The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these statements.
The accompanying notes to consolidated financial statements are an integral part of these financial statements.
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1) Consolidation, Noncontrolling Interests and Basis of Presentation
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).
2) Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3) Acquisitions/Divestitures
We account for business combinations and asset acquisitions using the acquisition method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date.
During the fiscal year ended May 31, 2020, we completed a total of three acquisitions among three of our four reportable segments. Within our CPG reportable segment, we acquired a manufacturer and marketer of joint sealants for commercial construction headquartered in Hudson, New Hampshire. Within our PCG reportable segment, we acquired a manufacturer of trenchless pipe rehabilitation equipment headquartered in Quebec, Canada. Lastly, within our SPG reportable segment, we acquired a manufacturer of dry stabilizer and emulsifier blends for the food industry, headquartered in Elgin, Illinois.
During the fiscal year ended May 31, 2019, we completed a total of five acquisitions among three of our four reportable segments. During fiscal 2019, our CPG reportable segment completed two acquisitions, which included the following: a leading manufacturer and distributor of insulated concrete forms in North America, based in Ontario, Canada; and a distributor of concrete admixture products throughout Puerto Rico, the Dominican Republic and Panama. Within our PCG reportable segment, we acquired a provider of hygienic flooring solutions for the U.K. food and beverage industry, headquartered in the United Kingdom. Within our Consumer reportable segment, we acquired a brand line of specialty cleaning products and the exclusive North American licensing for a brand line of drain care products based in Cincinnati, Ohio; and a manufacturer of non-toxic specialty cleaners based in Ontario, Canada.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The purchase price for each acquisition has been allocated to the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition. We have finalized the purchase price allocation for our fiscal 2019 acquisitions, and there was a $2.8 million adjustment reducing the fair value of deferred income taxes associated with the Consumer reportable segment’s acquisition of a manufacturer of non-toxic specialty cleaners based in Ontario, Canada. This adjustment is reflected in the “Fiscal 2019 Acquisitions” column of the table below. For acquisitions completed during fiscal 2020, the valuations of consideration transferred, total assets acquired and liabilities assumed are substantially complete. The primary areas that remain preliminary relate to the fair values of deferred income taxes. Acquisitions are aggregated by year of purchase in the following table:
|
|
|
Fiscal 2020 Acquisitions
|
|
|
Fiscal 2019 Acquisitions
|
|
|
|
(In thousands)
|
|
Weighted-Average
Intangible Asset
Amortization Life (In
Years)
|
|
Total
|
|
|
Weighted-Average
Intangible Asset
Amortization Life (In
Years)
|
|
Total
|
|
|
|
Current assets
|
|
|
|
$
|
10,649
|
|
|
|
|
$
|
29,737
|
|
|
|
Property, plant and equipment
|
|
|
|
|
1,694
|
|
|
|
|
|
22,607
|
|
|
|
Goodwill
|
|
N/A
|
|
|
28,291
|
|
|
N/A
|
|
|
75,142
|
|
|
|
Trade names - indefinite lives
|
|
N/A
|
|
|
1,555
|
|
|
N/A
|
|
|
14,033
|
|
|
|
Other intangible assets
|
|
16
|
|
|
31,046
|
|
|
10
|
|
|
59,748
|
|
|
|
Other long-term assets
|
|
|
|
|
56
|
|
|
|
|
|
3,095
|
|
|
|
Total Assets Acquired
|
|
|
|
$
|
73,291
|
|
|
|
|
$
|
204,362
|
|
|
|
Liabilities assumed
|
|
|
|
|
(7,135
|
)
|
|
|
|
|
(33,174
|
)
|
|
|
Net Assets Acquired
|
|
|
|
$
|
66,156
|
|
(1)
|
|
|
$
|
171,188
|
|
(2)
|
|
(1)
|
Figure includes cash acquired of $1.6 million.
|
|
(2)
|
Figure includes cash acquired of $2.3 million.
|
Our Consolidated Financial Statements reflect the results of operations of acquired businesses as of their respective dates of acquisition. Pro-forma results of operations for the years ended May 31, 2020 and 2019 were not materially different from reported results and, consequently, are not presented.
4) Foreign Currency
The functional currency for each of our foreign subsidiaries is its principal operating currency. Accordingly, for the periods presented, assets and liabilities have been translated using exchange rates at year end, while income and expense for the periods have been translated using a weighted-average exchange rate.
The resulting translation adjustments have been recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity, and will be included in net earnings only upon the sale or liquidation of the underlying foreign investment, neither of which is contemplated at this time. Transaction gains and losses increased during the last three fiscal years due to the fluctuations in strength of the U.S. dollar, resulting in net transactional foreign exchange gains in fiscal 2020 of approximately $0.3 million and net transactional foreign exchange losses for fiscal 2019 and 2018 of approximately $4.8 million and $12.3 million, respectively.
5) Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. We do not believe we are exposed to any significant credit risk on cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate fair value.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
6) Property, Plant & Equipment
|
May 31,
|
|
2020
|
|
|
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
85,860
|
|
|
$
|
88,638
|
|
|
Buildings and leasehold improvements
|
|
|
469,483
|
|
|
|
459,542
|
|
|
Machinery and equipment
|
|
|
1,199,847
|
|
|
|
1,114,679
|
|
|
Total property, plant and equipment, at cost
|
|
|
1,755,190
|
|
|
|
1,662,859
|
|
|
Less: allowance for depreciation and amortization
|
|
|
905,504
|
|
|
|
843,648
|
|
|
Property, plant and equipment, net
|
|
$
|
849,686
|
|
|
$
|
819,211
|
|
We review long-lived assets for impairment when circumstances indicate that the carrying values of these assets may not be recoverable. For assets that are to be held and used, an impairment charge is recognized when the estimated undiscounted future cash flows associated with the asset or group of assets are less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded for the difference between the carrying value and the fair value. Fair values are determined based on quoted market values, discounted cash flows, internal appraisals or external appraisals, as applicable. Assets to be disposed of are carried at the lower of their carrying value or estimated net realizable value.
Depreciation is computed primarily using the straight-line method over the following ranges of useful lives:
|
Buildings and leasehold improvements
|
|
1 to 50 years
|
|
Machinery and equipment
|
|
1 to 40 years
|
Total depreciation expense for each fiscal period includes the charges to income that result from the amortization of assets recorded under finance leases. For the periods ended May 31, 2020, 2019, & 2018, we recorded depreciation expense of $108.5 million, $94.0 million, and $82.0 million, respectively.
7) Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The majority of our revenue is recognized at a point in time. However, we also record revenues generated under construction contracts, mainly in connection with the installation of specialized roofing and flooring systems and related services. For certain polymer flooring installation projects, we account for our revenue using the output method, as we consider square footage of completed flooring to be the best measure of progress toward the complete satisfaction of the performance obligation. In contrast, for certain of our roofing installation projects, we account for our revenue using the input method, as that method was the best measure of performance as it considers costs incurred in relation to total expected project costs, which essentially represents the transfer of control for roofing systems to the customer. In general, for our other construction contracts, we record contract revenues and related costs as our contracts progress on an over-time model.
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”).
8) Shipping Costs
During the first quarter of fiscal 2020, we changed our method of accounting for shipping and handling costs, which we have identified as costs paid to third-party shippers for transporting products to customers. Under the new method of accounting, we include shipping costs in cost of sales, whereas previously, they were included in SG&A expense.
We believe that including these expenses in cost of sales is preferable, as it better aligns these costs with the related revenue in the gross profit calculation and is consistent with the practices of other industry peers. This change in accounting principle has been applied retrospectively, and the Consolidated Statements of Income reflect the effect of this accounting principle change for all periods presented. This reclassification had no impact on income before income taxes, net income attributable to RPM International Inc. Stockholders, net income or earnings per share. The Consolidated Balance Sheets, Statements of Comprehensive Income, Statements of Stockholders’ Equity, and Statements of Cash Flows were not impacted by this accounting principle change.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The Consolidated Statements of Income for fiscal 2019 and 2018 have been adjusted to reflect this change in accounting principle. The impact of the adjustment for fiscal 2019 and 2018 was an increase of $173.6 million and $164.7 million, respectively, to cost of sales and a corresponding decrease to SG&A expense.
9) Allowance for Doubtful Accounts Receivable
An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in collectibility and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we determine uncollectibility. Actual collections of trade receivables could differ from our estimates due to changes in future economic or industry conditions or specific customer’s financial conditions. For the periods ended May 31, 2020, 2019 and 2018, bad debt expense approximated $16.7 million, $18.6 million and $9.1 million, respectively. Bad debt expense remained elevated in fiscal 2020 due to additional write-offs associated with exiting unprofitable product lines and regions in conjunction with our 2020 MAP to Growth and, to a much lesser degree, due to the impact Covid-19 is having on some of our customers’ ability to pay timely. The increase in bad debt expense during fiscal 2019 was primarily due to write-offs associated with our 2020 MAP to Growth. Refer to Note B, “Restructuring,” for further information.
10) Inventories
Inventories are stated at the lower of cost or net realizable value, cost being determined on a first-in, first-out (FIFO) basis and net realizable value being determined on the basis of replacement cost. Inventory costs include raw materials, labor and manufacturing overhead. We review the net realizable value of our inventory in detail on an on-going basis, with consideration given to various factors, which include our estimated reserves for excess, obsolete, slow-moving or distressed inventories. If actual market conditions differ from our projections, and our estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales may be required. Historically, our inventory reserves have approximated actual experience.
For the periods ended May 31, 2020, 2019 and 2018, charges related to slow moving and/or obsolete inventory on hand approximated $39.6 million, $29.4 million and $43.7 million, respectively. During fiscal 2020, we recorded $28.8 million within our Consumer reportable segment as we continued to proactively manage excess quantities of inventory in order to accelerate cash conversion, SKU rationalization, and exiting unprofitable product lines and regions and $3.2 million within our PCG segment related to exiting unprofitable product lines and regions. During fiscal 2019, we recorded $10.5 million in charges resulting from more proactive management of inventory at our Consumer segment, and $9.0 million and $1.0 million of inventory charges related to restructuring activities at our PCG and CPG segments, respectively. During fiscal 2018, our Consumer reportable segment was impacted by tighter inventory management at many of their top customers and we made the determination to consolidate several divisions within certain Consumer segment businesses, close two manufacturing facilities and eliminate approximately 154 positions. These actions were taken by new leadership in place at our Rust-Oleum business in order to streamline processes, reduce overhead, improve margins and reduce working capital. In relation to these initiatives, our Consumer segment recognized $36.5 million of charges related to product line and SKU rationalization and related obsolete inventory identification during the fourth quarter of fiscal 2018. Additionally, during fiscal 2018, we incurred $1.2 million in inventory write-offs in connection with restructuring activities at our CPG reportable segment.
Inventories were composed of the following major classes:
|
May 31,
|
|
2020
|
|
|
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Raw material and supplies
|
|
$
|
282,579
|
|
|
$
|
296,493
|
|
|
Finished goods
|
|
|
527,869
|
|
|
|
545,380
|
|
|
Total Inventory
|
|
$
|
810,448
|
|
|
$
|
841,873
|
|
11) Goodwill and Other Intangible Assets
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.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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.
We test our goodwill balances at least annually, or more frequently as impairment indicators arise, at the reporting unit level. Our annual impairment assessment date has been designated as the first day of our fourth fiscal quarter. Our reporting units have been identified at the component level, which is the operating segment level or one level below our operating segments.
We follow the Financial Accounting Standards Board (“FASB”) guidance found in Accounting Standards Codification (“ASC”) 350 that simplifies how an entity tests goodwill for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the two-step goodwill impairment test.
We assess qualitative factors in each of our reporting units that carry goodwill. We assess these qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The traditional two-step quantitative process is required only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. However, we have an unconditional option to bypass a qualitative assessment and proceed directly to performing the traditional two-step quantitative analysis. We applied the traditional two-step quantitative process during our annual goodwill impairment assessment performed during the fourth quarter of fiscal 2020 and applied both the qualitative and traditional two-step quantitative processes during our annual goodwill impairment assessment performed during the fourth quarters of fiscal 2019 and 2018.
In applying the first step of the quantitative test, we compare the fair value of a reporting unit to its carrying value. Calculating the fair value of a reporting unit requires our use of estimates and assumptions. We use significant judgment in determining the most appropriate method to establish the fair value of a reporting unit. We estimate the fair value of a reporting unit by employing various valuation techniques, depending on the availability and reliability of comparable market value indicators, and employ methods and assumptions that include the application of third-party market value indicators and the computation of discounted future cash flows determined from estimated cashflow adjustments to a reporting unit’s annual projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), or adjusted EBITDA, which adjusts for one-off items impacting revenues and/or expenses that are not considered by management to be indicative of ongoing operations. Our fair value estimations may include a combination of value indications from both the market and income approaches, as the income approach considers the future cash flows from a reporting unit’s ongoing operations as a going concern, while the market approach considers the current financial environment in establishing fair value.
We evaluate discounted future cash flows determined from estimated cashflow adjustments to a reporting unit’s projected EBITDA. Under this approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired. An indication that goodwill may be impaired results when the carrying value of the net assets of a reporting unit exceeds the fair value of the reporting unit. At that point, the second step of the impairment test is performed, which requires a fair value estimate of each tangible and intangible asset in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.
In applying the discounted cash flow methodology, we rely on a number of factors, including future business plans, actual and forecasted operating results, and market data. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.
Prior to our fiscal 2019 annual goodwill impairment test, in connection with our 2020 MAP to Growth, during the third fiscal quarter ended February 28, 2019, we changed the composition of certain of our reporting units that were included in our former industrial reportable segment. Accordingly, we performed an interim impairment test for each reporting unit that changed in accordance with ASC 350, “Intangibles – Goodwill and Other.” Our interim goodwill impairment assessments did not indicate the presence of any goodwill
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
impairment for any of the reporting units tested. However, as previously disclosed during the period ended May 31, 2019, we noted that our Construction Product Group – Europe, which had $125.0 million of goodwill at February 28, 2019, had an excess of fair value over carrying value of approximately 9% using the income approach. Our annual goodwill impairment test for fiscal year 2019, which considered both the income and market approach, resulted in a substantial excess of fair value over carrying value. We continued to monitor the performance of this reporting unit during fiscal 2020, and did not note any interim indicators of impairment. Furthermore, our annual goodwill impairment test for fiscal 2020 resulted in a substantial excess of fair value over carrying value.
On June 1, 2019 (i.e., at the beginning of fiscal 2020), the composition of our reportable segments was revised, as further discussed in Note R, “Segment Information.” Prior to implementing the revised segment reporting structure beginning in fiscal 2020, our previously disclosed Industrial segment comprised two operating segments, the CPG operating segment and the PCG operating segment. Each of these operating segments comprised several reporting units, all of which were tested during our last annual goodwill impairment test during the fourth quarter of fiscal 2019 and again during the fourth quarter of fiscal 2020.
Also, in connection with our 2020 Map to Growth, we realigned certain businesses and management structure within our SPG segment. As such, our former Wood Finishes Group reporting unit was split into two separate reporting units: Guardian and Wood Finishes Group. Additionally, our former Kop-Coat Group reporting unit was split into two reporting units: Kop-Coat Industrial Protection Products and Kop-Coat Group. We performed an interim goodwill impairment test for each of the new reporting units upon the change in reportable segments, business realignment and management structure using a quantitative assessment. We concluded that the estimated fair values exceeded the carrying values for these new reporting units, and accordingly, no indications of impairment were identified as a result of these changes during the first quarter of fiscal 2020.
As a result of the annual impairment assessments performed for fiscal 2020, 2019 and 2018, there were no goodwill impairments, including no reporting units that were at risk of failing step one of the traditional two-step quantitative analysis.
Additionally, we test all indefinite-lived intangible assets for impairment at least annually during our fiscal fourth quarter. We follow the guidance provided by ASC 350 that simplifies how an entity tests indefinite-lived intangible assets for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before applying traditional quantitative tests. We applied both qualitative and quantitative processes during our annual indefinite-lived intangible asset impairment assessments performed during the fourth quarters of fiscal 2020, 2019 and 2018.
The annual impairment assessment involves estimating the fair value of each indefinite-lived asset and comparing it with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we record an impairment loss equal to the difference. Calculating the fair value of the indefinite-lived assets requires our significant use of estimates and assumptions. We estimate the fair values of our intangible assets by applying a relief-from-royalty calculation, which includes discounted future cash flows related to each of our intangible asset’s projected revenues. In applying this methodology, we rely on a number of factors, including actual and forecasted revenues and market data.
Our required annual impairment tests of each of our indefinite-lived intangible assets performed during fiscal 2020, 2019, and 2018 did not result in any additional impairment loss. No impairment losses were recorded as a result of our annual impairment tests, however, we did record an impairment charge in both fiscal 2020 and fiscal 2019. In fiscal 2020, in connection with 2020 Map to Growth, we recorded an impairment charge of $4.0 million included in restructuring expense in our Consumer reportable segment for impairment losses on indefinite-lived trade names. In fiscal 2019, we recorded an impairment charge of $4.2 million, of which $2.0 million was recorded by our CPG reportable segment for impairment losses on indefinite-lived trade names and approximately $2.2 million was recorded by our SPG reportable segment for impairment losses on definite-lived customer-related intangibles. Refer to Note C “Goodwill and Other Intangible Assets” for additional details on these indefinite-lived intangible asset impairment charges.
12) Advertising Costs
Advertising costs are charged to operations when incurred and are included in SG&A expenses. For the years ended May 31, 2020, 2019 and 2018, advertising costs were $49.7 million, $57.5 million and $58.0 million, respectively.
13) Research and Development
Research and development costs are charged to operations when incurred and are included in SG&A expenses. The amounts charged to expense for the years ended May 31, 2020, 2019 and 2018 were $76.5 million, $71.6 million and $69.7 million, respectively.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
14) Stock-Based Compensation
Stock-based compensation represents the cost related to stock-based awards granted to our employees and directors, which may include restricted stock and stock appreciation rights (“SARs”). We measure stock-based compensation cost at the date of grant, based on the estimated fair value of the award. We recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the related vesting period. Refer to Note J, “Stock-Based Compensation,” for further information.
15) Investment (Income), Net
Investment (income), net, consists of the following components:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income)
|
|
$
|
(5,313
|
)
|
|
$
|
(4,885
|
)
|
|
$
|
(5,003
|
)
|
|
Net loss (gain) on marketable securities
|
|
|
(1,629
|
)
|
|
|
8,366
|
|
|
|
(11,704
|
)
|
|
Dividend (income)
|
|
|
(2,797
|
)
|
|
|
(4,211
|
)
|
|
|
(3,735
|
)
|
|
Investment (income), net
|
|
$
|
(9,739
|
)
|
|
$
|
(730
|
)
|
|
$
|
(20,442
|
)
|
Net Loss (Gain) on Marketable Securities
During fiscal 2020, we recognized realized losses on sales of available-for-sale securities of $0.7 million, realized gains on trading securities of $0.9 million and unrealized losses on trading securities of $0.4 million. Also during the year ended May 31, 2020 we recognized unrealized gains of $1.8 million on marketable equity securities.
During fiscal 2019, we recognized realized losses on sales of available-for-sale securities of $3.0 million, realized gains on trading securities of $0.5 million and unrealized losses on trading securities of $1.3 million. Also during the year ended May 31, 2019, we recognized unrealized losses of $4.6 million on marketable equity securities as a result of our adoption of ASU 2016-01.
During fiscal 2018, we recognized gross realized gains and losses on sales of marketable securities of $11.9 million and $1.8 million, respectively.
