UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2018,
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 1-14187
RPM International Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE |
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02-0642224 |
(State or other jurisdiction of incorporation or organization) |
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(IRS Employer Identification No.) |
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P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO (Address of principal executive offices) |
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44258 (Zip Code) |
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(330) 273-5090
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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☐ |
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Emerging growth company |
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☐ |
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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 ☐ No ☒.
As of October 1, 2018 132,718,176 Shares of RPM International Inc. Common Stock were outstanding.
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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4 |
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5 |
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6 |
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7 |
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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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26 |
Item 3. |
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34 |
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Item 4. |
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34 |
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Item 1. |
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35 |
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Item 1A. |
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35 |
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Item 2. |
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36 |
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Item 6. |
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37 |
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38 |
* |
As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise. |
2
PART I. – FINANCIAL INFORMATION
RPM INTERNATIONAL INC. AND SUBSIDIARIES
(Unaudited)
(In thousands, except per share amounts)
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August 31, 2018 |
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May 31, 2018 |
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Assets |
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Current Assets |
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Cash and cash equivalents |
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$ |
202,183 |
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$ |
244,422 |
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Trade accounts receivable (less allowances of |
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$55,558 and $46,344, respectively) |
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1,070,626 |
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1,113,818 |
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Inventories |
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853,573 |
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834,461 |
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Prepaid expenses and other current assets |
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306,333 |
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278,230 |
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Total current assets |
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2,432,715 |
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2,470,931 |
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Property, Plant and Equipment, at Cost |
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1,589,312 |
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1,575,875 |
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Allowance for depreciation |
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(812,253 |
) |
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(795,569 |
) |
Property, plant and equipment, net |
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777,059 |
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780,306 |
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Other Assets |
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Goodwill |
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1,187,705 |
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1,192,174 |
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Other intangible assets, net of amortization |
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585,056 |
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584,272 |
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Deferred income taxes |
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21,953 |
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21,897 |
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Other |
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218,904 |
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222,242 |
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Total other assets |
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2,013,618 |
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2,020,585 |
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Total Assets |
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$ |
5,223,392 |
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$ |
5,271,822 |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts payable |
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$ |
500,913 |
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$ |
592,281 |
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Current portion of long-term debt |
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3,376 |
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3,501 |
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Accrued compensation and benefits |
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119,037 |
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177,106 |
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Accrued losses |
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30,295 |
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22,132 |
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Other accrued liabilities |
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224,515 |
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211,706 |
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Total current liabilities |
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878,136 |
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1,006,726 |
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Long-Term Liabilities |
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Long-term debt, less current maturities |
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2,267,159 |
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2,170,643 |
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Other long-term liabilities |
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360,074 |
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356,892 |
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Deferred income taxes |
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104,644 |
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104,023 |
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Total long-term liabilities |
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2,731,877 |
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2,631,558 |
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Commitments and contingencies (Note 14) |
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Stockholders' Equity |
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Preferred stock, par value $0.01; authorized 50,000 shares; none issued |
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- |
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- |
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Common stock, par value $0.01; authorized 300,000 shares; issued 142,096 and outstanding 133,408 as of August 31, 2018; issued 141,716 and outstanding 133,647 as of May 31, 2018 |
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1,334 |
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1,336 |
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Paid-in capital |
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992,086 |
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982,067 |
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Treasury stock, at cost |
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(256,899 |
) |
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(236,318 |
) |
Accumulated other comprehensive (loss) |
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(493,026 |
) |
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(459,048 |
) |
Retained earnings |
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1,366,952 |
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1,342,736 |
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Total RPM International Inc. stockholders' equity |
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1,610,447 |
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1,630,773 |
