ITEM 1. FINANCIAL 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.
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 month periods ended August 31, 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, 2019.
Our financial statements include all of our majority-owned subsidiaries. We account for our investments in less-than-majority-owned joint ventures, for which we have the ability to exercise significant influence, under the equity method. Effects of transactions between related companies are eliminated in consolidation.
Noncontrolling interests are presented in our consolidated financial statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our consolidated financial statements. Additionally, our consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only our share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.
Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprising the three month periods ending August 31, November 30 and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).
NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which increases lease transparency and comparability among organizations. Under the new standard, lessees are required to recognize a right-of-use (“ROU”) asset representing our right to use an underlying asset and a lease liability representing our obligation to make lease payments over the lease term, 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 adopted the new leasing standard on the required effective date of June 1, 2019 using the alternative transition method as described above. Results for reporting periods beginning on June 1, 2019 are presented under Topic 842, while prior period amounts continue to be reported and disclosed in accordance with our historical accounting treatment under Accounting Standards Codification (“ASC”) 840, “Leases (ASC 840).” We elected to apply the package of practical expedients permitted under the ASC 842 transition guidance. Accordingly, we did not reassess whether any expired or expiring contracts contain leases, lease classification between finance and operating leases, and the recognition of initial direct costs of leases commencing before the effective date. We also applied the practical expedient to not separate lease and non-lease components to existing leases, as well as new leases through transition. However, we did not elect the hindsight practical expedient to determine the lease term for existing leases. Adoption of the new lease standard resulted in additional operating lease right-of-use assets and operating lease liabilities of approximately $257.6 million and $265.8 million, respectively, as of August 31, 2019. The effects of our transition to ASC 842 resulted in no cumulative adjustment to retained earnings in the period of adoption. As a result of our adoption procedures, we have determined that the new guidance had a material impact on our Consolidated Balance Sheets and did not have a material effect on our Consolidated Statements of Income, Consolidated Statements of Cash Flows or our debt covenants. Refer to Note 14, “Leases,” for additional information.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” which requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Additionally, the standard amends the current available-for-sale security other-than-temporary impairment model for debt securities. The guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods therein. Early adoption is permitted beginning after December 15, 2018. We are currently reviewing the provisions of this new pronouncement, but do not expect our adoption of this guidance to have a material impact on our Consolidated Financial Statements.
8
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 disclosures. 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 comparative year-to-date interim periods. In July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections – Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update).” ASU 2019-07 codifies Final Rule Release No. 33-10532. 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, 2019.
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 February 2018, the FASB issued ASU 2018-02, “Income Statement (Topic 220), Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which allows for an entity to reclassify the tax effects of the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) that were previously recorded in accumulated comprehensive income to retained earnings. The adoption of this new guidance, effective June 1, 2019, did not have a material effect on our consolidated financial statements as we did not elect the option to reclassify to retained earnings the tax effects resulting from the Tax Act that were previously recorded in accumulated other comprehensive income.
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 the provisions of this new pronouncement, but do not expect our adoption of this guidance to have a material impact on our Consolidated Financial Statements.
NOTE 3 — CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of fiscal 2020, we changed our method of accounting for shipping and handling costs, which we have identified as costs paid to third-party shippers for transporting products to customers. Under the new method of accounting, we include shipping costs in cost of sales, whereas previously, they were included in SG&A expense.
We believe that including these expenses in cost of sales is preferable, as it better aligns these costs with the related revenue in the gross profit calculation and is consistent with the practices of other industry peers. This change in accounting principle has been applied retrospectively, and the consolidated statements of income reflect the effect of this accounting principle change for all periods presented. This reclassification had no impact on income before income taxes, net income attributable to RPM International Inc. Stockholders, net income or earnings per share. The consolidated balance sheets, statements of comprehensive income, statements of stockholders’ equity, and statements of cash flows were not impacted by this accounting principle change.
The consolidated statements of income for the three months ended August 31, 2018 have been adjusted to reflect this change in accounting principle. The impact of the adjustment for the three months ended August 31, 2018 was an increase of $44.7 million to cost of sales and a corresponding decrease to SG&A expense.
9
NOTE 4 — 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 increased by approximately $17.5 million compared to our previous estimate, primarily attributable to increases in expected severance and benefit charges of $13.0 million and facility closure and other related costs of $4.3 million. Most activities under our 2020 MAP to Growth are anticipated to be completed by the end of calendar year 2020.
