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EX-32.2 - EX-32.2 - RPM INTERNATIONAL INC/DE/rpm-ex322_7.htm
EX-32.1 - EX-32.1 - RPM INTERNATIONAL INC/DE/rpm-ex321_6.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_9.htm
EX-12 - EX-12 - RPM INTERNATIONAL INC/DE/rpm-ex12_8.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 November 30, 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;

2628 PEARL ROAD;

MEDINA, OHIO

(Address of principal executive offices)

 

44258

(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 January 3, 2017 133,575,814 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

 

24

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

Item 1A.

 

Risk Factors

 

36

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

37

Item 6.

 

Exhibits

 

38

Signatures

 

39

 

*

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)

 

 

 

November 30, 2016

 

 

May 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

205,907

 

 

$

265,152

 

Trade accounts receivable (less allowances of

 

 

 

 

 

 

 

 

  $40,909 and $24,600, respectively)

 

 

840,814

 

 

 

963,092

 

Inventories

 

 

762,167

 

 

 

685,818

 

Prepaid expenses and other current assets

 

 

232,217

 

 

 

221,286

 

Total current assets

 

 

2,041,105

 

 

 

2,135,348

 

Property, Plant and Equipment, at Cost

 

 

1,353,282

 

 

 

1,344,830

 

Allowance for depreciation

 

 

(714,353

)

 

 

(715,377

)

Property, plant and equipment, net

 

 

638,929

 

 

 

629,453

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,085,763

 

 

 

1,219,630

 

Other intangible assets, net of amortization

 

 

521,198

 

 

 

575,401

 

Deferred income taxes

 

 

59,619

 

 

 

19,771

 

Other

 

 

200,847

 

 

 

185,366

 

Total other assets

 

 

1,867,427

 

 

 

2,000,168

 

Total Assets

 

$

4,547,461

 

 

$

4,764,969

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

429,941

 

 

$

500,506

 

Current portion of long-term debt

 

 

3,880

 

 

 

4,713

 

Accrued compensation and benefits

 

 

126,097

 

 

 

183,768

 

Accrued losses

 

 

33,846

 

 

 

35,290

 

Other accrued liabilities

 

 

292,849

 

 

 

277,914

 

Total current liabilities

 

 

886,613

 

 

 

1,002,191

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

1,634,967

 

 

 

1,635,260

 

Other long-term liabilities

 

 

701,091

 

 

 

702,979

 

Deferred income taxes

 

 

41,456

 

 

 

49,791

 

Total long-term liabilities

 

 

2,377,514

 

 

 

2,388,030

 

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 141,205 and outstanding 133,576 as of  November 30, 2016;  issued 140,195 and outstanding 132,944 as of  May 31, 2016

 

 

1,336

 

 

 

1,329

 

Paid-in capital

 

 

938,963

 

 

 

921,956

 

Treasury stock, at cost

 

 

(215,936

)

 

 

(196,274

)

Accumulated other comprehensive (loss)

 

 

(555,541

)

 

 

(502,047

)

Retained earnings

 

 

1,112,610

 

 

 

1,147,371

 

Total RPM International Inc. stockholders' equity

 

 

1,281,432

 

 

 

1,372,335

 

Noncontrolling Interest

 

 

1,902

 

 

 

2,413

 

Total equity

 

 

1,283,334

 

 

 

1,374,748

 

Total Liabilities and Stockholders' Equity

 

$

4,547,461

 

 

$

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

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net Sales

 

$

1,190,770

 

 

$

1,155,984

 

 

$

2,442,833

 

 

$

2,398,510

 

Cost of Sales

 

 

669,089

 

 

 

662,050

 

 

 

1,369,110

 

 

 

1,371,618

 

Gross Profit

 

 

521,681

 

 

 

493,934

 

 

 

1,073,723

 

 

 

1,026,892

 

Selling, General and Administrative Expenses

 

 

419,494

 

 

 

352,594

 

 

 

803,579

 

 

 

725,448

 

Goodwill and Other Intangible Asset Impairments

 

 

188,298

 

 

 

 

 

 

 

188,298

 

 

 

 

 

Interest Expense

 

 

22,905

 

 

 

22,478

 

 

 

45,683

 

 

 

44,938

 

Investment (Income), Net

 

 

(2,416

)

 

 

(1,100

)

 

 

(6,254

)

 

 

