Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Results of Operations and Financial Condition
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Reportable Segment and Geographic Area Information
We have determined that RPM has two operating segments - industrial and consumer
- - based on the nature of our 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 segments based on earnings before
interest and taxes (EBIT) since interest expense is essentially related to
corporate acquisitions, as opposed to segment operations.
Industrial segment products are sold throughout North America and account for
most of RPM's sales in Europe, South America, Asia, South Africa, Australia and
the Middle East. The industrial product line is primarily sold to distributors,
contractors and to end users, such as industrial manufacturing facilities,
educational and governmental institutions and commercial establishments.
Industrial segment products reach their markets through a combination of direct
sales, sales representative organizations, distributor sales and sales of
licensees and joint ventures.
Consumer segment products are sold throughout North America to mass
merchandisers, home centers, hardware stores, paint stores, automotive supply
stores and craft shops. Major customers include Ace Hardware Stores, Canadian
Tire, Cotter & Company, Do It Best, The Home Depot, Lowe's Home Centers, W. W.
Grainger, and Wal-Mart. Consumer segment products are sold to retailers through
a combination of direct sales, sales representative organizations and
distributor sales.
The eight largest consumer segment customers represent approximately 23 percent,
19 percent, and 18 percent of consolidated net sales and approximately 49
percent, 41 percent, and 40 percent of consumer segment sales for 2002, 2001,
and 2000, respectively. The Home Depot represented 11 percent of consolidated
net sales and 24 percent of consumer segment sales for the year ended May 31,
2002.
Sales for the years ended May 31, 2002, 2001 and 2000 do not include sales of
RPM products by joint ventures and licensees, amounting to approximately $32
million, $37 million, and $35 million, respectively. We reflect income from our
joint ventures on the equity method, and receive royalties from our licensees,
both of which are reflected as offsets to selling, general and administrative
(SG&A) expenses. Export sales were less than 10 percent of net sales for each of
the three years presented.
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. These
corporate and other assets and expenses reconcile operating segment data to
total consolidated net sales, earnings before interest and taxes, identifiable
assets, capital expenditures, and depreciation and amortization.
The following data reflects the adoption of Statement of Financial Accounting
Standards (FAS) No. 142, "Goodwill and Other Intangible Assets," effective June
1, 2001 (refer to Note A [10]).
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SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
(In thousands)
Year Ended May 31 2002 2001 2000(1)
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Net sales
Industrial $ 1,053,632 $ 1,100,682 $ 1,092,976
Consumer 932,494 907,080 869,434
Corporate/Other
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TOTAL $ 1,986,126 $ 2,007,762 $ 1,962,410
==================================================================================================
Earnings before interest and taxes (EBIT)(2)
Industrial $ 107,033 $ 122,034 $ 98,980
Consumer 118,230 62,662 47,907
Corporate/Other (30,675) (18,006) (23,333)
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TOTAL $ 194,588 $ 166,690 $ 123,554
==================================================================================================
Identifiable assets
Industrial $ 962,742 $ 1,002,209 $ 993,239
Consumer 1,000,928 1,016,067 1,041,896
Corporate/Other 72,733 60,214 64,068
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TOTAL $ 2,036,403 $ 2,078,490 $ 2,099,203
==================================================================================================
Capital expenditures
Industrial $ 17,743 $ 30,123 $ 34,331
Consumer 20,559 23,629 27,929
Corporate/Other 1,629 366 925
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TOTAL $ 39,931 $ 54,118 $ 63,185
==================================================================================================
Depreciation and amortization
Industrial $ 26,883 $ 38,579 $ 38,519
Consumer 28,605 41,627 39,862
Corporate/Other 1,371 1,288 769
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TOTAL $ 56,859 $ 81,494 $ 79,150
==================================================================================================
GEOGRAPHIC INFORMATION
(In thousands)
Year Ended May 31 2002 2001 2000
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Net sales (based on shipping locations)
United States $ 1,615,047 $ 1,614,112 $ 1,572,919
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Foreign
Canada 135,694 140,009 135,641
Europe 158,440 164,517 172,662
Other Foreign 76,945 89,124 81,188
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Total Foreign 371,079 393,650 389,491
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TOTAL $ 1,986,126 $ 2,007,762 $ 1,962,410
==================================================================================================
Assets employed
United States $ 1,664,402 $ 1,732,238 $ 1,740,882
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Foreign
Canada 147,568 128,159 130,064
Europe 160,641 144,619 155,330
Other Foreign 63,792 73,474 72,927
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Total Foreign 372,001 346,252 358,321
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TOTAL $ 2,036,403 $ 2,078,490 $ 2,099,203
==================================================================================================
(1) Includes restructuring and asset impairment charges and related costs (refer
to Note I).
(2) EBIT 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 our historical
operating results nor is it meant to be predictive of potential future results.
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Critical Accounting Policies and Estimates
Our consolidated financial statements include accounts of RPM and all
majority-owned subsidiaries. Preparation of our financial statements requires
the use of estimates and judgments that affect the amounts of our assets,
liabilities, revenues and expenses. 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).
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. FAS 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 FAS No. 141 to all business
combinations initiated after its effective date. We also adopted FAS No. 142,
effective June 1, 2001 (refer to Note A [10]). Goodwill amortization ceased upon
adoption of this 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 the first fiscal
quarter. Losses, if any, resulting from impairment tests would be reflected 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
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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.
CONTINGENCIES (ALSO REFER TO NOTE H) - 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, and are reviewed quarterly and adjusted according to developments.
Changes in the amount of these provisions affect our consolidated statements of
income. Due to the inherent uncertainties in the loss reserve estimation
process, actual results may differ.
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.
Results of Operations
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES - Fiscal 2002 net sales were slightly below fiscal 2001 by $21.6
million, or 1 percent. The commercial unit of DAP was divested in March 2001,
and had sales of $26.3 million to that point in the 2001 fiscal year. Factoring
out those sales to be comparable, plus the negative effects from foreign
exchange differences of approximately $14 million, principally against the
Canadian dollar, year over year sales would show a 1 percent increase.
Industrial segment sales amounted to 53 percent of the RPM total, and were lower
year over year by 3.3 percent, when the negative foreign exchange effect of
$11.2 million is excluded. The industrial economy, including electronics, was
generally weak throughout the year, causing a number of customers to postpone
higher cost maintenance and replacement projects, particularly flooring. It is
our belief that this business was not lost to any competitor, but becomes
pent-up demand for those maintenance products and services. Furthermore,
flooring has higher than average margins in this segment, so earnings could
benefit even faster than normal when this business returns. We believe this
segment could begin to show a modest rebound in the second half of the 2003
fiscal year.
Consumer segment sales amounted to 47 percent of the RPM total, and were ahead
6.2 percent year over year on a comparable basis, after adjusting for the
commercial DAP unit divestiture and negative foreign exchange differences of
$2.8 million. Consumer demand was solid throughout the year, especially for our
DAP, Rust-Oleum, and Zinsser products. This growth reflects a combination of
higher unit volume of approximately
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5 percent, and the balance of growth from slightly higher pricing to counter
increased raw material and packaging costs during the 2001 fiscal year. We
anticipate continued solid sales from our consumer segment during the 2003
fiscal year.
GROSS PROFIT MARGIN - The gross profit margin improved in fiscal 2002, reaching
45.9 percent compared with 45.1 percent during fiscal 2001. The industrial gross
margin this year of 46.9 percent was slightly behind last year's 47.4 percent.
