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RPM INTERNATIONAL INC/DE/ - Quarter Report: 2010 February (Form 10-Q)

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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended February 28, 2010,
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          .
 
Commission File No. 1-14187
 
RPM International Inc.
(Exact name of Registrant as specified in its charter)
 
 
     
DELAWARE
(State or other jurisdiction of
incorporation or organization)
  02-0642224
(IRS Employer
Identification No.)
     
P.O. BOX 777;
2628 PEARL ROAD;
MEDINA, OHIO
(Address of principal executive offices)
  44258
(Zip Code)
 
(330) 273-5090
(Registrant’s telephone number including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ.
 
As of April 1, 2010
129,637,774 Shares of RPM International Inc. Common Stock were outstanding.
 


 

 
RPM INTERNATIONAL INC. AND SUBSIDIARIES*
 
INDEX
 
             
        Page No.
 
  Financial Statements (Unaudited):        
    Consolidated Balance Sheets     3  
    Consolidated Statements of Income     4  
    Consolidated Statements of Cash Flows     5  
    Notes to Consolidated Financial Statements     6  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     22  
  Quantitative and Qualitative Disclosures About Market Risk     39  
  Controls and Procedures     39  
 
  Legal Proceedings     40  
  Risk Factors     41  
  Exhibits     42  
    43  
 EX-10.1
 EX-10.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
 
* As used herein, the terms “RPM” and the “Company” refer to RPM International Inc. and its subsidiaries, unless the context indicates otherwise.


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PART I. — FINANCIAL INFORMATION
 
ITEM 1. — FINANCIAL STATEMENTS
 
RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    February 28, 2010     May 31, 2009  
    (Unaudited)        
    (In thousands, except share and per share amounts)  
 
ASSETS
Current Assets
               
Cash and cash equivalents
  $ 256,199     $ 253,387  
Trade accounts receivable (less allowances of $24,270 and $22,934, respectively)
    502,190       638,659  
Inventories
    441,578       406,175  
Deferred income taxes
    44,215       44,540  
Prepaid expenses and other current assets
    222,689       210,155  
                 
Total current assets
    1,466,871       1,552,916  
                 
Property, Plant and Equipment, at Cost
    1,067,577       1,056,555  
Allowance for depreciation and amortization
    (622,618 )     (586,452 )
                 
Property, plant and equipment, net
    444,959       470,103  
                 
Other Assets
               
Goodwill
    882,739       856,166  
Other intangible assets, net of amortization
    366,127       358,097  
Deferred income taxes, non-current
    62,474       92,500  
Other
    114,195       80,139  
                 
Total other assets
    1,425,535       1,386,902  
                 
Total Assets
  $ 3,337,365     $ 3,409,921  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
               
Accounts payable
  $ 230,361     $ 294,814  
Current portion of long-term debt
    5,534       168,547  
Accrued compensation and benefits
    121,856       124,138  
Accrued loss reserves
    74,562       77,393  
Asbestos-related liabilities
    75,000       65,000  
Other accrued liabilities
    132,271       119,270  
                 
Total current liabilities
    639,584       849,162  
                 
Long-Term Liabilities
               
Long-term debt, less current maturities
    902,563       762,295  
Asbestos-related liabilities
    357,891       425,328  
Other long-term liabilities
    200,924       204,021  
Deferred income taxes
    28,389       23,815  
                 
Total long-term liabilities
    1,489,767       1,415,459  
                 
Stockholders’ Equity
               
Preferred stock, par value $0.01; authorized 50,000 shares; none issued
               
Common stock, par value $0.01 authorized 300,000 shares; issued 131,781 and outstanding 129,601 as of February 2010; issued 131,230 and outstanding 128,501 as of May 2009
    1,296       1,285  
Paid-in capital
    798,721       796,441  
Treasury stock, at cost
    (40,237 )     (50,453 )
Accumulated other comprehensive (loss)
    (20,441 )     (29,928 )
Retained earnings
    468,675       427,955  
                 
Total stockholders’ equity
    1,208,014       1,145,300  
                 
Total Liabilities and Stockholders’ Equity
  $ 3,337,365     $ 3,409,921  
                 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
 
                                 
    Three Months Ended
    Nine Months Ended
 
    February 28,     February 28,  
    2010     2009     2010     2009  
    (Unaudited)  
    (In thousands, except share and per share amounts)  
 
Net Sales
  $ 666,594     $ 635,396     $ 2,441,205     $ 2,510,826  
Cost of Sales
    406,762       400,738       1,424,332       1,515,853  
                                 
Gross Profit
    259,832       234,658       1,016,873       994,973  
Selling, General and Administrative Expenses
    257,212       265,618       800,763       837,290  
Interest Expense
    15,802       12,350       43,271       42,309  
Investment Expense (Income), Net
    (1,833 )     1,170       (4,984 )     (809 )
                                 
Income (Loss) Before Income Taxes
    (11,349 )     (44,480 )     177,823       116,183  
Provision (Benefit) for Income Taxes
    (1,949 )     (13,547 )     58,305       35,873  
                                 
Net Income (Loss)
  $ (9,400 )   $ (30,933 )   $ 119,518     $ 80,310  
                                 
Average Number of Shares of Common Stock Outstanding:
                               
Basic
    127,500       126,575       126,940       126,295  
                                 
Diluted
    127,500       126,575       127,539       128,015  
                                 
Basic Earnings (Loss) per Share of Common Stock
  $ (0.07 )   $ (0.24 )   $ 0.93     $ 0.63  
                                 
Diluted Earnings (Loss) per Share of Common Stock
  $ (0.07 )   $ (0.24 )   $ 0.93     $ 0.62  
                                 
Cash Dividends Declared per Share of Common Stock
  $ 0.205     $ 0.200     $ 0.610     $ 0.590  
                                 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 
    Nine Months Ended
 
    February 28,  
    2010     2009  
    (Unaudited)  
    (In thousands)  
 
Cash Flows From Operating Activities:
               
Net income
  $ 119,518     $ 80,310  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    46,622       47,433  
Amortization
    16,600       16,709  
Other-than-temporary impairments on marketable securities
    236       7,371  
Deferred income taxes
    23,765       6,780  
Other
    6,057       5,604  
Changes in assets and liabilities, net of effect from purchases and sales of businesses:
               
Decrease in receivables
    154,567       317,443  
(Increase) decrease in inventory
    (27,732 )     17,398  
(Increase) decrease in prepaid expenses and other current and long-term assets
    (16,906 )     23,641  
(Decrease) in accounts payable
    (72,592 )     (188,436 )
(Decrease) in accrued compensation and benefits
    (10,246 )     (52,486 )
(Decrease) increase in accrued loss reserves
    (2,830 )     5,279  
Increase (decrease) in other accrued liabilities
    4,887       (73,175 )
Payments made for asbestos-related claims
    (57,437 )     (52,196 )
Other
    4,364       (27,088 )
                 
Cash From Operating Activities
    188,873       134,587  
                 
Cash Flows From Investing Activities:
               
Capital expenditures
    (14,069 )     (37,024 )
Acquisition of businesses, net of cash acquired
    (63,669 )     (6,649 )
Purchase of marketable securities
    (76,166 )     (71,583 )
Proceeds from sales of marketable securities
    66,375       65,452  
Other
    (186 )     777  
                 
Cash (Used For) Investing Activities
    (87,715 )     (49,027 )
                 
Cash Flows From Financing Activities:
               
Additions to long-term and short-term debt
    304,106       108,146  
Reductions of long-term and short-term debt
    (327,472 )     (51,563 )
Cash dividends
    (78,798 )     (76,152 )
Repurchase of stock
    (1,832 )     (45,188 )
Exercise of stock options
    6,919       1,980  
                 
Cash (Used For) Financing Activities
    (97,077 )     (62,777 )
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents
    (1,269 )     (48,797 )
                 
Net Change in Cash and Cash Equivalents
    2,812       (26,014 )
Cash and Cash Equivalents at Beginning of Period
    253,387       231,251  
                 
Cash and Cash Equivalents at End of Period
  $ 256,199     $ 205,237  
                 
 
The accompanying notes to consolidated financial statements are an integral part of these statements.


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RPM INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2010
(Unaudited)
 
NOTE 1 — BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles in the U.S. (“GAAP”) for complete financial statements. In our opinion, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the three and nine month periods ended February 28, 2010 and 2009. For further information, refer to the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended May 31, 2009.
 
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).
 
Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Please refer to Note 10, “Segment Information,” for information pertaining to a change in the composition of our reportable segments during the current fiscal year.
 
NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS
 
Accounting Standards Codification — In June 2009, the Financial Accounting Standards Board (the “FASB”) issued the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “ASC”), which identifies itself as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC became effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC does not change GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. Effective September 15, 2009, all of our public filings reference the ASC as the sole source of authoritative literature.
 
Subsequent Events — In February 2010, the FASB issued guidance which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Under the new guidance, entities that are SEC filers are required to evaluate subsequent events through the date the financial statements are issued. The guidance was effective upon issuance of the new provisions. Our adoption of the provisions of this new guidance had no impact on our financial position, results of operations or cash flows. Refer to Note 13, “Subsequent Events.”
 
Financial Instruments — In April 2009, the FASB issued new guidance regarding disclosures of the fair values of financial instruments for interim and annual reporting periods. The guidance is effective for interim reporting periods ending after June 15, 2009. We adopted the new guidance as of June 1, 2009. Refer to Note 5, “Fair Value Measurements,” for additional discussion.
 
Business Combinations — In December 2007, the FASB issued guidance regarding the accounting for business combinations. Under the updated guidance, transaction costs are no longer considered part of the fair value of an acquisition, but are required to be expensed as incurred. Additionally under the updated guidance, upon initially obtaining control of another entity or business, an acquirer must recognize 100% of the fair values of assets acquired, including goodwill and liabilities assumed, with limited exceptions, even if the acquirer has not acquired 100% of the target. We adopted the provisions of this guidance as of June 1, 2009. The impact of our adoption will depend upon the nature and significance of any acquisitions subject to this statement.
 
Consolidation of Noncontrolling Interests — In December 2007, the FASB issued guidance surrounding the accounting and reporting of noncontrolling interests, which requires entities to report noncontrolling (minority)


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
interests in subsidiaries as equity in the Consolidated Financial Statements. Our June 1, 2009 adoption of this new guidance did not have a material impact on our financial statements.
 
Convertible Debt — In May 2008, the FASB issued guidance which requires the issuer of certain convertible debt instruments that may be settled in cash upon conversion to separately account for liability and equity components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. Although we called for redemption all of our outstanding Senior Convertible Notes due May 13, 2033 during the first fiscal quarter of 2009, the FASB’s guidance requires retrospective application to all years presented. We adopted this new guidance effective June 1, 2009, and as a result, recorded additional interest expense of $5.0 million during our fiscal year ended May 31, 2008, which resulted in an after-tax decrease to reported net income of $3.3 million and a reduction of reported basic and diluted earnings per share of $0.03 per share of common stock. The cumulative effect of our adoption of this guidance as of June 1, 2008 was a reduction of retained earnings of approximately $15.5 million. Additionally, our fiscal 2008 financial statements will be restated in our fiscal 2010 Annual Report on Form 10-K. The following table illustrates the retrospective changes made to our comparative financial statements for fiscal 2009:
 
                         
    May 31, 2009
    As Reported   Adjustment   Restated
    (In thousands)
 
Paid-in Capital
  $ 780,967     $ 15,474     $ 796,441  
Retained Earnings
  $ 443,429     $ (15,474 )   $ 427,955  
 
NOTE 3 — INVENTORIES
 
Inventories were composed of the following major classes:
 
                 
    February 28, 2010     May 31, 2009  
    (In thousands)  
 
Raw material and supplies
  $ 143,624     $ 133,708  
Finished goods
    297,954       272,467  
                 
Total Inventory
  $ 441,578     $ 406,175  
                 
 
NOTE 4 — MARKETABLE SECURITIES
 
The following tables summarize marketable securities held at February 28, 2010 and May 31, 2009 by asset type:
 
                                 
    Available-For-Sale Securities  
                      Estimated
 
          Gross
    Gross
    Fair Value
 
    Amortized
    Unrealized
    Unrealized
    (Net Carrying
 
February 28, 2010
  Cost     Gains     Losses     Amount)  
    (In thousands)  
 
Equity securities:
                               
Stocks
  $ 44,210     $ 6,703     $ (413 )   $ 50,500  
Mutual funds
    21,275       3,660       (70 )     24,865  
                                 
Total equity securities
    65,485       10,363       (483 )     75,365  
Fixed maturity:
                               
U.S. treasury and other government
    21,403       347       (47 )     21,703  
Corporate
    8,483       739       (25 )     9,197  
                                 
Total fixed maturity securities
    29,886       1,086       (72 )     30,900  
                                 
Total
  $ 95,371     $ 11,449     $ (555 )   $ 106,265  
                                 


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    Available-For-Sale Securities  
                      Estimated
 
          Gross
    Gross
    Fair Value
 
    Amortized
    Unrealized
    Unrealized
    (Net Carrying
 
May 31, 2009
  Cost     Gains     Losses     Amount)  
    (In thousands)  
Equity securities:
                               
Stocks
  $ 36,475     $ 1,949     $ (2,686 )   $ 35,738  
Mutual funds
    21,321       804       (963 )     21,162  
                                 
Total equity securities
    57,796       2,753       (3,649 )     56,900  
Fixed maturity:
                               
U.S. treasury and other government
    9,164       258       (7 )     9,415  
Corporate
    16,075       1,028       (117 )     16,986  
                                 
Total fixed maturity securities
    25,239       1,286       (124 )     26,401  
                                 
Total
  $ 83,035     $ 4,039     $ (3,773 )   $ 83,301  
                                 
 
Marketable securities, included in other current and long-term assets, are composed of available-for-sale securities and are reported at fair value. Realized gains and losses on sales of investments are recognized in net income on the specific identification basis. Changes in the fair values of securities that are 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 income before income taxes in the period in which the unrealized losses are deemed other-than-temporary. In order to determine whether an other-than-temporary decline in market value has 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.
 
Gross gains and losses realized on sales of investments were $0.9 million and $0.5 million, respectively, for the quarter ended February 28, 2010. Gross gains and losses realized on sales of investments were $0.7 million and $0.1 million, respectively, for the quarter ended February 28, 2009. During the third quarter of fiscal 2010 and 2009, we recognized losses of $0.1 million and $4.0 million, respectively, for securities deemed to have other-than-temporary impairments.
 