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Noncontrolling Interest |
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2,932 |
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2,765 |
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Total equity |
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1,613,379 |
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1,633,538 |
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Total Liabilities and Stockholders' Equity |
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$ |
5,223,392 |
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$ |
5,271,822 |
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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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2018 |
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2017 |
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Net Sales |
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$ |
1,459,989 |
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$ |
1,345,394 |
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Cost of Sales |
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865,947 |
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773,386 |
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Gross Profit |
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594,042 |
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572,008 |
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Selling, General and Administrative Expenses |
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459,742 |
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394,409 |
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Restructuring Charges |
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20,076 |
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- |
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Interest Expense |
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24,406 |
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26,773 |
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Investment (Income), Net |
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(2,433 |
) |
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(4,453 |
) |
Other Expense (Income), Net |
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313 |
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(5 |
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Income Before Income Taxes |
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91,938 |
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155,284 |
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Provision for Income Taxes |
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21,752 |
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38,381 |
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Net Income |
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70,186 |
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116,903 |
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Less: Net Income Attributable to Noncontrolling Interests |
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422 |
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487 |
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Net Income Attributable to RPM International Inc. Stockholders |
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$ |
69,764 |
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$ |
116,416 |
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Average Number of Shares of Common Stock Outstanding: |
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Basic |
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131,861 |
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131,236 |
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Diluted |
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136,430 |
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135,720 |
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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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$ |
0.52 |
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$ |
0.87 |
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Diluted |
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$ |
0.52 |
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$ |
0.86 |
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Cash Dividends Declared per Share of Common Stock |
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$ |
0.320 |
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$ |
0.300 |
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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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2018 |
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2017 |
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Net Income |
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$ |
70,186 |
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$ |
116,903 |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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(40,689 |
) |
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44,478 |
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Pension and other postretirement benefit liability adjustments (net of tax of $982 and $646, respectively) |
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3,056 |
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629 |
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Unrealized gain (loss) on securities (net of tax of $668 and $(149), respectively) |
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2,476 |
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(78 |
) |
Unrealized gain (loss) on derivatives |
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921 |
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(394 |
) |
Total other comprehensive income (loss) income |
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(34,236 |
) |
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44,635 |
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Total Comprehensive Income |
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35,950 |
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161,538 |
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Less: Comprehensive Income Attributable to Noncontrolling Interests |
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164 |
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518 |
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Comprehensive Income Attributable to RPM International Inc. Stockholders |
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$ |
35,786 |
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$ |
161,020 |
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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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2018 |
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2017 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
70,186 |
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$ |
116,903 |
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Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
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Depreciation |
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24,068 |
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19,893 |
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Amortization |
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11,472 |
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11,483 |
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Restructuring charges, net of payments |
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7,084 |
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- |
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Deferred income taxes |
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(561 |
) |
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9,815 |
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Stock-based compensation expense |
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6,668 |
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7,465 |
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Other non-cash interest expense |
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775 |
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1,422 |
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Realized losses (gains) on sales of marketable securities |
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6 |
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(2,861 |
) |
Other |
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992 |
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(140 |
) |
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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32,389 |
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1,646 |
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(Increase) in inventory |
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(27,207 |
) |
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(46,771 |
) |
(Increase) in prepaid expenses and other current and long-term assets |
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(18,282 |
) |
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(10,865 |
) |
(Decrease) in accounts payable |
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(88,271 |
) |
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(72,688 |
) |
(Decrease) in accrued compensation and benefits |
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(56,747 |
