Summary of Significant Accounting Policies

12 Months Ended

May 31, 2022

Summary of Significant Accounting Policies

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1) Consolidation, Noncontrolling Interests and Basis of Presentation

Our financial statements include all of our majority-owned subsidiaries. We account for our investments in less-than-majority-owned joint ventures, for which we have the ability to exercise significant influence, under the equity method. Effects of transactions between related companies are eliminated in consolidation.

Noncontrolling interests are presented in our Consolidated Financial Statements as if parent company investors (controlling interests) and other minority investors (noncontrolling interests) in partially owned subsidiaries have similar economic interests in a single entity. As a result, investments in noncontrolling interests are reported as equity in our Consolidated Financial Statements. Additionally, our Consolidated Financial Statements include 100% of a controlled subsidiary’s earnings, rather than only our share. Transactions between the parent company and noncontrolling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.

Our business is dependent on external weather factors. Historically, we have experienced strong sales and net income in our first, second and fourth fiscal quarters comprising the three-month periods ending August 31, November 30 and May 31, respectively, with weaker performance in our third fiscal quarter (December through February).

2) Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3) Acquisitions/Divestitures

We account for business combinations and asset acquisitions using the acquisition method of accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date.

During the fiscal year ended May 31, 2022, we completed a total of eight acquisitions in three of our four reportable segments. Most notably, within our CPG reportable segment, we acquired a chemical manufacturing facility located in Corsicana, Texas. The facility will be repurposed to act as a manufacturing campus for a number of RPM's operating companies. Also within our CPG reportable segment, we acquired a provider of indoor air quality solutions headquartered in Clearwater, Florida. We also completed several other acquisitions within our CPG, SPG and PCG reportable segments.

During the fiscal year ended May 31, 2021, we completed a total of four acquisitions in each of our four reportable segments. Within our Consumer reportable segment, we acquired a manufacturer of sandpaper and other abrasives headquartered in Fairborn, Ohio. Within our PCG reportable segment, we acquired a manufacturer of raised flooring systems headquartered in Denver, Colorado. We also completed other acquisitions within our SPG and CPG reportable segments.

The purchase price for each acquisition has been allocated to the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition. We have finalized the purchase price allocation for our fiscal 2021 acquisitions. For acquisitions completed during fiscal 2022, the valuations of consideration transferred, total assets acquired and liabilities assumed are substantially complete. The primary areas that remain open relate to working capital adjustments and other intangible asset valuations. Acquisitions are aggregated by year of purchase in the following table:


	Fiscal 2022 Acquisitions					Fiscal 2021 Acquisitions
(In thousands)	Weighted-Average Intangible Asset Amortization Life (In Years)	Total				Weighted-Average Intangible Asset Amortization Life (In Years)	Total
Current assets		$	9,604				$	50,310
Property, plant and equipment			71,658					27,012
Goodwill	N/A		30,747			N/A		41,654
Trade names - indefinite lives	N/A		1,050			N/A		16,694
Other intangible assets	13		21,010			20		53,894
Other long-term assets			2,316					6,831
Total Assets Acquired		$	136,385				$	196,395
Liabilities assumed			(7,159	)				(24,232	)
Net Assets Acquired		$	129,226		(1)		$	172,163		(2)

(1)

Figure includes cash acquired of $1.8 million.

(2)

Figure includes cash acquired of $6.4 million.

Our Consolidated Financial Statements reflect the results of operations of acquired businesses as of their respective dates of acquisition. Pro-forma results of operations for the years ended May 31, 2022 and 2021 were not materially different from reported results and, consequently, are not presented.

4) Foreign Currency

The functional currency for each of our foreign subsidiaries is its principal operating currency. Accordingly, for the periods presented, assets and liabilities have been translated using exchange rates at year end, while income and expense for the periods have been translated using a weighted-average exchange rate.

