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TMCNet:  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[January 08, 2014]

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Consolidated Financial Statements include the accounts of RPM International Inc. and its majority-owned subsidiaries, except for certain subsidiaries that were deconsolidated on May 31, 2010 (please refer to Note 3 to the Consolidated Financial Statements for further information). Investments in less-than-majority-owned joint ventures for which we have the ability to exercise significant influence over are accounted for under the equity method.


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 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, 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 principal operating 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 strengthens, we reflect the resulting losses as a component of accumulated other comprehensive income (loss). Conversely, if the U.S. dollar weakens, foreign exchange translation gains result, which favorably impact accumulated other 29-------------------------------------------------------------------------------- Table of Contents comprehensive income. Translation adjustments may be included in net earnings in the event of a sale or liquidation of certain of our underlying foreign investments. If we determine that the functional currency of any of our foreign subsidiaries should be the U.S. dollar, our financial statements will be affected. Should this occur, we will adjust our reporting to appropriately account for any such changes.

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).

Goodwill We test our goodwill balances at least annually, or more frequently as impairment indicators arise, at the reporting unit level. Our reporting units have been identified at the component level, which is the operating segment level or one level below our operating segments.

In the fourth quarter of our fiscal year ended May 31, 2012, we early adopted new Financial Accounting Standards Board ("FASB") guidance that simplifies how an entity tests goodwill for impairment. It provides an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the two-step goodwill impairment test.

We assess qualitative factors in each of our reporting units that carry goodwill. Among other relevant events and circumstances that affect the fair value of our reporting units, we assess individual factors such as: • a significant adverse change in legal factors or the business climate; • an adverse action or assessment by a regulator; • unanticipated competition; • a loss of key personnel; and • a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of.

We assess these qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the new guidance, this quantitative test 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.

In applying the first step of the quantitative test, we compare the fair value of a reporting unit to its carrying value. Calculating the fair market 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 for a reporting unit's annual projected earnings before interest, taxes, depreciation and amortization ("EBITDA").

We evaluate discounted future cash flows for a reporting unit's projected EBITDA. Under this approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired. An indication that goodwill may be impaired results when the carrying value of the net assets of a reporting unit exceeds the fair value of the reporting unit. At that point, the second step of the impairment test is performed, which requires a fair value estimate of each tangible and intangible asset in order to determine the 30-------------------------------------------------------------------------------- Table of Contents implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.

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

Our annual goodwill impairment analysis for fiscal 2013 did not result in any indicators of impairment. 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. In the fourth quarter of our fiscal year ended May 31, 2013, we adopted new FASB guidance 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.

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 2013 annual impairment tests of each of our indefinite-lived intangible assets did not result in any impairment loss.

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 31-------------------------------------------------------------------------------- Table of Contents 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. 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.

Further, at each interim reporting period, we estimate an effective income tax rate that is expected to be applicable for the full year. Significant judgment is involved regarding the application of global income tax laws and regulations and when projecting the jurisdictional mix of income. Additionally, interpretation of tax laws, court decisions or other guidance provided by taxing authorities influences our estimate of the effective income tax rates. As a result, our actual effective income tax rates and related income tax liabilities may differ materially from our estimated effective tax rates and related income tax liabilities. Any resulting differences are recorded in the period they become known.

Contingencies We are party to various claims and lawsuits arising in the normal course of business. 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. In general, our accruals, including our accruals for environmental, warranty, and tax liabilities, discussed further below, represent the best estimate of a range of possible losses. 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. While it is reasonably possible that 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 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.

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; 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 also have 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 that govern, among other things, taxes on worldwide income. The calculation of our income tax expense is based on 32-------------------------------------------------------------------------------- Table of Contents the best information available, including the application of currently enacted income tax laws and regulations, and involves our significant judgment. The actual income tax liability for each jurisdiction in any year can ultimately be determined, in some instances, several years after the financial statements have been published.

We also 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 and actual income tax liabilities can also be affected by changes in applicable tax laws, retroactive tax law changes, or other factors, which may cause us to believe revisions of past estimates are appropriate. Although we believe that appropriate liabilities have been recorded for our income tax expense and income tax exposures, 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 collectability and past experience, but are primarily made up of individual account balances identified as doubtful based on specific facts and conditions. Receivable losses are charged against the allowance when we confirm uncollectibility. 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.

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.