) |
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(69,008 |
) |
Increase (decrease) in accrued losses |
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8,415 |
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|
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(5,765 |
) |
Increase in other accrued liabilities |
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20,857 |
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20,147 |
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Other |
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1,027 |
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(6,765 |
) |
Cash (Used For) Operating Activities |
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(7,129 |
) |
|
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(26,089 |
) |
Cash Flows From Investing Activities: |
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Capital expenditures |
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(28,295 |
) |
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(17,533 |
) |
Acquisition of businesses, net of cash acquired |
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(26,366 |
) |
|
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(36,169 |
) |
Purchase of marketable securities |
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(12,695 |
) |
|
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(56,275 |
) |
Proceeds from sales of marketable securities |
|
|
9,758 |
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|
|
40,792 |
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Other |
|
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(2,881 |
) |
|
|
702 |
|
Cash (Used For) Investing Activities |
|
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(60,479 |
) |
|
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(68,483 |
) |
Cash Flows From Financing Activities: |
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Additions to long-term and short-term debt |
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|
120,702 |
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|
|
19,125 |
|
Reductions of long-term and short-term debt |
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(21,952 |
) |
|
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(760 |
) |
Cash dividends |
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(42,714 |
) |
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(40,089 |
) |
Shares repurchased and shares returned for taxes |
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(20,581 |
) |
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(5,346 |
) |
Payments of acquisition-related contingent consideration |
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(3,456 |
) |
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(3,258 |
) |
Other |
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(320 |
) |
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(747 |
) |
Cash Provided By (Used For) Financing Activities |
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31,679 |
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(31,075 |
) |
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
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(6,310 |
) |
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|
11,341 |
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Net Change in Cash and Cash Equivalents |
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(42,239 |
) |
|
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(114,306 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
244,422 |
|
|
|
350,497 |
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Cash and Cash Equivalents at End of Period |
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$ |
202,183 |
|
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$ |
236,191 |
|
Supplemental Disclosures of Cash Flows Information: |
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Cash paid during the period for: |
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|
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Interest |
|
$ |
19,747 |
|
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$ |
20,284 |
|
Income Taxes |
|
$ |
13,525 |
|
|
$ |
12,042 |
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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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — CONSOLIDATION, NONCONTROLLING INTERESTS AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”) for interim financial information and the instructions to Form 10-Q. In our opinion, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three month periods ended August 31, 2018 and 2017. For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended May 31, 2018.
Our financial statements include all of our majority-owned subsidiaries. We account for our investments in less-than-majority-owned joint ventures, for which we have the ability to exercise significant influence, under the equity method. Effects of transactions between related companies are eliminated in consolidation.
Noncontrolling interests are presented in our consolidated financial statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our consolidated financial statements. Additionally, our consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only our share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.
Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprising the three month periods ending August 31, November 30 and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).
NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS
Effective June 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” and all the related amendments included within Accounting Standards Codification 606 (“ASC 606”), using the modified retrospective method of adoption. Under the modified retrospective method, comparative periods are not restated. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. As a result of our adoption procedures, we determined that revenue recognition for our broad portfolio of products and services will remain largely unchanged. Accordingly, our adoption of the new standard did not have a material impact on our overall Consolidated Financial Statements. Refer to Note 16, “Revenue,” and Note 17, “Segment Information,” for additional information.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which increases lease transparency and comparability among organizations. Under the new standard, lessees will be required to recognize all assets and liabilities arising from leases on the balance sheet, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In March 2018, the FASB approved an alternative transition method to the modified retrospective approach, which eliminates the requirement to restate prior period financial statements and requires the cumulative effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption. We are currently evaluating which transition method we will adopt on June 1, 2019 and the impact this guidance will have on our Consolidated Financial Statements. At a minimum, total assets and total liabilities will increase in the period the ASU is adopted. At August 31, 2018, our total undiscounted future minimum payments outstanding for operating lease obligations approximated $202.3 million.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which makes a number of changes meant to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. Our June 1, 2018 adoption of the new guidance, which we applied retrospectively to all periods presented, did not have a material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business,” with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (disposals) of
7
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
assets or of businesses. We adopted the new guidance as of June 1, 2018 and do not expect this revised guidance to have a material impact on our Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” to eliminate step two from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Our June 1, 2018 adoption of the new guidance did not have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. We do not expect our adoption of this guidance to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with employers that sponsor defined benefit or other postretirement plans. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. We are currently reviewing, but adoption of this guidance is not expected to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, “Intangible—Goodwill and Other- Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update makes a number of changes meant to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement), by providing guidance in determining when the arrangement includes a software license. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Our early adoption of this revised guidance as of June 1, 2018 did not have a material impact on our Consolidated Financial Statements.
NOTE 3 — RESTRUCTURING
We record restructuring charges associated with management-approved restructuring plans to either reorganize one or more of our business segments, or to remove duplicative headcount and infrastructure associated with our businesses. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other costs. Restructuring charges are recorded based upon planned employee termination dates and site closure and consolidation plans. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. We record the short-term portion of our restructuring liability in Other Accrued Liabilities and the long-term portion, if any, in Other Long-Term Liabilities in our Consolidated Balance Sheets.
