The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
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, 2019 and 2018. 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 15, “Revenue,” and Note 16, “Segment Information,” for additional information.
In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which provides amended guidance for certain aspects of recognition, measurement and disclosure of financial instruments. The main provisions of the standard impact how we account for changes in the fair value of our marketable securities currently classified as available-for-sale. Unrealized gains and losses on available-for-sale equity securities are required to be recognized in earnings rather than in other comprehensive income. Our adoption of the new standard during fiscal 2019 did not have a material effect on our overall Consolidated Financial Statements. See Note 4, “Marketable Securities,” and Note 7, “Investment Expense (Income), Net,” 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 have selected the alternative transition method for adoption, which we will adopt on June 1, 2019 and are still 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.
9
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In August 2018, the SEC issued Final Rule Release No. 33-10532, “Disclosure Update and Simplification,” which makes a number of changes meant to simplify interim d
isclosures. The new rule requires a presentation of changes in stockholders’ equity and noncontrolling interest in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and compa
rative year-to-date interim periods. The additional elements of this release did not have a material impact on our overall Consolidated Financial Statements. We adopted the new disclosure requirements in our Form 10-Q for the period ended February 28, 201
9.
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 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.
10
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
Between May and August 2018, we approved and implemented the initial phases of a multi-year restructuring plan, the 2020 Margin Acceleration Plan (“2020 MAP to Growth”). The initial phases of our 2020 MAP to Growth affected all of our reportable segments, as well as our corporate/nonoperating segment, and focused on margin improvement by simplifying business processes; reducing inventory categories and rationalizing SKUs; eliminating underperforming businesses; reducing headcount and working capital; and improving operating efficiency. The majority of the activities included in the initial phases of the restructuring activities have been completed.
During the second quarter ended November 30, 2018, we formally announced the final phases of our 2020 MAP to Growth. This multi-year restructuring is expected to increase operational efficiency while maintaining our entrepreneurial growth culture and will include three additional phases between September 2018 and December 2020. Our execution of the 2020 MAP to Growth will continue to drive the de-layering and simplification of management and businesses associated with group realignment. We will implement four center-led functional areas including manufacturing and operations; procurement and supply chain; information technology; and accounting and finance.
Our 2020 MAP to Growth will optimize our manufacturing facilities and will ultimately provide more efficient plant and distribution facilities. In the first phase of the restructuring we are implementing the planned closure of twelve plants and seven warehouses. We also expect to incur additional severance and benefit costs as part of our planned closure of these facilities.
Throughout the additional phases of our 2020 MAP to Growth initiative, we will continue to assess and find areas of improvement and cost savings. As such, the final implementation of the aforementioned phases and total expected costs are subject to change. In addition to the announced plan, we have continued to broaden the scope of our 2020 MAP to Growth initiative, specifically in consolidation of the general and administrative areas, potential outsourcing, as well as additional future plant closures and consolidations; the estimated costs of which have not yet been finalized. The current total expected costs associated with this plan are outlined in the table below and decreased by approximately $10.9 million compared to our previous estimate, primarily attributable to a reduction in expected facility closure and other related costs within our industrial, consumer, and specialty segments. These decreases were partially offset by increases in the expected severance charges within our industrial and specialty segments. Most activities under our 2020 MAP to Growth are anticipated to be completed by the end of calendar year 2020.
11
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of the charges recorded in connection with restructuring by report
able segment during fiscal 2019 is as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Cumulative Costs
|
|
Total Expected
|
|
(in thousands)
|
|
February 28, 2019
|
|
February 28, 2019
|
|
to Date
|
|
Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (a)
|
|
$
|
1,263
|
|
$
|
11,035
|
|
$
|
13,204
|
|
$
|
15,783
|
|
Facility closure and other related costs
|
|
|
3,228
|
|
|
4,531
|
|
|
5,576
|
|
|
9,815
|
|
Other asset write-offs
|
|
|
(79
|
)
|
|
648
|
|
|
2,021
|
|
|
3,012
|
|
Total Charges
|
|
$
|
4,412
|
|
$
|
16,214
|
|
$
|
20,801
|
|
$
|
28,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (b)
|
|
$
|
620
|
|
$
|
2,450
|
|
$
|
8,102
|
|
$
|
8,102
|
|
Facility closure and other related costs
|
|
|
1,078
|
|
|
1,248
|
|
|
6,387
|
|
|
8,817
|
|
Other asset write-offs
|
|
|
996
|
|
|
998
|
|
|
998
|
|
|
1,279
|
|
Total Charges
|
|
$
|
2,694
|
|
$
|
4,696
|
|
$
|
15,487
|
|
$
|
18,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (c)
|
|
$
|
1,512
|
|
$
|
5,445
|
|
$
|
5,445
|
|
$
|
6,351
|
|
Facility closure and other related costs
|
|
|
31
|
|
|
31
|
|
|
31
|
|
|
2,280
|
|
Other asset write-offs
|
|
|
5
|
|
|
8
|
|
|
8
|
|
|
256
|
|
Total Charges
|
|
$
|
1,548
|
|
$
|
5,484
|
|
$
|
5,484
|
|
$
|
8,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (d)
|
|
$
|
25
|
|
$
|
10,085
|
|
$
|
12,221
|
|
$
|
12,657
|
|
Total Charges
|
|
$
|
25
|
|
$
|
10,085
|
|
$
|
12,221
|
|
$
|
12,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs
|
|
$
|
3,420
|
|
$
|
29,015
|
|
$
|
38,972
|
|
$
|
42,893
|
|
Facility closure and other related costs
|
|
|
4,337
|
|
|
5,810
|
|
|
11,994
|
|
|
20,912
|
|
Other asset write-offs
|
|
|
922
|
|
|
1,654
|
|
|
3,027
|
|
|
4,547
|
|
Total Charges
|
|
$
|
8,679
|
|
$
|
36,479
|
|
$
|
53,993
|
|
$
|
68,352
|
|
(a)
|
Current quarter and year charges of $1.3 million and $11.0 million, respectively, are associated with the elimination of 150 positions, of which 2 occurred in the current quarter. Additionally, $0.2 million included in the current year charges are associated with the prior elimination of one position within the legal function during fiscal 2018.
|
(b)
|
Current quarter and year charges of $0.6 million and $2.5 million, respectively, are associated with the elimination of 63 positions, of which 19 occurred in the current quarter.
|
(c)
|
Current quarter and year charges of $1.5 million and $5.4 million, respectively, are associated with the elimination of 109 positions, of which 2 occurred in the current quarter.
|
(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 three industrial segment executives in connection with the aforementioned restructuring activities.
