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 AUGUST 31, 2003, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
. -------------------
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COMMISSION FILE NO. 1-14187
RPM INTERNATIONAL INC.
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(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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (330) 273-5090
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO THE FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ].
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
YES [X] NO [ ].
AS OF OCTOBER 6, 2003
115,647,619 SHARES OF RPM INTERNATIONAL INC. COMMON STOCK WERE OUTSTANDING.
RPM INTERNATIONAL INC. AND SUBSIDIARIES*
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
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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 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 21
ITEM 4. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
* As used herein, the terms "RPM" and the "Company" refer to RPM
International Inc. and its subsidiaries, unless the context
indicates otherwise.
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AUGUST 31, 2003 MAY 31, 2003
--------------- ------------
ASSETS
CURRENT ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 47,512 $ 50,725
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCES OF
$17,117 AND $17,297, RESPECTIVELY) 426,665 439,623
INVENTORIES 255,627 253,204
DEFERRED INCOME TAXES 51,285 51,285
PREPAID EXPENSES AND OTHER CURRENT ASSETS 137,653 133,257
----------- -----------
TOTAL CURRENT ASSETS 918,742 928,094
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 717,811 714,009
LESS ALLOWANCE FOR DEPRECIATION AND AMORTIZATION (350,681) (343,220)
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 367,130 370,789
----------- -----------
OTHER ASSETS
GOODWILL 633,820 631,253
OTHER INTANGIBLE ASSETS, NET OF AMORTIZATION 279,881 282,949
OTHER 34,705 34,126
----------- -----------
TOTAL OTHER ASSETS 948,406 948,328
----------- -----------
TOTAL ASSETS $ 2,234,278 $ 2,247,211
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 154,222 $ 171,956
CURRENT PORTION OF LONG-TERM DEBT 1,802 1,282
ACCRUED COMPENSATION AND BENEFITS 52,864 77,577
ACCRUED LOSS RESERVES 59,764 64,230
ASBESTOS-RELATED LIABILITIES 41,583 41,583
OTHER ACCRUED LIABILITIES 61,166 59,759
INCOME TAXES PAYABLE 17,628 11,263
----------- -----------
TOTAL CURRENT LIABILITIES 389,029 427,650
----------- -----------
LONG-TERM LIABILITIES
LONG-TERM DEBT, LESS CURRENT MATURITIES 728,367 724,846
ASBESTOS-RELATED LIABILITIES 95,274 103,000
OTHER LONG-TERM LIABILITIES 58,896 59,951
DEFERRED INCOME TAXES 61,108 54,756
----------- -----------
TOTAL LONG-TERM LIABILITIES 943,645 942,553
----------- -----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, PAR VALUE $0.01; AUTHORIZED 50,000 SHARES;
NONE ISSUED
COMMON STOCK, PAR VALUE $0.01; AUTHORIZED 300,000 SHARES;
ISSUED 115,674 AND OUTSTANDING 115,624 AS OF AUGUST 2003;
ISSUED 115,596 AND OUTSTANDING 115,496 AS OF MAY 2003 1,156 1,156
PAID-IN CAPITAL 509,332 508,397
TREASURY STOCK, AT COST (589) (1,167)
ACCUMULATED OTHER COMPREHENSIVE LOSS (26,739) (17,169)
RETAINED EARNINGS 418,444 385,791
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 901,604 877,008
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,234,278 $ 2,247,211
=========== ===========
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)
THREE MONTHS ENDED
AUGUST 31,
-------------------
2003 2002
-------- --------
NET SALES $590,091 $542,413
COST OF SALES 313,980 284,302
-------- --------
GROSS PROFIT 276,111 258,111
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 195,918 183,014
INTEREST EXPENSE, NET 6,283 7,204
-------- --------
INCOME BEFORE INCOME TAXES 73,910 67,893
PROVISION FOR INCOME TAXES 26,238 23,720
-------- --------
NET INCOME $ 47,672 $ 44,173
======== ========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING:
BASIC 115,557 114,765
======== ========
DILUTED 116,233 115,760
======== ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.41 $ 0.38
======== ========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ 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)
THREE MONTHS ENDED AUGUST 31,
-----------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 47,672 $ 44,173
DEPRECIATION AND AMORTIZATION 15,127 14,083
ITEMS NOT AFFECTING CASH AND OTHER (7,006) (3,055)
CHANGES IN OPERATING WORKING CAPITAL (29,074) (33,195)
-------- --------
26,719 22,006
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (6,808) (5,252)
ACQUISITION OF BUSINESSES, NET OF CASH ACQUIRED (13,000) (7,595)
-------- --------
(19,808) (12,847)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
ADDITIONS TO LONG-TERM AND SHORT-TERM DEBT 4,042 2,456
CASH DIVIDENDS (15,019) (14,261)
EXERCISE OF STOCK OPTIONS 853 721
-------- --------
(10,124) (11,084)
-------- --------
(DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (3,213) (1,925)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 50,725 42,172
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 47,512 $ 40,247
======== ========
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
AUGUST 31, 2003
(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 month periods ended August 31,
2003 and 2002. For further information, refer to the Consolidated Financial
Statements and notes included in our Annual Report on Form 10-K for
the year ended May 31, 2003.