2020 MAP to Growth
In May 2018, we approved and implemented the first phases of a multi-year restructuring plan, the 2020 Margin Acceleration Plan (“2020 MAP to Growth”). The first phases of our plan were focused within the consumer and industrial segments. The restructuring plan within the consumer segment, led by new senior leadership, is designed to improve margins by simplifying business processes, reducing inventory categories and rationalizing SKUs, reducing headcount and working capital and improving operating efficiency. This restructuring plan allows us to streamline management and focus our attention on faster growing and better performing brands and products within the consumer segment businesses. Payments associated with this initial phase of restructuring activities in the
8
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
consumer segment are expected to be completed during the first seven months of fiscal 2019. The restructuring plan within the industrial segment is designed to simplify processes, reduce headcount, eliminate underperforming businesses, and deliver better results for customers, employees and stockholders. The restructuring activities outlined during the first phase of the multi-year restructuring plan are expected to be completed during the first five months of fiscal 2019.
During the quarter ended August 31, 2018, we approved and began implementation of the second phase of our 2020 MAP to Growth. The second phase of our multi-year restructuring plan is focused on our specialty and corporate/nonoperating segments, and expands upon the restructuring activities being conducted by our consumer and industrial segments. Each phase of this restructuring plan has been designed to allow management to focus its attention on faster growing and better performing brands and products. The restructuring activities included in the second phase of our restructuring plan are expected to be completed by the end of fiscal 2020.
Furthermore, the restructuring plan within the specialty segment is designed to simplify processes and eliminate underperforming businesses. These actions will allow management to focus its attention on the faster growing and better performing brands and products, in an effort to achieve improved margins and operating results. These restructuring activities are expected to be completed by the end of fiscal 2020.
Lastly, the restructuring plan within the corporate/nonoperating segment is designed to improve consolidated results by reducing corporate overhead. These restructuring activities are expected to be completed during the first six months of fiscal 2019.
In addition to the segment specific restructuring plans outlined above, in the fourth quarter of fiscal 2018, we adopted a restructuring plan for the legal function to streamline litigation management. Payments related to this initial phase of restructuring activities are expected to be completed during the first quarter of fiscal 2020.
In furtherance of the 2020 MAP to Growth phases described above, we continue to work toward finalizing the last phases of our comprehensive, company-wide restructuring plan that we expect to formalize during our second quarter ending November 30, 2018. All activities under our 2020 MAP to Growth plan are anticipated to be completed by the end of calendar year 2020.
9
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of the charges recorded in connection with restructuring by reportable segment during fiscal 2019 is as follows:
|
|
Three Months Ended August 31, 2018 |
|
|||||||
|
|
Current Year |
|
Cumulative Costs |
|
Total Expected |
|
|||
|
|
Charges |
|
to Date |
|
Costs |
|
|||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment: |
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (a) |
|
$ |
1,551 |
|
$ |
7,203 |
|
$ |
11,718 |
|
Facility closure and other related costs |
|
|
- |
|
|
5,139 |
|
|
11,225 |
|
Total Charges |
|
$ |
1,551 |
|
$ |
12,342 |
|
$ |
22,943 |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment: |
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (b) |
|
$ |
6,365 |
|
$ |
8,534 |
|
$ |
13,098 |
|
Facility closure and other related costs |
|
|
436 |
|
|
1,480 |
|
|
25,643 |
|
Other asset write-offs |
|
|
578 |
|
|
1,951 |
|
|
2,996 |
|
Total Charges |
|
$ |
7,379 |
|
$ |
11,965 |
|
$ |
41,737 |
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Segment: |
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (c) |
|
$ |
2,147 |
|
$ |
2,147 |
|
$ |
5,295 |
|
Facility closure and other related costs |