Gross gains and losses realized on sales of investments were $2.3 million and $1.0 million, respectively, for the nine months ended February 28, 2010. Gross gains and losses realized on sales of investments were $4.4 million and $2.5 million, respectively, for the nine months ended February 28, 2009. During the first nine months of fiscal 2010 and fiscal 2009, we recognized losses of $0.2 million and $7.4 million, respectively, for securities deemed to have other-than-temporary impairments. These amounts are included in investment income, net in the Consolidated Statements of Income.
 
Summarized below are the securities we held at February 28, 2010 and May 31, 2009 that were in an unrealized loss position included in accumulated other comprehensive income, aggregated by the length of time the investments had been in that position:
 
                                 
    February 28, 2010   May 31, 2009
        Gross
      Gross
    Fair
  Unrealized
      Unrealized
    Value   Losses   Fair Value   Losses
    (In thousands)
 
Total investments with unrealized losses
  $ 20,422     $ (555 )   $ 43,624     $ (3,773 )
Unrealized losses with a loss position for less than 12 months
    19,020       (521 )     43,013       (3,721 )
Unrealized losses with a loss position for more than 12 months
    1,402       (34 )     611       (52 )


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Included in the figures above is our investment in Kemrock Industries, which has a fair value of $16.0 million and an unrealized gain of $1.3 million at February 28, 2010. At May 31, 2009, our investment in Kemrock Industries had a fair value of $9.2 million, and an unrealized loss of $2.0 million. 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. Unrealized losses at February 28, 2010 were generally related to the volatility in valuations over the last several months for a portion of our portfolio of investments in marketable securities. The unrealized losses generally relate to investments whose fair values at February 28, 2010 were less than 15% below their original cost or have been in a loss position for less than six consecutive months. Although we have begun to see recovery in general economic conditions, if we were to experience continuing or significant unrealized losses within our portfolio of investments in marketable securities in the future, we may recognize additional other-than-temporary impairment losses. Such potential losses could have a material impact on our results of operations in any given reporting period. As such, we continue to closely evaluate the status of our investments and our ability and intent to hold these investments.
 
The net carrying values of debt securities at February 28, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
 
                 
    Amortized Cost     Fair Value  
    (In thousands)  
 
Due:
               
Less than one year
  $ 5,554     $ 5,550  
One year through five years
    11,583       11,953  
Six years through ten years
    6,635       6,868  
After ten years
    6,114       6,529  
                 
    $ 29,886     $ 30,900  
                 
 
NOTE 5 — FAIR VALUE MEASUREMENTS
 
Financial instruments recorded on the balance sheet include cash and cash equivalents, accounts receivable, notes and accounts payable, and debt. The carrying amount of cash and cash equivalents, accounts receivable, and notes and accounts payable approximates fair value because of their short-term maturity.
 
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, past experience, and 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 on the balance sheet 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 Statement of Income in the current period. Changes in the fair value of derivative instruments used effectively as fair value hedges are recognized in earnings (losses), along with the change in the value of the hedged item. We do not hold or issue derivative instruments for speculative purposes.
 
The carrying amount of our debt instruments approximates fair value based on quoted market prices, variable interest rates or borrowing rates for similar types of debt arrangements, with the exception of our contingently-convertible notes due 2033. We called these notes for redemption during fiscal 2009. Please refer to Note 11, “Debt,” for further information.


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Effective June 1, 2008, we implemented new guidance issued by the FASB relating to fair value accounting. The guidance clarifies the definition of fair value, establishes a framework for measuring fair value based on the inputs used to measure fair value and expands the disclosures of fair value measurements. Effective June 1, 2009, we implemented the portion of this new guidance which pertains to our nonfinancial assets and nonfinancial liabilities. Our implementation of these provisions did not have a material impact on our financial statements.
 
The valuation techniques utilized for establishing the fair values of assets and liabilities are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect management’s market assumptions. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value, as follows:
 
Level 1 Inputs — Quoted prices for identical instruments in active markets.
 
Level 2 Inputs — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level 3 Inputs — Instruments with primarily unobservable value drivers.
 
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
 
                                 
    Quoted Prices in
          Significant
       
    Active Markets for
    Significant Other
    Unobservable
       
    Identical Assets
    Observable Inputs
    Inputs
    Fair Value at
 
    (Level 1)     (Level 2)     (Level 3)     February 28, 2010  
    (In thousands)  
 
Marketable equity securities
  $ 75,365     $       $              $ 75,365  
Marketable debt securities
            30,900               30,900  
Cross-currency swap
            (17,227 )             (17,227 )
                                 
Total
  $ 75,365     $ 13,673     $     $ 89,038  
                                 
 
Our marketable securities are composed of mainly available-for-sale securities, and are valued using a market approach based on quoted market prices for identical instruments. 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.
 
Our cross-currency swap was designed to fix our interest and principal payments in euros for the life of the debt, which resulted in an effective euro fixed-rate borrowing of 5.31%. The basis for determining the rates for this swap included three legs at the inception of the agreement: the USD fixed rate to a USD floating rate; the euro floating to euro fixed rate; and the dollar to euro basis fixed rate at inception. Therefore, we essentially exchanged fixed payments denominated in USD for fixed payments denominated in fixed euros, paying fixed euros at 5.31% and receiving fixed USD at 6.70%. The ultimate payments are based on the notional principal amounts of 150 million USD and approximately 125 million euros. There will be an exchange of the notional amounts at maturity. The rates included in this swap are based upon observable market data, but are not quoted market prices, and therefore, the cross-currency swap is considered a Level 2 liability on the fair value hierarchy. Additionally, our cross-currency swap has been designated as a hedging instrument, and is classified as other long-term liabilities in our consolidated balance sheets.


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The carrying value of our current financial instruments, which include cash and cash equivalents, marketable securities, trade accounts receivable, accounts payable, and short-term debt, approximates fair value because of the short-term maturity of these financial instruments. At February 28, 2010, the fair value of our long-term debt was estimated using active market quotes, based on our current incremental borrowing rates for similar types of borrowing arrangements which are considered to be Level 2 inputs. Based on the analysis performed, the fair value and the carrying value of our financial instruments and long-term debt as of February 28, 2010 are as follows:
 
                 
    Carrying Value   Fair Value
    (In thousands)
 
Cash and cash equivalents
  $ 256,199     $ 256,199  
Marketable equity securities
    75,365       75,365  
Marketable debt securities
    30,900       30,900  
Long-term debt, including current portion
    908,097       974,337  
 
NOTE 6 — CONTINGENCIES AND OTHER ACCRUED LOSSES
 
Asbestos-related Contingencies
 
Certain of our wholly-owned subsidiaries, principally Bondex International, Inc. (collectively referred to as the subsidiaries), are defendants in various asbestos-related bodily injury lawsuits filed in various state courts with the vast majority of current claims pending in six states — Texas, Florida, Maryland, Illinois, Mississippi and Ohio. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposures to asbestos-containing products previously manufactured by our subsidiaries or others.
 
As of February 28, 2010, our subsidiaries had a total of 10,329 active asbestos cases, compared to a total of 10,281 cases as of February 28, 2009. For the quarter ended February 28, 2010, our subsidiaries secured dismissals and/or settlements of 644 cases, compared to a total of 228 cases dismissed and/or settled for the quarter ended February 28, 2009. For the nine months ended February 28, 2010, our subsidiaries secured dismissals and/or settlements of 1,301 cases, compared to a total of 2,253 cases dismissed and/or settled for the nine months ended February 28, 2009.
 
Of the 2,253 cases that were dismissed in the nine months ended February 28, 2009, 1,420 were non-malignancies or unknown disease cases that had been maintained on an inactive docket in Ohio and were administratively dismissed by the Cuyahoga County Court of Common Pleas during our second fiscal quarter ended November 30, 2008. These claims were dismissed without prejudice and may be re-filed should the claimants involved be able to demonstrate disease in accordance with medical criteria laws established in the State of Ohio.
 
For the quarter ended February 28, 2010, our subsidiaries made total cash payments of $19.9 million relating to asbestos cases, which included defense-related payments paid during the quarter of $7.0 million, compared to total cash payments of $19.8 million relating to asbestos cases during the quarter ended February 28, 2009, which included defense-related payments paid during the quarter of $6.9 million. For the nine months ended February 28, 2010, our subsidiaries made total cash payments of $57.4 million relating to asbestos cases, which included defense-related payments of $22.1 million, compared to total cash payments of $52.2 million relating to asbestos cases during the nine months ended February 28, 2009, which included defense-related payments of $19.7 million.
 
During the third quarter of fiscal 2009, one payment totaling $3.6 million was made to satisfy an adverse judgment in a previous trial that occurred in calendar 2006 in California. This payment, which included a significant amount of accrued pre-judgment interest as required by California law, was made on December 8, 2008, approximately two and a half years after the adverse verdict and after all post-trial and appellate remedies had been exhausted. Such satisfaction of judgment amounts are not included in incurred costs until available appeals are exhausted and the final payment amount is determined. As a result, the timing and amount of any such payments could have a significant impact on quarterly settlement costs.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Excluding defense-related payments, the average payment made to settle or dismiss a case approximated $20,000 and $56,600 for each of the quarters ended February 28, 2010 and 2009, respectively, and approximated $27,100 and $14,400 for each of the nine month periods ended February 28, 2010 and 2009, respectively. The amount and timing of dismissals and settlements can fluctuate significantly from period to period, resulting in volatility in the average cost to resolve a case in any given quarter or year. In addition, in some jurisdictions, cases may involve more than one individual claimant. As a result, settlement or dismissal payments on a per case basis are not necessarily reflective of the payment amounts on a per claimant basis. For example, the average amount paid to settle or dismiss a case can vary widely depending on a variety of factors, including the mix of malignancy and non-malignancy claimants and the amount of defense expenditures incurred during the period.
 
Estimating the future cost of asbestos-related contingent liabilities was and continues to be subject to many uncertainties that may change over time, including (i) the ultimate number of claims filed; (ii) the amounts required to resolve both currently known and future unknown claims; (iii) the amount of insurance, if any, available to cover such claims, including the outcome of coverage litigation against our subsidiaries’ third-party insurers; (iv) future earnings and cash flow of our subsidiaries; (v) the impact of bankruptcies of other companies whose share of liability may be imposed on our subsidiaries under certain state liability laws; (vi) the unpredictable aspects of the litigation process including a changing trial docket and the jurisdictions in which trials are scheduled; (vii) the outcome of any such trials including judgments or jury verdicts, as a result of our more aggressive defense posture, which includes taking selective cases to verdict; (viii) the lack of specific information in many cases concerning exposure to products for which one of our subsidiaries is responsible and the claimants’ diseases; (ix) potential changes in applicable federal and/or state law; and (x) the potential impact of various proposed structured settlement transactions or subsidiary bankruptcies by other companies, some of which are the subject of federal appellate court review, the outcome of which could materially affect any future asbestos-related liability estimates.
 
In fiscal 2006, we retained Crawford & Winiarski (“C&W”), an independent, third-party consulting firm with expertise in the area of asbestos valuation work, to assist us in calculating an estimate of our liability for unasserted-potential-future-asbestos-related claims. The methodology used by C&W to project our liability for unasserted-potential-future-asbestos-related claims included C&W doing an analysis of: (a) widely accepted forecast of the population likely to have been exposed to asbestos; (b) epidemiological studies estimating the number of people likely to develop asbestos-related diseases; (c) historical rate at which mesothelioma incidences resulted in the payment of claims by us; (d) historical settlement averages to value the projected number of future compensable mesothelioma claims; (e) historical ratio of mesothelioma-related indemnity payments to non-mesothelioma indemnity payments; and (f) historical defense costs and their relationship with total indemnity payments.
 
During fiscal 2006, we recorded a liability for asbestos claims in the amount of $380.0 million, while paying out $59.9 million for dismissals and/or settlements, which resulted in our accrued liability balance moving from $101.2 million at May 31, 2005 to $421.3 million at May 31, 2006. This increase was based largely upon C&W’s analysis of our total estimated liability for unasserted-potential-future-asbestos-related claims through May 31, 2016. This amount was calculated on a pre-tax basis and was not discounted for the time value of money. In light of the uncertainties inherent in making long-term projections, we determined at that time that a ten-year period was the most reasonable time period over which reasonably accurate estimates might still be made for projecting asbestos liabilities and defense costs and, accordingly, our accrual did not include asbestos liabilities for any period beyond ten years.
 
During the fiscal year ended May 31, 2008, we reviewed and evaluated our ten-year asbestos liability established as of May 31, 2006. As part of that review and evaluation process, the credibility of epidemiological studies of our mesothelioma claims, first introduced to management by C&W some two-and-one-half years earlier, was validated. At the core of our evaluation process, and the basis of C&W’s actuarial work on behalf of Bondex, is the Nicholson Study. The Nicholson Study is the most widely recognized reference in bankruptcy trust valuations, global settlement negotiations and the Congressional Budget Office’s work done on the proposed FAIR Act in 2006. Based on our ongoing comparison of the Nicholson Study projections and Bondex’s specific actual experience,


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
which at that time continued to bear an extremely close correlation to the study’s projections, we decided to extend our asbestos liability projection out to the year 2028. C&W assisted us in calculating an estimate of our liability for unasserted-potential-future-asbestos-related claims out to that twenty-year period.
 
C&W projected that the cost of extending the asbestos liability to 2028, coupled with an updated evaluation of our current known claims to reflect our most recent actual experience, would be $288.1 million. Therefore, we added $288.1 million to our existing asbestos liability, which brought our total asbestos-related balance sheet liabilities at May 31, 2008 to $559.7 million. Of that total, $65.0 million was estimated to be the short-term liability due in fiscal 2009, with the remaining $494.7 million balance reflected as a long-term liability. The material components of the accruals are: (i) the gross number of open malignancy claims (principally mesothelioma claims) as these claims have the most significant impact on our asbestos settlement costs; (ii) historical and current settlement costs and dismissal rates by various categories; (iii) analysis of the jurisdiction and governing laws of the states in which these claims are pending; (iv) outside defense counsel’s opinions and recommendations with respect to the merits of such claims; and (v) analysis of projected liabilities for unasserted potential future claims.
 
In determining the amount of our asbestos liability, we relied on assumptions that are based on currently known facts and projection models. Our actual expenses could be significantly higher or lower than those recorded if assumptions used in our calculations vary significantly from actual results. Key variables in these assumptions include the period of exposure to asbestos claims, the number and type of new claims to be filed each year, the rate at which mesothelioma incidences result in compensable claims against us, the average cost of disposing of each such new claim, the dismissal rates each year and the related annual defense costs. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. A significant upward or downward trend in the number of claims filed, depending on the nature of the alleged injury, the jurisdiction where filed, the average cost of resolving each such claim and the quality of the product identification, could change our estimated liability, as could any substantial adverse verdict at trial. A federal legislative solution, further state tort reform or a structured-settlement transaction could also change the estimated liability.
 
