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EX-32.2 - EX-32.2 - RPM INTERNATIONAL INC/DE/rpm-ex322_8.htm
EX-32.1 - EX-32.1 - RPM INTERNATIONAL INC/DE/rpm-ex321_9.htm
EX-31.2 - EX-31.2 - RPM INTERNATIONAL INC/DE/rpm-ex312_7.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 August 31, 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 every Interactive Data File required to be submitted 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 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.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

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 October 1, 2018 132,718,176 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

 

26

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)

 

 

 

August 31, 2018

 

 

May 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

202,183

 

 

$

244,422

 

Trade accounts receivable (less allowances of

 

 

 

 

 

 

 

 

   $55,558 and $46,344, respectively)

 

 

1,070,626

 

 

 

1,113,818

 

Inventories

 

 

853,573

 

 

 

834,461

 

Prepaid expenses and other current assets

 

 

306,333

 

 

 

278,230

 

Total current assets

 

 

2,432,715

 

 

 

2,470,931

 

Property, Plant and Equipment, at Cost

 

 

1,589,312

 

 

 

1,575,875

 

Allowance for depreciation

 

 

(812,253

)

 

 

(795,569

)

Property, plant and equipment, net

 

 

777,059

 

 

 

780,306

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

1,187,705

 

 

 

1,192,174

 

Other intangible assets, net of amortization

 

 

585,056

 

 

 

584,272

 

Deferred income taxes

 

 

21,953

 

 

 

21,897

 

Other

 

 

218,904

 

 

 

222,242

 

Total other assets

 

 

2,013,618

 

 

 

2,020,585

 

Total Assets

 

$

5,223,392

 

 

$

5,271,822

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

500,913

 

 

$

592,281

 

Current portion of long-term debt

 

 

3,376

 

 

 

3,501

 

Accrued compensation and benefits

 

 

119,037

 

 

 

177,106

 

Accrued losses

 

 

30,295

 

 

 

22,132

 

Other accrued liabilities

 

 

224,515

 

 

 

211,706

 

Total current liabilities

 

 

878,136

 

 

 

1,006,726

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

 

2,267,159

 

 

 

2,170,643

 

Other long-term liabilities

 

 

360,074

 

 

 

356,892

 

Deferred income taxes

 

 

104,644

 

 

 

104,023

 

Total long-term liabilities

 

 

2,731,877

 

 

 

2,631,558

 

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 142,096 and outstanding 133,408 as of  August 31, 2018;  issued 141,716 and outstanding 133,647 as of  May 31, 2018

 

 

1,334

 

 

 

1,336

 

Paid-in capital

 

 

992,086

 

 

 

982,067

 

Treasury stock, at cost

 

 

(256,899

)

 

 

(236,318

)

Accumulated other comprehensive (loss)

 

 

(493,026

)

 

 

(459,048

)

Retained earnings

 

 

1,366,952

 

 

 

1,342,736

 

Total RPM International Inc. stockholders' equity

 

 

1,610,447

 

 

 

1,630,773

 

Noncontrolling Interest

 

 

2,932

 

 

 

2,765

 

Total equity

 

 

1,613,379

 

 

 

1,633,538

 

Total Liabilities and Stockholders' Equity

 

$

5,223,392

 

 

$

5,271,822

 

 

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,

 

 

 

2018

 

 

2017

 

Net Sales

 

$

1,459,989

 

 

$

1,345,394

 

Cost of Sales

 

 

865,947

 

 

 

773,386

 

Gross Profit

 

 

594,042

 

 

 

572,008

 

Selling, General and Administrative Expenses

 

 

459,742

 

 

 

394,409

 

Restructuring Charges

 

 

20,076

 

 

 

-

 

Interest Expense

 

 

24,406

 

 

 

26,773

 

Investment (Income), Net

 

 

(2,433

)

 

 

(4,453

)

Other Expense (Income), Net

 

 

313

 

 

 

(5

)

Income Before Income Taxes

 

 

91,938

 

 

 

155,284

 

Provision for Income Taxes

 

 

21,752

 

 

 

38,381

 

Net Income

 

 

70,186

 

 

 

116,903

 

Less:  Net Income Attributable to Noncontrolling Interests

 

 

422

 

 

 

487

 

Net Income Attributable to RPM International Inc.

