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 NOVEMBER 30, 2002, 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
RPM INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0642224
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO 44258
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (330) 273-5090
- --------------------------------------------------------------------------------
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 .
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
(AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
YES X NO .
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AS OF JANUARY 9, 2003
115,593,666 SHARES OF RPM INTERNATIONAL INC. COMMON STOCK WERE OUTSTANDING.
RPM INTERNATIONAL INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 28
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 29
CERTIFICATION OF CHIEF FINANCIAL OFFICER 30
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOVEMBER 30, 2002 MAY 31, 2002
----------------- ------------
ASSETS
CURRENT ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 60,433 $ 42,172
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCES OF
$16,902 AND $15,884, RESPECTIVELY) 364,781 397,659
INVENTORIES 250,252 251,446
PREPAID EXPENSES AND OTHER CURRENT ASSETS 106,235 110,037
------------ ------------
TOTAL CURRENT ASSETS 781,701 801,314
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, AT COST 670,112 655,841
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION (320,584) (300,044)
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET 349,528 355,797
------------ ------------
OTHER ASSETS
GOODWILL 596,525 592,329
OTHER INTANGIBLE ASSETS, NET OF AMORTIZATION 260,836 264,530
OTHER 30,763 22,433
------------ ------------
TOTAL OTHER ASSETS 888,124 879,292
------------ ------------
TOTAL ASSETS $ 2,019,353 $ 2,036,403
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 133,666 $ 160,767
CURRENT PORTION OF LONG-TERM DEBT 4,399 5,876
ACCRUED COMPENSATION AND BENEFITS 65,675 80,530
ACCRUED LOSS RESERVES 52,079 51,914
OTHER ACCRUED LIABILITIES 58,776 58,144
INCOME TAXES PAYABLE 1,640 7,483
------------ ------------
TOTAL CURRENT LIABILITIES 316,235 364,714
------------ ------------
LONG-TERM LIABILITIES
LONG-TERM DEBT, LESS CURRENT MATURITIES 687,197 707,921
OTHER LONG-TERM LIABILITIES 53,538 55,458
DEFERRED INCOME TAXES 47,276 50,204
------------ ------------
TOTAL LONG-TERM LIABILITIES 788,011 813,583
------------ ------------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.01 PAR VALUE; AUTHORIZED
50,000 SHARES; NONE ISSUED -- --
COMMON STOCK, PAR VALUE $0.01 AND WITHOUT PAR VALUE WITH A
STATED VALUE OF $.015 PER SHARE AS OF NOVEMBER 2002 AND MAY 2002,
RESPECTIVELY; AUTHORIZED 300,000 AND 200,000 SHARES,
RESPECTIVELY; OUTSTANDING 115,561 SHARES AND 114,696 SHARES,
RESPECTIVELY 1,156 1,786
PAID-IN CAPITAL 508,069 585,566
TREASURY STOCK, AT COST -- (88,364)
ACCUMULATED OTHER COMPREHENSIVE LOSS (48,423) (50,485)
RETAINED EARNINGS 454,305 409,603
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 915,107 858,106
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,019,353 $ 2,036,403
============ ============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
4
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
NET SALES $1,060,381 $1,021,155 $ 517,968 $ 487,880
COST OF SALES 567,029 548,513 283,820 265,912
---------- ---------- ---------- ----------
GROSS PROFIT 493,352 472,642 234,148 221,968
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 365,606 355,695 181,499 174,076
INTEREST EXPENSE, NET 14,188 24,423 6,984 11,359
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 113,558 92,524 45,665 36,533
PROVISION FOR INCOME TAXES 39,745 31,465 16,025 12,043
---------- ---------- ---------- ----------
NET INCOME $ 73,813 $ 61,059 $ 29,640 $ 24,490
========== ========== ========== ==========
AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING:
BASIC 115,001 102,266 115,240 102,321
========== ========== ========== ==========
DILUTED 115,981 102,512 116,201 102,828
========== ========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ 0.64 $ 0.60 $ 0.26 $ 0.24
========== ========== ========== ==========
CASH DIVIDENDS PER SHARE OF
COMMON STOCK $ 0.2550 $ 0.2500 $ 0.1300 $ 0.1250
========== ========== ========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
5
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 73,813 $ 61,059
DEPRECIATION AND AMORTIZATION 28,081 28,818
ITEMS NOT AFFECTING CASH AND OTHER (2,872) (7,773)
CHANGES IN OPERATING WORKING CAPITAL (8,489) 12,048
---------- ----------
90,533 94,152
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (13,702) (13,117)
ACQUISITION OF NEW BUSINESSES, NET OF CASH ACQUIRED (9,387) --
---------- ----------
(23,089) (13,117)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(DECREASE) IN DEBT (22,900) (34,271)
CASH DIVIDENDS (29,111) (25,435)
EXERCISE OF STOCK OPTIONS 2,828 345
---------- ----------
(49,183) (59,361)
---------- ----------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 18,261 21,674
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 42,172 23,926
---------- ----------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 60,433 $ 45,600
========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
6
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2002
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 six month periods ended
November 30, 2002 and 2001. 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, 2002.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE B - INVENTORIES
Inventories were composed of the following major classes:
NOVEMBER 30, 2002 MAY 31, 2002
----------------- ------------
(IN THOUSANDS)
Raw materials and supplies $ 89,353 $ 75,080
Finished goods 160,899 176,366
---------- ----------
$ 250,252 $ 251,446
========== ==========
NOTE C - 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, amounted to $30,995,000 and $18,540,000 during the second
quarter of fiscal years 2003 and 2002, respectively, and $75,875,000 and
$61,257,000 for the six months ended November 30, 2002 and 2001, respectively.
NOTE D - REINCORPORATION
At the annual shareholders meeting on October 11, 2002, RPM shareholders
approved a plan to change RPM's legal place of incorporation from Ohio to
Delaware. Under the plan, a new legal entity, RPM International Inc., was
incorporated in Delaware and became the parent holding company of Ohio-based
RPM, Inc. and several other intermediate holding companies and wholly owned
subsidiaries. In addition to the creation of a newly formed Delaware legal
entity, the legal structure of various operating companies were realigned in
consistency with their respective business objectives. All of the outstanding
treasury shares of RPM, Inc. were cancelled and retired without any
consideration. In addition, each common share of RPM, Inc. issued and
outstanding on October 15, 2002 was converted into one share of the Company,
with a $0.01 par value per share. This transaction did not have any effect on
the book value per share, post-reincorporation.