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:
AUGUST 31, 2003 MAY 31, 2003
--------------- ------------
(IN THOUSANDS)
Raw materials and supplies $ 97,401 $ 80,517
Finished goods 158,226 172,687
-------- --------
$255,627 $253,204
======== ========
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 $38.1 million and $44.9 million during the
first quarter of fiscal years 2004 and 2003, 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 structures 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.
7
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
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.
NOTE E - STOCK BASED COMPENSATION
At August 31, 2003, we had two stock-based compensation plans accounted for
under the recognition and measurement principles of Accounting Principles Board
Opinion (APBO) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Pro forma information regarding the impact of stock-based
compensation on net income and earnings per share is required by SFAS No. 123,
"Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." Such pro forma information,
determined as if we had accounted for our employee stock options under the fair
value recognition provisions of SFAS No. 123, is illustrated in the following
table:
Three Months Ended August 31,
2003 2002
---------- ----------
(In thousands, except per share amounts)
Net Income, as reported $ 47,672 $ 44,173
Add: Stock-based employee compensation expense from
restricted stock plans included in reported net
income, net of related tax effects 333 244
Deduct: Total stock-based compensation expense determined
under fair value-based method for all awards, net of
related tax effects (798) (836)
---------- ----------
Pro Forma Net Income $ 47,207 $ 43,581
========== ==========
Earnings per Share, as reported:
Basic and Diluted $ 0.41 $ 0.38
========== ==========
Pro Forma Earnings per Share:
Basic and Diluted $ 0.41 $ 0.38
========== ==========
8
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
NOTE F - ASBESTOS-RELATED LIABILITIES
Certain of our wholly owned subsidiaries, principally Bondex International, Inc.
(Bondex), along with many other U.S. companies, are and have been involved in a
large number of asbestos-related suits filed primarily in state courts during
the past two decades. These suits principally allege personal injury resulting
from exposure to asbestos-containing products.
The rate at which plaintiffs filed asbestos-related suits against Bondex
increased in the fourth quarter of 2002 and the first three quarters of 2003,
influenced by the bankruptcy filings of numerous other defendants in
asbestos-related litigation. Based on the significant increase in asbestos
claims activity and inequitable joint and several liability determinations
against Bondex, as previously reported, our third-party insurance was depleted
in this quarter. Our third-party insurers historically have been responsible,
under various cost-sharing arrangements, for the payment of approximately 90% of
the indemnity and defense costs associated with our asbestos litigation. Prior
to this sudden precipitous increase in loss rates, the combination of book loss
reserves and insurance coverage was expected to adequately fund asbestos loss
payments for the foreseeable future. We have reserved our rights with respect to
various of our third-party insurers' claims of exhaustion, and in late calendar
2002 commenced reviewing our known insurance policies to determine whether or
not other insurance limits may be available to cover our asbestos liabilities.
As a result of this examination, on July 3, 2003, the Company filed a complaint
in Federal Court against several insurance carriers for declaratory judgment,
breach of contract and bad faith. We are unable at the present time to predict
whether, or to what extent, any additional insurance may cover our asbestos
liabilities.
During the last seven months of 2003, new state liability laws were enacted in
three states where more than 80% of the claims against Bondex are pending. The
changes generally provide for liability to be determined on a "proportional
cause" basis, thereby limiting Bondex's responsibility to only its share of the
alleged asbestos exposure. The ultimate impacts of these new laws are difficult
to predict given the limited time following enactment, because the full
influence of these law changes on legal settlement values is not expected to be
significantly visible until the latter part of fiscal 2004.
