Rpm International Inc 10-Q for FY2021 Q1
Rpm International Inc (RPM)
About this 10-Q
Rpm International Inc filed this 10-Q on October 7, 2020, covering the quarter ended August 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended August 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.61B
- up 9.1% from $1.47B a year earlier
- Net income
- $180.6M
- up 70.1% from net income of $106.19M a year earlier
- Diluted EPS
- $1.39
- up 69.5% from $0.82 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No.
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☒.
As of October 5, 2020, the registrant had
RPM INTERNATIONAL INC. AND SUBSIDIARIES*
INDEX
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Page No. |
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Item 1. |
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3 |
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7 |
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8 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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32 |
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Item 4. |
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32 |
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Item 1. |
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33 |
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Item 1A. |
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34 |
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Item 2. |
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34 |
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Item 6. |
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35 |
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* |
As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise. |
2
PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
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August 31, 2020 |
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May 31, 2020 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Trade accounts receivable (less allowances of $ |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, Plant and Equipment, at Cost |
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Allowance for depreciation |
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Property, plant and equipment, net |
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Other Assets |
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Goodwill |
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Other intangible assets, net of amortization |
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Operating lease right-of-use assets |
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Deferred income taxes |
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Other |
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Total other assets |
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Total Assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable |
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$ |
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$ |
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Current portion of long-term debt |
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Accrued compensation and benefits |
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Accrued losses |
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Other accrued liabilities |
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Total current liabilities |
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Long-Term Liabilities |
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Long-term debt, less current maturities |
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Operating lease liabilities |
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Other long-term liabilities |
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Deferred income taxes |
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Total long-term liabilities |
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Commitments and contingencies (Note 13) |
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Stockholders' Equity |
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Preferred stock, par value $ |
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Common stock, par value $ issued issued |
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Paid-in capital |
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Treasury stock, at cost |
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Accumulated other comprehensive (loss) |
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Retained earnings |
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Total RPM International Inc. stockholders' equity |
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Noncontrolling Interest |
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Total equity |
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Total Liabilities and Stockholders' Equity |
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$ |
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$ |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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August 31, |
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August 31, |
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2020 |
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2019 |
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Net Sales |
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$ |
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$ |
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Cost of Sales |
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Gross Profit |
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Selling, General and Administrative Expenses |
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Restructuring Charges |
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Interest Expense |
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Investment (Income), Net |
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Other Expense, Net |
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Income Before Income Taxes |
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Provision for Income Taxes |
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Net Income |
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Less: Net Income Attributable to Noncontrolling Interests |
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Net Income Attributable to RPM International Inc. Stockholders |
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$ |
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$ |
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Average Number of Shares of Common Stock Outstanding: |
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Basic |
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Diluted |
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Earnings per Share of Common Stock Attributable to RPM International Inc. Stockholders: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
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Three Months Ended |
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August 31, |
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August 31, |
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2020 |
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2019 |
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Net Income |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments (net of tax of $ |
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Pension and other postretirement benefit liability adjustments (net of tax of $ |
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Unrealized gain on securities and other (net of tax benefit of $ |
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Unrealized gain (loss) on derivatives (net of tax of $ |
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Total other comprehensive income (loss) |
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Total Comprehensive Income |
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Less: Comprehensive Income Attributable to Noncontrolling Interests |
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Comprehensive Income Attributable to RPM International Inc. Stockholders |
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$ |
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$ |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Three Months Ended |
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August 31, |
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August 31, |
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2020 |
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2019 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
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Depreciation and amortization |
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Restructuring charges, net of payments |
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Fair value adjustments to contingent earnout obligations |
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- |
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Deferred income taxes |
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Stock-based compensation expense |
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Net (gain) on marketable securities |
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Other |
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Changes in assets and liabilities, net of effect from purchases and sales of businesses: |
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Decrease in receivables |
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Decrease (increase) in inventory |
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(Increase) in prepaid expenses and other current and long-term assets |
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Increase (decrease) in accounts payable |
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(Decrease) in accrued compensation and benefits |
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Increase in accrued losses |
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Increase in other accrued liabilities |
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Other |
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Cash Provided By Operating Activities |
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Cash Flows From Investing Activities: |
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Capital expenditures |
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Acquisition of businesses, net of cash acquired |
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- |
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Purchase of marketable securities |
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Proceeds from sales of marketable securities |
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Other |
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Cash (Used For) Investing Activities |
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( |
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Cash Flows From Financing Activities: |
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Additions to long-term and short-term debt |
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Reductions of long-term and short-term debt |
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Cash dividends |
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Repurchases of common stock |
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- |
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Shares of common stock returned for taxes |
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Payments of acquisition-related contingent consideration |
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Other |
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- |
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Cash (Used For) Financing Activities |
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
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Net Change in Cash and Cash Equivalents |
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Cash and Cash Equivalents at Beginning of Period |
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Cash and Cash Equivalents at End of Period |
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$ |
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$ |
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Supplemental Disclosures of Cash Flows Information: |
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Cash paid during the period for: |
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Interest |
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$ |
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$ |
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Income Taxes, net of refunds |
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$ |
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$ |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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Common Stock |
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Accumulated |
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Number |
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Other |
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Total RPM |
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of |
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Par/Stated |
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Paid-In |
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Treasury |
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Comprehensive |
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Retained |
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International |
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Noncontrolling |
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Total |
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Shares |
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Value |
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Capital |
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Stock |
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Income (Loss) |
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Earnings |
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Inc. Equity |
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Interests |
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Equity |
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Balance at June 1, 2020 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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- |
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- |
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- |
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Other comprehensive income |
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- |
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- |
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- |
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- |
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- |
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Dividends declared and paid ($ |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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- |
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( |
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Stock compensation expense and other deferred compensation, shares granted less shares returned for taxes |
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( |
) |
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- |
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- |
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- |
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Balance at August 31, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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$ |
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Common Stock |
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Accumulated |
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Number |
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Other |
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Total RPM |
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|
|
|||
|
|
|
of |
|
|
Par/Stated |
|
|
Paid-In |
|
|
Treasury |
|
|
Comprehensive |
|
|
Retained |
|
|
International |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||
|
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Stock |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Inc. Equity |
|
|
Interests |
|
|
Equity |
|
|||||||||
|
Balance at June 1, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Dividends declared and paid ($ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Other noncontrolling interest activity |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Share repurchases under repurchase program |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Stock compensation expense and other deferred compensation, shares granted less shares returned for taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Balance at August 31, 2019 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
7
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”) for interim financial information and the instructions to Form 10-Q. In our opinion, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three-month periods ended August 31, 2020 and August 31, 2019. 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, 2020.
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
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 Pronouncements Adopted
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 securities 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. The adoption of this new guidance, effective June 1, 2020, using the modified retrospective transition method, did not result in a cumulative-effect adjustment to the opening balance of retained earnings at June 1, 2020 and did not have a material impact on the Company's Consolidated Financial Statements. Refer to Note 14, “Revenue” for additional information.
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. The adoption of this new guidance, effective June 1, 2020, 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. The adoption of this new guidance, effective June 1, 2020, did not have a material impact on our Consolidated Financial Statements or disclosures.
New Pronouncements Issued
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
8
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.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. 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 — 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.
MAP to Growth
Between May and August 2018, we approved and implemented the initial phases of a multi-year restructuring plan, which was originally referred to as 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 activities included in the initial phases of the restructuring activities have been substantially completed.