7
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements include the accounts of RPM International
Inc. and its majority-owned subsidiaries. Preparation of our financial
statements requires the use of estimates and assumptions that affect the
reported amounts of our assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We continually evaluate these estimates, including those
related to allowances for doubtful accounts, inventories, allowances for
recoverable taxes, useful lives of property, plant and equipment, goodwill,
environmental and other contingent liabilities, income tax valuation allowances,
pension plans and the fair value of financial instruments. We base our estimates
on historical experience and other assumptions, which we believe to be
reasonable under the circumstances. These estimates form the basis for making
judgments about the carrying value of our assets and liabilities. Actual results
may differ from these estimates under different assumptions and conditions.
We have identified below the accounting policies that are critical to our
financial statements.
REVENUE RECOGNITION
Revenues are recognized when title and risk of loss passes to customers. The
Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition," provides guidance on the application of Generally
Accepted Accounting Principles (GAAP) in the U.S. to selected revenue
recognition issues. We have concluded that our revenue recognition policy is
appropriate and in accordance with GAAP and SAB No. 101.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Our reporting currency is the U.S. dollar. However, the functional currency of
all of our foreign subsidiaries is their local currency. We translate the
amounts included in our consolidated statements of income from our foreign
subsidiaries into U.S. dollars at year-to-date average exchange rates, which we
believe are fairly representative of the actual exchange rates on the dates of
the transactions. Our foreign subsidiaries' assets and liabilities are
translated into U.S. dollars from local currency at the actual exchange rates as
of the end of each reporting date, and we record the resulting foreign exchange
translation adjustments in our consolidated balance sheets as a component of
accumulated other comprehensive income (loss). If we determine that the
functional currency of any of our foreign subsidiaries should be the U.S.
dollar, our financial statements would be affected. Should this occur, we would
adjust our reporting to appropriately account for such change(s).
8
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
As appropriate, we use permanently invested intercompany loans as a source of
capital to reduce exposure to foreign currency fluctuations at our foreign
subsidiaries. These loans are treated as analogous to equity for accounting
purposes. Therefore, foreign exchange gains or losses on these intercompany
loans are recorded in other comprehensive income (loss). If we were to determine
that the functional currency of any of our subsidiaries should be the U.S.
dollar, we would no longer record foreign exchange gains or losses on such
intercompany loans.
GOODWILL
We adopted two new accounting standards issued by the Financial Accounting
Standards Board in June 2001. Statement of Financial Accounting Standards, or
SFAS, No. 141, "Business Combinations," eliminates the pooling method of
accounting for all business combinations initiated after June 30, 2001, and
addresses the initial recognition and measurement of goodwill and intangible
assets acquired in a business combination. Accordingly, we apply the provisions
of SFAS No. 141 to all business combinations initiated after its effective date.
We also adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective
June 1, 2001. Goodwill amortization ceased upon adoption of the standard, and
the required initial impairment tests were performed. Results of these
impairment tests have not generated any impairment loss to date.
Prospectively, goodwill will be tested on an annual basis, or more frequently as
impairment indicators arise. Impairment tests, which involve the use of
estimates related to the fair market values of the business operations with
which goodwill is associated, are performed at the end of our first quarter.
Losses, if any, resulting from impairment tests will be reflected in operating
income in our income statement.
OTHER LONG-LIVED ASSETS
We assess for impairment of identifiable non-goodwill intangibles and other
long-lived assets whenever events or changes in facts and circumstances indicate
the possibility that the carrying value may not be recoverable. Factors
considered important which might trigger an impairment evaluation, include the
following:
- significant under-performance relative to historical or projected future
operating results;
- significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
- significant negative industry or economic trends.
When we determine that the carrying value of non-goodwill intangibles and other
long-lived assets may not be recoverable based upon the existence of one or more
of the above described indicators, any impairment would be measured based on
projected net cash flows expected from the asset(s), including eventual
disposition.
9
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
CONTINGENCIES
We are party to claims and lawsuits arising in the normal course of business.
Although we cannot precisely predict the amount of any liability that may
ultimately arise with respect to any of these matters, we record provisions when
we consider the liability probable and reasonably estimable. The provisions are
based on historical experience and legal advice, are reviewed quarterly and are
adjusted according to developments. Changes in the amount of the provisions
affect our consolidated statements of income. Due to the inherent uncertainties
in the loss reserve estimation process, actual results may differ.
(Additionally, refer to Item 1. Legal Proceedings, Part II - Other Information
contained elsewhere in this report.)
Our environmental-related accruals are similarly established and/or adjusted as
information becomes available upon which costs can be reasonably estimated. Here
again, actual costs may vary from these estimates because of the inherent
uncertainties involved, including the identification of new sites and the
development of new information about contamination. Certain sites are still
being investigated and therefore we have been unable to fully evaluate the
ultimate cost for those sites. As a result, reserves have not been taken for
certain of these sites and costs may ultimately exceed existing reserves for
other sites. We have received indemnities for potential environmental issues
from purchasers of certain of our properties and businesses and from sellers of
properties or businesses we have acquired. We have also purchased insurance to
cover potential environmental liabilities at certain sites. If the indemnifying
or insuring party fails to, or becomes unable to, fulfill its obligations under
those agreements or policies, we may incur additional environmental costs in
addition to any amounts reserved, which could have a material adverse effect on
our financial condition, results of operations or cash flows.