(5,168

)

Other Expense (Income), Net

 

 

257

 

 

 

(299

)

 

 

799

 

 

 

(788

)

(Loss) Income Before Income Taxes

 

 

(106,857

)

 

 

120,261

 

 

 

41,618

 

 

 

262,462

 

(Benefit) Provision for Income Taxes

 

 

(36,601

)

 

 

36,112

 

 

 

(1,520

)

 

 

77,951

 

Net (Loss) Income

 

 

(70,256

)

 

 

84,149

 

 

 

43,138

 

 

 

184,511

 

Less:  Net Income Attributable to Noncontrolling Interests

 

 

670

 

 

 

716

 

 

 

1,295

 

 

 

1,263

 

Net (Loss) Income Attributable to RPM International Inc.

   Stockholders

 

$

(70,926

)

 

$

83,433

 

 

$

41,843

 

 

$

183,248

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

130,695

 

 

 

129,398

 

 

 

130,647

 

 

 

129,723

 

Diluted

 

 

130,695

 

 

 

136,734

 

 

 

130,647

 

 

 

137,072

 

(Loss) Earnings per Share of Common Stock Attributable to

   RPM International Inc. Stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.54

)

 

$

0.63

 

 

$

0.32

 

 

$

1.39

 

Diluted

 

$

(0.54

)

 

$

0.62

 

 

$

0.32

 

 

$

1.36

 

Cash Dividends Declared per Share of Common Stock

 

$

0.300

 

 

$

0.275

 

 

$

0.575

 

 

$

0.535

 

 

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

 

 

Six Months Ended

 

 

 

November 30,

 

 

November 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

Net (Loss) Income

 

$

(70,256

)

 

$

84,149

 

 

$

43,138

 

 

$

184,511

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(51,984

)

 

 

(53,814

)

 

 

(63,495

)

 

 

(84,420

)

Pension and other postretirement benefit liability adjustments

   (net of tax of $1,963; $1,803; $4,762; $3,817, respectively)

 

 

3,590

 

 

 

3,640

 

 

 

9,294

 

 

 

7,800

 

Unrealized gain (loss) on securities (net of tax of $(320); $632;

   $776; $(2,595), respectively)

 

 

(895

)

 

 

369

 

 

 

709

 

 

 

(6,715

)

Total other comprehensive (loss)

 

 

(49,289

)

 

 

(49,805

)

 

 

(53,492

)

 

 

(83,335

)

Total Comprehensive (Loss) Income

 

 

(119,545

)

 

 

34,344

 

 

 

(10,354

)

 

 

101,176

 

Less:  Comprehensive Income Attributable to Noncontrolling

   Interests

 

 

670

 

 

 

716

 

 

 

1,295

 

 

 

1,263

 

Comprehensive (Loss) Income Attributable to

   RPM International Inc. Stockholders

 

$

(120,215

)

 

$

33,628

 

 

$

(11,649

)

 

$

99,913

 

 

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)

 

 

 

Six Months Ended

 

 

 

November 30,

 

 

 

 

2016

 

 

 

2015

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

43,138

 

 

$

184,511

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

35,568

 

 

 

33,509

 

Amortization

 

 

22,111

 

 

 

22,144

 

Goodwill and other intangible asset impairments

 

 

188,298

 

 

 

-

 

Reversal of contingent earnout obligations

 

 

-

 

 

 

(14,500

)

Deferred income taxes

 

 

(59,363

)

 

 

(680

)

Stock-based compensation expense

 

 

17,013

 

 

 

15,524

 

Other non-cash interest expense

 

 

4,964

 

 

 

4,862

 

Realized (gains) on sales of marketable securities

 

 

(3,698

)

 

 

(4,418

)

Other

 

 

(47

)

 

 

1,441

 

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

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

110,871

 

 

 

117,358

 

(Increase) in inventory

 

 

(81,586

)

 

 

(49,781

)

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

 

 

(20,876

)

 

 

4,617

 

(Decrease) in accounts payable

 

 

(69,518

)

 

 

(105,841

)

(Decrease) in accrued compensation and benefits

 

 

(55,662

)

 

 

(45,649

)

(Decrease) increase in accrued losses

 

 

(899

)

 

 

715

 

Increase in other accrued liabilities

 

 

28,057

 

 

 

7,375

 

Other

 

 

361

 

 

 

(4,114

)