|
12
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of the activity in the restructuring reserves related to our 2020 MAP to Growth is as follows:
(in thousands)
|
Severance and Benefits Costs
|
|
Facility Closure and Other Related Costs
|
|
Other Asset Write-Offs
|
|
Total
|
|
Balance at November 30, 2018
|
$
|
10,427
|
|
$
|
2,535
|
|
$
|
-
|
|
|
12,962
|
|
Additions charged to expense
|
|
3,420
|
|
|
4,337
|
|
|
922
|
|
|
8,679
|
|
Cash payments charged against reserve
|
|
(4,975
|
)
|
|
(1,872
|
)
|
|
-
|
|
|
(6,847
|
)
|
Non-cash charges included above (e)
|
|
-
|
|
|
(6
|
)
|
|
(922
|
)
|
|
(928
|
)
|
Balance at February 28, 2019
|
$
|
8,872
|
|
$
|
4,994
|
|
$
|
-
|
|
$
|
13,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
29,015
|
|
|
5,810
|
|
|
1,654
|
|
|
36,479
|
|
Cash payments charged against reserve
|
|
(23,563
|
)
|
|
(3,620
|
)
|
|
|
|
|
(27,183
|
)
|
Non-cash charges included above (e)
|
|
(6,537
|
)
|
|
(3,380
|
)
|
|
(3,027
|
)
|
|
(12,944
|
)
|
Balance at February 28, 2019
|
$
|
8,872
|
|
$
|
4,994
|
|
$
|
-
|
|
$
|
13,866
|
|
(e)
|
Non-cash charges primarily include accelerated vesting of equity awards and asset-write offs.
|
In connection with our 2020 MAP to Growth, during the third quarter of fiscal 2019, we incurred approximately $1.1 million and $0.8 million of inventory-related charges at our industrial and consumer segments, respectively. During the first nine months of fiscal 2019, we incurred approximately $8.2 million and $2.1 million of inventory-related charges at our industrial and consumer segments, respectively. The inventory-related charges are partially offset by a favorable adjustment of approximately $0.2 million to the previous write-off at our consumer segment. All of the aforementioned inventory-related charges 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.
NOTE 4 — MARKETABLE SECURITIES
The following tables summarize available-for-sale marketable securities held at February 28, 2019 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)
|
|
February 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government
|
|
$
|
23,642
|
|
|
$
|
68
|
|
|
$
|
(375
|
)
|
|
$
|
23,335
|
|
Corporate bonds
|
|
|
422
|
|
|
|
35
|
|
|
|
(8
|
)
|
|
|
449
|
|
Total available-for-sale securities
|
|
$
|
24,064
|
|
|
$
|
103
|
|
|
$
|
(383
|
)
|
|
$
|
23,784
|
|
13
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, 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 $7.6 million and $16.2 million at February 28, 2019, 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 debt 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 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.
During fiscal 2019, we adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities,” which requires gains and losses on marketable equity securities to be recognized in earnings rather than in other comprehensive income.
Prior to adoption, equity securities were included in our available-for-sale portfolio and unrealized changes in fair value were recognized through other comprehensive (loss) income until realized, at which point we recorded a gain or loss on sale.
As of February 28, 2019, we held approximately $89.2 million in equity securities. Additionally, as of February 28, 2019 and May 31, 2018, we held approximately $12.4 million and $9.9 million, respectively, in trading securities in relation to our deferred compensation plan.
Gross realized gains and losses on sales of marketable securities are included in investment (income), net in the Consolidated Statements of Income. Refer to Note 7, “Investment Expense (Income), Net,” for further details.
Summarized below are the available-for-sale securities we held at February 28, 2019 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:
|
|
February 28, 2019
|
|
|
May 31, 2018
|
|
(In thousands)
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
Total investments with unrealized losses
|
|
$
|
16,582
|
|
|
$
|
(383
|
)
|
|
$
|
106,253
|
|
|
$
|
(4,527
|
)
|
Unrealized losses with a loss position for less than 12 months
|
|
|
822
|
|
|
|
(4
|
)
|
|
|
68,376
|
|
|
|
(1,570
|
)
|
Unrealized losses with a loss position for more than 12 months
|
|
|
15,760
|
|
|
|
(379
|
)
|
|
|
37,877
|
|
|
|
(2,957
|
)
|
14
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We have reviewed all of
the securities included in the table above and have concluded that we have the ability and intent to hold these investments until their cost can be recovered, based upon the severity and duration of the decline. Therefore, we did not recognize any other-t
han-temporary impairment losses on these investments. The unrealized losses generally relate to investments whose fair values at February 28, 2019 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 t
he future, we may recognize additional other-than-temporary impairment losses. 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, 2019, 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
|
|
$
|
7,646
|
|
|
$
|
7,604
|
|
One year through five years
|
|
|
10,718
|
|
|
|
10,522
|
|
Six years through ten years
|
|
|
4,749
|
|
|
|
4,684
|
|
After ten years
|
|
|
951
|
|
|
|
974
|
|
|
|
$
|
24,064
|
|
|
$
|
23,784
|
|
NOTE 5 — FAIR VALUE MEASUREMENTS
Financial instruments recorded in the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.
An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved, and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in collectibility and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility.
The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:
Level 1 Inputs
— Quoted prices for identical instruments in active markets.
Level 2 Inputs
— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs
— Instruments with primarily unobservable value drivers.
15
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
(In thousands)
|
|
Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Fair Value at
February 28,
2019
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government
|
|
$
|
-
|
|
|
$
|
23,335
|
|
|
$
|
-
|
|
|
$
|
23,335
|
|
Corporate bonds
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
|
449
|
|
Total available-for-sale debt securities
|
|
|
-
|
|
|
|
23,784
|
|
|
|
-
|
|
|
|
23,784
|
|
Trading and other equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - foreign
|
|
|
|
|
|
|
32,844
|
|
|
|
|
|
|
|
32,844
|
|
Mutual funds - domestic
|
|
|
|
|
|
|
68,754
|
|
|
|
|
|
|
|
68,754
|
|
Total trading and other equity securities
|
|
|
-
|
|
|
|
101,598
|
|
|
|
-
|
|
|
|
101,598
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(21,815
|
)
|
|
|
(21,815
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
125,382
|
|
|
$
|
(21,815
|
)
|
|
$
|
103,567
|
|
(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
|
|
|
|
|
|
|
|
107,017
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(17,998
|
)
|
|
|
(17,998
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
177,943
|
|
|
$
|
(17,998
|
)
|
|
$
|
159,945
|
|
Our investments in available-for-sale debt securities and trading and other equity 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 2019, we paid approximately $4.7 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 recorded an increase in the accrual for approximately $2.7 million and $5.8 million related to fair value adjustments and new acquisitions, respectively. 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 last year’s first nine months, and we increased our accrual by $0.5 million for fair value adjustments. These amounts are reported in payments of acquisition-related contingent consideration in cash flows from operations and from financing activities in the Consolidated Statements of Cash Flows.