10
Following is a summary of the charges recorded in connection with restructuring by reportable segment:
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
Cumulative
Costs
|
|
|
Total Expected
|
|
|
(in thousands)
|
|
August 31, 2019
|
|
|
August 31, 2018
|
|
|
to Date
|
|
|
Costs
|
|
|
Construction Products Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (a)
|
|
$
|
160
|
|
|
$
|
2,419
|
|
|
$
|
11,389
|
|
|
$
|
20,182
|
|
|
Facility closure and other related costs
|
|
|
688
|
|
|
|
13
|
|
|
|
3,657
|
|
|
|
4,404
|
|
|
Other asset write-offs
|
|
|
-
|
|
|
|
365
|
|
|
|
1,590
|
|
|
|
1,929
|
|
|
Total Charges
|
|
$
|
848
|
|
|
$
|
2,797
|
|
|
$
|
16,636
|
|
|
$
|
26,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (b)
|
|
$
|
2,500
|
|
|
$
|
4,405
|
|
|
$
|
8,913
|
|
|
$
|
14,617
|
|
|
Facility closure and other related costs
|
|
|
109
|
|
|
|
423
|
|
|
|
3,583
|
|
|
|
6,689
|
|
|
Other asset write-offs
|
|
|
-
|
|
|
|
213
|
|
|
|
351
|
|
|
|
1,207
|
|
|
Total Charges
|
|
$
|
2,609
|
|
|
$
|
5,041
|
|
|
$
|
12,847
|
|
|
$
|
22,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (c)
|
|
$
|
767
|
|
|
$
|
1,019
|
|
|
$
|
8,145
|
|
|
$
|
11,663
|
|
|
Facility closure and other related costs
|
|
|
516
|
|
|
|
-
|
|
|
|
7,208
|
|
|
|
9,308
|
|
|
Other asset write-offs
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
25
|
|
|
Total Charges
|
|
$
|
1,283
|
|
|
$
|
1,019
|
|
|
$
|
15,378
|
|
|
$
|
20,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Products Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (d)
|
|
$
|
366
|
|
|
$
|
2,220
|
|
|
$
|
5,702
|
|
|
$
|
8,979
|
|
|
Facility closure and other related costs
|
|
|
1,459
|
|
|
|
-
|
|
|
|
2,703
|
|
|
|
6,330
|
|
|
Other asset write-offs
|
|
|
64
|
|
|
|
-
|
|
|
|
1,067
|
|
|
|
1,425
|
|
|
Total Charges
|
|
$
|
1,889
|
|
|
$
|
2,220
|
|
|
$
|
9,472
|
|
|
$
|
16,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (e)
|
|
$
|
(7
|
)
|
|
$
|
8,999
|
|
|
$
|
12,113
|
|
|
$
|
12,113
|
|
|
Total Charges
|
|
$
|
(7
|
)
|
|
$
|
8,999
|
|
|
$
|
12,113
|
|
|
$
|
12,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs
|
|
$
|
3,786
|
|
|
$
|
19,062
|
|
|
$
|
46,262
|
|
|
$
|
67,554
|
|
|
Facility closure and other related costs
|
|
|
2,772
|
|
|
|
436
|
|
|
|
17,151
|
|
|
|
26,731
|
|
|
Other asset write-offs
|
|
|
64
|
|
|
|
578
|
|
|
|
3,033
|
|
|
|
4,586
|
|
|
Total Charges
|
|
$
|
6,622
|
|
|
$
|
20,076
|
|
|
$
|
66,446
|
|
|
$
|
98,871
|
|
|
(a)
|
Severance and benefit costs are associated with the elimination of 21 positions and 31 positions during the three months ended August 31, 2019 and 2018, respectively. Additionally, $0.2 million included in the charges incurred during the three months ended August 31, 2018 are associated with the prior elimination of one position within the legal function during fiscal 2018.
|
|
(b)
|
Severance and benefit costs are associated with the elimination of 51 positions and 85 positions during the three months ended August 31, 2019 and 2018, respectively.
|
|
(c)
|
Severance and benefit costs are associated with the elimination of 2 positions and 9 positions during the three months ended August 31, 2019 and 2018, respectively.
|
|
(d)
|
Severance and benefit costs are associated with the elimination of 10 positions and 25 positions during the three months ended August 31, 2019 and 2018, respectively.
|
|
(e)
|
Charges for the three months ended August 31, 2018 reflect the severance of two corporate executives, as well as accelerated vesting of equity awards for two corporate executives, four specialty segment executives and two construction segment executives in connection with the aforementioned restructuring activities.
|
11
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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Severance and
Benefits Costs
|
|
|
Facility
Closure and
Other Related
Costs
|
|
|
Other Asset
Write-Offs
|
|
|
Total
|
|
|
Balance at June 1, 2019
|
|
$
|
4,837
|
|
|
$
|
7,857
|
|
|
$
|
-
|
|
|
|
12,694
|
|
|
Additions charged to expense
|
|
|
3,786
|
|
|
|
2,772
|
|
|
|
64
|
|
|
|
6,622
|
|
|
Cash payments charged against reserve
|
|
|
(5,677
|
)
|
|
|
(334
|
)
|
|
|
-
|
|
|
|
(6,011
|
)
|
|
Non-cash charges included above (e)
|
|
|
-
|
|
|
|
(865
|
)
|
|
|
(64
|
)
|
|
|
(929
|
)
|
|
Balance at August 31, 2019
|
|
$
|
2,946
|
|
|
$
|
9,430
|
|
|
$
|
-
|
|
|
$
|
12,376
|
|
|
(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 first quarter of fiscal 2020, we incurred approximately $2.0 million, $0.9 million and $0.3 million of inventory-related charges at our performance coatings, consumer and construction segments, respectively. During the first quarter of fiscal 2019, we incurred approximately $4.3 million and $0.2 million of inventory-related charges at our performance coatings and construction products segments, respectively. The fiscal 2019 inventory-related charges were partially offset by a favorable adjustment of approximately $0.2 million to the fiscal 2018 inventory 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 5 — MARKETABLE SECURITIES
The following tables summarize available-for-sale marketable securities held at August 31, 2019 and May 31, 2019 by asset type:
|
|
|
Available-For-Sale Securities
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
(Net Carrying
Amount)
|
|
|
August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government
|
|
$
|
24,832
|
|
|
$
|
546
|
|
|
$
|
(124
|
)
|
|
$
|
25,254
|
|
|
Corporate bonds
|
|
|
422
|
|
|
|
57
|
|
|
|
-
|
|
|
|
479
|
|
|
Total available-for-sale securities
|
|
$
|
25,254
|
|
|
$
|
603
|
|
|
$
|
(124
|
)
|
|
$
|
25,733
|
|
|
|
|
Available-For-Sale Securities
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
(Net Carrying
Amount)
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government
|
|
$
|
24,483
|
|
|
$
|
372
|
|
|
$
|
(308
|
)
|
|
$
|
24,547
|
|
|
Corporate bonds
|
|
|
422
|
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
462
|
|
|
Total available-for-sale securities
|
|
$
|
24,905
|
|
|
$
|
415
|
|
|
$
|
(311
|
)
|
|
$
|
25,009
|
|
12
Marketable securities, included in other current and long-term assets totaling $9.3 million and $16.4 million at August 31, 2019, respectively, and included in other current and long-term assets totaling $8.6 million and $16.4 million at May 31, 2019, 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 include 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.
