1
Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REPORTABLE SEGMENT AND
GEOGRAPHIC AREA INFORMATION
The Company has determined that it has two operating segments - Industrial and
Consumer - based on the nature of business activities, products and services;
the structure of management; and the structure of information as presented to
the Board of Directors. Within each division, individual operating companies or
groups of companies generally address common markets, utilize similar
technologies, and can share manufacturing or distribution capabilities. The
Company evaluates the profit performance of the two divisions based on earnings
before interest and taxes since interest expense is essentially related to
corporate acquisitions, as opposed to segment operations.
The Industrial Division has operations throughout North America and accounts for
most of the Company's sales in Europe, South America, Asia, South Africa,
Australia and the Middle East. The Industrial product line is primarily sold to
distributors, contractors and to end users, such as industrial manufacturing
facilities, educational and governmental institutions and commercial
establishments. Industrial Division products reach their markets through a
combination of direct sales, sales representative organizations, distributor
sales and sales of licensees and joint ventures.
The Consumer Division's products are sold throughout North America by mass
merchandisers, home centers, hardware stores, paint stores, automotive supply
stores and craft shops. Major customers include Ace Hardware Stores, Cotter &
Company, The Home Depot, Kmart, Lowe's Home Centers, Sherwin-Williams and
Wal-Mart. Consumer Division products are sold to retailers through a combination
of direct sales, sales representative organizations and distributor sales.
Sales to the seven largest customers represent approximately 19%, 16% and 12% of
consolidated net sales for the years ended May 31, 2001, 2000 and 1999,
respectively. These sales are predominantly within the Consumer Division and
comprise approximately 41%, 37% and 32% of the division's sales for the
respective periods.
In addition to the two operating segments, there are certain business
activities, referred to as Corporate/Other, that do not constitute an operating
segment, including corporate headquarters and related administrative expenses,
results of the Company's captive insurance company, gains or losses on the sales
of certain assets and other expenses not directly associated with either
operating segment. Related assets consist primarily of investments, prepaid
expenses, deferred pension assets, and headquarters property and equipment.
These corporate and other assets and expenses reconcile operating segment data
to total consolidated net sales, earnings before interest and taxes,
identifiable assets, capital expenditures, and depreciation and amortization, as
follows on page 7.
Sales for the years ended May 31, 2001, 2000 and 1999 do not include sales of
Company products by joint ventures and licensees, amounting to approximately
$37,000,000, $35,000,000, and $72,000,000, respectively. The Company reflects
income from joint ventures on the equity method and receives royalties from its
licensees. Export sales were less than 10% of net sales for each of the three
years presented.
6
2
SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
- --------------------------------------------------------------------------------------------
(In thousands)
Year Ended May 31, 2001 2000(1,2) 1999(2)
- --------------------------------------------------------------------------------------------
Net sales
Industrial Division $ 1,100,682 $ 1,092,976 $ 1,062,785
Consumer Division 907,080 869,434 657,843
Corporate/Other
- --------------------------------------------------------------------------------------------
TOTAL $ 2,007,762 $ 1,962,410 $ 1,720,628
============================================================================================
Earnings before interest and taxes
Industrial Division $ 122,034 $ 98,980 $ 135,632
Consumer Division 62,662 47,907 71,294
Corporate/Other (18,006) (23,333) (14,548)
- --------------------------------------------------------------------------------------------
TOTAL $ 166,690 $ 123,554 $ 192,378
============================================================================================
Identifiable assets
Industrial Division $ 1,002,209 $ 993,239 $ 1,102,531
Consumer Division 1,016,067 1,041,896 586,846
Corporate/Other 60,214 64,068 47,859
- --------------------------------------------------------------------------------------------
TOTAL $ 2,078,490 $ 2,099,203 $ 1,737,236
============================================================================================
Capital expenditures
Industrial Division $ 30,123 $ 34,331 $ 35,779
Consumer Division 23,629 27,929 26,648
Corporate/Other 366 925 979
- --------------------------------------------------------------------------------------------
TOTAL $ 54,118 $ 63,185 $ 63,406
============================================================================================
Depreciation and amortization
Industrial Division $ 38,579 $ 38,519 $ 32,668
Consumer Division 41,627 39,862 28,387
Corporate/Other 1,288 769 1,080
- --------------------------------------------------------------------------------------------
TOTAL $ 81,494 $ 79,150 $ 62,135
============================================================================================
GEOGRAPHIC INFORMATION
(In thousands)
Year Ended May 31, 2001 2000(2) 1999(2)
- --------------------------------------------------------------------------------------------
Net sales (based on shipping locations)
United States $ 1,614,112 $ 1,572,919 $ 1,362,722
- --------------------------------------------------------------------------------------------
Foreign
Canada 140,009 135,641 115,201
Europe 164,517 172,662 171,825
Other Foreign 89,124 81,188 70,880
- --------------------------------------------------------------------------------------------
Total Foreign 393,650 389,491 357,906
- --------------------------------------------------------------------------------------------
TOTAL $ 2,007,762 $ 1,962,410 $ 1,720,628
============================================================================================
Assets employed
United States $ 1,732,238 $ 1,740,882 $ 1,445,599
- --------------------------------------------------------------------------------------------
Foreign
Canada 128,159 130,064 88,965
Europe 144,619 155,330 144,636
Other Foreign 73,474 72,927 58,036
- --------------------------------------------------------------------------------------------
Total Foreign 346,252 358,321 291,637
- --------------------------------------------------------------------------------------------
TOTAL $ 2,078,490 $ 2,099,203 $ 1,737,236
============================================================================================
(1) Includes restructuring and asset impairment charges and related costs
totaling $59.8 million, before taxes.
(2) Net sales for fiscal years 1999-2000 have been restated for the prescribed
accounting changes adopted in the 2001 fiscal year (see Note A [16] to
Consolidated Financial Statements).
7
3
RESULTS OF OPERATIONS
FISCAL 2001 COMPARED TO FISCAL 2000
Fiscal 2001 net sales were ahead of fiscal 2000 by $45 million, or 2%, resulting
in the 54th consecutive year of business growth for RPM.
On August 3, 1999, RPM acquired DAP Products Inc. and DAP Canada Corp.
(collectively "DAP"). DAP, with annual sales of approximately $220 million, is a
leading manufacturer and marketer of caulks and sealants, spackling and glazing
compounds, contact cements, and other specialty adhesives. Brand names DAP, Alex
Plus and Kwik Seal are well known throughout the U.S. and Canada.
On a consolidated basis, the extra two months of DAP sales this year, reported
within the Consumer Division, offset the loss of sales from Industrial Division
product lines divested during fiscal 2000. On a segment basis, comparable base
sales, including small product line additions, grew by 4% in the Industrial
Division, while base sales in the Consumer Division were flat year-over-year.
The Industrial growth of 4% reflects a combination of greater unit volume [2-3%]
and higher pricing [1-2%] to counter increased raw material and packaging costs
during the year. In addition, foreign exchange differences had a negative impact
on primarily Industrial sales between years, suppressing sales by approximately
$20 million, or 1%.
The general slowdown in the economy impacted sales in both divisions during the
past year, causing spending in areas such as protective maintenance, which our
products and services provide, to be deferred. The severe cold this past winter
extended much further south than usual, and Europe was hit hard as well, causing
sales to those regions to be much weaker than usual during our fiscal third
quarter, the seasonally slowest time of the year. Furthermore, several of the
Consumer Division's major accounts were aggressively de-stocking their
inventories this past year, especially impacting sales to those accounts during
the months of December and March. It is management's view that this de-stocking
activity is now largely completed and that sales to these accounts will
normalize, all other factors being equal, as we progress through 2002.
