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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_10.htm
EX-31.2 - EX-31.2 - RPM INTERNATIONAL INC/DE/rpm-ex312_11.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 August 31, 2017,

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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 29, 2017 133,535,736 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

 

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

27

Item 4.

 

Controls and Procedures

 

27

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

28

Item 1A.

 

Risk Factors

 

28

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

29

Item 6.

 

Exhibits

 

30

Signatures

 

31

 

*

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, 2017

 

 

May 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

236,191

 

 

$

350,497

 

Trade accounts receivable (less allowances of

 

 

 

 

 

 

 

 

   $45,063 and $44,138, respectively)

 

 

1,015,084

 

 

 

995,330

 

Inventories

 

 

851,312

 

 

 

788,197

 

Prepaid expenses and other current assets

 

 

260,361

 

 

 

263,412

 

Total current assets

 

 

2,362,948

 

 

 

2,397,436

 

Property, Plant and Equipment, at Cost

 

 

1,526,565

 

 

 

1,484,579

 

Allowance for depreciation

 

 

(770,692

)

 

 

(741,893

)

Property, plant and equipment, net

 

 

755,873

 

 

 

742,686

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,169,083

 

 

 

1,143,913

 

Other intangible assets, net of amortization

 

 

587,274

 

 

 

573,092

 

Deferred income taxes

 

 

22,126

 

 

 

19,793

 

Other

 

 

211,612

 

 

 

213,529

 

Total other assets

 

 

1,990,095

 

 

 

1,950,327

 

Total Assets

 

$

5,108,916

 

 

$

5,090,449

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

469,954

 

 

$

534,718

 

Current portion of long-term debt

 

 

254,061

 

 

 

253,645

 

Accrued compensation and benefits

 

 

115,124

 

 

 

181,084

 

Accrued losses

 

 

26,406

 

 

 

31,735

 

Other accrued liabilities

 

 

229,602

 

 

 

234,212

 

Total current liabilities

 

 

1,095,147

 

 

 

1,235,394

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

1,868,229

 

 

 

1,836,437

 

Other long-term liabilities

 

 

491,677

 

 

 

482,491

 

Deferred income taxes

 

 

91,660

 

 

 

97,427

 

Total long-term liabilities

 

 

2,451,566

 

 

 

2,416,355

 

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 141,326 and

   outstanding 133,537 as of  August 31, 2017;  issued 141,242 and outstanding 133,563 as

   of May 31, 2017

 

 

1,335

 

 

 

1,336

 

Paid-in capital

 

 

961,956

 

 

 

954,491

 

Treasury stock, at cost

 

 

(223,567

)

 

 

(218,222

)

Accumulated other comprehensive (loss)

 

 

(429,382

)

 

 

(473,986

)

Retained earnings

 

 

1,248,769

 

 

 

1,172,442

 

Total RPM International Inc. stockholders' equity

 

 

1,559,111

 

 

 

1,436,061

 

Noncontrolling Interest

 

 

3,092

 

 

 

2,639

 

Total equity

 

 

1,562,203

 

 

 

1,438,700

 

Total Liabilities and Stockholders' Equity

 

$

5,108,916

 

 

$

5,090,449

 

 

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,

 

 

August 31,

 

 

 

2017

 

 

2016

 

Net Sales

 

$

1,345,394

 

 

$

1,252,063

 

Cost of Sales

 

 

773,386

 

 

 

700,021

 

Gross Profit

 

 

572,008

 

 

 

552,042

 

Selling, General and Administrative Expenses

 

 

394,409

 

 

 

384,085

 

Interest Expense

 

 

26,773

 

 

 

22,778

 

Investment (Income), Net

 

 

(4,453

)

 

 

(3,838

)

Other (Income) Expense, Net

 

 

(5

)

 

 

542

 

Income Before Income Taxes

 

 

155,284

 

 

 

148,475

 

Provision for Income Taxes

 

 

38,381

 

 

 

35,081

 

Net Income

 

 

116,903

 

 

 

113,394

 

Less:  Net Income Attributable to Noncontrolling Interests

 

 

487

 

 

 

625

 

Net Income Attributable to RPM International Inc.

