Attached files

file filename
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_8.htm
EX-31.2 - EX-31.2 - RPM INTERNATIONAL INC/DE/rpm-ex312_9.htm
EX-31.1 - EX-31.1 - RPM INTERNATIONAL INC/DE/rpm-ex311_10.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 February 28, 2018,

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 April 2, 2018 133,729,592 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

 

23

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

Item 1A.

 

Risk Factors

 

35

Item 2.

 

Unregistered Sale of Equity Securities and Use of Proceeds

 

36

Item 6.

 

Exhibits

 

37

Signatures

 

38

 

*

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

 

 

2


 

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except per share amounts)

 

 

 

February 28, 2018

 

 

May 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

264,386

 

 

$

350,497

 

Trade accounts receivable (less allowances of

 

 

 

 

 

 

 

 

   $42,244 and $44,138, respectively)

 

 

884,295

 

 

 

995,330

 

Inventories

 

 

930,594

 

 

 

788,197

 

Prepaid expenses and other current assets

 

 

278,069

 

 

 

263,412

 

Total current assets

 

 

2,357,344

 

 

 

2,397,436

 

Property, Plant and Equipment, at Cost

 

 

1,570,597

 

 

 

1,484,579

 

Allowance for depreciation

 

 

(797,610

)

 

 

(741,893

)

Property, plant and equipment, net

 

 

772,987

 

 

 

742,686

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,185,890

 

 

 

1,143,913

 

Other intangible assets, net of amortization

 

 

577,861

 

 

 

573,092

 

Deferred income taxes

 

 

21,042

 

 

 

19,793

 

Other

 

 

220,801

 

 

 

213,529

 

Total other assets

 

 

2,005,594

 

 

 

1,950,327

 

Total Assets

 

$

5,135,925

 

 

$

5,090,449

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

433,372

 

 

$

534,718

 

Current portion of long-term debt

 

 

3,767

 

 

 

253,645

 

Accrued compensation and benefits

 

 

139,243

 

 

 

181,084

 

Accrued losses

 

 

21,107

 

 

 

31,735

 

Other accrued liabilities

 

 

324,624

 

 

 

234,212

 

Total current liabilities

 

 

922,113

 

 

 

1,235,394

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

2,179,658

 

 

 

1,836,437

 

Other long-term liabilities

 

 

334,913

 

 

 

482,491

 

Deferred income taxes

 

 

63,219

 

 

 

97,427

 

Total long-term liabilities

 

 

2,577,790

 

 

 

2,416,355

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

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 141,712 and outstanding 133,730 as of  February 28, 2018;  issued 141,242 and outstanding 133,563 as of  May 31, 2017

 

 

1,337

 

 

 

1,336

 

Paid-in capital

 

 

972,187

 

 

 

954,491

 

Treasury stock, at cost

 

 

(233,288

)

 

 

(218,222

)

Accumulated other comprehensive (loss)

 

 

(405,734

)

 

 

(473,986

)

Retained earnings

 

 

1,298,876

 

 

 

1,172,442

 

Total RPM International Inc. stockholders' equity

 

 

1,633,378

 

 

 

1,436,061

 

Noncontrolling Interest

 

 

2,644

 

 

 

2,639

 

Total equity

 

 

1,636,022

 

 

 

1,438,700

 

Total Liabilities and Stockholders' Equity

 

$

5,135,925

 

 

$

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

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

February 28,

 

 

February 28,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net Sales

 

$

1,102,677

 

 

$

1,022,496

 

 

$

3,763,487

 

 

$

3,465,329

 

Cost of Sales

 

 

663,184

 

 

 

593,923

 

 

 

2,200,971

 

 

 

1,963,033

 

Gross Profit

 

 

439,493

 

 

 

428,573

 

 

 

1,562,516

 

 

 

1,502,296

 

Selling, General and Administrative Expenses

 

 

382,972

 

 

 

386,032

 

 

 

1,196,980

 

 

 

1,189,611

 

Goodwill and Other Intangible Asset Impairments

 

 

-

 

 

 

4,900

 

 

 

-

 

 

 

193,198

 

Interest Expense

 

 

27,459

 

 

 

23,769

 

 

 