16
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 February 28, 2019 and May 31, 2018, the fair va
lue 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, 2019 and May 31, 2018 are as follows:
|
|
At February 28, 2019
|
|
(In thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
195,169
|
|
|
$
|
195,169
|
|
Marketable equity securities
|
|
|
89,234
|
|
|
|
89,234
|
|
Marketable debt securities
|
|
|
23,784
|
|
|
|
23,784
|
|
Long-term debt, including current portion
|
|
|
2,524,218
|
|
|
|
2,464,343
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2018
|
|
(In thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
Cash and cash equivalents
|
|
$
|
244,422
|
|
|
$
|
244,422
|
|
Marketable equity securities
|
|
|
144,555
|
|
|
|
144,555
|
|
Marketable debt securities
|
|
|
23,516
|
|
|
|
23,516
|
|
Long-term debt, including current portion
|
|
|
2,174,144
|
|
|
|
2,215,458
|
|
NOTE 6 — DERIVATIVES AND HEDGING
Derivative Instruments and Hedging Activities
We are exposed to market risks, such as changes in foreign currency exchange rates and interest rates. To manage the volatility related to these exposures, from time to time, we enter into various derivative transactions. We use various types of derivative instruments including forward contracts and swaps. We formally assess, designate and document, as a hedge of an underlying exposure, each qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, we assess, both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures.
Net Investment Hedge
In October 2017, as a means of mitigating the impact of currency fluctuations on our Euro investments in foreign entities, we executed a fair value hedge and two cross currency swaps, in which we will pay variable rate interest in Euros and receive fixed rate interest in U.S. Dollars with a combined notional amount of approximately €85.25 million ($100 million U.S. Dollar equivalent), and which have a maturity date of November 2022. This effectively converts a portion of our U.S. Dollar denominated fixed-rate debt to Euro denominated variable rate debt. The fair value hedge is recognized at fair value in our Consolidated Balance Sheets, while changes in the fair value of the hedge are recognized in interest expense in our Consolidated Statements of Income. We designated the swaps as net investment hedges of our net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. The changes in fair value of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized in accumulated other comprehensive income (“AOCI”) to offset the changes in the values of the net investments being hedged. Amounts released from AOCI and reclassified into interest expense did not have a material impact on our Consolidated Financial Statements for any period presented.
Derivatives Designated as Cash Flow Hedging Instruments
We have designated certain forward contracts as hedging instruments pursuant to ASC No. 815 (“ASC 815”), “Derivatives and Hedging.” Changes in the fair value of these highly effective hedges are recorded as a component of AOCI. During the period in which a forecasted transaction affects earnings, amounts previously recorded as a component of AOCI are reclassified into earnings as a component of cost of sales. Amounts released from AOCI and reclassified into earnings did not have a material impact on our Consolidated Financial Statements for any period presented. As of May 31, 2018 the notional amount of the forward contracts held to sell international currencies was $8.7 million, while there was no amount held at February 28, 2019.
17
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivatives Not Designated as Hedges
At February 28, 2019, we held one foreign currency forward contract designed to reduce our exposure to 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 contract has not been designated as a hedge; therefore, the changes in fair value of the derivative are recognized in earnings as a component of other (income) expense. Amounts recognized in earnings did not have a material impact on our Consolidated Financial Statements for any period presented. As of February 28, 2019 and May 31, 2018, the notional amounts of the forward contract held to purchase foreign currencies was $33.6 million and $147.4 million, respectively.
Disclosure about Derivative Instruments
All of our derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. We determine the fair value of our derivatives based on valuation methods, which project future cash flows and discount the future amounts to present value using market based observable inputs, including interest rate curves, foreign currency rates, as well as future and basis point spreads, as applicable.
The fair values of qualifying and non-qualifying instruments used in hedging transactions as of February 28, 2019 and May 31, 2018 are as follows:
(in thousands)
|
|
|
|
Fair Value
|
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
February 28, 2019
|
|
|
May 31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange (Cash Flow)
|
|
Other Current Assets
|
|
$
|
-
|
|
|
$
|
133
|
|
Cross Currency Swap (Net Investment)
|
|
Other Current Assets
|
|
|
2,099
|
|
|
|
2,580
|
|
Cross Currency Swap (Net Investment)
|
|
Other Assets (Long-Term)
|
|
|
3,771
|
|
|
|
1,986
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Fair Value)
|
|
Other Accrued Liabilities
|
|
|
459
|
|
|
|
441
|
|
Cross Currency Swap (Net Investment)
|
|
Other Long-Term Liabilities
|
|
|
3,201
|
|
|
|
5,293
|
|
Interest Rate Swap (Fair Value)
|
|
Other Long-Term Liabilities
|
|
|
1,377
|
|
|
|
2,634
|
|
(in thousands)
|
|
|
|
Fair Value
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
February 28, 2019
|
|
|
May 31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange
|
|
Other Current Assets
|
|
$
|
87
|
|
|
$
|
7
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange
|
|
Other Accrued Liabilities
|
|
|
-
|
|
|
|
2,985
|
|
NOTE 7
—
INVESTMENT EXPENSE (INCOME), NET
Investment (income), net, consists of the following components:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Interest (income)
|
|
$
|
(1,076
|
)
|
|
$
|
(1,454
|
)
|
|
$
|
(2,808
|
)
|
|
$
|
(3,645
|
)
|
Net (gain) loss on marketable securities
|
|
|
(1,683
|
)
|
|
|
(1,935
|
)
|
|
|
6,451
|
|
|
|
(6,833
|
)
|
Dividend (income)
|
|
|
(1,967
|
)
|
|
|
(2,082
|
)
|
|
|
(3,769
|
)
|
|
|
(3,185
|
)
|
Investment (income), net
|
|
$
|
(4,726
|
)
|
|
$
|
(5,471
|
)
|
|
$
|
(126
|
)
|
|
$
|
(13,663
|
)
|
18
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net (Gain)Loss on Marketable Securities
During the third quarter of fiscal 2019, we recognized gross realized gains and losses on sales of available-for-sale securities of $0.1 million and $2.2 million, respectively. Also during the current quarter, we recognized gross realized gains on sales of trading securities of $0.2 million and unrealized losses on trading securities of $0.1 million. For the first nine months of fiscal 2019, we recognized realized gains and losses on sales of available-for-sale securities of $0.3 million and $3.4 million, respectively, realized gains on trading securities of $0.2 million and unrealized losses on trading securities of $0.7 million. During the three and nine-month periods ended February 28, 2019, we recognized unrealized gains of $3.7 million and unrealized losses of $2.9 million marketable equity securities.
During the third quarter of fiscal 2018, we recognized gross realized gains and losses on sales of marketable securities of $2.6 million and $0.7 million, respectively. For the first nine months of fiscal 2018, we recognized gross realized gains and losses on sales of marketable securities of $8.6 million and $1.8 million, respectively.