Cash Provided By Operating Activities

 

 

158,732

 

 

 

167,073

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(48,049

)

 

 

(31,295

)

Acquisition of businesses, net of cash acquired

 

 

(65,201

)

 

 

(12,006

)

Purchase of marketable securities

 

 

(25,142

)

 

 

(14,213

)

Proceeds from sales of marketable securities

 

 

24,588

 

 

 

11,737

 

Other

 

 

956

 

 

 

5,355

 

Cash (Used For) Investing Activities

 

 

(112,848

)

 

 

(40,422

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

76,369

 

 

 

38,765

 

Reductions of long-term and short-term debt

 

 

(73,588

)

 

 

(18,774

)

Cash dividends

 

 

(76,604

)

 

 

(71,276

)

Shares repurchased and returned for taxes

 

 

(19,663

)

 

 

(45,292

)

Payments of acquisition-related contingent consideration

 

 

(4,130

)

 

 

(1,631

)

Other

 

 

(1,365

)

 

 

270

 

Cash (Used For) Financing Activities

 

 

(98,981

)

 

 

(97,938

)

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(6,148

)

 

 

(12,815

)

Net Change in Cash and Cash Equivalents

 

 

(59,245

)

 

 

15,898

 

Cash and Cash Equivalents at Beginning of Period

 

 

265,152

 

 

 

174,711

 

Cash and Cash Equivalents at End of Period

 

$

205,907

 

 

$

190,609

 

 

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 and six month periods ended November 30, 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 impacts on each of our different business units’ revenue streams and on our overall 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.

7


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 have elected to early adopt ASU 2016-09 in the first quarter of fiscal 2017.  The primary impact of our 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 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 and $0.9 million during the three months ended November 30, 2016 in the consolidated statements 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 statements of cash flows 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 – GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill, by reportable segment, for the six months ended November 30, 2016 follows:  

 

 

 

Industrial

 

 

Specialty

 

 

Consumer

 

 

 

 

 

(In thousands)

 

Segment

 

 

Segment

 

 

Segment

 

 

Total

 

Balance as of June 1, 2016

 

$

475,355

 

 

$

171,768

 

 

$

572,507

 

 

$

1,219,630

 

Acquisitions

 

 

31,434

 

 

 

 

 

 

 

 

 

 

 

31,434

 

Impairment

 

 

 

 

 

 

 

 

 

 

(140,686

)

 

 

(140,686

)

Translation adjustments

 

 

(12,631

)

 

 

(1,766

)

 

 

(10,218

)

 

 

(24,615

)

Balance as of November 30, 2016

 

$

494,158

 

 

$

170,002

 

 

$

421,603

 

 

$

1,085,763

 

 

The gross amount of accumulated impairment losses at June 1, 2016 totaled $14.9 million, all of which was recorded during the fiscal year ended May 31, 2009 by our industrial reportable segment. For the three and six months ended November 30, 2016, we recognized $140.7 million of preliminary goodwill impairment losses, which was recorded by our consumer reportable segment.  At November 30, 2016, accumulated impairment losses totaled $155.6 million.

8


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other intangible assets as of November 30, 2016 consist of the following major classes:

 

 

 

November 30, 2016

 

 

 

Gross Carrying

 

 

Accumulated

 

 

Impairment

 

 

Net Carrying

 

(In thousands)

 

Amount

 

 

Amortization

 

 

Charge

 

 

Amount

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Formulae

 

$

216,760

 

 

$

(123,977

)

 

$

(15,364

)

 

$

77,419

 

Customer-related intangibles

 

 

322,229

 

 

 

(108,072

)

 

 

(30,176

)

 

 

183,981

 

Trademarks/names

 

 

27,808

 

 

 

(13,919

)

 

 

 

 

 

 

13,889

 

Other

 

 

37,154

 

 

 

(19,723

)

 

 

(198

)

 

 

17,233

 

Total Amortized Intangibles

 

 

603,951

 

 

 

(265,691

)

 

 

(45,738

)

 

 

292,522

 

Indefinite-lived intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks/names

 

 

230,721

 

 

 

 

 

 

 

(2,045

)

 

 

228,676

 

Total Other Intangible Assets

 

$

834,672

 

 

$

(265,691

)

 

$

(47,783

)

 

$

521,198

 

 

The gross amount of other intangible asset accumulated impairment losses at June 1, 2016 totaled $0.6 million, all of which was recorded during the fiscal year ended May 31, 2009 by our industrial reportable segment.  For the three and six months ended November 30, 2016, we recorded preliminary other intangible asset impairment losses of approximately $47.8 million, which was recorded by our consumer reportable segment.  