Recently, however, the disruption caused by the outbreak of Covid-19 is expected to delay the finalization of our 2020 MAP to Growth past the original target completion date of December 31, 2020. We will provide an update on the revised target completion timeline at a later date. In recognition of the fact our restructuring plan will now extend into calendar year 2021, we will now refer to it simply as “MAP to Growth.”
Our execution of the MAP to Growth will continue to drive the de-layering and simplification of management and businesses associated with group realignment. We have implemented four center-led functional areas including manufacturing and operations; procurement and supply chain; information technology; and accounting and finance.
Our MAP to Growth optimizes our manufacturing facilities and will ultimately provide more efficient plant and distribution facilities. Through the balance sheet date, in association with our MAP to Growth initiative, we have completed, or are in the process of completing, the planned closure of 23 plants and 26 warehouses. We also expect to incur additional severance and benefit costs as part of our planned closure of these facilities.
Throughout the remainder of our MAP to Growth initiative, we will continue to assess and find areas of improvement and cost savings. As such, the final implementation and total expected costs are subject to change. In addition to the announced plan, we have continued to broaden the scope of our 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 $
9
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, 2020 |
|
|
August 31, 2019 |
|
|
to Date |
|
|
Costs |
|
||||
|
Construction Products Group ("CPG") Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (a) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Facility closure and other related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total Charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Group ("PCG") Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (b) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Facility closure and other related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total Charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (c) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Facility closure and other related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total Charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Products Group ("SPG") Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (d) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Facility closure and other related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs |
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
Total Charges |
|
$ |
- |
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Facility closure and other related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Charges |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(a) |
Severance and benefit costs are associated with the elimination of |
|
(b) |
Severance and benefit costs are associated with the elimination of |
|
(c) |
Severance and benefit costs are associated with the elimination of |
|
(d) |
Severance and benefit costs are associated with the elimination of |
10
A summary of the activity in the restructuring reserves related to our MAP to Growth is as follows:
|
(In thousands) |
|
Severance and Benefits Costs |
|
|
Facility Closure and Other Related Costs |
|
|
Other Restructuring Costs |
|
|
Total |
|
||||
|
Balance at June 1, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
|
|
|
|
Additions charged to expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments charged against reserve |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Non-cash charges included above (e) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Balance at August 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Severance and Benefits Costs |
|
|
Facility Closure and Other Related Costs |
|
|
Other Restructuring Costs |
|
|
Total |
|
||||
|
Balance at June 1, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Additions charged to expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments charged against reserve |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
Non-cash charges included above (e) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Balance at August 31, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
(e) |
|
In connection with our MAP to Growth, during the three months ended August 31, 2020, we incurred approximately $
NOTE 4 — FAIR VALUE MEASUREMENTS
Financial instruments recorded in the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.
An allowance for expected 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 conclude on 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.
11
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 addition, with respect to our derivative assets and liabilities measured at fair value, refer to Note 5, “Derivatives and Hedging” for discussion of their classification within 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, 2020 |
|
||||
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Corporate bonds |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks - domestic |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Mutual funds - foreign |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Mutual funds - domestic |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Total marketable equity securities |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Contingent consideration |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
(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, 2020 |
|
||||
|
Available-for-sale debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government |
|
$ |
- |
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
|
Corporate bonds |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Total available-for-sale debt securities |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Marketable equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks - domestic |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Mutual funds - foreign |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Mutual funds - domestic |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Total marketable equity securities |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Contingent consideration |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Our investments in available-for-sale debt securities and marketable 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 2021, we paid approximately $
12
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, 2020 and May 31, 2020, 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.
|
|
|
At August 31, 2020 |
|
|||||
|
(In thousands) |
|
Carrying Value |
|
|
Fair Value |
|
||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2020 |
|
|||||
|
(In thousands) |
|
Carrying Value |
|
|
Fair Value |
|
||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion |
|
|
|
|
|
|
|
|
NOTE 5 — 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.
Derivatives Designated as Hedges
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
Separately, in February 2020, as a means of mitigating the impact of currency fluctuations on our Euro investments in foreign entities, we executed a cash flow hedge and
13
loan facility (referred to as Foreign Borrower’s Term Loan), we executed a cash flow hedge, in which we will pay fixed rate interest in Euros and receive variable rate interest in U.S. Dollars with a notional amount of approximately €
The following table summarizes the location and effects of our derivatives instruments on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Income for gains or losses initially recognized in AOCI in the Consolidated Balance Sheet:
|
|
|
Pretax gain/(loss) recognized in AOCI |
|
|
|
|
Pretax gain/(loss) reclassified from AOCI into income |
|
||||||||
|
(In thousands) |
|
Three Months Ended |
|
|
|
|
Three Months Ended |
|
||||||||
|
Derivatives in hedging relationships |
|
August 31, 2020 |
|
August 31, 2019 |
|
|
Income statement location |
|
August 31, 2020 |
|
August 31, 2019 |
|
||||
|
Interest rate swap (cash flow) |
|
$ |
( |
) |
$ |
- |
|
|
|
|
$ |
( |
) |
$ |
- |
|
|
Cross currency swap (cash flow) |
|
|
( |
) |
|
- |
|
|
|
|
|
|
|
|
- |
|
|
Cross currency swap (cash flow) |
|
|
- |
|
|
- |
|
|
|
|
|
( |
) |
|
- |
|
|
Cross currency swap (net investment) |
|
|
( |
) |
|
|
|
|
|
|
|
- |
|
|
- |
|
|
Total |
|
$ |
( |
) |
$ |
|
|
|
|
|
$ |
( |
) |
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedges
At August 31, 2020, and May 31, 2020, we held
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.
14
The fair values of qualifying and non-qualifying instruments used in hedging transactions as of August 31, 2020 and May 31, 2020 are as follows:
|
(In thousands) |
|
|
|
Fair Value |
|
|||||
|
Derivatives Designated as Hedging Instruments |
|
Balance Sheet Location |
|
August 31, 2020 |
|
|
May 31, 2020 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Cross Currency Swap (Net Investment) |
|
Other Current Assets |
|
$ |
|
|
|
$ |
|
|
|
Cross Currency Swap (Cash Flow) |
|
Other Current Assets |
|
|
|
|
|
|
|
|
|
Cross Currency Swap (Net Investment) |
|
Other Assets (Long-Term) |
|
|
- |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Cash Flow) |
|
Other Accrued Liabilities |
|
$ |
|
|
|
$ |
|
|
|
Cross Currency Swap (Net Investment) |
|
Other Accrued Liabilities |
|
|
|
|
|
|
|
|
|
Cross Currency Swap (Net Investment) |
|
Other Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
Cross Currency Swap (Cash Flow) |
|
Other Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Cash Flow) |
|
Other Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
Fair Value |
|
|||||
|
Derivatives Not Designated as Hedging Instruments |
|
Balance Sheet Location |
|
August 31, 2020 |
|
|
May 31, 2019 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange |
|
Other Accrued Liabilities |
|
$ |
|
|
|
$ |
|
|
NOTE 6 — INVESTMENT (INCOME), NET
Investment (income), net, consists of the following components:
|
|
|
Three Months Ended |
|
|||||
|
|
|
August 31, |
|
|
August 31, |
|
||
|
(In thousands) |
|
2020 |
|
|
2019 |
|
||
|
Interest (income) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net (gain) on marketable securities |
|
|
( |
) |
|
|
( |
) |
|
Dividend (income) |
|
|
( |
) |
|
|
( |
) |
|
Investment (income), net |
|
$ |
( |
) |
|
$ |
( |
) |
Net (Gain) on Marketable Securities
|
|
|
Three Months Ended |
|
|||||
|
|
|
August 31, |
|
|
August 31, |
|
||
|
(In thousands) |
|
2020 |
|
|
2019 |
|
||
|
Unrealized (gains) on marketable equity securities |
|
$ |
( |
) |
|
$ |
( |
) |
|
Realized (gains) losses on marketable equity securities |
|
|
|
|
|
|
( |
) |
|
Realized losses on available-for-sale debt securities |
|
|
|
|
|
|
|
|
|
Net (gain) on marketable securities |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 7 — OTHER EXPENSE, NET
Other expense, net, consists of the following components:
|
|
|
Three Months Ended |
|
|||||
|
|
|
August 31, |
|
|
August 31, |
|
||
|
(In thousands) |
|
2020 |
|
|
2019 |
|
||
|
Royalty (income) expense, net |
|
$ |
( |
) |
|
$ |
|
|
|
(Income) expense related to unconsolidated equity affiliates |
|
|
( |
) |
|
|
|
|
|
Pension non-service costs |
|
|
|
|
|
|
|
|
|
Other expense, net |
|
$ |
|
|
|
$ |
|
|
15
NOTE 8 — INCOME TAXES
The effective income tax rate of
Our deferred tax liability for unremitted foreign earnings was $
NOTE 9 — INVENTORIES
Inventories, net of reserves, were composed of the following major classes:
|
(In thousands) |
|
August 31, 2020 |
|
|
May 31, 2020 |
|
||
|
Raw material and supplies |
|
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Total Inventory, Net of Reserves |
|
$ |
|
|
|
$ |
|
|
NOTE 10 — STOCK REPURCHASE PROGRAM
On
16
NOTE 11 — 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-month periods ended August 31, 2020 and 2019.
