1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2001,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________________
to ___________________.
Commission File No. 1-14187
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RPM, INC.
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(Exact name of Registrant as specified in its charter)
OHIO 34-6550857
- --------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) No.)
P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO 44258
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (330) 273-5090
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to the filing
requirements for the past 90 days.
Yes [x] No [ ].
As of April 11, 2001,
102,210,658 RPM Inc. Common Shares were outstanding.
2
RPM, INC. AND SUBSIDIARIES
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INDEX
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Page No.
--------
Part I. Financial Information
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Consolidated Balance Sheets
February 28, 2001 and May 31, 2000 3
Consolidated Statements of Income
Nine Months and Three Months Ended
February 28, 2001 and February 29, 2000 4
Consolidated Statements of Cash Flows
Nine Months Ended
February 28, 2001 and February 29, 2000 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
Part II. Other Information 16
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3
3
PART I. -- FINANCIAL INFORMATION
--------------------------------
ITEM 1. -- FINANCIAL STATEMENTS
RPM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
------
FEBRUARY 28, 2001 MAY 31, 2000
----------------- ------------
CURRENT ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 29,182 $ 31,340
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCE FOR DOUBTFUL
ACCOUNTS $16,924 AND $16,248) 336,667 399,683
INVENTORIES 289,185 244,559
PREPAID EXPENSES AND OTHER CURRENT ASSETS 111,421 109,510
----------- -----------
TOTAL CURRENT ASSETS 766,455 785,092
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 636,190 599,679
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 262,133 233,451
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 374,057 366,228
----------- -----------
OTHER ASSETS
COSTS OF BUSINESSES OVER NET ASSETS ACQUIRED, NET OF AMORTIZATION 582,384 595,106
INTANGIBLE ASSETS, NET OF AMORTIZATION 309,357 320,631
OTHER 35,485 32,146
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TOTAL OTHER ASSETS 927,226 947,883
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TOTAL ASSETS $ 2,067,738 $ 2,099,203
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
CURRENT PORTION OF LONG TERM DEBT $ 20,564 $ 4,987
NOTES AND ACCOUNTS PAYABLE 153,522 154,256
ACCRUED COMPENSATION AND BENEFITS 69,580 68,938
ACCRUED LOSS RESERVES 58,268 64,765
OTHER ACCRUED LIABILITIES 58,200 68,702
RESTRUCTURING RESERVE 5,568 13,540
INCOME TAXES PAYABLE (6,778) 1,014
----------- -----------
TOTAL CURRENT LIABILITIES 358,924 376,202
----------- -----------
LONG-TERM LIABILITIES
LONG-TERM DEBT, LESS CURRENT MATURITIES 969,846 959,330
DEFERRED INCOME TAXES 59,796 60,566
OTHER LONG-TERM LIABILITIES 47,353 57,381
----------- -----------
TOTAL LONG-TERM LIABILITIES 1,076,995 1,077,277
----------- -----------
SHAREHOLDERS' EQUITY
COMMON SHARES, STATED VALUE $.015 PER SHARE;
AUTHORIZED 200,000,000 SHARES;
OUTSTANDING 102,209,000 AND
103,134,000 SHARES, RESPECTIVELY 1,617 1,616
PAID-IN CAPITAL 424,674 424,077
TREASURY SHARES, AT COST (99,617) (88,516)
ACCUMULATED OTHER COMPREHENSIVE LOSS (43,767) (39,555)
RETAINED EARNINGS 348,912 348,102
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TOTAL SHAREHOLDERS' EQUITY 631,819 645,724
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,067,738 $ 2,099,203
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
4
4
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED
----------------- ------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES $1,454,559 $1,407,357 $ 403,665 $ 411,398
COST OF SALES 824,336 792,835 237,863 237,115
---------- ---------- ---------- ----------
GROSS PROFIT 630,223 614,522 165,802 174,283
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 516,647 480,412 159,668 155,508
RESTRUCTURING CHARGE 45,000
INTEREST EXPENSE, NET 51,156 35,958 17,453 12,451
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 62,420 53,152 (11,319) 6,324
PROVISION FOR INCOME TAXES 23,720 21,793 (4,301) 2,593
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 38,700 $ 31,359 ($ 7,018) $ 3,731
========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.38 $ 0.29 ($ 0.07) $ 0.04
========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.38 $ 0.29 ($ 0.07) $ 0.04
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ 0.3725 $ 0.3625 $ 0.1250 $ 0.1225
========== ========== ========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