10
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
REPORTABLE SEGMENT 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 segment, 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 its two operating segments based on
earnings before interest and taxes since interest expense is essentially related
to corporate acquisitions, as opposed to segment operations. 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 our
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. Comparative six month and
second quarter results on this basis are as follows:
SIX MONTHS ENDED NOVEMBER 30, QUARTER ENDED NOVEMBER 30,
------------------------------ ------------------------------
(In thousands) 2002 2001 2002 2001
------------ ------------ ------------ ------------
Net External Sales
Industrial Segment $ 578,562 $ 559,882 $ 286,317 $ 270,714
Consumer Segment 481,819 461,273 231,651 217,166
------------ ------------ ------------ ------------
TOTAL $ 1,060,381 $ 1,021,155 $ 517,968 $ 487,880
============ ============ ============ ============
Earnings Before Interest and Taxes (EBIT)(a)
Industrial Segment $ 79,580 $ 69,937 $ 34,543 $ 27,759
Consumer Segment 68,439 58,519 28,890 24,539
Corporate/Other (20,273) (11,509) (10,784) (4,406)
------------ ------------ ------------ ------------
TOTAL $ 127,746 $ 116,947 $ 52,649 $ 47,892
============ ============ ============ ============
NOVEMBER 30, 2002 MAY 31, 2002
----------------- ------------
Identifiable Assets
Industrial Segment $ 985,229 $ 962,742
Consumer Segment 994,590 1,000,928
Corporate/Other 39,534 72,733
------------ ------------
TOTAL $ 2,019,353 $ 2,036,403
============ ============
(a) EBIT is defined as earnings before interest and taxes. EBIT is presented
because it is a widely accepted financial indicator used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance. EBIT is not intended to represent cash flows for the period, nor is
it presented as an alternative to operating income or as an indicator of
operating performance. EBIT should not be considered in isolation, but with
Generally Accepted Accounting Principles in the U.S., and it is not indicative
of operating income or cash flow from operations as determined by those
principles. Our method of computation may or may not be comparable to other
similarly titled measures of other companies. EBIT may not be indicative of
historical operating results nor is it meant to be predictive of potential
future results.
11
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 2002
NET SALES
Fiscal 2003 consolidated net sales for the second quarter increased $30.1
million, or 6.2 percent, to $518.0 million from last year's second quarter sales
of $487.9 million. Continued strong demand for consumer/do-it-yourself (DIY)
products along with improved sales of industrial products and services drove the
improvement in sales levels. This growth principally represents unit volume, as
pricing adjustments have remained negligible. Additionally, sales from several
small product line acquisitions and slightly favorable year over year foreign
exchange differences had an impact on second quarter sales of less than 1
percent. Although foreign exchange differences, on a net basis, were minimal
overall during the quarter, the U.S. dollar was weaker against the euro, but
stronger against Latin American and Canadian currencies.
Industrial segment sales grew 5.8 percent to $286.3 million during the second
quarter, compared to $270.7 million a year ago. The mix of industrial sales this
year includes considerable growth in relatively newer but lower margin services
areas, such as roofing maintenance. As reported over the past several quarters,
a number of higher cost maintenance and replacement projects have been delayed
during the last 15-21 months, creating pent-up demand for those maintenance
products and services, some of which materialized in this second quarter to help
generate the sales increase. Consumer net sales grew 6.7 percent to $231.7
million during the second quarter, from $217.2 million during last year's second
quarter, reflecting continued solid demand for our main consumer/do-it-yourself
(DIY) product lines. For the balance of fiscal 2003, we continue to anticipate
modest growth in industrial volume and some challenge to the recent growth rates
within our consumer segment.
GROSS PROFIT MARGIN
Consolidated gross profit increased $12.2 million this second quarter over the
same period last year, while consolidated gross margin declined slightly to 45.2
percent of sales from 45.5 percent a year ago. Higher sales volume along with a
number of favorable raw material costs were the primary factors contributing to
the gross profit growth. By segment, the industrial gross profit margin fell to
45.5 percent from 46.4 percent a year ago, as the benefits from improved sales
levels and a number of lower raw material costs were more than offset by the
lower-margin sales mix referred to above. The consumer segment gross margin
improved to 44.9 percent from 44.4 percent last year, reflecting positive cost
leverage from the higher sales volume and a number of favorable raw material
costs. Additionally, manufacturing efficiencies from expanded Class A
manufacturing initiatives are being realized in both operating segments, and
these efforts will continue.
12
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Consolidated SG&A expense as a percentage of sales improved to 35.0 percent from
35.7 percent during the second quarter last year, which is largely attributable
to the significant sales growth in the relatively newer but lower margin
services areas referred to above. By segment, industrial SG&A of 33.4 percent
compares favorably against 36.1 percent from the prior year, an improvement of
2.7 percent of sales. After removing the impact of services sales and expenses
related to roofing maintenance, industrial SG&A would be 35.4 percent of sales
this year against 37.2 percent last year, a 1.8 percent of sales improvement.
This improvement reflects the benefits of higher sales volume this year, cost
savings initiatives made during fiscal 2002, and continued cost-containment
efforts throughout the segment in the current fiscal year. Consumer segment SG&A
of 32.4 percent this year also compares favorably against 33.1 percent a year
ago, as a result of higher sales volume and continued cost-containment efforts
throughout this segment.
Corporate/Other costs, another component of SG&A expense, amounted to $10.8
million this year compared with $4.4 million during the second quarter of last
year. This change includes increased product liability costs of $1.7 million and
a change in export sales incentive tax legislation that went into effect this
fiscal year, causing another $1.2 million of the increase in corporate/other
costs. Consolidated SG&A is not affected by this tax law change,
however, since this increase in corporate/other expense is offset by
corresponding reductions of expense in the industrial and consumer operating
segments. This approximate difference will continue each quarter through this
fiscal year, as a result of the change in tax legislation. The remainder of the
increase in corporate SG&A expense resulted from costs related to the company's
reincorporation into Delaware from Ohio ($1.1 million), rising health care and
other employee benefit costs, and increases in certain professional service
costs. License fee and joint venture income of $0.3 million and $0.6 million
during the second quarters of fiscal 2003 and 2002, respectively, are reflected
as credits to consolidated SG&A expenses.
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
We believe that EBIT best reflects the performance of our operating segments, as
interest expense and income taxes are not consistently allocated to operating
segments by the various constituencies utilizing our financial statements.
Requests for operating performance measures received from research analysts,
financial institutions and rating agencies typically focus on EBIT, and we
believe EBIT disclosure is responsive to investors.