Gross profit margin this year of 43.8% matches closely with last year's 44%. The
Industrial Division margin improved to 46.4% from 45.7%, from the divested
product lines during fiscal 2000, which carried lower margins and, to a lesser
extent, the leveraged benefits from higher sales volume. Timely pricing
initiatives in this division successfully offset rising material costs,
principally oil-related, during the year, and these material costs now appear to
have stabilized. The Consumer Division gross margin, in contrast, dipped to
40.7% from 41.8%, reflecting principally this division's less timely ability to
gain price relief during periods of rising material costs, typically having
servicing agreements with their accounts that renew annually. As these
agreements are being renewed, pricing relief is generally being successfully
negotiated. There were also two more months of lower-margin DAP this year than
last in this division, as well as premium costs incurred to outsource certain
products in order to seamlessly service customers during brief periods of
insufficient capacity during information systems conversions. During 2000, this
division had incurred $7 million in inventory discontinuation costs associated
with the comprehensive restructuring program initiated in August 1999.
Selling, general and administrative ("SG&A") expenses amounted to 35.5% of sales
this year, compared with 35% last year. The Industrial Division expenses
increased to 35.3% from 34.7% a year ago, mainly as the divested product lines
during fiscal 2000 had carried relatively much lower SG&A expenses, plus
additional, related costs of approximately $3 million were incurred this year
toward completion of the restructuring program. The Consumer Division expenses
increased to 33.8% from
8
4
33.4%, principally from incurring approximately $5 million in additional costs
related to the restructuring program, tempered slightly by two more months of
DAP, with its comparatively lower SG&A expense structure. This division also
incurred higher freight costs in the form of oil-driven fuel surcharges,
premiums to expedite certain shipments during restructuring, and increased
handling costs to service more frequent shipments. Additional costs related to
the conclusion of the restructuring program initiated during 2000 are scheduled
to be fully incurred by the end of calendar 2001, and will be much lower than
those incurred during fiscal 2001.
Industrial and Consumer Division 2001 earnings before interest and taxes (EBIT)
were both well ahead of their reported EBIT for 2000. Excluding the
restructuring and asset impairment charges and all related costs from 2000,
totaling $59.8 million, pro forma EBIT results [000s] for Industrial, Consumer
and Corporate/Other were $121,312; $79,761; and ($17,672), respectively, or
$183,401 in total. On that basis, Industrial EBIT year-over-year appears flat
[$122,034 vs. $121,312], but considering the loss of EBIT from the divestitures
during 2000 and the additional $3 million spent this year toward completion of
the restructuring program, Industrial EBIT during 2001 would have been $7
million ahead of 2000, or up 6% on the 4% higher sales. On the same pro forma
basis, Consumer EBIT was off $17 million [$62,662 vs. $79,761], or 21%, for the
reasons discussed above. Lastly, on the same pro forma basis, Corporate/Other
costs were flat year-over-year [($18,006) vs. ($17,672)] as certain lower costs
offset higher costs for e-commerce infrastructure development, which is now
completed.
In August 1999, the Company announced a comprehensive restructuring program to
generate manufacturing, distribution and administrative efficiencies, and to
better position the Company for increased profitability and long-term growth.
Pre-tax restructuring and asset impairment charges of $45 million and $7 million
were taken during the first and fourth quarters of fiscal 2000, respectively.
Through year-end 2001, the Company had incurred all of these charges (refer to
Note I to the Consolidated Financial Statements).
Net interest expense increased $13.4 million in 2001 (refer to Note A [12]),
reflecting higher average interest rates, year-over-year, on the variable rate
portion (approximately 80%) of outstanding borrowings (refer to Note B), two
additional months of indebtedness related to the August 1999 DAP acquisition,
and higher average indebtedness associated with the repurchase of 8,970,100 RPM
common shares between January 1999 and July 2000 (refer to Note D). The Federal
Reserve Board cuts in interest rates that began early in calendar 2001 are now
translating into lower rates on the variable portions of the Company's
outstanding borrowings, resulting in comparably lower interest costs.
The effective income tax rate this year of 38% compares favorably with last
year's 42.9% rate. The 2000 rate had been impacted by the restructuring and
asset impairment charges plus related costs that year. Excluding those charges
and costs, the pro forma tax rate for 2000 would have been 40.3%, still higher
than this year's 38%. This year's rate reduction mainly reflects an improved mix
of foreign income, including fewer unusable foreign tax losses this year than
last, which management expects will be sustainable.
This year's net income of $63 million, or $.62 per diluted share, compares
favorably with last year's $41 million, or $.38 per diluted share. Excluding the
$59.8 million pre-tax restructuring and asset impairment charges plus related
costs, pro forma net income for 2000 would have been $78.6 million, or $.73 per
diluted share. Against pro forma 2000, 2001 net income and EPS are off 20% and
15%, respectively, as a result of the factors
9
5
discussed above. In addition, the difference in pro forma decline year-over-year
between net income and EPS reflects the net benefit from the shares repurchased,
which added $.01 per diluted share to 2001 results.
FISCAL 2000 COMPARED TO FISCAL 1999
Fiscal 2000 net sales were ahead of fiscal 1999 by $241.2 million, or 14%,
representing the 53rd consecutive year of business growth for RPM. The vast
majority of this increase came as a net result of the August 1999 DAP
acquisition plus several product line additions, net of divestitures. DAP
accounted for the majority of the year 2000 sales increase, adjusted for
divestitures during 2000 and for unfavorable foreign exchange differences from
year-to-year. Growth within the Industrial and Consumer Divisions' base
businesses, before acquisitions, divestitures, and exchange differences,
amounted to approximately 3% and 4%, respectively. These growth rates included
several product line additions and are generally reflective of real unit volume
increases, as price levels year-to-year remained fairly stable.
Gross profit margin in 2000 declined 2.1%, ending at 44%, compared to 1999's
46.1% performance. The Industrial Division margin of 45.7% compared with 46.5%
in 1999. The key influence to this change was the difficulties experienced in
reorganizing to combine certain businesses, most notably outside the U.S.
Additionally, there were sales mix differences and minor raw material price
increases during 2000. Management believes that such cost increases can be
effectively managed, prospectively, as productive activities of its Purchasing
Action Group continue. This group focuses on purchasing major common raw and
packaging materials used across multiple business units, and will continue its
effort to identify and expand into other select procurement opportunities going
forward. The Consumer Division year 2000 margin of 41.8% compared with 45.5%
1999.
The majority of this margin reduction resulted from the DAP acquisition. DAP's
entire cost structure generally differs among the Consumer Division companies,
having much lower gross margins, but requiring lower support levels in the SG&A
expense areas. The Consumer Division also incurred $7 million in inventory
discontinuation costs during 2000 associated with the restructuring program. In
addition, the Consumer Division experienced raw material cost movements similar
to those described for the Industrial Division.
SG&A expenses were essentially unchanged from 1999 to 2000 as a percentage of
sales, ending both years at the 35% level. Industrial and Consumer expenses
amounted to 34.7% and 33.4% in 2000 compared with 33.7% and 34.7%, respectively,
in 1999. The Industrial Division increase was almost totally driven by the
divestiture of business units, which carried much lower SG&A expense levels.
Conversely, the Consumer Division, spending difference was the result of the
lower SG&A structure of DAP.
Excluding the restructuring and asset impairment charges of $52 million, and the
related $7.9 million of additional cost of sales, EBIT amounted to $183.4
million in fiscal 2000 (see above), compared with $192.4 million in fiscal 1999.