33-------------------------------------------------------------------------------- Table of Contents 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, 2013 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 2013 $ (5.3 ) $ 6.4 $ (1.9 ) $ 2.6 Increase (decrease) in obligation as of May 31, 2013 $ (44.4 ) $ 54.8 $ (31.7 ) $ 33.6 Expected Return on Plan Assets Increase (decrease) in expense in FY 2013 $ (2.1 ) $ 2.1 $ (1.4 ) $ 1.4 Increase (decrease) in obligation as of May 31, 2013 N/A N/A N/A N/A Compensation Increase Increase (decrease) in expense in FY 2013 $ 4.1 $ (3.6 ) $ 1.5 $ (0.9 ) Increase (decrease) in obligation as of May 31, 2013 $ 17.4 $ (15.6 ) $ 6.0 $ (5.4 ) Based upon May 31, 2013 information, the following table reflects 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 2013 $ - $ - $ (0.5 ) $ 0.6 Increase (decrease) in obligation as of May 31, 2013 $ (0.7 ) $ 0.8 $ (5.3 ) $ 6.8 Healthcare Cost Trend Rate Increase (decrease) in expense in FY 2013 $ - $ - $ 0.6 $ (0.5 ) Increase (decrease) in obligation as of May 31, 2013 $ 0.3 $ (0.3 ) $ 9.1 $ (3.8 ) BUSINESS 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 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 executive officer 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 segment's underlying businesses. We evaluate the profit performance of our segments primarily based on income before income taxes, but also look to earnings (loss) before interest and taxes ("EBIT") as a performance evaluation measure because interest expense is essentially related to corporate acquisitions, as opposed to segment operations.

Our industrial reportable segment's 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 four separate operating segments - Tremco Group, Tremco illbruck Group, Performance Coatings Group and RPM2-Industrial Group. Products and services within this reportable segment include construction chemicals; roofing systems; weatherproofing and other sealants; polymer flooring; edible coatings and specialty glazes for pharmaceutical, cosmetic and food industries; and other specialty chemicals.

34 -------------------------------------------------------------------------------- Table of Contents 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 reportable segment's major manufacturing and distribution operations are located primarily in North America, along with a few locations in Europe. Our consumer reportable segment's products are sold throughout North America primarily to mass merchants, home improvement centers, hardware stores, paint stores, craft shops, cosmetic companies and to other smaller customers through distributors.

This reportable segment comprises three operating segments - DAP Group, RPM2-Consumer Group and Rust-Oleum Group. Products within this reportable segment include specialty, hobby and professional paints; nail care enamels; 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 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.

Three Months Ended Six Months Ended November 30, November 30, November 30, November 30, 2013 2012 2013 2012 (In thousands) Net Sales Industrial Segment $ 708,713 $ 691,076 $ 1,439,939 $ 1,394,411 Consumer Segment 362,774 326,350 796,222 669,729 Consolidated $ 1,071,487 $ 1,017,426 $ 2,236,161 $ 2,064,140 Income (Loss) Before Income Taxes (a) Industrial Segment Income Before Income Taxes (a) $ 81,394 $ 75,495 $ 178,975 $ 149,799 Interest (Expense), Net (b) (2,528 ) (2,626 ) (5,062 ) (5,234 ) EBIT (c) $ 83,922 $ 78,121 $ 184,037 $ 155,033 Consumer Segment Income Before Income Taxes (a) $ 51,720 $ 38,561 $ 134,437 $ 97,349 Interest (Expense), Net (b) 26 (19 ) 65 (19 ) EBIT (c) $ 51,694 $ 38,580 $ 134,372 $ 97,368 Corporate/Other (Expense) Before Income Taxes (a) $ (35,530 ) $ (43,014 ) $ (68,612 ) $ (104,044 ) Interest (Expense), Net (b) (16,302 ) (15,859 ) (30,638 ) (24,707 ) EBIT (c) $ (19,228 ) $ (27,155 ) $ (37,974 ) $ (79,337 ) Consolidated Income (Loss) Before Income Taxes (a) $ 97,584 $ 71,042 $ 244,800 $ 143,104 Interest (Expense), Net (b) (18,804 ) (18,504 ) (35,635 ) (29,960 ) EBIT (c) $ 116,388 $ 89,546 $ 280,435 $ 173,064 35 -------------------------------------------------------------------------------- Table of Contents (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) Interest (expense), net includes the combination of interest (expense) and investment income/(expense), net.

(c) 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 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 November 30, 2013 Net Sales Consolidated net sales increased 5.3% to $1,071.5 million for the quarter ended November 30, 2013 due to organic growth of 5.3% and acquisition growth of 0.8%, offset by an unfavorable foreign exchange impact of 0.8%.

Industrial segment net sales for the current quarter were up 2.6% to $708.7 million due to acquisition growth of 0.4% and organic growth of 3.1%, offset by an unfavorable foreign exchange impact of 0.9%. The consumer segment generated net sales of $362.8 million, or 11.2% net sales growth during the current quarter versus the same period a year ago, due to organic growth of 10.1% and acquisition growth of 1.7%, offset by an unfavorable foreign exchange impact of 0.6%.