NOTE 8
—
OTHER EXPENSE (INCOME), NET
Other expense (income), net, consists of the following components:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Royalty expense, net
|
|
$
|
88
|
|
|
$
|
148
|
|
|
$
|
154
|
|
|
$
|
238
|
|
(Income) related to unconsolidated equity affiliates
|
|
|
(133
|
)
|
|
|
(313
|
)
|
|
|
(299
|
)
|
|
|
(830
|
)
|
Pension non-service costs
|
|
|
372
|
|
|
|
-
|
|
|
|
1,146
|
|
|
|
-
|
|
Loss on extinguishment of debt (a)
|
|
|
|
|
|
|
-
|
|
|
|
3,051
|
|
|
|
-
|
|
Other expense (income), net
|
|
$
|
327
|
|
|
$
|
(165
|
)
|
|
$
|
4,052
|
|
|
$
|
(592
|
)
|
(a)
|
In connection with the redemption of all of our outstanding 2.25% convertible senior notes in November 2018, we recognized a loss of $3.1 million, due to the fair value measurement of the instrument on the date of conversion.
|
NOTE 9 — INCOME TAXES
On December 22, 2017 the Tax Cuts and Jobs Act (“Act”) was enacted into law. The income tax effects of changes in tax laws are recognized in the period when enacted. The Act provides for numerous significant tax law changes and modifications with varying effective dates. Generally, the more significant provisions of the Act that impacted us for the year ended May 31, 2018 included the reduction in the corporate income tax rate from 35% to 21%, the creation of a territorial tax system (with a one-time mandatory tax on previously deferred foreign earnings) and allowance for immediate capital expensing of certain qualified property. The corporate tax rate reduction was effective for RPM as of January 1, 2018 and, accordingly, reduced our fiscal year 2018 federal statutory rate to a blended rate of approximately 29.2%. The significant provisions of the Act which impact us for fiscal 2019 include the full federal statutory rate reduction to 21% and the repeal of the domestic production activities deduction. Also effective for fiscal 2019 are provisions of the Act that subject us to current U.S. tax
on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries and allows a benefit for foreign-derived intangible income (“FDII”).
Subsequent to the enactment of the Act, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act’s enactment date for companies to complete the applicable accounting under ASC 740. In accordance with SAB 118 and based on the information available as of May 31, 2018, we recorded a net provisional income tax expense of $7.3 million in accordance with the applicable provisions of the Act. The net provisional income tax expense was comprised of a benefit of $15.7 million related to the provisional re-measurement of our U.S. deferred tax assets and liabilities at the reduced U.S. corporate tax rates, a provisional expense of $67.9 million for the transition tax on unremitted earnings from foreign subsidiaries, and a provisional benefit of $44.9 million for the partial reversal of existing deferred tax liabilities recorded for the estimated tax cost associated with unremitted foreign earnings not considered permanently reinvested.
19
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During our fiscal 2019 third quarter, we completed our assessment of the accounting for the impact of Act, which included analysis based on related legislative updates and technical interpretations of the Act. As a
result, and consistent with SAB 118, during the three months ended February 28, 2019 we recorded a net discrete income tax benefit of $8.1 million, which was comprised of a $6.3 million benefit for the re-measurement of certain U.S. deferred tax assets an
d liabilities and a $1.8 million benefit resulting from the reduction of the transition tax on unremitted earnings from foreign subsidiaries. No other SAB 118 adjustments for the impact of the Act were recorded this fiscal year.
We have estimated the tax impact related to GILTI and FDII for the year ended May 31, 2019 and included such impact in the estimated annual effective tax rate. The impact of GILTI and FDII was not material for the nine months ended February 28, 2019.
The effective income tax benefit rate of 224.7% for the three months ended February 28, 2019 compares to the effective income tax benefit rate of 17.0% for the three months ended February 28, 2018. The effective income tax benefit rate of 224.7% for the three months ended February 28, 2019 reflects variances from the 21% statutory rate due primarily to the favorable impact of $12.7 million of net discrete tax benefits recorded during the quarter and the amplified impact of those tax benefits on the relatively low level of pre-tax earnings. The $12.7 million net discrete benefits recorded are primarily comprised of the net $8.1 million benefit resulting from completion of our SAB 118 accounting for the impact of the Act and the release certain income tax reserves for uncertain tax positions. The 17.0% effective income tax benefit rate for the three months ended February 28, 2018 reflects variances from the blended fiscal year 2018 statutory rate of 29.2% due primarily to the cumulative favorable impact of the statutory rate reduction from 35% to 29.2% which occurred during that prior period. Additionally, the 17.0% effective income tax benefit rate reflects a $1.4 million discrete tax benefit related to an adjustment to the net provisional estimate of the Act as recorded in the prior period and consistent with SAB 118.
The effective income tax rate of 17.8% for the nine months ended February 28, 2019 compares to the effective income tax rate of 15.3% for the nine months ended February 28, 2018. The effective income tax rate for the nine months ended February 28, 2019 reflects variances from the 21% statutory rate due primarily to $16.5 million of net discrete tax benefits, which are comprised of the $12.7 million net tax benefit described above with the remaining balance being recorded in the prior quarters of this fiscal year. These discrete tax benefits were partially offset primarily by the unfavorable impact of state and local taxes and incremental valuation allowances associated with certain foreign net operating losses. The effective income tax rate for the nine months ended February 28, 2018 reflects variances from the 29.2% statutory rate primarily due to $27.0 million in discrete tax benefits recorded in connection with foreign tax credit planning and the implementation of a foreign legal entity restructuring and corresponding planning strategy.
Our deferred tax liability for unremitted foreign earnings was adjusted to $19.9 million as of May 31, 2018. The $19.9 million deferred tax liability represented our estimate of the foreign tax cost associated with the remittance of $549.8 million of foreign earnings that are not considered to be permanently reinvested. As of February 28, 2019, the amount of these earnings have been modified to approximately $423.4 million and the related deferred tax liability, which represents the estimated tax cost to repatriate these earnings, was adjusted to $19.2 million to reflect the impact of foreign exchange. The reduction to the earnings amounts no longer permanently reinvested is due principally to distributions made during this fiscal year, which were not subject to foreign withholding taxes.
We have not provided for foreign withholding or income taxes on the remaining foreign subsidiaries’ undistributed earnings because such earnings have been retained and reinvested by the subsidiaries as of February 28, 2019. Accordingly, no provision has been made for foreign withholding or income taxes, which may become payable if the remaining undistributed earnings of foreign subsidiaries were remitted to us as dividends.
NOTE 10 — INVENTORIES
Inventories, net of reserves, were composed of the following major classes:
|
|
February 28, 2019
|
|
|
May 31, 2018
|
|
(In thousands)
|
|
|
|
Raw material and supplies
|
|
$
|
309,108
|
|
|
$
|
288,201
|
|
Finished goods
|
|
|
607,253
|
|
|
|
546,260
|
|
Total Inventory, Net of Reserves
|
|
$
|
916,361
|
|
|
$
|
834,461
|
|
20
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11 — 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. As announced on November 28, 2018, our goal is to return $1.5 billion in capital to stockholders by May 31, 2021 through dividends and share repurchases. As a result, we may repurchase shares from time to time in the open market or in private transactions at various times and in amounts and for prices that our management deems appropriate, subject to insider trading rules and other securities law restrictions. The timing of our purchases will depend upon prevailing market conditions, alternative uses of capital and other factors. We may limit or terminate the repurchase program at any time. During the three months ended February 28, 2019, we repurchased 1,570,647 shares of our common stock at a cost of approximately $91.2 million, or an average cost of $58.08 per share, under this program. During the nine months ended February 28, 2019, we repurchased 2,819,045 shares of our common stock at a cost of approximately $173.2 million, or an average cost of $61.45 per share, under this program.