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5
RPM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED
-----------------------------------------
FEBRUARY 28, FEBRUARY 29,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 38,700 $ 31,359
DEPRECIATION AND AMORTIZATION 58,938 58,132
ITEMS NOT AFFECTING CASH AND OTHER (14,510) (10,024)
CHANGES IN WORKING CAPITAL (33,256) 44,515
--------- ---------
49,872 123,982
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CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY AND EQUIPMENT (43,513) (42,155)
SALE OF BUSINESS ASSETS, NET OF CASH TRANSFERRED 0 17,002
ACQUISITION OF NEW BUSINESSES, NET OF CASH (3,341) (303,336)
--------- ---------
(46,854) (328,489)
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CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM STOCK OPTION EXERCISES 598 866
INCREASE (DECREASE) IN DEBT 43,217 287,264
REPURCHASE OF COMMON SHARES (11,101) (48,379)
DIVIDENDS (37,890) (39,050)
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(5,176) 200,701
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NET INCREASE (DECREASE) IN CASH (2,158) (3,806)
CASH AT BEGINNING OF PERIOD 31,340 19,729
--------- ---------
CASH AT END OF PERIOD $ 29,182 $ 15,923
========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
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RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001
(Unaudited)
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NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for a fair presentation have
been included for the three and nine month periods ended February 28, 2001 and
February 29, 2000. For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended May 31, 2000.
Certain reclassifications may have been made to prior year amounts to conform
with the current year presentation.
NOTE B - INVENTORIES
- --------------------
Inventories were composed of the following major classes:
FEBRUARY 28, 2001 (1) MAY 31, 2000
--------------------- ------------
(IN THOUSANDS)
Raw Materials and supplies $102,586 $86,755
Finished Goods 186,599 157,804
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$289,185 $244,559
============== ===============
(1) Estimated, based on components at May 31, 2000.
NOTE C - ACQUISITIONS
- ---------------------
On August 3, 1999, the Company acquired all the outstanding shares of DAP
Products Inc. and DAP Canada Corp. (collectively, "DAP"). DAP, headquartered in
Baltimore, Maryland, is a leading North American manufacturer and marketer of
caulks and sealants, spackling and glazing compounds, contact cements, and other
specialty adhesives.
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RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001
(Unaudited)
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This acquisition has been accounted for by the purchase method of accounting.
The following data summarizes, on an unaudited proforma basis, the combined
results of operations of the companies for the nine months ended February 29,
2000. The proforma amounts give effect to appropriate adjustments resulting from
the combination, but are not necessarily indicative of future results of
operations or of what results would have been for the combined companies.
NINE MONTHS ENDED FEBRUARY 29, 2000
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales $1,451,396
Net Income $31,045
Basic earnings per common share $0.29
Diluted earnings per common share $0.29
NOTE D - COMPREHENSIVE INCOME
- ------------------------------
Other comprehensive income includes foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains or losses on
securities. Total comprehensive income, comprised of net income and other
comprehensive income (loss), amounted to $20,000 and $588,000 during the third
quarter of fiscal years 2001 and 2000, respectively, and $34,488,000 and
$24,395,000 for the nine months ended February 28, 2001 and February 29, 2000,
respectively.
NOTE E - RESTRUCTURING CHARGE
- -----------------------------
In August 1999, the Company recorded a restructuring and asset impairment charge
of $45,000,000 ($26,550,000 after-tax, or $0.24 per basic and diluted share).
Subsequently, in last year's fourth quarter, as the program's aggregate impact
was finalized, an additional $6,970,000 was charged to income. Included in these
charges are severance and other employee related costs, contract exit and
termination costs, facility closures and write-downs of property, plant and
equipment, and write-downs of intangibles.
As of February 28, 2001, the Company has paid or incurred $46,402,000 related to
these charges. The Company anticipates that substantially all of the remaining
restructuring and plant rationalization costs will be paid or incurred by May
31, 2001.