As set forth, within the Industrial Division, the earnings benefits of modest
volume increases were principally offset by costs incurred in reorganizing to
combine certain businesses and other cost increases not recovered by price
increases. The Consumer Division year-over-year comparisons disclose similar
occurrences; however, the DAP acquisition helped to more than offset the
earnings reduction. Weaker performance at certain business units, and general
cost increases not timely covered by pricing actions, drove a net cost increase
which exceeded the benefit from modest sales growth. General corporate and other
expenses increased just over 10%, with the investment initiative for e-commerce
infrastructure development driving the remainder of this cost increase.
10
6
Two non-core product lines, with annual sales of $65 million, were divested for
a net gain during 2000. Non-recurring expenses offset this net gain during the
year.
Net interest expense increased $19.0 million in 2000 (refer to Note A [12]),
reflecting primarily the additional indebtedness to acquire DAP and smaller
acquisitions throughout the year, and to repurchase RPM common shares. These
increases were partly offset by interest expense saved from the August 10, 1998
redemption of convertible debt securities, which reduced interest expense by
$1.3 million, and from debt paydowns during 2000. Fractionally higher interest
rates in 2000 further increased net interest expense.
The effective income tax rate in 2000 was 42.9%, compared to a 1999 rate of
40.8%. The higher 2000 rate is totally attributable to the restructuring and
asset impairment charges and related costs referred to above, totaling $59.8
million, pre-tax. Excluding those charges and costs, the pro forma tax rate for
2000 would have been 40.3%, or just slightly improved from the 1999 rate.
The much lower net income in the year 2000 than in 1999 was again largely
attributable to the $59.8 million of pre-tax restructuring and asset impairment
charges and related costs taken and incurred during 2000. Excluding such costs,
pro forma 2000 net income would have been $78.6 million, or $0.73 per diluted
share, with this pro forma difference attributable to the lower comparable
performances in both operating segments, higher corporate expenses and the
higher interest costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED FROM OPERATIONS
The Company generated $74.5 million in cash from operations during 2001, $28.1
million less than during 2000. The major difference between years occurred with
working capitals, particularly accounts receivable and inventory, where there
was considerable, yet temporary, net consumption of cash this past year tied to
the restructuring program and to certain information systems conversions during
the year. These levels will be brought back in line now that these activities
have been essentially completed.
The Company expects to continue to generate strong free cash flow from its
operations, which remains its primary source of financing internal growth with
limited use of short-term credit.
INVESTING ACTIVITIES
The Company is not capital intensive, and capital expenditures generally do not
exceed depreciation and amortization in a given year. Other than to make
ordinary repairs and replacements, capital expenditures are made to accommodate
the Company's continued growth through improved production and distribution
efficiencies and capacity, and to enhance administration. Capital expenditures
in 2001 of $54.1 million compare with depreciation and amortization of $81.5
million. Approximately $10 million of this year's expenditures were made to
accommodate the restructuring program, which is now completed, and $12 million
were information technology (IT) related, including the completion of several
major IT platform conversions. As previously indicated, capital spending in the
IT area is expected to trend downward for the next several years.
The Company's captive insurance company invests in marketable securities in the
ordinary course of conducting its operations, and this activity will continue.
The differences between years are attributable to the timing and performance of
its investments.
During 2001, the Company sold or divested certain non-core assets, generating
total proceeds of $31.7 million.
11
7
FINANCING ACTIVITIES
On January 22, 1999, the Company announced the authorization of a share
repurchase program, allowing the repurchase of up to 5 million RPM 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 shares.
As of May 31, 2001, the Company had repurchased 8,970,100 of its common shares
at an average price of $11.11 per share. No further share repurchases under this
program are anticipated at this time.
On July 14, 2000, the Company had refinanced its then-existing $300 million and
$400 million revolving credit facilities with a $200 million, 364-day revolving
credit facility and a $500 million, 5-year revolving credit facility. These new
facilities have been available to back up the Company's $700 million commercial
paper program to the extent these facilities are not drawn upon. As of May 31,
2001, the Company had drawn $655.7 million against these facilities and had no
outstanding commercial paper. Due to the Company's current public debt ratings,
access to the commercial paper market is presently limited. Subsequent to year
end, the Company refinanced its $200 million facility with a one-year term loan
due July 12, 2002. The debt to capital ratio was 60% at May 31, 2000 and 2001.
The stronger dollar effect on the Company's foreign net assets reduced
shareholders' equity this past year, a trend that could continue if the dollar
strengthens further and foreign net assets continue to grow.
The Company maintains excellent relations with its banks and other financial
institutions to support its existing businesses and to provide access to
financing for future growth opportunities.
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 (refer to Note H to the Consolidated Financial Statements).
MARKET RISK
The Company is exposed to market risk from changes in interest rates and foreign
currency exchange rates since it funds its operations through long- and
short-term borrowings and denominates its business transactions in a variety of
foreign currencies. A summary of the Company's primary market risk exposures is
presented below.
INTEREST RATE RISK
The Company's primary interest rate risk exposure results from floating rate
debt including various revolving credit and other lines of credit. At May 31,
2001, approximately 83% of the Company's total long-term debt consisted of
floating rate debt. If interest rates were to increase 100 basis points (1%)
from May 31, 2001 rates, and assuming no changes in long-term debt from the May
31, 2001 levels, the additional annual expense would be approximately $8.0
million on a pre-tax basis. The Company currently does not hedge its exposure to
floating interest rate risk.
FOREIGN CURRENCY RISK
The Company's foreign sales and results of operations are subject to the impact
of foreign currency fluctuations. As most of the Company's foreign operations
are in countries with fairly stable currencies, such as the United Kingdom,
Belgium and Canada, this effect has not been material. In addition, foreign debt
is denominated in the respective foreign currency, thereby eliminating any
related translation impact on earnings.
12
8
If the dollar continues to strengthen, the Company's foreign results of
operations will be negatively impacted, but the effect is not expected to be
material. A 10% adverse change in foreign currency exchange rates would not have
resulted in a material impact in the Company's net income for the year ended May
31, 2001. The Company does not currently hedge against the risk of exchange rate
fluctuations.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen members of the European Union adopted
a new European currency unit (the "euro") as their common legal currency. The
participating countries' national currencies will remain legal tender as
denominations of the euro from January 1, 1999 through January 1, 2002, and the
exchange rates between the euro and such national currency units will be fixed.
The Company has assessed the potential impact of the euro currency conversion on
its operating results and financial condition. The impact of pricing differences
on country-to-country indebtedness is not expected to be material. The Company
converted its European operations to the euro currency basis effective June 1,
1999.
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 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) future acquisitions and the Company's ability to
effectively integrate such acquisitions; (i) liability risks and insurance
coverage inherent in the Company's EIFS and asbestos litigation; and (j) the
ability of the Company to realize the projected pre-tax savings associated with
the restructuring and consolidation program, and to divest non-core product
lines.