At the end of 2002 and through the third quarter of 2003, Bondex had concluded
it was not possible to estimate its cost of disposing of asbestos-related claims
that might be filed against Bondex in the future. During the fourth quarter of
2003, Bondex retained a nationally recognized consulting firm with broad
experience in estimating resolution costs associated with mass tort litigation,
including asbestos, to assist it in analyzing its loss history data, to evaluate
whether it would be possible to estimate the cost of disposing pending claims in
light of both past and recent loss history, and to assist in determining whether
future asbestos-related claims reasonably expected to be filed against Bondex
were measurable, given recent changes of law.
As of May 31, 2003, the consultants concluded that it was not possible to
currently estimate the full range of the cost of resolving future
asbestos-related claims against Bondex because of various uncertainties
associated with those potential future claims. These uncertainties included the
following:
9
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
(UNAUDITED)
- The bankruptcies in the years 2000 through 2002 of other companies
facing large asbestos liability were a likely contributing cause of a
sharp increase in filings against many defendants, including Bondex.
- The recent state law changes in states wherein the vast majority of
our claims are pending and have been historically filed are expected
to materially affect future losses and future claim filing activity
and resolution costs.
- The currently proposed federal legislative initiative aimed at
establishment of a federal asbestos trust fund has influenced and
changed the demand behavior of plaintiffs from that of historic
levels, creating further uncertainty in the estimation process.
At this time, we cannot estimate the liability that will result from all future
claims. We established a reserve at May 31, 2003 for those pending cases that
had progressed to a stage where the cost to dispose of these cases could
reasonably be estimated. The estimation of even pending cases is difficult due
to the dynamic nature of asbestos litigation. The reserve was established by
taking an asbestos charge to 2003 operations of $140.0 million for measurable
known claims and a provision for the future claims that can presently be
estimated. We believed that the asbestos reserve would be sufficient to cover
asbestos-related cash flow requirements for approximately three years. The
estimates for the $140.0 million asbestos charge were developed in consultation
with our outside consulting firm and defense counsel, taking into account both
historical and current settlement values. We recognize that future facts, events
and legislation, both state and/or federal, may alter our estimates of both
pending and future claims. We cannot estimate possible liabilities in excess of
those accrued because we cannot predict the number of additional claims that may
be filed in the future, the grounds for such claims, the damages that may be
demanded, the probable outcome, or the impact of recent state and pending
federal legislation on prospective asbestos claims.
In conjunction with outside advisors, we continue to study our asbestos-related
exposure and evaluate the adequacy of this reserve and the related cash flow
implications in light of actual claims experience, the impact of state law
changes and the evolving nature of federal legislative efforts to address
asbestos litigation. As of August 31, 2003, we believe the underlying facts and
assumptions supporting establishment of the $140.0 million reserve (an amount
adequate to cover approximately three years of cash flow requirements) have
undergone no significant change, other than passage of time.
Due to the uncertainty inherent in the loss reserve estimations process, we are
unable to estimate an additional range of loss in excess of our accruals. 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 our competitive or financial position or
ongoing results of operations. However, such costs could be material to results
of operations in a future period.
10
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
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).
11
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
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
12
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
indicators, any impairment would be measured based on projected net cash flows
expected from the asset(s), including eventual disposition.
CONTINGENCIES
We are party to claims and lawsuits arising in the normal course of business,
including the various asbestos-related suits discussed herein and in Note H of
our Consolidated Financial Statements included in our Annual Report on Form 10-K
for the year ended May 31, 2003. 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, we are
unable to estimate an additional range of loss in excess of our accruals.
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 may have a material adverse effect on
our financial condition, results of operations or cash flows.
13
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
REPORTABLE SEGMENT INFORMATION
RPM 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. We evaluate the profit performance of our 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 companies, 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
first quarter results on this basis are as follows:
THREE MONTHS ENDED AUGUST 31,
-----------------------------
(In thousands) 2003 2002
--------- ---------
NET SALES:
Industrial Segment $ 316,194 $ 292,245
Consumer Segment 273,897 250,168
--------- ---------
TOTAL $ 590,091 $ 542,413
========= =========
INCOME BEFORE INCOME TAXES (a):
Earnings Before Interest and Taxes (EBIT) (b)
Industrial Segment $ 47,045 $ 45,037
Consumer Segment 42,135 39,549
Corporate/Other (8,987) (9,489)
--------- ---------
Total EBIT 80,193 75,097
Consolidated Interest Expense, Net (6,283) (7,204)
--------- ---------
TOTAL $ 73,910 $ 67,893
========= =========
AUGUST 31, 2003 MAY 31, 2003
--------------- ------------
IDENTIFIABLE ASSETS:
Industrial Segment $1,074,184 $1,067,916
Consumer Segment 1,021,783 1,038,350
Corporate/Other 138,311 140,945
---------- ----------
TOTAL $2,234,278 $2,247,211
========== ==========
(a) The presentation includes a reconciliation of EBIT to Income Before Income
Taxes, a measure defined by Generally Accepted Accounting Principles
("GAAP") in the U.S.