|
|
|
Three Months Ended |
|
|||||
|
|
|
August 31, |
|
|
August 31, |
|
||
|
(In thousands, except per share amounts) |
|
2020 |
|
|
2019 |
|
||
|
Numerator for earnings per share: |
|
|
|
|
|
|
|
|
|
Net income attributable to RPM International Inc. stockholders |
|
$ |
|
|
|
$ |
|
|
|
Less: Allocation of earnings and dividends to participating securities |
|
|
( |
) |
|
|
( |
) |
|
Net income available to common shareholders - basic |
|
|
|
|
|
|
|
|
|
Add: Undistributed earnings reallocated to unvested shareholders |
|
|
|
|
|
|
|
|
|
Net income available to common shareholders - diluted |
|
$ |
|
|
|
$ |
|
|
|
Denominator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
Basic weighted average common shares |
|
|
|
|
|
|
|
|
|
Average diluted options and awards |
|
|
|
|
|
|
|
|
|
Total shares for diluted earnings per share (1) |
|
|
|
|
|
|
|
|
|
Earnings Per Share of Common Stock Attributable to |
|
|
|
|
|
|
|
|
|
RPM International Inc. Stockholders: |
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share of Common Stock |
|
$ |
|
|
|
$ |
|
|
|
Method used to calculate basic earnings per share |
|
|
|
|
|
|
||
|
Diluted Earnings Per Share of Common Stock |
|
$ |
|
|
|
$ |
|
|
|
Method used to calculate diluted earnings per share |
|
|
|
|
|
|
||
|
(1) |
|
NOTE 12 — PENSION PLANS
We offer defined benefit pension plans, defined contribution pension plans, and various postretirement benefit plans.
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||
|
(In thousands) |
|
August 31, |
|
|
August 31, |
|
|
August 31, |
|
|
August 31, |
|
||||
|
Pension Benefits |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Net actuarial losses recognized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
17
|
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||||||||||
|
(In thousands) |
|
August 31, |
|
|
August 31, |
|
|
August 31, |
|
|
August 31, |
|
||||
|
Postretirement Benefits |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Service cost |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
|
$ |
|
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit) |
|
|
( |
) |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
Net actuarial (gains) losses recognized |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
Net Periodic Benefit (Credit) Cost |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
Due to lower discount rates, net periodic pension and U.S. postretirement cost for fiscal 2021 is higher than our fiscal 2020 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, 2020 that we expected to contribute approximately $
NOTE 13 — CONTINGENCIES AND ACCRUED LOSSES
Product Liability Matters
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.
Warranty Matters
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, 2020, 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 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, |
|
||
|
(In thousands) |
|
2020 |
|
|
2019 |
|
||
|
Beginning Balance |
|
$ |
|
|
|
$ |
|
|
|
Deductions (1) |
|
|
( |
) |
|
|
( |
) |
|
Provision charged to expense |
|
|
|
|
|
|
|
|
|
Ending Balance |
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
18
Environmental Matters
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.
Other Contingencies
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. The restatement shifted accrual amounts among the three quarters, which had the effect of reducing net income by $
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. The complaint seeks disgorgement of gains that may have resulted from the conduct alleged in the complaint, and payment of unspecified monetary penalties from us and our General Counsel pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. Further, the complaint seeks to permanently enjoin us from violations of Sections 17(a)(2) and (a)(3) of the Securities Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13, and to permanently enjoin our General Counsel from violations of Sections 17(a)(2) and (a)(3) of the Securities Act and Exchange Act Rules 13b2-1 and 13b2-2(a). 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 is closed. Summary judgement briefing is due to conclude in April 2021. 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 14 – 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 15, “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
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
19
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.
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 and recognized as a reduction of net sales. Up-front consideration provided to customers is capitalized as a component of other assets and amortized over the estimated life of the contractual arrangement. 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 13, “Contingencies and Other Accrued Losses.”
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.
Trade accounts receivable, net of allowances, and net contract assets (liabilities) consisted of the following:
|
(In thousands, except percents) |
|
August 31, 2020 |
|
|
May 31, 2020 |
|
|
$ Change |
|
|
% Change |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, less allowances |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
Contract liabilities - short-term |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
% |
|
Net Contract Assets (Liabilities) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
20
The $
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.
Allowance for Credit Losses
Our primary allowance for credit losses is the allowance for doubtful accounts. The allowance for doubtful accounts reduces the accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected. The allowance was based on assessments of current creditworthiness of customers, historical collection experience, the aging of receivables and other currently available evidence. Accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful collection of accounts are included in selling, general and administrative expenses.
The following table summarizes the activity for the allowance for credit losses for the three months ended August 31, 2020:
|
(In thousands) |
|
|
|
|
|
Balance at June 1, 2020 |
|
$ |
|
|
|
Bad debt expense |
|
|
|
|
|
Uncollectible accounts written off, net of recoveries |
|
|
( |
) |
|
Translation adjustments |
|
|
|
|
|
Balance at August 31, 2020 |
|
$ |
|
|
NOTE 15 — SEGMENT INFORMATION
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 below, 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
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.
21
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 SPG 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 SPG 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.
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.
|
Three Months Ended August 31, 2020 |
|
CPG Segment |
|
|
PCG Segment |
|
|
Consumer Segment |
|
|
SPG Segment |
|
|
Consolidated |
|
|||||
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Foreign |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
Total Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2019 |
|
CPG Segment |
|
|
PCG Segment |
|
|
Consumer Segment |
|
|
SPG Segment |
|
|
Consolidated |
|
|||||
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
Total Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
Three Months Ended |
|
|||||
|
(In thousands) |
|
August 31, |
|
|
August 31, |
|
||
|
Income (Loss) Before Income Taxes |
|
2020 |
|
|
2019 |
|
||
|
CPG Segment |
|
$ |
|
|
|
$ |
|
|
|
PCG Segment |
|
|
|
|
|
|
|
|
|
Consumer Segment |
|
|
|
|
|
|
|
|
|
SPG Segment |
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
( |
) |
|
|
( |
) |
|
Consolidated |
|
$ |
|
|
|
$ |
|
|
|
(In thousands) |
|
August 31, |
|
|
May 31, |
|
||
|
Identifiable Assets |
|
2020 |
|
|
2020 |
|
||
|
CPG Segment |
|
$ |
|
|
|
$ |
|
|
|
PCG Segment |
|
|
|
|
|
|
|
|
|
Consumer Segment |
|
|
|
|
|
|
|
|
|
SPG Segment |
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
|
|
|
$ |
|
|
NOTE 16 — 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.