As of August 31, 2019, we held approximately $97.9 million in equity securities. Additionally, as of August 31, 2019 and May 31, 2019, we held approximately $12.8 million and $12.3 million, respectively, in trading securities in relation to our deferred compensation plan.
Summarized below are the available-for-sale securities we held at August 31, 2019 and May 31, 2019 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, 2019
|
|
|
May 31, 2019
|
|
|
(In thousands)
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Total investments with unrealized losses
|
|
$
|
6,802
|
|
|
$
|
(124
|
)
|
|
$
|
11,508
|
|
|
$
|
(311
|
)
|
|
Unrealized losses with a loss position for less than 12 months
|
|
|
283
|
|
|
|
-
|
|
|
|
806
|
|
|
|
(2
|
)
|
|
Unrealized losses with a loss position for more than 12 months
|
|
|
6,519
|
|
|
|
(124
|
)
|
|
|
10,702
|
|
|
|
(309
|
)
|
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, 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 the 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 August 31, 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
|
|
$
|
9,370
|
|
|
$
|
9,338
|
|
|
One year through five years
|
|
|
10,161
|
|
|
|
10,242
|
|
|
Six years through ten years
|
|
|
4,548
|
|
|
|
4,816
|
|
|
After ten years
|
|
|
1,175
|
|
|
|
1,337
|
|
|
|
|
$
|
25,254
|
|
|
$
|
25,733
|
|
13
NOTE 6 — 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.
All derivative instruments are recognized in our Consolidated Balance Sheets and measured at fair value. Changes in the fair values of derivative instruments that do not qualify as hedges and/or any ineffective portion of hedges are recognized as a gain or (loss) in our Consolidated Statements of Income in the current period. Changes in the fair value of derivative instruments used effectively as cash flow hedges are recognized in other comprehensive income (loss), along with the change in the value of the hedged item. We do not hold or issue derivative instruments for speculative purposes.
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,
2019
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government
|
|
$
|
-
|
|
|
$
|
25,254
|
|
|
$
|
-
|
|
|
$
|
25,254
|
|
|
Corporate bonds
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
479
|
|
|
Total available-for-sale debt securities
|
|
|
-
|
|
|
|
25,733
|
|
|
|
-
|
|
|
|
25,733
|
|
|
Trading and other equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - foreign
|
|
|
|
|
|
|
33,595
|
|
|
|
|
|
|
|
33,595
|
|
|
Mutual funds - domestic
|
|
|
|
|
|
|
77,053
|
|
|
|
|
|
|
|
77,053
|
|
|
Total trading and other equity securities
|
|
|
-
|
|
|
|
110,648
|
|
|
|
-
|
|
|
|
110,648
|
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(15,668
|
)
|
|
|
(15,668
|
)
|
|
Total
|
|
$
|
-
|
|
|
$
|
136,381
|
|
|
$
|
(15,668
|
)
|
|
$
|
120,713
|
|
14
|
(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,
2019
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government
|
|
$
|
-
|
|
|
$
|
24,547
|
|
|
$
|
-
|
|
|
$
|
24,547
|
|
|
Corporate bonds
|
|
|
|
|
|
|
462
|
|
|
|
|
|
|
|
462
|
|
|
Total available-for-sale debt securities
|
|
|
-
|
|
|
|
25,009
|
|
|
|
-
|
|
|
|
25,009
|
|
|
Trading and other equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - foreign
|
|
|
|
|
|
|
32,082
|
|
|
|
|
|
|
|
32,082
|
|
|
Mutual funds - domestic
|
|
|
|
|
|
|
67,739
|
|
|
|
|
|
|
|
67,739
|
|
|
Total trading and other equity securities
|
|
|
-
|
|
|
|
99,821
|
|
|
|
-
|
|
|
|
99,821
|
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(21,551
|
)
|
|
|
(21,551
|
)
|
|
Total
|
|
$
|
-
|
|
|
$
|
124,830
|
|
|
$
|
(21,551
|
)
|
|
$
|
103,279
|
|
Our investments in available-for-sale debt securities and trading and other equity securities 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 three months of fiscal 2020, we paid approximately $5.9 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current period. During the first three months of fiscal 2019, we paid approximately $4.6 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 three months. In the Consolidated Statements of Cash Flows, payments of acquisition-related contingent consideration for the amount recognized at fair value as of the acquisition date are reported in cash flows from financing activities, while payments of contingent consideration in excess of fair value are reported in cash flows from operating activities.