(b) EBIT is defined as earnings before interest and taxes. We believe that EBIT
provides one of the best comparative measures of pure operating
performance, and it is a widely accepted financial indicator used by
certain investors and analysts to analyze and compare companies. 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 GAAP, 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 our historical operating results, nor is it meant to
be predictive of potential future results.
14
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
RESULTS OF OPERATIONS
NET SALES
Fiscal 2004 consolidated first quarter net sales of $590.1 million increased
$47.7 million, or 8.8 percent, over last year's consolidated first quarter net
sales of $542.4 million. This sales growth comes almost equally from a
combination of continued solid organic demand, principally for
consumer/do-it-yourself (DIY) products (virtually all unit volume), which added
$16.3 million, or 3.0 percent to sales, eight smaller acquisitions during the
past 12 months, which added $18.4 million, or 3.4 percent to sales, and net
favorable foreign exchange differences, principally against the euro and
Canadian currencies, which added the remaining $13.0 million, or 2.4 percent, to
net sales.
Industrial segment net sales amounted to 53.6 percent of the RPM total, and grew
8.2 percent to $316.2 million from last year's $292.2 million. This segment's
net sales growth comes from five smaller acquisitions during the past 12 months,
which added 4.9 percent to industrial sales, and from organic sales growth of
3.3 percent, including net favorable foreign exchange differences. Excluding the
foreign exchange effect, organic sales growth in the industrial segment was
essentially flat, as the industrial side of our business has yet to see
definitive signs of a business upturn. In the meantime, we continue to secure
new business and grow market share in many of our industrial segment operations.
Consumer segment net sales amounted to 46.4 percent of the RPM total, and grew
9.5 percent to $273.9 million from last year's $250.2 million. This segment's
net sales growth comes primarily from organic growth among the main consumer
product lines (DAP, Rust-Oleum, Zinsser), which added 7.8 percent to consumer
sales, including favorable foreign exchange differences, and from three smaller
acquisitions during the past 12 months, which added the remaining 1.7 percent to
consumer segment sales.
GROSS PROFIT MARGIN
Consolidated gross profit margin of 46.8 percent of net sales this first quarter
declined from 47.6 percent a year ago. The leverage benefits from higher organic
sales volume were more than offset by a number of higher raw material and
packaging costs, including oil-derivative materials such as acetones and
solvents, and by continued growth in certain strategic but lower-margin product
lines and services.
Industrial segment gross profit declined to 47.3 percent of net sales from 48.1
percent last year, primarily from the continued growth of lower-margin services,
and from timing shifts in the mix of certain sales, such as roofing.
15
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
Consumer segment gross profit declined to 46.2 percent of net sales from 47.0
percent last year, despite the positive leverage from higher organic sales
volume, from certain higher raw material and packaging costs, and from
planned-for growth in certain lower-margin product lines. The higher material
costs are being managed and are not expected to be as significant a factor the
remainder of this fiscal year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Consolidated SG&A expense levels improved to 33.2 percent of net sales compared
with 33.7 percent a year ago, attributable in large part to positive leverage
from the sales growth, especially the growth in lower-margin services that
require much lower SG&A support, along with ongoing cost reduction and
containment efforts. Sensing an upcoming improvement in business confidence and
the economy, in general, certain marketing and growth-related investments were
made this first quarter in both operating segments, partly offsetting these
sales volume benefits on SG&A.
Industrial segment SG&A of 32.4 percent of net sales this first quarter compared
favorably against 32.7 percent a year ago, fully attributable to the sales
growth and previous cost reduction efforts. In addition to the partly offsetting
growth-related investments made in this segment, there were higher product
liability accruals associated with our exterior insulating finishing systems, or
EIFS (see Item 1. Legal Proceedings, Part II - Other Information for further
discussion).
Consumer segment SG&A of 30.9 percent of net sales this first quarter compared
favorably against 31.2 percent a year ago, also fully attributable to the sales
growth and previous cost reduction efforts. There were partly offsetting
growth-related investments made in this segment as well.