The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the periods presented:
|
|
|
CPG |
|
|
PCG |
|
|
Consumer |
|
|
SPG |
|
|
|
|
|
||||
|
(In thousands) |
|
Segment |
|
|
Segment |
|
|
Segment |
|
|
Segment |
|
|
Total |
|
|||||
|
Balance as of May 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Translation adjustments & other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 17 — SUBSEQUENT EVENTS
Subsequent to the end of our first quarter, on September 1, 2020, we acquired Ali Industries, LLC, a leading manufacturer of sandpaper and other abrasives. The company, which is headquartered in Fairborn, Ohio, has annual net sales of approximately $
23
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements include all of our majority-owned subsidiaries. Investments in less-than-majority-owned joint ventures for which we have the ability to exercise significant influence over are accounted for under the equity method. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our allowances for doubtful accounts; reserves for excess and obsolete inventories; allowances for recoverable sales and/or value-added taxes; uncertain tax positions; useful lives of property, plant and equipment; goodwill and other intangible assets; environmental, warranties and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, may differ materially from our estimates.
A comprehensive discussion of the accounting policies and estimates that are the most critical to our financial statements are set forth in our Annual Report on Form 10-K for the year ended May 31, 2020.
24
BUSINESS SEGMENT INFORMATION
The following tables reflect the results of our reportable segments consistent with our management philosophy, and represent the information 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 |
|
|||||
|
|
|
August 31, |
|
|
August 31, |
|
||
|
(In thousands) |
|
2020 |
|
|
2019 |
|
||
|
Net Sales |
|
|
|
|
|
|
|
|
|
CPG Segment |
|
$ |
547,690 |
|
|
$ |
536,105 |
|
|
PCG Segment |
|
|
259,788 |
|
|
|
297,241 |
|
|
Consumer Segment |
|
|
641,168 |
|
|
|
479,330 |
|
|
SPG Segment |
|
|
158,024 |
|
|
|
160,088 |
|
|
Consolidated |
|
$ |
1,606,670 |
|
|
$ |
1,472,764 |
|
|
Income Before Income Taxes (a) |
|
|
|
|
|
|
|
|
|
CPG Segment |
|
|
|
|
|
|
|
|
|
Income Before Income Taxes (a) |
|
$ |
98,349 |
|
|
$ |
82,680 |
|
|
Interest (Expense), Net (b) |
|
|
(2,110 |
) |
|
|
(2,027 |
) |
|
EBIT (c) |
|
$ |
100,459 |
|
|
$ |
84,707 |
|
|
PCG Segment |
|
|
|
|
|
|
|
|
|
Income Before Income Taxes (a) |
|
$ |
28,514 |
|
|
$ |
28,057 |
|
|
Interest (Expense), Net (b) |
|
|
(31 |
) |
|
|
(129 |
) |
|
EBIT (c) |
|
$ |
28,545 |
|
|
$ |
28,186 |
|
|
Consumer Segment |
|
|
|
|
|
|
|
|
|
Income Before Income Taxes (a) |
|
$ |
132,722 |
|
|
$ |
59,158 |
|
|
Interest (Expense), Net (b) |
|
|
(62 |
) |
|
|
(105 |
) |
|
EBIT (c) |
|
$ |
132,784 |
|
|
$ |
59,263 |
|
|
SPG Segment |
|
|
|
|
|
|
|
|
|
Income Before Income Taxes (a) |
|
$ |
20,449 |
|
|
$ |
23,327 |
|
|
Interest Income (Expense), Net (b) |
|
|
(82 |
) |
|
|
26 |
|
|
EBIT (c) |
|
$ |
20,531 |
|
|
$ |
23,301 |
|
|
Corporate/Other |
|
|
|
|
|
|
|
|
|
(Loss) Before Income Taxes (a) |
|
$ |
(38,665 |
) |
|
$ |
(50,373 |
) |
|
Interest (Expense), Net (b) |
|
|
(6,697 |
) |
|
|
(20,697 |
) |
|
EBIT (c) |
|
$ |
(31,968 |
) |
|
$ |
(29,676 |
) |
|
Consolidated |
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
180,785 |
|
|
$ |
106,496 |
|
|
Add: Provision for Income Taxes |
|
|
60,584 |
|
|
|
36,353 |
|
|
Income Before Income Taxes (a) |
|
|
241,369 |
|
|
|
142,849 |
|
|
Interest (Expense) |
|
|
(21,745 |
) |
|
|
(28,317 |
) |
|
Investment Income, Net |
|
|
12,763 |
|
|
|
5,385 |
|
|
EBIT (c) |
|
$ |
250,351 |
|
|
$ |
165,781 |
|
|
(a) |
The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by generally accepted accounting principles ("GAAP") in the U.S., to EBIT. |
|
(b) |
Interest Income (Expense), Net includes the combination of interest income (expense) and investment income (expense), net. |
|
(c) |
EBIT is a non-GAAP measure, and is defined as earnings (loss) before interest and taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT, as a performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, income before income taxes as determined in accordance with GAAP, since EBIT omits the impact of interest in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets' analysis of our segments' core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results. |
25
RESULTS OF OPERATIONS
Three Months Ended August 31, 2020
Net Sales Consolidated net sales of $1,606.7 million for the first quarter of fiscal 2021 grew by approximately 9.1% from net sales of $1,472.8 million for last year’s first quarter. Organic sales, which include the impact of price and volume, contributed 9.3% to consolidated net sales while acquisitions added 0.5%. Unfavorable foreign currency exchange impacted consolidated net sales during the current quarter by 0.7%.
CPG segment net sales for the current quarter grew by 2.2% to $547.7 million from net sales of $536.1 million during the same period a year ago. Organic growth contributed 3.6% during the quarter, mainly driven by market share gains and the introduction of new products, with the fastest growth being generated in our roofing business, which experienced better weather in the current year than the prior year when unfavorable conditions caused a delay in North American construction activity, and our commercial sealants business, which experienced sales during the first quarter of fiscal 2021 from distributors who did not order in April and May due to Covid-19 lockdown restrictions. Unfavorable foreign currency exchange negatively impacted the segment’s net sales by 1.4% during the current quarter.
PCG segment net sales for the current quarter declined by 12.6% to $259.8 million from net sales of $297.3 million during the same period a year ago. The organic decline was 12.2% during the quarter as restrictions associated with Covid-19 impacted the ability of contractors to gain access to the facilities of our end customers. Furthermore, our customers in the energy sector are facing poor economic conditions, which is causing deferrals in industrial maintenance spending. Recent acquisitions contributed 0.3% to net sales during the current quarter, while unfavorable foreign currency exchange negatively impacted the segment’s net sales by 0.7% during the current quarter.
Consumer segment net sales for the quarter grew by 33.8% to $641.2 million from $479.3 million during last year’s first quarter. Organic growth provided 34.0%, while unfavorable foreign currency exchange negatively impacted net sales in the segment by 0.2% during the current quarter versus the same period a year ago. The significant increase in sales volume resulted from a combination of higher “do-it-yourself” demand as consumers are spending more time at home during the Covid-19 shutdowns and an easier comparison to the prior year, when sales were very low due to extremely wet weather.