13
9
CONSOLIDATED BALANCE SHEETS RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
May 31 2001 2000
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments (Note A) $ 23,926 $ 31,340
Trade accounts receivable (less allowances of
$17,705 in 2001 and $16,248 in 2000) 411,718 399,683
Inventories (Note A) 277,494 244,559
Prepaid expenses and other current assets 106,282 109,510
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 819,420 785,092
- ---------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE A)
Land 21,713 24,055
Buildings and leasehold improvements 188,590 190,658
Machinery and equipment 412,751 384,966
- ---------------------------------------------------------------------------------------------------------------
623,054 599,679
Less allowance for depreciation and amortization 261,018 233,451
- ---------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 362,036 366,228
- ---------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of amortization (Note A) 571,276 595,106
Other intangible assets, net of amortization (Note A) 300,372 320,631
Other 25,386 32,146
- ---------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 897,034 947,883
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,078,490 $ 2,099,203
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable $ 152,307 $ 154,256
Current portion of long-term debt (Note B) 7,379 4,987
Accrued compensation and benefits 74,888 76,314
Accrued loss reserves (Note H) 55,416 64,765
Accrued restructuring reserve (Note I) -0- 13,540
Other accrued liabilities 75,022 61,326
Income taxes payable (Notes A and C) 10,756 1,014
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 375,768 376,202
- ---------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities (Note B) 955,399 959,330
Other long-term liabilities 53,479 57,381
Deferred income taxes (Notes A and C) 54,134 60,566
- ---------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 1,063,012 1,077,277
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,438,780 1,453,479
- ---------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares, stated value $.015 per share; authorized 200,000 shares;
issued 111,153 and outstanding 102,211 in 2001; issued 110,947 and
outstanding 103,134 in 2000 (Note D) 1,619 1,616
Paid-in capital 430,015 424,077
Treasury shares, at cost (Note D) (99,308) (88,516)
Accumulated other comprehensive loss (Note A) (53,074) (39,555)
Retained earnings 360,458 348,102
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 639,710 645,724
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,078,490 $ 2,099,203
===============================================================================================================
See Notes to Consolidated Financial Statements
14
10
CONSOLIDATED STATEMENTS OF INCOME RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
Year Ended May 31 2001 2000 1999
- -------------------------------------------------------------------------------------------------
NET SALES $2,007,762 $1,962,410 $1,720,628
Cost of sales 1,127,787 1,099,637 927,110
- -------------------------------------------------------------------------------------------------
Gross profit 879,975 862,773 793,518
Selling, general and administrative expenses 713,285 687,249 601,140
Restructuring and asset impairment charge (Note I) -0- 51,970 -0-
Interest expense, net 65,203 51,793 32,781
- -------------------------------------------------------------------------------------------------
Income before income taxes 101,487 71,761 159,597
Provision for income taxes (Note C) 38,526 30,769 65,051
- -------------------------------------------------------------------------------------------------
NET INCOME $ 62,961 $ 40,992 $ 94,546
=================================================================================================
Average shares outstanding (Note D) 102,202 107,221 108,731
=================================================================================================
Basic earnings per common share (Note D) $ .62 $ .38 $ .87
=================================================================================================
Diluted earnings per common share (Note D) $ .62 $ .38 $ .86
=================================================================================================
Cash dividends per common share $ .498 $ .485 $ .465
=================================================================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY RPM, Inc. and Subsidiaries
(In thousands)
Common Shares Accumulated
------------- Other
Number Comprehensive
Of Shares Stated Paid-In Treasury Loss Retained
(Note D) Value Capital Shares (Note A) Earnings Total
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 100,254 $1,460 $264,508 $ $(14,542) $314,911 $566,337
---------
Comprehensive income
Net income 94,546 94,546
Reclassification adjustments (65) (65)
Other comprehensive loss (9,301) (9,301)
---------
Comprehensive income 85,180
Dividends paid (50,446) (50,446)
Debt conversion 10,135 148 156,896 157,044
Business combinations (24) (417) (417)
Repurchase of shares (1,296) (17,044) (17,044)
Stock option exercises 281 4 2,218 2,222
Restricted share awards 93 1 (1)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 109,443 1,613 423,204 (17,044) (23,908) 359,011 742,876
---------
Comprehensive income
Net income 40,992 40,992
Reclassification adjustments 738 738
Other comprehensive loss (16,385) (16,385)
---------
Comprehensive income 25,345
Dividends paid (51,901) (51,901)
Repurchase of shares (6,517) (71,472) (71,472)
Stock option exercises 100 1 875 876
Restricted share awards 108 2 (2)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2000 103,134 1,616 424,077 (88,516) (39,555) 348,102 645,724
---------
Comprehensive income
Net income 62,961 62,961
Reclassification adjustments 1,015 1,015
Other comprehensive loss (14,534) (14,534)
Comprehensive income 49,442
Dividends paid (50,605) (50,605)
Repurchase of shares (1,157) (11,101) (11,101)
Stock option exercises 59 1 101 309 411
Restricted share awards 175 2 5,837 5,839
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2001 102,211 $1,619 $430,015 $(99,308) $(53,074) $360,458 $639,710
===============================================================================================================================
</Table>
See Notes to Consolidated Financial Statements
15
11
CONSOLIDATED STATEMENTS OF CASH FLOWS RPM, Inc. and Subsidiaries
(In thousands)
<Table>
<Caption>
Year Ended May 31 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,961 $ 40,992 $ 94,546
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 43,035 42,290 34,803
Amortization of goodwill 19,694 18,352 13,625
Other amortization 18,765 18,508 13,707
Asset impairment charge, net of gains 3,354 6,940
(Decrease) in deferred liabilities (6,432) (31,081) (4,189)
(Earnings) of unconsolidated affiliates (275) (435) (2,332)
Changes in assets and liabilities, net of effect from purchases and sales
of businesses:
(Increase) decrease in accounts receivable (11,095) 6,251 (27,828)
(Increase) decrease in inventory (37,578) 4,716 11,089
(Increase) in prepaid and other assets (9,735) (13,484) (11,523)
Increase (decrease) in accounts payable (2,812) 1,615 (6,349)
Increase (decrease) in accrued restructuring (13,540) 13,540
Increase (decrease) in accrued liabilities 12,373 (11,285) 7,639
Other (4,220) 5,659 (5,467)
- ----------------------------------------------------------------------------------------------------------------------------
Cash From Operating Activities 74,495 102,578 117,721
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54,118) (63,185) (63,406)
Acquisition of businesses, net of cash acquired (2,645) (323,033) (34,551)
Purchase of marketable securities (21,906) (19,816) (31,666)
Proceeds from marketable securities 28,283 13,142 29,895
Joint ventures (investments) and distributions 647 (500) 1,063
Proceeds from sale of assets and businesses 31,694 55,290 565
- ----------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Investing Activities (18,045) (338,102) (98,100)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term and short-term debt 708,850 937,077 494,127
Reductions of long-term and short-term debt (710,389) (566,610) (469,022)
Cash dividends (50,605) (51,901) (50,446)
Exercise of stock options 411 876 2,222
Repurchase of shares (11,101) (71,472) (17,044)
- ----------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Financing Activities (62,834) 247,970 (40,163)
- ----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,030) (835) (512)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (7,414) 11,611 (21,054)
- ----------------------------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR 31,340 19,729 40,783
- ----------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 23,926 $ 31,340 $ 19,729
============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 60,027 $ 55,253 $ 36,155
Income taxes $ 35,216 $ 70,086 $ 71,904
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Shares issued for restricted stock plan $ 1,459 $ 1,202 $ 1,385
Receivables (debt) from business combinations $ (6,724) $ (1,557)
Interest accreted on convertible securities $ 1,696
Shares (returned) in business combinations $ (417)
Conversion of debt to equity $ 157,044
See Notes to Consolidated Financial Statements
16
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2001, 2000 and 1999
NOTE A - A SUMMARY OF SIGNIFICANT
ACCOUNTING PRINCIPLES
(1) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RPM, Inc. and its
majority owned subsidiaries. The Company accounts for its investment in less
than majority owned joint ventures under the equity method. Intercompany
accounts, transactions and unrealized profits and losses are eliminated in
consolidation.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
(2) BUSINESS COMBINATIONS
During the two year period ended May 31, 2001, the Company completed several
acquisitions which have been accounted for by the purchase method of accounting.
The $199,435,000 difference between the fair value of net assets acquired and
the purchase consideration of $354,810,000 has been allocated to goodwill. The
assets, liabilities and operating results of these companies are reflected in
the Company's financial statements from their respective dates of acquisition
forward.