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RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2001
(Unaudited)
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Following is a summary of the aggregate charge, the amounts paid or incurred to
date, and the reserved balance at this quarter's end:
UTILIZED THROUGH BALANCE AT
TOTAL CHARGE FEBRUARY 28, 2001 FEBRUARY 28, 2001
------------ ----------------- -----------------
(IN THOUSANDS)
Severance Costs $21,986 $17,048 $4,938
Exit and Termination Costs 2,059 1,429 630
Property, Plant and Equipment 22,342 22,342 0
Intangibles 5,583 5,583 0
------------ ------------ -------------
$51,970 $46,402 $5,568
============ ============ =============
The severance and other employee-related costs provided for a reduction of
approximately 760 employees related to the facility closures and the
streamlining of operations related to cost reduction initiatives. The costs of
exit and contract termination are comprised primarily of non-cancelable lease
obligations on the closed facilities. The charges for property, plant and
equipment and intangibles represent write-downs to net realizable value of less
efficient and duplicate facilities, machinery and equipment and intangibles no
longer needed in the combined restructured manufacturing operations.
9
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RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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REPORTABLE SEGMENT INFORMATION
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Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, was adopted by the Company effective May 31,
1999. This Standard requires disclosure of segment information using the
management approach, or the basis used internally to evaluate operating
performance and to decide resource allocations. Comparative nine month and third
quarter results on this basis are as follows:
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NINE MONTHS ENDED QUARTER ENDED
------------------------------------ ------------------------------------
(In thousands) FEBRUARY 28, 2001 FEBRUARY 29, 2000 FEBRUARY 28, 2001 FEBRUARY 29, 2000
----------------- ----------------- ----------------- -----------------
Net External Sales
Industrial Division $ 801,392 $ 807,047 $ 218,456 $ 225,027
Consumer Division 653,167 600,310 185,209 186,371
----------- ----------- ----------- -----------
Totals: $ 1,454,559 $ 1,407,357 $ 403,665 $ 411,398
=========== =========== =========== ===========
Earnings Before Interest
and Taxes
Industrial Division $ 88,858 $ 86,871 $ 9,476 $ 16,193
Consumer Division 40,503 17,171 942 6,784
Corporate/Other (15,785) (14,932) (4,284) (4,202)
----------- ----------- ----------- -----------
Totals: $ 113,576 $ 89,110 $ 6,134 $ 18,775
=========== =========== =========== ===========
Identifiable Assets FEBRUARY 28, 2001 MAY 31, 2000
----------------- ------------
Industrial Division $ 969,026 $ 993,239
Consumer Division 1,022,713 1,041,896
Corporate/Other 75,999 64,068
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Totals: $ 2,067,738 $ 2,099,203
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RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
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RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 28, 2001
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The Company's sales of $404 million were 1.9%, or $8 million, lower than the
prior year's comparable quarter. Exchange rate differentials had a slight
negative impact on quarter-over-quarter sales costing approximately 1.4
percentage points of growth; additionally, disposition of a product line before
this year's quarter served to reduce the change by another 1.3 points. Without
the impact of these two factors, this year's quarter grew nearly 1% versus last
year. Viewing the Company's operations on this basis, the Industrial Division
realized 1.8% growth while the Consumer Division was 0.4% lower in net sales
than for the previous year. During the first two months of this year's quarter,
extreme, often record-setting cold temperatures in southern U.S. markets
dampened sales; additionally, the heavier than normal rains in Europe,
particularly in England, also negatively impacted this year's revenue.
Construction and maintenance work in our industrial markets and off-the-shelf
sales of the Company's do-it-yourself consumer products were delayed. Business
volumes through the Company's Consumer Division were also negatively impacted as
mass merchandisers and home centers experienced market softness.
Gross profit margin decreased 1.3 points, ending at 41.1% of sales compared to
last year's quarter performance of 42.4%. The Industrial Division experienced a
0.2 point margin reduction to 44% of sales versus last year's 44.2% gross profit
level. Absent the effect of the business unit disposal, gross profit margins
dropped 0.6 points to the indicated 44% level. The combination of weaker sales
volume and higher raw material costs, particularly oil-based, caused the margin
decline in both Divisions. The Consumer Division experienced a 2.5 point drop in
gross profit margins to 37.6% this quarter. In addition, the implementation of a
new information technology platform at one of our larger business units involved
certain start-up inefficiencies. Higher outsourcing of production and attendant
freight costs were required to allow maintenance of customer service levels
during the system transition. The outsourcing has generally ceased at the
commencement of the fourth quarter. Pricing actions helped to offset a portion
of this negative impact. As the Company neared completion of its restructuring
plan, certain cost redundancies continued in the Company's Wood Finishes Group.