   Stockholders

 

$

69,764

 

 

$

116,416

 

Average Number of Shares of Common Stock Outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

131,861

 

 

 

131,236

 

Diluted

 

 

136,430

 

 

 

135,720

 

Earnings per Share of Common Stock Attributable to

   RPM International Inc. Stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.52

 

 

$

0.87

 

Diluted

 

$

0.52

 

 

$

0.86

 

Cash Dividends Declared per Share of Common Stock

 

$

0.320

 

 

$

0.300

 

 

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,

 

 

 

2018

 

 

2017

 

Net Income

 

$

70,186

 

 

$

116,903

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(40,689

)

 

 

44,478

 

Pension and other postretirement benefit liability adjustments

  (net of tax of $982 and $646, respectively)

 

 

3,056

 

 

 

629

 

Unrealized gain (loss) on securities (net of tax of $668 and $(149), respectively)

 

 

2,476

 

 

 

(78

)

Unrealized gain (loss) on derivatives

 

 

921

 

 

 

(394

)

Total other comprehensive income (loss) income

 

 

(34,236

)

 

 

44,635

 

Total Comprehensive Income

 

 

35,950

 

 

 

161,538

 

Less:  Comprehensive Income Attributable to Noncontrolling

   Interests

 

 

164

 

 

 

518

 

Comprehensive Income Attributable to

   RPM International Inc. Stockholders

 

$

35,786

 

 

$

161,020

 

 

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,

 

 

 

 

2018

 

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

70,186

 

 

$

116,903

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

24,068

 

 

 

19,893

 

Amortization

 

 

11,472

 

 

 

11,483

 

Restructuring charges, net of payments

 

 

7,084

 

 

 

-

 

Deferred income taxes

 

 

(561

)

 

 

9,815

 

Stock-based compensation expense

 

 

6,668

 

 

 

7,465

 

Other non-cash interest expense

 

 

775

 

 

 

1,422

 

Realized losses (gains) on sales of marketable securities

 

 

6

 

 

 

(2,861

)

Other

 

 

992

 

 

 

(140

)

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

 

 

 

 

 

 

 

 

Decrease in receivables

 

 

32,389

 

 

 

1,646

 

(Increase) in inventory

 

 

(27,207

)

 

 

(46,771

)

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

 

 

(18,282

)

 

 

(10,865

)

(Decrease) in accounts payable

 

 

(88,271

)

 

 

(72,688

)

(Decrease) in accrued compensation and benefits

 

 

(56,747

)

 

 

(69,008

)

Increase (decrease) in accrued losses

 

 

8,415

 

 

 

(5,765

)

Increase in other accrued liabilities

 

 

20,857

 

 

 

20,147

 

Other

 

 

1,027

 

 

 

(6,765

)

Cash (Used For) Operating Activities

 

 

(7,129

)

 

 

(26,089

)

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(28,295

)

 

 

(17,533

)

Acquisition of businesses, net of cash acquired

 

 

(26,366

)

 

 

(36,169

)

Purchase of marketable securities

 

 

(12,695

)

 

 

(56,275

)

Proceeds from sales of marketable securities

 

 

9,758

 

 

 

40,792

 

Other

 

 

(2,881

)

 

 

702

 

Cash (Used For) Investing Activities

 

 

(60,479

)

 

 

(68,483

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Additions to long-term and short-term debt

 

 

120,702

 

 

 

19,125

 

Reductions of long-term and short-term debt

 

 

(21,952

)

 

 

(760

)

Cash dividends

 

 

(42,714

)

 

 

(40,089

)

Shares repurchased and shares returned for taxes

 

 

(20,581

)

 

 

(5,346

)

Payments of acquisition-related contingent consideration

 

 

(3,456

)

 

 

(3,258

)

Other

 

 

(320

)

 

 

(747

)

Cash Provided By (Used For) Financing Activities

 

 

31,679

 

 

 

(31,075

)

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(6,310

)

 

 

11,341

 

Net Change in Cash and Cash Equivalents

 

 

(42,239

)

 

 

(114,306

)

Cash and Cash Equivalents at Beginning of Period

 

 

244,422

 

 

 

350,497

 

Cash and Cash Equivalents at End of Period

 

$

202,183

 

 

$

236,191

 

Supplemental Disclosures of Cash Flows Information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

19,747

 

 

$

20,284

 

Income Taxes

 

$

13,525

 

 

$

12,042

 

 

 

 

 

 

 

 

 

 

 

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, 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, 2018.