This was mainly a volume effect as the sales decline, particularly of higher
margin flooring (off $44 million, or 11 percent), was too great to overcome
versus related overhead costs. Restructuring savings (refer to Note I) and a
number of favorable raw material costs partially offset this volume effect.
Consumer gross margins, on the other hand, reached 44.8 percent from 42.5
percent last year. This improvement reflects additional restructuring savings of
approximately $21 million during fiscal 2002, plus positive cost leverage from
the higher sales volume, and a number of favorable raw material costs in this
segment as well.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) - SG&A expenses improved to
36.1 percent of sales this year from 36.8 percent during fiscal 2001. We adopted
FAS No. 142 as of June 1, 2001, the beginning of the 2002 fiscal year, and that
change is reflected in SG&A (refer to Note A [10]). On a pro forma basis, last
year's SG&A percentage under FAS No. 142 would have been $25.1 million lower, or
35.6 percent of sales. The divested commercial unit of DAP had carried a lower
SG&A percentage, having an approximate negative effect of 0.4 percent of sales,
bringing last year's SG&A percentage, adjusted for both FAS No. 142 and the
divestiture, to approximately 36 percent of sales. This year's $2.1 million
third quarter charge related to the devaluation of the Argentinean peso amounted
to 0.1 percent of fiscal 2002 sales. Without that charge, this year's SG&A
percentage would have equaled last year's 36 percent, adjusted for FAS No. 142
and the divestiture.
By segment, industrial SG&A of 36.8 percent this year compares with 36.3 percent
last year, or 35.2 percent on a pro forma FAS No. 142-adjusted basis. This
difference is attributable to the lower sales volume; increased distribution
costs associated with a transition to fewer warehouses, which is now completed;
and the Argentinean peso devaluation, all of which were partly offset by solid
cost-containment efforts throughout the segment. Consumer SG&A of 32.1 percent
this year compares favorably with 35.6 percent last year, or 34.1 percent on a
pro forma FAS No. 142-adjusted basis. This significant improvement is
attributable to the much higher consumer sales volume; some reduced freight
costs, as there were still restructuring-related inefficiencies a year ago; and
solid cost-containment efforts throughout this segment as well. Corporate/ Other
costs were $30.7 million this fiscal year compared with $18 million last year.
This change includes increased legal and professional fees associated with
terminated acquisition and divestiture efforts; increased product liability
costs (including those described in Note H); rising health care and other
employee benefit costs; and management succession costs. License fee and joint
venture income of $1.3 million and $1.7 million during fiscal years 2002 and
2001, respectively, are reflected as credits to 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 climbed $27.9 million, reaching $194.6 million in
fiscal 2002. Fiscal 2001 EBIT, adjusted for FAS No. 142, would have been $191.8
million, leaving this year's EBIT ahead by $2.8 million, or up 1.5 percent on a
1 percent decrease in sales. Industrial EBIT was down $15 million during fiscal
2002, or down $26.9 million after adjusting last year for FAS No. 142, with this
decline being mainly attributable to the lower flooring sales volume. Consumer
EBIT nearly doubled year over year, up $55.6 million, or still ahead $42.4
million on a pro forma FAS No. 142-adjusted basis, with that growth almost
equally attributable to the restructuring savings and the higher comparable
sales volume.
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NET INTEREST EXPENSE - Net interest expense declined $24.7 million during 2002
(refer to Note A [16]) as a result of lower interest rates on the variable rate
portion (approximately 75 percent) of average outstanding borrowings (refer to
Note B), and reduced debt levels during the year. The overall effective interest
rate of approximately 4.5 percent this year compares favorably with 6.9 percent
during fiscal 2001, amounting to savings of $20.3 million, net of changes in
investment income, this year. Total debt levels were approximately $63 million
lower on average throughout fiscal 2002, accounting for the remaining $4.4
million of interest costs saved year over year.
INCOME TAX RATE - The effective income tax rate this year of 34.1 percent
compares favorably with last year's 38 percent rate (refer to Note C). This rate
reduction is driven by the adoption of FAS No. 142, related to the elimination
of non-tax deductible goodwill amortization.
NET INCOME - This year's net income of $101.6 million, or $.97 per diluted
share, increased 61 percent and 56 percent, respectively, from fiscal 2001. On a
pro forma basis adjusted for FAS No. 142, last year's net earnings and diluted
earnings per share would have been $84.8 million and $.83 (refer to Note A
[10]), respectively, putting this year's results still ahead by 20 percent and
17 percent, respectively.
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 on fiscal 2002 earnings of $.01 per share. For 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.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES - Net sales for fiscal year 2001 increased by $45 million, or 2
percent, over fiscal 2000.
On August 3, 1999, we acquired DAP Products, Inc. and DAP Canada Corp., or DAP,
a leading manufacturer and marketer of caulks and sealants, spackling and
glazing compounds, contact cements, and other specialty adhesives, with annual
sales at the time of approximately $220 million. Its brand names DAP, Alex Plus
and Kwik Seal are well known throughout the U.S. and Canada.
On a consolidated basis, the extra two months of DAP sales during fiscal 2001,
reported within the consumer segment, offset the loss of sales from product
lines in the industrial segment that were sold in fiscal 2000. Comparable sales,
including small product line additions, grew by 4 percent in the industrial
segment, while sales in the consumer segment remained relatively flat from 2000
to 2001. The 4 percent growth in the industrial segment reflected a combination
of greater unit volume (2-3 percent) and higher pricing (1-2 percent) which
offset increased raw material and packaging costs during fiscal 2001. In
addition, on a year to year basis, foreign exchange differences had a negative
impact on sales, primarily within the industrial segment, decreasing sales by
approximately $20 million, or 1 percent.
The general slowdown in the economy impacted sales in both our consumer and
industrial segments during the 2001 fiscal year, causing firms to decrease or
defer spending in areas such as protective maintenance, which our products and
services provide. The severe winter cold during fiscal 2001 extended much
further south than usual, and Europe was affected as well, causing our sales to
those regions to be much weaker than usual during the third fiscal quarter in
2001, the seasonally slowest time of the year. Furthermore, several of our major
consumer segment accounts were aggressively de-stocking their inventories in
2001, which especially impacted our sales to those accounts during the months of
December 2000 and March 2001.
GROSS PROFIT MARGIN - Gross profit margin in fiscal 2001 of 45.1 percent closely
matched the prior year's gross profit margin of 45.3 percent. The gross profit
margin for the industrial segment improved to 47.4 percent from 46.6 percent in
fiscal 2000, due to the product lines that were sold during fiscal 2000, which
carried lower margins and, to a lesser extent, due to the leveraged benefits
from higher sales volume. We believe that timely pricing initiatives in this
segment successfully offset rising material costs, principally oil-related,
during fiscal 2001. The gross margin in the consumer segment, in contrast,
dipped to 42.5 percent in 2001 from 43.6 percent in 2000, principally reflecting
this segment's less timely ability to gain price relief during periods of rising
material costs, as our consumer segment businesses generally have servicing
agreements
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with their accounts that renew annually. As these agreements come up for
renewal, we have been generally successful in negotiating pricing relief. In
addition, the DAP acquisition accounts for two more months of lower than average
gross margins in 2001 as compared to 2000 in the consumer segment. We also
experienced lower gross margins in the consumer segment in 2001 because we
incurred premium costs to outsource some of our products in order to seamlessly
service customers during brief periods of insufficient capacity caused by
information systems conversions. During 2000, the consumer segment incurred $7
million in inventory discontinuation costs associated with the comprehensive
restructuring program initiated in August 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) - SG&A expenses amounted to
36.8 percent of sales in fiscal 2001, compared with 36.3 percent in fiscal 2000.