16) Other Expense (Income), Net
Other expense (income), net, consists of the following components:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty expense (income), net (a)
|
|
$
|
5,206
|
|
|
$
|
(96
|
)
|
|
$
|
404
|
|
|
(Income) related to unconsolidated equity affiliates
|
|
|
(165
|
)
|
|
|
(332
|
)
|
|
|
(1,002
|
)
|
|
Pension non-service costs
|
|
|
6,076
|
|
|
|
1,647
|
|
|
|
-
|
|
|
Loss on extinguishment of debt (b)
|
|
|
-
|
|
|
|
3,051
|
|
|
|
-
|
|
|
Loss on divestiture (c)
|
|
|
949
|
|
|
|
-
|
|
|
|
-
|
|
|
Other expense (income), net
|
|
$
|
12,066
|
|
|
$
|
4,270
|
|
|
$
|
(598
|
)
|
|
(a)
|
Includes a $5.3 million charge incurred during the fourth quarter of fiscal 2020 related to the termination of a licensing agreement within our Consumer reportable segment.
|
|
(b)
|
Reflects the loss incurred upon divestiture of a contracting business located in Australia, which had reported through our PCG segment. In connection with the redemption of all of our outstanding 2.25% convertible senior notes in November 2018, we recognized a loss of $3.1 million, due to the fair value remeasurement on the date of conversion.
|
|
(c)
|
Reflects the loss incurred upon divestiture of a contracting business located in Australia, which had reported through our PCG segment.
|
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
17) Income Taxes
The provision for income taxes is calculated using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax effect of temporary differences between the financial statement carrying amount of assets and liabilities and the amounts used for income tax purposes and for certain changes in valuation allowances. Valuation allowances are recorded to reduce certain deferred tax assets when, in our estimation, it is more likely than not that a tax benefit will not be realized.
18) Earnings Per Share of Common Stock
Earnings per share (EPS) is computed using the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed earnings. Our unvested share-based payment awards that contain rights to receive non-forfeitable dividends are considered participating securities. Basic EPS of common stock is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS of common stock is computed on the basis of the weighted-average number of shares of common stock, plus the effect of dilutive potential shares of common stock outstanding during the period using the treasury stock method. Dilutive potential shares of common stock include outstanding SARS, restricted stock awards and convertible notes. See Note L, “Earnings Per Share of Common Stock,” for additional information.
19) Other Recent Accounting Pronouncements
New Pronouncements Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which increases lease transparency and comparability among organizations. Under the new standard, lessees are required to recognize a right-of-use (“ROU”) asset representing our right to use an underlying asset and a lease liability representing our obligation to make lease payments over the lease term, with the exception of leases with a term of 12 months or less, which permits a lessee to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In March 2018, the FASB approved an alternative transition method to the modified retrospective approach, which eliminates the requirement to restate prior period financial statements and requires the cumulative effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption.
We adopted the new leasing standard on the required effective date of June 1, 2019 using the alternative transition method as described above. Results for reporting periods beginning on June 1, 2019 are presented under Topic 842, while prior period amounts continue to be reported and disclosed in accordance with our historical accounting treatment under Accounting Standards Codification (“ASC”) 840, “Leases (ASC 840).” We elected to apply the package of practical expedients permitted under the ASC 842 transition guidance. Accordingly, we did not reassess whether any expired or expiring contracts contain leases, lease classification between finance and operating leases, and the recognition of initial direct costs of leases commencing before the effective date. We also applied the practical expedient to not separate lease and non-lease components to existing leases, as well as new leases through transition. However, we did not elect the hindsight practical expedient to determine the lease term for existing leases. As a result of our adoption procedures, we have determined that the new guidance had a material impact on our Consolidated Balance Sheets and did not have a material effect on our Consolidated Statements of Income, Consolidated Statements of Cash Flows or our debt covenants. The effects of our transition to ASC 842 resulted in no cumulative adjustment to retained earnings in the period of adoption. Refer to Note M, “Leases,” for additional information.
In February 2018, the FASB issued ASU 2018-02, “Income Statement (Topic 220), Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which allows for an entity to reclassify the tax effects of the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Act”) that were previously recorded in accumulated comprehensive income to retained earnings. The adoption of this new guidance, effective June 1, 2019, did not have a material effect on our Consolidated Financial Statements as we did not elect the option to reclassify to retained earnings the tax effects resulting from the Tax Act that were previously recorded in accumulated other comprehensive income (“AOCI”).
New Pronouncements Issued
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
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
their credit loss estimates. Additionally, the standard amends the current available-for-sale security other-than-temporary impairment model for debt securities. The guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods therein. Early adoption is permitted beginning after December 15, 2018. We do not expect our adoption of this 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 August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of the update. We do not expect our adoption of this guidance to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20), Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with employers that sponsor defined benefit or other postretirement plans. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted for all entities and the amendments in this update are required to be applied on a retrospective basis to all periods presented. We are currently reviewing the provisions of this new pronouncement, but do not expect our adoption of this guidance to have a material impact on our Consolidated Financial Statements.
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 B — RESTRUCTURING
We record restructuring charges associated with management-approved restructuring plans to either reorganize one or more of our business segments, or to remove duplicative headcount and infrastructure associated with our businesses. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other costs. Restructuring charges are recorded based upon planned employee termination dates and site closure and consolidation plans. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. We record the short-term portion of our restructuring liability in Other Accrued Liabilities and the long-term portion, if any, in Other Long-Term Liabilities in our Consolidated Balance Sheets.
2020 MAP to Growth
Between May and August 2018, we approved and implemented the initial phases of a multi-year restructuring plan, the 2020 MAP to Growth. The initial phases of our 2020 MAP to Growth affected all of our reportable segments, as well as our corporate/nonoperating segment, and focused on margin improvement by simplifying business processes; reducing inventory categories and rationalizing SKUs; eliminating underperforming businesses; reducing headcount and working capital; and improving operating efficiency. The majority of the activities included in the initial phases of the restructuring activities have been completed.
During the second quarter ended November 30, 2018, we formally announced the final phases of our 2020 MAP to Growth. This multi-year restructuring is expected to increase operational efficiency while maintaining our entrepreneurial growth culture and will
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
include three additional phases originally expected to be implemented between September 2018 and December 2020. 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. Our execution of the 2020 MAP to Growth will continue to drive the de-layering and simplification of management and businesses associated with group realignment. We have implemented four center-led functional areas including manufacturing and operations; procurement and supply chain; information technology; and accounting and finance.
Our 2020 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 2020 MAP to Growth, we have completed, or are in the process of completing, the planned closure of 22 plants and 25 warehouses. We also expect to incur additional severance and benefit costs as part of our planned closure of these facilities.
Throughout the remaining phases of our 2020 MAP to Growth, we will continue to assess and identify areas of improvement and cost savings. As such, the final implementation of the aforementioned phases and total expected costs are subject to change. In addition to the announced plan, we have continued to broaden the scope of our 2020 MAP to Growth, 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 remained flat compared to our prior quarter estimate, reflecting decreases in expected severance and benefit costs of approximately $4.3 million, offset by increases in expected other asset write-offs and facility closure and other related costs of $3.8 million and $0.5 million, respectively.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
A summary of the charges recorded in connection with restructuring by reportable segment during is as follows:
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
Cumulative
Costs
|
|
Total
Expected
|
|
|
(in thousands)
|
|
May 31, 2020
|
|
May 31, 2019
|
|
May 31, 2018
|
|
to Date
|
|
Costs
|
|
|
CPG Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (a)
|
|
$
|
6,866
|
|
$
|
9,459
|
|
$
|
1,769
|
|
$
|
18,094
|
|
$
|
22,243
|
|
|
Facility closure and other related costs
|
|
|
1,508
|
|
|
1,924
|
|
|
1,045
|
|
|
4,477
|
|
|
7,140
|
|
|
Other asset write-offs
|
|
|
352
|
|
|
215
|
|
|
1,373
|
|
|
1,940
|
|
|
2,024
|
|
|
Total Charges
|
|
$
|
8,726
|
|
$
|
11,598
|
|
$
|
4,187
|
|
$
|
24,511
|
|
$
|
31,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PCG Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (b)
|
|
$
|
6,973
|
|
$
|
6,012
|
|
$
|
400
|
|
$
|
13,385
|
|
$
|
17,073
|
|
|
Facility closure and other related costs
|
|
|
1,873
|
|
|
3,474
|
|
|
-
|
|
|
5,347
|
|
|
7,349
|
|
|
Other asset write-offs
|
|
|
248
|
|
|
353
|
|
|
-
|
|
|
601
|
|
|
908
|
|
|
Total Charges
|
|
$
|
9,094
|
|
$
|
9,839
|
|
$
|
400
|
|
$
|
19,333
|
|
$
|
25,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (c)
|
|
$
|
3,089
|
|
$
|
1,726
|
|
$
|
5,652
|
|
$
|
10,467
|
|
$
|
11,493
|
|
|
Facility closure and other related costs
|
|
|
2,245
|
|
|
1,553
|
|
|
5,139
|
|
|
8,937
|
|
|
10,137
|
|
|
Other asset write-offs
|
|
|
4,094
|
|
|
25
|
|
|
-
|
|
|
4,119
|
|
|
4,119
|
|
|
Total Charges
|
|
$
|
9,428
|
|
$
|
3,304
|
|
$
|
10,791
|
|
$
|
23,523
|
|
$
|
25,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPG Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (d)
|
|
$
|
1,592
|
|
$
|
5,338
|
|
$
|
-
|
|
$
|
6,930
|
|
$
|
8,267
|
|
|
Facility closure and other related costs
|
|
|
2,922
|
|
|
1,244
|
|
|
-
|
|
|
4,166
|
|
|
5,649
|
|
|
Other asset write-offs
|
|
|
119
|
|
|
1,003
|
|
|
-
|
|
|
1,122
|
|
|
1,170
|
|
|
Total Charges
|
|
$
|
4,633
|
|
$
|
7,585
|
|
$
|
-
|
|
$
|
12,218
|
|
$
|
15,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs (e)
|
|
$
|
1,227
|
|
$
|
9,984
|
|
$
|
2,136
|
|
$
|
13,347
|
|
$
|
13,347
|
|
|
Total Charges
|
|
$
|
1,227
|
|
$
|
9,984
|
|
$
|
2,136
|
|
$
|
13,347
|
|
$
|
13,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and benefit costs
|
|
$
|
19,747
|
|
$
|
32,519
|
|
$
|
9,957
|
|
$
|
62,223
|
|
$
|
72,423
|
|
|
Facility closure and other related costs
|
|
|
8,548
|
|
|
8,195
|
|
|
6,184
|
|
|
22,927
|
|
|
30,275
|
|
|
Other asset write-offs
|
|
|
4,813
|
|
|
1,596
|
|
|
1,373
|
|
|
7,782
|
|
|
8,221
|
|
|
Total Charges
|
|
$
|
33,108
|
|
$
|
42,310
|
|
$
|
17,514
|
|
$
|
92,932
|
|
$
|
110,919
|
|
|
a)
|
Severance and benefit costs are associated with the elimination of 112 positions, 109 positions and 27 positions during fiscal 2020, 2019 and 2018, respectively. Additionally, $0.2 million included in the fiscal year 2019 charges are associated with the prior elimination of one position within the legal function during fiscal 2018.
|
|
b)
|
Severance and benefit costs are associated with the elimination of 161 positions, 114 positions and one position during fiscal 2020, 2019 and 2018, respectively.
|
|
c)
|
Severance and benefit costs are associated with the elimination of 92 positions, 21 positions and 155 positions during fiscal 2020, 2019 and 2018, respectively.
|
|
d)
|
Severance and benefit costs are associated with the elimination of 94 positions and 130 positions during fiscal 2020 and 2019, respectively. There were no such charges in fiscal 2018.
|
|
e)
|
Severance and benefit costs are associated with the elimination of two positions during fiscal 2020. Also reflects fiscal 2019 charges related to the severance of two corporate executives, as well as accelerated vesting of equity awards for two corporate executives, four SPG segment executives and three CPG segment executives in connection with the aforementioned restructuring activities. There were no such charges in fiscal 2018.
|
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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
|
|
32,519
|
|
|
8,195
|
|
|
1,596
|
|
|
42,310
|
|
|
Cash payments charged against reserve
|
|
(31,219
|
)
|
|
(3,019
|
)
|
|
-
|
|
|
(34,238
|
)
|
|
Non-cash charges included above (f)
|
|
(6,420
|
)
|
|
(3,503
|
)
|
|
(2,969
|
)
|
|
(12,892
|
)
|
|
Balance at May 31, 2019
|
$
|
4,837
|
|
$
|
7,857
|
|
$
|
-
|
|
$
|
12,694
|
|
|
Additions charged to expense
|
|
19,747
|
|
|
8,548
|
|
|
4,813
|
|
|
33,108
|
|
|
Cash payments charged against reserve
|
|
(17,038
|
)
|
|
(9,239
|
)
|
|
-
|
|
|
(26,277
|
)
|
|
Non-cash charges included above (f)
|
|
(189
|
)
|
|
(1,286
|
)
|
|
(4,813
|
)
|
|
(6,288
|
)
|
|
Balance at May 31, 2020
|
$
|
7,357
|
|
$
|
5,880
|
|
$
|
-
|
|
$
|
13,237
|
|
|
(f)
|
Non-cash charges primarily include accelerated vesting of equity awards and asset-write offs.
|
In connection with our 2020 MAP to Growth, during fiscal 2020, we incurred approximately $16.3 million, $3.2 million, $0.7 million and $0.1 million of inventory-related charges at our Consumer, PCG, CPG and SPG segments, respectively. All of the aforementioned inventory-related charges were the result of the exit of a business or product line and SKU rationalization initiatives in connection with our overall plan of restructuring, and are recorded in cost of sales in our Consolidated Statements of Income.
In connection with our 2020 MAP to Growth, during fiscal 2019, we incurred approximately $1.0 million, $9.0 million and $2.1 million of inventory-related charges at our CPG, PCG and Consumer segments, respectively. The inventory-related charges are partially offset by a favorable adjustment of approximately $0.2 million to the previous write-off at our Consumer segment. All of the aforementioned inventory-related charges were the result of the exit of a business or product line and SKU rationalization initiatives in connection with our overall plan of restructuring, and are recorded in cost of sales in our Consolidated Statements of Income.
In connection with the 2020 MAP to Growth, during fiscal 2018, we incurred approximately $36.5 million of inventory-related charges at our Consumer segment and approximately $1.2 million at our CPG segment, all of which were recorded in cost of sales in our Consolidated Statements of Income. These inventory charges were the result of product line and SKU rationalization that was initiated in the fourth quarter of fiscal 2018 by new leadership within the Consumer segment. Refer to Note A(10) for additional information.
NOTE C — GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill, by reportable segment, for the years ended May 31, 2020 and 2019, are as follows:
|
|
|
CPG
|
|
|
PCG
|
|
|
Consumer
|
|
|
SPG
|
|
|
|
|
|
|
(In thousands)
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Segment
|
|
|
Total
|
|
|
Balance as of June 1, 2018
|
|
$
|
372,033
|
|
|
$
|
186,775
|
|
|
$
|
477,718
|
|
|
$
|
155,648
|
|
|
$
|
1,192,174
|
|
|
Acquisitions
|
|
|
47,151
|
|
|
|
4,314
|
|
|
|
25,994
|
|
|
|
|
|
|
|
77,459
|
|
|
Translation adjustments & other
|
|
|
(11,755
|
)
|
|
|
(5,830
|
)
|
|
|
(4,325
|
)
|
|
|
(1,961
|
)
|
|
|
(23,871
|
)
|
|
Balance as of May 31, 2019
|
|
|
407,429
|
|
|
|
185,259
|
|
|
|
499,387
|
|
|
|
153,687
|
|
|
|
1,245,762
|
|
|
Acquisitions
|
|
|
14,689
|
|
|
|
3,023
|
|
|
|
|
|
|
|
10,352
|
|
|
|
28,064
|
|
|
Translation adjustments & other (1)
|
|
|
(16,764
|
)
|
|
|
(2,878
|
)
|
|
|
(3,169
|
)
|
|
|
(949
|
)
|
|
|
(23,760
|
)
|
|
Balance as of May 31, 2020
|
|
$
|
405,354
|
|
|
$
|
185,404
|
|
|
$
|
496,218
|
|
|
$
|
163,090
|
|
|
$
|
1,250,066
|
|
|
(1)
|
Activity includes a $2.3 million decrease to goodwill within our Consumer segment related to adjustments to preliminary purchase price allocations, primarily due to deferred tax adjustments.
|
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
Total accumulated goodwill impairment losses were $156.3 million at May 31, 2020. Of the accumulated balance, $141.4 million was recorded during the fiscal year ended May 31, 2017 by a reporting unit that at the time was included in our Consumer segment and is now included in our SPG segment, and $14.9 million was recorded during the fiscal year ended May 31, 2009 by a reporting unit that at the time was included in our former Industrial reportable segment and is now included in our CPG segment. There were no impairment losses recorded during fiscal 2020, 2019 or 2018.
Other intangible assets consist of the following major classes:
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Net Other
|
|
|
|
|
Amortization
|
|
Carrying
|
|
|
Accumulated
|
|
|
Intangible
|
|
|
(In thousands)
|
|
Period (In Years)
|
|
Amount
|
|
|
Amortization
|
|
|
Assets
|
|
|
As of May 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formulae
|
|
9 to 33
|
|
$
|
230,621
|
|
|
$
|
(160,771
|
)
|
|
$
|
69,850
|
|
|
Customer-related intangibles
|
|
5 to 33
|
|
|
439,153
|
|
|
|
(197,752
|
)
|
|
|
241,401
|
|
|
Trademarks/names
|
|
5 to 40
|
|
|
30,700
|
|
|
|
(17,224
|
)
|
|
|
13,476
|
|
|
Other
|
|
1 to 33
|
|
|
32,224
|
|
|
|
(23,281
|
)
|
|
|
8,943
|
|
|
Total Amortized Intangibles
|
|
|
|
|
732,698
|
|
|
|
(399,028
|
)
|
|
|
333,670
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/names
|
|
|
|
|
250,710
|
|
|
|
|
|
|
|
250,710
|
|
|
Total Other Intangible Assets
|
|
|
|
$
|
983,408
|
|
|
$
|
(399,028
|
)
|
|
$
|
584,380
|
|
|
As of May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Formulae
|
|
9 to 33
|
|
$
|
227,208
|
|
|
$
|
(150,091
|
)
|
|
$
|
77,117
|
|
|
Customer-related intangibles
|
|
5 to 33
|
|
|
413,475
|
|
|
|
(172,238
|
)
|
|
|
241,237
|
|
|
Trademarks/names
|
|
5 to 40
|
|
|
32,998
|
|
|
|
(16,867
|
)
|
|
|
16,131
|
|
|
Other
|
|
1 to 33
|
|
|
36,709
|
|
|
|
(26,599
|
)
|
|
|
10,110
|
|
|
Total Amortized Intangibles
|
|
|
|
|
710,390
|
|
|
|
(365,795
|
)
|
|
|
344,595
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/names
|
|
|
|
|
256,487
|
|
|
|
|
|
|
|
256,487
|
|
|
Total Other Intangible Assets
|
|
|
|
$
|
966,877
|
|
|
$
|
(365,795
|
)
|
|
$
|
601,082
|
|
The aggregate intangible asset amortization expense for the fiscal years ended May 31, 2020, 2019 and 2018 was $45.6 million, $45.1 million and $43.2 million, respectively. For the next five fiscal years, we estimate annual intangible asset amortization expense related to our existing intangible assets to approximate the following: 2021 — $42.1 million, 2022 — $40.8 million, 2023 — $37.1 million, 2024 — $33.9 million and 2025 — $29.1 million.