As previously reported, we had monitored the performance of our Kirker nail enamel business throughout fiscal 2016.  During the third quarter ended February 29, 2016, we reported that performance shortfalls for Kirker were attributable to a delay in new business.  We performed our annual goodwill impairment analysis during the fourth quarter of fiscal 2016, which resulted in an excess of fair value over carrying value of 8% for our Kirker reporting unit. During our first quarter ended August 31, 2016, we reported that while Kirker’s first quarter results were below the comparable prior year period, their performance was in line with expectations, and our assessment of the Kirker business did not indicate the presence of any goodwill impairment triggering events.

For the quarter ended November 30, 2016, we identified certain factors that we considered important in assessing the requirement to perform an interim impairment evaluation for our Kirker reporting unit.  First, Kirker’s three month operating results for the period ended November 30, 2016 were significantly below historical and expected operating results and downward adjustments were recently made regarding our expectations for Kirker’s performance. In the quarter ended November 30, 2016, Kirker experienced market share losses at several key customers, including the loss of its largest customer, which accounted for over 15% of Kirker’s fiscal 2016 sales.  In addition, some problematic customer relationship issues surfaced during the quarter ended November 30, 2016, which resulted in a personnel change in a key leadership position at Kirker.  After considering the totality of these recent events, we determined that an interim step one goodwill impairment assessment was required, as well as an impairment assessment for our intangible and other long-lived assets.  Our testing resulted in the preliminary impairment charges reflected above for goodwill and other intangible assets.  

Our goodwill impairment assessment included estimating the fair value of our Kirker reporting unit and comparing it with its carrying amount at November 30, 2016.  Since the carrying amount of Kirker exceeded its fair value, additional steps were required to determine and recognize a preliminary impairment loss. Calculating the fair value of a reporting unit requires our significant use of estimates and assumptions, which are generally considered Level 3 inputs based on our review of the fair value hierarchy. We estimated the fair value of our Kirker reporting unit by applying a discounted future cash flow calculation to Kirker’s projected earnings before interest, taxes, depreciation and amortization (“EBITDA”). In applying this methodology, we relied on a number of factors, including actual and forecasted operating results and market data for the nail enamel industry.  Discounted cash flow calculations represent a common measure used to value and buy or sell businesses in our industry.  The discounted cash flow used in the goodwill impairment test for Kirker assumed discrete period revenue growth through fiscal 2021 that was reflective of recent downward revisions to previous expectations for future growth from market opportunities related to contracting with certain retailers to fill nail polish for their respective private label brands as well as downward revisions to growth expectations for the Kirker liquid nail polish business below the expected liquid nail polish growth rates for the markets in which Kirker operates.  In the terminal year we assumed a long-term earnings growth rate of 3.0% that we believe is appropriate given the current industry specific expectations.  As of the valuation date, we utilized a weighted-average cost of capital of 8.0%, which we believe is appropriate as it reflects the relative risk, the time value of money, and is consistent with Kirker’s peer group. After recording the goodwill impairment charge of $140.7 million, no goodwill remains on the Kirker balance sheets as of November 30, 2016.  We are not able to finalize our goodwill impairment assessment until such time as we finalize our fair value determinations, which we expect to complete during our third fiscal quarter ending February 28, 2017.  At that time, we will record the necessary adjustments, if any, to our preliminary goodwill impairment charge recorded in the current quarter.  

9


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Our other intangible asset impairment assessment involved estimating the fair value of each of Kirker’s amortizable intangibles and other long-lived assets as well as the indefinite-lived tradename asset and comparing it with its carrying amount. Measuring a potential impairment of amortizable intangibles 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.  As the results of our testing indicated that the carrying values of certain of these assets would not be recoverable, as outlined in further detail in the table above, we recorded preliminary other intangible asset impairments of approximately $45.7 million for the three and six months ended November 30, 2016.    