NOTE 12 — EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine-month periods ended February 28, 2019 and 2018. For the three and nine months ended February 28, 2019 and 2018, basic earnings per share were calculated using the two-class method. For the three and nine months ended February 28, 2019, diluted earnings per share was calculated using the treasury method. For the three months ended February 28, 2018, basic weighted-average shares outstanding and basic net income available to common shareholders and basic weighted average common shares were used in calculating diluted earnings per share under the two-class method, as that method resulted in the most-dilutive earnings per share. For the nine months ended February 28, 2018, diluted earnings per share was calculated using the two-class method.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
(In thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Numerator for earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RPM International Inc.
stockholders
|
|
$
|
14,190
|
|
|
$
|
40,227
|
|
|
$
|
133,178
|
|
|
$
|
252,106
|
|
Less: Allocation of earnings and dividends to
participating securities
|
|
|
(109
|
)
|
|
|
(530
|
)
|
|
|
(996
|
)
|
|
|
(3,373
|
)
|
Net income available to common shareholders -
basic
|
|
|
14,081
|
|
|
|
39,697
|
|
|
|
132,182
|
|
|
|
248,733
|
|
Add: Undistributed earnings reallocated to unvested
shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Add: Allocation of earnings and dividends to participating securities
|
|
|
109
|
|
|
|
|
|
|
|
996
|
|
|
|
|
|
Add: Income effect of contingently issuable shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,351
|
|
Net income available to common shareholders -
diluted
|
|
$
|
14,190
|
|
|
$
|
39,697
|
|
|
$
|
133,178
|
|
|
$
|
253,091
|
|
Denominator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
130,105
|
|
|
|
131,178
|
|
|
|
131,019
|
|
|
|
131,195
|
|
Average diluted options and awards
|
|
|
1,784
|
|
|
|
|
|
|
|
1,810
|
|
|
|
540
|
|
Additional shares issuable assuming conversion of
convertible securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,922
|
|
Total shares for diluted earnings per share (2)
|
|
|
131,889
|
|
|
|
131,178
|
|
|
|
132,829
|
|
|
|
135,657
|
|
Earnings Per Share of Common Stock Attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPM International Inc. Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share of Common Stock
|
|
$
|
0.11
|
|
|
$
|
0.30
|
|
|
$
|
1.01
|
|
|
$
|
1.90
|
|
Diluted Earnings Per Share of Common Stock
|
|
$
|
0.11
|
|
|
$
|
0.30
|
|
|
$
|
1.00
|
|
|
$
|
1.87
|
|
(1)
|
Represents the number of shares that would have been issued if our contingently convertible notes had been converted. We included these shares in the calculation of diluted EPS as the conversion of the notes were eligible to be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. On November 27, 2018, we redeemed all of our 2.25% convertible senior notes due 2020, primarily for cash, but also issued 598,601 shares of our common stock in the transaction.
|
21
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(2)
|
Restricted shares totaling 429,750 and 323,000 for the three and nine months ended Feb
ruary 28, 2019
, respectively, and restricted shares totaling 48,212
for the three and nine months ended February 28, 2018
were excluded from the calculation of diluted earnings per share because the grant price of the restricted shares exceeded the average market price of the shares during the period and their effect, acc
ordingly, would have been anti-dilutive. In addition, stock appreciation rights (SARs) totaling 890,000 for the three and
nine months
ended
February 28, 2019
and 600,000 for the three and
nine months
ended
February 28, 2018
, were excluded from the calcula
tion of diluted earnings per share as their effect would have been anti-dilutive.
|
NOTE 13 — PENSION PLANS
We offer defined benefit pension plans, defined contribution pension plans, and various postretirement benefit plans. The following tables provide the retirement-related benefit plans’ impact on income before income taxes for the three and nine months ended February 28, 2019 and 2018:
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
Pension Benefits
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
9,382
|
|
|
$
|
9,465
|
|
|
$
|
1,219
|
|
|
$
|
1,175
|
|
Interest cost
|
|
|
5,497
|
|
|
|
4,379
|
|
|
|
1,399
|
|
|
|
1,145
|
|
Expected return on plan assets
|
|
|
(8,467
|
)
|
|
|
(8,086
|
)
|
|
|
(2,051
|
)
|
|
|
(1,978
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
29
|
|
|
|
29
|
|
|
|
(8
|
)
|
|
|
(6
|
)
|
Net actuarial losses recognized
|
|
|
3,272
|
|
|
|
3,618
|
|
|
|
319
|
|
|
|
451
|
|
Net Periodic Benefit Cost
|
|
$
|
9,713
|
|
|
$
|
9,405
|
|
|
$
|
878
|
|
|
$
|
787
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
Postretirement Benefits
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
392
|
|
|
$
|
311
|
|
Interest cost
|
|
|
48
|
|
|
|
43
|
|
|
|
291
|
|
|
|
224
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit)
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Net actuarial (gains) losses recognized
|
|
|
(6
|
)
|
|
|
6
|
|
|
|
115
|
|
|
|
79
|
|
Net Periodic Benefit (Credit) Cost
|
|
$
|
(13
|
)
|
|
$
|
(6
|
)
|
|
$
|
798
|
|
|
$
|
614
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
Pension Benefits
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
28,146
|
|
|
$
|
28,395
|
|
|
$
|
3,657
|
|
|
$
|
3,525
|
|
Interest cost
|
|
|
16,491
|
|
|
|
13,137
|
|
|
|
4,197
|
|
|
|
3,435
|
|
Expected return on plan assets
|
|
|
(25,401
|
)
|
|
|
(24,258
|
)
|
|
|
(6,153
|
)
|
|
|
(5,934
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
87
|
|
|
|
87
|
|
|
|
(24
|
)
|
|
|
(18
|
)
|
Net actuarial losses recognized
|
|
|
9,816
|
|
|
|
10,854
|
|
|
|
957
|
|
|
|
1,353
|
|
Net Periodic Benefit Cost
|
|
$
|
29,139
|
|
|
$
|
28,215
|
|
|
$
|
2,634
|
|
|
$
|
2,361
|
|
22
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
Postretirement Benefits
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,176
|
|
|
$
|
933
|
|
Interest cost
|
|
|
144
|
|
|
|
129
|
|
|
|
873
|
|
|
|
672
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit)
|
|
|
(165
|
)
|
|
|
(165
|
)
|
|
|
-
|
|
|
|
-
|
|
Net actuarial (gains) losses recognized
|
|
|
(18
|
)
|
|
|
18
|
|
|
|
345
|
|
|
|
237
|
|
Net Periodic Benefit (Credit) Cost
|
|
$
|
(39
|
)
|
|
$
|
(18
|
)
|
|
$
|
2,394
|
|
|
$
|
1,842
|
|
Due to slightly higher discount rates and increased asset values, offset by higher interest cost and lump sum mortality rates, net periodic pension and postretirement cost for fiscal 2019 is slightly higher than to our fiscal 2018 expense level. We expect that pension expense will fluctuate on a year-to-year basis, depending upon the investment performance of plan assets and potential changes in interest rates, but such changes are not expected to be material to our consolidated financial results. We previously disclosed in our financial statements for the fiscal year ended May 31, 2018 that we expected to contribute approximately $1.3 million to our retirement plans in the U.S. and approximately $8.1 million to plans outside the U.S. during the current fiscal year. However, during February 2019 we contributed an additional $56.5 million to the RPM Retirement Plan in the U.S., which increases our total expected U.S. contributions to $57.8 million for the current fiscal year.