Corporate/Other costs decreased this first quarter to $9.0 million from $9.5
million during the first quarter of last year. Product liability costs of $1.9
million were accrued for a year ago, associated with our asbestos exposure (see
Item 1. Legal Proceedings, Part II - Other Information for further discussion),
versus none this year, since there was an asbestos charge taken as of this past
fiscal year-end, which was estimated to cover approximately 3 years worth of
associated costs. In addition, there were year-over-year savings associated with
the recent management retirements. Partly offsetting these cost reductions were
higher insurance costs.
License fee and joint venture income of $0.1 million and $0.3 million during the
first quarters of fiscals 2004 and 2003, respectively, are reflected as
reductions of consolidated SG&A expenses.
16
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
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 our investors.
Consolidated EBIT grew $5.1 million, or by 6.8 percent, to $80.2 million from
$75.1 million during the first quarter a year ago.
Industrial segment EBIT grew $2.0 million, or by 4.5 percent, to $47.0 million
from last year's $45.0 million, mainly from the accretive results of its recent
acquisitions, as the core industrial segment still awaits an improved U.S.
economy.
Consumer segment EBIT grew $2.6 million, or by 6.5 percent, to $42.1 million
from last year's $39.5 million, mainly from the net profitability of the organic
sales growth in this segment.
NET INTEREST EXPENSE
Net interest expense was $0.9 million lower this first quarter than a year ago.
Interest rates averaged 3.53 percent during this first quarter, 46 basis points
lower than a year ago, accounting for $0.6 million of the interest savings. In
addition, investment income performance improved by $0.5 million year-over-year.
These combined savings were partly offset by $0.2 million of added interest cost
from approximately $42 million higher average borrowings this year, associated
with recent acquisitions.
INCOME TAX RATE
The effective income tax rate this year of 35.5 percent compares with 34.9
percent a year ago. Principally as a result of earnings growth, our effective
income tax rate will tend to increase as the one-time tax rate benefit from our
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, and this trend is expected to continue.
17
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
NET INCOME
This year's first quarter net income of $47.7 million increased $3.5 million, or
7.9 percent, from last year's $44.2 million. Earnings per common share also
increased by 7.9 percent, to $0.41 from $0.38 a year ago.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM:
OPERATING ACTIVITIES
There was $26.7 million of cash generated from operations during the first
quarter of fiscal 2003 compared with $22.0 million generated during the same
period a year ago. The resulting increase in cash flow from operations is mainly
as a result of an increase in net income of $3.5 million and depreciation and
amortization of $1.0 million versus the prior year's results. We generated $4.0
million of additional cash from operating working capital as we continue to
improve on our working capital ratios of day's sales outstanding and day's
inventory outstanding versus the prior year. We strive to continue focusing on
improving our accounts receivables collections and managing inventories levels
to lower levels as a result of strengthened information technology systems and
continuous improvements in operating techniques, such as Class A manufacturing.
In our "Items not affecting cash and other", cash usage increased by $4.0
million year over year mostly as of the result of after-tax payments made to
fund asbestos related liability settlements and defense costs. As disclosed in
our "Critical Accounting Policies and Estimates" and our discussion on asbestos
litigation (refer to Item 1. Legal Proceedings, Part II - Other Information),
the significant increase in asbestos claims activity and inequitable joint and
several liability determinations against our Bondex subsidiary, have caused our
related third-party insurance to be depleted during this current first quarter.
Accordingly, we are now required to fund costs previously covered by insurance
with our cash from operations.
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 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 three months of fiscal 2004 of $6.8 million compare with
depreciation of $11.6 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 $40 to $50 million annually for the next
several years.
18
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
During the first quarter of fiscal 2004, we invested a total of $13.0 million to
purchase the Chemical Admixture and Fiber Division of Boral Material
Technologies Incorporated. This acquisition is included in the results of the
industrial segment.
FINANCING ACTIVITIES
On June 6, 2002, we entered into a $125 million accounts receivable
securitization transaction with several banks through June 4, 2005, which is
subject to continuation by an annual renewal by the banks. The securitized
accounts receivable are owned in their entirety by RPM Funding Corporation, a
wholly owned consolidated special-purpose entity (SPE), and are not available to
satisfy claims of our creditors until the participating banks' obligations have
been paid in full. This securitization is being accomplished by having certain
subsidiaries sell the various of their accounts receivable to the SPE, and by
having the SPE then transfer those receivable to a conduit administered by the
banks. This securitization did not constitute a form of off-balance sheet
financing, and is fully reflected in our financial statements. The amounts
available under this program are subject to changes in the credit ratings of our
customers, customer concentration levels and certain characteristics of the
underlying accounts receivable. This transaction increased our liquidity and
reduced our financing costs by replacing up to $125 million of existing
borrowing at lower interest rates.