Gross Profit Margin Our consolidated gross profit margin improved to 42.7% of net sales for the second quarter of fiscal 2014 versus a consolidated gross profit margin of 41.8% for the comparable period a year ago, reflecting the impact of accretive acquisitions completed during the last 12 months, a favorable mix of sales, and favorable pricing initiatives instituted primarily during prior periods in order to offset raw material cost increases.

Selling, General and Administrative Expenses ("SG&A") Our consolidated SG&A remained flat at 32.0% of net sales for the quarter ended November 30, 2013 compared with the same period a year ago. The current quarter SG&A expense reflects an increase in commission and compensation-related expense as well as higher distribution and freight expense, offset by lower acquisition-related expense, bad debt and legal settlement expense. Warranty expense for the quarter ended November 30, 2013 increased from the amount recorded during the comparable prior year period. We anticipate that warranty expense will fluctuate from period to period, but will likely continue to slowly decline over the next few years.

Our industrial segment SG&A was approximately $6.7 million higher during the second quarter of fiscal 2014 versus the comparable prior year period, and was slightly higher as a percentage of net sales, reflecting the unfavorable impact of higher employee compensation and commission expense, higher warranty and distribution expense versus the comparable prior year period, partially offset by lower bad debt and legal settlement expense versus last year's second quarter.

Our consumer segment SG&A was approximately $7.7 million higher during the second quarter of fiscal 2014 versus the comparable prior year period, but lower as a percentage of net sales in the second quarter of fiscal 2014 as compared with the same period a year ago, primarily reflecting this segment's 10.1% organic growth in net sales. SG&A expense for this segment also reflects higher employee compensation expense during the 36-------------------------------------------------------------------------------- Table of Contents current quarter of fiscal 2014 versus the comparable prior year period, offset by lower acquisition-related expenses and lower bad debt expense.

SG&A expenses in our corporate/other category increased by $2.9 million during the current quarter of fiscal 2014 to $19.2 million from $16.4 million during the comparable prior year period. The increase in SG&A expense primarily reflects the impact of higher compensation-related expense and professional services expense during the current quarter versus the same period a year ago.

We recorded total net periodic pension and postretirement benefit costs of $11.7 million and $12.9 million for the second quarter of fiscal 2014 and 2013, respectively. The $1.2 million decrease in pension expense was primarily the result of $1.0 million of additional net actuarial gains recorded during the second quarter of fiscal 2014 versus the comparable prior year period and a favorable impact of $1.1 million due to a higher expected return on plan assets.

Higher service and interest cost of $0.9 million during the second quarter of fiscal 2014 versus the comparable prior year period slightly offset those gains.

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 7, "Pension Plans," for additional information regarding these benefits.

Interest Expense Interest expense was $20.8 million for the second quarter of fiscal 2014 versus $19.9 million for the same period a year ago. Higher average borrowings, related to recent acquisitions, increased interest expense during this year's second quarter by approximately $0.2 million versus the same period a year ago. Excluding acquisition-related borrowings, lower average borrowings year-over-year decreased interest expense by approximately $0.1 million. Higher interest rates, which averaged 5.22% overall for the second quarter of fiscal 2014 compared with 5.08% for the same period of fiscal 2013, increased interest expense by approximately $0.8 million during the current quarter versus the same period last year.

Investment Expense (Income), Net Net investment income of $2.0 million during the second quarter of fiscal 2014 compares to net investment income of $1.4 million during the same period last year. Dividend and interest income totaled $1.9 million for each of the quarters ended November 30, 2013 and 2012. Net realized gains on the sales of investments totaled $0.2 million during the second quarter of fiscal 2014, while those gains were immaterial during the same period a year ago. During the second quarter of fiscal 2014, impairments recognized on securities that management has determined are other-than-temporary declines in value were $0.1 million; while there were approximately $0.5 million of such losses during the same period a year ago.

Other Expense (Income), Net Other income of $1.5 million for the second quarter of fiscal 2014 compared with other expense of $9.7 million for the same period a year ago. The majority of the expense for the prior period, or $10.8 million, was recorded by our corporate/other segment, and represented impairment losses stemming from our various investments in Kemrock. As previously disclosed, as the economy and financial markets in India declined a year ago, we wrote down a portion of our equity investment in Kemrock and also the value of the conversion option feature of our investment in Kemrock's convertible bonds during the prior year second quarter. More detailed information is included in Note 2.

Other items reflected in this balance include net royalty income of $0.7 million and $0.4 million for the second quarter of fiscal 2014 and fiscal 2013, respectively. Lastly, included in this balance is our equity in earnings of unconsolidated affiliates totaling approximately $0.8 million and $0.7 million for the second quarter of fiscal 2014 and 2013, respectively.

Income Before Income Taxes ("IBT") Our consolidated pretax income for the second quarter of fiscal 2014 of $97.6 million compares with pretax income of $71.0 million for the second quarter of fiscal 2013.