EBIT improved in both operating segments, increasing $4.8 million, or 9.9
percent, to $52.6 million during the second quarter of fiscal 2003. Industrial
EBIT improved 24.4 percent on a 5.8 percent growth in sales, to $34.5 million,
or 12.1 percent of sales, compared to the prior year second quarter EBIT of
$27.8 million, or 10.3 percent of sales. Consumer EBIT improved 17.7 percent on
a 6.7 percent growth in sales, to $28.9 million, or 12.5 percent of sales, from
13
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
$24.5 million, or 11.3 percent of sales a year ago. Generally, these EBIT
improvements reflect the combination of the benefits from higher sales levels,
certain lower raw material costs and continued cost-containment efforts
throughout both operating segments. Offsetting the EBIT improvements achieved at
both operating segments were the additional corporate/other SG&A expenses
discussed above.
NET INTEREST EXPENSE
Net interest expense was $4.4 million lower than a year ago as a result of a
combination of lower interest rates on the variable debt portion of total debt,
and much lower debt levels year over year. Approximately 70 percent of the
current debt structure is subject to variable interest rates. The average
effective interest rate during this second quarter was 4.1 percent compared with
4.9 percent a year ago, contributing approximately $1.4 million of the interest
savings, and debt levels averaged $234.9 million lower this year than during
last year's second quarter, accounting for the remaining $3.0 million of
interest savings this quarter.
INCOME TAX RATE
The effective income tax rate this year of 35.1 percent compares with 33.0
percent a year ago. A slight downward adjustment had been made to the reported
tax rate during last year's second quarter, in order to bring last year's
reported tax rate through six months to 34 percent, the then-expected full year
fiscal 2002 effective tax rate as determined at that time. The effective income
tax rate will tend to increase as our earnings grow and the one-time static
benefit from the June 1, 2001 adoption of Statement of Financial Accounting
Standards No. 142, related to the elimination of non-tax deductible goodwill
amortization, becomes less and less significant.
NET INCOME
This year's second quarter net income of $29.6 million and earnings per share of
common stock of $0.26 increased 21.0 percent and 8.3 percent, respectively, from
last year's second quarter results.
During March 2002, RPM sold 11.5 million common shares (see Financing Activities
below) through a follow-on public equity offering, and this transaction had a
dilutive effect of approximately $.02 per share on this year's second quarter
earnings.
SIX MONTHS ENDED NOVEMBER 30, 2002
NET SALES
Consolidated net sales for the first six months of fiscal 2003 of $1,060.4
million increased $39.2 million, or 3.8 percent, from last year's sales of
$1,021.2 million during the same period. This growth is essentially the result
of higher unit volume as pricing adjustments have been
14
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
negligible. Sales from several small product line acquisitions during the
first six months, along with slightly favorable year over year foreign exchange
differences, also had a minor impact on sales this first half. Although foreign
exchange differences, on a net basis, were minimal overall during the past six
months, the U.S. dollar was weaker against the euro, but stronger against Latin
American and Canadian currencies.
Industrial segment sales grew 3.3 percent to $578.6 million, from $559.9 million
during the same period last year, and consumer segment sales grew 4.5 percent to
$481.8 million during this first half, in both cases for essentially the same
reasons as those given above for the second quarter. For the balance of fiscal
2003, we continue to anticipate modest growth in industrial volume and some
challenge to the recent growth rates within our consumer segment.
GROSS PROFIT MARGIN
The consolidated gross profit margin improved this first six months to 46.5
percent of sales from 46.3 percent a year ago. By segment, the industrial gross
margin declined to 47.0 percent from 47.4 percent a year ago, while the consumer
gross margin improved to 46.0 percent from 44.9 percent last year, in both cases
for essentially the same reasons as those given above for the second quarter.
Additionally, manufacturing efficiencies from expanded Class A manufacturing
initiatives are being realized in both operating segments, and these efforts
will continue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
After six months, consolidated SG&A expense levels as a percentage of sales have
improved to 34.5 percent from 34.8 percent a year ago, with this difference
largely attributable to the significant sales growth in the relatively newer but
lower margin services areas referred to above (see second quarter discussion).
By segment, industrial SG&A of 33.2 percent compares favorably against 34.9
percent for the prior year, an improvement of 1.7 percent of sales. After
removing the impact of services sales and expenses related to roofing
maintenance, industrial SG&A would be 34.6 percent of sales so far this year
against 35.7 percent a year ago, a 1.1 percent of sales improvement. This
improvement reflects the savings realized as a result of certain cost reduction
efforts made during fiscal 2002, continued cost-containment efforts throughout
the segment in the current fiscal year. Consumer SG&A of 31.8 percent of sales
this year also compares favorably against 32.2 percent a year ago, as a result
of higher sales volume and continued cost-containment efforts throughout this
segment as well.
Also included in consolidated SG&A expense are corporate/other costs that
totaled $20.3 million this first six months, compared with $11.5 million during
the same period last year. Reflected in this change are increased product
liability costs of $3.0 million and the change in export sales incentive tax
legislation that went into effect this fiscal year, referred to above. This
latter change caused $2.2 million of the increase in corporate/other costs
during the first half of this year. Consolidated SG&A is not affected by this
tax law change, however, since this increase in
15
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
corporate expense is offset by corresponding reductions of expense in the
industrial and consumer operating segments. The remainder of the increase in
corporate SG&A expense resulted from costs related to essentially the same items
as outlined in the discussion regarding the second quarter. License fee and
joint venture income of approximately $0.5 million and $1.0 million during the
six month periods ended November 30, 2002 and 2001, respectively, are reflected
as credits to consolidated SG&A expenses.
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
We believe that EBIT best reflects the performance of our operating segments as
interest expense and income taxes are not consistently allocated to operating
segments by the various constituencies utilizing our financial statements.
Requests for operating performance measures received from research analysts,
financial institutions and rating agencies typically focus on EBIT, and we
believe EBIT disclosure is responsive to investors.
EBIT increased $10.8 million, or 9.2 percent, to $127.7 million during the first
six months of fiscal 2003, from $116.9 million during the same period last year.
EBIT improved in both operating segments, with industrial EBIT improving by 13.8
percent on a 3.3 percent growth in sales, to $79.6 million, or 13.8 percent of
sales, compared to the prior year six months EBIT of $69.9 million, or 12.5
percent of sales. Consumer EBIT improved by 17 percent on a 4.5 percent growth
in sales, to $68.4 million, or 14.2 percent of sales, compared to the prior year
six months EBIT of $58.5 million, or 12.7 percent of sales. Generally, these
EBIT improvements reflect the combination of benefits from the higher sales
levels, certain lower raw material costs and continued cost-containment efforts
throughout both operating segments. Offsetting the EBIT improvements achieved at
both operating segments were the additional corporate/other SG&A expenses
previously discussed.