Selling, general and administrative expenses increased just over 2.5% from the
prior year levels. As a percent of sales, these costs were 39.6%, 1.8 points
higher than in last year's third quarter. The vast majority of the increase was
in the Industrial Division, where expenses were 39.6% of sales compared to 37%
last year; Consumer Division expenses increased modestly to 37.1% from 36.5%.
Despite relatively flat volume levels, both operating divisions continued
certain product and market development, promotional and other growth-related
initiatives. Freight costs continue to run higher from smaller, more frequent
shipments to consumer customers, and from oil price driven fuel surcharges. Wood
11
11
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
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Finishes Group distribution consolidation also resulted in temporarily increased
distribution costs. These increases were partially offset at the Corporate level
by expense constraint and lower year-over-year consulting services. Late in the
third quarter, the Company took actions to bring fixed costs in line with recent
business levels. Earnings benefits of these actions will accrue during the
fourth quarter.
Net interest expense increased $5 million in this year's third quarter,
reflecting partially the additional indebtedness incurred during prior periods
to repurchase common shares of the Company. Average interest rates this quarter
were up over last year by more than 90 basis points, further increasing net
expense. Based on the recent rate reductions, the average interest rate in the
Company's fourth quarter is expected to be lower than prior year levels.
The effective income tax rate for this year's quarter of 38% represents an
improvement over last year's rate of 41%. The change is primarily caused by the
favorable mix of differing tax rates and sourced income in the various countries
in which the Company operates. The Company continues to believe this improvement
will be sustained prospectively.
The net loss of $7 million this quarter is $10.7 million off the net income of
$3.7 million experienced in last year's third quarter. Improvements in earnings
from the reduction in the income tax rate were more than offset by the
disappointing volume levels, the lower gross profit margins, higher interest
costs and marketing and product development expenditures. The resulting loss per
share this year at $0.07 (both basic and diluted) is $0.11 lower than last
year's per share earnings of $0.04. The change in average shares outstanding
resulting from the Company's share repurchase program did provide a minor
benefit to earnings per share.
NINE MONTHS ENDED FEBRUARY 28, 2001
- -----------------------------------
The Company's sales of $1,455 million reflect an increase of $47 million, or
3.4% in the first nine months of fiscal 2001 when compared to last year. Net
income increased $7 million, 23% over last year's first nine months' result,
largely due to the $27 million after-tax restructuring and asset impairment
charge last year.
On August 3, 1999, the Company completed its acquisition of DAP Products Inc.
and DAP Canada Corp. (collectively "DAP"). DAP, with annual sales of
approximately $250 million, is a leading North American manufacturer and
marketer of caulks and sealants, spackling and glazing compounds, contact
cements, and other specialty adhesives. DAP is reported within the Consumer
Division.
The DAP acquisition accounted for approximately 84% of the first nine months'
sales increase. Exchange rate differences had a slight negative effect on
year-to-year sales, costing approximately 1.3 percentage points of growth. The
Company's existing operations and product line additions, net of several
Industrial Division product line divestitures, generated the balance of the
sales increase, primarily from higher unit volumes.
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RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
- --------------------------------------------------------------------------------
Internal growth within the Industrial Division increased approximately 4.7% in
the first nine months of fiscal 2001. Within the Consumer Division, core sales
were up approximately 2.9% over last year's comparative volume level. Late in
the second quarter, we began experiencing a general softening of demand in our
served markets which carried through this third quarter. The severe weather
issues noted in the quarterly comments also impacted the nine month comparisons
although to a lesser degree.