SPG segment net sales for the quarter decreased by 1.3% to $158.0 million from $160.1 million during last year’s first quarter. Organic sales declined 5.7% during the current quarter, as a result of supply chain difficulties and operating disruptions in our water damage restoration business and decreased demand in our fluorescent pigments and edible coatings businesses, all resulting from the Covid-19 pandemic. These declines were somewhat offset by favorable market conditions in our marine business, as Covid-19 has increased demand for outdoor recreation, our wood coatings business, which benefited from increased lumber sales, and our nail polish business, as Covid-19 has led to more demand for our product offering with nails being done at home instead of at salons. Additionally, foreign currency exchange had a favorable impact on the segment’s net sales of 0.3% during the quarter, while recent acquisitions added 4.1% of net sales during the quarter.
As demonstrated above, Covid-19 has had a mixed impact on our businesses, impacting some unfavorably and others favorably. RPM continues to be well-served by the strategic balance in its portfolio of businesses. It continues to be difficult to predict the future financial impact on net sales, as we cannot predict the duration or scope of the pandemic, but the impact could be material. Future performance in net sales is dependent on several factors, including but not limited to: (i) the ability of our customers to continue operations; (ii) continued organic growth in DIY sales, as people spend more time at home; (iii) a potential for organic growth in professional and consumer cleaning and disinfectant brands, some of which are effective against Covid-19; (iv) the nature and extent of facility closures as a result of Covid-19; and (v) the length and severity of the downturn in energy markets and associated unfavorable impact on maintenance spending in this sector. With that being said, we expect to generate consolidated sales growth in the low- to mid-single digits, which is more in line with recent quarters prior to the outbreak of Covid-19.
Gross Profit Margin Our consolidated gross profit margin of 40.7% of net sales for the first quarter of fiscal 2021 compares to a consolidated gross profit margin of 39.0% for the comparable period a year ago. The current quarter gross profit margin increase of approximately 1.7% of net sales, or 170 basis points (“bps”), resulted primarily from a combination of increases in selling prices, MAP to Growth savings, which include raw material savings due to our centralized procurement initiatives, and higher sales volume versus the same period a year ago.
Raw material costs inflation seems to be moderating in a number of our key product categories. Our global supply chain remains strong, despite some challenges at specific businesses in our portfolio. While we have had to temporarily shut down certain plants in response to Covid-19, we have generally been able to maintain our principal operations. While we have not yet experienced a material impact, we do anticipate that certain raw materials and packaging components are likely to create future cost pressure, as our
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suppliers are struggling to meet demand in light of Covid-19. Despite these facts, as we cannot predict the duration or scope of the Covid-19 pandemic, the future financial impact to gross profit margin cannot be reasonably estimated, but could be material.
SG&A Our consolidated SG&A expense during the current period was $4.6 million lower versus the same period last year and decreased to 24.6% of net sales from 27.2% of net sales for the prior year quarter. During the first quarter of fiscal 2021, we continued our MAP to Growth and have generated incremental savings of approximately $6.4 million. Additional SG&A expense recognized by companies we recently acquired approximated $1.3 million during the first quarter of fiscal 2021.
Our CPG segment SG&A was approximately $9.4 million lower for the first quarter of fiscal 2021 versus the comparable prior year period and decreased as a percentage of net sales. This decrease was mainly due to minimizing discretionary spending (i.e., meetings, travel, etc.), salary cuts taken in response to the economic downturn, and MAP to Growth savings.
Our PCG segment SG&A was approximately $8.6 million lower for the first quarter of fiscal 2021 versus the comparable prior year period, but increased as a percentage of net sales, mainly due to the decrease in sales for the quarter. The decrease in SG&A was primarily attributable to a reduction in discretionary spending, as well as MAP to Growth savings. Additionally, companies we recently acquired contributed approximately $0.2 million of additional SG&A expense during the current quarter.
Our Consumer segment SG&A increased by approximately $13.7 million during the first quarter of fiscal 2021 versus the same period last year, but significantly decreased as a percentage of net sales. The year-over-year increase in SG&A was primarily attributable to increases in distribution and incentives as a result of higher volume, offset somewhat by minimizing discretionary spending. There were also slight increases in advertising and promotional expense when compared to the prior year quarter.
Our SPG segment SG&A was approximately $0.7 million lower during the first quarter of fiscal 2021 versus the comparable prior year period and decreased as a percentage of net sales. The slight decrease in SG&A expense is attributable to cost control measures associated with lower sales volumes and savings resulting from actions taken during the past year associated with our MAP to Growth. Additionally, companies we recently acquired contributed approximately $1.1 million of additional SG&A expense during the current quarter.
SG&A expenses in our corporate/other category increased slightly to $29.0 million during the first quarter of fiscal 2021 as compared to $28.5 million recorded during last year’s first quarter.
We recorded total net periodic pension and postretirement benefit costs of $16.4 million and $13.1 million for the first quarter of fiscal 2021 and 2020, respectively. The $3.3 million increase in pension expense resulted from the combination of higher net actuarial losses recognized during the current quarter versus last year’s first quarter for approximately $2.9 million and a higher service costs of approximately $1.3 million during the current quarter versus the same period a year ago. These increases were partially offset by a decrease of approximately $1.4 million in interest costs during the current quarter, when compared to the same period a year ago. 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, both of which are difficult to predict in light of the lingering macroeconomic uncertainties associated with Covid-19, but which may have a material impact on our consolidated financial results in the future.
As we cannot predict the duration or scope of the Covid-19 pandemic, the future financial impact to SG&A cannot be reasonably estimated, but could be material. As previously disclosed, the disruption caused by the outbreak of Covid-19 is expected to delay the finalization of our MAP to Growth past the original target completion date of December 31, 2020, which may impact our near-term ability to drive further reduction in SG&A as a percentage of sales. However, this will be offset to some degree by lower variable SG&A, such as reduced travel-related expenses incurred by our associates, due to travel restrictions in place because of the Covid-19 outbreak.
Restructuring Charges We recorded restructuring charges of $4.2 million during the first quarter of fiscal 2021, which compares with $6.6 million during the first quarter of fiscal 2020. These charges were the result of the continued implementation of our MAP to Growth, which focuses upon strategic shifts in operations across our entire business. On a consolidated basis, we recognized $2.5 million of severance and benefit costs during the first quarter of fiscal 2021 compared with $3.8 million during the same period a year ago. Facility closure and other related costs totaled $1.5 million during the first quarter of fiscal 2021 versus $2.8 million during the first quarter of fiscal 2020. Finally, $0.2 million of other restructuring costs during the current period compared with $0.1 million during the same period a year ago. These charges were associated with closures of certain facilities as well as the elimination of duplicative headcount and infrastructure associated with certain of our businesses.
We currently expect to incur approximately $18.6 million of future additional charges in relation to implementation of our MAP to Growth. These additional charges include approximately $9.7 million of severance and benefit costs, $8.2 million of facility closure and other related charges, as well as $0.7 million of other restructuring costs. We previously expected these charges to be incurred by the end of calendar year 2020, upon which we expected to achieve an annualized pretax savings of approximately $290 million per year.
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Recently, however, the disruption caused by the outbreak of Covid-19 is expected to delay our implementation of our MAP to Growth past the original target completion date of December 31, 2020. We will provide an update on the revised target completion timeline at a later date. However, by May 31, 2021, we now expect we will have achieved our annualized pretax savings goal of approximately $290 million and made substantial progress on our $230 million working capital improvement goal. See Note 3, “Restructuring,” to the Consolidated Financial Statements, for further details surrounding our MAP to Growth.