NET INTEREST EXPENSE
Net interest expense was $10.2 million lower than a year ago as a result of a
combination of lower interest rates on the variable portion of total debt, and
much lower debt levels year over year. Approximately 70 percent of the current
debt structure is subject to variable interest rates. The average effective
interest rate during this first half was 4.0 percent compared with 5.1 percent a
year ago, accounting for approximately $3.9 million of the interest savings
these first six months. Additionally, debt levels averaged $239.9 million lower
this year than during last year's first half, accounting for the remaining
$6.3 million of the interest savings this year.
INCOME TAX RATE
The effective income tax rate provision this year of 35.0 percent compares with
34.0 percent a year ago. The effective income tax rate will tend to increase as
our earnings grow and the one-time static benefit from the June 1, 2001 adoption
of Statement of Financial Accounting
16
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
Standards No. 142, related to the elimination of non-tax deductible
goodwill amortization, becomes less and less significant.
NET INCOME
Net income of $73.8 million for the first six months this year and earnings per
share of common stock of $0.64 increased 20.9 percent and 6.7 percent,
respectively, from the same period a year ago.
During March 2002, we sold 11.5 million common shares (see Financing Activities
below) through a follow-on public equity offering, and this transaction had a
dilutive effect of $.05 per share on this year's first six months' earnings. For
all of fiscal 2003, this transaction is expected to have a dilutive effect on
earnings of approximately $.07 per share, based on fiscal 2002 average interest
rates.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM:
OPERATING ACTIVITIES
There was $90.5 million of cash generated from operations during the first six
months of fiscal 2003 compared with $94.2 million during the same period a year
ago. This difference mainly resides in the $20.5 million negative change in
working capital year over year, less the $12.8 million positive change in net
income during the same period. Payment terms were changed effective June 1, 2002
by a major customer of one of our consumer companies, which has negatively
affected accounts receivable and cash this year by approximately $8 million. In
addition, at May 31, 2001, as we completed our restructuring program, there was
an inefficient build-up in accounts receivable and inventory, which was being
worked down during the first six months a year ago, generating an abnormally
higher amount of cash flow from operations. This year, we are back to a more
normal relationship pattern in working capital relative to sales growth.
Furthermore, there was a higher payout of accrued incentives during the past six
months, as the fiscal year 2002 performance significantly surpassed that of the
year ended May 31, 2001.
Cash provided from operations remains our primary source of financing internal
growth, with limited use of short-term credit.
INVESTING ACTIVITIES
Capital expenditures, other than for ordinary repairs and replacements, are made
to accommodate our continued growth through improved production and distribution
efficiencies and capacity and to enhance administration. Capital expenditures
during the first six months of fiscal 2003 of
17
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
$13.7 million compare with depreciation of $22.0 million, well within the
maintenance level of spending. We are not capital intensive and capital
expenditures generally do not exceed depreciation in a given year. Capital
spending is expected to hold at approximately the maintenance level of between
$40 and $50 million per year for the next several years, as many larger spending
needs have been accomplished in recent years, such as to accommodate the
restructuring program and to upgrade several major information technology
platforms. We believe there is adequate production capacity to meet our needs
for the next several years at normal growth rates.
During the first six months of fiscal 2003, there were investments totaling $9.4
million for several minor product line and minority interest acquisitions.
FINANCING ACTIVITIES
During the first quarter of fiscal 2002, our $200 million revolving credit
facility was refinanced with a one-year term loan due July 12, 2002. During
March 2002, we sold 11.5 million common shares through a follow-on public
offering at $14.25 per share, closing on April 2, 2002. The entire proceeds of
the offering, $156 million, were used to permanently pay down the outstanding
balance under this $200 million term loan facility, which was then retired.
On November 27, 2001, we issued and sold $30 million aggregate principal amount
of 7.3 percent senior unsecured notes due 2008, $10 million aggregate principal
amount of 6.61 percent senior unsecured notes due 2006, and $15 million
aggregate principal amount of 6.12 percent senior unsecured notes due 2004 to
various insurance companies. The proceeds from these notes were used to reduce
the outstanding balance under the $500 million revolving credit agreement.
On June 6, 2002, we entered into a securitization transaction with several banks
for certain of our subsidiaries, providing for a wholly-owned special purpose
entity (SPE) to receive investments of up to $125 million. This securitization
is being accomplished by having certain subsidiaries sell various of their
accounts receivable to the SPE, and by having the SPE then transfer those
receivables to a conduit administered by the banks. This securitization
transaction did not constitute a form of off-balance sheet financing, and is
fully reflected in our financial statements. This transaction increases our
liquidity and reduces our financing costs by replacing up to $125 million of
existing borrowings at lower interest rates. As of November 30, 2002, $89
million was securitized under this agreement, which was used to reduce the
outstanding balance of the $500 million revolver to $290 million, leaving $210
million of liquidity then available under that facility.
Our debt-to-capital ratio improved to 43 percent at November 30, 2002 compared
with 45 percent at year-end May 31, 2002.
18
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
The following summarizes our financial obligations and their expected maturities
at November 30, 2002 and the effect such obligations are expected to have on our
liquidity and cash flow in the periods indicated.
Less than After
Total 1 year 1-3 years 3 years
----- --------- --------- -------
($ in millions)
Current portion of long-term debt $ 4.4 $ 4.4 $ - $ -
Long-term debt 687.2 - 547.0 140.2
Non-cancelable operating lease obligations(1) 62.2 16.4 19.3 26.5
------- ------ ------- -------
$ 753.8 $ 20.8 $ 566.3 $ 166.7
======= ====== ======= =======
(1) We calculate non-cancelable operating lease obligations on an annual basis
and consequently such information is not available at November 30, 2002.
Therefore, the amounts shown above are for the fiscal year end May 31, 2002.
The strength of the U.S. dollar has fluctuated among various
foreign currencies, as mentioned above, with the net effect causing foreign net
assets to slightly increase shareholder's equity compared to this past year end,
May 31, 2002. This trend could continue if the dollar continues to weaken
against, principally, the Canadian dollar or the euro.