The resulting translation adjustments have been recorded in accumulated other comprehensive income (loss), a component of stockholders’ equity, and will be included in net earnings only upon the sale or liquidation of the underlying foreign investment, neither of which is contemplated at this time. Transaction losses increased during the current fiscal year due to the strengthening of the U.S. dollar, resulting in net transactional losses of approximately $4.3 million. This compared to more moderate net transactional foreign exchange losses in fiscal 2021 of approximately $2.8 million, and net transactional foreign exchange gains for fiscal 2020 of approximately $0.3 million as a result of more modest fluctuations in the strength of the U.S. dollar.

5) Cash and Cash Equivalents

We consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. We do not believe we are exposed to any significant credit risk on cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate fair value.

6) Property, Plant & Equipment


May 31,	2022		2021
(In thousands)
Land	$	88,137	$	93,455
Buildings and leasehold improvements		519,391		518,205
Machinery and equipment		1,525,387		1,355,822
Total property, plant and equipment, at cost		2,132,915		1,967,482
Less: allowance for depreciation and amortization		1,028,932		1,002,300
Property, plant and equipment, net	$	1,103,983	$	965,182

We review long-lived assets for impairment when circumstances indicate that the carrying values of these assets may not be recoverable. For assets that are to be held and used, an impairment charge is recognized when the estimated undiscounted future cash flows associated with the asset or group of assets are less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded for the difference between the carrying value and the fair value. Fair values are determined based on quoted market values, discounted cash flows, internal appraisals or external appraisals, as applicable. Assets to be disposed of are carried at the lower of their carrying value or estimated net realizable value.

Depreciation is computed primarily using the straight-line method over the following ranges of useful lives:


Buildings and leasehold improvements		1 to 50 years
Machinery and equipment		1 to 36 years

Total depreciation expense for each fiscal period includes the charges to income that result from the amortization of assets recorded under finance leases. For the periods ended May 31, 2022, 2021 and 2020, we recorded depreciation expense of $104.3 million, $99.4 million, and $108.5 million, respectively.

7) Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. The majority of our revenue is recognized at a point in time. However, we also record revenues generated under construction contracts, mainly in connection with the installation of specialized roofing and flooring systems and related services. For certain polymer flooring installation projects, we account for our revenue using the output method, as we consider square footage of completed flooring to be the best measure of progress toward the complete satisfaction of the performance obligation. In contrast, for certain of our roofing installation projects, we account for our revenue using the input method, as that method was the best measure of performance as it considers costs incurred in relation to total expected project costs, which essentially represents the transfer of control for roofing systems to the customer. In general, for our construction contracts, we record contract revenues and related costs as our contracts progress on an over-time model.

8) Shipping Costs

We identify shipping and handling costs as costs paid to third-party shippers for transporting products to customers, and we include these costs in cost of sales in our Consolidated Statements of Income.

9) Allowance for Credit Losses

Our primary allowance for credit losses is the allowance for doubtful accounts. The allowance for doubtful accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected. The allowance is established using assessments of current creditworthiness of customers, historical collection experience, the aging of receivables and other currently available evidence. Trade accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. All provisions for allowances for doubtful collection of accounts are included in selling, general and administrative expenses. Actual collections of trade receivables could differ from our estimates due to changes in future economic or industry conditions or specific customer’s financial conditions.

For the periods ended May 31, 2022, 2021 and 2020, bad debt expense approximated $4.3 million, $10.0 million and $16.7 million, respectively. Bad debt expense was elevated in fiscal 2021 and 2020 due in part to additional write-offs associated with exiting unprofitable product lines and regions in conjunction with our MAP to Growth. Fiscal 2020 bad debt expense also reflects, although to a much lesser degree, the impact the Covid pandemic had on some of our customers’ ability to pay timely.

10) Inventories

Inventories are stated at the lower of cost or net realizable value, cost being determined on a first-in, first-out (FIFO) basis and net realizable value being determined on the basis of replacement cost. Inventory costs include raw materials, labor and manufacturing overhead. We review the net realizable value of our inventory in detail on an on-going basis, with consideration given to various factors, which include our estimated reserves for excess, obsolete, slow-moving or distressed inventories. If actual market conditions differ from our projections, and our estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales may be required. Historically, our inventory reserves have approximated actual experience.