Interest Expense Interest expense was $21.7 million for the first quarter of fiscal 2021 versus $28.3 million for the same period a year ago. Excluding acquisition-related borrowings, lower average borrowings quarter over quarter decreased interest expense by approximately $2.3 million during the first quarter of fiscal 2021 when compared to the prior year quarter. Higher average borrowings, related to recent acquisitions, increased interest expense during this year’s first quarter by approximately $0.2 million versus the same period a year ago. Lower interest rates, which averaged 3.38% overall for the first quarter of fiscal 2021 compared with 4.13% for the same period of fiscal 2020, decreased interest expense by approximately $4.5 million during the current quarter versus the same period last year. The interest rate decrease was a result of lower market rates on the variable cost borrowings.
Investment (Income)Expense, Net Net investment income of approximately $12.8 million for the first quarter of fiscal 2021 compares to net investment income of $5.4 million during the same period last year. Dividend and interest income totaled $1.0 million and $1.8 million for the first quarter of fiscal 2021 and 2020, respectively. Net gains on marketable securities totaled $11.8 million during the first quarter of fiscal 2021 compared to $3.5 million during the same period a year ago.
Income Before Income Taxes (“IBT”) Our consolidated IBT for the first quarter of fiscal 2021 of $241.4 million compares with IBT of $142.8 million for the same period a year ago. Our CPG segment had IBT of $98.3 million, or 18.0% of net sales, for the quarter ended August 31, 2020, versus IBT of $82.7 million, or 15.4% of net sales, for the same period a year ago. Our CPG segment results reflect selling price increases, moderating raw material costs, MAP to Growth savings and cost control measures. Our PCG segment had IBT of $28.5 million, or 11.0% of net sales, for the quarter ended August 31, 2020, versus IBT of $28.1 million, or 9.4% of net sales, for the same period a year ago. Our PCG segment results reflect proactively managing a favorable product and service mix with a focus on higher margins, as well as MAP to Growth business rationalization efforts. Our Consumer segment IBT approximated $132.7 million, or 20.7% of net sales, for the first quarter of fiscal 2021, versus the prior year first quarter IBT of $59.2 million, or 12.3% of net sales. Our Consumer segment results reflect the large increase in sales and related volume leveraging impact on margins, along with savings from MAP to Growth. Our SPG segment had IBT of $20.4 million, or 12.9% of net sales for the quarter ended August 31, 2020, versus IBT of $23.3 million, or 14.6% of net sales, for the same period a year ago, reflecting declines in sales volume in our water damage restoration products, fluorescent pigments and edible coatings businesses, which were somewhat mitigated by savings from MAP to Growth and other cost cutting measures.
Income Tax Rate The effective income tax rate of 25.1% for the three months ended August 31, 2020 compares to the effective income tax rate of 25.5% for the three months ended August 31, 2019. The effective income tax rates for the three months ended August 31, 2020 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.
Net Income Net income of $180.8 million for the quarter ended August 31, 2020 compares to net income of $106.5 million for the comparable prior year period. Net income attributable to RPM International Inc. stockholders for the first quarter of fiscal 2021 was $180.6 million, or 11.2% of consolidated net sales, which compared to net income of $106.2 million, or 7.2% of consolidated net sales for the comparable prior year period.
Diluted earnings per share of common stock for the quarter ended August 31, 2020 of $1.39 compares with diluted earnings per share of common stock of $0.82 for the quarter ended August 31, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Fiscal 2021 Compared with Fiscal 2020
Approximately $318.1 million of cash was provided by operating activities during the first three months of fiscal 2021, compared with $145.1 million of cash provided by operating activities during the same period last year. The net change in cash from operations includes the change in net income, which increased by $74.3 million during the first three months of fiscal 2021 versus the same period during fiscal 2020. During the first three months of fiscal 2021, we recorded $4.2 million in restructuring charges and made cash payments of $6.2 million related to our MAP to Growth, as further described in Note 3, “Restructuring.”
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Additionally, certain government entities located where we have operations have enacted various pieces of legislation designed to help businesses weather the economic impact of Covid-19 and ultimately preserve jobs. Some of this legislation, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act here in the U.S., enables employers to postpone the payment of various types of taxes over varying time horizons. As of May 31, 2020, we had deferred $17.7 million of such government payments that would have normally been paid during our fourth quarter of fiscal 2020, but which will be paid in future periods. During the first quarter ended August 31, 2020, we deferred an additional $14.8 million of such government payments that would have normally been paid during our first quarter of fiscal 2021, but which will be paid in future periods. The $14.8 million of deferrals generated during the first quarter of fiscal 2021 is presented net of payments that occurred during the quarter but which normally would have been paid in prior periods.
The change in accounts receivable during the first three months of fiscal 2021 provided approximately $115.7 million less cash than during the same period a year ago. This resulted from the timing of sales, which dipped sharply in the fourth quarter of last year, but rebounded sharply in the first quarter of this year. Days sales outstanding (“DSO”) at August 31, 2020 decreased to 60.4 days from 63.7 days at August 31, 2019. Our CPG, Consumer and SPG segments achieved decreases in DSO during the current period versus last year. Those improvements were partially offset by increased DSO at our PCG segment.
During the first three months of fiscal 2021, we spent approximately $66.0 million less cash for inventory compared to our spending during the same period a year ago, which resulted primarily from the timing of purchases by retail customers. Days of inventory outstanding (“DIO”) was approximately 74.0 and 86.2 days at August 31, 2020 and 2019, respectively. The improvement in DIO was driven mainly by the Consumer segment, which was due to a significant increase in demand as well as our MAP to Growth efforts to improve our manufacturing and operational planning processes.
The change in accounts payable during the first three months of fiscal 2021 used approximately $68.8 million less cash than during the first three months of fiscal 2020 due principally to the timing of purchases, but also longer days payables outstanding (“DPO”) which increased by approximately 3.5 days from 72.3 days at August 31, 2019 to 75.8 days at August 31, 2020. The longer DPO is a direct result of moving toward a center-led procurement process that includes negotiating modified payment terms. Cash provided from operations, along with the use of available credit lines, as required, remain our primary sources of liquidity.
As we cannot predict the duration or scope of the Covid-19 pandemic and its impact on our customers and suppliers, the negative financial impact to our results cannot be reasonably estimated, but could be material. We are actively managing the business to maintain cash flow and we have significant liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.
Investing Activities
For the first quarter of fiscal 2021, cash used for investing activities decreased by $32.2 million to $42.3 million as compared to $74.5 million in the prior year period. This year-over-year decrease in cash used for investing activities was mainly driven by $30.6 million in less cash spent on acquisitions as we did not acquire any businesses during the first quarter of fiscal 2021 as compared to one acquisition during the first quarter of 2020.
Capital expenditures, other than for ordinary repairs and replacements, are made to accommodate our continued growth to achieve production and distribution efficiencies, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. We paid for capital expenditures of $41.5 million and $36.6 million during the first quarters of fiscal 2021 and fiscal 2020, respectively. Depreciation is relatively flat year-over-year, as we incurred $23.8 million in the current year as compared to $23.6 million in the prior year. We have continued to increase our capital spending in fiscal 2021, in an effort to consolidate ERP systems and our plant footprint, as part of our MAP to Growth.