The expenses of our industrial segment increased to 36.3 percent from 35.6
percent in 2000, mainly because the product lines that were sold during fiscal
2000 had, on a relative basis, much lower SG&A expenses, plus we incurred
additional, related costs of approximately $3 million during 2001 toward
completion of the restructuring program. SG&A expenses in the consumer segment
increased to 35.6 percent from 35.2 percent in 2000, principally because we
incurred approximately $5 million in additional costs related to the
restructuring program, tempered slightly by two more months of results from DAP,
with its comparatively lower SG&A expense structure. Our consumer segment also
incurred higher freight costs in the form of oil-driven fuel surcharges,
premiums to expedite certain shipments during restructuring, and increased
handling costs to service more frequent shipments to our customers. License fee
and joint venture income included as credits to SG&A expenses approximated $1.7
million in each year.
EARNINGS BEFORE INTEREST AND TAXES (EBIT) - Fiscal 2001 EBIT in the industrial
and consumer segments were both well ahead of their reported EBIT for fiscal
2000. Excluding the restructuring and asset impairment charges and all related
costs from 2000, totaling $59.8 million, pro forma EBIT results for industrial,
consumer, and corporate/other would have been $121.3 million, $79.8 million and
($17.7) million, respectively, or $183.4 million in total. On that basis, EBIT
for the industrial segment year over year appears flat ($122.0 million vs.
$121.3 million), but considering the loss of EBIT from the divestitures during
2000 and the additional $3 million spent in 2001 toward completion of the
restructuring program, EBIT for the industrial segment during 2001 would have
been $7 million ahead of 2000, or up 6 percent on the 4 percent higher sales. On
the same pro forma basis, fiscal 2001 EBIT for our consumer segment was off $17
million ($62.7 million vs. $79.8 million), or 21 percent, for the reasons
discussed above. Lastly, on the same pro forma basis, corporate/other costs were
flat year over year ($18.0 million vs. $17.7 million) as certain lower corporate
costs offset higher costs associated with our now completed e-commerce
infrastructure development during 2001.
In August 1999, we announced a comprehensive restructuring program to generate
manufacturing, distribution and administrative efficiencies, and to better
position ourselves for increased profitability and long-term growth (refer to
Note I). Pre-tax restructuring and asset impairment charges for $45 million and
$7 million were taken during the first and fourth quarters of fiscal 2000,
respectively. Through year-end 2001, we had incurred all of these charges.
NET INTEREST EXPENSE - Net interest expense increased $13.4 million in 2001
(refer to Note A [16]), reflecting higher average interest rates as compared to
fiscal 2000, on the variable rate portion (approximately 80 percent) of
outstanding borrowings (refer to Note B), two additional months of indebtedness
related to our acquisition of DAP in August 1999, and higher average
indebtedness related to the repurchase of 8,970,100 of our common shares between
January 1999 and July 2000 (refer to Note D). The Federal Reserve Board cuts in
interest rates that began early in calendar 2001 translated into lower rates on
the variable portions of our outstanding borrowings, resulting in comparably
lower interest costs.
INCOME TAX RATE - The effective income tax rate in 2001 of 38 percent compared
favorably with the 42.9 percent rate in 2000 (refer to Note C). The 2000 rate
was impacted by the restructuring and asset impairment charges plus related
costs that year. Excluding those charges and costs, the pro forma tax rate for
2000 would have been 40.3 percent, still higher
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than the 2001 rate of 38 percent. The 2001 tax rate reduction mainly reflected
an improved mix of foreign income, including fewer unusable foreign tax losses
in 2001 as compared to 2000.
NET INCOME - Fiscal 2001 net income of $63 million, or $.62 per diluted share,
compared favorably with $41 million in 2000, or $.38 per diluted share.
Excluding the $59.8 million pre-tax restructuring and asset impairment charges
plus related costs, pro forma net income for 2000 would have been $78.6 million,
or $.73 per diluted share. Against fiscal 2000 on this pro forma basis, 2001 net
income and earnings per share (EPS) were down 20 percent and 15 percent,
respectively, as a result of the factors discussed above. In addition, the
difference in pro forma decline, year over year between net income and EPS
reflected the net benefit from the shares repurchased, which added $.01 per
diluted share to 2001 results.
Liquidity and Capital Resources
CASH FLOWS FROM:
OPERATING ACTIVITIES - There was $191.4 million of cash generated from
operations during fiscal 2002 compared with $74.5 million a year ago, a 157
percent increase. Aside from the earnings increase year over year, this
significant cash flow improvement reflects positive changes in working capital
this past year. Net reductions in working capital generated approximately $37
million of cash during fiscal 2002 compared with working capital consuming
approximately $67 million of cash during fiscal 2001, a positive swing in cash
of approximately $104 million from year to year. There has been a strong focus
on improved accounts receivable collections, and on managing inventory back down
to more appropriate levels post-restructuring, supported by strengthened
information technology and operating techniques, such as Class A manufacturing,
and these efforts will continue.
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 in fiscal 2002 of $39.9 million compare
with depreciation and amortization of $56.9 million. We are not capital
intensive and capital expenditures generally do not exceed depreciation and
amortization in a given year. We have enhanced our review and control over the
capital investment process, which contributed to the $14 million reduction in
capital expenditures this year compared to a year ago, and those efforts and
controls will continue. Capital spending is expected to hold at approximately
the fiscal 2002 level for the next several years as many larger spending needs
have been accomplished in recent years, such as to accommodate the restructuring
program plus several major information technology platform conversions. We
believe there is adequate production capacity to meet our needs for the next
several years at normal growth rates.
During fiscal 2002, there were investments totaling $3.1 million (refer to Note
A [2]) for several small product line and minority interest acquisitions.
Our captive insurance company invests in marketable securities in the ordinary
course of conducting its operations and this activity will continue (refer to
Note A [7]). Differences in these activities between years are attributable to
the timing and performance of its investments.
During fiscal 2002, certain non-core assets were sold, generating proceeds of
$1.6 million (refer to Note A [2]).
FINANCING ACTIVITIES (ALSO REFER TO NOTE B) - On January 22, 1999, we announced
the authorization of a share repurchase program, allowing the repurchase of up
to 5 million of our common shares over a period of 12 months. On October 8,
1999, we announced the authorized expansion of this repurchase program to a
total of 10 million shares. As of July 2000, we had repurchased 8,970,100 of our
common shares at an average price of $11.11 per share, and this program has
since expired.
On July 14, 2000, we refinanced our then-existing $300 million and $400 million
revolving credit facilities with a $200 million, 364-day revolving credit
facility and a $500 million, 5-year revolving credit facility.
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Early during the 2002 fiscal year, our $200 million 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 (refer to Note D). 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. As of
May 31, 2002, there was $395 million drawn against this facility, leaving $105
million of liquidity available, and we had no outstanding commercial paper.
Our debt-to-total-capital ratio was 45 percent at May 31, 2002, down from 60
percent at May 31, 2001.
The table below summarizes our financial obligations and their expected
maturities at May 31, 2002, and the effect such obligations are expected to have
on our liquidity and cash flow in the periods indicated.