For the periods ended May 31, 2022, 2021 and 2020, charges related to slow moving and/or obsolete inventory on hand approximated $9.8 million, $3.7 million and $39.6 million, respectively. Charges recorded during fiscal 2022 and fiscal 2021 were more normalized in comparison to fiscal 2020, which had elevated inventory charges associated with our MAP to Growth restructuring activities. During fiscal 2020, we recorded $28.8 million within our Consumer reportable segment consisting of proactive management of excess quantities of inventory in order to accelerate cash conversion, SKU rationalization, and exiting unprofitable product lines and regions and $3.2 million within our PCG segment related to exiting unprofitable product lines and regions.

Inventories were composed of the following major classes:


May 31,	2022		2021
(In thousands)
Raw materials and supplies	$	560,886	$	447,220
Finished goods		651,732		490,875
Total Inventory	$	1,212,618	$	938,095

11) Goodwill and Other Intangible Assets

We account for goodwill and other intangible assets in accordance with the provisions of Accounting Standards Codification ("ASC") 350 and account for business combinations using the acquisition method of accounting and, accordingly, the assets and liabilities of the entities acquired are recorded at their estimated fair values at the acquisition date.

Goodwill

Goodwill represents the excess of the purchase price paid over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Once goodwill has been allocated to the reporting units, it no longer retains its identification with a particular acquisition and becomes identified with the reporting unit in its entirety. Accordingly, the fair value of the reporting unit as a whole is available to support the recoverability of its goodwill. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach.

We test our goodwill balances at least annually, or more frequently as impairment indicators arise, at the reporting unit level. Our annual impairment assessment date has been designated as the first day of our fourth fiscal quarter. Our reporting units have been identified at the component level, which is one level below our operating segments.

We follow the Financial Accounting Standards Board (“FASB”) guidance found in ASC 350 that simplifies how an entity tests goodwill for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform a quantitative goodwill impairment test.

We assess qualitative factors in each of our reporting units that carry goodwill. We assess these qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The quantitative process is required only if we conclude that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. However, we have an unconditional option to bypass a qualitative assessment and proceed directly to performing the quantitative analysis. We applied the quantitative process during our annual goodwill impairment assessments performed during the fourth quarters of fiscal 2022, 2021 and 2020.

In applying the quantitative test, we compare the fair value of a reporting unit to its carrying value. If the calculated fair value is less than the current carrying value, then impairment of the reporting unit exists. Calculating the fair value of a reporting unit requires our use of estimates and assumptions. We use significant judgment in determining the most appropriate method to establish the fair value of a reporting unit. We estimate the fair value of a reporting unit by employing various valuation techniques, depending on the availability and reliability of comparable market value indicators, and employ methods and assumptions that include the application of third-party market value indicators and the computation of discounted future cash flows determined from estimated cashflow adjustments to a reporting unit’s annual projected earnings before interest, taxes, depreciation and amortization (“EBITDA”), or adjusted EBITDA, which adjusts for one-off items impacting revenues and/or expenses that are not considered by management to be indicative of ongoing operations. Our fair value estimations may include a combination of value indications from both the market and income approaches, as the income approach considers the future cash flows from a reporting unit’s ongoing operations as a going concern, while the market approach considers the current financial environment in establishing fair value.

In applying the market approach, we use market multiples derived from a set of similar companies. In applying the income approach, we evaluate discounted future cash flows determined from estimated cashflow adjustments to a reporting unit’s projected EBITDA. Under this approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. In applying the discounted cash flow methodology utilized in the income approach, we rely on a number of factors, including future business plans, actual and forecasted operating results, and market data. The significant assumptions employed under this method include discount rates; revenue growth rates, including assumed terminal growth rates; and operating margins used to project future cash flows for a reporting unit. The discount rates utilized reflect market-based estimates of capital costs and discount rates adjusted for management’s assessment of a market participant’s view with respect to other risks associated with the projected cash flows of the individual reporting unit. Our estimates are based upon assumptions we believe to be reasonable, but which by nature are uncertain and unpredictable. We believe we incorporate ample sensitivity ranges into our analysis of goodwill impairment testing for a reporting unit, such that actual experience would need to be materially out of the range of expected assumptions in order for an impairment to remain undetected.