We maintain excellent relations with our banks and other financial institutions
to provide continual access to financing for future growth opportunities.
STOCKHOLDERS' EQUITY
Effective October 15, 2002, the Company changed its legal place of incorporation
from Ohio to Delaware, following approval by its shareholders of a plan of
reincorporation at its annual meeting on October 11, 2002. Under the plan, RPM
International Inc. became the parent holding company of Ohio-based RPM, Inc. and
several other intermediate holding companies and wholly-owned subsidiaries. In
addition to the creation of a newly formed Delaware legal entity, the legal
structure of various operating companies were realigned in consistency with
their respective business objectives. In connection with the reincorporation,
shareholders approved and adopted the Company's amended and restated certificate
of incorporation, which authorizes the issuance of up to 300,000,000 shares of
Common Stock and 50,000,000 shares of Preferred Stock, both at a par value of
$0.01 per share. In conjunction with reincorporation, all of the outstanding
treasury shares of RPM, Inc. were cancelled and retired without any
consideration. In addition, each common share of RPM, Inc. issued and
outstanding on October 15, 2002 was converted into one share of the Company,
with a $0.01 par value per share. This transaction did not have any effect on
the book value per share, post-reincorporation.
19
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
OFF-BALANCE SHEET FINANCINGS
We do not have any off-balance sheet financings. We have no subsidiaries that
are not included in our financial statements, nor do we have any interests in or
relationships with any special purpose entities that are not reflected in our
financial statements.
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. Our critical accounting policies and estimates set forth above
describe our method of establishing and adjusting environmental-related accruals
and should be read in conjunction with this disclosure. (Additionally refer to
Note H to the Consolidated Financial Statements contained in our Annual Report
on Form 10-K for the year ended May 31, 2002).
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) general economic conditions; (b) the price and supply of raw
materials, particularly titanium dioxide, certain resins, aerosols and solvents;
(c) continued growth in demand for the Company's products; (d) legal,
environmental and litigation risks inherent in the Company's construction and
chemicals businesses and risks related to the adequacy of insurance and reserves
for such matters; (e) the effect of changes in interest rates; (f) the effect of
fluctuations in currency exchange rates upon the Company's foreign operations;
(g) the effect of non-currency risks of investing in and conducting operations
in foreign countries, including those relating to domestic and international
political, social, economic and regulatory factors; (h) risks and uncertainties
associated with the Company's ongoing acquisition and divestiture activities;
and other risks detailed in the Company's other reports and statements filed
with the Securities and Exchange Commission, including the risk factors set
forth in the Company's prospectus and prospectus supplement included as part of
the Company's Registration Statement on Form S-3 (File No. 333-77028), as the
same may be amended from time to time.
20
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2002
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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
------------------------------------------------
The Company's Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14) as of a date within 90
days prior to the filing date of this quarterly report (the "Evaluation
Date"), have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules
and forms.
(b) Changes in internal controls.
----------------------------
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the Evaluation Date.
21
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ---------------------------
EIFS LITIGATION
As previously reported, Dryvit is a defendant or co-defendant in numerous
exterior insulated finish systems ("EIFS") related lawsuits. As of November 30,
2002, Dryvit was a defendant or co-defendant in approximately 629 single
family residential EIFS cases, the vast majority of which are pending in North
Carolina, South Carolina and Alabama. Dryvit is also defending EIFS lawsuits
involving commercial structures and condominiums. The vast majority of Dryvit's
EIFS lawsuits seek monetary relief for water intrusion related property damages,
although some claims in certain lawsuits allege personal injuries from exposure
to mold.
As previously reported, Dryvit settled the North Carolina class action styled
Ruff, et al. v. Parex, Inc., et al. ("Ruff"). As of November 30, 2002, a
cumulative total of 656 claims had been submitted to the Ruff claims
administrator for verification and validation since the January 17, 2000 notice
to the Ruff class. Of these 656 claims, 137 claims were rejected and 321 claims
were paid in the amount of approximately $5.2 million pursuant to funding
arrangements with Dryvit's insurers. The remaining claims are at various stages
of investigation, review and validation by the Ruff claims administrator.
As previously reported, Dryvit is a defendant in an attempted state class action
filed on November 14, 2000 in Jefferson County, Tennessee styled Bobby R. Posey,
et al. v. Dryvit Systems, Inc. (formerly styled William J. Humphrey, et al. v.
Dryvit Systems, Inc.) (Case No. 17,715-IV) ("Posey"). As previously reported, a
preliminary approval order was entered on April 8, 2002 in the Posey case for a
proposed nationwide class action settlement covering "All Persons who, as of
June 5, 2002, in any State other than North Carolina, in whole or in part, with
Dryvit EIFS installed after January 1, 1989, except persons who (1) prior to
June 5, 2002, have settled with Dryvit, providing a release of claims relating
to Dryvit EIFS; or (2) have not obtained a judgment against Settling Defendant
for a Dryvit EIFS claim, or had a judgment entered against them on such a claim
in Settling Defendants' favor; and (3) any employees of Dryvit." Nationwide
notice to all eligible class members began on or about June 13, 2002. Any person
who wished to be excluded from the Posey settlement were provided an opportunity
to individually "opt out" and thus not be bound by the final Posey order.
A fairness hearing was held on October 1, 2002, for the court to determine
whether the proposed settlement is fair, reasonable and adequate. A continuation
of the fairness hearing was held on December 16, 2002 to address various
modifications and clarifications to the proposed settlement. The modifications
and clarifications are currently under review by the Posey court with a final
decision expected during the third quarter of fiscal 2003. If the court grants
final approval of the settlement and there are no appeals, all other pending
attempted state EIFS class actions will be dismissed.