|
|
- |
|
|
- |
|
|
3,835 |
|
Total Charges |
|
$ |
2,147 |
|
$ |
2,147 |
|
$ |
9,130 |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other Segment: |
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (d) |
|
$ |
8,999 |
|
$ |
11,135 |
|
$ |
11,135 |
|
Total Charges |
|
$ |
8,999 |
|
$ |
11,135 |
|
$ |
11,135 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs |
|
$ |
19,062 |
|
$ |
29,019 |
|
$ |
41,246 |
|
Facility closure and other related costs |
|
|
436 |
|
|
6,619 |
|
|
40,703 |
|
Other asset write-offs |
|
|
578 |
|
|
1,951 |
|
|
2,996 |
|
Total Charges |
|
$ |
20,076 |
|
$ |
37,589 |
|
$ |
84,945 |
|
(a) |
Includes current year charges of $1.6 million associated with the elimination of nine positions. |
(b) |
Includes current year charges of $6.2 million associated with the elimination of 94 positions and $0.2 million additional charges associated with the prior elimination of one position within the legal function during fiscal 2018. |
(c) |
Includes charges of $2.1 million associated with the elimination of 47 positions. |
(d) |
Reflects charges related to the severance of two corporate executives, as well as accelerated vesting of equity awards for two corporate executives, four specialty segment executives and two industrial segment executives in connection with the aforementioned restructuring activities. |
A summary of the activity in the restructuring reserves related to the 2020 MAP to Growth plan is as follows:
(in thousands) |
Severance and Benefits Costs |
|
Facility Closure and Other Related Costs |
|
Other Asset Write-Offs |
|
Total |
|
||||
Balance at June 1, 2018 |
$ |
9,957 |
|
$ |
6,184 |
|
$ |
1,373 |
|
$ |
17,514 |
|
Additions charged to expense |
|
19,062 |
|
|
436 |
|
|
578 |
|
|
20,076 |
|
Cash payments charged against reserve |
|
(12,575 |
) |
|
(418 |
) |
|
|
|
|
(12,993 |
) |
Non-cash charges included above (e) |
|
(5,484 |
) |
|
(838 |
) |
|
(1,951 |
) |
|
(8,273 |
) |
Balance at August 31, 2018 |
$ |
10,960 |
|
$ |
5,364 |
|
$ |
- |
|
$ |
16,324 |
|
Total Expected Costs |
$ |
41,246 |
|
$ |
40,703 |
|
$ |
2,996 |
|
$ |
84,945 |
|
10
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(e) |
Non-cash charges primarily include accelerated vesting of equity awards and asset-write offs. |
In connection with the 2020 MAP to Growth plan, during the first quarter of fiscal 2019, we incurred approximately $4.5 million of inventory-related charges at our industrial segment and recorded a favorable adjustment to the previous write off at our consumer segment for approximately $0.2 million, all of which are recorded in cost of sales in our Consolidated Statements of Income. These inventory charges were the result of product line and SKU rationalization initiatives in connection with our overall plan of restructuring.
The total expected costs to be incurred in relation to our 2020 MAP to Growth plan, as outlined in the table above, will be finalized and announced during our second quarter ending November 30, 2018.
NOTE 4 — MARKETABLE SECURITIES
The following tables summarize marketable securities held at August 31, 2018 and May 31, 2018 by asset type:
|
|
Available-For-Sale Securities |
|
|||||||||||||
(In thousands) |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value (Net Carrying Amount) |
|
||||
August 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - foreign |
|
$ |
47,736 |
|
|
$ |
1,241 |
|
|
$ |
(2,163 |
) |
|
$ |
46,814 |
|
Mutual funds - domestic |
|
|
100,244 |
|
|
|
4,810 |
|
|
|
(2,308 |
) |
|
|
102,746 |
|
Total equity securities |
|
|
147,980 |
|
|
|
6,051 |
|
|
|
(4,471 |
) |
|
|
149,560 |
|
Fixed maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government |
|
|
24,479 |
|
|
|
42 |
|
|
|
(494 |
) |
|
|
24,027 |
|
Corporate bonds |
|
|
422 |
|
|
|
39 |
|
|
|
(10 |
) |
|
|
451 |
|
Total fixed maturity securities |
|
|
24,901 |
|
|
|
81 |
|
|
|
(504 |
) |
|
|
24,478 |
|
Total |
|
$ |
172,881 |
|
|
$ |
6,132 |
|
|
$ |
(4,975 |
) |
|
$ |
174,038 |
|
|
|
Available-For-Sale Securities |
|
|||||||||||||
(In thousands) |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value (Net Carrying Amount) |
|
||||
May 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - foreign |
|
$ |
46,123 |
|
|
$ |
1,839 |
|
|
$ |
(1,197 |
) |
|
$ |
46,765 |
|
Mutual funds - domestic |
|
|
99,833 |
|
|
|
727 |
|
|
|
(2,770 |
) |
|
|
97,790 |
|
Total equity securities |
|
|
145,956 |
|
|
|
2,566 |
|
|
|
(3,967 |
) |
|
|
144,555 |
|
Fixed maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government |
|