The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable and short-term debt approximates fair value because of the short-term maturity of these financial instruments. At August 31, 2019 and May 31, 2019, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of August 31, 2019 and May 31, 2019 are as follows:
|
|
|
At August 31, 2019
|
|
|
(In thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Cash and cash equivalents
|
|
$
|
212,091
|
|
|
$
|
212,091
|
|
|
Marketable equity securities
|
|
|
97,895
|
|
|
|
97,895
|
|
|
Marketable debt securities
|
|
|
25,733
|
|
|
|
25,733
|
|
|
Long-term debt, including current portion
|
|
|
2,600,796
|
|
|
|
2,709,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2019
|
|
|
(In thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Cash and cash equivalents
|
|
$
|
223,168
|
|
|
$
|
223,168
|
|
|
Marketable equity securities
|
|
|
87,525
|
|
|
|
87,525
|
|
|
Marketable debt securities
|
|
|
25,009
|
|
|
|
25,009
|
|
|
Long-term debt, including current portion
|
|
|
2,525,908
|
|
|
|
2,526,817
|
|
15
NOTE 7 — 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 Not Designated as Hedges
At August 31, 2019, and May 31, 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 selling, general and administrative expenses (“SG&A”). Amounts recognized in earnings did not have a material impact on our Consolidated Financial Statements for any period presented. As of August 31, 2019 and May 31, 2019, the notional amounts of the forward contract held to purchase foreign currencies was $77.7 million and $38.7 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 August 31, 2019 and May 31, 2019 are as follows:
|
(in thousands)
|
|
|
|
Fair Value
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
August 31, 2019
|
|
|
May 31, 2019
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Fair Value)
|
|
Other Current Assets
|
|
$
|
77
|
|
|
$
|
513
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Current Assets
|
|
|
1,737
|
|
|
|
2,482
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Assets (Long-Term)
|
|
|
5,103
|
|
|
|
6,163
|
|
|
Interest Rate Swap (Fair Value)
|
|
Other Assets (Long-Term)
|
|
|
1,733
|
|
|
|
-
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Fair Value)
|
|
Other Accrued Liabilities
|
|
|
-
|
|
|
|
230
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Long-Term Liabilities
|
|
|
1,108
|
|
|
|
4,276
|
|
16
|
(in thousands)
|
|
|
|
Fair Value
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
August 31, 2019
|
|
|
May 31, 2019
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange
|
|
Other Current Assets
|
|
$
|
-
|
|
|
$
|
51
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange
|
|
Other Accrued Liabilities
|
|
|
318
|
|
|
|
-
|
|
NOTE 8 — INVESTMENT EXPENSE (INCOME), NET
Investment (income), net, consists of the following components:
|
|
|
Three Months Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
Interest (income)
|
|
$
|
(1,348
|
)
|
|
$
|
(904
|
)
|
|
Net (gain) on marketable securities
|
|
|
(3,540
|
)
|
|
|
(386
|
)
|
|
Dividend (income)
|
|
|
(497
|
)
|
|
|
(1,143
|
)
|
|
Investment (income), net
|
|
$
|
(5,385
|
)
|
|
$
|
(2,433
|
)
|
Net (Gain) on Marketable Securities
During the first quarter of fiscal 2020, we recognized unrealized gains on trading securities of $0.6 million and unrealized gains of $2.9 million on marketable equity securities.
During the first quarter of fiscal 2019, we recognized gross realized gains and losses on sales of marketable securities of $0.6 million and $0.1 million, respectively, as well as other-than-temporary impairments of $0.1 million.
NOTE 9 — OTHER EXPENSE, NET
Other expense, net, consists of the following components:
|
|
|
Three Months Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
Royalty expense, net
|
|
$
|
266
|
|
|
$
|
3
|
|
|
Loss (income) related to unconsolidated equity affiliates
|
|
|
91
|
|
|
|
(118
|
)
|
|
Pension non-service costs
|
|
|
1,428
|
|
|
|
428
|
|
|
Other expense, net
|
|
$
|
1,785
|
|
|
$
|
313
|
|
NOTE 10 — INCOME TAXES
The effective income tax rate of 25.5% for the three months ended August 31, 2019 compares to the effective income tax rate of 23.7% for the three months ended August 31, 2018. The effective income tax rates for the three months ended August 31, 2019 and 2018 reflect variances from the 21% statutory rate due primarily to the unfavorable impact of state and local income taxes and the net tax on foreign subsidiary income resulting from the global intangible low-taxed income provisions, partially offset by tax benefits related to equity compensation. The quarter over quarter increase in the effective income tax rate is primarily attributable to a decrease in the equity compensation income tax benefit.
Our deferred tax liability for unremitted foreign earnings was $18.8 million as of August 31, 2019, which represents our estimate of the foreign tax cost associated with the remittance of $413.9 million of foreign earnings that are not considered to be permanently reinvested. 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 August 31, 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.