NOTE 14 — CONTINGENCIES AND OTHER ACCRUED LOSSES
We provide, through our wholly owned insurance subsidiaries, certain insurance coverage, primarily product liability coverage, to our other subsidiaries. Excess coverage is provided by third-party insurers. Our product liability accruals provide for these potential losses as well as other uninsured claims. Product liability accruals are established based upon actuarial calculations of potential liability using industry experience, actual historical experience and actuarial assumptions developed for similar types of product liability claims, including development factors and lag times. To the extent there is a reasonable possibility that potential losses could exceed the amounts already accrued, we believe that the amount of any such additional loss would be immaterial to our results of operations, liquidity and consolidated financial position.
We also offer warranties on many of our products, as well as long-term warranty programs at certain of our businesses, and have established product warranty liabilities. We review these liabilities for adequacy on a quarterly basis and adjust them as necessary. The primary factors that could affect these liabilities may include changes in performance rates as well as costs of replacement. Provision for estimated warranty costs is recorded at the time of sale and periodically adjusted, as required, to reflect actual experience. It is probable that we will incur future losses related to warranty claims we have received but that have not been fully investigated and related to claims not yet received. While our warranty liabilities represent our best estimates at February 28, 2019, we can provide no assurances that we will not experience material claims in the future or that we will not incur significant costs to resolve such claims beyond the amounts accrued or beyond what we may recover from our suppliers. Based upon the nature of the expense, product warranty expense is recorded as a reduction of sales, as a component of cost of sales, or within selling, general and administrative expense.
Also, due to the nature of our businesses, the amount of claims paid can fluctuate from one period to the next. While our warranty liabilities represent our best estimates of our expected losses at any given time, from time-to-time we may revise our estimates based on our experience relating to factors such as weather conditions, specific circumstances surrounding product installations and other factors.
23
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table includes the changes in our accrued warranty balances:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
9,863
|
|
|
$
|
14,457
|
|
|
$
|
11,721
|
|
|
$
|
19,149
|
|
Deductions (1)
|
|
|
(4,283
|
)
|
|
|
(5,776
|
)
|
|
|
(17,557
|
)
|
|
|
(20,447
|
)
|
Provision charged to expense
|
|
|
4,091
|
|
|
|
2,540
|
|
|
|
15,507
|
|
|
|
12,519
|
|
Ending Balance
|
|
$
|
9,671
|
|
|
$
|
11,221
|
|
|
$
|
9,671
|
|
|
$
|
11,221
|
|
(1)
|
Primarily claims paid during the year.
|
In addition, like other companies participating in similar lines of business, some of our subsidiaries are involved in several proceedings relating to environmental matters. It is our policy to accrue remediation costs when it is probable that such efforts will be required and the related costs can be reasonably estimated. In general, our environmental accruals are undiscounted liabilities, which are exclusive of claims against third parties, and are not material to our financial statements during any of the periods presented.
We were notified by the SEC on June 24, 2014, that we are the subject of a formal investigation pertaining to the timing of our disclosure and accrual of loss reserves in fiscal 2013 with respect to the previously disclosed U.S. Department Of Justice (the “DOJ”) and the U.S. General Services Administration (the “GSA”) Office of Inspector General investigation into compliance issues relating to Tremco Roofing Division’s GSA contracts. As previously disclosed, our Audit Committee completed an investigation into the facts and circumstances surrounding the timing of our disclosure and accrual of loss reserves with respect to the GSA and DOJ investigation, and determined that it was appropriate to restate our financial results for the first, second and third quarters of fiscal 2013. These restatements had no impact on our audited financial statements for the fiscal years ended May 31, 2013 or 2014. The Audit Committee’s investigation concluded that there was no intentional misconduct on the part of any of our officers.
In connection with the foregoing, on September 9, 2016, the SEC filed an enforcement action against us and our General Counsel. We have cooperated with the SEC’s investigation and believe the allegations in the complaint mischaracterize both our and our General Counsel’s actions in connection with the matters related to our quarterly results in fiscal 2013 and are without merit. Both we and our General Counsel filed motions to dismiss the complaint on February 24, 2017. Those motions to dismiss the complaint were denied by the Court on September 29, 2017. We and our General Counsel filed answers to the complaint on October 16, 2017. Formal discovery commenced in January 2018 and is ongoing. The parties have engaged in written discovery, and depositions of fact witnesses began in September 2018. Further depositions scheduled in January 2019 were put on hold due to the U.S. government shutdown. The Court recently granted a joint motion to modify the case schedule in light of the delay resulting from the U.S. government shutdown, and set deadlines including May 10, 2019 for discovery, July 19, 2019 for our and our General Counsel’s dispositive motions, September 13, 2019 for the SEC’s oppositions and cross-dispositive motions, October 11, 2019 for our and our General Counsel’s reply briefs and cross-oppositions, and November 8, 2019 for the SEC’s cross-reply brief. We intend to continue to contest the allegations in the complaint vigorously.
Also in connection with the foregoing, a stockholder derivative action was filed in the United States District Court, Northern District of Ohio, Eastern Division, against certain of our directors and officers. The court has stayed this stockholder derivative action pending the completion of the SEC enforcement action.
The action by the SEC could result in sanctions against us and/or our General Counsel and could impose substantial additional costs and distractions, regardless of its outcome. We have determined that it is probable that we will incur a loss relating to this matter and have estimated a range of potential loss. We have accrued at the low end of the range of loss, as no amount within the range is more likely to occur, and no amount within the estimated range of loss would have a material impact on our consolidated financial condition, results of operations or cash flows.
With respect to a previously disclosed case pending against one of our subsidiaries in which both trade secret and trademark infringement had been alleged, during the quarter ended November 30, 2018, we agreed to settle the case for $6.5 million.