80,628

 

 

 

69,452

 

Investment (Income), Net

 

 

(5,471

)

 

 

(3,627

)

 

 

(13,663

)

 

 

(9,881

)

Other (Income) Expense, Net

 

 

(165

)

 

 

502

 

 

 

(592

)

 

 

1,301

 

Income Before Income Taxes

 

 

34,698

 

 

 

16,997

 

 

 

299,163

 

 

 

58,615

 

(Benefit) Provision for Income Taxes

 

 

(5,890

)

 

 

4,313

 

 

 

45,814

 

 

 

2,793

 

Net Income

 

 

40,588

 

 

 

12,684

 

 

 

253,349

 

 

 

55,822

 

Less:  Net Income Attributable to Noncontrolling Interests

 

 

361

 

 

 

756

 

 

 

1,243

 

 

 

2,051

 

Net Income Attributable to RPM International Inc.

   Stockholders

 

$

40,227

 

 

$

11,928

 

 

$

252,106

 

 

$

53,771

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

131,178

 

 

 

130,677

 

 

 

131,195

 

 

 

130,657

 

Diluted

 

 

131,178

 

 

 

130,677

 

 

 

135,657

 

 

 

130,657

 

Earnings per Share of Common Stock Attributable to

   RPM International Inc. Stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.09

 

 

$

1.90

 

 

$

0.41

 

Diluted

 

$

0.30

 

 

$

0.09

 

 

$

1.87

 

 

$

0.41

 

Cash Dividends Declared per Share of Common Stock

 

$

0.320

 

 

$

0.300

 

 

$

0.940

 

 

$

0.875

 

 

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

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

February 28,

 

 

February 28,

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

Net Income

 

$

40,588

 

 

$

12,684

 

 

$

253,349

 

 

$

55,822

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

31,133

 

 

 

16,576

 

 

 

67,453

 

 

 

(46,919

)

Pension and other postretirement benefit liability adjustments

  (net of tax of $1,319; $1,863; $3,576; $6,626, respectively)

 

 

2,279

 

 

 

3,222

 

 

 

5,974

 

 

 

12,516

 

Unrealized (loss) gain on securities (net of tax of $(1,070); $1,192; $43; $1,968, respectively)

 

 

(2,380

)

 

 

2,577

 

 

 

91

 

 

 

3,286

 

Unrealized (loss) on derivatives

 

 

(2,137

)

 

 

-

 

 

 

(5,277

)

 

 

-

 

Total other comprehensive income (loss)

 

 

28,895

 

 

 

22,375

 

 

 

68,241

 

 

 

(31,117

)

Total Comprehensive Income

 

 

69,483

 

 

 

35,059

 

 

 

321,590

 

 

 

24,705

 

Less:  Comprehensive Income Attributable to Noncontrolling

   Interests

 

 

393

 

 

 

756

 

 

 

1,234

 

 

 

2,051

 

Comprehensive Income Attributable to

   RPM International Inc. Stockholders

 

$

69,090

 

 

$

34,303

 

 

$

320,356

 

 

$

22,654

 

 

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

 

 

5


 

RPM INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

February 28,

 

 

February 28,

 

 

 

 

2018

 

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

253,349

 

 

$

55,822

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

61,078

 

 

 

53,343

 

Amortization

 

 

35,123

 

 

 

33,497

 

Goodwill and other intangible asset impairments

 

 

-

 

 

 

193,198

 

Deferred income taxes

 

 

(42,885

)

 

 

(26,996

)

Stock-based compensation expense

 

 

17,698

 

 

 

25,005

 

Other non-cash interest expense

 

 

4,275

 

 

 

7,149

 

Realized (gains) on sales of marketable securities

 

 

(6,833

)

 

 

(5,338

)

Other

 

 

(71

)

 

 

136

 

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

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

138,942

 

 

 

190,423

 

(Increase) in inventory

 

 

(121,095

)

 

 

(143,409

)

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

 

 

14,307

 

 

 

(26,698

)

(Decrease) in accounts payable

 

 

(112,888

)

 

 

(95,727

)

(Decrease) in accrued compensation and benefits

 

 

(45,873

)

 

 

(50,425

)