   Stockholders

 

$

116,416

 

 

$

112,769

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

131,236

 

 

 

130,600

 

Diluted

 

 

135,720

 

 

 

135,241

 

Earnings per Share of Common Stock Attributable to

   RPM International Inc. Stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.87

 

 

$

0.85

 

Diluted

 

$

0.86

 

 

$

0.83

 

Cash Dividends Declared per Share of Common Stock

 

$

0.300

 

 

$

0.275

 

 

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,

 

 

August 31,

 

 

 

 

2017

 

 

 

2016

 

Net Income

 

$

116,903

 

 

$

113,394

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

44,478

 

 

 

(11,511

)

Pension and other postretirement benefit liability adjustments

  (net of tax of $646; $2,799, respectively)

 

 

629

 

 

 

5,704

 

Unrealized (loss) gain on securities (net of tax of $(149); $1,096, respectively)

 

 

(78

)

 

 

1,604

 

Unrealized (loss) on derivatives

 

 

(394

)

 

 

-

 

Total other comprehensive income (loss)

 

 

44,635

 

 

 

(4,203

)

Total Comprehensive Income

 

 

161,538

 

 

 

109,191

 

Less:  Comprehensive Income Attributable to Noncontrolling

   Interests

 

 

518

 

 

 

625

 

Comprehensive Income Attributable to

   RPM International Inc. Stockholders

 

$

161,020

 

 

$

108,566

 

 

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,

 

 

 

 

2017

 

 

 

2016

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

116,903

 

 

$

113,394

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

19,893

 

 

 

17,679

 

Amortization

 

 

11,483

 

 

 

11,121

 

Deferred income taxes

 

 

9,815

 

 

 

(434

)

Stock-based compensation expense

 

 

7,465

 

 

 

8,171

 

Other non-cash interest expense

 

 

1,422

 

 

 

2,481

 

Realized (gains) on sales of marketable securities

 

 

(2,861

)

 

 

(2,584

)

Other

 

 

(140

)

 

 

18

 

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

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

1,646

 

 

 

28,663

 

(Increase) in inventory

 

 

(46,771

)

 

 

(42,763

)

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

 

 

(10,865

)

 

 

(18,206

)

(Decrease) in accounts payable

 

 

(72,688

)

 

 

(70,598

)

(Decrease) in accrued compensation and benefits

 

 

(69,008

)

 

 

(77,738

)

(Decrease) in accrued losses

 

 

(5,765

)

 

 

(2,021

)

Increase in other accrued liabilities

 

 

20,147

 

 

 

38,015

 

Other

 

 

(6,765

)

 

 

1,302

 

Cash (Used For) Provided By Operating Activities

 

 

(26,089

)

 

 

6,500

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(17,533

)

 

 

(16,957

)

Acquisition of businesses, net of cash acquired

 

 

(36,169

)

 

 

(17,274

)

Purchase of marketable securities

 

 

(56,275

)

 

 

(13,099

)

Proceeds from sales of marketable securities

 

 

40,792

 

 

 

12,602

 

Other

 

 

702

 

 

 

272

 

Cash (Used For) Investing Activities

 

 

(68,483

)

 

 

(34,456

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

19,125

 

 

 

91,669

 

Reductions of long-term and short-term debt

 

 

(760

)

 

 

(76,973

)

Cash dividends

 

 

(40,089

)

 

 

(36,529

)

Shares repurchased and returned for taxes

 

 

(5,346

)

 

 

(17,105

)

Payments of acquisition-related contingent consideration

 

 

(3,258

)

 

 

(4,033

)

Other

 

 

(747

)

 

 

(866

)

Cash (Used For) Financing Activities

 

 

(31,075

)

 

 

(43,837

)

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

11,341

 

 

 

1,111

 

Net Change in Cash and Cash Equivalents

 

 

(114,306

)

 

 

(70,682

)

Cash and Cash Equivalents at Beginning of Period

 

 

350,497

 

 

 

265,152

 

Cash and Cash Equivalents at End of Period

 

$

236,191

 

 

$

194,470

 

 

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, 2017 and 2016.  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, 2017.