Calculating the fair value of the Kirker indefinite-lived tradename required our significant use of estimates and assumptions. We estimated the fair value of Kirker’s indefinite-live tradename by applying a relief-from-royalty calculation, which included discounted future cash flows related to its projected revenues. In applying this methodology, we relied on a number of factors, including actual and forecasted revenues and market data for the nail enamel industry.  As the carrying amount of the tradename exceeded its fair value, the preliminary impairment loss of $2.0 million was recorded for the three and six months ended November 30, 2016.

Certain assets and liabilities are subject to nonrecurring fair value measurements, which typically are remeasured at fair value as a result of impairment charges.  As a result of the impairment testing described above, the fair value of Kirker’s identifiable intangible assets and indefinite-lived tradename were recalculated, and the resulting fair value approximated $5.8 million.  Based upon our review of the fair value hierarchy, the inputs used in these fair value measurements were considered Level 3 inputs.  We are not able to finalize our other intangible asset impairment assessments until such time as we finalize our fair value determinations, which we expect to complete during our third fiscal quarter ending February 28, 2017. At that time, we will record the necessary adjustments, if any, to our preliminary impairment charges recorded in the current quarter.  

 

 

NOTE 4 – MARKETABLE SECURITIES

The following tables summarize marketable securities held at November 30, 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)

 

November 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks – foreign

 

$

5,699

 

 

$

229

 

 

$

(323

)

 

$

5,605

 

Stocks – domestic

 

 

31,050

 

 

 

2,086

 

 

 

(1,325

)

 

 

31,811

 

Mutual funds – foreign

 

 

34,419

 

 

 

920

 

 

 

(3,204

)

 

 

32,135

 

Mutual funds – domestic

 

 

62,572

 

 

 

1,393

 

 

 

(2,938

)

 

 

61,027

 

Total equity securities

 

 

133,740

 

 

 

4,628

 

 

 

(7,790

)

 

 

130,578

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

22,235

 

 

 

76

 

 

 

(295

)

 

 

22,016

 

Corporate bonds

 

 

774

 

 

 

104

 

 

 

(8

)

 

 

870

 

Total fixed maturity securities

 

 

23,009

 

 

 

180

 

 

 

(303

)

 

 

22,886

 

Total

 

$

156,749

 

 

$

4,808

 

 

$

(8,093

)

 

$

153,464

 

10


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 $78.9 million and $74.6 million at November 30, 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 $1.9 million and $2.1 million for the quarters ended November 30, 2016 and 2015, respectively.  During the second quarter of fiscal 2017 and 2016, we recognized gross realized losses on sales of investments of $0.8 million and $0.1 million, respectively. During the second quarter of fiscal 2017 and 2016, we recognized losses of approximately $0.2 million and $2.5 million for securities deemed to have other-than-temporary impairments.  These amounts are included in investment (income), net in the Consolidated Statements of Income.

Gross gains realized on sales of investments were $4.7 million and $4.6 million for the six months ended November 30, 2016 and 2015, respectively.  During the first six months of fiscal 2017 and 2016, we recognized gross realized losses on sales of investments of $1.0 million and $0.2 million, respectively. During the first six months of fiscal 2017 and 2016, we recognized losses of approximately $0.4 million and $2.5 million, respectively, for securities deemed to have other-than-temporary impairments.  

Summarized below are the securities we held at November 30, 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:

 

 

 

November 30, 2016

 

 

May 31, 2016

 

(In thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

Total investments with unrealized losses

 

$

99,283

 

 

$

(8,093

)

 

$

89,360

 

 

$

(10,182

)

Unrealized losses with a loss position for less than 12 months

 

 

35,039

 

 

 

(1,925

)

 

 

41,762

 

 

 

(4,856

)

Unrealized losses with a loss position for more than 12 months

 

 

64,244

 

 

 

(6,168

)

 

 

47,598

 

 

 

(5,326

)

11


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

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 November 30, 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 November 30, 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

 

$

6,157

 

 

$

6,127

 

One year through five years

 

 

12,606

 

 

 

12,486

 

Six years through ten years

 

 

3,140

 

 

 

3,079

 

After ten years

 

 

1,106

 

 

 

1,194

 

 

 

$

23,009

 

 

$

22,886

 

 

 

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.

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 – (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

November 30,

2016

 

U.S. Treasury and other government

 

$

-

 

 

$

22,016

 

 

$

-

 

 

$

22,016

 

Corporate bonds

 

 

 

 

 

 

870

 

 

 

 

 

 

 

870

 

Stocks - foreign

 

 

5,605