Less than 1-3 After 3
May 31, 2002 Total 1 Year Years Years
- -------------------------------------------------------------------------------
(In thousands)
Current portion
of long-term debt $ 5.9 $ 5.9 $ -- $ --
Long-term debt 707.9 0.0 22.7 685.2
Non-cancelable
operating lease
obligations 62.2 16.4 19.3 26.5
- -------------------------------------------------------------------------------
$776.0 $22.3 $ 42.0 $711.7
===============================================================================
Subsequent to fiscal year end, 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 (refer to Note B). 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 will be reflected in our financial
statements and thus will not be off-balance sheet financing. 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 July 1, 2002, $100
million was securitized under this agreement, which was used to reduce the $395
million outstanding balance of the $500 million revolver, leaving $205 million
of liquidity then available under that facility.
The strength of the U.S. dollar has fluctuated throughout the year and was
slightly weaker at fiscal year end, over the previous year end, causing foreign
net assets to slightly increase shareholders' equity compared to a year ago.
This trend could continue if the dollar continues to weaken against,
principally, the Canadian dollar and the euro (refer to Note A [5]).
We maintain excellent relations with our banks and other financial institutions
to provide continual access to financing for future growth opportunities.
OFF-BALANCE SHEET FINANCINGS - We do not have any off-balance sheet financings,
other than the minimum leasing commitments described in Note E. 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.
30
- --------------------------------------------------------------------------------
Qualitative and Quantitative Disclosures
About Market Risk
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates because we fund our operations through long- and
short-term borrowings and denominate our business transactions in a variety of
foreign currencies. A summary of our primary market risk exposures is presented
below.
INTEREST RATE RISK - Our primary interest rate risk exposure results from our
floating rate debt, including various revolving and other lines of credit (refer
to Note B). At May 31, 2002, approximately 70 percent of our total debt was
subject to floating interest rates. If interest rates were to increase 100 basis
points (1 percent) from May 31, 2002 rates, and assuming no changes in debt from
the May 31, 2002 levels, the additional annual interest expense would amount to
approximately $5.0 million on a pre-tax basis. We currently do not hedge our
exposure to floating interest rate risk as we believe the cost of such hedging
would exceed the benefit at this time.
FOREIGN CURRENCY RISK - Our foreign sales and results of operations are subject
to the impact of foreign currency fluctuations (refer to Note A [4]). As most of
our foreign operations are in countries with fairly stable currencies, such as
Belgium, Canada and the United Kingdom, this effect has not been material. In
addition, foreign debt is denominated in the respective foreign currency,
thereby eliminating any related translation impact on earnings.
If the U.S. dollar continues to weaken, our foreign results of operations will
be positively impacted, but the effect is not expected to be material. A 10
percent change in foreign currency exchange rates would not have resulted in a
material impact to net income for the year ended May 31, 2002. We do not
currently hedge against the risk of exchange rate fluctuations.
Forward-Looking Statements
The foregoing discussion includes forward-looking statements relating to our
business. These forward-looking statements, or other statements made by us, are
made based on our expectations and beliefs concerning future events impacting us
and are subject to uncertainties and factors (including those specified below)
which are difficult to predict and, in many instances, are beyond our control.
As a result, our actual results could differ materially from those expressed in,
or implied by, any such forward-looking statements. These uncertainties and
factors include (a) 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 our products; (d) legal, environmental and
litigation risks inherent in our 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 our foreign operations; (g) the effect of non-currency risks
of investing in and conducting operations in foreign countries, including those
relating to domestic and international political, social, economic and
regulatory factors; (h) risks and uncertainties associated with our ongoing
acquisition and divestiture activities; and other risks detailed in our other
reports and statements filed with the Securities and Exchange Commission,
including the risk factors set forth in our prospectus and prospectus supplement
included as part of our recently filed Registration Statement on Form S-3 (File
No. 333-77028), as the same may be amended from time to time.
31
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
May 31 2002 2001
- -----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments (Note A) $ 42,172 $ 23,926
Trade accounts receivable (less allowances
of $15,884 in 2002 and $17,705 in 2001) 397,659 411,718
Inventories (Note A) 251,446 277,494
Prepaid expenses and other current assets 110,037 106,282
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 801,314 819,420
- -----------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE A)
Land 21,655 21,713
Buildings and leasehold improvements 203,428 188,590
Machinery and equipment 430,758 412,751
- -----------------------------------------------------------------------------------------------------------
655,841 623,054
Less allowance for depreciation and amortization 300,044 261,018
- -----------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 355,797 362,036
- -----------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill (Note A) 592,329 571,276
Other intangible assets, net of amortization (Note A) 264,530 300,372
Other 22,433 25,386
- -----------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 879,292 897,034
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,036,403 $2,078,490
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 160,767 $ 152,307
Current portion of long-term debt (Note B) 5,876 7,379
Accrued compensation and benefits 80,530 74,888
Accrued loss reserves (Note H) 51,914 55,416
Other accrued liabilities 58,144 75,022
Income taxes payable (Notes A and C) 7,483 10,756
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 364,714 375,768
- -----------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities (Note B) 707,921 955,399
Other long-term liabilities 55,458 53,479
Deferred income taxes (Notes A and C) 50,204 54,134
- -----------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 813,583 1,063,012
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,178,297 1,438,780
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares, stated value $.015 per share; authorized 200,000 shares;
issued 122,653 and outstanding 114,696 in 2002; issued 111,153 and
outstanding 102,211 in 2001 (Note D) 1,786 1,619
Paid-in capital 585,566 430,015
Treasury shares, at cost (Note D) (88,364) (99,308)
Accumulated other comprehensive loss (Note A) (50,485) (53,074)
Retained earnings 409,603 360,458
- -----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 858,106 639,710
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,036,403 $2,078,490
===========================================================================================================
See Notes to Consolidated Financial Statements
32
CONSOLIDATED STATEMENTS OF INCOME RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
Year Ended May 31 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
NET SALES $ 1,986,126 $2,007,762 $1,962,410
Cost of sales 1,073,910 1,101,417 1,074,011
- ------------------------------------------------------------------------------------------------------------------
Gross profit 912,216 906,345 888,399
Selling, general and administrative expenses 717,628 739,655 712,875
Restructuring and asset impairment charge (Note I) 51,970
Interest expense, net (Note A) 40,464 65,203 51,793
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 154,124 101,487 71,761
Provision for income taxes (Note C) 52,570 38,526 30,769
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 101,554 $ 62,961 $ 40,992
==================================================================================================================
Average shares outstanding (Note D) 104,418 102,202 107,221
- ------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share (Note D) $.97 $.62 $.38
==================================================================================================================
Cash dividends per common share $.5000 $.4975 $.4850
==================================================================================================================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY RPM, Inc. and Subsidiaries