Certain of Dryvit's insurers have paid or are currently paying a portion of
Dryvit's defense costs in the class actions, and individual commercial and
residential EIFS lawsuits. Dryvit, the Company's wholly-owned captive insurer
First Colonial Insurance Company and certain of Dryvit's umbrella insurers have
been parties to cost-sharing agreements the terms of which have
22
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
been subject to periodic renegotiation. Under these cost-sharing agreements,
Dryvit's insurers have covered a substantial portion of Dryvit's indemnity and
defense costs and Dryvit expects that its future EIFS litigation costs will
continue to be substantially covered by insurance. Dryvit is currently in
discussions with its insurers to secure funding for the Posey settlement and
expects to secure sufficient funding commitments to cover a substantial portion
of the costs of the Posey settlement. Based on consultation with its legal
counsel, management believes that to the extent some of the Posey settlement
costs are not covered by insurance commitments, such amounts will not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
ASBESTOS LITIGATION
As previously reported, the Company and certain of its wholly-owned
subsidiaries, principally Bondex International, Inc. (collectively referred to
as "the Company"), are defendants in various asbestos-related bodily injury
lawsuits. These cases generally seek unspecified damages for asbestos-related
diseases based on alleged exposures to asbestos-containing products previously
manufactured by the Company.
The Company continues to vigorously defend its asbestos-related lawsuits. In
many cases, the plaintiffs are unable to demonstrate that any injuries they have
incurred, in fact, resulted from exposure to one of the Company's products. In
such cases, the Company is generally dismissed without payment. With respect to
those cases where compensable disease, exposure and causation are established
with respect to one of the Company's products, the Company generally settles for
amounts that reflect the confirmed disease, the seriousness of the case, the
particular jurisdiction and the number and solvency of other parties in the
case.
The Company's third party insurers have historically been responsible, under
various cost sharing agreements, for the payment of approximately 90% of the
indemnity and defense costs associated with the Company's asbestos litigation.
The Company expects that its insurers will cover a substantial portion of the
costs associated with its asbestos litigation into the 2004 fiscal year. For the
costs through the end of the current fiscal year associated with the portion of
its known claims which are not covered by insurance, the Company has established
a financial reserve in an amount which it deems to be adequate.
As of November 30, 2002, the Company had a total of 1,490 active asbestos cases
compared to 1,656 cases as of November 30, 2001. For the quarter ended November
30, 2002, the Company secured dismissals and/or settlements of 1,090 plaintiffs
(1,086 cases), the total cost of which collectively to the Company, net of
insurer payments and excluding defense costs, amounted to $1,342,250, which
compared to dismissals and/or settlements of 195 plaintiffs (15 cases) and
$348,000 for the same quarter ended November 30, 2001. The Company has
experienced increased costs in recent quarters from higher settlement demands in
certain jurisdictions due primarily to the insolvency of other co-defendants in
the asbestos litigation. The Company expects these costs to continue at least at
the current level or possibly increase in future periods.
23
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
At the present time, management does not believe that the Company's current
asbestos cases will have a material adverse effect on the Company's consolidated
financial condition or results of operations. However, the potential costs
associated with its asbestos litigation is subject to many uncertainties,
including (i) the ultimate number of claims filed against the Company, (ii) the
cost of resolving current and future claims, (iii) the amount of insurance
available to cover such claims, (iv) future earnings and cash flow of the
Company, (v) the impact of bankruptcies of other companies whose share of
liability may be imposed on the Company under certain state liability laws, (vi)
the unpredictable aspects of the litigation process, and (vii) potential
legislative changes. Accordingly, management cannot be certain that the future
costs of the Company's asbestos litigation will not have a material adverse
effect on the Company's future business, consolidated financial condition,
results of operations, or cash flows.
ENVIRONMENTAL PROCEEDINGS
As previously reported, various of the Company's subsidiaries are, from time to
time, identified as a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act and similar state
environmental statutes. In some cases, the Company's subsidiaries are
participating in the cost of certain clean-up efforts or other remedial actions.
The Company's share of such costs, however, has not been material and management
believes that these environmental proceedings will not have a material adverse
effect on the Company's consolidated financial condition or results of
operations. See "Business-Environmental Matters," in the Company's Annual Report
on Form 10-K for the year ended May 31, 2002.
ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Annual Meeting of Shareholders of RPM, Inc. was held on October 11,
2002. The following matters were voted on at the meeting.
1. Election of Dr. Max D. Amstutz, E. Bradley Jones, Albert B. Ratner and Dr.
Jerry Sue Thornton as Directors of the Company. The nominees were elected as
Directors with the following votes:
DR. MAX D. AMSTUTZ
For 97,844,406
Withheld 5,244,634
Broker non-votes -0-
E. BRADLEY JONES
For 97,771,044
Withheld 5,317,996
Broker non-votes -0-
24
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ALBERT B. RATNER
For 99,247,451
Withheld 3,841,590
Broker non-votes -0-
DR. JERRY SUE THORNTON
For 99,186,079
Withheld 3,902,961
Broker non-votes -0-
In addition to the Directors above, the following Directors' terms of office
continued after the Annual Meeting of Shareholders: Edward B. Brandon, William
A. Papenbrock, Frank C. Sullivan, Thomas C. Sullivan, Bruce A. Carbonari, James
A. Karman, Donald K. Miller and Joseph P. Viviano.
2. The proposal to approve the reincorporation of the Company as a Delaware
corporation pursuant to an agreement and plan of merger was approved with the
following votes:
For 85,112,380
Against 4,732,488
Abstain 621,420
Broker non-votes 12,622,753
3. The proposal to approve an increase in the authorized shares of common stock
from 200,000,000 to 300,000,000 and to add a class of serial preferred stock in
the amount of 50,000,000 shares was approved with the following votes:
For 71,002,708
Against 18,385,259
Abstain 1,078,320
Broker non-votes 12,622,753
4. The proposal to approve the 2002 Performance Accelerated Restricted Stock
Plan was approved with the following votes:
For 92,107,859
Against 9,536,205
Abstain 1,444,976
Broker non-votes -0-
For information on how the votes for the above matters were tabulated, see the
Company's definitive Proxy Statement used in connection with the Annual Meeting
of Shareholders on October 11, 2002.
25
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits
Exhibit Number Exhibit Description
-------------- -------------------
2.1 Agreement and Plan of Merger, dated as of August 29,
2002, by and among RPM, Inc., the Company and RPM
Merger Company, which is incorporated herein by
reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K, as filed with the Commission on
October 15, 2002.
3.1 Amended and Restated Certificate of Incorporation of
the Company, which is incorporated herein by
reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (Registration No.
333-101501), as filed with the Commission on November
27, 2002.