Total gross accumulated intangible asset impairment losses were $61.8 million at May 31, 2020, and were recorded in the following fiscal years: 2009 - $0.6 million was recorded by our former Industrial reportable segment; 2017 - $53.0 million was recorded at the time by our Consumer segment; 2018 - There were no impairment losses recorded during fiscal 2018; 2019 - $4.2 million of total other intangible asset impairment losses were recorded, of which $2.0 million was recorded by our CPG reportable segment for impairment losses on trade names and approximately $2.2 million was recorded by our SPG reportable segment for impairment losses on customer-related intangibles; and 2020 - $4.0 million was recorded in our Consumer reportable segment for impairment losses related to the discontinuation of a trade name, and this amount was included in restructuring expense as this discontinuation occurred in connection with our 2020 MAP to Growth.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
NOTE D — MARKETABLE SECURITIES
The following tables summarize available-for-sale debt securities held at May 31, 2020 and 2019 by asset type:
|
|
|
Available-For-Sale Debt Securities
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
(Net Carrying
Amount)
|
|
|
May 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government
|
|
$
|
25,462
|
|
|
$
|
1,314
|
|
|
$
|
(40
|
)
|
|
$
|
26,736
|
|
|
Corporate bonds
|
|
|
143
|
|
|
|
43
|
|
|
|
|
|
|
|
186
|
|
|
Total available-for-sale debt securities
|
|
$
|
25,605
|
|
|
$
|
1,357
|
|
|
$
|
(40
|
)
|
|
$
|
26,922
|
|
|
|
|
Available-For-Sale Debt Securities
|
|
|
(In thousands)
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
(Net
Carrying
Amount)
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and other government
|
|
$
|
24,483
|
|
|
$
|
372
|
|
|
$
|
(308
|
)
|
|
$
|
24,547
|
|
|
Corporate bonds
|
|
|
422
|
|
|
|
43
|
|
|
|
(3
|
)
|
|
|
462
|
|
|
Total available-for-sale debt securities
|
|
$
|
24,905
|
|
|
$
|
415
|
|
|
$
|
(311
|
)
|
|
$
|
25,009
|
|
Marketable securities are composed of available-for-sale debt securities, marketable equity securities and trading securities and all marketable securities 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.
Available-for-sale debt securities are included in other current and long-term assets totaling $7.6 million and $19.3 million at May 31, 2020, respectively, and included in other current and long-term assets totaling $8.6 million and $16.4 million at May 31, 2019, respectively. Realized gains and losses on sales of available-for-sale debt securities are recognized in net income on the specific identification basis. Changes in the fair values of available-for-sale debt securities that are considered temporary are recorded as unrealized gains and losses, net of applicable taxes, in accumulated other comprehensive income (loss) within stockholders’ equity. Other-than-temporary declines in market value from original cost are reflected in investment income, net in the period in which the unrealized losses are deemed other than temporary. In order to determine whether other-than-temporary declines in market value have occurred, the duration of the decline in value and our ability to hold the investment are considered in conjunction with an evaluation of the strength of the underlying collateral and the extent to which the investment’s amortized cost or cost, as appropriate, exceeds its related market value.
During fiscal 2019, we adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Liabilities,” which requires all unrealized gains and losses on marketable equity securities to be recognized in earnings. Prior to adoption, marketable equity securities were included in our available-for-sale portfolio and unrealized gains and losses were recognized through other comprehensive (loss) income until realized, at which point we recorded a gain or loss on sale. Subsequent to adoption, unrealized gains and losses on marketable equity securities, as well as realized gains and losses, on sales of marketable equity securities are included in investment (income), net in the Consolidated Statements of Income. Refer to Note A(15), “Investment (Income), Net,” for further details. As of May 31, 2020 and 2019, we held approximately $87.1 million and $87.5 million in marketable equity securities, respectively. Additionally, as of May 31, 2020 and 2019, we held approximately $9.1 million and $12.3 million, respectively, in trading securities in relation to our deferred compensation plan.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
Summarized below are the available-for-sale debt securities we held at May 31, 2020 and 2019 that were in an unrealized loss position and that were included in accumulated other comprehensive income (loss), aggregated by the length of time the investments had been in that position:
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
(In thousands)
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Total investments with unrealized losses
|
|
$
|
2,028
|
|
|
$
|
(40
|
)
|
|
$
|
11,508
|
|
|
$
|
(311
|
)
|
|
Unrealized losses with a loss position for less than 12 months
|
|
|
-
|
|
|
|
-
|
|
|
|
806
|
|
|
|
(2
|
)
|
|
Unrealized losses with a loss position for more than 12 months
|
|
|
2,028
|
|
|
|
(40
|
)
|
|
|
10,702
|
|
|
|
(309
|
)
|
We have reviewed all of the securities included in the table above and have concluded that we have the ability and intent to hold these investments until their cost can be recovered, based upon the severity and duration of the decline. Therefore, we did not recognize any other-than-temporary impairment losses on these investments. The unrealized losses generally relate to investments whose fair values at May 31, 2020 and 2019 were less than 15% below their original cost. From time to time, we may experience significant volatility in general economic and market conditions.
The net carrying values of available-for-sale debt securities at May 31, 2020, 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
|
|
$
|
7,567
|
|
|
$
|
7,581
|
|
|
One year through five years
|
|
|
10,170
|
|
|
|
10,623
|
|
|
Six years through ten years
|
|
|
6,084
|
|
|
|
6,591
|
|
|
After ten years
|
|
|
1,784
|
|
|
|
2,127
|
|
|
|
|
$
|
25,605
|
|
|
$
|
26,922
|
|
NOTE E — FAIR VALUE MEASUREMENTS
Financial instruments recorded in the balance sheet include cash and cash equivalents, trade accounts receivable, marketable securities, notes and accounts payable, and debt.
An allowance for anticipated uncollectible trade receivable amounts is established using a combination of specifically identified accounts to be reserved, and a reserve covering trends in collectibility. These estimates are based on an analysis of trends in collectibility and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility.
All derivative instruments are recognized in our Consolidated Balance Sheets and measured at fair value. Changes in the fair values of derivative instruments that do not qualify as hedges and/or any ineffective portion of hedges are recognized as a gain or (loss) in our Consolidated Statements of Income in the current period. Changes in the fair value of derivative instruments used effectively as cash flow hedges are recognized in other comprehensive income (loss), along with the change in the value of the hedged item. We do not hold or issue derivative instruments for speculative purposes.
The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:
Level 1 Inputs — Quoted prices for identical instruments in active markets.
Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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 addition, with respect to our derivative assets and liabilities measured at fair value, refer to Note F – 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
May 31, 2020
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government
|
|
|
|
|
|
$
|
26,736
|
|
|
|
|
|
|
$
|
26,736
|
|
|
Corporate bonds
|
|
|
|
|
|
|
186
|
|
|
|
|
|
|
|
186
|
|
|
Total available-for-sale debt securities
|
|
|
-
|
|
|
|
26,922
|
|
|
|
-
|
|
|
|
26,922
|
|
|
Trading and other equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stocks-domestic
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
|
3,870
|
|
|
Mutual funds - foreign
|
|
|
|
|
|
|
28,815
|
|
|
|
|
|
|
|
28,815
|
|
|
Mutual funds - domestic
|
|
|
|
|
|
|
63,536
|
|
|
|
|
|
|
|
63,536
|
|
|
Total trading and other equity securities
|
|
|
3,870
|
|
|
|
92,351
|
|
|
|
-
|
|
|
|
96,221
|
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(15,682
|
)
|
|
|
(15,682
|
)
|
|
Total
|
|
$
|
3,870
|
|
|
$
|
119,273
|
|
|
$
|
(15,682
|
)
|
|
$
|
107,461
|
|
|
(In thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Fair Value at
May 31, 2019
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other government
|
|
$
|
-
|
|
|
$
|
24,547
|
|
|
$
|
-
|
|
|
$
|
24,547
|
|
|
Corporate bonds
|
|
|
|
|
|
|
462
|
|
|
|
|
|
|
|
462
|
|
|
Total available-for-sale debt securities
|
|
|
-
|
|
|
|
25,009
|
|
|
|
-
|
|
|
|
25,009
|
|
|
Trading and other equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds - foreign
|
|
|
|
|
|
|
32,082
|
|
|
|
|
|
|
|
32,082
|
|
|
Mutual funds - domestic
|
|
|
|
|
|
|
67,739
|
|
|
|
|
|
|
|
67,739
|
|
|
Total trading and other equity securities
|
|
|
-
|
|
|
|
99,821
|
|
|
|
-
|
|
|
|
99,821
|
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(21,551
|
)
|
|
|
(21,551
|
)
|
|
Total
|
|
$
|
-
|
|
|
$
|
124,830
|
|
|
$
|
(21,551
|
)
|
|
$
|
103,279
|
|
Our investments in available-for-sale debt securities, marketable equity securities and trading and other equity securities are valued using a market approach. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors, including the type of instrument, whether the instrument is actively traded and other characteristics particular to the transaction. For most of our financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The contingent consideration represents the estimated fair value of the additional variable cash consideration payable in connection with recent acquisitions that is contingent upon the achievement of certain performance milestones. We estimated the fair value using expected future cash flows over the period in which the obligation is expected to be settled, and applied a discount rate that appropriately captures a market participant's view of the risk associated with the obligation, which are considered to be Level 3 inputs. During fiscal 2020, we paid approximately $6.4 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during the current year. During fiscal 2019, we paid approximately $5.2 million for settlements of contingent consideration obligations relating to certain performance milestones that were established in prior periods and achieved during fiscal 2019, and we increased our accrual by $3.0 million related to acquisitions completed during fiscal 2019 and $5.8 million related to fair value adjustments. These amounts are reported in payments of acquisition-related contingent consideration in the Consolidated Statements of Cash Flows.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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 May 31, 2020 and 2019, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements, which are Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of May 31, 2020 and 2019 are as follows:
|
|
|
At May 31, 2020
|
|
|
(In thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Cash and cash equivalents
|
|
$
|
233,416
|
|
|
$
|
233,416
|
|
|
Marketable equity securities
|
|
|
87,111
|
|
|
|
87,111
|
|
|
Marketable debt securities
|
|
|
26,922
|
|
|
|
26,922
|
|
|
Long-term debt, including current portion
|
|
|
2,539,180
|
|
|
|
2,618,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2019
|
|
|
(In thousands)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Cash and cash equivalents
|
|
$
|
223,168
|
|
|
$
|
223,168
|
|
|
Marketable equity securities
|
|
|
87,525
|
|
|
|
87,525
|
|
|
Marketable debt securities
|
|
|
25,009
|
|
|
|
25,009
|
|
|
Long-term debt, including current portion
|
|
|
2,525,908
|
|
|
|
2,526,817
|
|
NOTE F — 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 two cross currency swaps, in which we paid variable rate interest in Euros and receive fixed rate interest in U.S. Dollars with a combined notional amount of approximately €85.25 million ($100 million U.S. Dollar equivalent), and which have a maturity date of November 2022. This effectively converted a portion of our U.S. Dollar denominated fixed-rate debt to Euro denominated variable rate debt. The fair value hedge was recognized at fair value in our Consolidated Balance Sheets, while changes in the fair value of the hedge were recognized in interest expense in our Consolidated Statements of Income. We designated the swaps as net investment hedges of our net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. In February 2020, the fair value hedge and two cross currency swaps agreements were terminated, and we received cash in the amount of $9.3 million, representing the fair value of the swap and interest accrued through the date of termination. Accordingly, hedge accounting was discontinued and a hedge accounting adjustment to our Senior Notes of $1.5 million was recorded and is being amortized to interest expense in the Consolidated Statements of Operations through the termination of the 3.450% Notes in November 2022. Changes in the fair value of the cross currency swaps due to spot foreign exchange rates are recorded as cumulative translation adjustment within AOCI and will remain in AOCI until either the sale or substantially complete liquidation of the hedged subsidiaries.
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 two cross currency swaps, in which we will pay fixed rate interest in Euros and receive variable rate interest in U.S. Dollars with a combined notional amount of approximately €277.73 million ($300 million U.S. Dollar equivalent), and which have a maturity date of February 2023. This effectively converts our U.S. Dollar denominated variable rate debt to Euro denominated fixed rate debt. The cash flow hedge is recognized at fair value in our Consolidated Balance Sheets, while changes in the fair value of the hedge will be recognized in AOCI when the hedged items affect earnings. Amounts recognized in AOCI will be recognized in earnings in interest expense when the hedged interest payment is accrued. We designated the swaps as net investment hedges of our net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. The
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
changes in fair value of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized in AOCI to offset the changes in the values of the net investments being hedged. In addition, in February 2020, as a means of mitigating the variability of the functional-currency-equivalent cash flows associated with the U.S. Dollar denominated term 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 €92.52 million ($100 million U.S. Dollar equivalent), and which have a maturity date of February 2023. This effectively converts our U.S. Dollar denominated variable rate debt to Euro denominated fixed rate debt. The cash flow hedge is recognized at fair value in our Consolidated Balance Sheets, while changes in the fair value of the hedge will be recognized in AOCI when the hedged items affect earnings. Amounts recorded in AOCI will be recognized in earnings in interest expense when the hedged interest payment is accrued. In addition, since this currency swap is a hedge of variability of the functional currency equivalent cash flows of a recognized liability to be remeasured at spot exchange rates under ASC 830, an amount that will offset the gain or loss arising from the remeasurement of the hedged liability will be reclassified each period from AOCI to earnings as foreign exchange gain/(loss), which is a component of SG&A expenses.
The following table summarizes the location and effects of the Company’s derivatives instruments on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Operations 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)
|
|
Year Ended May 31,
|
|
|
|
|
Year Ended May 31,
|
|
|
Derivatives in hedging
relationships
|
|
2020
|
|
2019
|
|
2018
|
|
|
Income Statement Location
|
|
2020
|
|
2019
|
|
2018
|
|
|
Interest Rate Swap
(Cash Flow)
|
|
$
|
(7,998
|
)
|
$
|
-
|
|
$
|
-
|
|
|
Interest Expense
|
|
$
|
170
|
|
$
|
-
|
|
$
|
-
|
|
|
Cross Currency Swap
(Cash Flow)
|
|
|
(2,254
|
)
|
|
-
|
|
|
-
|
|
|
Interest Expense
|
|
|
554
|
|
|
-
|
|
|
-
|
|
|
Cross Currency Swap
(Cash Flow)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Foreign Exchange Gain/(Loss)
|
|
|
(2,654
|
)
|
|
-
|
|
|
-
|
|
|
Cross Currency Swap
(Net Investment)
|
|
|
1,866
|
|
|
4,998
|
|
|
(769
|
)
|
|
Gain or (loss) on sale of subsidiary
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
(8,386
|
)
|
$
|
4,998
|
|
$
|
(769
|
)
|
|
|
|
$
|
(1,930
|
)
|
$
|
-
|
|
$
|
-
|
|
Derivatives Not Designated as Hedges
At May 31, 2020 and 2019, we held one foreign currency forward contract, which was designed to reduce our exposure to changes in the cash flows of intercompany foreign-currency-denominated loans related to changes in foreign currency exchange rates by fixing the functional currency cash flows. This contract has not been designated as a hedge; therefore, the changes in fair value of this derivative is recognized in earnings as a component of other (income) expense. Amounts recognized in earnings did not have a material impact on our Consolidated Financial Statements for any period presented. As of May 31, 2020 and May 31, 2019, the notional amounts of the forward contract held to purchase foreign currencies was $63.2 million and $38.7 million, respectively.
Disclosure About Derivative Instruments
All of our derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. We determine the fair value of our derivatives based on valuation methods, which project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, foreign currency rates, as well as future and basis point spreads, as applicable.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The fair values of qualifying and non-qualifying instruments used in hedging transactions as of May 31, 2020 and May 31, 2019 are as follows:
|
(In thousands)
|
|
|
|
Fair Value
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Fair Value)
|
|
Other Current Assets
|
|
$
|
-
|
|
|
$
|
513
|
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Current Assets
|
|
|
5,352
|
|
|
|
2,482
|
|
|
|
Cross Currency Swap (Cash Flow)
|
|
Other Current Assets
|
|
|
750
|
|
|
|
-
|
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Assets (Long-Term)
|
|
|
12,409
|
|
|
|
6,163
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap (Fair Value)
|
|
Other Accrued Liabilities
|
|
|
-
|
|
|
|
230
|
|
|
|
Interest Rate Swap (Cash Flow)
|
|
Other Accrued Liabilities
|
|
|
2,981
|
|
|
|
-
|
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Accrued Liabilities
|
|
|
294
|
|
|
|
-
|
|
|
|
Cross Currency Swap (Net Investment)
|
|
Other Long-Term Liabilities
|
|
|
18,204
|
|
|
|
4,276
|
|
|
|
Cross Currency Swap (Cash Flow)
|
|
Other Long-Term Liabilities
|
|
|
3,608
|
|
|
|
-
|
|
|
|
Interest Rate Swap (Cash Flow)
|
|
Other Long-Term Liabilities
|
|
|
5,187
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Fair Value
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Balance Sheet Location
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange
|
|
Other Current Assets
|
|
$
|
-
|
|
|
$
|
51
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Exchange
|
|
Other Accrued Liabilities
|
|
|
53
|
|
|
|
-
|
|
NOTE G — BORROWINGS
A description of long-term debt follows:
|
May 31,
|
|
2020
|
|
|
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Revolving credit facility with a syndicate of banks, through October 31, 2023(1)
|
|
$
|
419,317
|
|
|
$
|
336,442
|
|
|
Accounts receivable securitization program with two banks, through May 21, 2021 (2)
|
|
|
79,756
|
|
|
|
99,887
|
|
|
Unsecured 6.125% senior notes due October 15, 2019(3)
|
|
|
-
|
|
|
|
450,454
|
|
|
Unsecured 3.45% senior notes due November 15, 2022 (8)
|
|
|
300,615
|
|
|
|
299,257
|
|
|
Unsecured $100M Term Loan due February 21, 2023
|
|
|
99,810
|
|
|
|
|
|
|
Unsecured $300M Term Loan due February 21, 2023
|
|
|
299,431
|
|
|
|
|
|
|
Unsecured 3.75% notes due March 15, 2027 (4)
|
|
|
397,058
|
|
|
|
396,586
|
|
|
Unsecured 4.55% senior notes due March 1, 2029(5)
|
|
|
346,514
|
|
|
|
346,006
|
|
|
Unsecured 5.25% notes due June 1, 2045(6)
|
|
|
298,668
|
|
|
|
298,589
|
|
|
Unsecured 4.25% notes due January 15, 2048 (7)
|
|
|
296,590
|
|
|
|
296,467
|
|
|
Other obligations, including finance leases and unsecured notes payable at various rates
of interest due in installments through 2021
|
|
|
1,421
|
|
|
|
2,220
|
|
|
|
|
|
2,539,180
|
|
|
|
2,525,908
|
|
|
Less: current portion
|
|
|
80,890
|
|
|
|
552,446
|
|
|
Total Long-Term Debt, Less Current Maturities
|
|
$
|
2,458,290
|
|
|
$
|
1,973,462
|
|
|
(1)
|
Interest at May 31, 2020 was tied to LIBOR and averaged 1.5505% for USD denominated debt ($218,281), 1.4650% for AUD denominated debt ($37,199) and 1.3750% on EUR denominated debt ($167,537). Interest at May 31, 2019 was tied to LIBOR and averaged 3.6805% for USD denominated debt ($14,268), 2.69% for AUD denominated debt ($34,558), 3.23% on CAD denominated debt ($131,738) and 1.25% on EUR denominated debt ($159,745). At May 31, 2020 and 2019, the revolving credit facility is adjusted for debt issuance costs, net of amortization, for approximately $3.7 million and $3.9 million, respectively.
|
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
|
(2)
|
At May 31, 2020 and 2019, the accounts receivable securitization program is adjusted for debt issuance cost, net of amortization, for approximately $0.2 million and $0.1 million, respectively.
|
|
(3)
|
Includes the combination of the October 2009 initial issuance of $300.0 million aggregate principal amount and the May 2011 issuance of an additional $150.0 million aggregate principal amount of these notes. The effective interest rate on the notes issued in October 2009, including the amortization of the discount, was 6.139%. The additional $150.0 million aggregate principal amount of the notes due 2019 issued in May 2011 was adjusted for the unamortized premium received at issuance, which approximated $0.7 million at May 31, 2019. The premium effectively increased the proceeds from the financing. The effective interest rate on the $150.0 million notes issued in May 2011 is 4.934%. At May 31, 2019, the notes were adjusted for debt issuance costs, net of amortization, for approximately $0.2 million. During the second quarter of fiscal 2020, we used funds from our revolving credit facility to pay off our $450 million, 6.125% notes due in October 2019.
|
|
(4)
|
The $400.0 million face amount of the notes due 2027 is adjusted for the amortization of the original issue discount, which approximated $0.3 million and $0.4 million at May 31, 2020 and 2019, respectively. The original issue discount effectively reduced the ultimate proceeds from the financing. The effective interest rate on the notes, including the amortization of the discount, is 3.767%. At May 31, 2020 and 2019, the notes are adjusted for debt issuance costs, net of amortization, for approximately $2.6 million and $3.0 million, respectively.
|
|
(5)
|
The $350.0 million aggregate principal amount of the notes due 2029 is adjusted for the amortization of the original issue discount, which approximated $0.5 million at May 31, 2020 and 2019. The original issue discount effectively reduced the ultimate proceeds from the financing. The effective interest rate on the notes, including the amortization of the discount, was 4.568%. At May 31, 2020 and 2019, the notes were adjusted for debt issuance costs, net of amortization, for approximately $3.0 million and $3.5 million, respectively.
|
|
(6)
|
The $250.0 million face amount of the notes due 2045 is adjusted for the amortization of the original issue discount, which approximated $1.4 million at May 31, 2020 and 2019. The original issue discount effectively reduced the ultimate proceeds from the financing. The effective interest rate on the notes, including the amortization of the discount, is 5.29%. In March 2017, as a further issuance of the 5.25% notes due 2045, we closed an offering of $50.0 million aggregate principal, which is adjusted for the unamortized premium received at issuance, which approximated $2.9 million and $3.0 million at May 31, 2020 and 2019, respectively. The premium effectively increased the proceeds from the financing. The effective interest rate on the $50.0 million notes issued March 2017 is 4.839%. At May 31, 2020 and 2019, the notes are adjusted for debt issuance costs, net of amortization, for approximately $2.9 million and $3.0 million, respectively.
|
|
(7)
|
The $300.0 million face amount of the notes due 2048 is adjusted for the debt issuance cost, net of amortization, which approximated $3.4 million and $3.5 million at May 31, 2020 and 2019, respectively. The effective interest rate on the notes is 4.25%.
|
|
(8)
|
The $300.0 million face amount of the notes due 2022 is adjusted for the amortization of the original issue discount and mark-to-market derivative asset of approximated $0.1 million and ($1.3 million) at May 31, 2020 and approximated $0.1 million and ($0.3 million) at May 31, 2019, respectively. The original issue discount effectively reduced the ultimate proceeds from the financing. The effective interest rate on the notes, including the amortization of the discount, is 3.465%. At May 31, 2020 and 2019, the notes are reduced by debt issuance costs, net of amortization, for approximately $0.6 million and $0.9 million, respectively.
|
The aggregate maturities of long-term debt for the five years subsequent to May 31, 2020 are as follows: 2021 — $80.9 million; 2022 — $0.3 million; 2023 — $700.6 million; 2024 — $419.3 million; 2025 — $0.0 million and thereafter $1,338.1 million. Additionally, at May 31, 2020, we had unused lines of credit totaling $1,046.9 million.
Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at $1,280.4 million at May 31, 2020. Our debt-to-capital ratio was 66.8% at May 31, 2020, compared with 64.2% at May 31, 2019.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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 below 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 May 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 the event of an acquisition for which the aggregate consideration is $100.0 million or greater, 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 May 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 2.89 to 1, while our interest coverage ratio was 8.31 to 1. Our available liquidity under our Revolving Credit Facility stood at $877.0 million at May 31, 2020.
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.
Accounts Receivable Securitization Program
On May 9, 2014, we entered into a $200.0 million accounts receivable securitization facility (the “AR Program”) which was subsequently amended on May 22, 2020 to a maximum availability of $250.0 million and an extended facility termination date of May 21, 2021. The AR Program was entered into pursuant to (1) a second amended and restated receivables sales agreement, dated as of May 9, 2014, and subsequently amended on August 29, 2014; November 3, 2015; December 31, 2016; and March 31, 2017 (the “Sale Agreement”), among certain of our subsidiaries (the “Originators”), and RPM Funding Corporation, a special purpose entity (the “SPE”) whose voting interests are wholly owned by us, and (2) an amended and restated receivables purchase agreement, dated as of May 9, 2014 and subsequently amended on February 25, 2015 and May 2, 2017 and May 22, 2020 (the “Purchase Agreement”), among the SPE, certain purchasers from time to time party thereto (the “Purchasers”), and PNC Bank, National Association as administrative agent.
Under the Sale Agreement, the Originators may, during the term thereof, sell specified accounts receivable to the SPE, which may in turn, pursuant to the Purchase Agreement, transfer an undivided interest in such accounts receivable to the Purchasers. Once transferred to the SPE, such receivables are owned in their entirety by the SPE and are not available to satisfy claims of our creditors or creditors of the originating subsidiaries until the obligations owing to the participating banks have been paid in full. We indirectly hold a 100% economic interest in the SPE and will, along with our subsidiaries, receive the economic benefit of the AR Program. The
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
transactions contemplated by the AR Program do not constitute a form of off-balance sheet financing and will be fully reflected in our financial statements.
The maximum availability under the AR Program is $250.0 million. 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. As of May 31, 2020, there was $80.0 million outstanding balance under the AR Program, which compares with the maximum availability on that date of $250.0 million.
The interest rate under the Purchase Agreement is based on the Alternate Base Rate, LIBOR Market Index Rate, one-month LIBOR or LIBOR for a specified tranche period, as selected by us, plus in each case, a margin of 0.95%. In addition, as set forth in an Amended and Restated Fee Letter, dated May 22, 2020 (the “Fee Letter”), the SPE is obligated to pay a monthly unused commitment fee to the Purchasers based on the daily amount of unused commitments under the Agreement, which ranges from 0.30% to 0.50% based on usage. The AR Program contains various customary affirmative and negative covenants and also contains customary default and termination provisions.
Our failure to comply with the covenants described above and other covenants contained in the Revolving Credit Facility section above 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. 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.
3.45% Notes due 2022
On October 23, 2012, we sold $300 million aggregated principal amount of 3.45% Notes due 2022. The net proceeds of $297.7 million from this offering were used to repay short-term borrowings outstanding under our revolving credit facility.
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.
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. In addition, the agreement was amended on April 30, 2020 to allow the maximum permitted Net Leverage Ratio to be increased to 4.25 to 1 during certain periods (refer to the “Revolving Credit Agreement”). The covenants contained in the New Credit Facility are substantially similar to those contained in our Revolving Credit Facility. See “Revolving Credit Agreement” above for details on our compliance with all significant financial covenants at May 31, 2020.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
5.250% Notes due 2045 and 3.750% Notes due 2027
On March 2, 2017, we issued $50.0 million aggregate principal amount of 5.250% Notes due 2045 (the “2045 Notes”) and $400.0 million aggregate principal amount of 3.750% Notes due 2027 (the “2027 Notes”). The 2045 Notes are a further issuance of the $250 million aggregate principal amount of 5.250% Notes due 2045 initially issued by us on May 29, 2015. Interest on the 2045 Notes is payable semiannually in arrears on June 1st and December 1st of each year at a rate of 5.250% per year. The 2045 Notes mature on June 1, 2045. Interest on the 2027 Notes is payable semiannually in arrears on March 15th and September 15th of each year, at a rate of 3.750% per year. The 2027 Notes mature on March 15, 2027. The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable.
4.550% Notes due 2029
On February 27, 2019, we closed an offering for $350.0 million aggregate principal amount of 4.550% Notes due 2029 (the “2029 Notes”). The proceeds from the 2029 Notes were used to repay a portion of the outstanding borrowings under our revolving credit facility and for general corporate purposes. Interest on the 2029 Notes accrues from February 27, 2019 and is payable semiannually in arrears on March 1st and September 1st of each year, beginning September 1, 2019, at a rate of 4.550% per year. The 2029 Notes mature on March 1, 2029. The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable.
4.250% Notes due 2048
On December 20, 2017, we closed an offering for $300.0 million aggregate principal amount of 4.250% Notes due 2048 (the “2048 Notes”). The proceeds from the 2048 Notes were used to repay $250.0 million in principal amount of unsecured 6.50% senior notes due February 15, 2018, and for general corporate purposes. Interest on the 2048 Notes accrues from December 20, 2017 and is payable semiannually in arrears on January 15th and July 15th of each year, beginning July 15, 2018, at a rate of 4.250% per year. The 2048 Notes mature on January 15, 2048. The indenture governing this indebtedness includes cross-acceleration provisions. Under certain circumstances, where an event of default under our other instruments results in acceleration of the indebtedness under such instruments, holders of the indebtedness under the indenture are entitled to declare amounts outstanding immediately due and payable.
2.25% Convertible Senior Notes due 2020
On December 9, 2013, we issued $205 million of 2.25% Convertible Senior Notes due 2020 (the “Convertible Notes”). We paid interest on the Convertible Notes semi-annually on June 15th and December 15th of each year.
We completed the redemption of all $205.0 million aggregate principal amount of our outstanding Convertible Notes on November 27, 2018 (the “Redemption Date”). The redemption price for the Convertible Notes was equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest until, but excluding, the Redemption Date. As a result of the issuance of the notice of redemption, the Convertible Notes became convertible at any time prior to the close of business on November 26, 2018. The conversion rate was 19.221062 shares of RPM common stock per $1,000 original principal amount of the Convertible Notes, which is equivalent to a conversion price of approximately $52.12 per share (subject to adjustment in accordance with the terms of the Indenture). In accordance with the provisions of the indenture for the Convertible Notes, we elected to settle the Convertible Notes surrendered for conversion through a combination settlement of cash and shares of RPM common stock. In settlement of those conversions, we paid an aggregate of approximately $204.6 million in cash, including cash in lieu of fractional shares, and issued 598,601 shares of RPM common stock in the aggregate.
NOTE H — INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Act”). The income tax effects of changes in tax laws are recognized in the period when enacted. Generally, the more significant provisions of the Act that impacted us for the year ended May 31, 2018 included the reduction in the U.S. corporate income tax rate from 35% to 21% and the creation of a territorial tax system (with a one-time mandatory tax on previously unremitted foreign earnings). The corporate tax rate reduction was effective for RPM as of January 1, 2018 and, accordingly, reduced our fiscal year 2018 federal statutory tax rate to a blended rate of 29.2%. The significant provisions of the Act that impact us for fiscal 2019, and
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
thereafter, include the full federal statutory rate reduction to 21%, the repeal of the domestic production activities deduction and the provisions of the Act that subject us to current U.S. tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries and allows a benefit for foreign-derived intangible income (“FDII”).
Subsequent to the enactment of the Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Act. In accordance with SAB 118 and based on the information available as of May 31, 2018, we recorded a net provisional income tax expense of $7.3 million in accordance with the applicable provisions of the Act. The net provisional income tax expense was comprised of a benefit of $15.7 million related to the provisional re-measurement of our U.S. deferred tax assets and liabilities at the reduced U.S. corporate tax rates, a provisional expense of $67.9 million for the transition tax on unremitted earnings from foreign subsidiaries, and a provisional benefit of $44.9 million for the partial reversal of existing deferred tax liabilities recorded for the estimated tax cost associated with unremitted foreign earnings not considered permanently reinvested.
During fiscal 2019, we completed our assessment of the accounting for the impact of Act. As a result of this assessment, we recorded an income tax benefit of $8.1 million, which was comprised of a $6.3 million benefit for the re-measurement of certain U.S. deferred tax assets and liabilities and a $1.8 million benefit resulting from the reduction of the transition tax on unremitted earnings from foreign subsidiaries.
For the year ended May 31, 2020, the provision for income taxes is calculated in accordance with ASC 740, which requires the recognition of deferred income taxes using the asset and liability method.
Income before income taxes as shown in the Consolidated Statements of Income is summarized below for the periods indicated.
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
317,290
|
|
|
$
|
215,201
|
|
|
$
|
228,976
|
|
|
Foreign
|
|
|
90,474
|
|
|
|
124,644
|
|
|
|
188,072
|
|
|
Income Before Income Taxes
|
|
$
|
407,764
|
|
|
$
|
339,845
|
|
|
$
|
417,048
|
|
Provision (benefit) for income taxes consists of the following for the periods indicated:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
65,195
|
|
|
$
|
20,388
|
|
|
$
|
27,206
|
|
|
State and local
|
|
|
17,743
|
|
|
|
8,623
|
|
|
|
8,617
|
|
|
Foreign
|
|
|
31,894
|
|
|
|
37,713
|
|
|
|
52,658
|
|
|
Total Current
|
|
|
114,832
|
|
|
|
66,724
|
|
|
|
88,481
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(19,212
|
)
|
|
|
15,298
|
|
|
|
(8,054
|
)
|
|
State and local
|
|
|
(3,031
|
)
|
|
|
1,414
|
|
|
|
4,832
|
|
|
Foreign
|
|
|
10,093
|
|
|
|
(11,278
|
)
|
|
|
(7,468
|
)
|
|
Total Deferred
|
|
|
(12,150
|
)
|
|
|
5,434
|
|
|
|
(10,690
|
)
|
|
Provision for Income Taxes
|
|
$
|
102,682
|
|
|
$
|
72,158
|
|
|
$
|
77,791
|
|
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The significant components of deferred income tax assets and liabilities as of May 31, 2020 and 2019 were as follows:
|
|
|
2020
|
|
|
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets related to:
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
12,341
|
|
|
$
|
8,970
|
|
|
Allowance for losses
|
|
|
4,294
|
|
|
|
7,524
|
|
|
Accrued compensation and benefits
|
|
|
14,686
|
|
|
|
14,364
|
|
|
Accrued other expenses
|
|
|
15,107
|
|
|
|
17,036
|
|
|
Other long-term liabilities
|
|
|
22,030
|
|
|
|
15,947
|
|
|
Credit and net operating and capital loss carryforwards
|
|
|
65,994
|
|
|
|
63,395
|
|
|
Net unrealized loss on securities
|
|
|
16,892
|
|
|
|
12,391
|
|
|
Pension and other postretirement benefits
|
|
|
76,147
|
|
|
|
42,991
|
|
|
Total Deferred Income Tax Assets
|
|
|
227,491
|
|
|
|
182,618
|
|
|
Less: valuation allowances
|
|
|
(66,855
|
)
|
|
|
(55,274
|
)
|
|
Net Deferred Income Tax Assets
|
|
|
160,636
|
|
|
|
127,344
|
|
|
Deferred income tax (liabilities) related to:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(70,588
|
)
|
|
|
(72,387
|
)
|
|
Amortization of intangibles
|
|
|
(109,926
|
)
|
|
|
(116,097
|
)
|
|
Unremitted foreign earnings
|
|
|
(8,781
|
)
|
|
|
(18,795
|
)
|
|
Total Deferred Income Tax (Liabilities)
|
|
|
(189,295
|
)
|
|
|
(207,279
|
)
|
|
Deferred Income Tax Assets (Liabilities), Net
|
|
$
|
(28,659
|
)
|
|
$
|
(79,935
|
)
|
At May 31, 2020, we had U.S. capital loss carryforwards of approximately $47.0 million, of which $43.4 million will expire if not used by the end of our fiscal year 2022, with the balance expiring if unused by the end of our fiscal year 2025. Also, as of May 31, 2020, we had foreign tax credit carryforwards of $23.4 million, which expire through fiscal 2030. Additionally, as of May 31, 2020, we had approximately $6.1 million of tax benefits associated with state net operating loss carryforwards and state tax credit carryforwards, which expire at various dates beginning in fiscal 2021. Also, as of May 31, 2020, we had foreign net operating loss carryforwards of approximately $152.5 million, of which approximately $8.3 million will expire at various dates beginning in fiscal 2021 and approximately $144.2 million that have an indefinite carryforward period. Additionally, as of May 31, 2020, we had foreign capital loss carryforwards of approximately $29.0 million that can be carried forward indefinitely.
When evaluating the realizability of deferred income tax assets, we consider, among other items, whether a jurisdiction has experienced cumulative pretax losses and whether a jurisdiction will generate the appropriate character of income to recognize a deferred income tax asset. More specifically, if a jurisdiction experiences cumulative pretax losses for a period of three years, including the current fiscal year, or if a jurisdiction does not have sufficient income of the appropriate character in the relevant carryback or projected carryforward periods, we generally conclude that it is more likely than not that the respective deferred tax asset will not be realized unless factors such as expected operational changes, availability of prudent and feasible tax planning strategies, reversal of taxable temporary differences or other information exists that would lead us to conclude otherwise. If, after we have evaluated these factors, the deferred income tax assets are not expected to be realized within the carryforward or carryback periods allowed for that jurisdiction, we would conclude that a valuation allowance is required.
Total valuation allowances of approximately $66.9 million and $55.3 million have been recorded as of May 31, 2020 and 2019, respectively. These recorded valuation allowances relate primarily to U.S. capital losses, state net operating losses and certain foreign net operating losses, net foreign deferred tax assets and foreign tax credit carryforwards. The year-over-year increase in valuation allowances is primarily attributable to foreign tax credit carryforwards.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The following table reconciles income tax expense (benefit) computed by applying the U.S. statutory federal income tax rate against income (loss) before income taxes to the provision (benefit) for income taxes:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense at the U.S. statutory federal income tax rate
|
|
$
|
85,630
|
|
|
$
|
71,367
|
|
|
$
|
121,812
|
|
|
Impact of foreign operations
|
|
|
3,433
|
|
|
|
(1,571
|
)
|
|
|
(16,276
|
)
|
|
State and local income taxes, net
|
|
|
11,651
|
|
|
|
7,224
|
|
|
|
9,520
|
|
|
Impact of GILTI provisions
|
|
|
3,051
|
|
|
|
5,772
|
|
|
|
|
|
|
Domestic manufacturing deduction
|
|
|
|
|
|
|
-
|
|
|
|
(4,839
|
)
|
|
Nondeductible business expense
|
|
|
2,005
|
|
|
|
2,259
|
|
|
|
2,473
|
|
|
Valuation allowance
|
|
|
14,008
|
|
|
|
7,021
|
|
|
|
(5,235
|
)
|
|
Deferred tax liability for unremitted foreign earnings
|
|
|
(5,527
|
)
|
|
|
-
|
|
|
|
(77,970
|
)
|
|
Changes in unrecognized tax benefits
|
|
|
1,292
|
|
|
|
(8,480
|
)
|
|
|
|
|
|
Other
|
|
|
(3,351
|
)
|
|
|
1,195
|
|
|
|
737
|
|
|
FY19 GILTI impact of issued regulations
|
|
|
(4,348
|
)
|
|
|
|
|
|
|
|
|
|
Equity-based compensation
|
|
|
(5,162
|
)
|
|
|
(4,496
|
)
|
|
|
(4,652
|
)
|
|
Transition tax liability
|
|
|
|
|
|
|
(1,868
|
)
|
|
|
67,899
|
|
|
Remeasurement of U.S. deferred income taxes
|
|
|
|
|
|
|
(6,265
|
)
|
|
|
(15,678
|
)
|
|
Provision for Income Tax Expense
|
|
$
|
102,682
|
|
|
$
|
72,158
|
|
|
$
|
77,791
|
|
|
Effective Income Tax Rate
|
|
|
25.2
|
%
|
|
|
21.2
|
%
|
|
|
18.7
|
%
|
Uncertain income tax positions are accounted for in accordance with ASC 740. The following table summarizes the activity related to unrecognized tax benefits:
|
(In millions)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Balance at June 1
|
|
$
|
8.1
|
|
|
$
|
14.1
|
|
|
$
|
13.2
|
|
|
Additions based on tax positions related to current year
|
|
|
-
|
|
|
|
0.1
|
|
|
|
5.1
|
|
|
Additions for tax positions of prior years
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
-
|
|
|
Reductions for tax positions of prior years
|
|
|
(0.9
|
)
|
|
|
(7.9
|
)
|
|
|
(4.5
|
)
|
|
Foreign currency translation
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
Balance at May 31
|
|
$
|
9.0
|
|
|
$
|
8.1
|
|
|
$
|
14.1
|
|
The total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was $8.6 million at May 31, 2020, $7.7 million at May 31, 2019 and $13.6 million at May 31, 2018.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. At May 31, 2020, 2019 and 2018, the accrual for interest and penalties was $2.9 million, $3.0 million and $2.8 million, respectively. Unrecognized tax benefits, including interest and penalties, have been classified as other long-term liabilities unless expected to be paid in one year.