Subject to the foregoing variables, and based on currently available data, we believe that our current asbestos liability is sufficient to cover asbestos-related expenses for our known pending and unasserted-potential-future-asbestos-related claims through 2028. However, given the uncertainties associated with projecting matters into the future and numerous other factors outside of our control, we believe that it is reasonably possible we may incur additional material asbestos liabilities in periods before 2028. Due to the uncertainty inherent in the process undertaken to estimate our losses, we are unable at the present time to estimate an additional range of loss in excess of our existing accruals. While it is reasonably possible that such excess liabilities could be material to operating results in any given quarter or year, we do not believe that it is reasonably possible that such excess liabilities would have a material adverse effect on our long-term results of operations, liquidity or consolidated financial position.
 
During fiscal 2004, certain of our subsidiaries’ third-party insurers claimed exhaustion of coverage. On July 3, 2003, certain of our subsidiaries filed the case of Bondex International, Inc. et al. v. Hartford Accident and Indemnity Company et al., Case No. 1:03-cv-1322, in the United States District Court for the Northern District of Ohio, for declaratory judgment, breach of contract and bad faith against these third-party insurers, challenging their assertion that their policies covering asbestos-related claims have been exhausted. The coverage litigation involves, among other matters, insurance coverage for claims arising out of alleged exposure to asbestos containing products manufactured by the previous owner of the Bondex tradename before March 1, 1966. On March 1, 1966, Republic Powdered Metals Inc. (as it was known then), purchased the assets and assumed the liabilities of the previous owner of the Bondex tradename. That previous owner subsequently dissolved and was never a subsidiary of Republic Powdered Metals, Bondex, RPM, Inc. or the Company. Because of the earlier assumption of liabilities, however, Bondex has historically responded, and must continue to respond, to lawsuits alleging exposure to these asbestos-containing products. We discovered that the defendant insurance companies in the coverage litigation had wrongfully used cases alleging exposure to these pre-1966 products to erode their aggregate limits. This conduct, apparently known by the insurance industry based on discovery conducted to date, was in breach of the insurers’


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
policy language. Two of the defendant insurers have filed counterclaims seeking to recoup certain monies should plaintiffs prevail on their claims.
 
During the second fiscal quarter ended November 30, 2006, plaintiffs and one of the defendant insurers reached a settlement of $15.0 million, the terms of which are confidential by agreement of the parties. The settling defendant was dismissed from the case.
 
In 2007, plaintiffs had filed motions for partial summary judgment against the defendants and defendants had filed motions for summary judgment against plaintiffs. In addition, plaintiffs had filed a motion to dismiss the counterclaim filed by one of the defendants. On December 1, 2008, the court decided the pending motions for summary judgment and dismissal. The court denied the plaintiffs’ motions for partial summary judgment and granted the defendants’ motions for summary judgment against plaintiffs on a narrow ground. The court also granted the plaintiffs’ motion to dismiss one defendant’s amended counterclaim. In light of its summary judgment rulings, the court entered judgment as a matter of law on all remaining claims and counterclaims, including the counterclaim filed by another defendant, and dismissed the action. The court also dismissed certain remaining motions as moot. Plaintiffs have filed a notice of appeal to the United States Sixth Circuit Court of Appeals and will continue to aggressively pursue their claims on appeal. Certain defendants have filed cross-appeals. On December 17, 2009, the Sixth Circuit Court of Appeals issued a briefing schedule. Plaintiffs’ first brief on appeal was filed on January 26, 2010. On February 2, 2010, the Ohio Manufacturers’ Association filed an amicus brief in support of plaintiffs. Defendants moved for an extension of time to file their briefs, which was granted by the Sixth Circuit Court of Appeals. As a result, defendants’ briefs were filed on March 31, 2010, and final briefs are due on April 28, 2010.
 
We are unable at the present time to predict the timing or ultimate outcome of this insurance coverage litigation or whether there will be any further settlements. Consequently, we are unable to predict whether, or to what extent, any additional insurance may be available to cover a portion of our subsidiaries’ asbestos liabilities. We have not included any potential benefits from this litigation in calculating our current asbestos liability. Our wholly-owned captive insurance companies have not provided any insurance or reinsurance coverage for any of our subsidiaries’ asbestos-related claims.
 
The following table illustrates the movement of current and long-term asbestos-related liabilities through February 28, 2010:
 
Asbestos Liability Movement
(Current and Long-Term)
 
                                 
    Balance at
  Additions to
      Balance at
    Beginning of
  Asbestos
      End of
    Period   Charge   Deductions*   Period
    (In thousands)
 
Nine Months Ended February 28, 2010
  $ 490,328             $ 57,437     $ 432,891  
Year Ended May 31, 2009
    559,745               69,417       490,328  
Year Ended May 31, 2008
    354,268     $ 288,100       82,623       559,745  
 
 
* Deductions include payments for defense-related costs and amounts paid to settle claims.
 
EIFS Litigation
 
As of February 28, 2010, Dryvit, one of our wholly owned subsidiaries, was a defendant or co-defendant in various single family residential exterior insulating finishing systems (“EIFS”) cases, the majority of which are pending in the southeastern region of the country. Dryvit is also defending EIFS lawsuits involving commercial structures, townhouses and condominiums. The vast majority of Dryvit’s EIFS lawsuits seek monetary relief for


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
water intrusion related property damages, although some claims in certain lawsuits allege personal injuries from exposure to mold.
 
Third-party excess insurers have historically paid varying shares of Dryvit’s defense and settlement costs in the individual commercial and residential EIFS lawsuits under various cost-sharing agreements. Dryvit has assumed a greater share of the costs associated with its EIFS litigation as it seeks funding commitments from our third-party excess insurers and will likely continue to do so pending the outcome of coverage litigation involving these same third-party insurers. This coverage litigation, Dryvit Systems, Inc. et al v. Chubb Insurance Company et al, Case No. CV 05 578004, is pending in the Cuyahoga Court of Common Pleas. As previously reported, all parties filed motions for partial summary judgment in 2008. The motions were filed pursuant to an order entered by the trial court on March 17, 2008, which requested the parties to address the following three issues: (1) whether the policies of Defendants contain a duty to defend; (2) whether the policies contain an obligation to reimburse defense costs; and (3) whether Defendants’ policy obligations are triggered through exhaustion of the underlying coverage.
 
On November 23, 2009, the trial court filed its Journal Entry ruling upon the parties’ motions for partial summary judgment. The trial court decided issues one and two relating to defense coverage in favor of Chubb and Agricultural. The court ruled that Chubb and Agricultural do not have a duty to pay defense costs under their respective 1995 and 1996 policies. As a result, the trial court denied another Defendant’s motion to dismiss the broker negligence and breach of contract claims asserted by RPM and Dryvit.
 
With respect to the third issue, the trial court ruled that the 1995 Agricultural policy was not properly exhausted because Agricultural did not pay $10 million in indemnity payments to settle claims. The trial court found that the $5.2 million Agricultural paid for defense costs under its 1995 policy did not reduce its aggregate limit of liability. The trial court also determined that the 1995 Chubb excess policy is not required to pay indemnity for Dryvit EIFS claims at this time.
 
The trial court’s November 23, 2009 Journal Entry is not a final appealable order, and the court denied the broker Defendant’s motion seeking a certification of the ruling for an interlocutory appeal. The parties may appeal from the trial court’s ruling after other claims and defenses in the litigation are decided by motion or at trial.
 
The parties are required by court order to engage in settlement negotiations through private mediation. If the mediation is not successful, the parties will complete discovery, which will include discovery on damages and expert witnesses in anticipation of filing additional summary judgment motions and conducting a jury trial.
 
Other Contingencies
 
We provide, through our wholly-owned insurance subsidiaries, certain insurance coverage, primarily product liability, to our other subsidiaries. Excess coverage is provided by third-party insurers. Our reserves provide for these potential losses as well as other uninsured claims.
 
We also offer warranty programs at several of our industrial businesses and have established a product warranty liability. We review this liability for adequacy on a quarterly basis and adjust it as necessary. The primary factors that could affect this liability may include changes in the historical system performance rate as well as the 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 claims not yet received, which are not currently estimable due to the significant number of variables contributing to the extent of any necessary remediation. While our warranty liability represents our best estimate at February 28, 2010, we can provide no assurances that we will not experience material claims in the future or that we will not incur significant costs to


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
resolve such claims beyond the amounts accrued or beyond what we may recover from our suppliers. Product warranty expense is recorded within selling, general and administrative expense.
 
The following table includes the changes in our accrued warranty balances:
 
                                 
    Quarter Ended
    Nine Months Ended
 
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands)  
 
Beginning Balance
  $ 15,097     $ 7,146     $ 18,993     $ 8,055  
Deductions(1)
    (3,741 )     (3,166 )     (18,200 )     (10,823 )
Provision charged to SG&A expense
    3,263       4,931       13,826       11,679  
                                 
Ending Balance
  $ 14,619     $ 8,911     $ 14,619     $ 8,911  
                                 
 
 
(1) Primarily claims paid during the year.
 
In addition, like other companies participating in similar lines of business, some of our subsidiaries are involved in several proceedings relating to environmental matters. It is our policy to accrue remediation costs when it is probable that such efforts will be required and the related costs can be reasonably estimated. These liabilities are undiscounted.
 
NOTE 7 — INCOME TAXES
 
The effective income tax benefit rate was 17.2% for the three months ended February 28, 2010 compared to an effective income tax benefit rate of 30.5% for the three months ended February 28, 2009. The effective income tax rate was 32.8% for the nine months ended February 28, 2010 compared to an effective income tax rate of 30.9% for the same period a year ago.
 
For the three and nine months ended February 28, 2010 and February 28, 2009, respectively, the effective tax rate differed from the federal statutory rate principally due to the impact of certain foreign operations on our U.S. taxes and the effect of lower tax rates in certain of our foreign jurisdictions. These decreases in taxes were partially offset by an increase in state taxes, non-deductible business operating expenses and provisions for valuation allowances associated with losses incurred by certain of our foreign businesses and for foreign tax credit carryforwards.
 
We file income tax returns in the U.S. and in various state, local and foreign jurisdictions. As of February 28, 2010, the fiscal years 2007 through 2009 are subject to U.S. federal income tax examination. With limited exceptions we are also subject to various state and local or non-U.S. income tax examinations by tax authorities for the fiscal years 2003 through 2009. Currently, the Internal Revenue Service is examining the fiscal 2007 and 2008 tax years. Also, the Canada Revenue Authority is examining certain 2006 and 2007 Canadian returns. While it is reasonably possible that these matters could be resolved during the next 12 months, the timing and ultimate outcomes are uncertain.
 
As of February 28, 2010, we have determined, based on the available evidence, that it is uncertain whether we will be able to recognize certain deferred tax assets. Therefore, we intend to maintain the tax valuation allowances recorded at February 28, 2010 for certain deferred tax assets until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support their reversal. These valuation allowances relate to U.S. foreign tax credit carryforwards, certain foreign net operating losses and net foreign deferred tax assets. A portion of the valuation allowance is associated with deferred tax assets recorded in purchase accounting for prior year acquisitions. A reversal of the valuation allowance that was recorded in purchase accounting will impact earnings.


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
NOTE 8 — PENSION AND POSTRETIREMENT HEALTH CARE BENEFITS
 
We offer defined benefit pension plans, defined contribution pension plans, as well as several unfunded health care benefit plans primarily for certain of our retired employees. The following tables provide the retirement-related benefit plans’ impact on income before income taxes for the three and nine month periods ended February 28, 2010 and 2009:
 
                                 
    U.S. Plans
    Non-U.S. Plans
 
    Quarter Ended
    Quarter Ended
 
    February 28,     February 28,  
Pension Benefits
  2010     2009     2010     2009  
    (In thousands)  
 
Service cost
  $ 3,505     $ 3,680     $ 486     $ 760  
Interest cost
    3,375       2,976       1,823       1,915  
Expected return on plan assets
    (2,448 )     (3,224 )     (1,502 )     (1,847 )
Amortization of:
                               
Prior service cost
    87       85       3       1  
Net actuarial losses recognized
    1,638       663       235       310  
                                 
Net Periodic Benefit Cost
  $ 6,157     $ 4,180     $ 1,045     $ 1,139  
                                 
 
                                 
    U.S. Plans
    Non-U.S. Plans
 
    Quarter Ended
    Quarter Ended
 
    February 28,     February 28,  
Postretirement Benefits
  2010     2009     2010     2009  
    (In thousands)  
 
Service cost
  $     $     $ 814     $ 99  
Interest cost
    143       108       160       189  
Prior service cost
    (7 )     (7 )                
Net actuarial (gains) losses recognized
    (34 )     (24 )     (33 )      
                                 
Net Periodic Benefit Cost
  $ 102     $ 77     $ 941     $ 288  
                                 
 
                                 
    U.S. Plans
    Non-U.S. Plans
 
    Nine Months Ended
    Nine Months Ended
 
    February 28,     February 28,  
Pension Benefits
  2010     2009     2009     2008  
    (In thousands)  
 
Service cost
  $ 10,515     $ 11,040     $ 1,459     $ 2,279  
Interest cost
    10,124       8,930       5,467       5,745  
Expected return on plan assets
    (7,346 )     (9,670 )     (4,506 )     (5,540 )
Amortization of:
                               
Prior service cost
    263       256       7       3  
Net actuarial losses recognized
    4,915       1,989       706       932  
                                 
Net Periodic Benefit Cost
  $ 18,471     $ 12,545     $ 3,133     $ 3,419  
                                 
 


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                                 
    U.S. Plans
    Non-U.S. Plans
 
    Nine Months Ended
    Nine Months Ended
 
    February 28,     February 28,  
Postretirement Benefits
  2009     2008     2009     2008  
    (In thousands)  
 
Service cost
  $ 2     $     $ 244     $ 295  
Interest cost
    427       324       480       567  
Prior service cost
    (21 )     (21 )                
Net actuarial (gains) losses recognized
    (103 )     (72 )     (100 )      
                                 
Net Periodic Benefit Cost
  $ 305     $ 231     $ 624     $ 862  
                                 
 
We previously disclosed in our financial statements for the fiscal year ended May 31, 2009 that we expected to contribute approximately $10.8 million to our retirement plans in the U.S. and approximately $8.7 million to plans outside the U.S. during the current fiscal year. As of February 28, 2010, we have updated our expected contributions to the Retirement Plans in the U.S. to be $30.5 million, in an effort to improve the funded status of those plans. We do not anticipate any changes to the contribution levels outside the U.S.
 