|
23,562 |
|
|
|
39 |
|
|
|
(552 |
) |
|
|
23,049 |
|
Corporate bonds |
|
|
432 |
|
|
|
43 |
|
|
|
(8 |
) |
|
|
467 |
|
Total fixed maturity securities |
|
|
23,994 |
|
|
|
82 |
|
|
|
(560 |
) |
|
|
23,516 |
|
Total |
|
$ |
169,950 |
|
|
$ |
2,648 |
|
|
$ |
(4,527 |
) |
|
$ |
168,071 |
|
Marketable securities, included in other current and long-term assets totaling $102.8 million and $71.2 million at August 31, 2018, respectively, and included in other current and long-term assets totaling $97.4 million and $70.7 million at May 31, 2018, respectively, are composed of available-for-sale securities and are reported at fair value. We carry a portion of our marketable securities portfolio in long-term assets since they are generally held for the settlement of our general and product liability insurance claims processed through our wholly owned captive insurance subsidiaries.
Marketable securities are composed of available-for-sale securities and are reported at fair value. Realized gains and losses on sales of investments are recognized in net income on the specific identification basis. Changes in the fair values of securities that are
11
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
considered temporary are recorded as unrealized gains and losses, net of applicable taxes, in accumulated other comprehensive (loss) within stockholders’ equity. Other-than-temporary declines in market value from original cost are reflected in investment income, net in the period in which the unrealized losses are deemed other than temporary. In order to determine whether other-than-temporary declines in market value have occurred, the duration of the decline in value and our ability to hold the investment are considered in conjunction with an evaluation of the strength of the underlying collateral and the extent to which the investment’s amortized cost or cost, as appropriate, exceeds its related market value. In addition to the $174.0 million in available-for-sale securities presented in the table above, as of August 31, 2018, we held approximately $11.9 million in trading securities in relation to our deferred compensation plan. At May 31, 2018, the fair value of trading securities approximated $9.9 million.
Gross realized gains on sales of investments were $0.6 million and $4.0 million for the quarters ended August 31, 2018 and 2017, respectively. During the first quarter of fiscal 2019 and 2018, we recognized gross realized losses on sales of investments of $0.1 million and $1.1 million, respectively. These amounts are included in investment (income), net in the Consolidated Statements of Income.
Summarized below are the securities we held at August 31, 2018 and May 31, 2018 that were in an unrealized loss position and that were included in accumulated other comprehensive (loss), aggregated by the length of time the investments had been in that position:
|
|
August 31, 2018 |
|
|
May 31, 2018 |
|
||||||||||
(In thousands) |
|
Fair Value |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
Gross Unrealized Losses |
|
||||
Total investments with unrealized losses |
|
$ |
87,434 |
|
|
$ |
(4,975 |
) |
|
$ |
106,253 |
|
|
$ |
(4,527 |
) |
Unrealized losses with a loss position for less than 12 months |
|
|
50,465 |
|
|
|
(1,950 |
) |
|
|
68,376 |
|
|
|
(1,570 |
) |
Unrealized losses with a loss position for more than 12 months |
|
|
36,969 |
|
|
|
(3,025 |
) |
|
|
37,877 |
|
|
|
(2,957 |
) |
We have reviewed all of the securities included in the table above and have concluded that we have the ability and intent to hold these investments until their cost can be recovered, based upon the severity and duration of the decline. Therefore, we did not recognize any other-than-temporary impairment losses on these investments. The unrealized losses generally relate to investments whose fair values at August 31, 2018 were less than 15% below their original cost. From time to time, we may experience significant volatility in general economic and market conditions. If we were to experience unrealized losses that were to continue for longer periods of time, or arise to more significant levels of unrealized losses within our portfolio of investments in marketable securities in the future, we may recognize additional other-than-temporary impairment losses. Such potential losses could have a material impact on our results of operations in any given reporting period. As such, we continue to closely evaluate the status of our investments and our ability and intent to hold these investments.