We file income tax returns in the U.S. and in various state, local and foreign jurisdictions. The Internal Revenue Service has completed examinations of our 2015 and 2016 federal income tax returns which resulted in an inconsequential reduction to our 2015 federal income tax liability and no changes to our 2016 federal income tax liability. Although not currently under examination, the statutory audit period for our 2014 federal tax return remains open. Further, with limited exceptions, we are generally subject to state and local or non-U.S. income tax examinations by tax authorities for the fiscal years 2013 through 2019.
We are currently under examination, or have been notified of an upcoming tax examination, for various non-U.S. and domestic state and local jurisdictions. Although it is possible that certain tax examinations could be resolved during the next 12 months, the timing and outcomes are uncertain.
Our deferred tax liability for unremitted foreign earnings was adjusted to $18.8 million as of May 31, 2019. The $18.8 million deferred tax liability represented our estimate of the foreign tax cost associated with the remittance of $413.3 million of foreign earnings that were not considered to be permanently reinvested. As of May 31, 2020, the amount of these earnings has decreased to approximately $407.4 million and the related deferred tax liability, which represents the estimated tax cost to repatriate these earnings, was adjusted to $12.1 million. The reduction to the deferred tax liability is primarily due to the impact of foreign exchange and the elimination of withholding taxes on certain of our foreign earnings not considered permanently reinvested.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
We have not provided for U.S. income taxes or foreign withholding taxes on the remaining $905.1 million of foreign unremitted earnings because such earnings have been retained and reinvested by the foreign subsidiaries as of May 31, 2020. Accordingly, no provision has been made for U.S. income taxes or foreign withholding taxes, which may become payable if the remaining unremitted earnings of foreign subsidiaries were distributed to the U.S. Due to the uncertainties and complexities involved in the various options for repatriation of foreign earnings, it is not practical to calculate the deferred taxes associated with the remaining foreign earnings.
NOTE I — STOCK REPURCHASE PROGRAM
On January 8, 2008, we announced our authorization of a stock repurchase program under which we may repurchase shares of RPM International Inc. common stock at management’s discretion. As announced on November 28, 2018, our goal is to return $1.0 billion in capital to stockholders by May 31, 2021 through share repurchases. On April 16, 2019, after taking into account share repurchases under our existing stock repurchase program to date, our Board of Directors authorized the repurchase of the remaining $600.0 million in value of RPM International Inc. common stock by May 31, 2021. As a result, we may repurchase shares from time to time in the open market or in private transactions at various times and in amounts and for prices that our management deems appropriate, subject to insider trading rules and other securities law restrictions. The timing of our purchases will depend upon prevailing market conditions, alternative uses of capital and other factors. We may limit or terminate the stock repurchase program at any time. During the fiscal year ended May 31, 2020, we repurchased 2,041,847 shares of our common stock at a cost of approximately $125.0 million, or an average cost of $61.22 per share, under this program. During the fiscal year ended May 31, 2019, we repurchased 3,286,907 shares of our common stock at a cost of approximately $200.2 million, or an average cost of $60.92 per share, under this program. During the fiscal year ended May 31, 2018, we did not repurchase any shares of our common stock under this program. Given recent macroeconomic uncertainty resulting from the Covid-19 pandemic, we have suspended our stock repurchase program.
NOTE J — STOCK-BASED COMPENSATION
Stock-based compensation represents the cost related to stock-based awards granted to our employees and directors; these awards include restricted stock, restricted stock units, performance stocks, performance stock units and SARs. We grant stock-based incentive awards to our employees and/or our directors under various share-based compensation plans. The plan that is active or provides for stock option grants or share-based payment awards is the Amended and Restated 2014 Omnibus Equity and Incentive Plan (the “2014 Omnibus Plan”), which includes provisions for grants of restricted stock, restricted stock units, performance stock, performance stock units and SARs. Other plans, which provide for restricted stock grants only, include the 2003 Restricted Stock Plan for Directors (the “2003 Plan”) and the 2007 Restricted Stock Plan (the “2007 Plan”).
We measure stock-based compensation cost at the date of grant, based on the estimated fair value of the award. We recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the related vesting period.
The following table represents total stock-based compensation expense included in our Consolidated Statements of Income:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense, included in SG&A
|
|
$
|
19,789
|
|
|
$
|
31,154
|
|
|
$
|
25,440
|
|
|
Stock-based compensation expense, included in restructuring expense
|
|
|
116
|
|
|
|
4,283
|
|
|
|
2,136
|
|
|
Total stock-based compensation cost
|
|
|
19,905
|
|
|
|
35,437
|
|
|
|
27,576
|
|
|
Income tax (benefit)
|
|
|
(2,784
|
)
|
|
|
(6,937
|
)
|
|
|
(7,178
|
)
|
|
Total stock-based compensation cost, net of tax
|
|
$
|
17,121
|
|
|
$
|
28,500
|
|
|
$
|
20,398
|
|
SARs
SARs are awards that allow our employees to receive shares of our common stock at a fixed price. We grant SARs at an exercise price equal to the stock price on the date of the grant. The fair value of SARs granted is estimated as of the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of options granted is derived from the input of the option-pricing model and represents the period of time that options granted are expected to be outstanding. Expected volatility rates are based on historical volatility of shares of our common stock.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The following is a summary of our weighted-average assumptions related to SARs grants made during the last three fiscal years:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
Risk-free interest rate
|
|
|
1.9
|
%
|
|
|
2.9
|
%
|
|
|
2.2
|
%
|
|
Expected life of option
|
|
6.5 yrs
|
|
|
6.5 yrs
|
|
|
7.0 yrs
|
|
|
Expected dividend yield
|
|
|
2.3
|
%
|
|
|
2.1
|
%
|
|
|
2.2
|
%
|
|
Expected volatility rate
|
|
|
22.4
|
%
|
|
|
25.2
|
%
|
|
|
26.2
|
%
|
The 2014 Omnibus Plan was approved by our stockholders on October 9, 2014,and amendments to the 2014 Omnibus Plan were subsequently approved by our stockholders in 2018 and 2019. The 2014 Omnibus Plan provides us with the flexibility to grant a wide variety of stock and stock-based awards, as well as dollar-denominated performance-based awards, and is intended to be the primary stock-based award program for covered employees. A wide variety of stock and stock-based awards, as well as dollar-denominated performance-based awards, may be granted under these plans. SARs are issued at fair value at the date of grant, have up to ten-year terms and have graded-vesting terms over four years. Compensation cost for these awards is recognized on a straight-line basis over the related vesting period. Currently all SARs outstanding are to be settled with stock. As of May 31, 2020, there were 2,482,500 SARs outstanding.
The following table summarizes option and share-based payment activity (including SARs) under these plans during the fiscal year ended May 31, 2020:
|
|
|
2020
|
|
|
Share-Based Payments
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
Shares Under
Option
|
|
|
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
|
$
|
46.44
|
|
|
|
3,097
|
|
|
Options granted
|
|
|
62.17
|
|
|
|
340
|
|
|
Options exercised
|
|
|
43.10
|
|
|
|
(955
|
)
|
|
Balance at May 31, 2020
|
|
|
49.88
|
|
|
|
2,482
|
|
|
Exercisable at May 31, 2020
|
|
$
|
44.15
|
|
|
|
1,520
|
|
|
SARs
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant-date fair value per SAR
|
|
$
|
11.59
|
|
|
$
|
14.08
|
|
|
$
|
12.90
|
|
|
Intrinsic value of options exercised
|
|
$
|
9.62
|
|
|
$
|
9.29
|
|
|
$
|
11.10
|
|
|
Tax benefit from options exercised
|
|
$
|
5.94
|
|
|
$
|
3.21
|
|
|
$
|
3.40
|
|
|
Fair value of SARS vested
|
|
$
|
12.27
|
|
|
$
|
9.30
|
|
|
$
|
6.50
|
|
At May 31, 2020, the aggregate intrinsic value and weighted-average remaining contractual life of options outstanding was $61.8 million and 6.11 years, respectively, while the aggregate intrinsic value and weighted-average remaining contractual life of options exercisable was $46.6 million and 4.85 years, respectively.
At May 31, 2020, the total unamortized stock-based compensation expense related to SARs that were previously granted was $7.9 million, which is expected to be recognized over 2.30 years. We anticipate that approximately 2.5 million shares at a weighted-average exercise price of $49.86 and a weighted-average remaining contractual term of 6.1 years will ultimately vest under these plans.
Restricted Stock Plans
We also grant stock-based awards, which may be made in the form of restricted stock, restricted stock units, performance stock and performance stock units. These awards are granted to eligible employees or directors, and entitle the holder to shares of our common stock as the award vests. The fair value of the awards is determined and fixed based on the stock price at the date of grant. A description of our restricted stock plans follows.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
Under the 2014 Omnibus Plan, a total of 6,000,000 shares of our common stock may be subject to awards. Of those issuable shares, up to 3,000,000 shares of common stock may be subject to “full-value” awards. In October 2019, shareholders approved an amendment to the 2014 Omnibus Plan making an additional 5,000,000 shares of common stock subject to awards. After approval, 6,100,427 shares were available for new awards. Of those additional issuable shares, 2,250,000 shares may be subject to “full-value” awards similar to those issued under the 2014 Omnibus Plan.
The following table summarizes the share-based performance-earned restricted stock (“PERS”) and performance stock units (“PSUs”) activity during the fiscal year ended May 31, 2020:
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
2020
|
|
|
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
|
$
|
54.90
|
|
|
|
829
|
|
|
Shares granted
|
|
|
63.52
|
|
|
|
405
|
|
|
Shares forfeited
|
|
|
55.80
|
|
|
|
(8
|
)
|
|
Shares vested
|
|
|
51.11
|
|
|
|
(361
|
)
|
|
Balance at May 31, 2020
|
|
$
|
60.51
|
|
|
|
865
|
|
The weighted-average grant-date fair value was $63.52, $60.36 and $52.26 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. The restricted stock and performance stock cliff vest after three years. Nonvested restricted shares of common stock under the 2014 Omnibus Plan are eligible for dividend payments, while performance stock units are not eligible for dividend payments. At May 31, 2020, remaining unamortized deferred compensation expense for performance-earned restricted stock totaled $15.8 million. The remaining amount is being amortized over the applicable vesting period for each participant.
On October 3, 2018, our Compensation Committee granted in the aggregate 192,000 Performance Stock Units (the “2018 PSUs”) to certain executives at a weighted-average grant-date price of $60.50 per PSU. The awards are contingent upon the level of attainment of performance goals for the three-year performance period from June 1, 2018 ending May 31, 2021. Vesting of 50% of the 2018 PSUs relates to compounded annualized growth rates in adjusted revenue for the period, and the vesting of the remaining 50% relates to an increase in EBIT margin, measured at the end of the three-year performance period. The number of PSUs that may vest with respect to the achievement of the performance goals may range from 0% to 200% of the PSUs granted under this program. Compensation cost for these awards has been recognized on a straight-line basis over the related performance period, with consideration given to the probability of attaining the performance goals. As of May 31, 2020, there were 168,000 2018 PSUs outstanding and $0.6 million unamortized stock-based compensation, which is expected to be recognized over a weighted average period of one year.
On July 18, 2019, our Compensation Committee granted in the aggregate 178,000 Performance Stock Units (the “2019 PSUs”) to certain executives at a weighted-average grant-date price of $62.17 per PSU. The awards are contingent upon the level of attainment of performance goals for the three-year performance period from June 1, 2019 ending May 31, 2022. Vesting of 50% of the 2019 PSUs relates to compounded annualized growth rates in adjusted revenue for the period, and the vesting of the remaining 50% relates to an increase in EBIT margin, measured at the end of the three-year performance period. The number of PSUs that may vest with respect to the achievement of the performance goals may range from 0% to 200% of the PSUs granted under this program. Compensation cost for these awards has been recognized on a straight-line basis over the related performance period, with consideration given to the probability of attaining the performance goals. As of May 31, 2020, there were 178,000 2019 PSUs outstanding and $3.3 million unamortized stock-based compensation, which is expected to be recognized over a weighted average period of 2.0 years
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The 2003 Plan was approved on October 10, 2003 by our stockholders, and was established primarily for the purpose of recruiting and retaining directors, and to align the interests of directors with the interests of our stockholders. Only directors who are not our employees are eligible to participate. Under the 2003 Plan, up to 500,000 shares of our common stock may be awarded, with awards cliff vesting over a three-year period. The following table summarizes the share-based activity under the 2003 Plan during fiscal 2019:
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
2020
|
|
|
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
|
$
|
54.56
|
|
|
|
55
|
|
|
Shares granted to directors
|
|
|
67.26
|
|
|
|
23
|
|
|
Shares vested
|
|
|
50.61
|
|
|
|
(16
|
)
|
|
Balance at May 31, 2020
|
|
$
|
60.25
|
|
|
|
62
|
|
The weighted-average grant-date fair value was $67.26, $60.50 and $51.63 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. Unamortized deferred compensation expense relating to restricted stock grants for directors of $1.9 million at May 31, 2020, is being amortized over the applicable remaining vesting period for each director. Nonvested restricted shares of common stock under the 2003 Plan are eligible for dividend payments. As of May 31, 2020, there were 7,200 shares available for future grant. When shares in the 2003 Plan are exhausted in fiscal year 2021, Director rewards will be issued from the 2014 Omnibus Plan on the go forward basis.
During fiscal 2020, a total of 30,185 shares were awarded under the 2014 Omnibus Plan to certain employees as supplemental retirement benefits, generally subject to forfeiture. The shares vest upon the latter of attainment of age 55 and the fifth anniversary of the May 31st immediately preceding the date of the grant. The following table sets forth such awards for the year ended May 31, 2020:
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
2020
|
|
|
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
Balance at June 1, 2019
|
|
$
|
31.73
|
|
|
|
432
|
|
|
Shares granted
|
|
|
62.17
|
|
|
|
30
|
|
|
Shares forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Shares exercised
|
|
|
33.96
|
|
|
|
(16
|
)
|
|
Balance at May 31, 2020
|
|
$
|
33.82
|
|
|
|
446
|
|
The weighted-average grant-date fair value was $62.17, $60.01 and $55.19 for the fiscal years ended May 31, 2020, 2019 and 2018, respectively. As of May 31, 2020, no shares remain available for future grant under the 2007 Plan, and future issuances of shares as supplemental retirement benefits are made under the 2014 Omnibus Plan. At May 31, 2020, unamortized stock-based compensation expense of $0.6 million and $3.5 million relating to the 2007 Plan and the 2014 Omnibus Plan, respectively, are being amortized over the applicable vesting period associated with each participant.
The following table summarizes the activity for all nonvested restricted shares during the year ended May 31, 2020:
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
Grant-Date Fair
|
|
|
Number of
|
|
|
(Shares in thousands)
|
|
Value
|
|
|
Shares
|
|
|
Balance at June 1, 2019
|
|
$
|
52.35
|
|
|
|
1,091
|
|
|
Granted
|
|
|
63.62
|
|
|
|
458
|
|
|
Vested
|
|
|
49.42
|
|
|
|
(421
|
)
|
|
Forfeited
|
|
|
55.80
|
|
|
|
(8
|
)
|
|
Balance at May 31, 2020
|
|
$
|
58.03
|
|
|
|
1,120
|
|
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The remaining weighted-average contractual term of nonvested restricted shares at May 31, 2020 is the same as the period over which the remaining cost of the awards will be recognized, which is approximately 2.18 years. The fair value of the nonvested restricted share awards have been calculated using the market value of the shares on the date of issuance. For the years ended May 31, 2020, 2019 and 2018, the weighted-average grant-date fair value for restricted share grants was $63.62, $60.34 and $52.62, respectively. The total fair value of shares that vested during the years ended May 31, 2020, 2019 and 2018 was $20.8 million, $37.8 million and $29.9 million, respectively. We anticipate that approximately 1.12 million shares at a weighted-average grant-date fair value of $58.03 and a weighted-average remaining contractual term of 2.18 years will ultimately vest, based upon the unique terms and participants of each plan. Approximately 420,571 shares of restricted stock were vested during the year ended May 31, 2020, with 832,717 restricted shares vested during the year ended May 31, 2019. The total intrinsic value of restricted shares converted during the years ended May 31, 2020, 2019 and 2018 was $26.8 million, $58.1 million and $7.6 million, respectively.
Total unrecognized compensation cost related to all nonvested awards of restricted shares of common stock was $25.7 million as of May 31, 2020. That cost is expected to be recognized over a weighted-average period of 2.18 years. We did not receive any cash from employees as a result of employee vesting and release of restricted shares for the year ended May 31, 2020.
NOTE K — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consists of the following components:
|
|
|
|
|
|
|
Pension And
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Benefit
|
|
|
Gain
|
|
|
Gain (Loss)
|
|
|
|
|
|
|
|
|
Currency
|
|
|
Liability
|
|
|
(Loss) On
|
|
|
On
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Adjustments,
|
|
|
Derivatives,
|
|
|
Securities,
|
|
|
|
|
|
|
(In thousands)
|
|
Adjustments
|
|
|
Net of Tax
|
|
|
Net of Tax
|
|
|
Net of Tax
|
|
|
Total
|
|
|
Balance at June 1, 2017
|
|
$
|
(308,415
|
)
|
|
$
|
(166,724
|
)
|
|
$
|
16
|
|
|
$
|
1,137
|
|
|
$
|
(473,986
|
)
|
|
Reclassification adjustments for gains included in net
income, net of taxes of $591
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
(1,244
|
)
|
|
|
(1,244
|
)
|
|
Other comprehensive income
|
|
|
10,989
|
|
|
|
11,375
|
|
|
|
(359
|
)
|
|
|
(2,050
|
)
|
|
|
19,955
|
|
|
Deferred taxes
|
|
|
(2,587
|
)
|
|
|
(2,146
|
)
|
|
|
212
|
|
|
|
748
|
|
|
|
(3,773
|
)
|
|
Balance at May 31, 2018
|
|
|
(300,013
|
)
|
|
|
(157,495
|
)
|
|
|
(131
|
)
|
|
|
(1,409
|
)
|
|
|
(459,048
|
)
|
|
Reclassification adjustments for gains included in net
income, net of taxes of $151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,777
|
|
|
|
1,777
|
|
|
Other comprehensive income
|
|
|
(73,660
|
)
|
|
|
(70,785
|
)
|
|
|
4,713
|
|
|
|
307
|
|
|
|
(139,425
|
)
|
|
Deferred taxes
|
|
|
3,178
|
|
|
|
16,635
|
|
|
|
(203
|
)
|
|
|
(542
|
)
|
|
|
19,068
|
|
|
Balance at May 31, 2019
|
|
|
(370,495
|
)
|
|
|
(211,645
|
)
|
|
|
4,379
|
|
|
|
133
|
|
|
|
(577,628
|
)
|
|
Reclassification adjustments for losses included in net
income, net of taxes of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Other comprehensive income
|
|
|
(71,820
|
)
|
|
|
(86,347
|
)
|
|
|
(6,315
|
)
|
|
|
1,210
|
|
|
|
(163,272
|
)
|
|
Deferred taxes
|
|
|
1,583
|
|
|
|
20,275
|
|
|
|
1,865
|
|
|
|
(320
|
)
|
|
|
23,403
|
|
|
Balance at May 31, 2020
|
|
$
|
(440,732
|
)
|
|
$
|
(277,717
|
)
|
|
$
|
(71
|
)
|
|
$
|
1,023
|
|
|
$
|
(717,497
|
)
|
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
NOTE L — EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share for the years ended May 31, 2020, 2019 and 2018:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to RPM International Inc. stockholders
|
|
$
|
304,385
|
|
|
$
|
266,558
|
|
|
$
|
337,770
|
|
|
Less: Allocation of earnings and dividends to participating securities
|
|
|
(1,956
|
)
|
|
|
(1,514
|
)
|
|
|
(3,858
|
)
|
|
Net income available to common shareholders - basic
|
|
|
302,429
|
|
|
|
265,044
|
|
|
|
333,912
|
|
|
Reverse: Allocation of earnings and dividends to participating securities
|
|
|
1,956
|
|
|
|
1,514
|
|
|
|
3,858
|
|
|
Add: Income effect of contingently issuable shares
|
|
|
-
|
|
|
|
3,655
|
|
|
|
5,673
|
|
|
Net income available to common shareholders - diluted
|
|
$
|
304,385
|
|
|
$
|
270,213
|
|
|
$
|
343,443
|
|
|
Denominator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
128,468
|
|
|
|
130,552
|
|
|
|
131,179
|
|
|
Average diluted options
|
|
|
1,506
|
|
|
|
1,838
|
|
|
|
2,064
|
|
|
Net issuable common share equivalents (1)
|
|
|
-
|
|
|
|
1,943
|
|
|
|
3,928
|
|
|
Total shares for diluted earnings per share (2)
|
|
|
129,974
|
|
|
|
134,333
|
|
|
|
137,171
|
|
|
Earnings Per Share of Common Stock Attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPM International Inc. Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share of Common Stock
|
|
$
|
2.35
|
|
|
$
|
2.03
|
|
|
$
|
2.55
|
|
|
Method used to calculate basic earnings per share
|
|
Two-Class
|
|
|
Two-Class
|
|
|
Two-Class
|
|
|
Diluted Earnings Per Share of Common Stock
|
|
$
|
2.34
|
|
|
$
|
2.01
|
|
|
$
|
2.50
|
|
|
Method used to calculate diluted earnings per share
|
|
Treasury
|
|
|
Treasury
|
|
|
Treasury
|
|
|
(1)
|
Represents the number of shares that would be issued if our contingently convertible notes had been converted. We included these shares in the calculation of diluted EPS as the conversion of the notes were eligible to be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our common stock. On November 27, 2018, we redeemed all of our 2.25% convertible senior notes due 2020, primarily for cash, but also issued 598,601 shares of our common stock in the transaction
|
|
(2)
|
For the years ended May 31, 2020, 2019 and 2018, approximately 340,000, 862,500 and 799,362 shares of stock, respectively, granted under stock-based compensation plans were excluded from the calculation of diluted EPS, as the effect would have been anti-dilutive.