Changes in the Composition of Reporting Units in Fiscal 2020

On June 1, 2019, the composition of our reportable segments was revised. Prior to implementing the revised segment reporting structure beginning in fiscal 2020, our previously disclosed Industrial segment comprised two operating segments, the CPG operating segment and the PCG operating segment. Each of these operating segments comprised several reporting units, all of which were tested during the annual goodwill impairment tests during the fourth quarter of fiscal 2020, 2021 and 2022.

Also, in connection with our Map to Growth, we realigned certain businesses and management structure within our SPG segment. As such, our former Wood Finishes Group reporting unit was split into two separate reporting units: Guardian and Wood Finishes Group. Additionally, our former Kop-Coat Group reporting unit was split into two reporting units: Kop-Coat Industrial Protection Products

and Kop-Coat Group. We performed an interim goodwill impairment test for each of the new reporting units upon the change in business realignment using a quantitative assessment. We concluded that the estimated fair values exceeded the carrying values for these new reporting units, and accordingly, no indications of impairment were identified as a result of these changes during the first quarter of fiscal 2020.

Conclusion on Annual Goodwill Impairment Tests

As a result of the annual impairment assessments performed for fiscal 2022, 2021 and 2020, there were no goodwill impairments.

Indefinite-Lived Intangible Assets

Additionally, we test all indefinite-lived intangible assets for impairment at least annually during our fiscal fourth quarter. We follow the guidance provided by ASC 350 that simplifies how an entity tests indefinite-lived intangible assets for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount before applying traditional quantitative tests. We applied quantitative processes during our annual indefinite-lived intangible asset impairment assessments performed during the fourth quarters of fiscal 2022, 2021 and 2020.

The annual impairment assessment involves estimating the fair value of each indefinite-lived asset and comparing it with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we record an impairment loss equal to the difference. Calculating the fair value of the indefinite-lived assets requires our significant use of estimates and assumptions. We estimate the fair values of our intangible assets by applying a relief-from-royalty calculation, which includes discounted future cash flows related to each of our intangible asset’s projected revenues. In applying this methodology, we rely on a number of factors, including actual and forecasted revenues and market data.

Our required annual impairment test of each of our indefinite-lived intangible assets performed during fiscal 2022, 2021 and 2020 did not result in an impairment charge.

Although no impairment losses were recorded as a result of our annual impairment tests, we did record an intangible impairment charge in fiscal 2020. In fiscal 2020, in connection with Map to Growth, we recorded an impairment charge of $4.0 million included in restructuring expense in our Consumer reportable segment for impairment losses on indefinite-lived trade names. Refer to Note C “Goodwill and Other Intangible Assets” for additional details on this indefinite-lived intangible asset impairment charge.

Definite-Lived Intangible Assets

In accordance with the guidance provided by ASC 360, we assess identifiable, amortizable intangibles 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.

Measuring a potential impairment of amortizable intangibles 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; market participant assumptions; 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.

We did not record any impairment charges related to our definite-lived intangible assets during fiscal 2022, 2021 and 2020.

12) Advertising Costs

Advertising costs are charged to operations when incurred and are included in SG&A expenses. For the years ended May 31, 2022, 2021 and 2020, advertising costs were $45.4 million, $61.1 million and $49.7 million, respectively.

13) Research and Development

Research and development costs are charged to operations when incurred and are included in SG&A expenses. The amounts charged to expense for the years ended May 31, 2022, 2021 and 2020 were $80.5 million, $77.6 million and $76.5 million, respectively.