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

Effective June 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” and all the related amendments included within Accounting Standards Codification 606 (“ASC 606”), using the modified retrospective method of adoption.  Under the modified retrospective method, comparative periods are not restated. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied.   As a result of our adoption procedures, we determined that revenue recognition for our broad portfolio of products and services will remain largely unchanged.  Accordingly, our adoption of the new standard did not have a material impact on our overall Consolidated Financial Statements.  Refer to Note 16, “Revenue,” and Note 17, “Segment Information,” for additional information.

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. In March 2018, the FASB approved an alternative transition method to the modified retrospective approach, which eliminates the requirement to restate prior period financial statements and requires the cumulative effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption.  We are currently evaluating which transition method we will adopt on June 1, 2019 and 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 August 31, 2018, our total undiscounted future minimum payments outstanding for operating lease obligations approximated $202.3 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.  Our June 1, 2018 adoption of the new guidance, which we applied retrospectively to all periods presented, did not have a material impact 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

7


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

assets or of businesses. We adopted the new guidance as of June 1, 2018 and do not expect this revised guidance to have a material impact 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.  Our June 1, 2018 adoption of the new guidance did not have a material impact on our Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. We do not expect our adoption of this guidance to have a material impact on our Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with employers that sponsor defined benefit or other postretirement plans. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. We are currently reviewing, but adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15, “Intangible—Goodwill and Other- Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update makes a number of changes meant to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance in determining when the arrangement includes a software license.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Our early adoption of this revised guidance as of June 1, 2018 did not have a material impact on our Consolidated Financial Statements.

 

NOTE 3 — RESTRUCTURING

 

We record restructuring charges associated with management-approved restructuring plans to either reorganize one or more of our business segments, or to remove duplicative headcount and infrastructure associated with our businesses. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other costs. Restructuring charges are recorded based upon planned employee termination dates and site closure and consolidation plans. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. We record the short-term portion of our restructuring liability in Other Accrued Liabilities and the long-term portion, if any, in Other Long-Term Liabilities in our Consolidated Balance Sheets.

 

2020 MAP to Growth

 

In May 2018, we approved and implemented the first phases of a multi-year restructuring plan, the 2020 Margin Acceleration Plan (“2020 MAP to Growth”).  The first phases of our plan were focused within the consumer and industrial segments. The restructuring plan within the consumer segment, led by new senior leadership, is designed to improve margins by simplifying business processes, reducing inventory categories and rationalizing SKUs, reducing headcount and working capital and improving operating efficiency. This restructuring plan allows us to streamline management and focus our attention on faster growing and better performing brands and products within the consumer segment businesses. Payments associated with this initial phase of restructuring activities in the

8


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

consumer segment are expected to be completed during the first seven months of fiscal 2019. The restructuring plan within the industrial segment is designed to simplify processes, reduce headcount, eliminate underperforming businesses, and deliver better results for customers, employees and stockholders. The restructuring activities outlined during the first phase of the multi-year restructuring plan are expected to be completed during the first five months of fiscal 2019.

 

During the quarter ended August 31, 2018, we approved and began implementation of the second phase of our 2020 MAP to Growth.  The second phase of our multi-year restructuring plan is focused on our specialty and corporate/nonoperating segments, and expands upon the restructuring activities being conducted by our consumer and industrial segments. Each phase of this restructuring plan has been designed to allow management to focus its attention on faster growing and better performing brands and products. The restructuring activities included in the second phase of our restructuring plan are expected to be completed by the end of fiscal 2020.

 

Furthermore, the restructuring plan within the specialty segment is designed to simplify processes and eliminate underperforming businesses.  These actions will allow management to focus its attention on the faster growing and better performing brands and products, in an effort to achieve improved margins and operating results.  These restructuring activities are expected to be completed by the end of fiscal 2020.

 

Lastly, the restructuring plan within the corporate/nonoperating segment is designed to improve consolidated results by reducing corporate overhead.  These restructuring activities are expected to be completed during the first six months of fiscal 2019.

 

In addition to the segment specific restructuring plans outlined above, in the fourth quarter of fiscal 2018, we adopted a restructuring plan for the legal function to streamline litigation management. Payments related to this initial phase of restructuring activities are expected to be completed during the first quarter of fiscal 2020. 

 

In furtherance of the 2020 MAP to Growth phases described above, we continue to work toward finalizing the last phases of our comprehensive, company-wide restructuring plan that we expect to formalize during our second quarter ending November 30, 2018. All activities under our 2020 MAP to Growth plan are anticipated to be completed by the end of calendar year 2020.