|
NOTE M — LEASES
We have leases for manufacturing facilities, warehouses, office facilities, equipment, and vehicles, which are primarily classified and accounted for as operating leases. We have a small portfolio of finance leases, which are not material to our Consolidated Financial Statements. Some leases include one or more options to renew, generally at our sole discretion, with renewal terms that can extend the lease term from one to five years or more. In addition, certain leases contain termination options, where the rights to terminate are held by either us, the lessor, or both parties. These options to extend or terminate a lease are included in the lease terms when it is reasonably certain that we will exercise that option. We have made an accounting policy election not to recognize ROU assets and lease liabilities for leases with a term of twelve months or less, with no purchase option that we are reasonably certain to exercise. ROU assets and lease liabilities are recognized based on the present value of the fixed and in-substance fixed lease payments over the lease term at the commencement date. The ROU assets also include any initial direct costs incurred and lease payments made at or before the commencement date and are reduced by lease incentives. We use our incremental borrowing rate as the discount rate to determine the present value of the lease payments for leases, as our leases do not have readily determinable implicit discount rates. Our incremental borrowing rate is the rate of interest that we would have to borrow on a collateralized basis over a similar term and amount in a similar economic environment. We determine the incremental borrowing rates for our leases by adjusting the local risk-free interest rate with a credit risk premium corresponding to our credit rating.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
Operating lease cost is recognized on a straight-line basis over the lease term. Finance lease cost is recognized as a combination of the amortization expense for the ROU assets and interest expense for the outstanding lease liabilities using the discount rate discussed above. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain vendors have the right to declare that we are in default of our agreements if any such vendor, including the lessors under its vehicle leases, determines that a change in our financial condition poses a substantially increased credit risk. Our lease agreements do not contain any significant residual value guarantees or material restrictive covenants. Income from subleases was not significant for any period presented.
During the fiscal year ended May 31, 2020, we incurred lease costs of $84.2 million, which is primarily comprised of operating lease costs of $73.7 million and other costs of $10.5 million, which include costs for our finance leases, short-term leases and variable lease payments. Total rental expense for all operating leases amounted to $64.9 million and $64.3 million for the fiscal years ended May 31, 2019 and 2018, respectively.
For fiscal year ended May 31, 2020, we paid approximately $69.4 million for operating lease obligations. These payments are included in operating cash flows. In addition, during the fiscal 2020, we recognized ROU assets for $61.6 million in exchange for operating lease obligations. At May 31, 2020, the weighted-average remaining lease term under our operating leases was 9.1 years, while the weighted-average discount rate for our operating leases was approximately 3.7%.
The following represents our future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities, as of May 31, 2020:
|
(In thousands)
|
|
|
|
|
|
Year ending May 31,
|
|
Operating Leases
|
|
|
2021
|
|
$
|
61,328
|
|
|
2022
|
|
|
50,452
|
|
|
2023
|
|
|
38,921
|
|
|
2024
|
|
|
31,572
|
|
|
2025
|
|
|
27,771
|
|
|
Thereafter
|
|
|
144,982
|
|
|
Total lease payments
|
|
$
|
355,026
|
|
|
Less imputed interest
|
|
|
57,746
|
|
|
Total present value of lease liabilities
|
|
$
|
297,280
|
|
As of May 31, 2020, our current lease liability balance was $52.6 million and recorded within Other Accrued Liabilities on our Consolidated Balance Sheet.
Following is a summary of our future minimum lease commitments, as determined under ASC 840, for all non-cancelable lease agreements, for each of the next five years and in the aggregate, as of May 31, 2019:
|
May 31,
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
2020
|
|
$
|
59,163
|
|
|
2021
|
|
|
49,731
|
|
|
2022
|
|
|
40,339
|
|
|
2023
|
|
|
32,798
|
|
|
2024
|
|
|
27,716
|
|
|
Thereafter
|
|
|
119,607
|
|
|
Total Minimum Lease Commitments
|
|
$
|
329,354
|
|
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
NOTE N — PENSION PLANS
We sponsor several pension plans for our employees, including our principal plan (the “Retirement Plan”), which is a non-contributory defined benefit pension plan covering substantially all domestic non-union employees. Pension benefits are provided for certain domestic union employees through separate plans. Employees of our foreign subsidiaries receive pension coverage, to the extent deemed appropriate, through plans that are governed by local statutory requirements.
The Retirement Plan provides benefits that are based upon years of service and average compensation with accrued benefits vesting after five years. Benefits for union employees are generally based upon years of service, or a combination of years of service and average compensation. Our pension funding policy considers contributions in an amount on an annual basis that can be deducted for federal income tax purposes, using a different actuarial cost method and different assumptions from those used for financial reporting. For the fiscal year ending May 31, 2021, we are required to contribute approximately $8,000 to the retirement plans in the U.S. and approximately $6.7 million to our foreign plans. During the year, the company will evaluate whether to make additional contributions. During February 2020, we contributed an additional $51.5 million to the RPM International Inc. Retirement Plan in the U.S. than what had been planned at the beginning of the fiscal year.
Net periodic pension cost consisted of the following for the year ended May 31:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Service cost
|
|
$
|
39,425
|
|
$
|
37,528
|
|
$
|
37,859
|
|
|
$
|
5,400
|
|
$
|
4,693
|
|
$
|
4,620
|
|
|
Interest cost
|
|
|
20,415
|
|
|
21,987
|
|
|
17,518
|
|
|
|
4,842
|
|
|
5,420
|
|
|
5,025
|
|
|
Expected return on plan assets
|
|
|
(34,291
|
)
|
|
(33,867
|
)
|
|
(32,342
|
)
|
|
|
(7,118
|
)
|
|
(7,907
|
)
|
|
(8,270
|
)
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
9
|
|
|
118
|
|
|
117
|
|
|
|
(36
|
)
|
|
(30
|
)
|
|
(31
|
)
|
|
Net actuarial losses recognized
|
|
|
18,516
|
|
|
13,087
|
|
|
14,470
|
|
|
|
2,029
|
|
|
1,229
|
|
|
1,758
|
|
|
Curtailment/settlement losses
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
86
|
|
|
89
|
|
|
128
|
|
|
Net Pension Cost
|
|
$
|
44,074
|
|
$
|
38,853
|
|
$
|
37,622
|
|
|
$
|
5,203
|
|
$
|
3,494
|
|
$
|
3,230
|
|
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The changes in benefit obligations and plan assets, as well as the funded status of our pension plans at May 31, 2020 and 2019, were as follows:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Benefit obligation at beginning of year
|
|
$
|
660,277
|
|
$
|
617,255
|
|
|
$
|
205,967
|
|
$
|
194,149
|
|
|
Service cost
|
|
|
39,425
|
|
|
37,528
|
|
|
|
5,400
|
|
|
4,693
|
|
|
Interest cost
|
|
|
20,415
|
|
|
21,987
|
|
|
|
4,842
|
|
|
5,420
|
|
|
Benefits paid
|
|
|
(41,186
|
)
|
|
(45,917
|
)
|
|
|
(6,269
|
)
|
|
(7,488
|
)
|
|
Participant contributions
|
|
|
-
|
|
|
-
|
|
|
|
1,106
|
|
|
1,003
|
|
|
Plan amendments
|
|
|
-
|
|
|
11
|
|
|
|
(893
|
)
|
|
(33
|
)
|
|
Plan combination
|
|
|
-
|
|
|
-
|
|
|
|
922
|
|
|
-
|
|
|
Plan settlements/curtailments
|
|
|
-
|
|
|
-
|
|
|
|
(288
|
)
|
|
(607
|
)
|
|
Actuarial losses
|
|
|
83,808
|
|
|
29,413
|
|
|
|
2,718
|
|
|
17,286
|
|
|
Premiums paid
|
|
|
-
|
|
|
-
|
|
|
|
(99
|
)
|
|
(97
|
)
|
|
Currency exchange rate changes
|
|
|
-
|
|
|
-
|
|
|
|
(3,128
|
)
|
|
(8,359
|
)
|
|
Benefit Obligation at End of Year
|
|
$
|
762,739
|
|
$
|
660,277
|
|
|
$
|
210,278
|
|
$
|
205,967
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
496,865
|
|
$
|
487,233
|
|
|
$
|
187,112
|
|
$
|
188,960
|
|
|
Actual return on plan assets
|
|
|
8,689
|
|
|
(2,272
|
)
|
|
|
9,899
|
|
|
6,737
|
|
|
Employer contributions
|
|
|
52,182
|
|
|
57,821
|
|
|
|
6,331
|
|
|
6,770
|
|
|
Participant contributions
|
|
|
-
|
|
|
-
|
|
|
|
1,106
|
|
|
1,003
|
|
|
Benefits paid
|
|
|
(41,186
|
)
|
|
(45,917
|
)
|
|
|
(6,269
|
)
|
|
(7,488
|
)
|
|
Plan combination
|
|
|
-
|
|
|
-
|
|
|
|
182
|
|
|
-
|
|
|
Premiums paid
|
|
|
-
|
|
|
-
|
|
|
|
(99
|
)
|
|
(97
|
)
|
|
Plan settlements/curtailments
|
|
|
-
|
|
|
-
|
|
|
|
(281
|
)
|
|
(580
|
)
|
|
Currency exchange rate changes
|
|
|
-
|
|
|
-
|
|
|
|
(3,107
|
)
|
|
(8,193
|
)
|
|
Fair Value of Plan Assets at End of Year
|
|
$
|
516,550
|
|
$
|
496,865
|
|
|
$
|
194,874
|
|
$
|
187,112
|
|
|
(Deficit) of plan assets versus benefit obligations at end of year
|
|
$
|
(246,189
|
)
|
$
|
(163,412
|
)
|
|
$
|
(15,404
|
)
|
$
|
(18,855
|
)
|
|
Net Amount Recognized
|
|
$
|
(246,189
|
)
|
$
|
(163,412
|
)
|
|
$
|
(15,404
|
)
|
$
|
(18,855
|
)
|
|
Accumulated Benefit Obligation
|
|
$
|
662,197
|
|
$
|
553,392
|
|
|
$
|
197,167
|
|
$
|
192,533
|
|
The fair value of the assets held by our pension plans has increased at May 31, 2020 since our previous measurement date at May 31, 2019, due to our plan contributions and market returns. Total plan liabilities have increased due to increased benefit accruals and a decrease in the discount rate used to value the liability. We have increased our recorded liability for the net underfunded status of our pension plans. Due to lower discount rates, we expect pension expense in fiscal 2021 to be higher when compared to our fiscal 2020 expense level. Any future declines in the value of our pension plan assets or increases in our plan liabilities could require us to increase our recorded liability for the net underfunded status of our pension plans and could also require accelerated and higher cash contributions to our pension plans.
Amounts recognized in the Consolidated Balance Sheets for the years ended May 31, 2020 and 2019 are as follows:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Noncurrent assets
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
13,395
|
|
$
|
9,047
|
|
|
Current liabilities
|
|
|
(8
|
)
|
|
(8
|
)
|
|
|
(547
|
)
|
|
(435
|
)
|
|
Noncurrent liabilities
|
|
|
(246,181
|
)
|
|
(163,404
|
)
|
|
|
(28,252
|
)
|
|
(27,467
|
)
|
|
Net Amount Recognized
|
|
$
|
(246,189
|
)
|
$
|
(163,412
|
)
|
|
$
|
(15,404
|
)
|
$
|
(18,855
|
)
|
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The following table summarizes the relationship between our plans' benefit obligations and assets:
|
|
|
U.S. Plans
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(In thousands)
|
|
Benefit
Obligation
|
|
Plan Assets
|
|
|
Benefit
Obligation
|
|
Plan Assets
|
|
|
Plans with projected benefit obligations in excess of plan assets
|
|
$
|
762,739
|
|
$
|
516,550
|
|
|
$
|
660,277
|
|
$
|
496,865
|
|
|
Plans with accumulated benefit obligations in excess of plan assets
|
|
|
662,197
|
|
|
516,550
|
|
|
|
553,392
|
|
|
496,865
|
|
|
Plans with assets in excess of projected benefit obligations
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
Plans with assets in excess of accumulated benefit obligations
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(In thousands)
|
|
Benefit
Obligation
|
|
Plan Assets
|
|
|
Benefit
Obligation
|
|
Plan Assets
|
|
|
Plans with projected benefit obligations in excess of plan assets
|
|
$
|
163,589
|
|
$
|
134,791
|
|
|
$
|
162,824
|
|
$
|
134,921
|
|
|
Plans with accumulated benefit obligations in excess of plan assets
|
|
|
150,478
|
|
|
134,598
|
|
|
|
149,390
|
|
|
134,921
|
|
|
Plans with assets in excess of projected benefit obligations
|
|
|
46,689
|
|
|
60,083
|
|
|
|
43,143
|
|
|
52,191
|
|
|
Plans with assets in excess of accumulated benefit obligations
|
|
|
46,689
|
|
|
60,276
|
|
|
|
43,143
|
|
|
52,191
|
|
The following table presents the pretax net actuarial loss and prior service (costs) recognized in accumulated other comprehensive income (loss) not affecting retained earnings:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Net actuarial loss
|
|
$
|
(341,179
|
)
|
$
|
(250,286
|
)
|
|
$
|
(48,090
|
)
|
$
|
(51,184
|
)
|
|
Prior service (costs) credits
|
|
|
(20
|
)
|
|
(28
|
)
|
|
|
1,098
|
|
|
224
|
|
|
Total recognized in accumulated other comprehensive
income not affecting retained earnings
|
|
$
|
(341,199
|
)
|
$
|
(250,314
|
)
|
|
$
|
(46,992
|
)
|
$
|
(50,960
|
)
|
The following table includes the changes recognized in other comprehensive income:
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Changes in plan assets and benefit obligations recognized in other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
-
|
|
$
|
11
|
|
|
$
|
(893
|
)
|
$
|
(33
|
)
|
|
|
|
Net loss (gain) arising during the year
|
|
|
109,409
|
|
|
65,552
|
|
|
|
(70
|
)
|
|
18,456
|
|
|
|
|
Effect of exchange rates on amounts included in AOCI
|
|
|
-
|
|
|
-
|
|
|
|
(922
|
)
|
|
(1,593
|
)
|
|
Amounts recognized as a component of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization or curtailment recognition of prior service (cost) benefit
|
|
|
(9
|
)
|
|
(118
|
)
|
|
|
36
|
|
|
30
|
|
|
|
|
Amortization or settlement recognition of net (loss)
|
|
|
(18,516
|
)
|
|
(13,087
|
)
|
|
|
(2,115
|
)
|
|
(1,345
|
)
|
|
|
|
Total recognized in other comprehensive loss (income)
|
|
$
|
90,884
|
|
$
|
52,358
|
|
|
$
|
(3,964
|
)
|
$
|
15,515
|
|
The following table presents the amounts in accumulated other comprehensive income (loss) as of May 31, 2020 that have not yet been recognized in net periodic pension cost, but are expected to be recognized in our Consolidated Statements of Income during the fiscal year ending May 31, 2021:
|
(In thousands)
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
Net actuarial loss
|
|
$
|
(27,457
|
)
|
|
$
|
(2,106
|
)
|
|
Prior service (cost) credit
|
|
$
|
(8
|
)
|
|
$
|
141
|
|
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
In measuring the projected benefit obligation and net periodic pension cost for our plans, we utilize actuarial valuations. These valuations include specific information pertaining to individual plan participants, such as salary, age and years of service, along with certain assumptions. The most significant assumptions applied include discount rates, expected return on plan assets and rate of compensation increases. We evaluate these assumptions, at a minimum, on an annual basis, and make required changes, as applicable. In developing our expected long-term rate of return on pension plan assets, we consider the current and expected target asset allocations of the pension portfolio, as well as historical returns and future expectations for returns on various categories of plan assets. Expected return on assets is determined by using the weighted-average return on asset classes based on expected return for the target asset allocations of the principal asset categories held by each plan. In determining expected return, we consider both historical performance and an estimate of future long-term rates of return. Actual experience is used to develop the assumption for compensation increases.