14) Stock-Based Compensation

Stock-based compensation represents the cost related to stock-based awards granted to our associates and directors, which may include restricted stock and stock appreciation rights (“SARs”). We measure stock-based compensation cost at the date of grant, based on the estimated fair value of the award. We recognize the cost as expense on a straight-line basis (net of estimated forfeitures) over the related vesting period. Refer to Note J, “Stock-Based Compensation,” for further information.

15) Investment Expense (Income), Net

Investment expense (income), net, consists of the following components:


Year Ended May 31,	2022			2021			2020
(In thousands)
Interest (income)	$	(4,435	)	$	(3,555	)	$	(5,313	)
Net loss (gain) on marketable securities		17,706			(38,774	)		(1,629	)
Dividend (income)		(5,676	)		(2,121	)		(2,797	)
Investment expense (income), net	$	7,595		$	(44,450	)	$	(9,739	)

Net Loss (Gain) on Marketable Securities


Year Ended May 31,	2022			2021			2020
(In thousands)
Unrealized losses (gains) on marketable equity securities	$	19,164		$	(16,133	)	$	(1,457	)
Realized (gains) on marketable equity securities		(1,488	)		(22,680	)		(237	)
Realized losses on available-for-sale debt securities		30			39			65
Net loss (gain) on marketable securities	$	17,706		$	(38,774	)	$	(1,629	)

16) Other (Income) Expense, Net

Other (income) expense, net, consists of the following components:


Year Ended May 31,	2022			2021			2020
(In thousands)
Royalty (income) expense, net (a)	$	(915	)	$	(387	)	$	5,206
(Income) related to unconsolidated equity affiliates		(350	)		(516	)		(165	)
Pension non-service (credit) cost		(10,581	)		14,542			6,076
Loss on divestiture (b)		-			-			949
Other (income) expense, net	$	(11,846	)	$	13,639		$	12,066

(a)

Includes a $5.3 million charge incurred during the fourth quarter of fiscal 2020 related to the termination of a licensing agreement within our Consumer reportable segment.

(b)

Reflects the loss incurred upon divestiture of a contracting business located in Australia, which had reported through our PCG segment.

17) Income Taxes

The provision for income taxes is calculated using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax effect of temporary differences between the financial statement carrying amount of assets and liabilities and the amounts used for income tax purposes and for certain changes in valuation allowances. Valuation allowances are recorded to reduce certain deferred tax assets when, in our estimation, it is more likely than not that a tax benefit will not be realized.

18) Earnings Per Share of Common Stock

Earnings per share (EPS) is computed using both the treasury stock and two-class method, as our unvested share-based payment awards contain rights to receive non-forfeitable dividends are considered participating securities. We calculate both Basic and Diluted EPS under each method and compare the results, reporting the method that is most dilutive.

Basic EPS of common stock is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS of common stock is computed on the basis of the weighted-average number of shares of common stock, plus the effect of dilutive potential shares of common stock outstanding during the period using the treasury stock method. Dilutive potential shares of common stock include outstanding SARS and restricted stock awards. The treasury stock method also assumes that we use the proceeds from the hypothetical exercise of the stock compensation awards to repurchase common stock at the average market price during the period.

The two-class method determines EPS for each class of common stock and participating securities according to dividends and dividend equivalents and their respective participation rights in undistributed earnings.

See Note L, “Earnings Per Share,” to the Consolidated Financial Statements for additional information.

19) Recent Accounting Pronouncements

New Pronouncements Adopted

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740),” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments was permitted. Depending on the amendment, adoption may have been applied on the retrospective, modified retrospective or prospective basis. The adoption of this new guidance, effective June 1, 2021 using the prospective method, did not have a material impact on our Consolidated Financial Statements.

New Pronouncements Issued

We are not aware of any recently issued accounting pronouncements that have not yet been adopted by us and which would have a material impact on our consolidated financial statements.

20) Subsequent Event

From June 1, 2022 through July 22, 2022, we repurchased 303,079 shares of RPM common stock since May 31, 2022, at a cost of approximately $25.0 million, or an average of $82.49 per share, under the stock repurchase program described further in Note I, "Stock Repurchase Program."