In connection with the foregoing, on September 9, 2016, the SEC filed an enforcement action against us and our General
Counsel. We have cooperated with the SECs investigation and believe the allegations in the complaint mischaracterize both our and our General Counsels actions in connection with the matters related to our quarterly results in fiscal 2013
and are without merit. We intend to contest the allegations in the complaint vigorously, and both we and our General Counsel filed motions to dismiss the complaint on February 24, 2017.
The action by the SEC could result in sanctions against us and/ or our General Counsel and could impose substantial additional costs and distractions, regardless of its
outcome. We have determined that it is probable that we will incur a loss relating to this matter and have estimated a range of potential loss. We have accrued at the low end of the range of loss, as no amount within the range is more likely to
occur, and no amount within the estimated range of loss would have a material impact on our consolidated financial condition, results of operations or cash flows.
December 2014, we received notice of a claim seeking damages against one of our industrial segment subsidiaries alleging failure of a coating system application on a parking garage in Dubai, UAE. During the year ended May 31, 2017, the case
settled for an immaterial amount.
A consolidated class-action complaint is pending against Rust-Oleum Corporation (Rust-Oleum) seeking to have a class
certified and alleging breach of warranty, breach of contract and other claims regarding certain deck coating products of Rust-Oleum. In October 2016, the parties executed a settlement agreement. The court has granted final approval of the
settlement. Rust-Oleum has deposited $9.3 million into a settlement fund in satisfaction of the claims. We recorded the amount of the settlement in accrued losses in our Consolidated Balance Sheets and reflected the amount in other expense (income),
net, in our Consolidated Statements of Income as of and for the fiscal year ended May 31, 2016.
NOTE O SEGMENT INFORMATION
We changed the composition of our operating and reportable segments in order to reflect managements view of the operating results for each segment
during the quarter ended August 31, 2016. Under our new composition, we made the determination to move a group of businesses serving the industrial flooring, concrete repair and specialty waterproofing markets out of our specialty reportable
segment into our Performance Coatings Group operating segment, which better aligns with our management structure and reports through our industrial reportable segment. For the fiscal year ended May 31, 2016, this group of businesses represented
less than 1% of our consolidated net sales, income before income taxes and identifiable assets. Information for all periods presented has been recast to reflect this change.
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 three reportable segments: the industrial reportable segment, the specialty reportable segment and the consumer reportable segment. Within each reportable
segment, we aggregate operating segments or product lines that consist of individual companies or 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 seven operating segments represent components of our business for which separate financial information is available that is utilized on a regular basis by our chief operating decision maker
in determining how to allocate the assets of the company and evaluate performance. These seven 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 segments underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to earnings (loss) before interest and taxes (EBIT) as a
performance evaluation measure because interest expense is essentially related to acquisitions, as opposed to segment operations.
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. The industrial reportable segment comprises three separate operating segments Tremco Group, tremco illbruck Group and Performance Coatings Group. Products and services within this reportable
segment include construction chemicals, roofing systems, weatherproofing and other sealants, and polymer flooring.
Our specialty reportable segment products are sold
throughout North America and a few international locations, primarily in Europe. Our specialty product lines are sold directly to contractors, distributors and end-users, such as industrial manufacturing facilities, public institutions and other
commercial customers. The specialty reportable segment is a single operating segment, which offers products that include industrial cleaners, restoration services equipment, colorants, exterior finishes, edible coatings and specialty glazes for
pharmaceutical and food industries, and other specialty OEM coatings. As discussed in Note A(2), this segment includes the SPHC businesses, which were reconsolidated as of January 1, 2015.
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 segments major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe and other parts of the world. Our
consumer reportable segment products are primarily sold directly to mass merchandisers, home improvement centers, hardware stores, paint stores, craft shops, cosmetic companies and through distributors. This reportable segment comprises three
operating segments Rust-Oleum Group, DAP Group and SPG-Consumer Group. Products within this reportable segment include specialty, hobby and professional paints; nail enamels; caulks; adhesives; silicone sealants and wood stains. Sales to the
Home Depot represented less than 10% of our consolidated net sales for fiscal 2017 and 2016, and 10% of our consolidated net sales for fiscal 2015, and 28%, 28% and 29% of our consumer segment net sales for fiscal 2017, 2016 and 2015, respectively.
In addition to our three reportable segments, there is a category of certain business activities and expenses, referred to as corporate/other, that does not
constitute an operating segment. This category includes our corporate headquarters and related administrative expenses, results of our captive insurance companies, gains or losses on the sales of certain assets and other expenses not directly
associated with any reportable segment. Assets related to the corporate/other category consist primarily of investments, prepaid expenses and headquarters property and equipment. These corporate and other assets and expenses reconcile
reportable segment data to total consolidated income before income taxes, interest expense and earnings before interest and taxes; as well as identifiable assets, capital expenditures and depreciation and amortization.
We reflect income from our joint ventures on the equity method, and receive royalties from our licensees.
RPM International Inc. and Subsidiaries 61
RPM International Inc. (NYSE: RPM) owns subsidiaries that are world leaders in coatings, sealants, building materials and related services. From homes to precious landmarks worldwide, their brands are trusted by consumers and professionals alike to protect, improve and beautify. Among its leading consumer brands are Rust-Oleum, DAP and Zinsser. Learn more about RPM brands >>
RPM is a compelling long-term investment.
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