(In thousands)
Common Shares
------------- Accumulated
Number Other
Of Shares Stated Paid-In Treasury Comprehensive Retained
(Note D) Value Capital Shares Loss (Note A) Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 109,443 $ 1,613 $423,204 $ (17,044) $ (23,908) $359,011 $742,876
----------
Comprehensive income
Net income 40,992 40,992
Reclassification adjustments 738 738
Translation loss and other (16,385) (16,385)
----------
Comprehensive income 25,345
Dividends paid (51,901) (51,901)
Repurchase of shares (6,517) (71,472) (71,472)
Stock option exercises 100 1 875 876
Restricted share awards 108 2 (2)
BALANCE AT MAY 31, 2000 103,134 1,616 424,077 (88,516) (39,555) 348,102 645,724
----------
Comprehensive income
Net income 62,961 62,961
Reclassification adjustments 1,015 1,015
Translation loss and other (14,534) (14,534)
----------
Comprehensive income 49,442
Dividends paid (50,605) (50,605)
Repurchase of shares (1,157) (11,101) (11,101)
Stock option exercises 59 1 101 309 411
Restricted share awards 175 2 5,837 5,839
BALANCE AT MAY 31, 2001 102,211 1,619 430,015 (99,308) (53,074) 360,458 639,710
----------
Comprehensive income
Net income 101,554 101,554
Reclassification adjustments (120) (120)
Translation gain and other 2,709 2,709
----------
Comprehensive income 104,143
Dividends paid (52,409) (52,409)
Sale of shares 11,500 167 155,767 155,934
Stock option exercises, net 847 92 9,412 9,504
Restricted share awards 138 (308) 1,532 1,224
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2002 114,696 $ 1,786 $585,566 $ (88,364) $ (50,485) $409,603 $858,106
=============================================================================================================================
See Notes to Consolidated Financial Statements
33
CONSOLIDATED STATEMENTS OF CASH FLOWS RPM, Inc. and Subsidiaries
(In thousands)
Year Ended May 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 101,554 $ 62,961 $ 40,992
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 43,541 43,035 42,290
Amortization of goodwill 19,694 18,352
Other amortization 13,318 18,765 18,508
Asset impairment charge, net of gains 3,354 6,940
(Decrease) in deferred income taxes (3,930) (6,432) (31,081)
(Earnings) of unconsolidated affiliates (391) (275) (435)
Changes in assets and liabilities, net of effect
from purchases and sales of businesses:
(Increase) decrease in accounts receivable 15,031 (11,095) 6,251
(Increase) decrease in inventory 25,929 (37,578) 4,716
(Increase) in prepaid and other assets (8,447) (9,735) (13,484)
Increase (decrease) in accounts payable 8,489 (2,812) 1,615
Increase (decrease) in accrued restructuring (13,540) 13,540
Increase (decrease) in accrued liabilities (5,810) 12,373 (11,285)
Other 2,086 (4,220) 5,659
- ---------------------------------------------------------------------------------------------------------
Cash From Operating Activities 191,370 74,495 102,578
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (39,931) (54,118) (63,185)
Acquisition of businesses, net of cash acquired (3,138) (2,645) (323,033)
Purchase of marketable securities (15,693) (21,906) (19,816)
Proceeds from marketable securities 19,495 28,283 13,142
Joint ventures (investments) and distributions 16 647 (500)
Proceeds from sale of assets and businesses 1,553 31,694 55,290
- ---------------------------------------------------------------------------------------------------------
Cash (Used For) Investing Activities (37,698) (18,045) (338,102)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term and short-term debt 236,681 708,850 937,077
Reductions of long-term and short-term debt (485,662) (710,389) (566,610)
Cash dividends (52,409) (50,605) (51,901)
Sale of shares 155,934
Exercise of stock options 9,504 411 876
Repurchase of shares (11,101) (71,472)
- ---------------------------------------------------------------------------------------------------------
Cash From (Used For) Financing Activities (135,952) (62,834) 247,970
- ---------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND SHORT-TERM INVESTMENTS 526 (1,030) (835)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS 18,246 (7,414) 11,611
- ---------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR 23,926 31,340 19,729
- ---------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 42,172 $ 23,926 $ 31,340
- ---------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ 50,353 $ 60,027 $ 55,253
Income taxes $ 59,774 $ 35,216 $ 70,086
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Shares issued for restricted stock plan $ 1,224 $ 1,459 $ 1,202
(Debt) from business combinations $ (6,724)
See Notes to Consolidated Financial Statements
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2002, 2001, 2000
- --------------------------------------------------------------------------------
Note A - Summary of Significant
Accounting Policies
(1) PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of RPM, Inc. and its majority owned subsidiaries. The Company
accounts for its investment in less than majority owned joint ventures under the
equity method. Intercompany accounts, transactions and unrealized profits and
losses are eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation. In an effort to achieve improved reporting
consistency across divisions, and in conjunction with the migration to a new
reporting and consolidation system, the Company has adopted a new chart of
accounts. Accordingly, the Company has elected to reclassify certain internal
distribution costs from cost of sales to selling, general and administrative
expenses. Additionally, a portion of those costs are offset by the movement of
certain employee benefits costs related to manufacturing personnel out of
selling, general and administrative expenses and into cost of sales. For the
fiscal years ended May 31, 2001 and 2000, the net effect of the reclassification
of these expenses resulted in the movement of $26.4 million and $25.6 million,
respectively, from cost of sales to selling, general and administrative
expenses.
(2) BUSINESS COMBINATIONS - During the two year period ended May 31, 2002, the
Company completed several product line and minority interest acquisitions which
have been accounted for by the purchase method of accounting. The $4,083,000
difference between the fair value of net assets acquired and the purchase
consideration of $5,783,000 has been allocated to goodwill. The assets,
liabilities and operating results of these companies are reflected in the
Company's financial statements from their respective dates of acquisition
forward.
During the past two years, the Company realized proceeds from divestitures of
approximately $24,147,000 resulting in a gain of approximately $823,000.
Pro forma results of operations for the years ended May 31, 2002 and May 31,
2001, were not materially different from reported results and consequently are
not presented.
(3) ESTIMATES - The preparation of financial statements in conformity with
Generally Accepted Accounting Principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(4) FOREIGN CURRENCY - The functional currency of foreign subsidiaries is their
local currency. Accordingly, for the periods presented, assets and liabilities
have been translated using exchange rates at year end, while income and expense
for the periods have been translated using an annual average exchange rate. The
resulting translation adjustments have been recorded in other comprehensive
loss, a component of shareholders' equity, and will be included in net earnings
only upon the sale or liquidation of the underlying foreign investment, which is
not contemplated at this time. Transaction gains and losses have been immaterial
during the past three fiscal years.
35
(5) COMPREHENSIVE INCOME - Accumulated other comprehensive loss (which is shown
net of taxes) consists of the following components:
Foreign Minimum Unrealized
Currency Pension Gain (Loss)
Translation Liability On
(In thousands) Adjustments Adjustments Securities Total
- -----------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1999 $(22,317) $ (853) $ (738) $(23,908)
Reclassification adjustments for
(gains) losses included in net income 738 738
Other Comprehensive Gain (Loss) (16,223) 853 (1,015) (16,385)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2000 (38,540) (1,015) (39,555)
Reclassification adjustments for
(gains) losses included in net income 1,015 1,015
Other Comprehensive Gain (Loss) (14,552) (102) 120 (14,534)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2001 (53,092) (102) 120 (53,074)
Reclassification adjustments for
(gains) losses included in net income (120) (120)
Other Comprehensive Gain (Loss) 3,411 (151) (551) 2,709
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2002 $(49,681) $ (253) $ (551) $(50,485)
=============================================================================================================================
(6) CASH AND SHORT-TERM INVESTMENTS - For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Company does
not believe it is exposed to any significant credit risk on cash and
short-term investments.