Gross profit margin was 0.4 points less than last year, at 43.3% of sales. The
Industrial Division improved to 45.9% from 45%, approximately two-thirds of the
improvement resulting from the impact of product line divestitures, with the
remainder the result of product mix changes, firm price posture and cost
control. Within the Consumer Division, margins moved from 41.9% a year ago to
40.2% this year, with nearly one-half the decrease attributable to the lower
margins inherent in the cost structure at DAP. As noted in prior reports, the
DAP impact will only effect year-to-date comparisons for this and the next
reporting period; quarterly comparisons are no longer effected. The Company's
nine month comparisons were also adversely effected by competitive pricing
pressures, raw material inflation, new systems implementation and restructuring
cost redundancies.
Selling, general and administrative expenses at 35.5% of sales compare with
34.1% a year ago. With respect to the aggregate $36 million increase in this
expense compared to the comparable period last year, 29% is the result of the
DAP acquisition. This year a full nine months of DAP spending is included in
operations while last year's results only include August through February
spending. The Industrial Division expenses increased to 34.8% of sales from
32.5% while the Consumer Division expenses decreased to 34% from 34.1% in 2000.
The Consumer Division benefited mainly from increased volume and a lower SG&A
percentage at DAP. Both Divisions continued with product and market development,
promotional and other growth-related initiatives until cost containment actions
were initiated late in the third quarter. Although accelerated e-commerce
related initiatives were undertaken within the Corporate/Other segment, these
investments will have only nominal prospective impact on costs as the
infrastructure is now in place. The Wood Finishes Group freight and distribution
costs also negatively impacted this year's nine month results. At the corporate
level, professional fees were also higher than normal principally due to
increased legal and regulatory expenses, other consulting and advisory services.
(See Part II, Item 1) These expenses plateaued vis-a-vis last year during this
year's third quarter.
In August of 1999, the Company announced a restructuring program to generate
manufacturing, distribution, and administrative efficiencies, and to better
position the Company for increased profitability and long-term growth. The cost
of the program and related asset impairment was estimated at $45 million before
taxes ($0.24 per basic and diluted share); subsequently, in last year's fourth
quarter, an additional $7 million was charged as the program's aggregate impact
was finalized. The program is expected to generate annualized before tax savings
of approximately $23 million upon completion. Phased in over fiscal years 2000
and 2001, the full savings expectation should be realized beginning in fiscal
2002. Through February 28, 2001, the
13
13
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
- --------------------------------------------------------------------------------
Company had paid or incurred $46 million of these charges, approximately 60% of
which was associated with the write-down of property and intangibles with the
remainder covering severance, exit and termination costs (refer to Note E). The
net cash requirements of the restructuring program are estimated to total
approximately $10 million.
Net interest expense increased $15.2 million in this year's first nine months,
reflecting primarily the additional indebtedness to acquire DAP and to
repurchase common shares of the Company. Average interest rates this year's
first nine months were up over last year by 87 basis points, further increasing
net interest expense.
The effective income tax rate this year of 38% represents an improvement over
last year's 41% rate. As noted on this year's quarterly comments, the change is
primarily caused by the favorable mix of differing tax rates and sourced income
amounts in the various countries in which the Company operates and, is expected
to continue going forward.
Before the restructuring charge, net income decreased 33% on the 3.4% sales
increase, with the margin declining to 2.7% from 4.1% last year. Improvements to
earnings from gross profit increases (after absorbing information technology
platform change-driven outsourcing costs), and the improvement in the income tax
rate were more than offset by higher interest costs, marketing and product
development expenditures, legal and professional fees and e-commerce
initiatives. DAP's acquisition costs plus the earnings foregone through product
lines divested also served to reduce earnings margins. The resulting earnings
per share this year at $0.38 (both basic and diluted) is $0.16 lower than a year
ago, excluding the impact of the fiscal 2000 restructuring and asset impairment
charge. The change in average shares outstanding resulting from the company's
share repurchase program is providing a minor benefit to earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH PROVIDED FROM OPERATIONS
- -----------------------------
The Company generated $49.9 million of cash from operations during the past nine
months, compared with $124.0 million a year ago. The restructuring and asset
impairment charge during last year's first quarter is the major factor
contributing to the $7.3 million increase in this year's net income when
compared to last year. The restructuring activity last year caused a decrease in
working capital of $9 million while this year it increased working capital $8
million; this difference accounts for $17 million of the $74 million
year-to-year working capital change. The remainder of the change in working
capital components, $61 million, results from modestly higher receivable and
inventory increases this year versus last year, offset by positive fluctuations
in accounts payable and current income taxes payable when comparing the change
this year versus the prior year. All other components of working capital had
minimal effect when comparing the changes occurring during the first nine months
this year versus last year.