The following weighted-average assumptions were used to determine our year-end benefit obligations and net periodic pension cost under the plans:
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
|
Year-End Benefit Obligations
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Discount rate
|
|
|
2.77
|
%
|
|
|
|
3.64
|
%
|
|
|
|
2.49
|
%
|
|
|
|
2.61
|
%
|
|
|
Rate of compensation increase
|
|
|
3.19
|
%
|
|
|
|
3.80
|
%
|
|
|
|
2.86
|
%
|
|
|
|
2.86
|
%
|
|
|
|
|
U.S. Plans
|
|
|
|
Non-U.S. Plans
|
|
|
|
Net Periodic Pension Cost
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Discount rate
|
|
|
3.65
|
%
|
|
|
|
4.12
|
%
|
|
|
|
3.81
|
%
|
|
|
|
2.61
|
%
|
|
|
|
3.09
|
%
|
|
|
|
2.79
|
%
|
|
|
Expected return on plan assets
|
|
|
7.40
|
%
|
|
|
|
7.40
|
%
|
|
|
|
7.89
|
%
|
|
|
|
3.91
|
%
|
|
|
|
4.30
|
%
|
|
|
|
4.37
|
%
|
|
|
Rate of compensation increase
|
|
|
3.80
|
%
|
|
|
|
3.80
|
%
|
|
|
|
3.80
|
%
|
|
|
|
2.86
|
%
|
|
|
|
2.85
|
%
|
|
|
|
3.00
|
%
|
|
The following tables illustrate the weighted-average actual and target allocation of plan assets:
|
|
|
U.S. Plans
|
|
|
|
|
Target Allocation
|
|
Actual Asset Allocation
|
|
|
(Dollars in millions)
|
|
as of May 31, 2020
|
|
2020
|
|
|
2019
|
|
|
Equity securities
|
|
|
55
|
%
|
|
|
$
|
261.0
|
|
|
$
|
295.1
|
|
|
Fixed income securities
|
|
|
25
|
%
|
|
|
|
106.4
|
|
|
|
83.8
|
|
|
Multi-class
|
|
|
20
|
%
|
|
|
|
118.2
|
|
|
|
78.1
|
|
|
Cash (1)
|
|
|
|
|
|
|
|
30.8
|
|
|
|
39.7
|
|
|
Other
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
Total assets
|
|
|
100
|
%
|
|
|
$
|
516.6
|
|
|
$
|
496.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
Target Allocation
|
|
Actual Asset Allocation
|
|
|
(Dollars in millions)
|
|
as of May 31, 2020
|
|
2020
|
|
|
2019
|
|
|
Equity securities
|
|
|
33
|
%
|
|
|
$
|
79.3
|
|
|
$
|
79.9
|
|
|
Fixed income securities
|
|
|
48
|
%
|
|
|
|
88.2
|
|
|
|
79.3
|
|
|
Cash
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
Property and other
|
|
|
19
|
%
|
|
|
|
27.3
|
|
|
|
27.8
|
|
|
Total assets
|
|
|
100
|
%
|
|
|
$
|
194.9
|
|
|
$
|
187.1
|
|
|
(1)
|
The larger than target cash position at May 31, 2020 results from our February 2020 contribution to the RPM International Inc. Retirement Plan because of our plans to invest the February contribution over a period of time, due to dollar cost averaging.
|
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The following tables present our pension plan assets as categorized using the fair value hierarchy at May 31, 2020 and 2019:
|
U.S. Plans
|
|
|
(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
|
|
|
U.S. Treasury and other government
|
|
$
|
-
|
|
|
$
|
12,973
|
|
|
$
|
-
|
|
|
$
|
12,973
|
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
508
|
|
|
|
-
|
|
|
|
508
|
|
|
Foreign bonds
|
|
|
-
|
|
|
|
715
|
|
|
|
-
|
|
|
|
715
|
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
23,824
|
|
|
|
-
|
|
|
|
23,824
|
|
|
Corporate bonds
|
|
|
-
|
|
|
|
34,317
|
|
|
|
-
|
|
|
|
34,317
|
|
|
Stocks - large cap
|
|
|
19,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,589
|
|
|
Mutual funds - equity
|
|
|
-
|
|
|
|
241,426
|
|
|
|
-
|
|
|
|
241,426
|
|
|
Mutual funds - multi-class
|
|
|
-
|
|
|
|
118,205
|
|
|
|
-
|
|
|
|
118,205
|
|
|
Mutual funds - fixed
|
|
|
-
|
|
|
|
33,993
|
|
|
|
-
|
|
|
|
33,993
|
|
|
Cash and cash equivalents
|
|
|
30,830
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,830
|
|
|
Limited partnerships
|
|
|
-
|
|
|
|
-
|
|
|
|
170
|
|
|
|
170
|
|
|
Total
|
|
$
|
50,419
|
|
|
$
|
465,961
|
|
|
$
|
170
|
|
|
$
|
516,550
|
|
|
Non-U.S. Plans
|
|
|
(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
|
|
|
Pooled equities
|
|
$
|
-
|
|
|
$
|
78,472
|
|
|
$
|
-
|
|
|
$
|
78,472
|
|
|
Pooled fixed income
|
|
|
-
|
|
|
|
87,610
|
|
|
|
-
|
|
|
|
87,610
|
|
|
Foreign bonds
|
|
|
-
|
|
|
|
603
|
|
|
|
-
|
|
|
|
603
|
|
|
Insurance contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
27,267
|
|
|
|
27,267
|
|
|
Mutual funds
|
|
|
-
|
|
|
|
855
|
|
|
|
-
|
|
|
|
855
|
|
|
Cash and cash equivalents
|
|
|
67
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67
|
|
|
Total
|
|
$
|
67
|
|
|
$
|
167,540
|
|
|
$
|
27,267
|
|
|
$
|
194,874
|
|
|
U.S. Plans
|
|
|
(In thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Fair Value at
May 31, 2019
|
|
|
U.S. Treasury and other government
|
|
$
|
-
|
|
|
$
|
13,854
|
|
|
$
|
-
|
|
|
$
|
13,854
|
|
|
State and municipal bonds
|
|
|
-
|
|
|
|
386
|
|
|
|
-
|
|
|
|
386
|
|
|
Foreign bonds
|
|
|
-
|
|
|
|
1,031
|
|
|
|
-
|
|
|
|
1,031
|
|
|
Mortgage-backed securities
|
|
|
-
|
|
|
|
20,075
|
|
|
|
-
|
|
|
|
20,075
|
|
|
Corporate bonds
|
|
|
-
|
|
|
|
26,204
|
|
|
|
-
|
|
|
|
26,204
|
|
|
Stocks - mid cap
|
|
|
13,392
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,392
|
|
|
Stocks - small cap
|
|
|
15,720
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,720
|
|
|
Mutual funds - equity
|
|
|
-
|
|
|
|
265,969
|
|
|
|
-
|
|
|
|
265,969
|
|
|
Mutual funds - multi-class
|
|
|
-
|
|
|
|
78,143
|
|
|
|
-
|
|
|
|
78,143
|
|
|
Mutual funds - fixed
|
|
|
-
|
|
|
|
22,215
|
|
|
|
-
|
|
|
|
22,215
|
|
|
Cash and cash equivalents
|
|
|
39,704
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,704
|
|
|
Limited partnerships
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
|
|
172
|
|
|
Total
|
|
$
|
68,816
|
|
|
$
|
427,877
|
|
|
$
|
172
|
|
|
$
|
496,865
|
|
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
Fair Value at
May 31, 2019
|
|
|
Pooled equities
|
|
$
|
-
|
|
|
$
|
78,733
|
|
|
$
|
-
|
|
|
$
|
78,733
|
|
|
Pooled fixed income
|
|
|
-
|
|
|
|
79,061
|
|
|
|
-
|
|
|
|
79,061
|
|
|
Foreign bonds
|
|
|
-
|
|
|
|
227
|
|
|
|
-
|
|
|
|
227
|
|
|
Insurance contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
27,843
|
|
|
|
27,843
|
|
|
Mutual funds
|
|
|
-
|
|
|
|
1,125
|
|
|
|
-
|
|
|
|
1,125
|
|
|
Cash and cash equivalents
|
|
|
123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
Total
|
|
$
|
123
|
|
|
$
|
159,146
|
|
|
$
|
27,843
|
|
|
$
|
187,112
|
|
The following table includes the activity that occurred during the years ended May 31, 2020 and 2019 for our Level 3 assets:
|
|
|
|
|
|
|
Actual Return on Plan Assets For:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Assets Still Held
|
|
|
Assets Sold
|
|
|
Purchases, Sales and
|
|
|
Balance at
|
|
|
(In thousands)
|
|
Beginning of Period
|
|
|
at Reporting Date
|
|
|
During Year
|
|
|
Settlements, net (1)
|
|
|
End of Period
|
|
|
Year ended May 31, 2020
|
|
$
|
28,015
|
|
|
|
(691
|
)
|
|
|
-
|
|
|
|
113
|
|
|
$
|
27,437
|
|
|
Year ended May 31, 2019
|
|
|
28,448
|
|
|
|
1,228
|
|
|
|
-
|
|
|
|
(1,661
|
)
|
|
|
28,015
|
|
|
(1)
|
Includes the impact of exchange rate changes during the year.
|
The primary objective for the investments of the Retirement Plan is to provide for long-term growth of capital without undue exposure to risk. This objective is accomplished by utilizing a strategy of equities, fixed-income securities and cash equivalents in a mix that is conducive to participation in a rising market, while allowing for adequate protection in a falling market. Our Investment Committee oversees the investment allocation process, which includes the selection and evaluation of investment managers, the determination of investment objectives and risk guidelines, and the monitoring of actual investment performance. In order to manage investment risk properly, Plan policy prohibits short selling, securities lending, financial futures, options and other specialized investments, except for certain alternative investments specifically approved by the Investment Committee. The Investment Committee reviews, on a quarterly basis, reports of actual Plan investment performance provided by independent third parties, in addition to its review of the Plan investment policy on an annual basis. The investment objectives are similar for our plans outside of the U.S., subject to local regulations.
The goals of the investment strategy for pension assets include: the total return of the funds shall, over an extended period of time, surpass an index composed of the MSCI World Stock Index (equity), the Barclays Aggregate Bond Index (fixed income), and 30-day Treasury Bills (cash), weighted appropriately to match the asset allocation of the plans. The equity portion of the funds shall surpass the MSCI World Stock Index over a full market cycle, while the fixed-income portion shall surpass Barclays Aggregate Bond Index over a full market cycle. The purpose of the core fixed-income fund is to increase return in the form of cash flow, provide a hedge against inflation and to reduce the volatility of the fund overall. Therefore, the primary objective of the core fixed-income portion is to match the Barclays Aggregate Bond Index. The purpose of including opportunistic fixed-income assets such as, but not limited to, global and high-yield securities in the portfolio is to enhance the overall risk-return characteristics of the Fund.
In addition to the defined benefit pension plans discussed above, we also sponsor employee savings plans under Section 401(k) of the Internal Revenue Code, which cover most of our employees in the U.S. We record expense for defined contribution plans for any employer-matching contributions made in conjunction with services rendered by employees. The majority of our plans provide for matching contributions made in conjunction with services rendered by employees. Matching contributions are invested in the same manner that the participants invest their own contributions. Matching contributions charged to income were $21.1 million, $19.4 million and $18.7 million for the years ending May 31, 2020, 2019 and 2018, respectively.
We expect to pay the following estimated pension benefit payments in the next five years (in millions): $71.0 in 2021, $71.0 in 2022, $70.6 in 2023, $70.1 in 2024 and $67.3 in 2025. In the five years thereafter (2026-2030), we expect to pay $339.2 million.
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
NOTE O — POSTRETIREMENT BENEFITS
We sponsor several unfunded-healthcare-benefit plans for certain of our retired employees, as well as postretirement life insurance for certain key former employees. Eligibility for these benefits is based upon various requirements. The following table illustrates the effect on operations of these plans for the three years ended May 31, 2020:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
2018
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Service cost - benefits earned during the period
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
1,661
|
|
$
|
1,507
|
|
$
|
1,307
|
|
|
Interest cost on the accumulated obligation
|
|
|
149
|
|
|
192
|
|
|
173
|
|
|
|
1,089
|
|
|
1,122
|
|
|
939
|
|
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service (credit)
|
|
|
(219
|
)
|
|
(219
|
)
|
|
(220
|
)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Net actuarial (gains) losses
|
|
|
(66
|
)
|
|
(26
|
)
|
|
24
|
|
|
|
611
|
|
|
442
|
|
|
332
|
|
|
Net Postretirement Benefit (Income) Cost
|
|
$
|
(136
|
)
|
$
|
(53
|
)
|
$
|
(23
|
)
|
|
$
|
3,361
|
|
$
|
3,071
|
|
$
|
2,578
|
|
The changes in benefit obligations of the plans at May 31, 2020 and 2019 were as follows:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Accumulated postretirement benefit obligation at beginning of year
|
|
$
|
4,990
|
|
$
|
5,368
|
|
|
$
|
37,663
|
|
$
|
33,281
|
|
|
Service cost
|
|
|
-
|
|
|
-
|
|
|
|
1,661
|
|
|
1,507
|
|
|
Interest cost
|
|
|
149
|
|
|
192
|
|
|
|
1,089
|
|
|
1,122
|
|
|
Benefit payments
|
|
|
(1,659
|
)
|
|
(287
|
)
|
|
|
(639
|
)
|
|
(664
|
)
|
|
Actuarial (gains) losses
|
|
|
702
|
|
|
(283
|
)
|
|
|
(683
|
)
|
|
3,801
|
|
|
Currency exchange rate changes
|
|
|
-
|
|
|
-
|
|
|
|
(702
|
)
|
|
(1,384
|
)
|
|
Accumulated and accrued postretirement benefit obligation at end of year
|
|
$
|
4,182
|
|
$
|
4,990
|
|
|
$
|
38,389
|
|
$
|
37,663
|
|
In determining the postretirement benefit amounts outlined above, measurement dates as of May 31 for each period were applied.
Amounts recognized in the Consolidated Balance Sheets for the years ended May 31, 2020 and 2019 are as follows:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Current liabilities
|
|
$
|
(385
|
)
|
$
|
(423
|
)
|
|
$
|
(805
|
)
|
$
|
(741
|
)
|
|
Noncurrent liabilities
|
|
|
(3,797
|
)
|
|
(4,567
|
)
|
|
|
(37,584
|
)
|
|
(36,922
|
)
|
|
Net Amount Recognized
|
|
$
|
(4,182
|
)
|
$
|
(4,990
|
)
|
|
$
|
(38,389
|
)
|
$
|
(37,663
|
)
|
The following table presents the pretax net actuarial gain (loss) and prior service credits recognized in accumulated other comprehensive income (loss) not affecting retained earnings:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Net actuarial gain (loss)
|
|
$
|
(386
|
)
|
$
|
381
|
|
|
$
|
(11,331
|
)
|
$
|
(12,891
|
)
|
|
Prior service credits
|
|
|
448
|
|
|
667
|
|
|
|
-
|
|
|
-
|
|
|
Total recognized in accumulated other comprehensive income not affecting retained
earnings
|
|
$
|
62
|
|
$
|
1,048
|
|
|
$
|
(11,331
|
)
|
$
|
(12,891
|
)
|
86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
The following table includes the changes recognized in other comprehensive income:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
Net loss (gain) arising during the year
|
|
|
702
|
|
|
(283
|
)
|
|
|
(683
|
)
|
|
3,801
|
|
|
Effect of exchange rates on amounts included in AOCI
|
|
|
-
|
|
|
-
|
|
|
|
(266
|
)
|
|
(419
|
)
|
|
Amounts recognized as a component of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization or curtailment recognition of prior service credit
|
|
|
219
|
|
|
219
|
|
|
|
-
|
|
|
-
|
|
|
Amortization or settlement recognition of net gain (loss)
|
|
|
66
|
|
|
26
|
|
|
|
(611
|
)
|
|
(442
|
)
|
|
Total recognized in other comprehensive loss (income)
|
|
$
|
987
|
|
$
|
(38
|
)
|
|
$
|
(1,560
|
)
|
$
|
2,940
|
|
The following weighted-average assumptions were used to determine our year-end benefit obligations and net periodic postretirement benefit costs under the plans:
|
|
|
U.S. Plans
|
|
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End Benefit Obligations
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.44
|
%
|
|
|
|
3.44
|
%
|
|
|
|
3.32
|
%
|
|
|
|
3.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Current healthcare cost trend rate
|
|
|
6.68
|
%
|
|
|
|
7.29
|
%
|
|
|
|
5.73
|
%
|
|
|
|
5.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Ultimate healthcare cost trend rate
|
|
|
4.36
|
%
|
|
|
|
4.36
|
%
|
|
|
|
3.70
|
%
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ultimate healthcare cost trend rate will be realized
|
|
|
2037
|
|
|
|
|
2037
|
|
|
|
|
2040
|
|
|
|
|
2040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
|
Non-U.S. Plans
|
|
|
|
Net Periodic Postretirement Cost
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Discount rate
|
|
|
3.44
|
%
|
|
|
|
4.03
|
%
|
|
|
|
3.61
|
%
|
|
|
|
3.22
|
%
|
|
|
|
3.70
|
%
|
|
|
|
3.61
|
%
|
|
|
Healthcare cost trend rate
|
|
|
7.29
|
%
|
|
|
|
7.86
|
%
|
|
|
|
14.75
|
%
|
|
|
|
5.77
|
%
|
|
|
|
6.02
|
%
|
|
|
|
5.85
|
%
|
|
|
Ultimate healthcare cost trend rate
|
|
|
4.36
|
%
|
|
|
|
4.36
|
%
|
|
|
|
4.36
|
%
|
|
|
|
3.70
|
%
|
|
|
|
4.20
|
%
|
|
|
|
4.20
|
%
|
|
|
Year ultimate healthcare cost trend rate will be realized
|
|
|
2037
|
|
|
|
|
2037
|
|
|
|
|
2037
|
|
|
|
|
2040
|
|
|
|
|
2032
|
|
|
|
|
2030
|
|
|
We utilize a sensitivity analysis to measure the potential impact of changes in our healthcare cost trend rate on our Consolidated Financial Statements. Increasing or decreasing current healthcare cost trend rates by 1% would affect our accumulated postretirement benefit obligation and net postretirement expense by the following amounts for the years ended May 31, 2020 and 2019:
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
(In thousands)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
|
1% Increase in Healthcare Cost Trend Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
130
|
|
$
|
124
|
|
|
$
|
7,452
|
|
$
|
8,300
|
|
|
Postretirement cost
|
|
|
4
|
|
|
7
|
|
|
|
814
|
|
|
731
|
|
|
1% Decrease in Healthcare Cost Trend Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
(117
|
)
|
$
|
(112
|
)
|
|
$
|
(5,843
|
)
|
$
|
(6,390
|
)
|
|
Postretirement cost
|
|
|
(3
|
)
|
|
(6
|
)
|
|
|
(595
|
)
|
|
(539
|
)
|
We expect to pay approximately $1.2 million to $1.5 million in estimated postretirement benefits in each of the next five years. In the five years thereafter (2026-2030), we expect to pay a cumulative total of $8.9 million.
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
NOTE P — CONTINGENCIES AND OTHER ACCRUED LOSSES
Accrued loss reserves consist of the following:
|
May 31,
|
|
2020
|
|
2019
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Accrued product liability reserves
|
|
$
|
10,458
|
|
$
|
11,739
|
|
|
Accrued warranty reserves
|
|
|
7,593
|
|
|
7,013
|
|
|
Accrued environmental reserves
|
|
|
1,970
|
|
|
1,147
|
|
|
Total Accrued Loss Reserves - Current
|
|
$
|
20,021
|
|
$
|
19,899
|
|
|
Accrued product liability reserves - noncurrent
|
|
$
|
27,016
|
|
$
|
29,942
|
|
|
Accrued warranty liability - noncurrent
|
|
|
3,513
|
|
|
3,401
|
|
|
Accrued environmental reserves - noncurrent
|
|
|
4,125
|
|
|
4,211
|
|
|
Total Accrued Loss Reserves - Noncurrent
|
|
$
|
34,654
|
|
$
|
37,554
|
|
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 May 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:
|
Year Ended May 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
10,414
|
|
$
|
11,721
|
|
$
|
19,149
|
|
|
Deductions (1)
|
|
|
(20,762
|
)
|
|
(22,262
|
)
|
|
(26,199
|
)
|
|
Provision charged to expense
|
|
|
21,454
|
|
|
20,955
|
|
|
17,924
|
|
|
Acquisitions
|
|
|
|
|
|
|
|
|
847
|
|
|
Ending Balance
|
|
$
|
11,106
|
|
$
|
10,414
|
|
$
|
11,721
|
|
|
(1)
|
Primarily claims paid during the year.
|
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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 $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 years ended May 31, 2013 or 2014. The audit committee’s investigation concluded that there was no intentional misconduct on the part of any of our officers.
In connection with the foregoing, on September 9, 2016, the SEC filed an enforcement action against us and our General Counsel. We have cooperated with the SEC’s investigation and believe the allegations in the complaint mischaracterize both our and our General Counsel’s actions in connection with the matters related to our quarterly results in fiscal 2013 and are without merit. 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 commenced in January 2018, and closed as of June 3, 2019, other than some remaining, limited discovery requests. The parties engaged in written discovery, and several fact witnesses were deposed. We are currently awaiting further instruction regarding the remaining case schedule. We intend to continue to contest the allegations in the complaint vigorously.
Also in connection with the foregoing, a stockholder derivative action was filed in the United States District Court, Northern District of Ohio, Eastern Division, against certain of our directors and officers. The court has stayed this stockholder derivative action pending the completion of the SEC enforcement action.
The action by the SEC could result in sanctions against us and/or our General Counsel and could impose substantial additional costs and distractions, regardless of its outcome. We have determined that it is probable that we will incur a loss relating to this matter and have estimated a range of potential loss. We have accrued at the low end of the range of loss, as no amount within the range is more likely to occur, and no amount within the estimated range of loss would have a material impact on our consolidated financial condition, results of operations or cash flows.