The fair value of the assets held by our pension plans at May 31, 2009 declined from their prior year values due primarily to the significant declines that have taken place in the stock markets over that time. Although we have seen a recovery in the stock markets in recent months, we cannot be certain that this trend will continue. The actuarial assumptions used to calculate our net periodic benefit cost are reviewed annually, most recently as of our May 31, 2009 measurement date. Those actuarial assumptions and related market conditions are reflected in our current fiscal year net periodic benefit costs included above.
 
NOTE 9 — EARNINGS PER SHARE
 
On June 1, 2009, we implemented the provisions of recent guidance issued by the FASB regarding the computation of earnings per share. The FASB’s updated guidance clarifies that unvested share-based payment awards that contain rights to receive non-forfeitable dividends are participating securities. Our unvested restricted shares are considered participating securities. The FASB also updated their guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method. We have retroactively applied the provisions of this guidance to the financial information included herein, which impacted prior year reported figures by reducing basic and diluted earnings per share for the nine months ended February 28, 2009 by $0.01 per share, from reported basic earnings per share of $0.64 to as-adjusted basic earnings per share of $0.63, and from reported diluted earnings per share of $0.63 to as-adjusted diluted earnings per share of $0.62. No other prior year figures were impacted by this change.

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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table sets forth the reconciliation of the numerator and denominator of basic and diluted earnings per share, as calculated using the two-class method, for the nine month periods ended February 28, 2010 and 2009. For the quarters ended February 28, 2010 and 2009, the treasury stock method was utilized for the purpose of computing basic and diluted earnings per share, as the result under the two-class method would have been anti-dilutive:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    February 28,     February 28,  
    2010     2009     2010     2009  
    (In thousands, except per share amounts)  
 
Numerator for earnings per share:
                               
Net income (loss)
  $ (9,400 )   $ (30,933 )   $ 119,518     $ 80,310  
Less: Allocation of earnings and dividends to participating securities
                    (1,446 )     (1,130 )
                                 
Net income available to common shareholders — basic
    (9,400 )     (30,933 )     118,072       79,180  
Add: Undistributed earnings reallocated to unvested shareholders
                    3       52  
Add: Income effect of contingently issuable shares
                            229  
                                 
Net income available to common shareholders — diluted
  $ (9,400 )   $ (30,933 )   $ 118,075     $ 79,461  
                                 
Denominator for basic and diluted earnings per share:
                               
Basic weighted average common shares
    127,500       126,575       126,940       126,295  
Average diluted options
                    599       596  
Additional shares issuable assuming conversion of convertible securities
                            1,124  
                                 
Total shares for diluted earnings per share
    127,500       126,575       127,539       128,015  
                                 
Earnings Per Share:
                               
Basic earnings per share of common stock
  $ (0.07 )   $ (0.24 )   $ 0.93     $ 0.63  
                                 
Diluted earnings per share of common stock
  $ (0.07 )   $ (0.24 )   $ 0.93     $ 0.62  
                                 
 
NOTE 10 — SEGMENT INFORMATION
 
We operate a portfolio of businesses and product lines that manufacture and sell a variety of specialty paints, protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by organizing our businesses and product lines into two reportable segments: the industrial reportable segment and the consumer reportable segment. Within each reportable segment, we aggregate several operating segments that consist of individual groups of companies and product lines, which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our five operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief executive officer in determining how to allocate the assets of the Company and evaluate performance. These five 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. Over the past several years, a number of product lines included within our RPM II/Consumer Group were either sold to third-parties or reassigned to other operating segments within our consumer reportable segment to better align with how management views our business. After a comprehensive review and analysis of the remaining product lines in the RPM II/Consumer Group and the current customer base and markets served, it was determined that these remaining businesses are more appropriately accounted for in our RPM II/


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Industrial Group. Total net sales for these businesses approximated 3.0% of consolidated net sales for the quarter and nine month periods ended February 28, 2009. The financial statements and notes contained herein reflect the reclassification of these product lines to the RPM II/Industrial Group for all periods presented.
 
Our industrial reportable segment products are sold throughout North America and also account for the majority of our international sales. Our industrial product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. This reportable segment comprises three separate operating segments — our Building Solutions Group, Performance Coatings Group, and RPM II Group. Products and services within this reportable segment include construction chemicals; roofing systems; weatherproofing and other sealants; polymer flooring; wood stains; edible coatings and specialty glazes for pharmaceutical, cosmetic and food industries; and other specialty chemicals.
 
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. Consumer segment products are sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops and to other smaller customers through distributors. This reportable segment comprises two operating segments — our DAP Group and our Rust-Oleum Group. Products within this reportable segment include specialty, hobby and professional paints; caulks; adhesives; silicone sealants; and wood stains.
 
In addition to our two 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 either reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses, deferred pension assets, 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. Our comparative three and nine month results for the periods ended February 28, 2010 and 2009, and identifiable assets as of February 28, 2010 and May 31, 2009 are presented in segment detail in the following table.
 
                                 
    Three Months Ended     Nine Months Ended  
    February 28,
    February 28,
    February 28,
    February 28,
 
    2010     2009     2010     2009  
    (In thousands)  
 
Net Sales
                               
Industrial Segment
  $ 457,683     $ 429,126     $ 1,695,206     $ 1,806,936  
Consumer Segment
    208,911       206,270       745,999       703,890  
                                 
Consolidated
  $ 666,594     $ 635,396     $ 2,441,205     $ 2,510,826  
                                 
Gross Profit
                               
Industrial Segment
  $ 184,174     $ 166,985     $ 727,125     $ 747,317  
Consumer Segment
    75,658       67,673       289,748       247,656  
                                 
Consolidated
  $ 259,832     $ 234,658     $ 1,016,873     $ 994,973  
                                 
Income (Loss) Before Income Taxes
                               
Industrial Segment
  $ 1,207     $ (20,446 )   $ 159,954     $ 144,627  
Consumer Segment
    12,285       1,663       94,735       46,596  
Corporate/Other
    (24,841 )     (25,697 )     (76,866 )     (75,040 )
                                 
Consolidated
  $ (11,349 )   $ (44,480 )   $ 177,823     $ 116,183  
                                 
 


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RPM INTERNATIONAL INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                 
Identifiable Assets
  February 28, 2010     May 31, 2009  
    (In thousands)  
 
Industrial Segment
  $ 1,890,390     $ 1,878,378  
Consumer Segment
    1,089,635       1,127,285  
Corporate/Other
    357,340       404,258  
                 
Consolidated
  $ 3,337,365     $ 3,409,921  
                 
 
NOTE 11 — DEBT
 
On October 9, 2009, we sold $300.0 million aggregate principal amount of 6.125% Notes due 2019 (the “Notes”). The net proceeds from the offering of the Notes were used to repay $163.7 million in principal amount of our unsecured notes due October 15, 2009, and approximately $120.0 million in principal amount of short-term borrowings outstanding under our accounts receivable securitization program. The balance of the net proceeds was used for general corporate purposes.
 
During our first fiscal quarter ended August 31, 2008, our Senior Convertible Notes (the “Convertible Notes”) due May 13, 2033 became eligible for conversion based upon the price of RPM International Inc. common stock. Subsequent to this event, on June 13, 2008, we called for the redemption of all of our outstanding Convertible Notes on the effective date of July 14, 2008 (the “Redemption Date”). Prior to the Redemption Date, virtually all of the holders had already converted their Convertible Notes into 8,030,455 shares of RPM International Inc. common stock, or 27.0517 shares of common stock for each $1,000 Face Value Convertible Note they held. Any fractional shares from the conversion were paid in cash.
 
NOTE 12 — COMPREHENSIVE INCOME
 
The following table illustrates the components of total comprehensive income:
 
                                 
    Three Months Ended
    Nine Months Ended
 
    February 28,     February 28,  
    2010     2009     2010     2009  
          (In thousands)        
 
Net income (loss)
  $ (9,400 )   $ (30,933 )   $ 119,518     $ 80,310  
Other Comprehensive Income:
                               
Foreign currency translation adjustments
    (41,556 )     (20,759 )     (1,093 )     (194,482 )
Pension and other postretirement benefit liability adjustments, net of tax
    1,323       1,314       3,539       6,302  
Unrealized gain (loss) on securities, net of tax
    811       (1,320 )     8,428       (29,124 )
Derivatives income, net of tax
    (2,087 )     (5,683 )     (1,386 )     (4,437 )
                                 
Total Comprehensive Income (Loss)
  $ (50,909 )   $ (57,381 )   $ 129,006     $ (141,431 )
                                 
 
NOTE 13 — SUBSEQUENT EVENTS
 
We have evaluated events subsequent to February 28, 2010, through the date the financial statements were issued, and have determined no events have occurred that require adjustment of or disclosure in the consolidated financial statements.

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our Consolidated Financial Statements include the accounts of RPM International Inc. and its majority-owned subsidiaries. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We continually evaluate these estimates, including those related to our asbestos liability; allowances for doubtful accounts; inventories; allowances for recoverable taxes; useful lives of property, plant and equipment; goodwill and other intangible assets; environmental, warranties and other contingent liabilities; income tax valuation allowances; pension plans; and the fair value of financial instruments. We base our estimates on historical experience, our most recent facts, and other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of our assets and liabilities. Actual results, which are shaped by actual market conditions, including legal settlements, may differ materially from our estimates.
 
We have identified below the accounting policies and estimates that are the most critical to our financial statements.
 
Revenue Recognition
 
Revenues are recognized when realized or realizable, and when earned. In general, this is when title and risk of loss pass to the customer. Further, revenues are realizable when we have persuasive evidence of a sales arrangement, the product has been shipped or the services have been provided to the customer, the sales price is fixed or determinable, and collectibility is reasonably assured. We reduce our revenues for estimated customer returns and allowances, certain rebates, sales incentives and promotions in the same period the related sales are recorded.
 
We also record revenues generated under long-term construction contracts, mainly in connection with the installation of specialized roofing and flooring systems, and related services. In general, we account for long-term construction contracts under the percentage-of-completion method, and therefore record contract revenues and related costs as our contracts progress. This method recognizes the economic results of contract performance on a timelier basis than does the completed-contract method; however, application of this method requires reasonably dependable estimates of progress toward completion, as well as other dependable estimates. When reasonably dependable estimates cannot be made, or if other factors make estimates doubtful, the completed-contract method is applied. Under the completed-contract method, billings and costs are accumulated on the balance sheet as the contract progresses, but no revenue is recognized until the contract is complete or substantially complete.
 
Translation of Foreign Currency Financial Statements and Foreign Currency Transactions
 
Our reporting currency is the U.S. dollar. However, the functional currency for each of our foreign subsidiaries is its local currency. We translate the amounts included in our Consolidated Statements of Income from our foreign subsidiaries into U.S. dollars at weighted-average exchange rates, which we believe are representative of the actual exchange rates on the dates of the transactions. Our foreign subsidiaries’ assets and liabilities are translated into U.S. dollars from local currency at the actual exchange rates as of the end of each reporting date, and we record the resulting foreign exchange translation adjustments in our Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss). If the U.S. dollar continues to strengthen, we will continue to reflect the resulting losses as a component of accumulated other comprehensive income. Conversely, if the U.S. dollar were to weaken, foreign exchange translation gains could result, which would favorably impact accumulated other comprehensive income. Translation adjustments will be included in net earnings in the event of a sale or liquidation of any of our underlying foreign investments, or in the event that we distribute the accumulated earnings of consolidated foreign subsidiaries. If we determined that the functional currency of any of our foreign subsidiaries should be the U.S. dollar, our financial statements would be affected. Should this occur, we would adjust our reporting to appropriately account for any such changes.


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As appropriate, we use permanently invested intercompany loans as a source of capital to reduce exposure to foreign currency fluctuations at our foreign subsidiaries. These loans, on a consolidated basis, are treated as being analogous to equity for accounting purposes. Therefore, foreign exchange gains or losses on these intercompany loans are recorded in accumulated other comprehensive income (loss). If we were to determine that the functional currency of any of our subsidiaries should be the U.S. dollar, we would no longer record foreign exchange gains or losses on such intercompany loans.
 
Goodwill
 
We test our goodwill balances at least annually, or more frequently as impairment indicators arise, using a fair-value approach at the reporting unit level. Our reporting units have been identified at the component level, or one level below our operating segments. We perform a two-step impairment test. In the first step, we compare the fair value of each of our reporting units to its carrying value. We have elected to perform our annual required impairment tests, which involve the use of estimates related to the fair market values of the reporting units with which goodwill is associated, during our fourth fiscal quarter. Calculating the fair market values of reporting units requires our use of estimates and assumptions.
 
We use significant judgment in determining the most appropriate method to establish the fair values of each of our reporting units. We estimate the fair values of our reporting units by employing various valuation techniques, depending on the availability and reliability of comparable market value indicators, and employ methods and assumptions which include the application of third-party market value indicators and the computation of discounted future cash flows for each of our reporting unit’s annual projected earnings before interest, taxes, depreciation and amortization (“EBITDA”). For each of our reporting units, we calculate a break-even multiple based on its carrying value as of the testing date. We then compare each reporting unit’s break-even EBITDA market multiple to guideline EBITDA market multiples applicable to our industry and peer group, the data for which we develop internally and through third-party sources. The result of this analysis provides us with insight and sensitivity as to which reporting units, if any, may have a higher risk for a potential impairment.
 
We then supplement this analysis with an evaluation of discounted future cash flows for each reporting unit’s projected EBITDA. Under this approach, we calculate the fair value of each 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 each 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 units. 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 each 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.
 
Our annual goodwill impairment analysis, which we performed during the fourth quarter of fiscal 2009, resulted in an impairment charge related to a reduction in the carrying value of goodwill in the amount of $14.9 million, relating to our Fibergrate reporting unit. The remaining net goodwill balance relating to our Fibergrate unit approximates $23 million. The excess of fair value over carrying value for our other reporting units as of March 1, 2009, ranged from approximately $1.3 million to $249.8 million. In order to evaluate the sensitivity of the fair value calculations of our goodwill impairment test, we applied a hypothetical 5% decrease to the fair values of each reporting unit. This hypothetical 5% decrease would result in excess fair value over carrying value


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ranging from approximately $1.0 million to $231.8 million for our reporting units. Further, we compare the sum of the fair values of our reporting units resulting from our discounted cash flow calculations to our market capitalization as of our valuation date. We use this comparison to further assess the reasonableness of the assumptions employed in our valuation calculations. As of the valuation date, the sum of the fair values we calculated for our reporting units was approximately 15% above our market capitalization.
 
