net Income Attributable to RPM International Inc. Stockholders

 

$

112,769

 

 

$

99,815

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

130,600

 

 

 

130,045

 

Diluted

 

 

135,241

 

 

 

137,307

 

Earnings per Share of Common Stock Attributable to

   RPM International Inc. Stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.85

 

 

$

0.76

 

Diluted

 

$

0.83

 

 

$

0.74

 

Cash Dividends Declared per Share of Common Stock

 

$

0.275

 

 

$

0.260

 

 

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

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

 

 

2016

 

 

 

2015

 

Net Income

 

$

113,394

 

 

$

100,362

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(11,511

)

 

 

(30,606

)

Pension and other postretirement benefit liability adjustments (net of tax

   of $2,799 and $2,014, respectively)

 

 

5,704

 

 

 

4,160

 

Unrealized gain (loss) on securities (net of tax of $1,096 and $(3,228),

   respectively)

 

 

1,604

 

 

 

(7,084

)

Total other comprehensive (loss)

 

 

(4,203

)

 

 

(33,530

)

Total Comprehensive Income

 

 

109,191

 

 

 

66,832

 

Less:  Comprehensive Income Attributable to Noncontrolling Interests

 

 

625

 

 

 

547

 

Comprehensive Income Attributable to RPM International Inc.

   Stockholders

 

$

108,566

 

 

$

66,285

 

 

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)

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

 

2016

 

 

 

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

113,394

 

 

$

100,362

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

17,679

 

 

 

16,775

 

Amortization

 

 

11,121

 

 

 

11,092

 

Deferred income taxes

 

 

(434

)

 

 

(8,207

)

Stock-based compensation expense

 

 

8,171

 

 

 

6,707

 

Other non-cash interest expense

 

 

2,481

 

 

 

2,430

 

Realized (gains) on sales of marketable securities

 

 

(2,584

)

 

 

(2,375

)

Other

 

 

18

 

 

 

(337

)

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

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

28,663

 

 

 

19,112

 

(Increase) in inventory

 

 

(42,763

)

 

 

(52,082

)

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

 

 

(18,206

)

 

 

186

 

(Decrease) in accounts payable

 

 

(70,598

)

 

 

(65,285

)

(Decrease) in accrued compensation and benefits

 

 

(77,738

)

 

 

(65,704

)

(Decrease) in accrued losses

 

 

(2,021

)

 

 

(1,466

)

Increase in other accrued liabilities

 

 

38,015

 

 

 

35,868

 

Other

 

 

1,302

 

 

 

9,519

 

Cash Provided By Operating Activities

 

 

6,500

 

 

 

6,595

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(16,957

)

 

 

(12,035

)

Acquisition of businesses, net of cash acquired

 

 

(17,274

)

 

 

(5,120

)

Purchase of marketable securities

 

 

(13,099

)

 

 

(4,775

)

Proceeds from sales of marketable securities

 

 

12,602

 

 

 

11,218

 

Other

 

 

272

 

 

 

375

 

Cash (Used For) Investing Activities

 

 

(34,456

)

 

 

(10,337

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

91,669

 

 

 

94,516

 

Reductions of long-term and short-term debt

 

 

(76,973

)

 

 

(18,401

)

Cash dividends

 

 

(36,529

)

 

 

(34,634

)

Shares repurchased and returned for taxes

 

 

(17,105

)

 

 

(35,348

)

Payments of acquisition-related contingent consideration

 

 

(4,033

)

 

 

(1,585

)

Other

 

 

(866

)

 

 

267

 

Cash (Used For) Provided By Financing Activities

 

 

(43,837

)

 

 

4,815

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

1,111

 

 

 

(6,326

)

Net Change in Cash and Cash Equivalents

 

 

(70,682

)

 

 

(5,253

)

Cash and Cash Equivalents at Beginning of Period

 

 

265,152

 

 

 

174,711

 

Cash and Cash Equivalents at End of Period

 

$

194,470

 

 

$

169,458

 

 

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

 

NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION

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 month periods ended August 31, 2016 and 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, 2016.

Our financial statements include all of our majority-owned subsidiaries. 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.

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).

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

 

 

NOTE 2 — 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.

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 adopted ASU 2015-03 on June 1, 2016.  As a result, net deferred debt costs are presented as offsets to the carrying amount of the respective debt on our Consolidated Balance Sheets for each period presented.  The net deferred debt costs previously reported in our May 31, 2016 Consolidated Balance Sheet in prepaid expenses and other current assets of $3.0 million and other long-term assets of $8.2 million were reclassified as offsets to long-term debt, less current maturities.  There was no impact on our results of operations as a result of our adoption of ASU 2015-03.