On February 12, 2003, we announced the authorization of a share repurchase
program, allowing the repurchase of up to 10 million shares of RPM common stock
over a period of 12 months. As of August 31, 2003, we had repurchased 100,000 of
our shares at an average price of $11.67 per share.
In May 2003, we issued $297 million face value at maturity unsecured 2.75%
Senior Convertible Notes ("2.75% Notes") due May 13, 2033. We generated net
proceeds of $146 million from the sale of the 2.75% Notes. The 2.75% Notes are
convertible into 8,034,355 shares of our common stock at a price of $18.68 per
share, subject to adjustments, during any fiscal quarter for which the closing
price of our common stock is greater than $22.41 per share for a defined
duration of time. The 2.75% Notes are also convertible during any period in
which our credit rating is below a specified level, or if specified corporate
transactions have occurred. The 2.75% Notes are redeemable by the holder for the
issuance price plus accrued original issue discount in May 2008, 2013, 2018,
2023, 2028 and 2033. Interest on the 2.75% Notes is payable at a rate of 2.75%
beginning November 13, 2003 until May 13, 2008, depending upon the market price
of the Notes. After that date, cash interest will only accrete and will not be
paid prior to maturity, subject to certain contingencies.
In May 2003, we established a $200 million non-rated commercial paper ("CP")
program under which borrowings are unsecured for terms of 270 days or less. This
CP program currently allows for lower interest cost than that available under
the Company's $500 million revolving credit facility. The $500 million credit
facility is available to back up our CP program to the extent it is not drawn
upon. As of August 31, 2003, there was $64.3 million outstanding under this CP
program.
19
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
Our debt-to-capital ratio was 45% at August 31, 2003, unchanged from May 31,
2003.
The following table summarizes our financial obligations and their expected
maturities at August 31, 2003 and the effect such obligations are expected to
have on our liquidity and cash flow in the periods indicated.
Less then After
Total 1 Year 1-3 Years 3 years
----- ------ --------- -------
($ in millions)
Current portion of long-term debt $ 1.8 $ 1.8 $ - $ -
Long-term debt 728.4 - 438.2 290.2
Non-cancelable operating lease obligations(1) 72.8 16.8 23.9 32.1
------ ------ ------ ------
$803.0 $ 18.6 $462.1 $322.3
====== ====== ====== ======
(1) We calculate non-cancelable operating lease obligations on an annual basis
and consequently such information is not available at August 31, 2003. The
amounts shown above are for the fiscal year end May 31, 2003.
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.
20
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
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. (For additional
information, refer to Note H to the Consolidated Financial Statements contained
in our Annual Report on Form 10-K for the year ended May 31, 2003).
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;
(i) risks inherent in our contingent liability reserves, including asbestos; 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. 333-108647), as the same
may be amended from time to time.
21
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED AUGUST 31, 2003
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, 2003.
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 August 31, 2003 (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 changes in the Company's internal controls that occurred
during the fiscal quarter ended August 31, 2003 that have materially affected,
or are reasonably likely to materially affect, the Company's internal controls.
22
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 August 31,
2003, Dryvit was a defendant or co-defendant in approximately 425 single family
residential EIFS cases, the majority of which are pending in the Southeastern
region of the U.S. Dryvit is also defending EIFS lawsuits involving commercial
structures, townhouses 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 September 30, 2003, a
cumulative total of 733 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 733 claims, 257 claims were rejected and 370 claims
were paid in the aggregate amount of approximately $6.04 million pursuant to
funding arrangements with Dryvit's insurers. The claim period for filing claims
in the Ruff class action expired on January 17, 2003. The remaining submitted
claims are at various stages of review by the Ruff claims administrator. Based
on the funding commitments in place to cover the Ruff claims, Dryvit does not
expect the costs of resolving the residual claims to be material.
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 was 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 (which continued on December 16,
2002), for the court to determine whether the proposed settlement is fair,
reasonable and adequate. An order and judgment granting final approval of the
settlement was entered on January 14, 2003. Subsequent to the Final Order,
notices of appeal were filed by persons seeking to challenge certain provisions
of the proposed settlement. Dryvit believes they have no standing to complain
about the settlement. Dryvit is vigorously challenging this appeal and expects
that the Final Order will be upheld.