Should the future earnings and cash flows at our reporting units decline and/or discount rates increase, future impairment charges to goodwill and other intangible assets may be required.
 
Other Long-Lived Assets
 
We assess identifiable, non-goodwill intangibles and other long-lived assets for impairment whenever events or changes in facts and circumstances indicate the possibility that the carrying values of these assets may not be recoverable over their estimated remaining useful lives. Factors considered important in our assessment, which might trigger an impairment evaluation, include the following:
 
  •  significant under-performance relative to historical or projected future operating results;
 
  •  significant changes in the manner of our use of the acquired assets;
 
  •  significant changes in the strategy for our overall business; and
 
  •  significant negative industry or economic trends.
 
Additionally, we test all indefinite-lived intangible assets for impairment at least annually during our fiscal fourth quarter. Measuring a potential impairment of non-goodwill intangibles and other long-lived assets requires the use of various estimates and assumptions, including the determination of which cash flows are directly related to the assets being evaluated, the respective useful lives over which those cash flows will occur and potential residual values, if any. If we determine that the carrying values of these assets may not be recoverable based upon the existence of one or more of the above-described indicators or other factors, any impairment amounts would be measured based on the projected net cash flows expected from these assets, including any net cash flows related to eventual disposition activities. The determination of any impairment losses would be based on the best information available, including internal estimates of discounted cash flows; quoted market prices, when available; and independent appraisals, as appropriate, to determine fair values. Cash flow estimates would be based on our historical experience and our internal business plans, with appropriate discount rates applied. Our fiscal 2009 annual impairment tests of each of our indefinite-lived intangible assets resulted in an impairment loss of $0.5 million related to the reduction in carrying value of one of our tradenames. This loss was primarily the result of continued declines in sales and projected sales in one of our businesses which operates primarily in the residential housing market. We also performed a recoverability test with respect to the assets of both of our entities that incurred goodwill or other intangible asset impairments during the current fiscal year. The tests included the comparison of our estimation of undiscounted future cash flows associated with these businesses to their respective book value as of the date of our annual impairment tests. No impairment losses were required as a result of either of these tests for recoverability.
 
Deferred Income Taxes
 
Our provision for income taxes is calculated using the liability method which requires the recognition of deferred income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain changes in valuation allowances. We provide valuation allowances against deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
 
In determining the adequacy of valuation allowances, we consider cumulative and anticipated amounts of domestic and international earnings or losses, anticipated amounts of foreign source income, as well as the anticipated taxable income resulting from the reversal of future taxable temporary differences.


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We intend to maintain any recorded valuation allowances until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support a reversal of the tax valuation allowances.
 
Contingencies
 
We are party to claims and lawsuits arising in the normal course of business, including the various asbestos-related suits discussed in Note 6 to our financial statements. Although we cannot precisely predict the amount of any liability that may ultimately arise with respect to any of these matters, we record provisions when we consider the liability probable and reasonably estimable. Our provisions are based on historical experience and legal advice, reviewed quarterly and adjusted according to developments. Estimating probable losses requires the analysis of multiple forecasted factors that often depend on judgments about potential actions by third parties, such as regulators, courts, and state and federal legislatures. Changes in the amounts of our loss provisions, which can be material, affect our Consolidated Statements of Income. Due to the inherent uncertainties in the process undertaken to estimate potential losses, we are unable to estimate an additional range of loss in excess of our accruals. While it is reasonably possible that such excess liabilities, if they were to occur, could be material to operating results in any given quarter or year of their recognition, we do not believe that it is reasonably possible that such excess liabilities would have a material adverse effect on our long-term results of operations, liquidity or consolidated financial position.
 
Our environmental-related accruals are similarly established and/or adjusted as more information becomes available upon which costs can be reasonably estimated. Here again, actual costs may vary from these estimates because of the inherent uncertainties involved, including the identification of new sites and the development of new information about contamination. Certain sites are still being investigated and, therefore, we have been unable to fully evaluate the ultimate costs for those sites. As a result, accruals have not been estimated for certain of these sites and costs may ultimately exceed existing estimated accruals for other sites. We have received indemnities for potential environmental issues from purchasers of certain of our properties and businesses and from sellers of some of the properties or businesses we have acquired. We have also purchased insurance to cover potential environmental liabilities at certain sites. If the indemnifying or insuring party fails to, or becomes unable to, fulfill its obligations under those agreements or policies, we may incur environmental costs in addition to any amounts accrued, which may have a material adverse effect on our financial condition, results of operations or cash flows.
 
Several of our industrial businesses offer extended warranty terms and related programs, and thus have established a corresponding warranty liability. Warranty expense is impacted by variations in local construction practices and installation conditions, including geographic and climate differences.
 
Additionally, our operations are subject to various federal, state, local and foreign tax laws and regulations which govern, among other things, taxes on worldwide income. The calculation of our income tax expense is based on the best information available and involves our significant judgment. The actual income tax liability for each jurisdiction in any year can be, in some instances, determined ultimately several years after the financial statements have been published.
 
We maintain accruals for estimated income tax exposures for many different jurisdictions. Tax exposures are settled primarily through the resolution of audits within each tax jurisdiction or the closing of a statute of limitation. Tax exposures can also be affected by changes in applicable tax laws or other factors, which may cause us to believe a revision of past estimates is appropriate. We believe that appropriate liabilities have been established for income tax exposures; however, actual results may differ materially from our estimates.
 
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, past experience and individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm 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.


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Inventories
 
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out (FIFO) basis and market being determined on the basis of replacement cost or net realizable value. 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.
 
Marketable Securities
 
Marketable securities, included in other current and long-term assets, are composed of available-for-sale securities and are reported at fair value. Realized gains and losses on sales of investments are recognized in net income on the specific identification basis. Changes in fair values of 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 operating income in the period in which the unrealized losses are deemed other than temporary. In order to determine whether an other-than-temporary decline in market value has occurred, the duration of the decline in value and our ability to hold the investment to recovery 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.
 
Pension and Postretirement Plans
 
We sponsor qualified defined benefit pension plans and various other nonqualified postretirement plans. The qualified defined benefit pension plans are funded with trust assets invested in a diversified portfolio of debt and equity securities and other investments. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plans could have an adverse impact on our cash flow.
 
Changes in our key plan assumptions would impact net periodic benefit expense and the projected benefit obligation for our defined benefit and various postretirement benefit plans. Based upon May 31, 2009 information, the following tables reflect the impact of a 1% change in the key assumptions applied to our defined benefit pension plans in the U.S. and internationally:
 
                                 
    U.S.   International
    1% Increase   1% Decrease   1% Increase   1% Decrease
        (In millions)    
 
Discount Rate
                               
Increase (decrease) in expense in FY 2009
  $ (2.9 )   $ 2.9     $ (1.8 )   $ 2.0  
Increase (decrease) in obligation as of May 31, 2009
  $ (19.5 )   $ 21.2     $ (12.4 )   $ 15.8  
Expected Return on Plan Assets
                               
Increase (decrease) in expense in FY 2009
  $ (1.5 )   $ 1.5     $ (1.0 )   $ 1.0  
Increase (decrease) in obligation as of May 31, 2009
  $ N/A     $ N/A     $ N/A     $ N/A  
Compensation Increase
                               
Increase (decrease) in expense in FY 2009
  $ 2.6     $ (2.3 )   $ 0.9     $ (0.8 )
Increase (decrease) in obligation as of May 31, 2009
  $ 10.1     $ (8.9 )   $ 3.3     $ (2.9 )


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Based upon May 31, 2009 information, the following tables reflect the impact of a 1% change in the key assumptions applied to our various postretirement health care plans:
 
                                 
    U.S.   International
    1% Increase   1% Decrease   1% Increase   1% Decrease
        (In millions)    
 
Discount Rate
                               
Increase (decrease) in expense in FY 2009
  $     $     $ (0.2 )   $ 0.3  
Increase (decrease) in obligation as of May 31, 2009
  $ (0.7 )   $ 0.8     $ (1.1 )   $ 1.4  
Healthcare Cost Trend Rate
                               
Increase (decrease) in expense in FY 2009
  $     $     $ 0.1     $ (0.3 )
Increase (decrease) in obligation as of May 31, 2009
  $ 0.5     $ (0.4 )   $ 1.4     $ (1.1 )
 
REPORTABLE SEGMENT INFORMATION
 
Our business is divided into two reportable segments: the industrial reportable segment and the consumer reportable segment. Within each reportable segment, we aggregate several operating segments that consist of individual groups of companies and product lines, which generally address common markets, share similar economic characteristics, utilize similar technologies and can share manufacturing or distribution capabilities. Our five operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief executive officer in determining how to allocate the assets of the Company and evaluate performance. These five 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 gross profit, and, to a lesser extent, income (loss) before income taxes, but also look to earnings (loss) before interest and taxes (“EBIT”) as a performance evaluation measure because interest expense is essentially related to corporate acquisitions, as opposed to segment operations. Over the past several years, a number of product lines included within our RPM II/Consumer Group were either sold to third-parties or reassigned to other operating segments within our consumer reportable segment to better align with how management views our business. After a comprehensive review and analysis of the remaining product lines in the RPM II/Consumer Group and the current customer base and markets served, it was determined that these remaining businesses are more appropriately accounted for in our RPM II/Industrial Group. Total net sales for these businesses approximated 3.0% of consolidated net sales for the three and nine month periods ended February 28, 2009. The financial statements and notes contained herein reflect the reclassification of these product lines to the RPM II/Industrial Group for all periods presented.
 
Our industrial reportable segment products are sold throughout North America and also account for the majority of our international sales. Our industrial product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other commercial customers. This reportable segment comprises three separate operating segments — our Building Solutions Group, Performance Coatings Group, and RPM II Group. Products and services within this reportable segment include construction chemicals; roofing systems; weatherproofing and other sealants; polymer flooring; wood stains; edible coatings and specialty glazes for pharmaceutical, cosmetic and food industries; and other specialty chemicals.
 
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. Consumer segment products are sold throughout North America directly to mass merchants, home improvement centers, hardware stores, paint stores, craft shops and to other smaller customers through distributors. This reportable segment comprises two operating segments — our DAP Group and our Rust-Oleum Group. Products within this reportable segment include specialty, hobby and professional paints; caulks; adhesives; silicone sealants; and wood stains.


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In addition to our two 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 either reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses, deferred pension assets, and headquarters’ property and equipment. These corporate and other assets and expenses reconcile reportable segment data to total consolidated income before income taxes, interest expense and earnings before interest and taxes.
 
The following table reflects the results of our reportable segments consistent with our management philosophy, and represents the information we utilize, in conjunction with various strategic, operational and other financial performance criteria, in evaluating the performance of our portfolio of product lines.
 
                                 
    Quarter Ended     Nine Months Ended  
    February 28,
    February 28,
    February 28,
    February 28,
 
    2010     2009     2010     2009  
          (In thousands)        
 
Net Sales
                               
Industrial Segment
  $ 457,683     $ 429,126     $ 1,695,206     $ 1,806,936  
Consumer Segment
    208,911       206,270       745,999       703,890  
                                 
Consolidated
  $ 666,594     $ 635,396     $ 2,441,205     $ 2,510,826  
                                 
Gross Profit
                               
Industrial Segment
  $ 184,174     $ 166,985     $ 727,125     $ 747,317  
Consumer Segment
    75,658       67,673       289,748       247,656  
                                 
Consolidated
  $ 259,832     $ 234,658     $ 1,016,873     $ 994,973  
                                 
Income (Loss) Before Income Taxes(a)
                               
Industrial Segment
                               
Income Before Income Taxes(a)
  $ 1,207     $ (20,446 )   $ 159,954     $ 144,627  
Interest (Expense), Net
    (16 )     (114 )     (384 )     (150 )
                                 
EBIT(b)
  $ 1,223     $ (20,332 )   $ 160,338     $ 144,777  
                                 
Consumer Segment
                               
Income Before Income Taxes(a)
  $ 12,285     $ 1,663     $ 94,735     $ 46,596  
Interest (Expense), Net
    2       (1,052 )     (7 )     (3,529 )
                                 
EBIT(b)
  $ 12,283     $ 2,715     $ 94,742     $ 50,125  
                                 
Corporate/Other
                               
(Expense) Before Income Taxes(a)
  $ (24,841 )   $ (25,697 )   $ (76,866 )   $ (75,040 )
Interest (Expense), Net
    (13,955 )     (12,354 )     (37,896 )     (37,821 )
                                 
EBIT(b)
  $ (10,886 )   $ (13,343 )   $ (38,970 )   $ (37,219 )
                                 
Consolidated
                               
Income (Loss) Before Income Taxes(a)
  $ (11,349 )   $ (44,480 )   $ 177,823     $ 116,183  
Interest (Expense), Net
    (13,969 )     (13,520 )     (38,287 )     (41,500 )
                                 
EBIT(b)
  $ 2,620     $ (30,960 )   $ 216,110     $ 157,683  
                                 
 
 
(a) The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure defined by generally accepted accounting principles (“GAAP”) in the U.S., to EBIT.
 
(b) EBIT is defined as earnings (loss) before interest and taxes. We evaluate the profit performance of our segments based on income before income taxes, but also look to EBIT as a performance evaluation measure because


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interest expense is essentially related to corporate acquisitions, as opposed to segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as a metric in their investment decisions. EBIT should not be considered an alternative to, or more meaningful than, operating income as determined in accordance with GAAP, since EBIT omits the impact of interest and taxes in determining operating performance, which represent items necessary to our continued operations, given our level of indebtedness and ongoing tax obligations. Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating agencies and the banking community all of whom believe, and we concur, that this measure is critical to the capital markets’ analysis of our segments’ core operating performance. We also evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing. Our underwriters and bankers consistently require inclusion of this measure in offering memoranda in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our historical operating results, nor is it meant to be predictive of potential future results.
 