The net carrying values of debt securities at August 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
(In thousands) |
|
Amortized Cost |
|
|
Fair Value |
|
||
Due: |
|
|
|
|
|
|
|
|
Less than one year |
|
$ |
7,114 |
|
|
$ |
7,072 |
|
One year through five years |
|
|
13,180 |
|
|
|
12,898 |
|
Six years through ten years |
|
|
3,542 |
|
|
|
3,412 |
|
After ten years |
|
|
1,065 |
|
|
|
1,096 |
|
|
|
$ |
24,901 |
|
|
$ |
24,478 |
|
NOTE 5 — FAIR VALUE MEASUREMENTS
Financial instruments recorded in the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.
An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved, and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in
12
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
collectibility and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility.
The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:
Level 1 Inputs — Quoted prices for identical instruments in active markets.
Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs — Instruments with primarily unobservable value drivers.
The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
(In thousands) |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
|
Fair Value at August 31, 2018 |
|
||||
U.S. Treasury and other government |
|
$ |
- |
|
|
$ |
24,027 |
|
|
$ |
- |
|
|
$ |
24,027 |
|
Corporate bonds |
|
|
|
|
|
|
451 |
|
|
|
|
|
|
|
451 |
|
Mutual funds - foreign |
|
|
|
|
|
|
47,595 |
|
|
|
|
|
|
|
47,595 |
|
Mutual funds - domestic |
|
|
|
|
|
|
113,891 |
|
|
|
|
|
|
|
113,891 |
|
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
(13,416 |
) |
|
|
(13,416 |
) |
Total |
|
$ |
- |
|
|
$ |
185,964 |
|
|
$ |
(13,416 |
) |
|
$ |
172,548 |
|
(In thousands) |
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Significant Unobservable Inputs (Level 3) |
|
|
Fair Value at May 31, 2018 |
|
||||
U.S. Treasury and other government |
|
$ |
- |
|
|
$ |
23,049 |
|
|
$ |
- |
|
|
$ |
23,049 |
|
Corporate bonds |
|
|
|
|
|
|
467 |
|
|
|
|
|
|
|
467 |
|
Mutual funds - foreign |
|
|
|
|
|
|
47,410 |
|
|
|
|
|
|
|
47,410 |
|
Mutual funds - domestic |
|
|
|
|
|
|
107,017 |
|
|
|
|
|
|
|
107,017 |
|
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
(17,998 |
) |
|
|
(17,998 |
) |
Total |
|
$ |
- |
|
|
$ |
177,943 |
|
|
$ |
(17,998 |
) |
|
$ |
159,945 |
|
Our marketable securities are primarily composed of available-for-sale securities, and are valued using a market approach. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with recent acquisitions that is contingent upon the achievement of certain performance milestones. We estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled, and applied a discount rate that appropriately captures a market participant's view of the risk associated with the obligation, which are considered to be Level 3 inputs. During the first three months of fiscal 2019, we paid approximately $4.6 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current period. During the first three months of fiscal 2018, we paid approximately $3.3 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during last year’s first
13
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
quarter. These amounts are reported in payments of acquisition-related contingent consideration in cash flows from operations and from financing activities in the Consolidated Statements of Cash Flows.
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, 2018 and May 31, 2018, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are considered to be Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of August 31, 2018 and May 31, 2018 are as follows:
|
|
At August 31, 2018 |
|
|||||
(In thousands) |
|
Carrying Value |
|
|
Fair Value |
|
||
Cash and cash equivalents |
|
$ |
202,183 |
|
|
$ |
202,183 |
|
Marketable equity securities |
|
|
149,560 |
|
|
|
149,560 |
|
Marketable debt securi |