With respect to a previously disclosed case pending against one of our subsidiaries in which both trade secret and trademark infringement had been alleged, during fiscal 2019, we agreed to settle the case for $6.5 million.
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
NOTE Q — 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 R, “Segment Information,” for further details regarding our disaggregated revenues, as well as a description of each of the unique revenue streams related to each of our four reportable segments.
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The majority of our revenue is recognized at a point in time. However, we also record revenues generated under construction contracts, mainly in connection with the installation of specialized roofing and flooring systems and related services. For certain polymer flooring installation projects, we account for our revenue using the output method, as we consider square footage of completed flooring to be the best measure of progress toward the complete satisfaction of the performance obligation. In contrast, for certain of our roofing installation projects, we account for our revenue using the input method, as that method was the best measure of performance as it considers costs incurred in relation to total expected project costs, which essentially represents the transfer of control for roofing systems to the customer. In general, for our construction contracts, we record contract revenues and related costs as our contracts progress on an over-time model.
We have elected to apply the practical expedient to recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Payment terms and conditions vary by contract type, although our customers’ payment terms generally include a requirement to pay within 30 to 60 days of fulfilling our performance obligations. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component. We have elected to apply the practical expedient to treat all shipping and handling costs as fulfillment costs, as a significant portion of these costs are incurred prior to control transfer.
Significant Judgments
Our contracts with customers may include promises to transfer multiple products and/or services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. For example, judgment is required to determine whether products sold in connection with the sale of installation services are considered distinct and accounted for separately, or not distinct and accounted for together with installation services and recognized over time.
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 P, “Contingencies and Other Accrued Losses.”
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing customers. Our contract assets are recorded for products and services that have been provided to our customer but have not yet been billed, and are included in prepaid expenses and other current assets in our consolidated balance sheets. Our short-term contract liabilities consist of advance payments, or deferred revenue, and are included in other accrued liabilities in our consolidated balance sheets.
Accounts receivable, net of allowances, and net contract assets (liabilities) consisted of the following:
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
|
(In thousands, except percents)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, less allowance
|
|
$
|
1,137,957
|
|
|
$
|
1,232,350
|
|
|
$
|
(94,393
|
)
|
|
|
-7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
25,249
|
|
|
$
|
21,628
|
|
|
$
|
3,621
|
|
|
|
16.7
|
%
|
|
Contract liabilities - short-term
|
|
|
(25,288
|
)
|
|
|
(25,896
|
)
|
|
|
608
|
|
|
|
-2.3
|
%
|
|
Net Contract Liabilities
|
|
$
|
(39
|
)
|
|
$
|
(4,268
|
)
|
|
$
|
4,229
|
|
|
|
-99.1
|
%
|
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience and other currently available evidence. The $4.2 million change in our net contract liabilities from May 31, 2019 to May 31, 2020, resulted primarily from the timing and volume of construction jobs in progress at May 31, 2020 versus May 31, 2019. During the fourth quarter of fiscal 2020, net sales at our general contracting and roofing services business increased by $22.1 million as compared to the fourth quarter of fiscal 2019. Despite the Covid-19 pandemic, this growth occurred as many of our customers chose to utilize this time, as fewer people were inside their facilities, to tackle projects that they had previously been putting off. Furthermore, roofing projects are completed outdoors, and contractors do not require entry into customers’ facilities. We also record long-term deferred revenue, which amounted to $66.0 million and $66.5 million as of May 31, 2020 and 2019, respectively. The long-term portion of deferred revenue is related to assurance type warranty contracts and is included in other long-term liabilities in our consolidated balance sheets.
We have elected to adopt the practical expedient to not disclose the aggregate amount of transaction price allocated to performance obligations that are unsatisfied as of the end of the reporting period for performance obligations that are part of a contract with an original expected duration of one year or less.
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. As our contract terms are primarily one year or less in duration, we have elected to apply a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain incentive programs as we have determined annual compensation is commensurate with annual sales activities.
NOTE R — SEGMENT INFORMATION
Effective June 1, 2019, we realigned certain businesses and management structure to recognize how we allocate resources and analyze the operating performance of our businesses. Among other things, the realignment of certain businesses occurred as a result of the 2020 MAP to Growth that was approved and initiated between May and August 2018. As we began to execute on our operating improvement initiatives, we identified ways to realign certain businesses, and concluded that moving to an expanded reporting structure could help us to better manage our assets and improve synergies across the enterprise.
This realignment changed our reportable segments beginning with our first quarter of fiscal 2020. As such we now report under four reportable segments instead of our three previous reportable segments. Our four reporting segments are: the CPG reportable segment, PCG reportable segment, Consumer reportable segment and SPG reportable segment. In connection with the realignment, we shifted our Kirker business out of Consumer into SPG, and also shifted our Dryvit and Nudura businesses out of SPG into CPG. The newly formed CPG also includes our Tremco, Tremco illbruck, Euclid Chemical, Viapol, Vandex and Flowcrete businesses. PCG includes Stonhard, Carboline, USL and Fibergrate businesses, while Consumer comprises the Rust-Oleum and DAP businesses.
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by organizing our businesses and product lines into four reportable segments as outlined above, which also represent our operating segments. Within each operating segment, we manage product lines and businesses which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our four operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief operating decision maker in determining how to allocate the assets of the company and evaluate performance. These four operating segments are each managed by an operating segment manager, who is responsible for the day-to-day operating decisions and performance evaluation of the operating segment’s underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to earnings (loss) before interest and taxes (“EBIT”), and/or adjusted EBIT, as a performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations.
Our CPG reportable segment products are sold throughout North America and also account for the majority of our international sales. Our construction product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include construction sealants and adhesives, coatings and chemicals, roofing systems, concrete admixture and repair products, building envelope solutions, insulated cladding, flooring systems, and weatherproofing solutions.
Our PCG reportable segment products are sold throughout North America, as well as internationally, and are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. Products and services within this reportable segment include high-performance flooring solutions, corrosion control and fireproofing coatings, infrastructure repair systems, fiberglass reinforced plastic gratings and drainage systems.
Our Consumer reportable segment manufactures and markets professional use and do-it-yourself (“DIY”) products for a variety of mainly consumer applications, including home improvement and personal leisure activities. Our Consumer segment’s major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe and other parts of the world. Our Consumer reportable segment products are primarily sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops and through distributors. The Consumer reportable segment offers products that include specialty, hobby and professional paints; caulks; adhesives; silicone sealants and wood stains. Sales to The Home Depot, Inc. represented less than 10% of our consolidated net sales for fiscal 2020, 2019 and 2018, respectively. Furthermore, sales to The Home Depot, Inc. represented 26%, 29% and 28% of our Consumer segment net sales for each of the fiscal years ended May 31, 2020, 2019 and 2018, respectively.
Our SPG reportable segment products are sold throughout North America and a few international locations, primarily in Europe. Our SPG 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.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
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.
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPG
|
|
$
|
1,880,105
|
|
|
$
|
1,899,744
|
|
|
$
|
1,837,280
|
|
|
PCG
|
|
|
1,080,701
|
|
|
|
1,136,119
|
|
|
|
1,088,606
|
|
|
Consumer
|
|
|
1,945,220
|
|
|
|
1,858,453
|
|
|
|
1,722,220
|
|
|
SPG
|
|
|
600,968
|
|
|
|
670,235
|
|
|
|
673,537
|
|
|
Total
|
|
$
|
5,506,994
|
|
|
$
|
5,564,551
|
|
|
$
|
5,321,643
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPG
|
|
$
|
209,663
|
|
|
$
|
178,823
|
|
|
$
|
174,032
|
|
|
PCG
|
|
|
102,345
|
|
|
|
77,388
|
|
|
|
112,614
|
|
|
Consumer
|
|
|
198,024
|
|
|
|
217,448
|
|
|
|
171,872
|
|
|
SPG
|
|
|
57,933
|
|
|
|
86,018
|
|
|
|
107,455
|
|
|
Corporate/Other
|
|
|
(160,201
|
)
|
|
|
(219,832
|
)
|
|
|
(148,925
|
)
|
|
Total
|
|
$
|
407,764
|
|
|
$
|
339,845
|
|
|
$
|
417,048
|
|
|
Identifiable Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPG
|
|
$
|
1,622,632
|
|
|
$
|
1,573,329
|
|
|
$
|
1,531,485
|
|
|
PCG
|
|
|
925,569
|
|
|
|
951,644
|
|
|
|
974,104
|
|
|
Consumer
|
|
|
2,067,017
|
|
|
|
1,953,279
|
|
|
|
1,833,372
|
|
|
SPG
|
|
|
728,449
|
|
|
|
689,133
|
|
|
|
684,254
|
|
|
Corporate/Other
|
|
|
287,287
|
|
|
|
273,970
|
|
|
|
248,607
|
|
|
Total
|
|
$
|
5,630,954
|
|
|
$
|
5,441,355
|
|
|
$
|
5,271,822
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPG
|
|
$
|
63,393
|
|
|
$
|
40,119
|
|
|
$
|
39,368
|
|
|
PCG
|
|
|
23,868
|
|
|
|
22,158
|
|
|
|
22,102
|
|
|
Consumer
|
|
|
47,331
|
|
|
|
45,039
|
|
|
|
38,341
|
|
|
SPG
|
|
|
21,610
|
|
|
|
28,006
|
|
|
|
14,213
|
|
|
Corporate/Other
|
|
|
1,077
|
|
|
|
1,435
|
|
|
|
595
|
|
|
Total
|
|
$
|
157,279
|
|
|
$
|
136,757
|
|
|
$
|
114,619
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPG
|
|
$
|
46,491
|
|
|
$
|
44,150
|
|
|
$
|
41,538
|
|
|
PCG
|
|
|
23,850
|
|
|
|
27,116
|
|
|
|
21,394
|
|
|
Consumer
|
|
|
56,570
|
|
|
|
40,231
|
|
|
|
36,744
|
|
|
SPG
|
|
|
24,111
|
|
|
|
25,199
|
|
|
|
23,085
|
|
|
Corporate/Other
|
|
|
5,820
|
|
|
|
5,046
|
|
|
|
5,738
|
|
|
Total
|
|
$
|
156,842
|
|
|
$
|
141,742
|
|
|
$
|
128,499
|
|
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
|
Year Ended May 31, 2020
|
|
CPG Segment
|
|
|
PCG Segment
|
|
|
Consumer Segment
|
|
|
SPG Segment
|
|
|
Consolidated
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location) (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,068,552
|
|
|
$
|
656,162
|
|
|
$
|
1,573,966
|
|
|
$
|
489,543
|
|
|
$
|
3,788,223
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
159,986
|
|
|
|
71,689
|
|
|
|
116,424
|
|
|
|
8,354
|
|
|
|
356,453
|
|
|
Europe
|
|
|
418,249
|
|
|
|
247,904
|
|
|
|
195,783
|
|
|
|
74,162
|
|
|
|
936,098
|
|
|
Latin America
|
|
|
151,099
|
|
|
|
32,471
|
|
|
|
24,909
|
|
|
|
1,328
|
|
|
|
209,807
|
|
|
Asia Pacific
|
|
|
73,629
|
|
|
|
24,622
|
|
|
|
26,432
|
|
|
|
27,581
|
|
|
|
152,264
|
|
|
Other Foreign
|
|
|
8,590
|
|
|
|
47,853
|
|
|
|
7,706
|
|
|
|
-
|
|
|
|
64,149
|
|
|
Total Foreign
|
|
|
811,553
|
|
|
|
424,539
|
|
|
|
371,254
|
|
|
|
111,425
|
|
|
|
1,718,771
|
|
|
Total
|
|
$
|
1,880,105
|
|
|
$
|
1,080,701
|
|
|
$
|
1,945,220
|
|
|
$
|
600,968
|
|
|
$
|
5,506,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, 2019
|
|
CPG Segment
|
|
|
PCG Segment
|
|
|
Consumer Segment
|
|
|
SPG Segment
|
|
|
Consolidated
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location) (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,003,227
|
|
|
$
|
667,402
|
|
|
$
|
1,462,446
|
|
|
$
|
543,429
|
|
|
$
|
3,676,504
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
181,089
|
|
|
|
82,897
|
|
|
|
117,305
|
|
|
|
8,908
|
|
|
|
390,199
|
|
|
Europe
|
|
|
477,761
|
|
|
|
251,600
|
|
|
|
213,466
|
|
|
|
86,197
|
|
|
|
1,029,024
|
|
|
Latin America
|
|
|
155,039
|
|
|
|
34,588
|
|
|
|
28,020
|
|
|
|
1,397
|
|
|
|
219,044
|
|
|
Asia Pacific
|
|
|
81,895
|
|
|
|
36,498
|
|
|
|
29,171
|
|
|
|
30,304
|
|
|
|
177,868
|
|
|
Other Foreign
|
|
|
733
|
|
|
|
63,134
|
|
|
|
8,045
|
|
|
|
-
|
|
|
|
71,912
|
|
|
Total Foreign
|
|
|
896,517
|
|
|
|
468,717
|
|
|
|
396,007
|
|
|
|
126,806
|
|
|
|
1,888,047
|
|
|
Total
|
|
$
|
1,899,744
|
|
|
$
|
1,136,119
|
|
|
$
|
1,858,453
|
|
|
$
|
670,235
|
|
|
$
|
5,564,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, 2018
|
|
CPG Segment
|
|
|
PCG Segment
|
|
|
Consumer Segment
|
|
|
SPG Segment
|
|
|
Consolidated
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (based on shipping location) (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
938,062
|
|
|
$
|
628,177
|
|
|
$
|
1,325,509
|
|
|
$
|
540,286
|
|
|
$
|
3,432,034
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
166,600
|
|
|
|
83,607
|
|
|
|
106,460
|
|
|
|
8,682
|
|
|
|
365,349
|
|
|
Europe
|
|
|
485,583
|
|
|
|
241,639
|
|
|
|
221,484
|
|
|
|
91,712
|
|
|
|
1,040,418
|
|
|
Latin America
|
|
|
160,010
|
|
|
|
37,849
|
|
|
|
27,834
|
|
|
|
1,514
|
|
|
|
227,207
|
|
|
Asia Pacific
|
|
|
82,856
|
|
|
|
29,856
|
|
|
|
32,492
|
|
|
|
31,343
|
|
|
|
176,547
|
|
|
Other Foreign
|
|
|
4,169
|
|
|
|
67,478
|
|
|
|
8,441
|
|
|
|
-
|
|
|
|
80,088
|
|
|
Total Foreign
|
|
|
899,218
|
|
|
|
460,429
|
|
|
|
396,711
|
|
|
|
133,251
|
|
|
|
1,889,609
|
|
|
Total
|
|
$
|
1,837,280
|
|
|
$
|
1,088,606
|
|
|
$
|
1,722,220
|
|
|
$
|
673,537
|
|
|
$
|
5,321,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31,
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,146,333
|
|
|
$
|
1,859,628
|
|
|
$
|
1,807,046
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
224,177
|
|
|
|
242,582
|
|
|
|
139,259
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
358,511
|
|
|
|
343,501
|
|
|
|
361,317
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
252,185
|
|
|
|
217,414
|
|
|
|
230,071
|
|
|
|
|
|
|
|
|
|
|
Other Foreign
|
|
|
195,425
|
|
|
|
225,230
|
|
|
|
241,301
|
|
|
|
|
|
|
|
|
|
|
Total Foreign
|
|
|
1,030,298
|
|
|
|
1,028,727
|
|
|
|
971,948
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,176,631
|
|
|
$
|
2,888,355
|
|
|
$
|
2,778,994
|
|
|
|
|
|
|
|
|
|
|
(a)
|
It is not practicable to obtain the information needed to disclose revenues attributable to each of our product lines.
|
94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2020, 2019, 2018
|
(b)
|
Long-lived assets include all non-current assets, excluding non-current deferred income taxes.
|
NOTE S — QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended May 31, 2020 and 2019:
|
|
|
For Quarter Ended
|
|
|
(In thousands, except per share amounts)
|
|
August 31
|
|
|
November 30
|
|
|
February 29
|
|
|
May 31
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,472,764
|
|
|
$
|
1,401,292
|
|
|
$
|
1,173,976
|
|
|
$
|
1,458,962
|
|
|
Gross Profit
|
|
$
|
574,754
|
|
|
$
|
529,398
|
|
|
$
|
434,747
|
|
|
$
|
553,956
|
|
|
Net Income Attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPM International Inc. Stockholders (a)
|
|
$
|
106,188
|
|
|
$
|
77,030
|
|
|
$
|
11,853
|
|
|
$
|
109,314
|
|
|
Basic Earnings Per Share
|
|
$
|
0.82
|
|
|
$
|
0.60
|
|
|
$
|
0.09
|
|
|
$
|
0.85
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.82
|
|
|
$
|
0.59
|
|
|
$
|
0.09
|
|
|
$
|
0.84
|
|
|
Dividends Per Share
|
|
$
|
0.350
|
|
|
$
|
0.360
|
|
|
$
|
0.360
|
|
|
$
|
0.360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
August 31
|
|
|
November 30
|
|
|
February 28
|
|
|
May 31
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,459,989
|
|
|
$
|
1,362,531
|
|
|
$
|
1,140,630
|
|
|
$
|
1,601,401
|
|
|
Gross Profit
|
|
$
|
549,353
|
|
|
$
|
493,731
|
|
|
$
|
409,422
|
|
|
$
|
635,814
|
|
|
Net Income Attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPM International Inc. Stockholders (b)
|
|
$
|
69,764
|
|
|
$
|
49,224
|
|
|
$
|
14,190
|
|
|
$
|
133,380
|
|
|
Basic Earnings Per Share
|
|
$
|
0.52
|
|
|
$
|
0.37
|
|
|
$
|
0.11
|
|
|
$
|
1.03
|
|
|
Diluted Earnings Per Share
|
|
$
|
0.52
|
|
|
$
|
0.37
|
|
|
$
|
0.11
|
|
|
$
|
1.02
|
|
|
Dividends Per Share
|
|
$
|
0.320
|
|
|
$
|
0.350
|
|
|
$
|
0.350
|
|
|
$
|
0.350
|
|
|
(a)
|
Reflects inventory-related charges of $28.8 million in our Consumer reportable segment resulting from SKU rationalization, excess and obsolescence, and exiting unprofitable product lines and regions and $3.2 million in our PCG segment resulting from the exit of unprofitable product lines and regions. Also reflects restructuring charges totaling $33.1 million that were incurred throughout fiscal 2020, as further described in Note B, “Restructuring”.
|
|
(b)
|
Reflects inventory-related charges of $10.5 million in our Consumer reportable segment resulting from more proactive management of inventory and $9.0 million and $1.0 million in inventory reductions related to restructuring activities in our PCG and CPG reportable segments, respectively. Also reflects restructuring charges totaling $42.3 million that were incurred throughout fiscal 2019, as further described in Note B, “Restructuring”.
|
Quarterly earnings per share may not total to the yearly earnings per share due to the weighted-average number of shares outstanding in each quarter. In addition, during the first quarter of fiscal 2020, we changed our method of accounting for shipping and handling costs, which we have identified as costs paid to third-party shippers for transporting products to customers. Under the new method of accounting, we include shipping costs in cost of sales, whereas previously, they were included in SG&A expense. This change in accounting principle has been applied retrospectively, and the Consolidated Statements of Income amounts presented in the table above for both fiscal 2020 and fiscal 2019 reflect the effect of this accounting principle change.
95
Management’s Report on Internal Control Over Financials Reporting
The management of RPM International, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. RPM’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statements preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of RPM’s internal control over financial reporting as of May 31, 2020. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management concluded that, as of May 31, 2020, RPM’s internal control over financial reporting is effective.
The independent registered public accounting firm Deloitte & Touche LLP, has also audited the Company’s internal control over financial reporting as of May 31, 2020, and their report thereon is included below
|
/s/ Frank C. Sullivan
|
|
/s/ Russell L. Gordon
|
|
Frank C. Sullivan
|
|
Russell L. Gordon
|
|
Chairman, President and Chief Executive Officer
|
|
Vice President and Chief Financial Officer
|
|
|
|
|
|
July 27, 2020
|
|
|
96