The Company also completed several divestitures of businesses and product lines
during the past two years, realizing proceeds of $74,262,000. The resulting net
gains of $823,000 for the year ended May 31, 2001 and $11,993,000 for the year
ended May 31, 2000, when netted against non-recurring costs, had an immaterial
effect on net income.
Pro forma results of operations, reflecting the acquisitions and divestitures
for the years ended May 31, 2001 and May 31, 2000, were not materially different
from reported results.
(3) FOREIGN CURRENCY
The functional currency of foreign subsidiaries is their local currency.
Accordingly, for the periods presented, assets and liabilities have been
translated using exchange rates at year end while income and expense for the
periods have been translated using an annual average exchange rate. The
resulting translation adjustments have been recorded in other comprehensive
loss, a component of shareholders' equity, and will be included in net earnings
only upon the sale or liquidation of the underlying foreign investment, which is
not contemplated at this time. Transaction gains and losses have been immaterial
during the past three fiscal years.
17
13
(4) COMPREHENSIVE INCOME
Accumulated other comprehensive loss (which is shown net of taxes) consists of
the following components:
Foreign Minimum Unrealized
Currency Pension Gain (Loss)
Translation Liability On
(In thousands) Adjustments Adjustments Securities Total
- -------------------------------------------------------------------------------------------------------
Balance at May 31, 1998 $(13,821) $ (786) $ 65 $(14,542)
Reclassification adjustments for
(gains) losses included in net income (65) (65)
Other Comprehensive Loss (8,496) (67) (738) (9,301)
- -------------------------------------------------------------------------------------------------------
Balance at May 31, 1999 (22,317) (853) (738) (23,908)
Reclassification adjustments for
(gains) losses included in net income 738 738
Other Comprehensive Loss (16,223) 853 (1,015) (16,385)
- -------------------------------------------------------------------------------------------------------
Balance at May 31, 2000 (38,540) (1,015) (39,555)
Reclassification adjustments for
(gains) losses included in net income 1,015 1,015
Other Comprehensive Loss (14,552) (102) 120 (14,534)
- -------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2001 $(53,092) $ (102) $ 120 $(53,074)
=======================================================================================================
(5) CASH AND SHORT-TERM INVESTMENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The Company does not believe it is exposed to any significant
credit risk on cash and short-term investments.
(6) MARKETABLE SECURITIES
Marketable securities, all of which are classified as available for sale, total
$24,480,000 and $29,277,000 at May 31, 2001 and 2000, respectively. The
estimated fair values of these securities are included in other current assets
and are based on quoted market prices.
(7) FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include cash
and short-term investments, accounts receivable, notes and accounts payable and
debt. The carrying amount of cash and short-term investments, accounts
receivable and notes and accounts payable approximates fair value because of
their short-term maturity.
The carrying amount of the Company's debt instruments approximates fair value
based on quoted market prices, variable interest rates or borrowing rates for
similar types of debt arrangements.
(8) INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
substantially on a first-in, first-out (FIFO) basis and market being determined
on the basis of replacement cost or net realizable value. Inventory costs
include raw material, labor and manufacturing overhead. Inventories were
composed of the following major classes:
May 31 2001 2000
- -----------------------------------------------------------
(In thousands)
Raw material and supplies $ 89,071 $ 86,755
Finished goods 188,423 157,804
- -----------------------------------------------------------
Total Inventory $277,494 $244,559
===========================================================
18
14
(9) DEPRECIATION
Depreciation is computed over the estimated useful lives of the assets primarily
using the straight-line method. Depreciation expense charged to operations for
the three years ended May 31, 2001 was $43,035,000, $42,290,000 and $34,803,000,
respectively. The annual depreciation rates are based on the following ranges of
useful lives:
Land improvements 10 to 50 years
Buildings and improvements 5 to 50 years
Machinery and equipment 3 to 20 years
(10) INTANGIBLES
The excess of cost over the underlying value of the net assets of companies
acquired is being amortized on the straight-line basis, primarily over 40 years.
Amortization expense charged to operations for the three years ended May 31,
2001 was $19,694,000, $18,352,000 and $13,625,000, respectively. Goodwill is
shown net of accumulated amortization of $103,494,000 at May 31, 2001
($88,060,000 at May 31, 2000).
Intangible assets also represent costs allocated to formulae, trademarks and
other specifically identifiable assets arising from business acquisitions. These
assets are being amortized using the straight-line method principally over
periods of 7 to 40 years. The Company assesses the recoverability of the excess
of cost over the assigned value of net assets acquired by determining whether
the amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations.
Amortization expense charged to operations for the three years ended May 31,
2001 was $16,602,000, $17,084,000 and $12,504,000, respectively.
Other intangible assets consist of the following major classes:
May 31 2001 2000
- ----------------------------------------------------------
(In thousands)
Formulae $167,845 $170,146
Trademarks 105,466 106,363
Distributor networks 39,034 39,076
Workforce 38,107 40,589
Other 30,627 34,635
- ----------------------------------------------------------
381,079 390,809
Accumulated amortization 80,707 70,178
- ----------------------------------------------------------
OTHER INTANGIBLE ASSETS, NET $300,372 $320,631
(11) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged for the three years ended
May 31, 2001 were $21,841,000, $22,328,000 and $18,022,000, respectively. The
customer sponsored portion of such expenditures was not significant.
(12) INTEREST EXPENSE, NET
Interest expense is shown net of investment income which consists of interest,
dividends and capital gains. Investment income for the three years ended May 31,
2001 was $3,682,000, $2,643,000 and $4,880,000, respectively.
(13) INCOME TAXES
The Company and its wholly owned domestic subsidiaries file a consolidated
federal income tax return. The tax effects of transactions are recognized in the
year in which they enter into the determination of net income, regardless of
when they are recognized for tax purposes. As a result, income tax expense
differs from actual taxes payable. The accumulation of these differences at May
31, 2001 is shown as a noncurrent liability of $54,134,000 (net of a noncurrent
asset of $74,268,000). At May 31, 2000, the noncurrent liability was $60,566,000
(net of a noncurrent asset of $72,323,000). The Company does not intend to
19
15
distribute the accumulated earnings of consolidated foreign subsidiaries
amounting to $102,847,000 at May 31, 2001, and $92,706,000 at May 31, 2000, and
therefore no provision has been made for the taxes which would result if such
earnings were remitted to the Company.
(14) ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(15) REPORTABLE SEGMENTS
Reportable segment information appears on pages 6 and 7 of this report.
(16) CHANGES IN ACCOUNTING POLICIES
DERIVATIVES
The Company adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133")
beginning June 1, 2001. SFAS No. 133, as amended by SFAS No. 138, establishes
accounting and reporting standards that require derivative instruments to be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. The adoption
of SFAS No. 133 will not have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
REVENUE RECOGNITION
The Company's subsidiaries recognize revenue when title and risk of loss passes
to customers. Staff Accounting Bulletin No. 101, "Revenue Recognition," issued
by the Securities and Exchange Commission, did not have an impact on the
Company's operating revenues for any of the years presented.
The Financial Accounting Standards Board's Emerging Issues Task Force
pronouncements issued during the current year covering shipping and handling
costs and certain sales incentives have been adopted. The net impact of these
accounting changes resulted in modest increases in net sales with offsets to
selling, general and administrative expenses. This change has no effect on the
dollar amount of the Company's net income. Prior year net sales and selling,
general and administrative expenses have been reclassified to conform to current
period presentation.
