go to Financial Statements Notes page # 1 | 2 | 3 | 4 | 5
Next Page
Notes to Consolidated Financial Statements
May 31, 2003, 2002, 2001 - Page 1
Note A - Summary of Significant Accounting Policies
(1) Principles of Consolidation At the Company’s annual meeting on October 11, 2002, stockholders approved a plan to change the Company’s legal place of incorporation from Ohio to Delaware. Under the plan, a new legal entity, RPM International Inc., was incorporated in Delaware and became, pursuant to a merger, the parent holding company of Ohio-based RPM, Inc. The Consolidated Financial Statements include the accounts of RPM International Inc. and its majority-owned subsidiaries. The Company accounts for its investment in less than majority-owned joint ventures under the equity method. Intercompany accounts, transactions and unrealized profits and losses are eliminated in consolidation. Certain reclassifications have been made to prior-year amounts to conform with the current-year presentation. (2) Business Combinations During the year ended May 31, 2003, the Company completed seven product line acquisitions and one minority interest acquisition, all of which have been accounted for as business combinations. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the respective dates of acquisition. The Company obtained independent valuation of certain intangible assets.
The operating results of these businesses are reflected in the Company’s financial statements from their respective dates of acquisition. Pro forma results of operations for the years ended May 31, 2003 and May 31, 2002 were not materially different from reported results and, consequently, are not presented.
(3) Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (4) Foreign Currency The functional currency of foreign subsidiaries is their local 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 an annual average exchange rate. The resulting translation adjustments have been recorded in accumulated other comprehensive loss, a component of stockholders’ equity, and will be included in net earnings only upon the sale or liquidation of the underlying foreign investment, neither of which is contemplated at this time. Transaction gains and losses have been immaterial during the past three fiscal years. (5) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss (which is shown net of taxes) consists of the following components:
(6) Cash and Short-Term Investments For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company does not believe it is exposed to any significant credit risk on cash and short-term investments. (7) Marketable Securities Marketable securities, all of which are classified as available for sale, totaled $22,073,000 and $19,396,000 at May 31, 2003 and 2002, respectively. The estimated fair values of these securities are included in other current assets and are based on quoted market prices. (8) Financial Instruments The Company’s financial instruments recorded on the balance sheet include cash and short-term investments, accounts receivable, notes and accounts payable, and debt. The carrying amount of cash and short-term investments, accounts receivable, and notes and accounts payable approximates fair value because of their short-term maturity. The carrying amount of the Company’s debt instruments approximates fair value based on quoted market prices, variable interest rates or borrowing rates for similar types of debt arrangements.
(9) Inventories Inventories are stated at the lower of cost or market, cost being determined substantially 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 material, labor and manufacturing overhead. Inventories were composed of the following major classes:
(10) Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method for all business combinations initiated after June 30, 2001. It also provides guidance on purchase accounting related to the recognition of intangible assets. SFAS No. 142 requires that goodwill and identifiable acquired intangible assets with indefinite useful lives shall no longer be amortized, but tested for impairment annually and whenever events or circumstances occur indicating that goodwill might be impaired. SFAS No. 142 also requires the amortization of identifiable assets with finite useful lives. Identifiable acquired intangible assets, which are subject to amortization, are to be tested for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adoption of SFAS No. 144 on June 1, 2001 did not have an impact on the Company.