RESULTS OF OPERATIONS
 
Three Months Ended February 28, 2010
 
Net Sales
 
On a consolidated basis, net sales of $666.6 million for the third quarter ended February 28, 2010 increased 4.9%, or $31.2 million, over net sales of $635.4 million during the same period last year. The organic growth in sales amounted to 3.0%, or $18.8 million, of the growth in net sales over the prior year’s third quarter result, which includes the impact of net favorable foreign exchange rates year-over-year, which amounted to 5.1%, or $32.1 million, partially offset by the combination of volume-related declines approximating 1.1% or $6.6 million and pricing reductions representing 1.0% of the prior period sales, or $6.7 million. Foreign exchange gains resulted from the weak dollar against nearly all major foreign currencies, with the majority of the gains resulting from the stronger euro and Canadian dollar. Seven small acquisitions over the past year provided 1.9% of sales growth over last year’s third quarter, or $12.4 million.
 
Industrial segment net sales, which comprised 68.7% of the current quarter’s consolidated net sales, totaled $457.7 million, an improvement of 6.7% from $429.1 million during last year’s third quarter. This segment’s net sales growth resulted primarily from an overall improvement in organic sales, which accounted for 3.9% of the sales growth over prior year third quarter sales. That 3.9% growth included a gain of 6.1% from net favorable foreign exchange differences, partially offset by volume declines approximating 0.6% and by pricing reductions of approximately 1.6%. Six small acquisitions provided 2.8% of the growth over the prior year third quarter. The pure unit organic sales decline in the industrial segment resulted primarily from declines in our industrial product lines, especially those exposed to the domestic commercial construction market, which remains weak. A few of our industrial segment product lines, including roofing, fluorescent pigments and polymer flooring products, continued to grow organic sales during the quarter. Despite the impact of the continuing weak economic environment on certain sectors of our domestic commercial construction markets, which we expect will continue for the remainder of fiscal 2010, we have begun to see more favorable comparisons in this segment in this year’s third fiscal quarter versus the same period last year. We continue to secure new business through the strength of our brands, new product innovations and global expansion.
 
Consumer segment net sales, which comprised 31.3% of the current quarter’s consolidated net sales, increased by 1.3% to $208.9 million from $206.3 million during last year’s third quarter. The improvement in this segment was almost entirely organic, including the impact of prior period price increases, which provided 0.2%, and the impact of net favorable foreign exchange rates for approximately 2.9%, offset by volume declines approximating 2.0%. The organic sales volume decline during the current quarter was the result of timing in relation to certain large orders, which occurred during last year’s third quarter, and which did not recur during the current quarter. However, this segment benefited from several new product introductions and a more stable market demand for consumer repair and maintenance products. Our consumer segment continues to increase market penetration at major retail accounts with various new product launches and broader channel penetration, while also maintaining a focus on our existing repair and maintenance oriented products.


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Gross Profit Margin
 
Our consolidated gross profit improved to 39.0% of net sales this quarter from 36.9% of net sales for the same period a year ago, despite our overall lower overhead absorption resulting from a 1.1% decline in organic sales volume. Tighter cost controls benefited the current quarter gross profit margin by approximately 80 basis points (“bps”), while the year-over-year impact of lower raw material costs provided a benefit of approximately 230 bps to the current quarter’s gross profit margin, reflecting year-over-year declines in energy costs and demand for raw materials. However, while these costs were lower versus the prior year third quarter, we experienced upward price pressure in several of our raw materials in comparison to the first part of the current fiscal year. We have faced historically higher petroleum based input costs since 2005, which has in turn put sustained pressure on our gross margins. Historically higher material costs were driven by certain key factors, including greater divergence of natural gas versus oil prices that drove more refining of the comparatively lower cost natural gas, which in turn reduced the availability of certain oil-derived residual byproducts such as propylene monomer. In addition, the increased refinery use of cokers resulted in reduced availability of residual byproducts such as asphalt and some suppliers have idled capacity to offset reduced demand. Other factors impacting our current quarter gross profit margin were pricing, which unfavorably impacted our gross profit margin by approximately 60 bps; an unfavorable mix of product sold versus the same period last year, which had an impact of approximately 20 bps; and unfavorable overhead absorption approximating 20 bps.
 
Our industrial segment gross profit for the third quarter of fiscal 2010 improved by 130 bps to 40.2% of net sales from last year’s third quarter result of 38.9% of net sales. Contributing to this improvement was the decline in certain raw material costs, which had a favorable impact of approximately 210 bps. Additionally, the combination of relatively lower labor costs related to the reduction in force that was initiated during the prior fiscal year and generally tighter cost controls during this year’s third quarter versus the same period last year impacted the current quarter’s gross profit margin by approximately 100 bps. Reducing those gains by approximately 90 bps was the impact of unfavorable pricing during this year’s third quarter versus the same period a year ago, along with a combined unfavorable overhead and mix of sales during the current quarter versus the same period last year were unfavorable by approximately 90 bps versus last year’s third quarter.
 
Our consumer segment gross profit for the quarter improved by approximately 340 bps to 36.2% of net sales from 32.8% of net sales for the same period last year, mainly as a result of the 290 bps impact of lower raw material costs during the current fiscal quarter versus the same period a year ago, combined with prior period price increases which contributed approximately 10 bps, and improved operating leverage at many of our plants attributable to our prior year cost reduction initiatives, which provided approximately 20 bps. Although the price increases were favorable during the current quarter versus the same period last year, our pricing still has not recaptured the significant raw material cost increases we have incurred since 2005. Additionally, while raw material costs were lower versus the prior year third quarter, we have experienced upward price pressure in several of our raw materials in comparison to the first part of the current fiscal year. The remaining 20 bps improvement in the consumer segment’s gross profit margin during the current quarter is a result of this segment’s favorable mix of sales during the current quarter versus the same period a year ago.
 
Selling, General and Administrative Expenses (“SG&A”)
 
Our consolidated SG&A improved by approximately 320 bps to 38.6% of net sales for the current quarter compared with 41.8% a year ago. A large portion of the improvement resulted from the prior year severance costs in each of our reportable segments, related to the prior year cost reduction program, which did not recur this year. The current quarter results also reflect the impact of lower bad debt, warranty and hospitalization expense. While prior year expense reduction initiatives reduced headcount-related costs for this year’s third quarter, the current year benefit from those reductions was more than offset by higher employee incentives, commissions based on the current quarter’s favorable mix of product sales and other employee compensation-related expenses incurred during this year’s third quarter versus the same period a year ago. Finally, there were certain direct costs related to acquisition activity that were required to be treated as expense under new accounting rules which took effect during the current fiscal year.


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Our industrial segment SG&A improved by approximately 370 bps to 39.9% of net sales for the current quarter versus 43.6% of net sales for the same period last year. This segment’s SG&A margin improvement primarily reflects lower bad debt, distribution and warranty expense versus the same period last year. The favorable impact of the headcount reductions completed during the last half of fiscal 2009 were more than offset by higher employee compensation, commissions and benefits. This segment was also unfavorably impacted by the change in accounting for acquisition-related costs, as discussed above.
 
Our consumer segment SG&A as a percentage of net sales for the current quarter decreased by 120 bps to 30.3% compared with 31.5% a year ago, primarily reflecting lower distribution and bad debt expense, while lower employment related compensation expense was more than offset by higher commissions based on the current mix of sales.
 
SG&A expenses in our corporate/other category decreased during the current quarter to $10.9 million from $13.3 million during the corresponding period last year. This $2.4 million decrease reflects the combination of lower hospitalization, environmental and insurance-related expense. Partially offsetting these expense reductions were increases in legal, pension and compensation expenses versus last year’s third fiscal quarter.
 
License fee and joint venture income of approximately $0.5 million and $0.6 million for each of the quarters ended February 28, 2010 and 2009, respectively, are reflected as reductions of consolidated SG&A expenses.
 
We recorded total net periodic pension and postretirement benefit costs of $8.2 million and $5.7 million for the quarters ended February 28, 2010 and 2009, respectively. This increased pension expense of $2.5 million was primarily the result of a $1.1 million decline in the expected return on plan assets, combined with approximately $0.9 million of additional net actuarial losses incurred this quarter versus the same period a year ago. An increase in service costs combined with higher interest expense unfavorably impacted pension expense by approximately $0.5 million. We expect that pension expense will fluctuate on a year-to-year basis, depending primarily upon the investment performance of plan assets and potential changes in interest rates, but such changes are not expected to be material to our consolidated financial results. See Note 8, “Pension and Postretirement Health Care Benefits,” for additional information regarding these benefits.
 
Interest Expense
 
Interest expense was $15.8 million for the third quarter of fiscal 2010 versus $12.4 million for the same period a year ago. Lower average borrowings, net of additional borrowings for acquisitions, reduced interest expense this quarter by approximately $1.1 million versus last year’s third quarter, while higher average interest rates, which averaged 6.63% overall for the third quarter of fiscal 2010 compared with 4.73% for the same period of fiscal 2009, increased interest expense by approximately $4.5 million during the current quarter versus the same period a year ago.
 
Investment Expense (Income), Net
 
Net investment income of $1.8 million during the third quarter of fiscal 2010 compares to fiscal 2009 third quarter net investment expense of $1.1 million. Net realized gains on the sales of investments resulted in a net gain of $0.4 million for the quarter ended February 28, 2010 versus a net gain of $0.6 million for the same period during fiscal 2009. Additionally, impairments recognized on securities that management has determined are other-than-temporary declines in value during the current fiscal quarter totaled approximately $0.1 million, while these losses approximated $4.0 million for the third quarter of fiscal 2009. Finally, dividend and interest income totaling $1.5 million during the current quarter compares with $2.3 million of income during last year’s third quarter.
 
Income Before Income Taxes (“IBT”)
 
Our consolidated pretax loss for this year’s third quarter of $11.4 million compares with last year’s third quarter pretax loss of $44.5 million, for a negative margin on net sales of 1.7% versus 7.0% a year ago.
 
Our industrial segment had IBT of $1.2 million for this year’s third quarter versus last year’s third quarter loss before tax of $20.4 million, principally reflecting this segment’s tighter cost controls and the more benign raw material cost environment experienced during the current quarter versus the same period a year ago, combined with this segment’s 3.9% increase in organic sales during the quarter versus the same period last year. Our consumer segment IBT improved to $12.3 million for the quarter, from $1.7 million last year, primarily from the 1.1% organic


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sales improvement during the current quarter versus last year’s third quarter, combined with the benefit of relatively lower raw material costs.
 
Income Tax Rate
 
Our effective income tax benefit rate was 17.2% for the three months ended February 28, 2010 compared to an effective income tax benefit rate of 30.5% for the three months ended February 28, 2009.
 
For the three months ended February 28, 2010 and, to a greater extent for the three months ended February 28, 2009, our effective tax rate differed from the federal statutory rate principally due to the impact of certain foreign operations on our U.S. taxes and the effect of lower tax rates in certain of our foreign jurisdictions. These decreases in taxes were partially offset by an increase to state taxes, non-deductible business operating expenses and provisions for valuation allowances associated with losses incurred by certain of our foreign businesses and for foreign tax credit carryforwards.
 
As of February 28, 2010, we have determined, based on the available evidence, that it is uncertain whether we will be able to recognize certain deferred tax assets. Therefore, we intend to maintain the tax valuation allowances recorded at February 28, 2010 for certain deferred tax assets until sufficient positive evidence (for example, cumulative positive foreign earnings or additional foreign source income) exists to support their reversal. These valuation allowances relate to U.S. foreign tax credit carryforwards, certain foreign net operating losses and net foreign deferred tax assets. A portion of the valuation allowance is associated with deferred tax assets recorded in purchase accounting for prior year acquisitions. A reversal of the valuation allowance that was recorded in purchase accounting may impact earnings.
 
Net Income (Loss)
 
Net loss of $9.4 million for the three months ended February 28, 2010 compares to a net loss of $30.9 million for the same period last year, for a negative net margin on sales of 1.4% for the current quarter compared to the prior year period’s 4.9% negative net margin on sales. The improved result for the current quarter over the prior year period reflects the benefit of higher gross margins versus the prior year third quarter, along with the prior year severance costs, which did not recur.
 
Diluted loss per share of common stock for this year’s third quarter of $0.07 compares with a loss of $0.24 a year ago.
 
Nine Months Ended February 28, 2010
 
Net Sales
 
On a consolidated basis, net sales of $2.4 billion for the nine months ended February 28, 2010 declined 2.8%, or $69.6 million, over net sales of $2.5 billion during the same period last year. The organic decline in sales amounted to 3.4%, or $85.7 million, of the shortfall in net sales versus the same period a year ago, which includes volume-related declines approximating 4.4% or $109.4 million, offset partially by the impact of net favorable foreign exchange rates year-over-year, which amounted to 0.6%, or $14.2 million, and by overall favorable pricing initiatives representing 0.4% of the prior period sales, or $9.5 million. These favorable pricing initiatives, including those across both of our reportable segments, were instituted during prior periods in order to offset the escalated costs of many of our raw materials. Foreign exchange losses resulted from the strong dollar against nearly all major foreign currencies, with the majority of the losses resulting from the weaker euro, Canadian dollar and Latin American currencies. Seven small acquisitions over the past year provided 0.6% of sales growth over last year’s first nine months, or $16.1 million.
 
Industrial segment net sales, which comprised 69.4% of consolidated net sales for this year’s first nine months, totaled $1.70 billion, a decline of 6.2% from $1.81 billion during last year’s first nine months. This segment’s net sales decline resulted primarily from an overall decline in organic sales, which accounted for a decline of 7.0% from last year’s first nine months sales levels, including a 0.7% increase resulting from net favorable foreign exchange differences and volume declines approximating 7.7%. Six small acquisitions provided 0.8% growth over the prior year first nine months.


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Consumer segment net sales, which comprised 30.6% of consolidated net sales for this year’s first nine months, totaled $746.0 million, an increase of 6.0% from $703.9 million during last year’s first nine months. The improvement in this segment was purely organic, including unit volume growth approximating 4.3%, combined with the impact of prior period price increases, which provided 1.3%, and net favorable foreign exchange rates for approximately 0.4%.
 
Gross Profit Margin
 
Our consolidated gross profit improved to 41.7% of net sales for this year’s first nine months from 39.6% of net sales for the same period a year ago, despite our overall lower overhead absorption resulting from a 4.4% decline in organic sales volume. Raw material costs, which were lower versus the first nine months of fiscal 2009, positively impacted the current period’s gross profit margin by approximately 220 bps, reflecting the impact of year-over-year declines in energy costs and demand for raw materials, which had previously put upward cost pressure on many of our raw material, packaging and freight costs. Pricing favorably impacted our gross profit margin by approximately 20 bps. The remaining 30 bps decline in gross profit margin resulted primarily from a combination of unfavorable product mix and lower sales volume during the current period versus the same period a year ago.
 