Shipping costs paid to third party shippers for transporting products to
customers are included in selling, general and administrative expense. For the
years ended May 31, 2001, 2000 and 1999, shipping costs were $75,400,000,
$66,100,000 and $56,000,000, respectively.
GOODWILL AND OTHER INTANGIBLES
The Company adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" effective June 1, 2001. The Standard
replaces the requirement to amortize goodwill and certain other intangible
assets with an impairment test requirement. The Company is in the process of
evaluating this Standard and its impact on net income.
20
16
NOTE B - Borrowings
A description of long-term debt follows:
May 31 2001 2000
- -------------------------------------------------------------------------------------------------------------
(In thousands)
Revolving credit agreement for $500,000,000 with a syndicate of banks through
July 14, 2005. Interest, which is tied to LIBOR, averaged 6.09% at May 31, 2001.
The Chairman of the Board and Chief Executive Officer of the Company is a
director of one of the banks providing this facility. $500,000 $ -0-
Revolving 364-day credit agreement for $200,000,000 with a syndicate of banks.
Interest, which is tied to LIBOR, averaged 5.62% at May 31, 2001. 155,700 -0-
Commercial Paper refinanced with proceeds from the credit agreements
described above. -0- 604,000
Short-term borrowings with a bank bearing interest of 5.63% at May 31, 2001.
These obligations along with other short-term borrowings have been reclassified
as long-term debt reflecting the Company's intent and ability, through unused
credit facilities, to refinance these obligations. 33,000 75,000
7.00% unsecured senior notes due June 15, 2005. 150,000 150,000
Unsecured notes due March 1, 2008, interest, which is tied to LIBOR, averaged
5.10% at May 31, 2001. 100,000 100,000
Revolving multi-currency credit agreement for $15,000,000 with a bank through
December 31, 2002. Interest, which is tied to one of various rates, averaged
5.67% at May 31, 2001. 9,827 -0-
Revolving 364-day multi-currency credit agreement for $23,445,000 with a bank.
Interest, which is tied to one of various rates, averaged 5.30% at May 31, 2000. -0- 17,553
6.75% unsecured senior notes due to an insurance company in annual
installments through 2003 5,143 6,857
Other notes and mortgages payable at various rates of interest due in
installments through 2008, substantially secured by property. 9,108 10,907
- -------------------------------------------------------------------------------------------------------------
962,778 964,317
Less current portion 7,379 4,987
- -------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT, LESS CURRENT MATURITIES $955,399 $959,330
=============================================================================================================
Subsequent to year end, the Company refinanced the $200,000,000 credit agreement
with a one-year term loan due July 12, 2002.
At May 31, 2001, the Company had additional unused short-term lines of credit
with several banks totalling $51,600,000, in addition to the $44,300,000
available under the $200 million, 364-day revolving credit agreement.
The aggregate maturities of long-term debt for the five years subsequent to May
31, 2001 are as follows: 2002 - $7,379,000; 2003 - $202,075,000; 2004 -
$2,960,000; 2005 - $269,000; 2006 - $650,030,000.
21
17
NOTE C - Income Taxes
Consolidated income before taxes consists of the following:
Year Ended May 31 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
United States $ 81,853 $ 41,424 $ 124,965
Foreign 19,634 30,337 34,632
- -------------------------------------------------------------------------------------------------------------------------------
$ 101,487 $ 71,761 $ 159,597
===============================================================================================================================
Provision for income taxes consists of the following:
Current:
U.S. federal $ 38,991 $ 43,174 $ 48,609
State and local 3,829 3,547 7,448
Foreign 2,138 15,129 13,183
- -------------------------------------------------------------------------------------------------------------------------------
44,958 61,850 69,240
- -------------------------------------------------------------------------------------------------------------------------------
Deferred:
U.S. federal (4,831) (29,028) (6,238)
Foreign (1,601) (2,053) 2,049
- -------------------------------------------------------------------------------------------------------------------------------
(6,432) (31,081) (4,189)
- -------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $ 38,526 $ 30,769 $ 65,051
===============================================================================================================================
A reconciliation between the actual income tax expense provided and the income tax expense computed by applying the statutory
federal income tax rate of 35% to income before tax is as follows:
Income taxes at U.S. statutory rate $ 35,520 $ 25,116 $ 55,859
Difference in foreign taxes versus the U.S. statutory rate (1,563) 2,458 1,032
State and local income taxes net of federal income tax benefit 2,489 2,306 4,841
Tax credits (676) (340) (660)
Amortization of goodwill 4,530 4,285 3,326
Tax benefits from foreign sales corporation (1,675) (1,725) (1,860)
Other (99) (1,331) 2,513
- -------------------------------------------------------------------------------------------------------------------------------
ACTUAL TAX EXPENSE $ 38,526 $ 30,769 $ 65,051
- -------------------------------------------------------------------------------------------------------------------------------
ACTUAL TAX RATE 37.96% 42.88% 40.76%
===============================================================================================================================
Deferred income taxes result from timing differences in recognition of revenue
and expense for book and tax purposes, primarily from the tax timing differences
relating to business combinations.
NOTE D - Common Shares
There are 200,000,000 common shares authorized with a stated value of $.015 per
share. At May 31, 2001 and 2000, there were 102,211,000 and 103,134,000 shares
outstanding, respectively, each of which is entitled to one vote.
Basic earnings per share is computed by dividing income available to common
shareholders, the numerator, by the weighted average number of common shares
outstanding during each year, the denominator (102,202,000 in 2001, 107,221,000
in 2000 and 108,731,000 in 1999). In computing diluted earnings per share, the
net income was increased in 1999 by the add back of interest expense, net of
tax, on convertible securities assumed to be converted. In addition, the number
of common shares was increased by common stock options with exercisable prices
lower than the average market prices of common shares during each year and
reduced by the number of shares assumed to have been purchased with proceeds
from the exercised options. In 1999 the number of common shares was also
increased by additional shares issuable assuming conversion of convertible
securities.
22
18
In April 1997, the Company adopted a Restricted Stock Plan. The Plan is intended
to replace, over a period of time, the Company's existing cash based Benefit
Restoration Plan. Under the terms of the Plan, up to 1,563,000 shares may be
awarded to certain employees through May 2007. For the year ended May 31, 2001,
175,000 shares were awarded under this Plan, net of forfeitures (108,000 shares
in 2000). Substantially, none of these awards, which generally are subject to
forfeiture until the completion of five years of service, were vested at May 31,
2001 or 2000.
In 1999, the Company authorized the repurchase of up to 10,000,000 of its common
shares. The repurchase of shares under this program were made in the open market
or in private transactions, at times and in amounts and prices that management
deemed appropriate. The Company terminated the repurchase program in July 2000,
through which time the Company had repurchased 8,970,000 shares (7,813,000
through May 31, 2000) at an aggregate cost of $99,617,000 ($88,516,000 at May
31, 2000). The Company has subsequently reissued 28,000 of these shares in
connection with its Stock Option program, bringing the balance to 8,942,000 in
treasury shares. Shares repurchased under this program are held at cost and are
included in Shareholders' Equity as treasury shares.
In April 1999, the Company adopted a Shareholder Rights Plan and declared a
dividend distribution of one right for each outstanding common share. The Plan
provides existing shareholders the right to purchase shares of the Company at a
discount in certain circumstances as defined by the Plan. The rights are not
exercisable at May 31, 2001 and expire in May 2009.
The Company has options outstanding under two stock option plans, the 1989 Stock
Option Plan and the 1996 Key Employees Stock Option Plan, which provide for the
granting of options for up to 9,000,000 shares (4,500,000 shares in 2000 and
1999). These options are generally exercisable cumulatively in equal annual
installments commencing one year from the grant date and have expiration dates
ranging from July 2001 to April 2011. At May 31, 2001, 3,589,000 shares (291,000
at May 31, 2000) were available for future grant.