Our industrial segment had pretax income of $81.4 million, or 11.5% of net sales, for the quarter ended November 30, 2013, versus pretax income of $75.5 million, or 10.9% of net sales, for the same period a year ago. The increase in IBT for the industrial segment resulted from the 3.1% growth in organic sales during the current 37-------------------------------------------------------------------------------- Table of Contents period versus the same period last year, along with the improvements in this segment's gross profit margin. Our consumer segment IBT increased to $51.7 million, or 14.3% of net sales for the second quarter of fiscal 2014, from the comparable prior year period result of $38.6 million, or 11.8% of net sales.

This was driven primarily by the 11.2% growth in organic net sales for the consumer segment in the second quarter of fiscal 2014 from the comparable prior year period, stemming from new product introductions and accretive acquisitions.

Income Tax RateThe effective income tax rate was 29.9% for the three months ended November 30, 2013 compared to an effective income tax rate of 35.1% for the three months ended November 30, 2012.

For the three months ended November 30, 2013 and 2012, the effective tax rates reflect variances from the 35% federal statutory rate primarily due to lower effective tax rates of certain of our foreign subsidiaries, the favorable impact of certain foreign operations on our U.S. taxes, the research and development tax credit, the benefit of the domestic manufacturing deduction and for the three months ended November 30, 2013, the impact of lower valuation allowances on foreign tax credit carryforwards. These favorable variances from the statutory tax rate were offset by the net impact of valuation allowances associated with certain foreign net operating losses, state and local income taxes, and non-deductible business operating expenses.

Additionally for the three months ended November 30, 2012, the effective tax rate differed from the federal statutory rate as a result of valuation allowances related to losses associated with our investments in Kemrock and as a result of the impact on our effective tax rate in certain foreign jurisdictions where income tax benefits associated with net operating losses incurred by those foreign businesses are not recognized.

As of November 30, 2013, 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 November 30, 2013 for those 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 carry forwards, capital loss carryforwards, unrealized losses on securities, certain foreign net operating losses and net foreign deferred tax assets.

Net Income Net income of $68.4 million for the quarter ended November 30, 2013 compares to net income of $46.1 million for the comparable prior year period, which results in a net margin on sales of 6.4% and 4.5%, respectively, for the second quarter of fiscal 2014 and 2013. Excluding the impact of the prior year losses relating to our former investments in Kemrock, the prior period adjusted net income of $56.9 million represented an adjusted net margin on sales of 5.6%.

The current period growth in net income reflects the organic growth in sales of 5.3% during the current quarter versus the comparable prior year period, coupled with accretive acquisitions. During the quarter ended November 30, 2013, we had net income from noncontrolling interests of $4.8 million versus $4.4 million during the comparable prior year period. Net income attributable to RPM International Inc. stockholders was $63.6 million and $41.7 million, respectively, for the quarters ended November 30, 2013 and 2012.

Diluted earnings per share of common stock for the quarter ended November 30, 2013 of $0.48 compares with diluted earnings per share of common stock of $0.31 for the quarter ended November 30, 2012.

Six Months Ended November 30, 2013 Net Sales Consolidated net sales increased 8.3% to $2.24 billion for the six months ended November 30, 2013 due to organic growth of 5.3% and acquisition growth of 3.6%, offset by an unfavorable foreign exchange impact of 0.6%.

Industrial segment net sales for the first half of fiscal 2014 were up 3.3% to $1.44 billion due to acquisition growth of 0.6% and organic growth of 3.3%, offset by an unfavorable foreign exchange impact of 0.6%. The consumer segment generated net sales of $796.2 million, or 18.9% net sales growth during this year's first half versus the same period a year ago, due to organic growth of 9.6% and acquisition growth of 9.8%, offset by an unfavorable foreign exchange impact of 0.5%.

38 -------------------------------------------------------------------------------- Table of Contents Gross Profit Margin Our consolidated gross profit margin improved to 42.8% of net sales for the first half of fiscal 2014 versus a consolidated gross profit margin of 41.6% for the comparable period a year ago, reflecting the impact of accretive acquisitions completed during the last 12 months, a favorable mix of sales and pricing initiatives instituted primarily during prior periods in order to offset unfavorable swings in foreign exchange and raw material cost increases. Additionally, the prior period was negatively impacted by approximately 20 basis points as a result of one-time charges taken by the industrial segment's roofing division for revised cost estimates in conjunction with unprofitable contracts outside of North America.

SG&A Our consolidated SG&A decreased to 30.4% of net sales for the first half of fiscal 2014 compared with 30.8% of net sales for the same period a year ago.