Our captive insurance companies invest their excess cash in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are primarily attributable to differences in the timing and performance of their investments balanced against amounts required to satisfy claims. At August 31, 2020 and May 31, 2020, the fair value of our investments in marketable securities totaled $133.6 million and $114.0 million, respectively. The fair value of our portfolio of marketable securities is based on quoted market prices for identical, or similar, instruments in active or non-active markets or model-derived-valuations with observable inputs. We have no marketable securities whose fair value is subject to unobservable inputs.
As of August 31, 2020, approximately $217.6 million of our consolidated cash and cash equivalents were held at various foreign subsidiaries, compared with $199.6 million at May 31, 2020. Undistributed earnings held at our foreign subsidiaries that are considered permanently reinvested will be used, for instance, to expand operations organically or for acquisitions in foreign jurisdictions. Further, our operations in the U.S. generate sufficient cash flow to satisfy U.S. operating requirements. Refer to Note 8, “Income Taxes,” to the Consolidated Financial Statements for additional information regarding unremitted foreign earnings.
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Financing Activities
For the first quarter of fiscal 2021, cash used for financing activities increased by $191.9 million to $268.9 million as compared to $77.0 million in the prior year period. The overall increase in cash used for financing activities was driven principally by debt-related activities, as we received $75.6 million less cash related to new debt and used $212.2 million more cash to paydown existing debt in the first quarter of fiscal 2021 as compared to the prior year. See below for further details on the significant components of our debt.
The increase in cash used for financing activities generated by debt-related activities was somewhat offset by a $100.0 million decrease in cash used for the repurchase of common stock during the first quarter of fiscal 2021, as compared to the prior year, as we suspended our stock repurchase program during the fourth quarter of fiscal 2020, given recent macroeconomic uncertainty resulting from the Covid-19 pandemic.
Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at $1.50 billion at August 31, 2020, compared with $1.28 billion at May 31, 2020. Significant components of our debt include (refer to “Note G – Borrowings” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020 for more comprehensive details):
Term Loan Facility Credit Agreement
On February 21, 2020, we and our subsidiary, RPM New Horizons Netherlands, B.V. (the “Foreign Borrower”), entered into an unsecured syndicated term loan facility credit agreement (the “New Credit Facility”) with the lenders party thereto and PNC Bank, National Association, as administrative agent for the lenders. The New Credit Facility provides for a $300 million term loan to the Company and a $100 million term loan to the Foreign Borrower (together, the “Term Loans”), each of which was fully advanced on the closing date. The Term Loans mature on February 21, 2023, with no scheduled amortization before that date, and the Term Loans may be prepaid at any time without penalty or premium. We agreed to guarantee all obligations of the Foreign Borrower under the New Credit Facility. The proceeds of the Term Loans were used to repay a portion of the outstanding borrowings under our revolving credit facility. After giving effect to such repayment, we had approximately $820 million of borrowing availability on our Revolving Credit Facility. See “Revolving Credit Agreement” below for further details.
The Term Loans will bear interest at either the base rate or the Eurodollar Rate, at our option, plus a spread determined by our debt rating. We, and the Foreign Borrower, have entered into multicurrency floating to fixed interest rate swap agreements that effectively fix interest payment obligations on the entire principal amount of the Term Loans through their maturity at (a) 0.612% per annum on our Term Loan, and (b) 0.558% per annum on the Foreign Borrower’s Term Loan.
The New Credit Facility contains customary covenants, including but not limited to, limitations on our ability, and in certain instances, our subsidiaries’ ability, to incur liens, make certain investments, or sell or transfer assets. Additionally, we may not permit (i) our consolidated interest coverage ratio to be less than 3.5 to 1.0, or (ii) our leverage ratio (defined as the ratio of total indebtedness, less unencumbered cash and cash equivalents in excess of $50 million, to consolidated EBITDA for the four most recent fiscal quarters) to exceed 3.75 to 1.0. Upon notification to the lenders, however, the maximum permitted leverage ratio can be relaxed to 4.25 to 1.0 for a one-year period in connection with certain material acquisitions. The covenants contained in the New Credit Facility are substantially similar to those contained in our Revolving Credit Facility. See “Revolving Credit Agreement” below for details on our compliance with all significant financial covenants at August 31, 2020.
Accounts Receivable Securitization Program
As of August 31, 2020, the outstanding balance under our AR Program was $45.0 million, which compares with the maximum availability on that date of $250.0 million. The maximum availability under the AR Program is $250.0 million, but availability is further subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the accounts receivable being transferred and, therefore, at certain times, we may not be able to fully access the $250.0 million of funding available under the AR Program.
The AR Program contains various customary affirmative and negative covenants, as well as customary default and termination provisions. Our failure to comply with the covenants described above and other covenants contained in the Revolving Credit Facility could result in an event of default under that agreement, entitling the lenders to, among other things, declare the entire amount outstanding under the Revolving Credit Facility to be due and payable immediately. The instruments governing our other outstanding indebtedness generally include cross-default provisions that provide that, under certain circumstances, an event of default that results in acceleration of our indebtedness under the Revolving Credit Facility will entitle the holders of such other indebtedness to declare amounts outstanding immediately due and payable.
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Revolving Credit Agreement
During the quarter ended November 30, 2018, we replaced our previous $800.0 million revolving credit agreement, which was set to expire on December 5, 2019, with a $1.3 billion unsecured syndicated revolving credit facility (the “Revolving Credit Facility”), which expires on October 31, 2023. The Revolving Credit Facility includes sublimits for the issuance of swingline loans, which are comparatively short-term loans used for working capital purposes and letters of credit. The aggregate maximum principal amount of the commitments under the Revolving Credit Facility may be expanded upon our request, subject to certain conditions, up to $1.5 billion. The Revolving Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditures, and for general corporate purposes.
On April 30, 2020, we amended both our Revolving Credit Facility and the New Credit Facility (see “Term Loan Facility Credit Agreement” section above for further details) to allow the maximum permitted Net Leverage Ratio to be increased from 3.75 to 1.00 to 4.25 to 1 for four consecutive fiscal quarters following notice to the Administrative Agent on or before June 30, 2021 and the payment of a ten basis point fee (“Increased Net Leverage Ratio Period”). Such increase is in addition to any increase requested by the Company in the maximum permitted Net Leverage Ratio following a Material Acquisition (any acquisition for which the aggregate consideration is $100.0 million or greater). During an Increased Net Leverage Ratio Period, the Euro-Rate Spread on loans under the Revolving Credit Facility shall be increased to 1.75% and the Base Rate Spread shall be 0.75% until the first day of the month following the Increased Net Leverage Ratio Period: provided, however, if at any time during an Increased Net Leverage Ratio, all three rating agencies rate the Company as non-investment grade, the Euro-Rate Spread shall be 2.00% and the Base Rate Spread shall be 1.0% in each case until earlier of the first day of the month after the Increased Net Leverage Ratio or the date on which at least one rating agency rates the Company as investment grade. As of August 31, 2020, we have not provided any notice to the Administrative Agent to trigger this provision of the agreement.
The Revolving Credit Facility requires us to comply with various customary affirmative and negative covenants, including a leverage covenant (i.e., Net Leverage Ratio) and interest coverage ratio, which are calculated in accordance with the terms as defined by the credit agreement. Under the terms of the leverage covenant, we may not permit our leverage ratio for total indebtedness to consolidated EBITDA for the four most recent fiscal quarters to exceed 3.75 to 1.0. During certain periods and per the terms of the Revolving Credit Facility, this ratio may be increased to 4.25 to 1.0 in connection with certain material acquisitions, or under the Increased Net Leverage Ratio Period. The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended using EBITDA as defined in the Revolving Credit Facility.