Transactions during the last two years are summarized as follows:
Shares Under Option 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Outstanding, beginning of year (weighted average price of
$13.01 ranging from $5.84 to $17.25 per share) 6,243 4,708
Granted (weighted average price of $9.21 ranging from
$8.69 to $9.26 per share) 1,202 1,843
Cancelled (weighted average price of $13.26 ranging from
$8.81 to $17.25 per share) (369) (208)
Exercised (weighted average price of $6.92 ranging from
$5.84 to $8.42 per share) (59) (100)
- --------------------------------------------------------------------------------
OUTSTANDING, END OF YEAR (WEIGHTED AVERAGE PRICE OF
$12.39 RANGING FROM $8.42 TO $16.35 PER SHARE) 7,017 6,243
================================================================================
EXERCISABLE, END OF YEAR (WEIGHTED AVERAGE PRICE OF
$13.17 RANGING FROM $8.42 TO $16.35 PER SHARE) 3,947 3,103
================================================================================
23
19
<Table>
<Caption>
Options Outstanding Options Exercisable
at May 31, 2001 at May 31, 2001
------------------------------------------------ -----------------------------
Weighted
Average Weighted Weighted
Range of Shares Remaining Average Shares Average
Exercise Prices (000's) Life Price (000's) Price
$ 5.00- $ 9.99 2,364 8.5 $ 9.36 445 $ 9.41
$ 10.00- $ 14.99 2,523 4.9 $12.64 2,110 $12.43
$ 15.00- $ 17.25 2,130 6.7 $15.46 1,392 $15.50
------ ------
7,017 6.6 $12.39 3,947 $13.17
====== ======
The Company is accounting for its stock option plans under the provisions of the
Accounting Principle Board's Opinion No. 25 and, accordingly, no compensation
cost has been recognized. If compensation cost had been determined based on the
fair value at the grant date for awards under this plan consistent with the
method prescribed by Statement of Financial Accounting Standards No. 123, the
Company's net income and earnings per share for the years ended May 31, 2001 and
2000, would have been reduced to the pro forma amounts indicated in the
following table:
2001 2000
- --------------------------------------------------------------------------------
(In thousands except per share amounts)
Pro Forma Net Income $59,956 $38,169
================================================================================
Pro Forma Earnings Per Share:
Basic $ .59 $ .36
================================================================================
Diluted $ .59 $ .36
================================================================================
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions. The expected volatility rate is 32.5% for shares granted in 2001
and 28.9% for 2000. The expected life is 7.0 and 7.5 years, with dividend yields
of 3.5% and 3.3% and risk-free interest rates of 5.1% and 6.4%, for 2001 and
2000, respectively.
NOTE E - Leases
At May 31, 2001, certain property, plant and equipment were leased by the
Company under long-term leases. Certain of these leases provide for increased
rental based upon an increase in the cost-of-living index. Future minimum lease
commitments as of May 31, 2001 for all non-cancelable leases are as follows:
May 31 (In thousands)
- --------------------------------------------------------------------------------
2002 $ 13,572
2003 10,627
2004 6,445
2005 4,766
2006 4,241
Thereafter 18,400
- --------------------------------------------------------------------------------
TOTAL MINIMUM LEASE COMMITMENTS $ 58,051
================================================================================
Rental expenses for all operating leases totalled $20,523,000 in 2001,
$17,183,000 in 2000 and $13,934,000 in 1999. Capitalized leases were
insignificant for the three years ended May 31, 2001.
NOTE F - Retirement Plans
The Company sponsors a non-contributory defined benefit pension plan (The
Retirement Plan) covering substantially all domestic non-union employees.
Pension coverage for employees of the Company's foreign subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. In addition, benefits for
domestic union employees are provided by separate plans.
The Retirement Plan provides benefits that are based upon years of service and
average compensation with accrued benefits vesting after five years. Benefits
for union employees are generally based upon years of service. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes using a different actuarial cost method and
different assumptions from those used for financial reporting.
24
20
Net periodic pension cost (income) consisted of the following for the three
years ended May 31, 2001:
U.S. Plans Non-U.S. Plans
------------------------------------ -----------------------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $ 7,742 $ 6,650 $ 7,247 $ 1,112 $ 1,122 $ 1,041
Interest cost 6,470 5,678 5,253 2,314 2,176 2,263
Expected return on plan assets (9,157) (6,123) (6,071) (3,396) (3,026) (3,183)
Amortization of:
Prior service cost 164 132 114
Net gain on adoption of SFAS No. 87 (87) (96) (100)
Net actuarial (gains) losses recognized (62) 439 71 (85) 91 1
Curtailment/settlement (gains) losses (722) 103 (1,728) (24) (308)
- --------------------------------------------------------------------------------------------------------------------------------
NET PENSION COST $ 4,348 $ 6,783 $ 4,786 $ (55) $ 339 $ (186)
================================================================================================================================
The changes in benefit obligations and plan assets, as well as the funded status
of the Company's pension plans at May 31, 2001 and 2000 were as follows:
U.S. Plans Non-U.S. Plans
------------------------------ -------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Benefit obligation at beginning of year $ 81,892 $ 76,328 $ 32,343 $ 33,006
Service cost 7,742 6,650 1,112 1,122
Interest cost 6,470 5,678 2,314 2,176
Benefits paid (12,785) (3,820) (1,641) (1,376)
Participant contributions 428 404
Actuarial (gains) losses 4,156 (5,884) 2,219 (3,520)
Currency exchange rate changes (2,600) 683
Curtailment/settlement (gains) losses (721) (11,184) (152)
Plan amendments 2,786
Acquisitions 445 11,338
- --------------------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 87,199 $ 81,892 $ 34,175 $ 32,343
================================================================================================================================
Fair value of plan assets at beginning of year $ 101,502 $ 61,715 $ 40,921 $ 36,469
Actual return on plan assets (2,543) 22,675 186 4,138
Employer contributions 7,202 9,772 500 421
Participant contributions 428 404
Benefits paid (12,785) (3,820) (1,641) (1,376)
Currency exchange rate changes (2,837) 865
Curtailment/settlement gains (losses) (6,092)
Acquisitions 523 17,252
- --------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 93,899 $ 101,502 $ 37,557 $ 40,921
================================================================================================================================
Excess of plan assets versus benefit
obligations at end of year $ 6,700 $ 19,610 $ 3,382 $ 8,577
Contributions after measurement date 2,537 15 93 108
Unrecognized actuarial (gains) losses 2,715 (13,191) 3,514 (1,811)
Unrecognized prior service cost 1,568 1,732
Unrecognized net transitional asset (198) (285)
- --------------------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 13,322 $ 7,881 $ 6,989 $ 6,874
================================================================================================================================
25
21
U.S. Plans Non-U.S. Plans
------------------------- --------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 14,057 $ 9,401 $ 7,973 $ 7,874
Accrued benefit liability (781) (1,520) (1,041) (1,000)
Accumulated other comprehensive loss 46 56
- -----------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 13,322 $ 7,881 $ 6,988 $ 6,874
=======================================================================================================================
For domestic plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value of assets were $781,000, $781,000 and $ -0-, respectively, as of May
31, 2001 and $1,243,000, $1,243,000 and $ -0-, respectively, as of May 31, 2000.
For foreign plans with accumulated benefit obligations in excess of plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
of assets were $1,145,000, $1,042,000 and $ -0-, respectively, as of May 31,
2001 and $1,088,000, $944,000 and $ -0-, respectively, as of May 31, 2000.