During the prior year period, our industrial segment recorded $5.0 million of bad debt expense related to its $10.0 million loan to Kemrock, and $5.6 million in roofing exit costs related to a loss contract outside North America. The current period decrease in SG&A as a percent of net sales versus the prior year also reflects lower legal settlement and bad debt expense, offset by higher employee compensation-related expense, including commissions on higher sales, as well as higher distribution expense and unfavorable foreign exchange. Warranty expense for the six months ended November 30, 2013 also increased from the amount recorded during the comparable prior year period. We anticipate that warranty expense will fluctuate from period to period, but will likely continue to slowly decline over the next few years.

Our industrial segment SG&A was approximately $12.7 million higher during the first half of fiscal 2014 versus the comparable prior year period, but slightly lower as a percentage of net sales, reflecting this segment's current period growth in organic sales of 3.3%. Results for the prior year period reflect the impact of the $5.0 million bad debt write down on our loan to Kemrock and the $10.6 million loss related to a loss contract outside North America and exit costs related to that contract as previously discussed. Industrial segment results for the first half of fiscal 2014 reflect the impact of higher employee compensation and benefit expense, including higher commissions, higher distribution expense, warranty expense and unfavorable foreign exchange, partially offset by lower legal settlement and bad debt expense versus the comparable prior year period.

Our consumer segment SG&A was approximately $24.1 million higher during the first half of fiscal 2014 versus the comparable prior year period, but lower as a percentage of net sales during the first half of fiscal 2014 as compared with the same period a year ago. This reflects the leveraging of this segment's 18.9% growth in net sales over the prior year period despite higher compensation-related expense, including commissions, along with higher acquisition-related expense, legal and advertising expense during this year's first half versus the same period a year ago.

SG&A expenses in our corporate/other category increased by $5.0 million during the first half of fiscal 2014 to $38.0 million from $33.0 million during the comparable prior year period. The increase in SG&A expense reflects the combination of higher employee compensation, higher legal expense and unfavorable foreign exchange.

We recorded total net periodic pension and postretirement benefit costs of $23.4 million and $25.8 million for the first half of fiscal 2014 and 2013, respectively. The $2.4 million decrease in pension expense was primarily the result of $2.0 million of additional net actuarial gains recorded during the first half of fiscal 2014 versus the comparable prior year period and a favorable impact of $2.2 million due to larger returns on higher plan asset levels. Higher service and interest cost of $1.8 million during the first half of fiscal 2014 versus the comparable prior year period slightly offset those gains. 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.

Interest Expense Interest expense was $41.5 million for the first half of fiscal 2014 versus $38.3 million for the same period a year ago. Higher average borrowings, related to recent acquisitions, increased interest expense during this year's first half by approximately $2.0 million versus the same period a year ago. Excluding acquisition-related borrowings, higher average borrowings year-over-year increased interest expense by approximately $1.3 million. Lower interest rates, which averaged 5.14% overall for the first half of fiscal 2014 39 -------------------------------------------------------------------------------- Table of Contents compared with 5.31% for the same period of fiscal 2013, decreased interest expense by approximately $0.1 million during the current six-month period versus the same period last year.

Investment Expense (Income), Net Net investment income of $5.9 million during this year's first half compares to net investment income of $8.3 million for the same period a year ago. Dividend and interest income totaled $3.6 million during this year's first half versus $4.3 million of income during the same period last year. Net realized gains on the sales of investments resulted in a net gain of $2.4 million for this year's first half versus a net gain of $4.6 million for the same period during fiscal 2013. Impairments recognized on securities that management has determined are other-than-temporary declines in value approximated $0.1 million for the first half of fiscal 2014, versus impairments of $0.6 million for the same period a year ago.

Other (Income), Net Other income of $2.0 million for the first half of fiscal 2014 compared with other expense of $49.1 million for the same period a year ago. The prior period result reflects $51.1 million of impairment losses stemming from our various investments in Kemrock. As previously disclosed, as the economy and financial markets in India declined a year ago, we wrote down a portion of our equity investment in Kemrock and also the value of the conversion option feature of our investment in Kemrock's convertible bonds. More detailed information is included in Note 2.

Other items reflected in this balance include net royalty income of approximately $0.4 million and $0.7 million for the first half of fiscal 2014 and fiscal 2013, respectively. Lastly, included in this balance is our equity in earnings of unconsolidated affiliates totaling approximately $1.5 million and $1.2 million for the first half of fiscal 2014 and 2013, respectively.

IBT Our consolidated pretax income for this year's first half of $244.8 million compares with pretax income of $143.1 million for the same period last year, resulting in a pretax profit margin on net sales of 10.9% for the current period versus a pretax profit margin on net sales of 6.9% a year ago. As discussed above, the prior period results reflect the impact of the impairment losses relating to our various investments in Kemrock, approximating $56.1 million, combined with the approximately $11.0 million in losses on contracts outside of North America in our roofing division and related exit costs.