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).

 

 

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which establishes a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The new standard prescribes a five-step model for recognizing revenue, which will require significant judgment in its application. The new standard requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

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. The provisions of this ASU may be applied retrospectively to each prior reporting period presented, or on a modified retrospective basis by recognizing a cumulative catch-up transition amount at the date of initial application. We have selected the modified retrospective transition method, which we will apply upon adoption of the standard as of June 1, 2018.

Given the scope of work required to implement the recognition and disclosure requirements under the new standard, we began our assessment process during fiscal 2016.  Our progress to date includes a preliminary identification of areas which will require changes to policies, processes, systems or internal controls.  We expect revenue recognition for our broad portfolio of products and services to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including our accounting for long-term construction contracts. While these impacts are not expected to be material to our overall Consolidated Financial Statements, we do anticipate that the new disclosure requirements surrounding revenue recognition will be significant. We continue to assess all potential impacts of the guidance and given the stage of our adoption procedures as well as our normal ongoing business dynamics, our preliminary conclusions and assessments of the potential impacts on each of our different business units’ revenue streams are subject to change.  

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. At a minimum, total assets and total liabilities will increase

7


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

in the period the ASU is adopted.  At August 31, 2017, our total undiscounted future minimum payments outstanding for operating lease obligations approximated $216.0 million.  

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.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business,” with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or of businesses. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently reviewing the impact this revised guidance will have on our Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” to eliminate step two from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements.  

 

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  We are currently reviewing 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, 2017 and May 31, 2017 by asset type:

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

August 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks - domestic

 

$

2,110

 

 

$

76

 

 

$

-

 

 

$

2,186

 

Mutual funds - foreign

 

 

27,754

 

 

 

2,463

 

 

 

(218

)

 

 

29,999

 

Mutual funds - domestic

 

 

92,075

 

 

 

1,749

 

 

 

(2,987

)

 

 

90,837

 

Total equity securities

 

 

121,939

 

 

 

4,288

 

 

 

(3,205

)

 

 

123,022

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

22,170

 

 

 

140

 

 

 

(170

)

 

 

22,140

 

Corporate bonds

 

 

660

 

 

 

97

 

 

 

(6

)

 

 

751

 

Total fixed maturity securities

 

 

22,830

 

 

 

237

 

 

 

(176

)

 

 

22,891

 

Total

 

$

144,769

 

 

$

4,525

 

 

$

(3,381

)

 

$

145,913

 

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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks - domestic

 

$

2,391

 

 

$

76

 

 

$

-

 

 

$

2,467

 

Mutual funds - foreign

 

 

35,169

 

 

 

2,470

 

 

 

(204

)

 

 

37,435

 

Mutual funds - domestic

 

 

102,671

 

 

 

2,084

 

 

 

(3,118

)

 

 

101,637

 

Total equity securities

 

 

140,231

 

 

 

4,630

 

 

 

(3,322

)

 

 

141,539

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

22,176

 

 

 

120

 

 

 

(177

)

 

 

22,119

 

Corporate bonds

 

 

706

 

 

 

97

 

 

 

(6

)

 

 

797

 

Total fixed maturity securities

 

 

22,882

 

 

 

217

 

 

 

(183

)

 

 

22,916

 

Total

 

$

163,113

 

 

$

4,847

 

 

$

(3,505

)

 

$

164,455

 

 

Marketable securities, included in other current and long-term assets totaling $72.4 million and $73.5 million at August 31, 2017, respectively, and included in other current and long-term assets totaling $89.5 million and $75.0 million at May 31, 2017, 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 (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 $4.0 million and $2.8 million for the quarters ended August 31, 2017 and 2016, respectively.  During the first quarter of fiscal 2018 and 2017, we recognized gross realized losses on sales of investments of $1.1 million and $0.2 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 during the current three month period.  These amounts are included in investment (income), net in the Consolidated Statements of Income.