The following weighted average assumptions were used to determine the Company's
obligations under the plans:
U.S. Plans Non-U.S. Plans
------------------------- --------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Discount rate 7.50% 8.00% 6.63% 6.17%
Expected return on plan assets 9.00% 9.00% 8.25% 8.25%
Rate of compensation increase 4.00% 4.50% 4.00% 4.25%
The plans' assets consist primarily of stocks, bonds and fixed income
securities.
The Company also sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code, which covers substantially all non-union employees in the
United States. The Plan provides for matching contributions in Company shares
based upon qualified employee contributions. Matching contributions charged to
income were $5,170,000, $4,925,000 and $4,304,000 for years ending May 31, 2001,
2000 and 1999, respectively.
26
22
NOTE G - Postretirement Health Care Benefits
In addition to the defined benefit pension plan, the Company also provides
health care benefits to certain of its retired employees through unfunded plans.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The components of this expense for the three years ended
May 31, 2001 were as follows:
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost - Benefits earned during this period $ 81 $ 110 $ 99
Interest cost on the accumulated obligation 918 890 784
Amortization of unrecognized (gains) (124) (55) (40)
- -----------------------------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT EXPENSE $ 875 $ 945 $ 843
=============================================================================================================================
The changes in the benefit obligations of the plans at May 31, 2001 and 2000,
were as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Accumulated postretirement benefit obligation at beginning of year $ 11,928 $ 11,548
Service cost 81 110
Interest cost 918 890
Settlement/curtailment (gains) losses (221)
Acquisitions 1,629
Benefit payments (972) (902)
Actuarial (gains) losses 791 (1,238)
Currency exchange rate changes (131) 112
- -----------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation at end of year 12,615 11,928
Unrecognized actuarial gains (losses) 1,874 2,881
- -----------------------------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS $ 14,489 $ 14,809
=============================================================================================================================
A 7.5% general discount rate was used in determining the accumulated
postretirement benefit obligation as of May 31, 2001 (8.0% for May 31, 2000). A
7.0% increase in the cost of covered health care benefits was generally assumed
for fiscal 2001 (8.0% for fiscal 2000). This trend rate in all cases is assumed
to decrease to 5.0% after several years and remain at that level thereafter
except for various union plans which will cap at alternate benefit levels. A
1.0% increase in the health care costs trend rate would have increased the
accumulated postretirement benefit obligation as of May 31, 2001 by $1,275,000
and the net postretirement expense by $113,000. A 1.0% decrease in the health
care costs trend rate would have decreased the accumulated postretirement
benefit obligation as of May 31, 2001 by $1,116,000 and the net postretirement
expense by $94,000.
27
23
NOTE H - Contingencies and Loss Reserves
Accrued loss reserves consisted of the following classes:
May 31 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Accrued product liability reserves $39,054 $41,176
Accrued warranty reserves - Current 5,170 7,908
Accrued environmental reserves 9,557 14,116
Accrued other 1,635 1,565
- --------------------------------------------------------------------------------
Accrued loss reserves - Current 55,416 64,765
Accrued warranty reserves - Long-term 11,959 13,740
- --------------------------------------------------------------------------------
Total Accrued Loss Reserves $67,375 $78,505
================================================================================
The Company, through its wholly owned insurance subsidiary, provides certain
insurance coverage, primarily product liability, to the Company's other domestic
subsidiaries. Excess coverage is provided by outside carriers. The reserves
reflected above provide for these potential losses as well as other uninsured
claims. Provision for estimated warranty costs is recorded at the time of sale
and periodically adjusted to reflect actual experience.
In addition, the Company, like others in similar businesses, is involved in
several proceedings relating to environmental matters. It is the Company's
policy to accrue remediation costs when it is probable that such efforts will be
required and the related costs can be reasonably estimated. These liabilities
are undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds or claims against third parties.
Due to the uncertainty inherent in the loss reserve estimation process, it is at
least reasonably possible that actual costs will differ from estimates, but,
based upon information presently available, such future costs are not expected
to have a material adverse effect on the Company's competitive or financial
position or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
28
24
NOTE I - Restructuring and
Asset Impairment Charge
For the year ended May 31, 2000, the Company recorded a restructuring charge of
$51,970,000. Included in this charge were severance and other employee related
costs of $21,986,000, contract exit and termination costs of $2,059,000,
facility closures and write-downs of property, plant and equipment of
$22,342,000 and write-downs of intangibles of $5,583,000.
In addition to the $51,970,000 restructuring charge, related costs were incurred
during the May 31, 2000 year primarily to account for inventory of certain
product lines that were being discontinued, totalling $7,876,000, and these
costs were charged to earnings and classified as a component of cost of sales.
Through May 31, 2001, the Company has paid or incurred all of the $51,970,000
restructuring charge as reflected below:
Paid or Incurred in
Year Ended May 31
Total -------------------
Charge 2001 2000
- --------------------------------------------------------------------------------
(In thousands)
Severance costs $21,986 $12,058 $ 9,928
Exit and termination costs 2,059 1,482 577
Property, plant and equipment 22,342 22,342
Intangibles 5,583 5,583
- --------------------------------------------------------------------------------
RESTRUCTURING AND ASSET IMPAIRMENT CHARGE $51,970 $13,540 $38,430
================================================================================
The severance and other employee related costs provided for a reduction of
approximately 780 employees related to facility closures and streamlining of
operations for cost reduction initiatives. The costs of exit and contract
termination were comprised primarily of non-cancelable lease obligations on the
closed facilities. The charge for property, plant and equipment represents
write-downs to net realizable value of less efficient and duplicate facilities
and machinery and equipment no longer needed in the combined restructured
manufacturing operations.
29
25
NOTE J - Interim Financial Information (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended May 31, 2001 and 2000:
Three Months Ended
-----------------------------------------------------------------
August 31 November 30 February 28 May 31
- ------------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
2001
- ------------------------------------------------------------------------------------------------------------------------
Net sales $554,923 $499,904 $405,400 $547,535
- ------------------------------------------------------------------------------------------------------------------------
Gross profit $249,252 $219,102 $167,537 $244,084
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 28,850 $ 16,868 $ (7,018) $ 24,261
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $ .28 $ .17 $ (.07) $ .24
========================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE $ .28 $ .17 $ (.07) $ .24
========================================================================================================================
DIVIDENDS PER SHARE $ .1225 $ .1250 $ .1250 $ .1250
========================================================================================================================
Three Months Ended
-----------------------------------------------------------------
August 31 November 30 February 29 May 31
- ------------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
2000
- ------------------------------------------------------------------------------------------------------------------------
Net sales $497,869 $502,450 $413,178 $548,913
- ------------------------------------------------------------------------------------------------------------------------
Gross profit $228,290 $216,309 $176,063 $242,111
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 7,264 $ 20,364 $ 3,731 $ 9,633
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ .07 $ .19 $ .04 $ .09
========================================================================================================================
DILUTED EARNINGS PER SHARE $ .07 $ .19 $ .04 $ .09
========================================================================================================================
DIVIDENDS PER SHARE $ .1175 $ .1225 $ .1225 $ .1225
========================================================================================================================
Quarterly earnings per share do not total to the yearly earnings per share due
to the weighted average number of shares outstanding in each quarter.
30
26
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Shareholders
RPM, Inc. and Subsidiaries
Medina, Ohio
We have audited the accompanying consolidated balance sheets of RPM, Inc. and
Subsidiaries as of May 31, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three year period ended May 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RPM, Inc. and
Subsidiaries at May 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
2001, in conformity with accounting principles generally accepted in the United
States.
/s/ CIULLA, SMITH & DALE, LLP
Cleveland, Ohio
July 2, 2001
31