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. Our adoption of the provisions of ASU 2015-16 beginning on June 1, 2016 did not have a material impact 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

7


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 have elected to early adopt ASU 2016-09 in the first quarter of fiscal 2017.  The primary impact of adoption was the recognition of excess tax benefits related to equity compensation in our provision for income taxes rather than paid-in capital, which is a change required to be applied on a prospective basis only in accordance with the new guidance. Accordingly, we recorded a discrete income tax benefit of $10.4 million for excess tax benefits generated during the three months ended August 31, 2016 in the consolidated statement of income. The corresponding cash flows are reflected in cash provided by operating activities instead of financing activities, as was previously required.  

Additionally, under ASU 2016-09, we have elected to continue to estimate equity award forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact on our results of operations. The presentation requirements for cash flows related to employee taxes paid for withheld shares also had no impact to any of the periods presented in our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.  

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows.  The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted.  Upon adoption, entities must apply the guidance retrospectively to all periods presented.  We are currently evaluating the impact this guidance will have on our Consolidated Financial Statements.

 

 

NOTE 3 – MARKETABLE SECURITIES

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

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

August 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks – foreign

 

$

4,989

 

 

$

180

 

 

$

(53

)

 

$

5,116

 

Stocks – domestic

 

 

30,896

 

 

 

2,613

 

 

 

(866

)

 

 

32,643

 

Mutual funds – foreign

 

 

35,923

 

 

 

932

 

 

 

(2,828

)

 

 

34,027

 

Mutual funds – domestic

 

 

61,070

 

 

 

1,051

 

 

 

(3,364

)

 

 

58,757

 

Total equity securities

 

 

132,878

 

 

 

4,776

 

 

 

(7,111

)

 

 

130,543

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

21,770

 

 

 

289

 

 

 

(97

)

 

 

21,962

 

Corporate bonds

 

 

829

 

 

 

151

 

 

 

-

 

 

 

980

 

Total fixed maturity securities

 

 

22,599

 

 

 

440

 

 

 

(97

)

 

 

22,942

 

Total

 

$

155,477

 

 

$

5,216

 

 

$

(7,208

)

 

$

153,485

 

8


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

May 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks - foreign

 

$

5,051

 

 

$

439

 

 

$

(247

)

 

$

5,243

 

Stocks - domestic

 

 

27,717

 

 

 

3,831

 

 

 

(911

)

 

 

30,637

 

Mutual funds - foreign

 

 

35,903

 

 

 

802

 

 

 

(4,357

)

 

 

32,348

 

Mutual funds - domestic

 

 

60,354

 

 

 

99

 

 

 

(4,587

)

 

 

55,866

 

Total equity securities

 

 

129,025

 

 

 

5,171

 

 

 

(10,102

)

 

 

124,094

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

21,704

 

 

 

214

 

 

 

(80

)

 

 

21,838

 

Corporate bonds

 

 

887

 

 

 

137

 

 

 

-

 

 

 

1,024

 

Total fixed maturity securities

 

 

22,591

 

 

 

351

 

 

 

(80

)

 

 

22,862

 

Total

 

$

151,616

 

 

$

5,522

 

 

$

(10,182

)

 

$

146,956

 

 

Marketable securities, included in other current and long-term assets totaling $78.4 million and $75.1 million at August 31, 2016, respectively, and included in other current and long-term assets totaling $74.2 million and $72.8 million at May 31, 2016, 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.

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 $2.8 million and $2.5 million for the quarters ended August 31, 2016 and 2015, respectively.  During the first quarter of fiscal 2017 and 2016, we recognized gross realized losses on sales of investments of $0.2 million and $0.1 million, respectively. During the first quarter of fiscal 2017, we recognized losses of approximately $0.2 million for securities deemed to have other-than-temporary impairments, while there were no such losses recorded during the same period last year.  These amounts are included in investment (income), net in the Consolidated Statements of Income.

Summarized below are the securities we held at August 31, 2016 and May 31, 2016 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:

 

 

 

August 31, 2016

 

 

May 31, 2016

 

(In thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

Total investments with unrealized losses

 

$

85,895

 

 

$

(7,208

)

 

$

89,360

 

 

$

(10,182

)

Unrealized losses with a loss position for less

   than 12 months

 

 

21,014

 

 

 

(1,081

)

 

 

41,762

 

 

 

(4,856

)

Unrealized losses with a loss position for more

   than 12 months

 

 

64,881

 

 

 

(6,127

)

 

 

47,598

 

 

 

(5,326

)

 

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

9


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

other-than-temporary impairment losses on these investments. The unrealized losses generally relate to investments whose fair values at August 31, 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.