9


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

A summary of the charges recorded in connection with restructuring by reportable segment during fiscal 2019 is as follows:

 

 

 

Three Months Ended August 31, 2018

 

 

 

Current Year

 

Cumulative Costs

 

Total Expected

 

 

 

Charges

 

to Date

 

Costs

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Segment:

 

 

 

 

 

 

 

 

 

 

Severance and benefit costs (a)

 

$

1,551

 

$

7,203

 

$

11,718

 

Facility closure and other related costs

 

 

-

 

 

5,139

 

 

11,225

 

Total Charges

 

$

1,551

 

$

12,342

 

$

22,943

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Segment:

 

 

 

 

 

 

 

 

 

 

Severance and benefit costs (b)

 

$

6,365

 

$

8,534

 

$

13,098

 

Facility closure and other related costs

 

 

436

 

 

1,480

 

 

25,643

 

Other asset write-offs

 

 

578

 

 

1,951

 

 

2,996

 

Total Charges

 

$

7,379

 

$

11,965

 

$

41,737

 

 

 

 

 

 

 

 

 

 

 

 

Specialty Segment:

 

 

 

 

 

 

 

 

 

 

Severance and benefit costs (c)

 

$

2,147

 

$

2,147

 

$

5,295

 

Facility closure and other related costs

 

 

-

 

 

-

 

 

3,835

 

Total Charges

 

$

2,147

 

$

2,147

 

$

9,130

 

 

 

 

 

 

 

 

 

 

 

 

Corporate/Other Segment:

 

 

 

 

 

 

 

 

 

 

Severance and benefit costs (d)

 

$

8,999

 

$

11,135

 

$

11,135

 

Total Charges

 

$

8,999

 

$

11,135

 

$

11,135

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated:

 

 

 

 

 

 

 

 

 

 

Severance and benefit costs

 

$

19,062

 

$

29,019

 

$

41,246

 

Facility closure and other related costs

 

 

436

 

 

6,619

 

 

40,703

 

Other asset write-offs

 

 

578

 

 

1,951

 

 

2,996

 

Total Charges

 

$

20,076

 

$

37,589

 

$

84,945

 

 

(a)

Includes current year charges of $1.6 million associated with the elimination of nine positions.  

(b)

Includes current year charges of $6.2 million associated with the elimination of 94 positions and $0.2 million additional charges associated with the prior elimination of one position within the legal function during fiscal 2018.

(c)

Includes charges of $2.1 million associated with the elimination of 47 positions.

(d)

Reflects charges related to the severance of two corporate executives, as well as accelerated vesting of equity awards for two corporate executives, four specialty segment executives and two industrial segment executives in connection with the aforementioned restructuring activities.

A summary of the activity in the restructuring reserves related to the 2020 MAP to Growth plan is as follows:

 

(in thousands)

Severance and Benefits Costs

 

Facility Closure and Other Related Costs

 

Other Asset Write-Offs

 

Total

 

Balance at June 1, 2018

$

9,957

 

$

6,184

 

$

1,373

 

$

17,514

 

Additions charged to expense

 

19,062

 

 

436

 

 

578

 

 

20,076

 

Cash payments charged against reserve

 

(12,575

)

 

(418

)

 

 

 

 

(12,993

)

Non-cash charges included above (e)

 

(5,484

)

 

(838

)

 

(1,951

)

 

(8,273

)

Balance at August 31, 2018

$

10,960

 

$

5,364

 

$

-

 

$

16,324

 

Total Expected Costs

$

41,246

 

$

40,703

 

$

2,996

 

$

84,945

 

10


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

(e)

Non-cash charges primarily include accelerated vesting of equity awards and asset-write offs.

 

In connection with the 2020 MAP to Growth plan, during the first quarter of fiscal 2019, we incurred approximately $4.5 million of inventory-related charges at our industrial segment and recorded a favorable adjustment to the previous write off at our consumer segment for approximately $0.2 million, all of which are recorded in cost of sales in our Consolidated Statements of Income.  These inventory charges were the result of product line and SKU rationalization initiatives in connection with our overall plan of restructuring. 

 

The total expected costs to be incurred in relation to our 2020 MAP to Growth plan, as outlined in the table above, will be finalized and announced during our second quarter ending November 30, 2018. 