Our industrial segment gross profit for the first nine months of fiscal 2010 increased by 150 bps, to 42.9% of net sales from last year’s first nine months result of 41.4% of net sales. Declines in certain raw material costs had a favorable impact of approximately 190 bps. The industrial segment’s 7.0% decline in organic sales unfavorably impacted this segment’s gross margin, along with an unfavorable mix of sales and increased overhead expense, however, these higher expenses were partially offset by a decline in labor expenses, for a net unfavorable impact on this segment’s gross margin by approximately 40 bps during the current period versus the same period a year ago.
 
Our consumer segment gross profit for the first nine months improved by approximately 360 bps to 38.8% of net sales from 35.2% of net sales for the same period last year, mainly as a result of the 280 bps favorable impact of lower raw material costs combined with favorable price increases and approximating 80 bps. Although the price increases were favorable on a year-over-year basis, our pricing has not recaptured the significant raw material cost increases we have incurred over the past several years.
 
Selling, General and Administrative Expenses (“SG&A”)
 
Our consolidated SG&A improved to 32.8% of net sales for this year’s first nine months compared with 33.3% a year ago. A large portion of the 50 bps improvement in SG&A as a percentage of sales resulted from the prior year severance costs, related to the prior year cost reduction program in both of our segments, which did not recur this year. The current nine month results also reflect the impact of lower distribution, advertising and hospitalization expense, along with favorable adjustments to environmental accruals and insurance reserves at our captive insurance entities. While prior year expense reduction initiatives reduced headcount-related costs for this year’s first nine months, the benefit from those expense reductions was more than offset by higher employee incentives, commissions based on the current period’s favorable mix of product sales and other employee compensation-related expenses incurred during this year’s first nine months versus the same period a year ago. Finally, there was the impact of certain direct costs related to acquisition activity that were required to be treated as expense under new accounting rules which took effect at the beginning of the current fiscal year.
 
Our industrial segment SG&A remained flat at 33.4% of net sales for each of the nine months ended February 28, 2010 and 2009. The favorable impact of the headcount reductions completed in conjunction with last year’s cost reduction program were more than offset by higher employee compensation, commissions and benefits during the first nine months of the current year. Increased warranty-related expense, unfavorable foreign exchange expense and additional expense relating to the change in accounting for acquisition-related costs, as discussed above, were offset by lower distribution, bad debt expense, and other lower discretionary selling and marketing expenses, including promotional expense.
 
Our consumer segment SG&A as a percentage of net sales for the first nine months decreased by 200 bps to 26.1% compared with 28.1% a year ago, primarily reflecting the favorable margin impact of the 4.3% sales volume improvement in this segment, in addition to lower distribution expense during the current nine months versus the same period last year, and the impact of favorable foreign exchange adjustments. These gains were partially offset


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by higher bad debt expense and higher compensation expense, including commissions on higher sales volumes, during the current year’s first nine months versus the same period a year ago.
 
SG&A expenses in our corporate/other category increased during the first nine months to $39.0 million from $37.2 million during the corresponding period last year. This $1.8 million increase essentially reflects the combination of higher legal, pension and employee compensation expenses during the current period versus last year’s first nine months. These higher costs were offset in part by favorable foreign exchange gains and lower hospitalization and worker’s compensation expense.
 
License fee and joint venture income of approximately $2.0 million for each of the nine month periods ended February 28, 2010 and 2009 are reflected as reductions of consolidated SG&A expenses.
 
We recorded total net periodic pension and postretirement benefit costs of $22.5 million and $17.1 million for the nine months ended February 28, 2010 and 2009, respectively. This increased pension expense of $5.4 million was primarily the result of a $3.4 million decline in the expected return on plan assets, combined with $2.5 million of additional net actuarial losses incurred during this year’s first nine months versus the same period a year ago. Lower service costs were partially offset by higher interest costs, for a net favorable impact on pension expense of approximately $0.5 million. We expect that pension expense will fluctuate on a year-to-year basis, depending primarily upon the investment performance of plan assets and potential changes in interest rates, but such changes are not expected to be material to our consolidated financial results. See Note 8, “Pension and Postretirement Health Care Benefits,” for additional information regarding these benefits.
 
Interest Expense
 
Interest expense was $43.3 million for the first nine months of fiscal 2010 versus $42.3 million for the same period a year ago. Lower average borrowings, net of additional borrowings for acquisitions, reduced interest expense this first nine months by approximately $4.5 million versus last year’s first nine months. Higher interest rates, which averaged 6.16% overall for the first nine months of fiscal 2010 compared with 5.41% for the same period of fiscal 2009, increased interest expense by approximately $5.5 million versus last year’s first nine months.
 
Investment Expense (Income), Net
 
Net investment income of $5.0 million during the first nine months of fiscal 2010 compares to fiscal 2009 first nine months net investment income of $0.8 million. Net realized gains on the sales of investments resulted in a net gain of $1.3 million for the first nine months ended February 28, 2010 versus a net gain of $1.9 million for the same period during fiscal 2009. Additionally, impairments recognized on securities that management has determined are other-than-temporary declines in value approximated $0.2 million for the first nine months of fiscal 2010, versus $7.4 million for the same period a year ago. Dividend and interest income totaling $3.9 million during this year’s first nine months compares with $6.3 million of income during last year’s first nine months.
 
Income Before Income Taxes (“IBT”)
 
Our consolidated pretax income for this year’s first nine months of $177.8 million compares with last year’s first nine months pretax income of $116.2 million, for a profit margin on net sales of 7.3% versus 4.6% a year ago.
 
Our industrial segment had IBT of $160.0 million for this year’s first nine months versus last year’s first nine months IBT of $144.6 million, principally reflecting this segment’s overall lower raw material costs during this year’s first nine months versus the same period a year ago, combined with overall lower distribution, legal and bad debt expense. Our consumer segment IBT improved to $94.7 million for the period, from $46.6 million last year, primarily from the 6.0% organic sales improvement during this year’s first nine months. IBT for both segments during the current nine month period benefited from the prior year severance costs which did not recur during the current fiscal year.
 
Income Tax Rate
 
Our effective income tax rate was 32.8% for the nine months ended February 28, 2010 compared to an effective income tax rate of 30.9% for the nine months ended February 28, 2009.


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For the nine months ended February 28, 2010 and, to a greater extent for the nine months ended February 28, 2009, our effective tax rate differed from the federal statutory rate principally due to the impact of certain foreign operations on our U.S. taxes and the effect of lower tax rates in certain of our foreign jurisdictions. These decreases in taxes were partially offset by an increase to state taxes, non-deductible business operating expenses and provisions for valuation allowances associated with losses incurred by certain of our foreign businesses and for foreign tax credit carryforwards.
 
As described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three month period ended February 28, 2010, we are uncertain as to whether we will be able to recognize certain deferred tax assets. Refer to the section captioned, “Three Months Ended February 28, 2010 — Income Tax Rate,” for further information.
 
Net Income
 
Net income of $119.5 million for the nine months ended February 28, 2010 compares to $80.3 million for the same period last year, for a net margin on sales of 4.9% for this year’s first nine months compared to the prior year period’s 3.2% net margin on sales. The improvement in this net margin year-over-year resulted from the benefit of prior year aggressive cost reduction initiatives, coupled with a more benign raw material cost environment versus the prior year first nine months.
 
Diluted earnings per share of common stock for this year’s first nine months of $0.93 compares with $0.62 a year ago.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash Flows From:
 
Operating Activities
 
Operating activities provided cash flow of $188.9 million during the first nine months of the current fiscal year compared with $134.6 million during the same period of fiscal 2009.
 
The net improvement in cash from operations includes the change in net income, adjusted for non-cash expenses and income, which increased by approximately $48.6 million versus last year, in addition to changes in working capital accounts and other accruals. The current period decrease in accounts receivable since May 31, 2009 provided cash of $154.6 million versus the $317.4 million of cash generated from collections on accounts receivable during the same period last year, or approximately $162.9 million less cash provided year over year. While our collections of accounts receivable have improved, the cash collected during this year’s first nine months was less than the same period a year ago as a result of the relatively lower accounts receivable balance of May 31, 2009 versus May 31, 2008. Inventory balances required the use of $27.7 million of cash during the current year-to-date period, compared with cash provided by a decrease in inventory of $17.4 million during last year’s first nine months, or $45.1 million more cash used year over year. With regard to accounts payable, we used $115.8 million less cash during this year’s first nine months compared to the same period a year ago as a result of a change in the timing of certain payments and lower sales volumes during the current period versus the same period a year ago. Accrued compensation and benefits used approximately $42.2 million less cash versus the prior year period due to lower bonus payments made during this year’s first nine months versus the same period a year ago, while other accruals, including those for other short-term and long-term items, provided $78.1 million more in cash versus last year’s first nine months due to changes in the timing of such payments. Cash provided from operations, along with the use of available credit lines, as required, remain our primary sources of liquidity.
 
Investing Activities
 
Capital expenditures, other than for ordinary repairs and replacements, are made to accommodate our continued growth to achieve production and distribution efficiencies, to expand capacity and to enhance our administration capabilities. Capital expenditures of $14.1 million during this year’s first nine months compare with depreciation of $46.6 million. We expect capital spending to continue to trail depreciation expense at least through the end of the current fiscal year. Due to additional capacity, which we have brought on-line over the last several years, we believe


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there is adequate production capacity to meet our needs based on anticipated growth rates. Any additional capital expenditures made over the next few years will likely relate primarily to new products and technology. Not reflected in our capital expenditures is the capacity added through our recent acquisitions of product lines and businesses, which totaled approximately $11.1 million during the current fiscal year. We presently anticipate that additional shifts at our production facilities, coupled with the capacity added through acquisition activity, will enable us to meet increased demand during the current fiscal year even with these lower levels of capital spending this fiscal year.
 
Our captive insurance companies invest their excess cash in marketable securities in the ordinary course of conducting their operations, and this activity will continue. Differences in the amounts related to these activities on a year-over-year basis are primarily attributable to differences in the timing and performance of their investments balanced against amounts required to satisfy claims. At February 28, 2010, the fair value of our investments in marketable securities totaled $106.3 million, of which investments with a fair value of $20.3 million were in an unrealized loss position. At May 31, 2009, the fair value of our investments in marketable securities totaled $83.3 million, of which investments with a fair value of $43.6 million were in an unrealized loss position. Total pre-tax unrealized losses recorded in accumulated other comprehensive income at February 28, 2010 and May 31, 2009 were $0.5 million and $3.8 million, respectively.
 
We regularly review our marketable securities in unrealized loss positions in order to determine whether or not we have the ability and intent to hold these investments. That determination is based upon the severity and duration of the decline, in addition to our evaluation of the cash flow requirements of our businesses. Unrealized losses at February 28, 2010 were generally related to the volatility in valuations over the last several months for a portion of our portfolio of investments in marketable securities. The unrealized losses generally relate to investments whose fair values at February 28, 2010 were less than 15% below their original cost or have been in a loss position for less than six consecutive months. Although we have begun to see recovery in general economic conditions, if we were to experience continuing or significant unrealized losses within our portfolio of investments in marketable securities in the future, we may recognize additional other-than-temporary impairment losses. Such potential losses could have a material impact on our results of operations in any given reporting period. As such, we continue to closely evaluate the status of our investments and our ability and intent to hold these investments.
 
Financing Activities
 
On October 9, 2009, we sold $300.0 million aggregate principal amount of 6.125% Notes due 2019 (the “Notes”). The net proceeds from the offering of the Notes were used to repay $163.7 million in principal amount of our unsecured notes due October 15, 2009, and approximately $120.0 million in principal amount of short-term borrowings outstanding under our accounts receivable securitization program. The balance of the net proceeds was used for general corporate purposes.
 
On April 7, 2009, we replaced our existing $125.0 million accounts receivable securitization program, which was set to expire on May 7, 2009, with a new, three-year, $150.0 million accounts receivable securitization program (the “AR program”). The AR program, which was established with two banks for certain of our subsidiaries (“originating subsidiaries”), contemplates that the originating subsidiaries will sell certain of their accounts receivable to RPM Funding Corporation, a wholly-owned special purpose entity (“SPE”), which will then transfer undivided interests in such receivables to the participating banks. 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. The 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. Entry into the AR program increased our liquidity by $25.0 million, but also increased our financing costs due to higher market rates. The amounts available under the AR program are subject to changes in the credit ratings of our customers, customer concentration levels or certain characteristics of the underlying accounts receivable, and therefore at certain times we may not be able to fully access the $150.0 million of funding available under the AR program. At February 28, 2010, approximately $61.9 million was available under this AR program.
 
On February 20, 2008 we issued and sold $250.0 million of 6.50% Notes due February 15, 2018. The proceeds were used to repay our $100.0 million Senior Unsecured Notes due March 1, 2008, the outstanding principal under


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our $125.0 million accounts receivable securitization program and $19.0 million in short-term borrowings under our revolving credit facility. This financing strengthened our credit profile and liquidity position, as well as lengthened the average maturity of our outstanding debt obligations.
 
On December 29, 2006, we replaced our $330.0 million revolving credit facility with a $400.0 million five-year credit facility (the “Credit Facility”). The Credit Facility is used for working capital needs and general corporate purposes, including acquisitions. The Credit Facility provides for borrowings in U.S. dollars and several foreign currencies and provides sublimits for the issuance of letters of credit in an aggregate amount of up to $35.0 million and a swing-line of up to $20.0 million for short-term borrowings of less than 15 days. In addition, the size of the Credit Facility may be expanded, subject to lender approval, upon our request by up to an additional $175.0 million, thus potentially expanding the Credit Facility to $575.0 million.
 
On May 29, 2009, we entered into an amendment to our Credit Facility agreement with our lenders. Under the amendment, we are required to comply with various customary affirmative and negative covenants. These include financial covenants requiring us to maintain certain leverage and interest coverage ratios. The definition of EBITDA has been amended to add back the sum of all (i) non-cash charges relating to the write-down or impairment of goodwill and other intangibles during the applicable period, (ii) other non-cash charges up to an aggregate of $25.0 million during such applicable period and (iii) one-time cash charges incurred during the period from June 1, 2008 through May 31, 2010, but only up to an aggregate of not more than $25.0 million during such applicable period. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended. The minimum required consolidated interest coverage ratio, EBITDA to interest expense, remains 3.50 to 1 under the amendment, but allowance of the add-backs referred to above has the effect of making this covenant less restrictive. Under the terms of the leverage covenant, we may not permit our consolidated indebtedness at any date to exceed 55% of the sum of such indebtedness and our consolidated shareholders’ equity on such date, and may not permit the indebtedness of our domestic subsidiaries (determined on a combined basis and excluding indebtedness to us and indebtedness incurred pursuant to permitted receivables securitizations) to exceed 15% of our consolidated shareholders’ equity. This amendment also added a fixed charge coverage covenant beginning with our fiscal quarter ended August 31, 2009. Under the fixed charge coverage covenant, the ratio of our consolidated EBITDA for any four-fiscal-quarter- period to the sum of our consolidated interest expense, income taxes paid in cash (other than taxes on non-recurring gains), capital expenditures, scheduled principal payments on our amortizing indebtedness (other than indebtedness scheduled to be repaid at maturity) and dividends paid in cash (or, for testing periods ending on or before May 31, 2010, 70% of dividends paid in cash), in each case for such four-fiscal-quarter period, may not be less than 1.00 to 1. This amendment also included a temporary, one-year restriction on certain mergers, asset dispositions and acquisitions, and contains customary representations and warranties.
 