(7) MARKETABLE SECURITIES - Marketable securities, all of which are classified
as available for sale, total $19,396,000 and $24,480,000 at May 31, 2002 and
2001, respectively. The estimated fair values of these securities are included
in other current assets and are based on quoted market prices.
(8) FINANCIAL INSTRUMENTS - The Company's financial instruments recorded on the
balance sheet include cash and short-term investments, accounts receivable,
notes and accounts payable and debt. The carrying amount of cash and short-term
investments, accounts receivable and notes and accounts payable approximates
fair value because of their short-term maturity.
The carrying amount of the Company's debt instruments approximates fair value
based on quoted market prices, variable interest rates or borrowing rates for
similar types of debt arrangements.
The Company adopted Statement of Financial Accounting Standards (FAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
effective June 1, 2001. This statement standardizes the accounting for
derivative instruments by requiring those items to be recognized as assets or
liabilities with changes in fair value reported in earnings or other
comprehensive income in the current period. The adoption of FAS No. 133 has had
no impact on financial results of the Company.
(9) INVENTORIES - Inventories are stated at the lower of cost or market, cost
being determined substantially on a first-in, first-out (FIFO) basis and market
being determined on the basis of replacement cost or net realizable value.
Inventory costs include raw material, labor and manufacturing overhead.
Inventories were composed of the following major classes:
May 31 2002 2001
- ---------------------------------------------------------
(In thousands)
Raw material and supplies $ 75,080 $ 89,071
Finished goods 176,366 188,423
- ---------------------------------------------------------
TOTAL INVENTORY $251,446 $277,494
=========================================================
(10) GOODWILL AND OTHER INTANGIBLE ASSETS - In June 2001, the Financial
Accounting Standards Board issued FAS No. 141, "Business Combinations," and FAS
No. 142, "Goodwill and Other Intangible Assets."
36
- --------------------------------------------------------------------------------
FAS No. 141 requires the use of the purchase method for all business
combinations initiated after June 30, 2001. It also provides guidance on
purchase accounting related to the recognition of intangible assets, noting that
any purchase price allocated to an assembled workforce may not be accounted for
separately from goodwill. FAS No. 142 requires that goodwill and identifiable
acquired intangible assets with indefinite useful lives shall no longer be
amortized, but tested for impairment annually and whenever events or
circumstances occur indicating that goodwill might be impaired. FAS No. 142 also
requires the amortization of identifiable assets with finite useful lives.
Identifiable acquired intangible assets, which are subject to amortization, are
to be tested for impairment in accordance with FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The adoption of FAS No. 144 on
June 1, 2001, did not have an impact on the Company.
The Company elected to adopt the provisions of FAS No. 142 as of June 1, 2001,
and has identified its reporting units (components) to be one level below its
industrial and consumer operating segments. The Company has determined the
carrying value of each reporting unit by assigning assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of June 1, 2001. Upon adoption of FAS No. 142, amortization of goodwill
recorded for business combinations consummated prior to July 1, 2001 ceased, and
intangible assets acquired prior to July 1, 2001 that did not meet the criteria
for recognition apart from goodwill under FAS No. 141 were reclassified to
goodwill (e.g. workforce). In connection with the adoption of FAS No. 142, the
Company was required to perform a transitional goodwill impairment assessment
within six months of adoption. Prospectively, the annual impairment test will be
performed in the first quarter of the Company's fiscal year and any losses
resulting from the test will be reflected in operating income. The annual
goodwill impairment assessment involves estimating the fair value of the
reporting unit and comparing it with its carrying amount. If the carrying amount
of the reporting unit exceeds its fair value, additional steps are followed to
recognize a potential impairment loss. Calculating the fair values of the
reporting units requires significant estimates and assumptions by management.
The Company estimates the fair value of each of its reporting units by applying
third party market value indicators to the reporting unit's projected earnings
before interest, taxes, depreciation and amortization. The Company completed its
transitional goodwill impairment assessment as of June 1, 2001, and its annual
impairment assessment as of August 31, 2001, with no adjustment to the carrying
value of its goodwill.
The changes in the carrying amount of goodwill, by reporting segment, for the
year ended May 31, 2002, are as follows:
Industrial Consumer
(In thousands) Segment Segment Total
- --------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 2001 $244,707 $326,569 $571,276
Goodwill related to acquisitions 1,253 1,253
FAS No. 142 workforce reclassification, net of deferred tax 10,377 8,490 18,867
Translation adjustments (371) 1,304 933
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2002 $255,966 $336,363 $592,329
==========================================================================================================================
37
- --------------------------------------------------------------------------------
Other intangible assets consist of the following major classes:
Amortization Gross Net Other
Period Carrying Accumulated Intangible
(In thousands) (In Years) Amount Amortization Assets
- ------------------------------------------------------------------------------------------------------------
As of May 31, 2002
Amortized intangible assets
Formulae 10 to 33 $167,721 $ 42,067 $125,654
Customer related intangibles 10 to 33 48,094 10,960 37,134
Trademarks/names 5 to 40 4,336 1,146 3,190
Other 3 to 20 23,088 8,903 14,185
- ------------------------------------------------------------------------------------------------------------
Total Amortized Intangibles 243,239 63,076 180,163
Unamortized intangible assets
Trade names 84,367 84,367
- ------------------------------------------------------------------------------------------------------------
TOTAL OTHER INTANGIBLE ASSETS $327,606 $ 63,076 $264,530
============================================================================================================
As of May 31, 2001
Amortized intangible assets
Formulae 10 to 25 $167,845 $ 34,643 $133,202
Customer related intangibles 10 to 33 48,084 9,028 39,056
Trademarks/names 10 to 40 105,466 17,918 87,548
Workforce 15 to 20 38,107 12,729 25,378
Other 5 to 20 21,577 6,389 15,188
- ------------------------------------------------------------------------------------------------------------
TOTAL OTHER INTANGIBLE ASSETS $381,079 $ 80,707 $300,372
============================================================================================================
The aggregate other intangible asset amortization expense for the fiscal years
ended May 31, 2002, 2001 and 2000, was $11,329,000, $16,602,000 and $17,084,000
respectively. For each of the next five fiscal years through May 31, 2007, the
estimated annual intangible asset amortization expense will approximate
$11,000,000.
The following pro forma information reconciles net income reported for the years
ended May 31, 2002, 2001 and 2000, to adjusted net income, reflecting the impact
of FAS No. 142:
Year Ended May 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net income
Reported net income $101,554 $ 62,961 $ 40,992
Add back goodwill amortization, net of tax 18,468 17,233
Add back workforce amortization, net of tax 1,406 1,413
Add back trade name amortization, net of tax 1,930 1,844
- -------------------------------------------------------------------------------------------------
ADJUSTED NET INCOME $101,554 $ 84,765 $ 61,482
=================================================================================================
Basic and diluted earnings per share
Reported net income $.97 $.62 $.38
Goodwill amortization, net of tax .18 .16
Workforce amortization, net of tax .01 .01
Trade name amortization, net of tax .02 .02
- -------------------------------------------------------------------------------------------------
ADJUSTED BASIC AND DILUTED EARNINGS PER SHARE $.97 $.83 $.57
=================================================================================================
38
- --------------------------------------------------------------------------------
(11) DEPRECIATION - Depreciation is computed over the estimated useful lives of
the assets primarily using the straight-line method. Depreciation expense
charged to operations for the three years ended May 31, 2002 was $43,541,000,
$43,035,000 and $42,290,000, respectively. The annual depreciation rates are
based on the following ranges of useful lives:
Land improvements 5 to 42 years
Buildings and improvements 5 to 50 years
Machinery and equipment 3 to 20 years
(12) REVENUE RECOGNITION - The Company's subsidiaries recognize revenue when
title and risk of loss passes to customers.