23
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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 are subject to periodic
renegotiation. Under current cost-sharing agreements and funding obtained from
one of Dryvit's historical carriers, Dryvit's indemnity and defense costs
continue to be substantially covered by insurance; however, Dryvit has recently
assumed a greater share of its EIFS litigation costs. Dryvit has secured insurer
funding commitments to cover a substantial portion of the anticipated costs of
the Posey settlement. Since Dryvit does not presently have sufficient claims
experience under the proposed Posey settlement, it is possible that the rate of
actual claims may, at some point in the future, exceed management's current
expectations. Based on consultation with counsel, management believes that to
the extent some of the Posey settlement costs are not covered by existing
funding 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, certain of the Company's wholly-owned subsidiaries,
principally Bondex International, Inc. (collectively referred to as "the
Subsidiaries"), are defendants in various asbestos-related bodily injury
lawsuits filed in various state courts with the vast majority of current claims
pending in four states - Illinois, Ohio, Mississippi and Texas. These cases
generally seek unspecified damages for asbestos-related diseases based on
alleged exposures to asbestos-containing products previously manufactured by one
of the Company's Subsidiaries.
The Company's Subsidiaries vigorously defend these asbestos-related lawsuits and
in many cases, the plaintiffs are unable to demonstrate that any injuries they
have incurred, in fact, resulted from exposure to one of our Subsidiaries'
products. In such cases, the Subsidiary is generally dismissed without payment.
With respect to those cases where compensable disease, exposure and causation
are established with respect to one of our Subsidiaries' products, the
Subsidiary generally settles for amounts that reflect the confirmed disease, the
particular jurisdiction, applicable law, the number and solvency of other
parties in the case and various other factors which may influence the settlement
value each party assigns to a particular case at the time.
As of August 31, 2003, the Company had a total of 2,131 active asbestos cases
compared to a total of 2,154 cases as of August 31, 2002. For the quarter ended
August 31, 2003, the Company's dismissals and/or settlements covered 131 cases
for a total of $7.7 million, net of the remaining insurer contributions during
the quarter and defense costs. For the comparable period ended August 31, 2002,
the Company's dismissals and/or settlements covered 132 cases for a total of
$1.56 million, net
24
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
of insurer payments and defense costs. On a comparable basis, gross settlement
costs for the quarter ending August 31, 2003 were approximately $17 million
versus approximately $16 million in last year's quarter. In some jurisdictions,
the dismissal or settlement of a case may involve more than one individual
plaintiff.
Beginning in the fourth quarter of fiscal 2002 continuing into fiscal 2003, the
Company's Subsidiaries (principally Bondex), incurred higher settlement and
defense costs resulting from higher settlement demands in certain jurisdictions
due primarily to the insolvency of other co-defendants in the asbestos
litigation which, in many cases, disproportionately increased our Subsidiaries'
share of the alleged liability. The Company expects that it will continue to
experience these higher settlement and defense costs during the current fiscal
year. The federal legislative initiative aimed at the establishment of a trust
fund coupled with recent state tort law changes could significantly alter future
settlement values and claim rates. Based on the significant increase in asbestos
claims and the inequitable impact of joint and several liability laws on Bondex,
as previously reported, our undisputed third-party insurance was depleted during
the first quarter of 2004. Prior to this sudden and precipitous increase in
claims and settlement values, the combination of reserves and available
insurance was expected to adequately cover our asbestos claims for the
foreseeable future.
As previously disclosed, during the fourth quarter of fiscal 2003, the Company
engaged an outside advisor to assist its Subsidiaries in evaluating their
asbestos-related liabilities. Estimating the future cost of these asbestos
related contingent liabilities is subject to many uncertainties, including (i)
the ultimate number of claims filed against the Subsidiaries, (ii) the cost of
resolving both current known and future unknown claims, (iii) the amount of
insurance available to cover such claims, (iv) future earnings and cash flow of
the Company's Subsidiaries, (v) the impact of bankruptcies of other companies
whose share of liability may be imposed on the Company's Subsidiaries under
certain state liability laws, (vi) the unpredictable aspects of the litigation
process including the scheduling of trial dates and the jurisdictions in which
trials are scheduled, (vii) the lack of specific information in many cases
concerning exposure to the Subsidiaries' products and the claimants' diseases,
and (viii) potential changes in applicable federal and/or state law. Recently
adopted state tort law changes have created significant uncertainty with respect
to future defense strategies, settlement values and, over time, are expected to
impact claim frequency and severity. The changes generally provide for liability
to be determined on a proportional cause basis. These state law changes are not
expected to have an impact on asbestos litigation until the latter part of
fiscal 2004. Therefore, at this time, the Company has concluded that the
potential liability that may result from all known and future unknown claims is
not presently estimable.