Our industrial segment had IBT of $179.0 million, for a profit margin on net sales of 12.4% for this year's first half, versus IBT of $149.8 million, for a profit margin on net sales of 10.7%, for the same period last year. Our consumer segment IBT increased to $134.4 million, or 16.9% of net sales for the period, from last year's first half' IBT of $97.3 million, or 14.5% of net sales. The increase in IBT as a percent of sales for the consumer segment resulted primarily from the leverage of the impact of this segment's 18.9% growth in net sales, including the impact of accretive acquisitions during the current period versus the same period a year ago.

Income Tax Rate The effective income tax rate was 28.4% for the six months ended November 30, 2013 compared to an effective income tax rate of 41.3% for same period a year ago.

For the six months ended November 30, 2013 and 2012, the effective tax rates reflect variances from the 35% federal statutory rate primarily due to lower effective tax rates of certain of our foreign subsidiaries, the favorable impact of certain foreign operations on our U.S. taxes, the research and development tax credit, the benefit of the domestic manufacturing deduction and for the three and six months ended November 30, 2013, the impact of lower valuation allowances on foreign tax credit carryforwards. These favorable variances from the statutory tax rate were offset by the net impact of valuation allowances associated with certain foreign net operating losses, state and local income taxes, and non-deductible business operating expenses.

Furthermore, for the six month period ended November 30, 2013, the effective tax rate includes a discrete benefit related to the recognition of a foreign deferred income tax asset resulting from the merger of certain foreign subsidiaries. This benefit was partially offset by the impact of the enactment of a Canadian tax law change, Canada Bill C-48, Technical Tax Amendments Act, 2012 ("Bill C-48"), which was effective as of June 26, 2013.

40-------------------------------------------------------------------------------- Table of Contents Furthermore, for the six month period ended November 30, 2012, the effective tax rate differed from the federal statutory rate as a result of valuation allowances related to losses associated with our investments in Kemrock and as a result of the impact on our effective tax rate in certain foreign jurisdictions where income tax benefits associated with net operating losses incurred by those foreign businesses are not recognized.

As described in this Management's Discussion and Analysis of Financial Condition and Results of Operations for the three month period ended November 30, 2013, there is uncertainty as to whether we will be able to recognize certain deferred tax assets. Refer to the section captioned "Three Months Ended November 30, 2013 - Income Tax Rate," for further information.

Net Income Net income of $175.3 million for the first half of fiscal 2014 compares to net income of $84.0 million for the same period last year, reflecting the prior period impairment losses relating to our investments in Kemrock and the impact of loss contracts outside of North America at our roofing division. Excluding those prior period charges, adjusted net income during the prior year period approximated $147.3 million. Net income as a percentage of net sales of 7.8% for the current year period compares with an adjusted net margin on sales of 7.1% for the comparable prior year period. Net income for the current year period reflects the leverage of the organic growth in net sales of 5.3% versus net sales for the same period last year, as well as accretive acquisitions. During the six months ended November 30, 2013, we had net income from noncontrolling interests of $8.6 million versus $8.4 million during the same period a year ago. Net income attributable to RPM International Inc.

stockholders was $166.7 million for the six months ended November 30, 2013, versus $75.6 million for the same period a year ago.

Diluted earnings per share of common stock for the first half of fiscal 2014 of $1.25 compares with $0.57 for the same period last year.

LIQUIDITY AND CAPITAL RESOURCES Operating Activities Approximately $21.8 million of cash was provided by operating activities during the first half of fiscal 2014 compared with $127.6 million during the same period during fiscal 2013, resulting in $105.8 million less cash provided during the current period versus the same period a year ago.

The net change in cash from operations includes the change in net income, which increased by $91.3 million during the first half of fiscal 2014 versus the same period a year ago. Reflected in net income for the prior year six month period are $61.7 million of one-time charges for the write-downs of our various investments in Kemrock and the exit costs and revised cost estimates recorded by our industrial segment's roofing division a year ago. Other items impacting the net change in cash from operations included items adjusting net income for non-cash expenses and income, which decreased cash flows by approximately $51.0 million more during the current period versus the same period last year; and changes in working capital accounts and all other accruals, which decreased cash flows by $84.4 million during the first half of fiscal 2014 versus the same period last year.

The decrease in accounts receivable during the first half of fiscal 2014 provided cash of $22.0 million versus the $63.7 million of cash generated by accounts receivable during the same period last year, or approximately $41.7 million less cash provided year-over-year. This resulted from the geographical mix of sales and from the timing of sales and collections on accounts receivable. Days sales outstanding at November 30, 2013 increased to 61.2 days from 60.8 days sales outstanding at November 30, 2012.

Inventory balances used $44.0 million of cash during the first half of fiscal 2013, compared with the use of $25.9 million in cash during the same period last year, or $18.1 million more cash used year-over-year. Days of inventory outstanding at November 30, 2013 increased to 87.7 days from 82.9 days of inventory outstanding at November 30, 2012.