24
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 15 – REVENUE
We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We disaggregate revenues from the sales of our products and services based upon geographical location by each of our reportable segments, which are aligned by similar economic factors, trends and customers, which best depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. See Note 16, “Segment Information,” for further details regarding our disaggregated revenues as well as a description of each of the unique revenue streams related to each of our three reportable segments.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The majority of our revenue is recognized at a point in time. However, we also record revenues generated under construction contracts, mainly in connection with the installation of specialized roofing and flooring systems and related services. For certain polymer flooring installation projects, we account for our revenue using the output method, as we consider square footage of completed flooring to be the best measure of progress toward the complete satisfaction of the performance obligation. In contrast, for certain of our roofing installation projects, we account for our revenue using the input method, as that method was the best measure of performance as it considers costs incurred in relation to total expected project costs, which essentially represents the transfer of control for roofing systems to the customer. In general, for our construction contracts, we record contract revenues and related costs as our contracts progress on an over-time model.
We have elected to apply the practical expedient to recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Payment terms and conditions vary by contract type, although our customers’ payment terms generally include a requirement to pay within 30 to 60 days of fulfilling our performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. We have elected to apply the practical expedient to treat all shipping and handling costs as fulfillment costs as a significant portion of these costs are incurred prior to control transfer.
Significant Judgments
Our contracts with customers may include promises to transfer multiple products and/or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For example, judgment is required to determine whether products sold in connection with the sale of installation services are considered distinct and accounted for separately, or not distinct and accounted for together with installation services and recognized over time.
We provide customer rebate programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. In general, this determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. Certain of our contracts include contingent consideration that is receivable only upon the final inspection and acceptance of a project. We include estimates of such variable consideration in our transaction price. Based on historical experience, we consider the probability-based expected value method appropriate to estimate the amount of such variable consideration.
Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. We record a right of return liability to accrue for expected customer returns. Historical actual returns are used to estimate future returns as a percentage of current sales. Obligations for returns and refunds were not material individually or in the aggregate.
We offer assurance type warranties on our products as well as separately sold warranty contracts. Revenue related to warranty contracts that are sold separately is recognized over the life of the warranty term. Warranty liabilities for our assurance type warranties are discussed further in Note 14.
25
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing customers. Our contract assets are recorded for products and services that have been provided to our customer but have not yet been billed, and are included in prepaid expenses and other current assets in our consolidated balance sheets. Our short-term contract liabilities consist of advance payments, or deferred revenue, and are included in other accrued liabilities in our consolidated balance sheets.
Accounts receivable, net of allowances, and net contract assets (liabilities) consisted of the following:
|
|
February 28, 2019
|
|
|
November 30, 2018
|
|
|
$ Change
|
|
|
% Change
|
|
(In thousands, except percents)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance
|
|
$
|
961,628
|
|
|
$
|
1,013,030
|
|
|
$
|
(51,402
|
)
|
|
|
-5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
11,204
|
|
|
$
|
15,955
|
|
|
$
|
(4,751
|
)
|
|
|
-29.8
|
%
|
Contract liabilities - short-term
|
|
|
(24,697
|
)
|
|
|
(23,454
|
)
|
|
|
(1,243
|
)
|
|
|
5.3
|
%
|
Net Contract Liabilities
|
|
$
|
(13,493
|
)
|
|
$
|
(7,499
|
)
|
|
$
|
(5,994
|
)
|
|
|
79.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
|
May 31, 2018
|
|
|
$ Change
|
|
|
% Change
|
|
(In thousands, except percents)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance
|
|
$
|
961,628
|
|
|
$
|
1,113,818
|
|
|
$
|
(152,190
|
)
|
|
|
-13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
11,204
|
|
|
$
|
18,212
|
|
|
$
|
(7,008
|
)
|
|
|
-38.5
|
%
|
Contract liabilities - short-term
|
|
|
(24,697
|
)
|
|
|
(23,335
|
)
|
|
|
(1,362
|
)
|
|
|
5.8
|
%
|
Net Contract Liabilities
|
|
$
|
(13,493
|
)
|
|
$
|
(5,123
|
)
|
|
$
|
(8,370
|
)
|
|
|
163.4
|
%
|
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. The $6.0 million change in our net contract liabilities from November 30, 2018 to February 28, 2019 and the $8.4 million change in our net contract liabilities from May 31, 2018 to February 28, 2019 resulted primarily from the seasonality associated with construction jobs in progress during peak summer months versus later in the calendar year, as well as the timing of revenue recognition under the new standard. We also record long-term deferred revenue, which amounted to $64.7 million and $64.1 million as of February 28, 2019 and May 31, 2018, respectively. The long-term portion of deferred revenue is related to assurance type warranty contracts and is included in other long-term liabilities in our consolidated balance sheets.
We have elected to adopt the practical expedient to not disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied as of the end of the reporting period for performance obligations that are part of a contract with an original expected duration of one year or less.
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. As our contract terms are primarily one year or less in duration, we have elected to apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain incentive programs as we have determined annual compensation is commensurate with annual sales activities.
NOTE 16 — SEGMENT INFORMATION
During the quarter ended August 31, 2018, we made the determination to streamline certain businesses and management structures within our industrial reportable segment. As a result, our former tremco illbruck Group, Tremco Group and several components from our Performance Coatings Group, including our Euclid and Flowcrete businesses, were combined to form a new Construction Products Group. There were no changes in the composition of any of our reportable segments and, therefore, previously reported business segment information remains unchanged.
26
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We operate a portfolio of businesses an
d product lines that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by organizing our businesses and product lines into three reportable segments: the industrial
reportable segment, the consumer reportable segment and the specialty reportable segment. Within each reportable segment, we aggregate operating segments or product lines that consist of individual companies or groups of companies and product lines, which
generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our
six
operating segments represent components of our business for which separate financial in
formation is available that is utilized on a regular basis by our chief operating decision maker in determining how to allocate the assets of the company and evaluate performance. These six operating segments are each managed by an operating segment manage
r, who is responsible for the day-to-day operating decisions and performance evaluation of the operating segment’s underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to ear
nings (loss) before interest and taxes (“EBIT”) as a performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations.
Our industrial reportable segment products are sold throughout North America and also account for the majority of our international sales. Our industrial product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. The industrial reportable segment comprises two separate operating segments — Construction Products Group and Performance Coatings Group. Products and services within this reportable segment include construction chemicals, roofing systems, weatherproofing and other sealants, and polymer flooring.
Our consumer reportable segment manufactures and markets professional use and do-it-yourself (“DIY”) products for a variety of mainly consumer applications, including home improvement and personal leisure activities. Our consumer segment’s major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe and other parts of the world. Our consumer reportable segment products are primarily sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops, cosmetic companies and through distributors. This reportable segment comprises three operating segments — Rust-Oleum Group, DAP Group and SPG-Consumer Group. Products within this reportable segment include specialty, hobby and professional paints; nail enamels; caulks; adhesives; silicone sealants and wood stains.