(Decrease) increase in accrued losses

 

 

(11,001

)

 

 

2,247

 

(Decrease) in other accrued liabilities

 

 

(42,895

)

 

 

(35,135

)

Other

 

 

(483

)

 

 

(3,613

)

Cash Provided By Operating Activities

 

 

140,748

 

 

 

173,479

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(72,769

)

 

 

(80,110

)

Acquisition of businesses, net of cash acquired

 

 

(59,991

)

 

 

(246,874

)

Purchase of marketable securities

 

 

(139,641

)

 

 

(36,418

)

Proceeds from sales of marketable securities

 

 

97,624

 

 

 

36,696

 

Other

 

 

6,766

 

 

 

1,493

 

Cash (Used For) Investing Activities

 

 

(168,011

)

 

 

(325,213

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

340,106

 

 

 

422,521

 

Reductions of long-term and short-term debt

 

 

(264,051

)

 

 

(78,654

)

Cash dividends

 

 

(125,672

)

 

 

(116,680

)

Shares repurchased and returned for taxes

 

 

(15,065

)

 

 

(20,092

)

Payments of acquisition-related contingent consideration

 

 

(3,825

)

 

 

(4,206

)

Payments to 524(g) trust

 

 

-

 

 

 

(102,500

)

Other

 

 

(1,911

)

 

 

(2,009

)

Cash (Used For) Provided By Financing Activities

 

 

(70,418

)

 

 

98,380

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

11,570

 

 

 

(1,002

)

Net Change in Cash and Cash Equivalents

 

 

(86,111

)

 

 

(54,356

)

Cash and Cash Equivalents at Beginning of Period

 

 

350,497

 

 

 

265,152

 

Cash and Cash Equivalents at End of Period

 

$

264,386

 

 

$

210,796

 

 

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 nine month periods ended February 28, 2018 and 2017.  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 in the period the ASU is adopted.  At February 28, 2018, our total undiscounted future minimum payments outstanding for operating lease obligations approximated $276.0 million.  

7


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.  

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which simplifies hedge accounting through changes to both designation and measurement requirements.  For hedges that qualify as highly effective, the new standard eliminates the requirement to separately measure and record hedge ineffectiveness, resulting in better alignment between the presentation of the effects of the hedging instrument and the hedged item in the financial statements.  ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted in any interim period after issuance of the update.  Our early adoption of this pronouncement during our current quarter ended November 30, 2017 did not have a material impact on our Consolidated Financial Statements.  Refer to Note 6, “Derivatives and Hedging,” for further information.    

 

NOTE 3 — GOODWILL AND OTHER INTANGIBLE ASSETS

During the three and nine month periods ended February 28, 2017, we recorded impairment charges related to a reduction of the carrying value of goodwill and other intangible assets totaling $4.9 million and $193.2 million, respectively.  All of the charges were recorded by our consumer reportable segment.  The goodwill impairment loss incurred during fiscal 2017 totaled $140.5 million, and the impairment losses for other intangible assets, totaling $52.6 million, related to formulae for $15.3 million; customer-related intangibles for $30.1 million; other intangibles for $0.2 million and indefinite-lived trademarks for $7.0 million.  

Total accumulated goodwill impairment losses were $156.3 million and $155.4 million at February 28, 2018 and 2017, which comprise the goodwill impairment loss incurred during fiscal 2017 as well as a $14.9 million goodwill impairment loss recorded by our industrial reportable segment during fiscal 2009.

The gross amount of other intangible asset accumulated impairment losses were $53.6 million and $53.2 million at February 28, 2018 and 2017, which comprise the other intangible asset impairment loss incurred during fiscal 2017 as well as a $0.6 million other intangible asset impairment loss recorded by our industrial reportable segment during fiscal 2009.  