17
NOTE 11 — INVENTORIES
Inventories, net of reserves, were composed of the following major classes:
|
(In thousands)
|
|
August 31, 2019
|
|
|
May 31, 2019
|
|
|
Raw material and supplies
|
|
$
|
302,410
|
|
|
$
|
296,493
|
|
|
Finished goods
|
|
|
558,108
|
|
|
|
545,380
|
|
|
Total Inventory, Net of Reserves
|
|
$
|
860,518
|
|
|
$
|
841,873
|
|
NOTE 12 — 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 $1.0 billion in capital to stockholders by May 31, 2021 through share repurchases. On April 16, 2019, after taking into account share repurchases under our existing stock repurchase program to date, our Board of Directors authorized the repurchase of the remaining $600.0 million in value of RPM International Inc. common stock by May 31, 2021. 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 August 31, 2019, we repurchased 1,655,616 shares of our common stock at a cost of approximately $100.0 million, or an average cost of $60.40 per share, under this program. During the three months ended August 31, 2018, we repurchased 103,446 shares of our common stock at a cost of approximately $7.0 million, or an average cost of $67.61 per share, under this program.
NOTE 13 — EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share, as calculated using the two class method, for the three-month periods ended August 31, 2019 and 2018.
|
|
|
Three Months Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
(In thousands, except per share amounts)
|
|
2019
|
|
|
2018
|
|
|
Numerator for earnings per share:
|
|
|
|
|
|
|
|
|
|
Net income attributable to RPM International Inc. stockholders
|
|
$
|
106,188
|
|
|
$
|
69,764
|
|
|
Less: Allocation of earnings and dividends to participating securities
|
|
|
(623
|
)
|
|
|
(611
|
)
|
|
Net income available to common shareholders - basic
|
|
|
105,565
|
|
|
|
69,153
|
|
|
Add: Undistributed earnings reallocated to unvested shareholders
|
|
|
2
|
|
|
|
1
|
|
|
Add: Allocation of earnings and dividends to participating securities
|
|
|
|
|
|
|
|
|
|
Add: Income effect of contingently issuable shares
|
|
|
|
|
|
|
1,480
|
|
|
Net income available to common shareholders - diluted
|
|
$
|
105,567
|
|
|
$
|
70,634
|
|
|
Denominator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
128,882
|
|
|
|
131,861
|
|
|
Average diluted options and awards
|
|
|
622
|
|
|
|
636
|
|
|
Additional shares issuable assuming conversion of convertible securities (1)
|
|
|
|
|
|
|
3,933
|
|
|
Total shares for diluted earnings per share (2)
|
|
|
129,504
|
|
|
|
136,430
|
|
|
Earnings Per Share of Common Stock Attributable to
|
|
|
|
|
|
|
|
|
|
RPM International Inc. Stockholders:
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share of Common Stock
|
|
$
|
0.82
|
|
|
$
|
0.52
|
|
|
Diluted Earnings Per Share of Common Stock
|
|
$
|
0.82
|
|
|
$
|
0.52
|
|
|
(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.
|
|
(2)
|
Restricted shares totaling 178,000 and 126,750 for the three months ended August 31, 2019 and 2018, respectively, were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive. In addition, stock appreciation rights (SARs) totaling 790,000 for the three months ended August 31, 2019 and 890,000 for the three months ended August 31, 2018, were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive.
|
18
NOTE 14—LEASES
We have leases for manufacturing facilities, warehouses, office facilities, equipment, and vehicles, which are primarily classified and accounted for as operating leases. We have a small portfolio of finance leases, which are not material to our consolidated financial statements. Some leases include one or more options to renew, generally at our sole discretion, with renewal terms that can extend the lease term from one to five years or more. In addition, certain leases contain termination options, where the rights to terminate are held by either us, the lessor, or both parties. These options to extend or terminate a lease are included in the lease terms when it is reasonably certain that we will exercise that option. We have made an accounting policy election not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less, with no purchase option that we are reasonably certain to exercise. ROU assets and lease liabilities are recognized based on the present value of the fixed and in-substance fixed lease payments over the lease term at the commencement date. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by lease incentives. We use our incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases, as our leases do not have readily determinable implicit discount rates. Our incremental borrowing rate is the rate of interest that we would have to borrow on a collateralized basis over a similar term and amount in a similar economic environment. We determine the incremental borrowing rates for our leases by adjusting the local risk-free interest rate with a credit risk premium corresponding to our credit rating.
Operating lease cost is recognized on a straight-line basis over the lease term. Finance lease cost is recognized as a combination of the amortization expense for the ROU assets and interest expense for the outstanding lease liabilities using the discount rate discussed above. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain vendors have the right to declare that we are in default of our agreements if any such vendor, including the lessors under its vehicle leases, determines that a change in our financial condition poses a substantially increased credit risk. Our lease agreements do not contain any significant residual value guarantees or material restrictive covenants. Income from subleases was not significant for any period presented.
During the three months ended August 31, 2019, we incurred lease cost of $20.7 million, which is primarily comprised of operating lease cost of $18.1 million and other costs of $2.6 million which include costs for our finance leases, short-term leases, and variable lease payments.
For the three months ended August 31, 2019, we paid approximately $16.9 million for operating lease obligations. These payments are included in operating cash flows. In addition, we recognized ROU assets for $3.1 million in exchange for new operating lease obligations. At August 31, 2019, the weighted-average remaining lease term under our operating leases was 8.4 years, while the weighted-average discount rate for our operating leases was approximately 3.8%.