The current year-to-date change in accounts payable used $16.1 million more cash during the first half of fiscal 2014 compared to the same period last year, resulting from a change in the timing of certain payments. Accrued 41-------------------------------------------------------------------------------- Table of Contents compensation and benefits used approximately $18.0 million less cash during the first half of fiscal 2014 versus the same period last year, as there were higher bonus accruals established during the current period related to better operating performance versus last year's first half. Other accruals and prepaids, including those for other short-term and long-term items and changes, used $17.6 million more cash during the first half of fiscal 2014 versus the same period a year ago, 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, expand capacity, introduce new technology, improve environmental health and safety capabilities, improve information systems, and enhance our administration capabilities. Capital expenditures of $34.6 million during the first half of fiscal 2014 compare with depreciation of $29.1 million. We believe our current production capacity, along with moderate plant modifications or additions will be adequate to meet our immediate needs based on anticipated growth rates. We anticipate that additional shifts at our production facilities, coupled with the capacity added through acquisition activity and our planned increase in future capital spending levels, will enable us to meet increased demand throughout fiscal 2014.

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 November 30, 2013, the fair value of our investments in marketable securities totaled $135.2 million, of which investments with a fair value of $35.9 million were in an unrealized loss position. At May 31, 2013, the fair value of our investments in marketable securities totaled $113.1 million, of which investments with a fair value of $36.6 million were in an unrealized loss position. The fair value of our portfolio of marketable securities is based on quoted market prices for identical, or similar, instruments in active or non-active markets or model-derived-valuations with observable inputs. We have no marketable securities whose fair value is subject to unobservable inputs.

Total pretax unrealized losses recorded in accumulated other comprehensive income at November 30, 2013 and May 31, 2013 were $1.6 million and $1.0 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 November 30, 2013 were generally related to the normal volatility in valuations over the past several months for a portion of our portfolio of investments in marketable securities. The unrealized losses generally relate to investments whose fair values at November 30, 2013 were less than 15% below their original cost or that have been in a loss position for less than six consecutive months. From time to time, we may experience significant volatility in general economic and market conditions. If we were to experience unrealized losses that were to continue for longer periods of time, or arise to more significant levels of 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.

As of November 30, 2013, approximately 86% of our consolidated cash and cash equivalents were held at various foreign subsidiaries. Currently, the funds held at our foreign subsidiaries are considered permanently reinvested to be used, for instance, to expand operations organically or for acquisitions in foreign jurisdictions. Our operations in the U.S. generate sufficient cash flow to satisfy U.S. operating requirements. Although we do not intend to repatriate any significant amounts of these cash balances to the U.S. in the foreseeable future, any 42 -------------------------------------------------------------------------------- Table of Contents repatriation of these balances could be subject to governmental restrictions and U.S. and foreign taxes. However, a portion of the foreign earnings have previously been subject to U.S. taxation and could be repatriated to the U.S.

with little or no residual tax impact. We believe that the tax impact of repatriating these previously taxed earnings to the U.S. would not have a material impact on our financial results.

As previously stated, we intend to permanently reinvest the cash and cash equivalents held at our various foreign subsidiaries for foreign expansion and other uses. Due to the uncertainties and complexities involved in the various options for repatriation of foreign cash, including any associated governmental or other restrictions, it is not practicable to calculate the deferred taxes associated with the remittance of these cash balances.

Financing Activities As a result of the Specialty Products Holding Corp. ("SPHC") bankruptcy filing, our access to the cash flows of SPHC and its subsidiaries has been restricted.

However, the bankruptcy filing has not resulted in any reductions in our credit ratings by Moody's Investor Service, Standard & Poors or Fitch Ratings.

Therefore, we feel this has not adversely impacted our ability to gain access to capital.

Our available liquidity, including our cash and cash equivalents and amounts available under our committed credit facilities, stood at $969.5 million at November 30, 2013. Our debt-to-capital ratio was 50.9% at November 30, 2013, compared with 53.3% at May 31, 2013.

2.25% Convertible Senior Notes due 2020 Subsequent to the current quarter, on December 9, 2013, we issued $205 million of 2.25% convertible senior notes due 2020 (the "Convertible Notes"). In accordance with the agreement, we will pay interest on the Convertible Notes semi-annually on June 15th and December 15th of each year, beginning on June 15, 2014. Net proceeds of approximately $200.1 million from the sale were used to refinance $200 million in principal amount of unsecured senior notes due December 15, 2013, which bear interest at 6.25%, together with accrued and unpaid interest thereon.