14
14
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
- --------------------------------------------------------------------------------
The Company's cash flows from operations will continue as its primary source of
financing internal growth.
INVESTING ACTIVITIES
- --------------------
The Company is not capital intensive, and capital expenditures generally do not
exceed depreciation and amortization in a given year. Capital expenditures
totaling $43.5 million in the first nine months of fiscal 2001 are made
primarily to accommodate the Company's continued growth through improved
production and distribution efficiencies and capacity, and to enhance
administration. The investment of $303 million in new businesses last year
reflects the acquisition of DAP and other product line additions, net of cash
acquired. In addition, during the second quarter last year, the Company sold a
non-core business for $17.5 million, net of cash transferred, for a net gain.
FINANCING ACTIVITIES
- --------------------
On January 22, 1999, the Company announced the authorization of a share
repurchase program, allowing the repurchase of up to 5 million of the Company's
common shares over a period of 12 months. On October 8, 1999, the Company
announced the authorized expansion of this repurchase program to a total of 10
million common shares. As of February 28, 2001, the Company had repurchased 9
million of its common shares at an average price of $11.11 per share. No future
repurchases are anticipated at this time.
The acquisition of DAP was financed with a bridge loan arranged through one of
the Company's lead banks. This transaction was subsequently refinanced through a
$700 million commercial paper program, fully backed by the Company's existing
$300 million revolving credit facility, plus a new $400 million revolving credit
facility. During this year's first half, the Company refinanced its $300 million
revolving credit facility and its $400 million revolving credit facility with a
$200 million 364-day revolving credit facility, and a $500 million 5-year
revolving credit facility. The new credit facilities are available to back up
the Company's $700 million commercial paper program to the extent the facilities
are not drawn upon. As of February 28, 2001, the Company had drawn on the
revolving credit facilities an aggregate of $664.4 million and had no
outstanding commercial paper. Due to the Company's current public debt ratings,
access to the commercial paper market is limited. The Company's debt-to-capital
ratio is now at 61.5%, versus 60% at May 31, 2000.
The stronger dollar effect on the Company's foreign net assets has tended to
reduce shareholders' equity, and this trend could continue if the dollar
strengthens and the growth of foreign net assets continues.
The Company maintains excellent relations with its banks and other financial
institutions to support the Company's current portfolio of business.
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RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2001
- --------------------------------------------------------------------------------
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 the Company's results of operations or financial
condition.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing discussion includes forward-looking statements relating to the
business of the Company. These forward-looking statements, or other statements
made by the Company, are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors (including those specified below) which are difficult to predict
and, in many instances, are beyond the control of the Company. As a result,
actual results of the Company could differ materially from those expressed in or
implied by any such forward-looking statements. These uncertainties and factors
include (a) the price and supply of raw materials, particularly oil-based
feedstocks, titanium dioxide, certain resins, aerosols and solvents; (b)
continued growth in demand for the Company's products; (c) environmental
liability risks inherent in the chemical coatings business; (d) the effect of
changes in interest rates; (e) the effect of fluctuations in currency exchange
rates upon the Company's foreign operations; (f) the potential impact of the
Euro currency conversion; (g) the effect of non-currency risks of investing in
and conducting operations in foreign countries, including those relating to
political, social, economic and regulatory factors; (h) the Company's ability to
make future acquisitions and its ability to effectively integrate such
acquisitions; (i) liability risks inherent in the Company's EIFS and asbestos
litigation and the continuation of insurance coverage for such risks; (j) the
ability of the Company to realize the projected pre-tax savings associated with
the restructuring program and the continuation of the assumed geographic pre-tax
income sourcing; and (k) the Company's ability to divest non-core product lines.
ITEM 3. QUANTITATIVE AND QUALITATIVE
- ------- ----------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
The Company is exposed to market risk from changes in interest rates and foreign
exchange rates since it funds its operations through long- and short-term
borrowings and denominates its business transactions in a variety of foreign
currencies. There were no material changes in the Company's exposure to market
risk from May 31, 2000.