As of August 31, 2020, we were in compliance with all financial covenants contained in our Revolving Credit Facility, including the leverage and interest coverage ratio covenants. At that date, our leverage ratio was 2.39 to 1, while our interest coverage ratio was 9.80 to 1. As of August 31, 2020, we had $1.04 billion of borrowing availability on our Revolving Credit Facility.
Our access to funds under our Revolving Credit Facility is dependent on the ability of the financial institutions that are parties to the Revolving Credit Facility to meet their funding commitments. Those financial institutions may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. Moreover, the obligations of the financial institutions under our Revolving Credit Facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
Stock Repurchase Program
See Note 10, “Stock Repurchase Program” to the Consolidated Financial Statements, for further detail surrounding our stock repurchase program.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financings for the year ended May 31, 2020, other than the minimum operating lease commitments as previously disclosed in our Form 10-K for the year ended May 31, 2020. As of June 1, 2019, upon adoption of ASC 842, the minimum operating lease commitments are no longer off-balance sheet. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in, or relationships with, any special purpose entities that are not reflected in our financial statements.
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OTHER MATTERS
Environmental Matters
Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect our results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. For additional information, refer to “Part II, Item 1. Legal Proceedings.”
FORWARD-LOOKING STATEMENTS
The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital and the effect of changes in interest rates, and the viability of banks and other financial institutions; (b) the prices, supply and capacity of raw materials, including assorted pigments, resins, solvents, and other natural gas- and oil-based materials; packaging, including plastic and metal containers; and transportation services, including fuel surcharges; (c) continued growth in demand for our products; (d) legal, environmental and litigation risks inherent in our construction and chemicals businesses and risks related to the adequacy of our insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon our foreign operations; (g) the effect of non-currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with our ongoing acquisition and divestiture activities; (i) the timing of and the realization of anticipated cost savings from restructuring initiatives and the ability to identify additional cost savings opportunities; (j) risks related to the adequacy of our contingent liability reserves; (k) risks relating to the recent outbreak of the coronavirus (Covid-19); and (l) other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2020, as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk from changes in raw materials costs, interest rates and foreign exchange rates since we fund our operations through long- and short-term borrowings and conduct our business in a variety of foreign currencies. There were no material potential changes in our exposure to these market risks since May 31, 2020.
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ITEM 4. |
CONTROLS AND PROCEDURES |
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of August 31, 2020 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
(b) CHANGES IN INTERNAL CONTROL.
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended August 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
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ITEM 1. |
LEGAL PROCEEDINGS |
SEC Investigation and Enforcement Action
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 DOJ and 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 investigations, and determined to restate our financial results for the first, second and third quarters of fiscal 2013. The restatement shifted accrual amounts among the three quarters, which had the effect of reducing net income by $7.2 million and $10.8 million for the quarterly periods ended August 31, 2012 and November 30, 2012, respectively, and increasing net income for the quarterly period ended February 28, 2013 by $18.0 million. These restatements had no impact on our audited financial statements for the fiscal year ended May 31, 2013. 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 in the U.S. District Court for the District of Columbia 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. The complaint seeks disgorgement of gains that may have resulted from the conduct alleged in the complaint, and payment of unspecified monetary penalties from us and our General Counsel pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. Further, the complaint seeks to permanently enjoin us from violations of Sections 17(a)(2) and (a)(3) of the Securities Act, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13, and to permanently enjoin our General Counsel from violations of Sections 17(a)(2) and (a)(3) of the Securities Act and Exchange Act Rules 13b2-1 and 13b2-2(a). 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 is closed. Summary judgement briefing is due to conclude in April 2021. 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.
Environmental Proceedings
Like other companies participating in similar lines of business, some of our subsidiaries are identified as a “potentially responsible party” under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar local environmental statutes or are participating in the cost of certain clean-up efforts or other remedial actions relating to environmental matters. Our share of such costs to date, however, has not been material and management believes that these environmental proceedings will not have a material adverse effect on our consolidated financial condition or results of operations. See “Item 1 — Business — Environmental Matters,” in our Annual Report on Form 10-K for the year ended May 31, 2020.
On August 13, 2019, Kirker Enterprises Inc. received an Administrative Order and Civil Administrative Penalty Assessment letter from the State of New Jersey Department of Environmental Protection Division of Air Enforcement formally notifying it of alleged failures to fulfill all conditions of an air permit applicable to its Patterson, New Jersey facility. The letter includes a proposed penalty of approximately $192,000.
Carboline Company previously was identified as a potentially responsible party in connection with a matter filed on behalf of the U.S. EPA claiming that Carboline Company, among other potentially responsible parties, violated Section 107 of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and seeking reimbursement for response costs incurred in connection with the release or threatened release of hazardous substances at the Lammers Barrel Superfund Site in Beavercreek,
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Ohio. During the third quarter of fiscal 2020, Carboline Company agreed in principle to settle this matter for $1.3 million, which amount is subject to final approval and court entry of the proposed consent decree relating to this matter.
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ITEM 1A. |
RISK FACTORS |
In addition to the other information set forth in this report, you should carefully consider the other risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2020.
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ITEM 2. |
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS |
(c) The following table presents information about repurchases of common stock we made during the first quarter of fiscal 2021:
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Maximum |
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Total Number |
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Dollar Amount |
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of Shares |
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that |
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Purchased as |
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May Yet be |
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Part of Publicly |
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Purchased |
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Total Number |
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Average |
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Announced |
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Under the |
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of Shares |
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Price Paid |
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Plans or |
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Plans or |
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Period |
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Purchased(1) |
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Per Share |
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Programs |
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Programs(2) |
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June 1, 2020 through June 30, 2020 |
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4,793 |
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$ |
73.64 |
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- |
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July 1, 2020 through July 31, 2020 |
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79,275 |
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$ |
81.49 |
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- |
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August 1, 2020 through August 31, 2020 |
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3,584 |
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$ |
83.87 |
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- |
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Total - First Quarter |
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87,652 |
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$ |
81.15 |
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- |
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(1) |
All of the 87,652 shares of common stock reported as purchased during the period represents shares of common stock that were disposed of back to us in satisfaction of tax obligations related to the vesting of restricted stock which was granted under RPM International Inc.'s Amended and Restated 2014 Omnibus Equity and Incentive Plan and 2007 Restricted Stock Plan. |
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(2) |
The maximum dollar amount that may yet be repurchased under our program was approximately $469.7 million at August 31, 2020. Given recent macroeconomic uncertainty resulting from the Covid-19 pandemic, we have suspended our stock repurchase program. Refer to Note 10 “Stock Repurchase Program” to the Consolidated Financial Statements for further information regarding our stock repurchase program. |
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ITEM 6. |
EXHIBITS |
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Exhibit Number |
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Description |
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10.1 |
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10.2 |
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31.1 |
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Rule 13a-14(a) Certification of the Company’s Chief Executive Officer.(x) |
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31.2 |
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Rule 13a-14(a) Certification of the Company’s Chief Financial Officer.(x) |
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32.1 |
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Section 1350 Certification of the Company’s Chief Executive Officer.(x) |
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32.2 |
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Section 1350 Certification of the Company’s Chief Financial Officer.(x) |
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101.INS |
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Inline XBRL Instance Document- the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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104 |
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The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended August 31, 2020, has been formatted in Inline XBRL |
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(x) |
Filed herewith. |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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RPM International Inc. |
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By: |
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/s/ Frank C. Sullivan |
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Frank C. Sullivan |
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Chairman and Chief Executive Officer |
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By: |
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/s/ Russell L. Gordon |
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Russell L. Gordon |
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Vice President and |
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Chief Financial Officer |
Dated: October 7, 2020
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