The following represents our future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities, as of August 31, 2019:
|
Year ending May 31,
|
|
Operating Leases
|
|
|
(In thousands)
|
|
|
|
|
|
2020 (excluding the three months ended August 31)
|
|
$
|
46,387
|
|
|
2021
|
|
|
51,794
|
|
|
2022
|
|
|
40,792
|
|
|
2023
|
|
|
31,889
|
|
|
2024
|
|
|
26,759
|
|
|
Thereafter
|
|
|
121,011
|
|
|
Total lease payments
|
|
$
|
318,632
|
|
|
Less imputed interest
|
|
|
52,787
|
|
|
Total present value of lease liabilities
|
|
$
|
265,845
|
|
As of August 31, 2019, our current lease liability balance was $50.7 million and recorded within Other Accrued Liabilities on our Consolidated Balance Sheet.
19
Following is a summary of our future minimum lease commitments, as determined under ASC 840, for all non-cancelable lease agreements, for each of the next five years and in the aggregate, as of May 31, 2019:
|
Year ending May 31,
|
|
Operating Leases
|
|
|
(In thousands)
|
|
|
|
|
|
2020
|
|
$
|
59,163
|
|
|
2021
|
|
|
49,731
|
|
|
2022
|
|
|
40,339
|
|
|
2023
|
|
|
32,798
|
|
|
2024
|
|
|
27,716
|
|
|
Thereafter
|
|
|
119,607
|
|
|
Total lease payments
|
|
$
|
329,354
|
|
Related party leases and subleases were not significant during any period presented, and therefore are not disclosed. Further, we do not have leases that have not yet commenced, which would create significant rights and obligations for us, including any involvement with the construction or design of the underlying asset.
NOTE 15 — 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 months ended August 31, 2019 and 2018:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Pension Benefits
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Service cost
|
|
$
|
9,856
|
|
|
$
|
9,382
|
|
|
$
|
1,391
|
|
|
$
|
1,219
|
|
|
Interest cost
|
|
|
5,104
|
|
|
|
5,497
|
|
|
|
1,193
|
|
|
|
1,399
|
|
|
Expected return on plan assets
|
|
|
(8,573
|
)
|
|
|
(8,467
|
)
|
|
|
(1,834
|
)
|
|
|
(2,051
|
)
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
|
|
2
|
|
|
|
29
|
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
Net actuarial losses recognized
|
|
|
4,629
|
|
|
|
3,272
|
|
|
|
523
|
|
|
|
319
|
|
|
Net Periodic Benefit Cost
|
|
$
|
11,018
|
|
|
$
|
9,713
|
|
|
$
|
1,264
|
|
|
$
|
878
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Postretirement Benefits
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
August 31,
|
|
|
(In thousands)
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Service cost
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
429
|
|
|
$
|
392
|
|
|
Interest cost
|
|
|
37
|
|
|
|
48
|
|
|
|
282
|
|
|
|
291
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit)
|
|
|
(55
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Net actuarial (gains) losses recognized
|
|
|
(16
|
)
|
|
|
(6
|
)
|
|
|
158
|
|
|
|
115
|
|
|
Net Periodic Benefit (Credit) Cost
|
|
$
|
(34
|
)
|
|
$
|
(13
|
)
|
|
$
|
869
|
|
|
$
|
798
|
|
Due to slightly lower discount rates, net periodic pension and postretirement cost for fiscal 2020 is higher than our fiscal 2019 expense. 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, 2019 that we expected to contribute approximately $0.9 million to our retirement plans in the U.S. and approximately $6.4 million to plans outside the U.S. during the current fiscal year, and as of August 31, 2019, those amounts remain unchanged.
NOTE 16 — CONTINGENCIES AND OTHER ACCRUED LOSSES
20
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 August 31, 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 SG&A.
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.
The following table includes the changes in our accrued warranty balances:
|
|
|
Three Months Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(In thousands)
|
|
|
Beginning Balance
|
|
$
|
10,414
|
|
|
$
|
11,721
|
|
|
Deductions (1)
|
|
|
(5,513
|
)
|
|
|
(6,614
|
)
|
|
Provision charged to expense
|
|
|
5,168
|
|
|
|
5,478
|
|
|
Ending Balance
|
|
$
|
10,069
|
|
|
$
|
10,585
|
|
|
(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.
21
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 closed as of June 3, 2019, other than one remaining discovery dispute. The parties engaged in written discovery, and several fact witnesses were deposed. The dispositive motion briefing schedule was vacated by the Court on July 2, 2019, due to the remaining discovery dispute, and will be reset once this dispute is fully resolved. 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.
NOTE 17 – 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 18, “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 four 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.
22
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 16.