We are subject to the same leverage, interest coverage and fixed charge coverage covenants under the AR program as those contained in our Credit Facility. On May 29, 2009, we also entered into an amendment to our AR program. Included in the amendment were the same amendments to the definition of EBITDA, an identical reduction in the maximum consolidated leverage ratio and the same fixed charge coverage covenants as were included in our Credit Facility amendment, as outlined above.
 
Our failure to comply with these and other covenants contained in the Credit Facility may result in an event of default under that agreement, entitling the lenders to, among other things, declare the entire amount outstanding under the 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 Credit Facility will entitle the holders of such other indebtedness to declare amounts outstanding immediately due and payable.
 
As of February 28, 2010, we were in compliance with all covenants contained in our Credit Facility, including the leverage, interest coverage ratio and fixed charge coverage covenants. At that date, our leverage ratio was 42.9%, while our interest coverage and fixed charge coverage ratios were 6.46:1 and 1.60:1, respectively. Additionally, in accordance with these covenants, at February 28, 2010, our domestic subsidiaries indebtedness did not exceed 15% of consolidated shareholders’ equity as of that date.
 
Our access to funds under our Credit Facility is dependent on the ability of the financial institutions that are parties to the Credit Facility to meet their funding commitments. Those financial institutions may not be able to


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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 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.
 
We are exposed to market risk associated with interest rates. We do not use financial derivative instruments for trading purposes, nor do we engage in foreign currency, commodity or interest rate speculation. Concurrent with the issuance of our 6.7% Senior Unsecured Notes, RPM United Kingdom G.P. entered into a cross currency swap, which fixed the interest and principal payments in euros for the life of the 6.7% Senior Unsecured Notes and resulted in an effective euro fixed rate borrowing of 5.31%.
 
Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at $695.8 million at February 28, 2010. Our debt-to-capital ratio was 42.9% at February 28, 2010, compared with 44.9% May 31, 2009.
 
During the first quarter of fiscal 2009, we called for redemption all of our outstanding Senior Convertible Notes due May 13, 2033. Prior to the redemption, virtually all of the holders converted their Senior Convertible Notes into shares of our common stock. For additional information, refer to Note 11, “Debt,” to the Consolidated Financial Statements.
 
The following table summarizes our financial obligations and their expected maturities at February 28, 2010 and the effect such obligations are expected to have on our liquidity and cash flow in the periods indicated.
 
Contractual Obligations
 
                                         
    Total
                         
    Contractual
                         
    Payment
    Payments Due In  
    Stream     2011     2012-13     2014-15     After 2015  
    (In thousands)  
 
Long-term debt obligations
  $ 908,097     $ 5,534     $ 1,875     $ 201,498     $ 699,190  
Capital lease obligations
    2,669       527       892       822       428  
Operating lease obligations
    164,886       37,327       48,793       27,285       51,481  
Other long-term liabilities(1):
                                       
Interest payments on long-term debt obligations
    410,945       54,997       112,342       87,342       156,264  
Contributions to pension and postretirement plans(2)
    340,400       40,200       41,700       81,500       177,000  
                                         
Total
  $ 1,826,997     $ 138,585     $ 205,602     $ 398,447     $ 1,084,363  
                                         
 
 
(1) Excluded from other long-term liabilities is our liability for unrecognized tax benefits, which totaled $4.9 million at February 28, 2010. Currently, we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
 
(2) These amounts represent our estimated cash contributions to be made in the periods indicated for our pension and postretirement plans, assuming no actuarial gains or losses, assumption changes or plan changes occur in any period. The projection results assume $30.5 million will be contributed to the U.S. plans in fiscal 2010; all other plans and years assume the required minimum contribution will be made.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet financings, other than the minimum operating lease commitments included per the above Contractual Obligations table. We have no subsidiaries that are not included in our financial statements, nor do we have any interests in or relationships with any special purpose entities that are not reflected in our financial statements.


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OTHER MATTERS
 
Environmental Matters
 
Environmental obligations continue to be appropriately addressed and, based upon the latest available information, it is not anticipated that the outcome of such matters will materially affect our results of operations or financial condition. Our critical accounting policies and estimates set forth above describe our method of establishing and adjusting environmental-related accruals and should be read in conjunction with this disclosure. For additional information, refer to “Part II, Item 1. Legal Proceedings.”
 
FORWARD-LOOKING STATEMENTS
 
The foregoing discussion includes forward-looking statements relating to our business. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) global markets and general economic conditions, including uncertainties surrounding the volatility in financial markets, the availability of capital and the effect of changes in interest rates, and the viability of banks and other financial institutions; (b) the prices, supply and capacity of raw materials, including assorted pigments, resins, solvents, and other natural gas and oil based materials; packaging, including plastic containers; and transportation services, including fuel surcharges; (c) continued growth in demand for our products; (d) legal, environmental and litigation risks inherent in our construction and chemicals businesses and risks related to the adequacy of our insurance coverage for such matters; (e) the effect of changes in interest rates; (f) the effect of fluctuations in currency exchange rates upon our foreign operations; (g) the effect of non-currency risks of investing in and conducting operations in foreign countries, including those relating to domestic and international political, social, economic and regulatory factors; (h) risks and uncertainties associated with our ongoing acquisition and divestiture activities; (i) risks related to the adequacy of our contingent liability reserves, including for asbestos-related claims; and (j) other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2009, as the same may be updated from time to time. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the filing date of this document.
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk from changes in raw materials costs, interest rates and foreign exchange rates since we fund our operations through long- and short-term borrowings and conduct our business in a variety of foreign currencies. There were no material potential changes in our exposure to these market risks since May 31, 2009.
 
ITEM 4.   CONTROLS AND PROCEDURES
 
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
 
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of February 28, 2010 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (2) is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
 
(b) CHANGES IN INTERNAL CONTROL.
 
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended February 28, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II — OTHER INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
Asbestos Litigation
 
Certain of our wholly-owned subsidiaries, principally Bondex International, Inc. (collectively referred to as the subsidiaries), are defendants in various asbestos-related bodily injury lawsuits filed in various state courts with the vast majority of current claims pending in six states — Texas, Florida, Maryland, Illinois, Mississippi and Ohio. These cases generally seek unspecified damages for asbestos-related diseases based on alleged exposures to asbestos-containing products previously manufactured by our subsidiaries or others.
 
As of February 28, 2010, our subsidiaries had a total of 10,329 active asbestos cases, compared to a total of 10,281 cases as of February 28, 2009. For the quarter ended February 28, 2010, our subsidiaries secured dismissals and/or settlements of 644 cases, compared to a total of 228 cases dismissed and/or settled for the quarter ended February 28, 2009. For the nine months ended February 28, 2010, our subsidiaries secured dismissals and/or settlements of 1,301 cases, compared to a total of 2,253 cases dismissed and/or settled for the nine months ended February 28, 2009.
 
Of the 2,253 cases that were dismissed in the nine months ended February 28, 2009, 1,420 were non-malignancies or unknown disease cases that had been maintained on an inactive docket in Ohio and were administratively dismissed by the Cuyahoga County Court of Common Pleas during our second fiscal quarter ended November 30, 2008. These claims were dismissed without prejudice and may be re-filed should the claimants involved be able to demonstrate disease in accordance with medical criteria laws established in the State of Ohio.
 
For the quarter ended February 28, 2010, our subsidiaries made total cash payments of $19.9 million relating to asbestos cases, which included defense-related payments paid during the quarter of $7.0 million, compared to total cash payments of $19.8 million relating to asbestos cases during the quarter ended February 28, 2009, which included defense-related payments paid during the quarter of $6.9 million. For the nine months ended February 28, 2010, our subsidiaries made total cash payments of $57.4 million relating to asbestos cases, which included defense-related payments of $22.1 million, compared to total cash payments of $52.2 million relating to asbestos cases during the nine months ended February 28, 2009, which included defense-related payments of $19.7 million.
 
During the third quarter of fiscal 2009, one payment totaling $3.6 million was made to satisfy an adverse judgment in a previous trial that occurred in calendar 2006 in California. This payment, which included a significant amount of accrued pre-judgment interest as required by California law, was made on December 8, 2008, approximately two and a half years after the adverse verdict and after all post-trial and appellate remedies had been exhausted. Such satisfaction of judgment amounts are not included in incurred costs until available appeals are exhausted and the final payment amount is determined. As a result, the timing and amount of any such payments could have a significant impact on quarterly settlement costs.
 
Excluding defense-related payments, the average payment made to settle or dismiss a case approximated $20,000 and $56,600 for each of the quarters ended February 28, 2010 and 2009, respectively, and approximated $27,100 and $14,400 for each of the nine months ended February 28, 2010 and 2009, respectively. The amount and timing of dismissals and settlements can fluctuate significantly from period to period, resulting in volatility in the average cost to resolve a case in any given quarter or year. In addition, in some jurisdictions, cases may involve more than one individual claimant. As a result, settlement or dismissal payments on a per case basis are not necessarily reflective of the payment amounts on a per claimant basis. For example, the average amount paid to settle or dismiss a case can vary widely depending on a variety of factors, including the mix of malignancy and non-malignancy claimants and the amount of defense expenditures incurred during the period.
 
For additional information on our asbestos litigation, including a discussion of our asbestos related loss contingencies and a discussion of certain of our subsidiaries complaint against certain third-party insurers, see Note 6 of the Notes to Consolidated Financial Statements.


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EIFS Litigation
 
As of February 28, 2010, Dryvit, one of our wholly owned subsidiaries, was a defendant or co-defendant in various single family residential exterior insulating finishing systems (“EIFS”) cases, the majority of which are pending in the southeastern region of the country. Dryvit is also defending EIFS lawsuits involving commercial structures, townhouses and condominiums. The vast majority of Dryvit’s EIFS lawsuits seek monetary relief for water intrusion related property damages, although some claims in certain lawsuits allege personal injuries from exposure to mold.
 
Third-party excess insurers have historically paid varying shares of Dryvit’s defense and settlement costs in the individual commercial and residential EIFS lawsuits under various cost-sharing agreements. Dryvit has assumed a greater share of the costs associated with its EIFS litigation as it seeks funding commitments from our third-party excess insurers and will likely continue to do so pending the outcome of coverage litigation involving these same third-party insurers. This coverage litigation, Dryvit Systems, Inc. et al v. Chubb Insurance Company et al, Case No. CV 05 578004, is pending in the Cuyahoga Court of Common Pleas. As previously reported, all parties filed motions for partial summary judgment in 2008. The motions were filed pursuant to an order entered by the trial court on March 17, 2008, which requested the parties to address the following three issues: (1) whether the policies of Defendants contain a duty to defend; (2) whether the policies contain an obligation to reimburse defense costs; and (3) whether Defendants’ policy obligations are triggered through exhaustion of the underlying coverage.
 
On November 23, 2009, the trial court filed its Journal Entry ruling upon the parties’ motions for partial summary judgment. The trial court decided issues one and two relating to defense coverage in favor of Chubb and Agricultural. The court ruled that Chubb and Agricultural do not have a duty to pay defense costs under their respective 1995 and 1996 policies. As a result, the trial court denied another Defendant’s motion to dismiss the broker negligence and breach of contract claims asserted by RPM and Dryvit.
 
With respect to the third issue, the trial court ruled that the 1995 Agricultural policy was not properly exhausted because Agricultural did not pay $10 million in indemnity payments to settle claims. The trial court found that the $5.2 million Agricultural paid for defense costs under its 1995 policy did not reduce its aggregate limit of liability. The trial court also determined that the 1995 Chubb excess policy is not required to pay indemnity for Dryvit EIFS claims at this time.
 
The trial court’s November 23, 2009 Journal Entry is not a final appealable order, and the court denied the broker Defendant’s motion seeking a certification of the ruling for an interlocutory appeal. The parties may appeal from the trial court’s ruling after other claims and defenses in the litigation are decided by motion or at trial.
 
The parties are required by court order to engage in settlement negotiations through private mediation. If the mediation is not successful, the parties will complete discovery, which will include discovery on damages and expert witnesses in anticipation of filing additional summary judgment motions and conducting a jury trial.
 
Environmental Proceedings
 
As previously reported, several of our subsidiaries are, from time to time, identified as a “potentially responsible party” under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar state environmental statutes. In some cases, our subsidiaries are participating in the cost of certain clean-up efforts or other remedial actions. Our share of such costs, however, has not been material and we believe that these environmental proceedings will not have a material adverse effect on our consolidated financial condition or results of operations. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Matters,” in Part I of this Quarterly Report on Form 10-Q.
 
ITEM 1A.   RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended May 31, 2009.


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ITEM 6.   EXHIBITS
 
         
Exhibit
   
Number
 
Description
 
  10 .1   Amendment No. 1 to Amended and Restated Receivables Sale Agreement, dated February 18, 2010.(x)
  10 .2   Amendment No. 2 to Receivables Purchase Agreement, dated February 18, 2010.(x)
  31 .1   Rule 13a-14(a) Certification of the Company’s Chief Executive Officer.(x)
  31 .2   Rule 13a-14(a) Certification of the Company’s Chief Financial Officer.(x)
  32 .1   Section 1350 Certification of the Company’s Chief Executive Officer.(x)
  32 .2   Section 1350 Certification of the Company’s Chief Financial Officer.(x)
 
 
(x) Filed herewith.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RPM International Inc.
 
  By: 
/s/  Frank C. Sullivan
Frank C. Sullivan
Chairman and Chief Executive Officer
 
  By: 
/s/  P. Kelly Tompkins
P. Kelly Tompkins
Executive Vice President and
Chief Financial Officer
 
Dated: April 8, 2010


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