(13) SHIPPING COSTS - Shipping costs paid to third-party shippers for
transporting products to customers are included in selling, general and
administrative expense. For the years ended May 31, 2002, 2001 and 2000,
shipping costs were $73,700,000, $75,400,000 and $66,100,000, respectively.
(14) ADVERTISING COSTS - Advertising costs are charged to operations when
incurred and are included in selling, general and administrative expenses. For
the years ended May 31, 2002, 2001 and 2000, advertising costs were $53,400,000,
$52,400,000 and $47,100,000, respectively.
(15) RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations when incurred and are included in selling, general and administrative
expenses. The amounts charged for the three years ended May 31, 2002 were
$20,900,000, $21,800,000 and $22,300,000, respectively. The customer sponsored
portion of such expenditures was not significant.
(16) INTEREST EXPENSE, NET - Interest expense is shown net of investment income
which consists of interest, dividends and capital gains. Investment income for
the three years ended May 31, 2002 was $2,094,000, $3,682,000 and $2,643,000,
respectively.
(17) INCOME TAXES - The Company and its wholly owned domestic subsidiaries file
a consolidated federal income tax return. The tax effects of transactions are
recognized in the year in which they enter into the determination of net income,
regardless of when they are recognized for tax purposes. As a result, income tax
expense differs from actual taxes payable. The accumulation of these differences
at May 31, 2002 is shown as a noncurrent liability of $50,204,000 (net of a
noncurrent asset of $69,963,000). At May 31, 2001, the noncurrent liability was
$54,134,000 (net of a noncurrent asset of $70,754,000). The Company does not
intend to distribute the accumulated earnings of consolidated foreign
subsidiaries amounting to $115,415,000 at May 31, 2002, and $102,847,000 at May
31, 2001, and therefore no provision has been made for the taxes which would
result if such earnings were remitted to the Company.
(18) REPORTABLE SEGMENTS - Reportable segment information appears on pages 22
and 23 of this report.
39
- --------------------------------------------------------------------------------
Note B - Borrowings
A description of long-term debt follows:
May 31 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Revolving credit agreement for $500,000,000 with a syndicate of banks through
July 14, 2005. Interest, which is tied to LIBOR, averaged 3.17% at May 31, 2002.
The chairman of the board and chief executive officer of the company is a director
of one of the banks providing this facility. $395,000 $500,000
Short-term borrowings with a bank paid off with proceeds from the credit agreement
described above. 33,000
Revolving 364-day credit agreement for $200,000,000 with a syndicate of banks,
refinanced and subsequently paid off and retired with proceeds from the March 2002
sale of common shares. 155,700
Unsecured 7.00% senior notes due June 15, 2005. 150,000 150,000
Unsecured notes due March 1, 2008, interest, which is tied to LIBOR, averaged
2.08% at May 31, 2002. 100,000 100,000
Unsecured senior notes due insurance companies: 6.75% due August 2, 2002 and
2003 in the amount of $3,429,000 ($5,143,000 at May 31, 2001); 6.12% due
November 15, 2004 in the amount of $15,000,000; 6.61% due November 15, 2006
in the amount of $10,000,000 and 7.30% due November 15, 2008 in the amount
of $30,000,000. 58,429 5,143
Revolving multi-currency credit agreement for $15,000,000 with a bank through
December 31, 2002. Interest, which is tied to one of various rates, averaged
4.73% at May 31, 2002. This obligation has been reclassified as long-term,
reflecting the Company's intent and ability to refinance this obligation through
unused credit facilities. 3,835 9,827
Other notes and mortgages payable at various rates of interest due in installments
through 2011, substantially secured by property. 6,533 9,108
- ----------------------------------------------------------------------------------------------------------------------------
713,797 962,778
Less current portion 5,876 7,379
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT, LESS CURRENT MATURITIES $707,921 $955,399
============================================================================================================================
At May 31, 2002, the Company had additional unused short-term lines of credit
with several banks totaling $45,600,000, in addition to $105,000,000 available
under the $500,000,000 revolving credit agreement.
The aggregate maturities of long-term debt for the five years subsequent to May
31, 2002 are as follows: 2003 -$5,876,000; 2004 - $6,958,000; 2005 -
$15,728,000; 2006 - $545,051,000; 2007 - $10,047,000.
Subsequent to year end, on June 6, 2002, the Company entered into an accounts
receivable securitization transaction for certain of its subsidiaries. This
securitization transaction will remain on the balance sheet and allows for a
maximum of $125,000,000 of borrowings at lower interest rates.
As of July 1, 2002, the Company had $100,000,000 outstanding under this program,
with the proceeds being used to reduce the outstanding balance of the Company's
$500,000,000 revolving credit agreement from $395,000,000 to $295,000,000.
40
- --------------------------------------------------------------------------------
Note C - Income Taxes
Consolidated income before taxes consists of the following:
Year Ended May 31 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
United States $ 128,883 $ 81,853 $ 41,424
Foreign 25,241 19,634 30,337
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED INCOME BEFORE TAXES $ 154,124 $ 101,487 $ 71,761
=========================================================================================================================
Provision for income taxes consists of the following:
Current
U.S. federal $ 42,901 $ 31,821 $ 43,174
State and local 4,770 3,829 3,547
Foreign 8,829 9,308 15,129
- -------------------------------------------------------------------------------------------------------------------------
56,500 44,958 61,850
- -------------------------------------------------------------------------------------------------------------------------
Deferred
U.S. federal (5,370) (9,603) (29,028)
Foreign 1,440 3,171 (2,053)
- -------------------------------------------------------------------------------------------------------------------------
(3,930) (6,432) (31,081)
- -------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $ 52,570 $ 38,526 $ 30,769
=========================================================================================================================
A reconciliation between the actual income tax expense provided and the income
tax expense computed by applying the statutory federal income tax rate of 35% to
income before tax is as follows:
Income taxes at U.S. statutory rate $ 53,943 $ 35,520 $ 25,116
Difference in foreign taxes versus the U.S. statutory rate (3,155) (1,563) 2,458
State and local income taxes net of federal income tax benefit 3,101 2,489 2,306
Amortization of goodwill 4,530 4,285
Tax benefits from foreign sales corporation (1,362) (1,675) (1,725)
Other 43 (775) (1,671)
- -------------------------------------------------------------------------------------------------------------------------
ACTUAL TAX EXPENSE $ 52,570 $ 38,526 $ 30,769
=========================================================================================================================
ACTUAL TAX RATE 34.11% 37.96% 42.88%
=========================================================================================================================
Deferred income taxes result from timing differences in recognition of revenue
and expense for book and tax purposes, primarily from the tax timing differences
relating to business combinations.
Note D - Common Shares
In March 2002, the Company completed a public offering for 11,500,000 of its
common shares at $14.25 per share. Net proceeds of $155,934,000 after expenses
were used to retire debt.