The 2.25% Convertible Notes will be convertible under certain circumstances and during certain periods at an initial conversion rate of 18.8905 shares of RPM common stock per $1,000 principal amount of notes (representing an initial conversion price of approximately $52.94 per share of common stock), subject to adjustment in certain circumstances. The initial conversion price represents a conversion premium of approximately 37% over the last reported sale price of RPM common stock of $38.64 on December 3, 2013. Prior to June 15, 2020, the Convertible Notes may be converted only upon specified events, and, thereafter, at any time. Upon conversion, the Convertible Notes may be settled, at RPM's election, in cash, shares of RPM's common stock, or a combination of cash and shares of RPM's common stock.

6.25% Notes due 2013 On December 15, 2013, our $200 million 6.25% senior notes matured. Subsequent to the current quarter, we refinanced this debt with proceeds received from our issuance of $205 million of Convertible Notes due 2020. As a result, the senior notes were classified as long-term debt at November 30, 2013.

3.45% Notes due 2022 On October 23, 2012, we sold $300 million aggregated principal amount of 3.45% Notes due 2022 (the "New Notes"). The net proceeds of $297.7 million from the offering of the New Notes were used to repay short-term borrowings outstanding under our $600 million revolving credit facility.

Revolving Credit Agreement On June 29, 2012, we entered into an unsecured syndicated revolving credit facility (the "Credit Facility") with a group of banks. The Credit Facility expires on June 29, 2017 and provides for a five-year $600.0 million 43-------------------------------------------------------------------------------- Table of Contents revolving credit facility, which includes sublimits for the issuance of $50.0 million in swingline loans, which are comparatively short-term loans used for working capital purposes, and letters of credit. The aggregate maximum principal amount of the commitments under the Credit Facility may be expanded upon our request, subject to certain conditions, to $800.0 million. The Credit Facility is available to refinance existing indebtedness, to finance working capital and capital expenditure needs, and for general corporate purposes.

The Credit Facility requires us to comply with various customary affirmative and negative covenants, including a leverage covenant and interest coverage ratio.

Under the terms of the leverage covenant, we may not permit our consolidated indebtedness as of any fiscal quarter end to exceed 60% of the sum of such indebtedness and our consolidated shareholders' equity on such date. The minimum required consolidated interest coverage ratio for EBITDA to interest expense is 3.50 to 1. The interest coverage ratio is calculated at the end of each fiscal quarter for the four fiscal quarters then ended.

As of November 30, 2013, we were in compliance with all covenants contained in our Credit Facility, including the leverage and interest coverage ratio covenants. At that date, our leverage ratio was 51.0%, while our interest coverage ratio was 5.89 to 1.

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 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%.

The following table summarizes our financial obligations and their expected maturities at November 30, 2013 and the effect such obligations are expected to have on our liquidity and cash flow in the periods indicated.

Contractual Obligations Total Contractual Payments Due In Payment Stream 2014 2015-16 2017-18 After 2018 (In thousands) Long-term debt obligations $ 1,369,950 $ 204,834 $ 151,855 $ 253,541 $ 759,720 Capital lease obligations 1,462 638 807 17 Operating lease obligations 186,891 44,628 62,719 32,374 47,170 Other long-term liabilities (1): Interest payments on long-term debt obligations 357,760 69,442 117,354 108,325 62,639 Contributions to pension and postretirement plans (2) 333,700 35,900 95,800 89,800 112,200 Total $ 2,249,763 $ 355,442 $ 428,535 $ 484,057 $ 981,729 (1) Excluded from other long-term liabilities are our gross long-term liabilities for unrecognized tax benefits, which totaled $21.9 million at November 30, 2013. Currently, we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities related to these liabilities.

44 -------------------------------------------------------------------------------- Table of Contents (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 the required minimum contribution will be contributed.

Off-Balance Sheet Arrangements We do not have any off-balance sheet financings, other than the minimum operating lease commitments included in 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. At the end of fiscal 2010, we deconsolidated our wholly owned subsidiary, SPHC, and its subsidiaries, from our balance sheet and eliminated the results of SPHC's operations from our operations beginning on May 31, 2010. We account for our investment in SPHC, which had no value at November 30, 2013 and May 31, 2013, under the cost method (refer to Note 3 to the Consolidated Financial Statements).

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." GSA Investigation As previously disclosed, we recorded a $65.1 million accrual during the year ended May 31, 2013 associated with settlement discussions with the DOJ and the GSA Office of Inspector General aimed at resolving an existing investigation. In August 2013, we entered into a final agreement with the DOJ and the GSA Office of Inspector General regarding this matter. During the quarter ended August 31, 2013, we paid the GSA Office of Inspector General $61.9 million, and we have since made other payments for miscellaneous expenses relating to this matter of approximately $0.4 million. We expect to pay approximately $2.8 million more in legal fees and other related costs arising out of this investigation. See Note 15 to the Consolidated Financial Statements for more information.

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; 45 -------------------------------------------------------------------------------- Table of Contents (j) risks and uncertainties associated with the SPHC bankruptcy proceedings; and (k) 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, 2013, 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.

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