Summarized below are the securities we held at August 31, 2017 and May 31, 2017 that were in an unrealized loss position and that were included in accumulated other comprehensive (loss), aggregated by the length of time the investments had been in that position:

 

 

 

August 31, 2017

 

 

May 31, 2017

 

(In thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

Total investments with unrealized losses

 

$

44,094

 

 

$

(3,381

)

 

$

59,987

 

 

$

(3,505

)

Unrealized losses with a loss position for less than 12 months

 

 

9,808

 

 

 

(208

)

 

 

40,854

 

 

 

(2,983

)

Unrealized losses with a loss position for more than 12 months

 

 

34,286

 

 

 

(3,173

)

 

 

19,133

 

 

 

(522

)

 

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 August 31, 2017 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

9


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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, 2017, 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

 

$

3,304

 

 

$

3,305

 

One year through five years

 

 

15,154

 

 

 

15,071

 

Six years through ten years

 

 

3,170

 

 

 

3,196

 

After ten years

 

 

1,202

 

 

 

1,319

 

 

 

$

22,830

 

 

$

22,891

 

 

 

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.

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.

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,

2017

 

U.S. Treasury and other government

 

$

-

 

 

$

22,140

 

 

$

-

 

 

$

22,140

 

Corporate bonds

 

 

 

 

 

 

751

 

 

 

 

 

 

 

751

 

Stocks - domestic

 

 

2,186

 

 

 

 

 

 

 

 

 

 

 

2,186

 

Mutual funds - foreign

 

 

 

 

 

 

29,999

 

 

 

 

 

 

 

29,999

 

Mutual funds - domestic

 

 

 

 

 

 

90,837

 

 

 

 

 

 

 

90,837

 

Foreign currency forward contract

 

 

 

 

 

 

992

 

 

 

 

 

 

 

992

 

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(14,787

)

 

 

(14,787

)

Total

 

$

2,186

 

 

$

144,719

 

 

$

(14,787

)

 

$

132,118

 

10


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

(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,

2017

 

U.S. Treasury and other government

 

$

-

 

 

$

22,119

 

 

$

-

 

 

$

22,119

 

Corporate bonds

 

 

 

 

 

 

797

 

 

 

 

 

 

 

797

 

Stocks - domestic

 

 

2,467

 

 

 

 

 

 

 

 

 

 

 

2,467

 

Mutual funds - foreign

 

 

 

 

 

 

37,435

 

 

 

 

 

 

 

37,435

 

Mutual funds - domestic

 

 

 

 

 

 

101,637

 

 

 

 

 

 

 

101,637

 

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(17,979

)

 

 

(17,979

)

Total

 

$

2,467

 

 

$

161,988

 

 

$

(17,979

)

 

$

146,476

 

 

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, 2017, we had a foreign currency forward contract with a fair value of approximately $1.0 million, which is classified in other current assets in our Consolidated Balance Sheets.  The balance for this foreign currency forward contract was not significant at May 31, 2017.  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 the first quarter of fiscal 2018, we paid approximately $3.3 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current period.  During the first quarter of fiscal 2017, we paid approximately $4.0 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during last year’s first quarter. These amounts are reported in payments of acquisition-related contingent consideration in cash flows from financing activities in the Consolidated Statements of Cash Flows.  

11


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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, 2017 and May 31, 2017, 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, 2017 and May 31, 2017 are as follows:

 

 

 

At August 31, 2017

 

(In thousands)

 

Carrying Value

 

 

Fair Value

 

Cash and cash equivalents

 

$

236,191

 

 

$

236,191

 

Marketable equity securities

 

 

123,022

 

 

 

123,022

 

Marketable debt securities

 

 

22,891

 

 

 

22,891

 

Long-term debt, including current portion

 

 

2,122,290

 

 

 

2,270,329

 

 

 

 

 

 

 

 

 

 

 

 

At May 31, 2017

 

(In thousands)

 

Carrying Value

 

 

Fair Value

 

Cash and cash equivalents

 

$

350,497

 

 

$

350,497

 

Marketable equity securities

 

 

141,539

 

 

 

141,539

 

Marketable debt securities

 

 

22,916

 

 

 

22,916

 

Long-term debt, including current portion

 

 

2,090,082

 

 

 

2,243,167

 

 

 