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RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
BONDEX
- ------
As previously reported, the Company, its wholly-owned subsidiaries, Bondex
International, Inc. ("Bondex") and Republic Powdered Metals, Inc. ("Republic"),
are each defendants or co-defendants in asbestos-related bodily injury lawsuits
filed on behalf of various individuals in various jurisdictions including
Illinois, Missouri, Texas, New York and Pennsylvania. These cases seek damages
for asbestos-related diseases based on alleged exposures to asbestos-containing
products previously manufactured by the Company, Bondex or Republic. In many
cases, the plaintiffs are unable to demonstrate that any injuries they have
incurred, in fact, resulted from exposure to Bondex, Republic or Company
products. Bondex, Republic or the Company are generally dismissed from those
cases. With respect to those cases where compensable disease, exposure and
causation are established, Bondex, Republic and the Company generally settle for
amounts each considers reasonable given the facts and circumstances of each
case. Settlement demands vary for specific cases in particular jurisdictions
depending on (1) the seriousness of each case, (2) the number of co-defendants
in the case, and (3) the higher risk of an adverse verdict in certain
jurisdictions. The amounts paid to defend and settle cases filed against Bondex,
Republic and the Company continue to be substantially covered by product
liability insurance.
As of November 30, 2000, Bondex, Republic and the Company had a total of 826
active asbestos cases. As of February 28, 2001, Bondex, Republic and the Company
had a total of 919 active asbestos cases. Bondex, Republic and the Company
secured dismissals and/or settlements, the total cost of which collectively to
Bondex, Republic and the Company, net of insurer contributions, amounted to
$77,080 for the quarter ended November 30, 2000 and $164,193 for the quarter
ended February 28, 2001.
Bondex, Republic and the Company continue to vigorously defend all
asbestos-related lawsuits. Under a cost-sharing arrangement among the Company,
Bondex, Republic and its insurers, the insurers are responsible for payment of a
substantial portion of defense costs and indemnity payments with the Company,
Bondex and Republic each responsible for the balance. Recent developments
including the bankruptcy filings of various other asbestos litigation defendants
could, however, result in higher future settlement demands for certain cases in
certain jurisdictions. Based on its existing insurance assets, the Company
continues to believe that its current asbestos litigation will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
DRYVIT
- ------
As previously reported, Dryvit Systems, Inc., a wholly-owned subsidiary of the
Company ("Dryvit"), is a defendant or co-defendant in numerous lawsuits seeking
damages for structures clad with exterior insulated finish systems ("EIFS")
products manufactured by Dryvit and other EIFS manufacturers. As of March 31,
2001, Dryvit was a defendant or co-defendant in approximately 750 single-family
residential cases, the vast majority of which are pending in Alabama, North
Carolina and South Carolina. Dryvit is also one of several co-defendants in
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RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
various commercial EIFS lawsuits involving condominium complexes and office
buildings. While the vast majority of Dryvit's EIFS lawsuits claim water
intrusion and related property damages, several EIFS lawsuits have alleged
claims involving respiratory-based personal injuries from alleged exposure to
mold. Dryvit is vigorously challenging these mold allegations and does not
believe there is currently adequate scientific and medical support to sustain
such a personal injury action against Dryvit.
As previously reported, Dryvit settled the North Carolina class action styled
Ruff, et al. v. Parex, Inc., et al. As of March 31, 2001, a total of 473 claims
have been submitted to the claims administrator for verification and validation.
Of these 473 claims, 106 have been approved for payment. Approximately $1.5
million has been paid to date on these 106 claims. The remaining claims that are
currently pending are in the process of being reviewed, investigated and
verified by the claims administrator. Dryvit continues to believe that it has
adequate insurance commitments to cover its obligations under the Ruff
settlement.
As previously reported, Dryvit was named in an attempted class action, Lienhart,
et al. v. Dryvit Systems, Inc., et al. (5:99-CV-4700-BR(3)), in the Eastern
District of North Carolina seeking a class comprised of owners of structures
clad with a direct applied EIFS-type product known as Fastrak System 4000
("DEFS"). Dryvit challenged class certification and joined numerous third
parties for indemnification and contribution. On December 18, 2000, the U.S.