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:
|
(In thousands, except percents)
|
|
August 31, 2019
|
|
|
May 31, 2019
|
|
|
$ Change
|
|
|
% Change
|
|
|
Accounts receivable, less allowance
|
|
$
|
1,109,259
|
|
|
$
|
1,232,350
|
|
|
$
|
(123,091
|
)
|
|
|
-10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
26,464
|
|
|
$
|
21,628
|
|
|
$
|
4,836
|
|
|
|
22.4
|
%
|
|
Contract liabilities - short-term
|
|
|
(27,402
|
)
|
|
|
(25,896
|
)
|
|
|
(1,506
|
)
|
|
|
5.8
|
%
|
|
Net Contract Liabilities
|
|
$
|
(938
|
)
|
|
$
|
(4,268
|
)
|
|
$
|
3,330
|
|
|
|
-78.0
|
%
|
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 $3.3 million change in our net contract liabilities from May 31, 2019 to August 31, 2019 resulted primarily from the timing of construction jobs in progress. During the first quarter of fiscal 2020, we performed a substantial amount of work on construction projects, and as such, our unbilled revenue is higher as of August 31, 2019 than it was at May 31, 2019. We also record long-term deferred revenue, which amounted to $65.6 million and $66.5 million as of August 31, 2019 and May 31, 2019, 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 18 — SEGMENT INFORMATION
Effective June 1, 2019, we realigned certain businesses and management structure to recognize how we allocate resources and analyze the operating performance of our businesses. Among other things, the realignment of certain businesses occurred as a result of the
23
2020 MAP to Growth plan that was approved and initiated between May and August 2018. As we began to execute on our operating improvement initiatives, we identified ways to realign certain businesses, and concluded that moving to an expanded reporting structure could help us to better manage our assets and improve synergies across the enterprise.
This realignment changed our reportable segments beginning with our first quarter of fiscal 2020. As such, we will begin reporting under four reportable segments instead of our three previous reportable segments. Our four reporting segments will now be: the Construction Products Group (“CPG”), Performance Coatings Group (“PCG”), Consumer Group (“Consumer”) and Specialty Products Group (“Specialty”). In connection with the realignment, we shifted our Kirker business out of Consumer into Specialty, and also shifted our Dryvit and Nudura businesses out of Specialty into CPG. The newly formed CPG will also include our Tremco, Tremco illbruck, Euclid Chemical, Viapol, Vandex and Flowcrete businesses. PCG will include Stonhard, Carboline, USL and Fibergrate businesses, while Consumer will comprise the Rust-Oleum and DAP businesses.
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 manage our portfolio by organizing our businesses and product lines into four reportable segments as outlined above, which also represent our operating segments. Within each operating segment, we manage product lines and businesses which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our four operating segments represent components of our business for which separate financial information 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 four operating segments are each managed by an operating segment manager, 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 earnings (loss) before interest and taxes (“EBIT”), and/or adjusted EBIT, as a performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations.
Our CPG reportable segment products are sold throughout North America and also account for the majority of our international sales. Our construction product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include construction sealants and adhesives, coatings and chemicals, roofing systems, concrete admixture and repair products, building envelope solutions, insulated cladding, flooring systems, and weatherproofing solutions.
Our PCG reportable segment products are sold throughout North America, as well as internationally, and are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include high-performance flooring solutions, corrosion control and fireproofing coatings, infrastructure repair systems, fiberglass reinforced plastic gratings and drainage systems.
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 and through distributors. The Consumer reportable segment offers products that include specialty, hobby and professional paints; 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 offers products that include industrial cleaners, restoration services equipment, colorants, nail enamels, exterior finishes, edible coatings and specialty glazes for pharmaceutical and food industries, and other specialty original equipment manufacturer (“OEM”) coatings.
In addition to our four 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.
24
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 information we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of businesses. Information for all periods presented has been recast to reflect the current quarter change in reportable segments.
|
Three Months Ended August 31, 2019
|
|
CPG Segment
|
|
|
PCG Segment
|
|
|
Consumer
Segment
|
|
|
Specialty
Segment
|
|
|
Consolidated
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
307,659
|
|
|
$
|
181,906
|
|
|
$
|
381,229
|
|
|
$
|
131,731
|
|
|
$
|
1,002,525
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
50,443
|
|
|
|
20,973
|
|
|
|
32,505
|
|
|
|
2,228
|
|
|
|
106,149
|
|
|
Europe
|
|
|
114,302
|
|
|
|
64,459
|
|
|
|
51,009
|
|
|
|
20,839
|
|
|
|
250,609
|
|
|
Latin America
|
|
|
42,847
|
|
|
|
8,441
|
|
|
|
6,315
|
|
|
|
432
|
|
|