 

 

8


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

NOTE 4 — MARKETABLE SECURITIES

The following tables summarize marketable securities held at February 28, 2018 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)

 

February 28, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks - domestic

 

$

1,235

 

 

$

76

 

 

$

-

 

 

$

1,311

 

Mutual funds - foreign

 

 

45,397

 

 

 

3,229

 

 

 

(299

)

 

 

48,327

 

Mutual funds - domestic

 

 

106,443

 

 

 

1,874

 

 

 

(2,938

)

 

 

105,379

 

Total equity securities

 

 

153,075

 

 

 

5,179

 

 

 

(3,237

)

 

 

155,017

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

22,773

 

 

 

29

 

 

 

(593

)

 

 

22,209

 

Corporate bonds

 

 

532

 

 

 

49

 

 

 

(7

)

 

 

574

 

Total fixed maturity securities

 

 

23,305

 

 

 

78

 

 

 

(600

)

 

 

22,783

 

Total

 

$

176,380

 

 

$

5,257

 

 

$

(3,837

)

 

$

177,800

 

 

 

 

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 $95.9 million and $81.9 million at February 28, 2018, 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 realized gains on sales of investments were $2.6 million and $1.7 million for the quarters ended February 28, 2018 and 2017, respectively.  During the third quarter of fiscal 2018 and 2017, we recognized gross realized losses on sales of investments of $0.7 million and $0.1 million, respectively.

9


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Gross realized gains on sales of investments were $8.6 million and $6.4 million for the nine months ended February 28, 2018 and 2017, respectively.  During the first nine months of fiscal 2018 and 2017, we recognized gross realized losses on sales of investments of $1.8 million and $1.1 million, respectively. During the first nine months of fiscal 2017, we recognized losses of approximately $0.4 million for securities deemed to have other-than-temporary impairments, while there were no such losses during the first nine months of fiscal 2018.  These amounts are included in investment (income), net in the Consolidated Statements of Income.

Summarized below are the securities we held at February 28, 2018 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:

 

 

 

February 28, 2018

 

 

May 31, 2017

 

(In thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

Total investments with unrealized losses

 

$

93,287

 

 

$

(3,837

)

 

$

59,987

 

 

$

(3,505

)

Unrealized losses with a loss position for less than 12 months

 

 

56,775

 

 

 

(795

)

 

 

40,854

 

 

 

(2,983

)

Unrealized losses with a loss position for more than 12 months

 

 

36,512

 

 

 

(3,042

)

 

 

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 February 28, 2018 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 February 28, 2018, 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

 

$

4,894

 

 

$

4,856

 

One year through five years

 

 

14,180

 

 

 

13,825

 

Six years through ten years

 

 

3,137

 

 

 

2,977

 

After ten years

 

 

1,094

 

 

 

1,125

 

 

 

$

23,305

 

 

$

22,783

 

 

 

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.

10


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

February 28,

2018

 

U.S. Treasury and other government

 

$

-

 

 

$

22,209

 

 

$

-

 

 

$

22,209

 

Corporate bonds

 

 

 

 

 

 

574

 

 

 

 

 

 

 

574

 

Stocks - domestic

 

 

1,311

 

 

 

 

 

 

 

 

 

 

 

1,311

 

Mutual funds - foreign

 

 

 

 

 

 

48,327

 

 

 

 

 

 

 

48,327

 

Mutual funds - domestic

 

 

 

 

 

 

105,379

 

 

 

 

 

 

 

105,379

 

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(14,653

)

 

 

(14,653

)

Total

 

$

1,311

 

 

$

176,489

 

 

$

(14,653

)

 

$

163,147

 

 

(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.

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 nine months of fiscal 2018, we paid approximately $3.8 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current period, and we increased our accrual by $0.5 million for fair value adjustments.  During the first nine months of fiscal 2017, we accrued an additional approximate $6.9 million for contingent payments related to acquisitions, including the estimated amount for the mandatory purchase of a step-acquisition, and paid approximately $4.2 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 nine months. These amounts are

11


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 February 28, 2018 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 February 28, 2018 and May 31, 2017 are as follows:

 

 

 

At February 28, 2018

 

(In thousands)

 

Carrying Value

 

 

Fair Value

 

Cash and cash equivalents

 

$

264,386

 

 

$

264,386

 

Marketable equity securities

 

 

155,017

 

 

 

155,017

 

Marketable debt securities

 

 

22,783

 

 

 

22,783

 

Long-term debt, including current portion

 

 

2,183,425

 

 

 

2,243,062

 

 

 

 

 

 

 

 

 

 

 

 

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