The net carrying values of debt securities at August 31, 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

 

$

6,049

 

 

$

6,035

 

One year through five years

 

 

11,013

 

 

 

11,051

 

Six years through ten years

 

 

4,420

 

 

 

4,537

 

After ten years

 

 

1,117

 

 

 

1,319

 

 

 

$

22,599

 

 

$

22,942

 

 

 

NOTE 4 — 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.

10


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

August 31,

2016

 

U.S. Treasury and other government

 

$

-

 

 

$

21,962

 

 

$

-

 

 

$

21,962

 

Corporate bonds

 

 

 

 

 

 

980

 

 

 

 

 

 

 

980

 

Stocks - foreign

 

 

5,116

 

 

 

 

 

 

 

 

 

 

 

5,116

 

Stocks - domestic

 

 

32,643

 

 

 

 

 

 

 

 

 

 

 

32,643

 

Cash and cash equivalents

 

 

1,098

 

 

 

 

 

 

 

 

 

 

 

1,098

 

Mutual funds - foreign

 

 

 

 

 

 

34,027

 

 

 

 

 

 

 

34,027

 

Mutual funds - domestic

 

 

 

 

 

 

58,757

 

 

 

 

 

 

 

58,757

 

Foreign currency forward contract

 

 

 

 

 

 

115

 

 

 

 

 

 

 

115

 

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(7,737

)

 

 

(7,737

)

Total

 

$

38,857

 

 

$

115,841

 

 

$

(7,737

)

 

$

146,961

 

 

(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,

2016

 

U.S. Treasury and other government

 

$

-

 

 

$

21,838

 

 

$

-

 

 

$

21,838

 

Corporate bonds

 

 

 

 

 

 

1,024

 

 

 

 

 

 

 

1,024

 

Stocks - foreign

 

 

5,243

 

 

 

 

 

 

 

 

 

 

 

5,243

 

Stocks - domestic

 

 

30,637

 

 

 

 

 

 

 

 

 

 

 

30,637

 

Mutual funds - foreign

 

 

 

 

 

 

32,348

 

 

 

 

 

 

 

32,348

 

Mutual funds - domestic

 

 

 

 

 

 

55,866

 

 

 

 

 

 

 

55,866

 

Foreign currency forward contract

 

 

 

 

 

 

(159

)

 

 

 

 

 

 

(159

)

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(11,771

)

 

 

(11,771

)

Total

 

$

35,880

 

 

$

110,917

 

 

$

(11,771

)

 

$

135,026

 

 

Our marketable securities are primarily composed of available-for-sale securities, and are valued using a market approach. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

At August 31, 2016, we had a foreign currency forward contract with a fair value of approximately $0.1 million, which is classified in other current assets in our Consolidated Balance Sheets.  At May 31, 2016, we had a foreign currency forward contract with a fair value of approximately $0.2 million, which is classified in other accrued liabilities in our Consolidated Balance Sheets.  Our foreign currency forward contract, which has not been designated as a hedge, was designed to reduce our exposure to the changes in the cash flows of intercompany foreign-currency-denominated loans related to changes in foreign currency exchange rates by fixing the functional currency cash flows.  The foreign exchange rates included in the forward contract are based upon observable market data, but are not quoted market prices, and therefore, the forward currency forward contract is considered a Level 2 liability on the fair value hierarchy.

The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with recent acquisitions that is contingent upon the achievement of certain performance milestones. We estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled, and applied a discount rate that appropriately captures a market participant's view of the risk associated with the obligation, which are considered to be Level 3 inputs. During fiscal 2017, we paid approximately $4.0 million for settlements of contingent consideration obligations relating to certain

11


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

performance milestones that were established in prior periods and achieved during the current period, and these amounts are reported in payments of acquisition-related contingent consideration in cash flows from financing activities in the Consolidated Statements of Cash Flows.

The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable and short-term debt approximates fair value because of the short-term maturity of these financial instruments. At August 31, 2016 and May 31, 2016, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are considered to be Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of August 31, 2016 and May 31, 2016 are as follows:

 

 

 

At August 31, 2016

 

(In thousands)

 

Carrying Value

 

 

Fair Value

 

Cash and cash equivalents

 

$

194,470

 

 

$

194,470

 

Marketable equity securities

 

 

130,543

 

 

 

130,543

 

Marketable debt securities

 

 

22,942

 

 

 

22,942

 

Long-term debt, including current portion

 

 

1,656,730

 

 

 

1,965,820

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2016

 

(In thousands)

 

Carrying Value

 

 

Fair Value

 

Cash and cash equivalents

 

$

265,152

 

 

$

265,152

 

Marketable equity securities

 

 

124,094

 

 

 

124,094

 

Marketable debt securities

 

 

22,862

 

 

 

22,862

 