The Company has, however, established a reserve for those pending cases that
have progressed to a stage where the cost to dispose of these cases can
reasonably be estimated. For those claims for which the Company has been able to
develop estimates, it has done so in consultation with its outside advisor and
defense counsel taking into account both historical and current settlement
values. The reserve was established by taking an asbestos charge in fiscal 2003
of $140 million for measurable known claims and a provision for those
foreseeable future claims that can presently be estimated. After payments made
during the quarter ended August 31, 2003, of
25
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
$7.7 million, the remaining amount of the reserve is $136.9 million. We believe
this asbestos reserve will be sufficient to cover our Subsidiaries'
asbestos-related cash flow requirements through fiscal 2006.
The Company recognizes that future facts, events and legislation (both state
and/or federal) may alter its estimates of both its pending and future claims.
The Company cannot estimate possible liabilities in excess of those accrued
because it cannot predict the number of additional claims that may be filed
against its Subsidiaries in the future, the grounds for such claims, the damages
that may be demanded in such claims or the probable outcome of such claims. The
Company, in conjunction with outside advisors, will continue to study its
Subsidiaries' asbestos-related exposures, and regularly evaluate the adequacy of
this reserve and the related cash flow implications in light of actual claims
experience, the impact of state law changes and the evolving nature of federal
legislative efforts to address asbestos litigation.
As previously disclosed, the Company's Subsidiaries' undisputed third party
insurance coverage was depleted during the first quarter of the 2004 fiscal
year. Since the third quarter of fiscal 2003, the Company's Subsidiaries have
been in the process of reviewing their known (and searching for any additional
unknown) insurance policies to determine whether or not other insurance limits
may be available to cover its asbestos liabilities. On July 3, 2003, certain of
the Company's Subsidiaries filed a complaint for declaratory judgment, breach of
contract and bad faith in the U.S. Federal District Court (Northern District of
Ohio, Eastern Division) against several of their third party insurers who had
issued liability insurance policies that provided various types of primary and
excess coverage during various policy periods between 1968 and 1984. Under the
liability insurance policies, these insurers had provided defense and/or
indemnity coverage to certain of the Company's Subsidiaries for asbestos bodily
injury claims. This coverage action was filed when these insurers ceased
providing defense and/or indemnity coverage to certain of the Company's
Subsidiaries and wrongfully claimed that aggregate limits of liability of their
respective insurance policies have been exhausted. The Company is unable at the
present time to predict the outcome of this recently filed action.
ENVIRONMENTAL PROCEEDINGS
As previously reported, several 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, 2003.
26
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(c) Recent Sales of Unregistered Securities
No securities of the Company that were not registered under the Securities
Act of 1933 have been issued or sold by the Company during the period
covered by this Quarterly Report on Form 10-Q other than the following:
(i) On July 14, 2003, the Company issued 49,472 shares of Common Stock to
certain of its officers and other employees pursuant to the RPM
International Inc. 1997 Restricted Stock Plan (the "Restricted Stock Plan").
Such shares are restricted pursuant to the terms of the Restricted Stock
Plan. The issuance of such shares was made to individuals who were
participants in the RPM International Inc. Benefit Restoration Plan and such
awards were designed to replace cash benefit payments being canceled under
the RPM International Inc. Benefit Restoration Plan. Consequently, no
additional consideration was received by the Company for such issuance. The
dollar value of the restricted share awards was based on the closing price
of the Company's Common Stock on April 28, 2003, of $11.80 per share.
Registration under the Securities Act of 1933 was not effected with respect
to the transaction described above in reliance upon the exemption from the
registration contained in Section 4(2) of the Securities Act of 1933.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
11.1 Computation of Net Income per share of Common Stock. (x)
31.1 Rule 13a-14(a) Certification of the Company's Chief Executive
Officer. (x)
31.2 Rule 13a-14(a) Certification of the Company's Chief Financial
Officer. (x)
32.1 Section 1350 Certification of the Company's Chief Executive
Officer. (x)
32.2 Section 1350 Certification of the Chief Financial Officer (x)
(x) Filed herewith.
(b) REPORTS ON FORM 8-K
(i) Current Report on Form 8-K, dated July 30, 2003,
regarding the Company's fourth quarter and fiscal
year ended May 31, 2003 results.
27
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: OCTOBER 9, 2003