Our specialty reportable segment products are sold throughout North America and a few international locations, primarily in Europe. Our specialty product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. The specialty reportable segment is a single operating segment, which offers products that include industrial cleaners, restoration services equipment, colorants, exterior finishes, edible coatings and specialty glazes for pharmaceutical and food industries, and other specialty OEM coatings.
In addition to our three reportable segments, there is a category of certain business activities and expenses, referred to as corporate/other, that does not constitute an operating segment. This category includes our corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets and other expenses not directly associated with any reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses and headquarters’ property and equipment. These corporate and other assets and expenses reconcile reportable segment data to total consolidated income before income taxes and identifiable assets.
We reflect income from our joint ventures on the equity method, and receive royalties from our licensees.
27
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables present a disaggregation of revenues by geography, and reflect the results of our reportable segments consistent with our management philosophy, by representing the informat
ion we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of businesses.
Three Months Ended February 28, 2019
|
|
Industrial Segment
|
|
|
Consumer Segment
|
|
|
Specialty Segment
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
299,442
|
|
|
$
|
304,184
|
|
|
$
|
137,181
|
|
|
$
|
740,807
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
40,378
|
|
|
|
21,404
|
|
|
|
8,211
|
|
|
|
69,993
|
|
Europe
|
|
|
154,753
|
|
|
|
43,888
|
|
|
|
21,060
|
|
|
|
219,701
|
|
Latin America
|
|
|
44,420
|
|
|
|
6,781
|
|
|
|
306
|
|
|
|
51,507
|
|
Asia Pacific
|
|
|
28,415
|
|
|
|
6,904
|
|
|
|
7,987
|
|
|
|
43,306
|
|
Other Foreign
|
|
|
13,481
|
|
|
|
1,835
|
|
|
|
-
|
|
|
|
15,316
|
|
Total Foreign
|
|
|
281,447
|
|
|
|
80,812
|
|
|
|
37,564
|
|
|
|
399,823
|
|
Total
|
|
$
|
580,889
|
|
|
$
|
384,996
|
|
|
$
|
174,745
|
|
|
$
|
1,140,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended February 28, 2018
|
|
Industrial Segment
|
|
|
Consumer Segment
|
|
|
Specialty Segment
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
277,374
|
|
|
$
|
280,422
|
|
|
$
|
137,863
|
|
|
$
|
695,659
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
40,006
|
|
|
|
19,421
|
|
|
|
3,144
|
|
|
|
62,571
|
|
Europe
|
|
|
155,127
|
|
|
|
46,997
|
|
|
|
20,929
|
|
|
|
223,053
|
|
Latin America
|
|
|
50,763
|
|
|
|
6,946
|
|
|
|
332
|
|
|
|
58,041
|
|
Asia Pacific
|
|
|
29,021
|
|
|
|
7,643
|
|
|
|
7,829
|
|
|
|
44,493
|
|
Other Foreign
|
|
|
16,919
|
|
|
|
1,941
|
|
|
|
-
|
|
|
|
18,860
|
|
Total Foreign
|
|
|
291,836
|
|
|
|
82,948
|
|
|
|
32,234
|
|
|
|
407,018
|
|
Total
|
|
$
|
569,210
|
|
|
$
|
363,370
|
|
|
$
|
170,097
|
|
|
$
|
1,102,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended February 28, 2019
|
|
Industrial Segment
|
|
|
Consumer Segment
|
|
|
Specialty Segment
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,118,016
|
|
|
$
|
1,021,933
|
|
|
$
|
452,918
|
|
|
$
|
2,592,867
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
163,141
|
|
|
|
73,813
|
|
|
|
32,058
|
|
|
|
269,012
|
|
Europe
|
|
|
526,962
|
|
|
|
159,118
|
|
|
|
70,041
|
|
|
|
756,121
|
|
Latin America
|
|
|
136,905
|
|
|
|
20,183
|
|
|
|
976
|
|
|
|
158,064
|
|
Asia Pacific
|
|
|
87,626
|
|
|
|
21,735
|
|
|
|
23,559
|
|
|
|
132,920
|
|
Other Foreign
|
|
|
48,180
|
|
|
|
5,986
|
|
|
|
-
|
|
|
|
54,166
|
|
Total Foreign
|
|
|
962,814
|
|
|
|
280,835
|
|
|
|
126,634
|
|
|
|
1,370,283
|
|
Total
|
|
$
|
2,080,830
|
|
|
$
|
1,302,768
|
|
|
$
|
579,552
|
|
|
$
|
3,963,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended February 28, 2018
|
|
Industrial Segment
|
|
|
Consumer Segment
|
|
|
Specialty Segment
|
|
|
Consolidated
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,038,594
|
|
|
$
|
920,714
|
|
|
$
|
444,424
|
|
|
$
|
2,403,732
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
166,056
|
|
|
|
69,658
|
|
|
|
16,253
|
|
|
|
251,967
|
|
Europe
|
|
|
517,303
|
|
|
|
164,678
|
|
|
|
69,553
|
|
|
|
751,534
|
|
Latin America
|
|
|
145,315
|
|
|
|
20,582
|
|
|
|
1,085
|
|
|
|
166,982
|
|
Asia Pacific
|
|
|
84,087
|
|
|
|
24,251
|
|
|
|
24,344
|
|
|
|
132,682
|
|
Other Foreign
|
|
|
50,528
|
|
|
|
6,062
|
|
|
|
-
|
|
|
|
56,590
|
|
Total Foreign
|
|
|
963,289
|
|
|
|
285,231
|
|
|
|
111,235
|
|
|
|
1,359,755
|
|
Total
|
|
$
|
2,001,883
|
|
|
$
|
1,205,945
|
|
|
$
|
555,659
|
|
|
$
|
3,763,487
|
|
28
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment
|
|
$
|
11,368
|
|
|
$
|
17,804
|
|
|
$
|
134,818
|
|
|
$
|
174,402
|
|
Consumer Segment
|
|
|
23,212
|
|
|
|
29,123
|
|
|
|
115,747
|
|
|
|
146,576
|
|
Specialty Segment
|
|
|
17,147
|
|
|
|
22,792
|
|
|
|
74,927
|
|
|
|
90,398
|
|
Corporate/Other
|
|
|
(47,263
|
)
|
|
|
(35,021
|
)
|
|
|
(162,497
|
)
|
|
|
(112,213
|
)
|
Consolidated
|
|
$
|
4,464
|
|
|
$
|
34,698
|
|
|
$
|
162,995
|
|
|
$
|
299,163
|
|
NOTE 17 — SUBSEQUENT EVENTS
As of April 8, 2019, we have repurchased 467,862 shares of RPM common stock since February 28, 2019, at a cost of approximately $27.0 million, or an average of $57.71, under the stock repurchase program described in Note 11.
29