The Company elected to adopt the provisions of SFAS No. 142 as of June 1, 2001, and identified its reporting units (components) to be one level below its industrial and consumer operating segments. The Company determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of June 1, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 ceased, and intangible assets acquired prior to July 1, 2001 that did not meet the criteria for recognition apart from goodwill under SFAS No. 141 were reclassified to goodwill. In connection with the adoption of SFAS No. 142, the Company was required to perform a transitional goodwill impairment assessment within six months of adoption. The Company completed its transitional goodwill impairment assessment, with no adjustment to the carrying value of its goodwill as of June 1, 2001. Prospectively, the annual impairment test will be performed in the first quarter of the Company’s fiscal year and any losses resulting from the test will be reflected in operating income. The annual goodwill impairment assessment involves estimating the fair value of the reporting unit and comparing it with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, additional steps are followed to recognize a potential impairment loss. Calculating the fair value of the reporting units requires significant estimates and assumptions by management. The Company estimates the fair value of its reporting units by applying third-party market value indicators to the reporting unit’s projected earnings before interest, taxes, depreciation and amortization. The Company completed its annual impairment tests with no adjustment to the carrying value of its goodwill as of May 31, 2003 and 2002. The changes in the carrying amount of goodwill, by reporting segment, for the year ended May 31, 2003 are as follows:
Other intangible assets consist of the following major classes:
The aggregate other intangible asset amortization expense for the fiscal years ended May 31, 2003, 2002 and 2001 was $11,904,000, $11,329,000 and $16,602,000, respectively. For each of the next five fiscal years through May 31, 2008, the estimated annual intangible asset amortization expense will approximate $12,000,000. The following pro forma information reconciles net income reported for the year ended May 31, 2001 to adjusted net income, reflecting the impact of SFAS No. 142. All amortization amounts are reflected net of tax.
(11) Depreciation Depreciation is computed primarily using the straight-line method over the following ranges of useful lives:
Land improvements Buildings and improvements Machinery and equipment	5 to 42 years 5 to 50 years 3 to 20 years
(12) Revenue Recognition The Company’s subsidiaries recognize revenue when title and risk of loss pass to customers. (13) Shipping Costs Shipping costs paid to third-party shippers for transporting products to customers are included in selling, general and administrative expenses. For the years ended May 31, 2003, 2002 and 2001, shipping costs were $74,200,000, $73,700,000 and $75,400,000, respectively. (14) Advertising Costs Advertising costs are charged to operations when incurred and are included in selling, general and administrative expenses. For the years ended May 31, 2003, 2002 and 2001, advertising costs were $58,700,000, $53,400,000 and $52,400,000, respectively. (15) Research and Development Research and development costs are charged to operations when incurred and are included in selling, general and administrative expenses. The amounts charged for the years ended May 31, 2003, 2002 and 2001 were $23,800,000, $20,900,000 and $21,800,000, respectively. The customer-sponsored portion of such expenditures was not significant.
(16) Stock-Based Compensation At May 31, 2003, the Company had two stock-based compensation plans accounted for under the recognition and measurement principles of Accounting Principles Board Opinion (APBO) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as more fully described in Note D. Pro forma information regarding the impact of stock-based compensation on net income and earnings per share is required by SFAS No. 123, “Account-ing for Stock-Based Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Such pro forma information, determined as if the Company had accounted for its employee stock options under the fair value recognition provisions of SFAS No. 123, is illustrated in the table on the right: The fair value for these options was estimated as of the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions for all options granted:
(17) Interest Expense, Net Interest expense is shown net of investment income, which consists of interest, dividends and capital gains (losses). Investment income for the years ended May 31, 2003, 2002 and 2001 was $1,437,000, $2,094,000 and $3,682,000, respectively. (18) Income Taxes The Company and its wholly owned domestic subsidiaries file a consolidated federal income tax return. The tax effects of transactions are recognized in the year in which they enter into the determination of net income, regardless of when they are recognized for tax purposes. As a result, income tax expense differs from actual taxes payable. The Company does not intend to distribute the accumulated earnings of consolidated foreign subsidiaries totaling approximately $115,000,000 at May 31, 2003, and therefore no provision has been made for the taxes that would result if such earnings were remitted to the Company. (19) Reportable Segments Reportable segment information appears in Management’s Discussion and Analysis. (20) Other Recent Accounting Pronouncements In July 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. The Company will apply the provisions of SFAS No. 146 to any future exit or disposal activities.
go to Financial Statements Notes page # 1 | 2 | 3 | 4 | 5
Next Page