District Court certified a class of "homes, condominiums, apartment complexes or
commercial buildings which have been constructed after January 1, 1992, using an
exterior cladding system known as Fastrak System 4000." Dryvit estimates there
are less than 500 DEFS-clad homes in North Carolina. The class certification was
limited to two issues: (1) whether Dryvit's product was defectively designed and
(2) whether Dryvit had breached a duty to warn homeowners of hazards inherent in
the use of their products. Dryvit's third-party claims were severed and stayed
for all purposes until after the plaintiffs' case is tried. Dryvit filed an
interlocutory appeal with the U.S. Court of Appeals (Fourth Circuit) requesting
the appellate court to exercise its discretion and permit an immediate appeal of
the district court's class certification ruling. Oral argument on Dryvit's
appeal was held on February 27, 2001. As of April 9, 2001, the appellate court
had not issued its decision.
On December 1, 2000, Dryvit received a class action Complaint filed in Jefferson
County, Tennessee styled William J. Humphrey, et al. v. Dryvit Systems, Inc.
(Case No. 17,715-IV) ("Humphrey"). The Humphrey case is an attempted state-wide
class action which seeks various types of damages on behalf of all similarly
situated persons who paid for the purchase of a Dryvit EIFS-clad structure in
the State of Tennessee during the period beginning November 14, 1990 to the date
of the Complaint. Dryvit intends to vigorously oppose class certification in
Humphrey.
On or about March 22, 2001, Dryvit, and other co-defendants, received a class
action Complaint filed in Mobile County, Alabama styled Tony Bryan, et al. v.
Dryvit Systems, Inc. (Case No. CV-01-000761 JSJ) ("Bryan"). The Bryan case is an
attempted state-wide class action which seeks various types of damages on behalf
of the following class: "Persons who own a single residence in the State of
Alabama on which an Exterior Insulation and Finish system ("EIF system") has
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RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
been installed or any previous owner of such residence who incurred any costs or
expenses to inspect, repair or replace the EIF system at any time from November
14, 1990 until the date the Defendants' continuing conduct is terminated ("the
Class Period")." Dryvit intends to vigorously oppose class certification in
Bryan.
Dryvit, the Company's captive insurer, First Colonial Insurance Company, and one
of Dryvit's umbrella carriers, are parties to various cost-sharing agreements
which are currently providing insurance coverage for Dryvit's EIFS and DEFS
lawsuits. Dryvit believes that the damages sought by the plaintiffs in these
cases are covered by its existing insurance and that such insurance is presently
adequate. Based on the continuation of its existing insurance arrangements, the
Company continues to believe that this litigation will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
Official Exhibit Number Description
----------------------- -----------
10.1 Amended and Restated Employment Agreement, dated
as of February 1, 2001, by and between RPM, Inc.
and Thomas C. Sullivan, Chairman of the Board
and Chief Executive Officer.
10.2 Amended and Restated Employment Agreement, dated
as of February 1, 2001, by and between RPM, Inc.
and James A. Karman, Vice Chairman.
10.3 Form of Employment Agreement entered into by and
between RPM, Inc. and each of Frank C. Sullivan,
President; Michael E. Steele, Vice President,
Chief Financial Officer; P. Kelly Tompkins, Vice
President, General Counsel and Secretary; Glenn
R. Hasman, Vice President - Finance and
Communications; Paul G. Hoogenboom, Vice
President - Operations and Systems; Gordon M.
Hyde, Vice President - Manufacturing; Stephen J.
Knoop - Vice President - Corporate Development;
Robert L. Matejka - Vice President, Controller;
Ronald A. Rice, Vice President - Risk Management
and Benefits, Assistant Secretary; and Keith R.
Smiley - Vice President, Treasurer, and
Assistant Secretary.
11.1 Statement regarding computation of per share
earnings.
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RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the three months ended
February 28, 2001.
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20
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RPM, Inc.
By /s/ Thomas C. Sullivan
---------------------------------
Thomas C. Sullivan
Chairman & Chief Executive Officer
By /s/ Michael E. Steele
---------------------------------
Michael E. Steele
Chief Financial Officer
April 16, 2001