 

 

NOTE 4 — MARKETABLE SECURITIES

The following tables summarize marketable securities held at August 31, 2018 and May 31, 2018 by asset type:

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

August 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds - foreign

 

$

47,736

 

 

$

1,241

 

 

$

(2,163

)

 

$

46,814

 

Mutual funds - domestic

 

 

100,244

 

 

 

4,810

 

 

 

(2,308

)

 

 

102,746

 

Total equity securities

 

 

147,980

 

 

 

6,051

 

 

 

(4,471

)

 

 

149,560

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

24,479

 

 

 

42

 

 

 

(494

)

 

 

24,027

 

Corporate bonds

 

 

422

 

 

 

39

 

 

 

(10

)

 

 

451

 

Total fixed maturity securities

 

 

24,901

 

 

 

81

 

 

 

(504

)

 

 

24,478

 

Total

 

$

172,881

 

 

$

6,132

 

 

$

(4,975

)

 

$

174,038

 

 

 

 

Available-For-Sale Securities

 

(In thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

(Net Carrying

Amount)

 

May 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds - foreign

 

$

46,123

 

 

$

1,839

 

 

$

(1,197

)

 

$

46,765

 

Mutual funds - domestic

 

 

99,833

 

 

 

727

 

 

 

(2,770

)

 

 

97,790

 

Total equity securities

 

 

145,956

 

 

 

2,566

 

 

 

(3,967

)

 

 

144,555

 

Fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and other government

 

 

23,562

 

 

 

39

 

 

 

(552

)

 

 

23,049

 

Corporate bonds

 

 

432

 

 

 

43

 

 

 

(8

)

 

 

467

 

Total fixed maturity securities

 

 

23,994

 

 

 

82

 

 

 

(560

)

 

 

23,516

 

Total

 

$

169,950

 

 

$

2,648

 

 

$

(4,527

)

 

$

168,071

 

 

Marketable securities, included in other current and long-term assets totaling $102.8 million and $71.2 million at August 31, 2018, respectively, and included in other current and long-term assets totaling $97.4 million and $70.7 million at May 31, 2018, 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

11


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 investment income, net 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.  In addition to the $174.0 million in available-for-sale securities presented in the table above, as of August 31, 2018, we held approximately $11.9 million in trading securities in relation to our deferred compensation plan.  At May 31, 2018, the fair value of trading securities approximated $9.9 million.

Gross realized gains on sales of investments were $0.6 million and $4.0 million for the quarters ended August 31, 2018 and 2017, respectively.  During the first quarter of fiscal 2019 and 2018, we recognized gross realized losses on sales of investments of $0.1 million and $1.1 million, respectively. These amounts are included in investment (income), net in the Consolidated Statements of Income.

Summarized below are the securities we held at August 31, 2018 and May 31, 2018 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, 2018

 

 

May 31, 2018

 

(In thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

Total investments with unrealized losses

 

$

87,434

 

 

$

(4,975

)

 

$

106,253

 

 

$

(4,527

)

Unrealized losses with a loss position for less than 12 months

 

 

50,465

 

 

 

(1,950

)

 

 

68,376

 

 

 

(1,570

)

Unrealized losses with a loss position for more than 12 months

 

 

36,969

 

 

 

(3,025

)

 

 

37,877

 

 

 

(2,957

)

 

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, 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 August 31, 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

 

$

7,114

 

 

$

7,072

 

One year through five years

 

 

13,180

 

 

 

12,898

 

Six years through ten years

 

 

3,542

 

 

 

3,412

 

After ten years

 

 

1,065

 

 

 

1,096

 

 

 

$

24,901

 

 

$

24,478

 

 

 

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

12


RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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,

2018

 

U.S. Treasury and other government

 

$

-

 

 

$

24,027

 

 

$

-

 

 

$

24,027

 

Corporate bonds

 

 

 

 

 

 

451

 

 

 

 

 

 

 

451

 

Mutual funds - foreign

 

 

 

 

 

 

47,595

 

 

 

 

 

 

 

47,595

 

Mutual funds - domestic

 

 

 

 

 

 

113,891

 

 

 

 

 

 

 

113,891

 

Contingent consideration

 

 

 

 

 

 

 

 

 

 

(13,416

)

 

 

(13,416

)

Total

 

$

-

 

 

$

185,964

 

 

$

(13,416

)

 

$

172,548

 

 

(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,

2018

 

U.S. Treasury and other government

 

$

-

 

 

$

23,049

 

 

$

-

 

 

$

23,049

 

Corporate bonds

 

 

 

 

 

 

467

 

 

 

 

 

 

 

467

 

Mutual funds - foreign

 

 

 

 

 

 

47,410

 

 

 

 

 

 

 

47,410

 

Mutual funds - domestic

 

 

 

 

 

 

107,017