NOTE 5 - INVESTMENT (INCOME), NET

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

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

(In thousands)

 

2017

 

 

2016

 

Interest (income)

 

$

(894

)

 

$

(1,140

)

Net (gain) on sale of marketable securities

 

 

(2,861

)

 

 

(2,584

)

Other-than-temporary impairment on securities

 

 

-

 

 

 

186

 

Dividend (income)

 

 

(698

)

 

 

(300

)

Investment (income), net

 

$

(4,453

)

 

$

(3,838

)

 

 

NOTE 6 - OTHER (INCOME) EXPENSE, NET

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

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

(In thousands)

 

2017

 

 

2016

 

Royalty expense, net

 

$

268

 

 

$

756

 

(Income) related to unconsolidated equity affiliates

 

 

(273

)

 

 

(214

)

Other (income) expense, net

 

$

(5

)

 

$

542

 

 

 

NOTE 7 — INCOME TAXES

The effective income tax rate was 24.7% for the three months ended August 31, 2017 compared to an effective income tax rate of 23.6% for the three months ended August 31, 2016.  

The effective tax rate for the three months ended August 31, 2017 and 2016 reflect variances from the 35% federal statutory rate due to lower effective tax rate of certain of our foreign subsidiaries, the benefit of the domestic manufacturing deduction, partially offset by the unfavorable impact of state and local taxes. Additionally, we recorded favorable discrete tax adjustments for excess tax benefits

12


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

related to equity compensation of $1.5 million and $10.4 million, respectively, in the three-month periods ended August 31, 2017 and 2016.  

During the three months ended August 31, 2017, we identified an opportunity and executed a transaction related to an intercompany loan and foreign distribution, which was taxable in the U.S. and resulted in a net $9.0 million discrete tax benefit.  The net tax benefit is comprised of a $7.3 million discrete tax charge related to an intercompany distribution, which is taxable in the U.S.  The net tax benefit also includes a discrete tax benefit of $16.3 million resulting from a related subsequent foreign distribution. The $16.3 million discrete tax benefit is attributable to a reduction in the previously recorded estimated deferred income tax liability for the U.S. tax cost associated with unremitted foreign earnings that are not considered permanently reinvested.

As of August 31, 2017, the amount of unremitted earnings that may be repatriated and the corresponding deferred tax liability have been adjusted to $290.4 million and $85.4 million, respectively. The reduction to the amount of unremitted foreign earnings that may be repatriated is a result of the above noted intercompany transaction, partially offset by the impact of foreign currency translation. The reduction to the deferred tax liability was primarily comprised of the above noted $16.3 million adjustment, offset by a $7.6 million increase due to foreign currency translation. The increase to the deferred tax liability related to foreign currency translation was recorded as a component of accumulated other comprehensive income.

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, 2017.  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, 2017

 

 

May 31, 2017

 

(In thousands)

 

 

 

Raw material and supplies

 

$

267,588

 

 

$

248,426

 

Finished goods

 

 

583,724

 

 

 

539,771

 

Total Inventory, Net of Reserves

 

$

851,312

 

 

$

788,197

 

 

 

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 month periods ended August 31, 2017 and 2016, we did not repurchase any shares of our common stock under this program.

 

 

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 three month periods ended August 31, 2017 and 2016.

 

 

 

Three Months Ended

 

 

 

August 31,

 

 

August 31,

 

(In thousands, except per share amounts)

 

2017

 

 

2016

 

Numerator for earnings per share:

 

 

 

 

 

 

 

 

Net income attributable to RPM International Inc.

   stockholders

 

$

116,416

 

 

$

112,769

 

Less:  Allocation of earnings and dividends to

   participating securities

 

 

(1,750

)

 

 

(1,819

)

Net income available to common shareholders -

   basic

 

 

114,666

 

 

 

110,950

 

Add:  Undistributed earnings reallocated to unvested

   shareholders

 

 

5

 

 

 

7

 

Add:  Income effect of contingently issuable shares

 

 

1,377

 

 

 

1,362

 

Net income available to common shareholders -

   diluted

 

$

116,048

 

 

$

112,319

 

Denominator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

Basic weighted average common shares