3.2 Amended and Restated By-Laws of the Company, which
are incorporated herein by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-8
(Registration No. 333-101501), as filed with the
Commission on November 27, 2002.
3.3 Specimen Certificate of Common Stock, par value $0.01
per share, of the Company, which is incorporated
herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-8 (Registration No.
333-101501), as filed with the Commission on November
27, 2002.
3.4 Second Amendment to Rights Agreement, dated as of
October 15, 2002, among RPM, Inc., National City Bank
(as successor rights agent to Computershare Investor
Services, formerly Harris Trust and Savings Bank) and
the Company, which is incorporated herein by
reference to Exhibit 4.4.2 to the Company's
Registration Statement on Form S-8 (Registration No.
333-101501), as filed with the Commission on November
27, 2002.
*10.1 Letter of Amendment to Employment Agreement and
Consulting Letter Agreement, dated as of October 14,
2002, by and between RPM, Inc., the Company and
Thomas C. Sullivan. (x)
*10.2 Letter of Amendment to Employment Agreement and
Consulting Letter Agreement, dated as of October 14,
2002, by and between RPM, Inc., the Company and James
A. Karman. (x)
*10.3 Form of Letter of Amendment to Employment Agreements
entered into by and between RPM, Inc., the Company
and each of P. Kelly Tompkins, Senior Vice President,
General Counsel and Secretary, Ronald A. Rice, Senior
Vice President - Administration and Assistant
Secretary, Glenn R. Hasman, Vice President - Finance
and Communications, Stephen J. Knoop, Vice President
- Corporate Development, Robert L. Matejka, Chief
Financial Officer and Vice President - Controller and
Keith R. Smiley, Vice President, Treasurer and
Assistant Secretary. (x)
26
*10.4 Amended and Restated Employment Agreement between the
Company and Frank C. Sullivan - Chief Executive
Officer and President. (x)
*10.5 Amendment No. 3 to RPM International Inc. 1989 Stock
Option Plan, as amended, which is incorporated by
reference to Exhibit 4.5.1 to the Company's
Registration Statement on Form S-8 (Registration No.
033-32794), as filed with the Commission on November
27, 2002.
*10.6 Amendment No. 3 to RPM International Inc. 1996 Stock
Option Plan, which is incorporated herein by
reference to Exhibit 4.5.3 to the Company's
Registration Statement on Form S-8 (Registration No.
333-60104), as filed with the Commission on November
27, 2002.
*10.6.1 Form of Stock Option Agreement to be used in
connection with the RPM International Inc. 1996 Stock
Option Plan, as amended. (x)
*10.7 Amendment No. 2 to RPM International Inc. 401(k)
Trust and Plan, as amended (f/k/a the RPM, Inc. 401
(k) Trust and Plan), which is incorporated herein by
reference to Exhibit 4.5.2 to the Company's
Registration Statement on Form S-8 (Registration No.
333-101501), as filed with the Commission on November
27, 2002.
*10.8 Amendment No. 2 to RPM International Inc. Union 401
(k) Retirement Savings Trust and Plan, as amended
(f/k/a the RPM, Inc. Union 401(k) Retirement Savings
Trust and Plan), which is incorporated herein by
reference to Exhibit 4.6.2 to the Company's
Registration Statement on Form S-8 (Registration No.
333-101501), as filed with the Commission on November
27, 2002.
*10.9 Amendment No. 2 to the RPM International Inc. Benefit
Restoration Plan (f/k/a the RPM, Inc. Benefit
Restoration Plan). (x)
*10.10 Amendment No. 1 to RPM International Inc. Deferred
Compensation Plan
27
(f/k/a the RPM, Inc. Deferred Compensation
Plan), which is incorporated herein by reference
to Exhibit 4.5.1 to the Company's Registration
Statement on Form S-8 (Registration No.
333-101512), as filed with the Commission on
November 27, 2002.
*10.11 Amendment No. 1 to the RPM International Inc.
Incentive Compensation Plan (f/k/a the RPM, Inc.
Incentive Compensation Plan). (x)
*10.12 1997 RPM International Inc. Restricted Stock Plan
(f/k/a the 1997 RPM, Inc. Restricted Stock Option
Plan), and Form of Acceptance and Escrow Agreement
to be used in connection therewith. (x)
*10.12.1 Third Amendment to 1997 RPM International Inc.
Restricted Stock Plan. (x)
*10.13 2002 RPM International Inc. Performance Accelerated
Restricted Stock Plan (f/k/a the 2002 RPM, Inc.
Performance Accelerated Restricted Stock Plan). (x)
*10.14 Form of Indemnification Agreement entered into by and
between the Company and each of its Directors and
Executive Officers. (x)
10.15 Assignment, Assumption and Release Agreement, related
to the Five-Year Credit Agreement, dated as of
October 15, 2002, between RPM Inc, the Company, the
Lenders party thereto and Chase Manhattan Bank, as
Administrative Agent. (x)
10.16 Omnibus Amendment No. 1 to the Receivables Sale
Agreement and the Receivables Purchase Agreement, by
and among RPM, Inc., the Company, certain
subsidiaries of the Company, RPM Funding Corporation
and Bank One, dated as of October 15, 2002. (x)
10.16.1 Performance Undertaking by the Company related to the
Receivables Sale Agreement and Receivables Purchase
Agreement, dated as of October 15, 2002. (x)
11.1 Computation of Net Income per share of Common Stock. (x)
(x) Filed herewith.
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the three
month period ended November 30, 2002:
Current Report on Form 8-K dated October 15, 2002, announcing the completion of
the Company's reincorporation from Ohio to Delaware.
28
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 INTERNATIONAL INC.
BY /s/ Frank C. Sullivan
-----------------------------------------
FRANK C. SULLIVAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BY /s/ Robert L. Matejka
-----------------------------------------
ROBERT L. MATEJKA
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND CONTROLLER
DATED: JANUARY 13, 2003
29
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Frank C. Sullivan, President and Chief Executive Officer of RPM International
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of RPM International Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Frank C. Sullivan
Frank C. Sullivan
President and Chief Executive Officer
January 13, 2003
30
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert L. Matejka, Vice President, Chief Financial Officer and Controller of
RPM International Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of RPM International Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Robert L. Matejka
Robert L. Matejka
Vice President, Chief Financial Officer and Controller
January 13, 2003