Long-term debt, including current portion

 

 

1,639,973

 

 

 

1,925,079

 

 

 

NOTE 5 - INVESTMENT (INCOME), NET

Investment (income), net, consists of the following components:

 

 

 

Three Months Ended

 

 

 

August 31,

 

(In thousands)

 

2016

 

 

2015

 

Interest (income)

 

$

(1,140

)

 

$

(1,364

)

(Gain) on sale of marketable securities

 

 

(2,584

)

 

 

(2,376

)

Other-than-temporary impairment on securities

 

 

186

 

 

 

-

 

Dividend (income)

 

 

(300

)

 

 

(328

)

Investment (income), net

 

$

(3,838

)

 

$

(4,068

)

 

 

NOTE 6 - OTHER EXPENSE (INCOME), NET

Other expense (income), net, consists of the following components:

 

 

 

Three Months Ended

 

 

 

August 31,

 

(In thousands)

 

2016

 

 

2015

 

Royalty expense (income), net

 

$

756

 

 

$

(10

)

(Income) related to unconsolidated equity affiliates

 

 

(214

)

 

 

(479

)

Other expense (income), net

 

$

542

 

 

$

(489

)

 

 

NOTE 7 — INCOME TAXES

The effective income tax rate was 23.6% for the three months ended August 31, 2016 compared to an effective income tax rate of 29.4% for the three month ended August 31, 2015.

12


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The effective tax rate for the three month periods ended August 31, 2016 and 2015 reflect variances from the 35% federal statutory rate primarily due to lower effective tax rate of certain of our foreign subsidiaries, the benefit of the domestic manufacturing deduction and the unfavorable impact of state and local taxes.

Additionally, as a result of our current quarter early adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, we recorded a $10.4 million discrete tax benefit for excess tax benefits related to equity compensation that were generated during the three months ended August 31, 2016. Please see Note 2, “New Accounting Pronouncements,” for additional discussion regarding our adoption of the standard.  

At May 31, 2016, we determined that it was possible that we would repatriate approximately $377.3 million of undistributed foreign earnings in the foreseeable future. Accordingly, as of May 31, 2016, we recorded a deferred income tax liability of $98.5 million, which represented our estimate of the net U.S income and foreign withholding tax associated with the $377.3 million of unremitted foreign earnings. As of August 31, 2016, the amount of undistributed earnings that may be repatriated and the corresponding deferred tax liability has been adjusted to $377.0 million and $98.1 million, respectively.  The adjustments are due to foreign currency translation and changes in the underlying U.S. tax attributes.  We have not provided for U.S. income and foreign withholding taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of August 31, 2016.  Accordingly, no provision has been made for U.S. income taxes or foreign withholding taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were paid to us as dividends.

 

 

NOTE 8 — INVENTORIES

Inventories, net of reserves, were composed of the following major classes:

 

 

 

August 31, 2016

 

 

May 31, 2016

 

(In thousands)

 

 

 

Raw material and supplies

 

$

238,163

 

 

$

227,900

 

Finished goods

 

 

490,434

 

 

 

457,918

 

Total Inventory, Net of Reserves

 

$

728,597

 

 

$

685,818

 

 

 

NOTE 9 — STOCK REPURCHASE PROGRAM

On January 8, 2008, we announced our authorization of a stock repurchase program under which we may repurchase shares of RPM International Inc. common stock at management’s discretion for general corporate purposes. Our current intent is to limit our repurchases only to amounts required to offset dilution created by stock issued in connection with our equity-based compensation plans, or approximately one to two million shares per year. As a result of this authorization, we may repurchase shares from time to time in the open market or in private transactions at various times and in amounts and for prices that our management deems appropriate, subject to insider trading rules and other securities law restrictions. The timing of our purchases will depend upon prevailing market conditions, alternative uses of capital and other factors. We may limit or terminate the repurchase program at any time. During the three months ended August 31, 2016, we did not repurchase any shares of our common stock under this program.  During the three months ended August 31, 2015, we repurchased approximately 300,000 shares of our common stock under this program, for approximately $12.8 million.

 

 

13


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 10 — EARNINGS PER SHARE

The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share, as calculated using the two-class method for the first quarter ended August 31, 2016.  For the quarter ended August 31, 2015, the two-class method was used to compute basic earnings per share, while the treasury stock method was utilized for the purpose of computing diluted earnings per share, as that method resulted in the most-dilutive earnings per share.

 

 

 

Three Months Ended

 

 

 

August 31,

 

(In thousands, except per share amounts)

 

2016

 

 

2015

 

Numerator for earnings per share:

 

 

 

 

 

 

 

 

Net income attributable to RPM International Inc.

   stockholders

 

$

112,769