|
58,035
|
|
|
Asia Pacific
|
|
|
20,396
|
|
|
|
7,424
|
|
|
|
6,181
|
|
|
|
4,858
|
|
|
|
38,859
|
|
|
Other Foreign
|
|
|
458
|
|
|
|
14,038
|
|
|
|
2,091
|
|
|
|
-
|
|
|
|
16,587
|
|
|
Total Foreign
|
|
|
228,446
|
|
|
|
115,335
|
|
|
|
98,101
|
|
|
|
28,357
|
|
|
|
470,239
|
|
|
Total
|
|
$
|
536,105
|
|
|
$
|
297,241
|
|
|
$
|
479,330
|
|
|
$
|
160,088
|
|
|
$
|
1,472,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2018
|
|
CPG Segment
|
|
|
PCG Segment
|
|
|
Consumer
Segment
|
|
|
Specialty
Segment
|
|
|
Consolidated
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
289,799
|
|
|
$
|
177,457
|
|
|
$
|
375,536
|
|
|
$
|
137,881
|
|
|
$
|
980,673
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
43,338
|
|
|
|
22,188
|
|
|
|
29,005
|
|
|
|
2,246
|
|
|
|
96,777
|
|
|
Europe
|
|
|
125,287
|
|
|
|
60,614
|
|
|
|
57,876
|
|
|
|
22,800
|
|
|
|
266,577
|
|
|
Latin America
|
|
|
37,985
|
|
|
|
9,642
|
|
|
|
6,122
|
|
|
|
307
|
|
|
|
54,056
|
|
|
Asia Pacific
|
|
|
20,290
|
|
|
|
10,212
|
|
|
|
6,912
|
|
|
|
5,481
|
|
|
|
42,895
|
|
|
Other Foreign
|
|
|
793
|
|
|
|
16,306
|
|
|
|
1,912
|
|
|
|
-
|
|
|
|
19,011
|
|
|
Total Foreign
|
|
|
227,693
|
|
|
|
118,962
|
|
|
|
101,827
|
|
|
|
30,834
|
|
|
|
479,316
|
|
|
Total
|
|
$
|
517,492
|
|
|
$
|
296,419
|
|
|
$
|
477,363
|
|
|
$
|
168,715
|
|
|
$
|
1,459,989
|
|
|
|
|
Three Months Ended
|
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
(In thousands)
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
|
CPG Segment
|
|
$
|
82,680
|
|
|
$
|
65,044
|
|
|
PCG Segment
|
|
|
28,057
|
|
|
|
8,325
|
|
|
Consumer Segment
|
|
|
59,158
|
|
|
|
50,969
|
|
|
Specialty Segment
|
|
|
23,327
|
|
|
|
23,816
|
|
|
Corporate/Other
|
|
|
(50,373
|
)
|
|
|
(56,216
|
)
|
|
Consolidated
|
|
$
|
142,849
|
|
|
$
|
91,938
|
|
|
|
|
August 31,
|
|
|
May 31,
|
|
|
|
|
2019
|
|
|
2019
|
|
|
|
|
(In thousands)
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
CPG Segment
|
|
$
|
1,594,453
|
|
|
$
|
1,573,329
|
|
|
PCG Segment
|
|
|
992,995
|
|
|
|
951,644
|
|
|
Consumer Segment
|
|
|
1,987,280
|
|
|
|
1,953,279
|
|
|
Specialty Segment
|
|
|
711,348
|
|
|
|
689,133
|
|
|
Corporate/Other
|
|
|
310,349
|
|
|
|
273,970
|
|
|
Consolidated
|
|
$
|
5,596,425
|
|
|
$
|
5,441,355
|
|
25
NOTE 19 — GOODWILL
We account for goodwill and other intangible assets in accordance with the provisions of ASC 350 and account for business combinations using the acquisition method of accounting and, accordingly, the assets and liabilities of the entities acquired are recorded at their estimated fair values at the acquisition date. Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets.
We assess goodwill for impairment annually during the fourth quarter, or more frequently, if events and circumstances indicate impairment may have occurred. We test goodwill for impairment at the reporting unit level. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Once goodwill has been allocated to the reporting units, it no longer retains its identification with a particular acquisition and becomes identified with the reporting unit in its entirety. Accordingly, the fair value of the reporting unit as a whole is available to support the recoverability of its goodwill. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach.
Subsequent to our prior annual impairment test as of the first day of our fourth fiscal quarter, the composition of our reportable segments was revised, as further discussed in Note 18, “Segment Information.” Prior to implementing the revised segment reporting structure during our current quarter of fiscal 2020, our previously disclosed Industrial Segment comprised two operating segments, the CPG operating segment and the PCG operating segment. Each of these operating segments comprised several reporting units, all of which were tested during our last annual goodwill impairment test during the fourth quarter of fiscal 2019.
Also, in connection with our 2020 Map to Growth initiative, we realigned certain businesses and management structure within our Specialty segment. As such, our former Wood Finishes Group reporting unit was split into two separate reporting units: Guardian and Wood Finishes Group. Additionally, our former Kop-Coat Group reporting unit was split into two reporting units: Kop-Coat Industrial Protection Products and Kop-Coat Group. We performed a goodwill impairment test for each of the new reporting units upon the change in reportable segments, business realignment and management structure using a quantitative assessment. We concluded that the estimated fair values exceeded the carrying values for these new reporting units, and accordingly, no indications of impairment were identified as a result of these changes during the first quarter of fiscal 2020.
The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the periods presented:
|
|
|
CPG
|
|
|
PCG
|
|
|
Industrial
|
|
|
Consumer
|
|
|
Specialty
|
|
|
|
|
|
|
(In thousands)
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Balance as of May 31, 2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
526,419
|
|
|
$
|
499,387
|
|
|
$
|
219,956
|
|
|
$
|
1,245,762
|
|
|
Allocation to new segments
|
|
|
407,429
|
|
|
|
185,259
|
|
|
|
(526,419
|
)
|
|
|
|
|
|
|
(66,269
|
)
|
|
|
-
|
|
|
Acquisitions
|
|
|
14,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,689
|
|
|
Translation adjustments
|
|
|
(3,578
|
)
|
|
|
(2,577
|
)
|
|
|
|
|
|
|
(3,568
|
)
|
|
|
(910
|
)
|
|
|
(10,633
|
)
|
|
Balance as of August 31, 2019
|
|
$
|
418,540
|
|
|
$
|
182,682
|
|
|
$
|
-
|
|
|
$
|
495,819
|
|
|
$
|
152,777
|
|
|
$
|
1,249,818
|
|
26