The Company's authorized common shares total 200,000,000 with a stated value of
$.015 per share. At May 31, 2002 and 2001, there were 114,696,000 and
102,211,000 shares outstanding, respectively, each of which is entitled to one
vote.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
each year (104,418,000 in 2002, 102,202,000 in 2001 and 107,221,000 in 2000). To
compute diluted earnings per share, the weighted average number of common shares
outstanding during each year was increased by common stock options with
exercisable prices lower than the average market prices of common shares during
each year and reduced by the number of shares assumed to have been purchased
with proceeds from the exercised options (105,131,000 in 2002, 102,212,000 in
2001 and 107,384,000 in 2000).
41
- --------------------------------------------------------------------------------
The Company has a Restricted Stock Plan. Under the terms of the Plan, up to
1,563,000 shares may be awarded, generally subject to forfeiture until the
completion of five years of service, to certain employees through May 2007. For
the year ended May 31, 2002, 138,000 shares were awarded under this Plan, net of
forfeitures (175,000 shares in 2001). At May 31, 2002, 86,000 shares awarded
under this Plan were vested (none at May 31, 2001).
In 1999, the Company authorized the repurchase of up to 10,000,000 of its common
shares. Through July 2000, the Company had repurchased 8,970,000 shares at an
aggregate cost of $99,617,000, and this program has since expired. The Company
subsequently reissued 1,013,000 (28,000 through May 31, 2001) of these shares in
connection with its Stock Option and Restricted Stock programs bringing the
balance to 7,957,000 in treasury shares. Shares repurchased under this program
are held at cost and are included in Shareholders' Equity as treasury shares.
The Company's Shareholder Rights Plan provides existing shareholders the right
to purchase shares of the Company at a discount in certain circumstances as
defined by the Plan. The rights are not exercisable at May 31, 2002 and expire
in May 2009.
The Company has options outstanding under two stock option plans, the 1989 Stock
Option Plan, and the 1996 Key Employees Stock Option Plan, which provides for
the granting of options for up to 9,000,000 shares. These options are generally
exercisable cumulatively in equal annual installments commencing one year from
the grant date and have expiration dates ranging from July 2002 to April 2012.
At May 31, 2002, 3,093,000 shares (3,589,000 at May 31, 2001) were available for
future grant.
Transactions during the last two years are summarized as follows:
Year Ended May 31,
------------------
Shares Under Option 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
Outstanding, beginning of year (weighted average price of $12.39 ranging from
$8.42 to $16.35 per share) 7,017 6,243
Granted (weighted average price of $11.83 ranging from $10.26 to $16.70 per share) 496 1,202
Cancelled/expired (weighted average price of $11.17 ranging from $8.42 to $16.35 per share) (390) (369)
Exercised (weighted average price of $11.54 ranging from $8.42 to $16.35 per share) (900) (59)
- ---------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, END OF YEAR (WEIGHTED AVERAGE PRICE OF $12.58 RANGING FROM
$8.69 TO $16.70 PER SHARE) 6,223 7,017
===========================================================================================================================
EXERCISABLE, END OF YEAR (WEIGHTED AVERAGE PRICE OF $13.50 RANGING FROM
$8.69 TO $16.35 PER SHARE) 3,987 3,947
- ---------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
at May 31, 2002 at May 31, 2002
------------------------------------------ -------------------------------
Weighted
Average Weighted Weighted
Range of Shares Remaining Average Shares Average
Exercise Prices (000's) Life Price (000's) Price
- --------------------------------------------------------------------------------------------------------------------
$ 8.00 - $ 9.99 1,870 8.2 $ 9.36 587 $ 9.43
$ 10.00 - $ 14.99 2,310 5.3 $12.61 1,592 $12.73
$ 15.00 - $ 16.75 2,043 5.5 $15.48 1,808 $15.50
----- -----
6,223 6.2 $12.58 3,987 $13.50
===== =====
42
- --------------------------------------------------------------------------------
The Company is accounting for its stock option plans under the provisions of the
Accounting Principle Board's Opinion No. 25 and, accordingly, no compensation
cost has been recognized. If compensation cost had been determined based on the
fair value at the grant date for awards under this plan consistent with the
method prescribed by FAS No. 123, the Company's net income and earnings per
share for the years ended May 31, 2002 and 2001, would have been reduced to the
pro forma amounts indicated in the following table:
(In thousands, except per share amounts) 2002 2001
- ---------------------------------------------------------------
Pro Forma Net Income $ 99,411 $ 59,956
===============================================================
Pro Forma Earnings Per Share:
BASIC AND DILUTED $.95 $.59
===============================================================
As Reported Earnings Per Share:
BASIC AND DILUTED $.97 $.62
===============================================================
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions. The expected volatility rate is 34.2% for shares granted in 2002
and 32.5% for 2001. The expected life is 7.0 years, with dividend yields of 3.0%
and 3.5% and risk-free interest rates of 4.4% and 5.1%, for 2002 and 2001,
respectively.
Note E - Leases
At May 31, 2002, certain property, plant and equipment were leased by the
Company under long-term leases. Certain of these leases provide for increased
rental based upon an increase in the cost-of-living index. Future minimum lease
commitments as of May 31, 2002 for all non-cancelable leases are as follows:
May 31 (In thousands)
- -----------------------------------------
2003 $16,374
2004 11,304
2005 8,059
2006 5,722
2007 4,363
Thereafter 16,402
- -----------------------------------------
TOTAL MINIMUM LEASE COMMITMENTS $ 62,224
=========================================
Rental expenses for all operating leases totaled $23,100,000 in 2002,
$20,500,000 in 2001 and $17,200,000 in 2000. Capitalized leases were
insignificant for the three years ended May 31, 2002.
Note F - Retirement Plans
The Company sponsors a non-contributory defined benefit pension plan (The
Retirement Plan) covering substantially all domestic non-union employees.
Pension coverage for employees of the Company's foreign subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. In addition, benefits for
domestic union employees are provided by separate plans.
The Retirement Plan provides benefits that are based upon years of service and
average compensation with accrued benefits vesting after five years. Benefits
for union employees are generally based upon years of service. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes using a different actuarial cost method and
different assumptions from those used for financial reporting.
43
- --------------------------------------------------------------------------------
Net periodic pension cost (income) consisted of the following for the three
years ended May 31, 2002:
U.S. Plans Non-U.S. Plans
---------------------------------------- ---------------------------------------
2002 2001 2000 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $8,310 $7,742 $6,650 $1,073 $1,112 $1,122
Interest cost 6,706 6,470 5,678 2,305 2,314 2,176
Expected return on plan assets (8,589) (9,157) (6,123) (3,118) (3,396) (3,026)
Amortization of:
Prior service cost 188 164 132
Net gain on adoption of FAS No. 87 (85) (87) (96)
Net actuarial (gains) losses recognized (11) (62) 439 87 (85) 91
Curtailment/settlement (gains) losses (722) 103 (24)
- ---------------------------------------------------------------------------------------------------------------------------------
NET PENSION COST $6,519 $4,348 $6,783 $ 347 $ (55) $ 339
=================================================================================================================================
The changes in benefit obligations and plan assets, as well as the funded status
of the Company's pension plans at May 31, 2002 and 2001 were as follows:
U.S. Plans Non-U.S. Plans
------------------------ -----------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(In thousands)
Benefit obligation at beginning of year $ 87,199 $ 81,892 $ 34,175 $ 32,343
Service cost 8,310 7,742 1,073 1,112
Interest cost 6,706 6,470 2,305 2,314
Benefits paid (14,022) (12,785) (1,465) (1,452)
Participant contributions 385 428
Actuarial (gains) losses 7,508 4,156 47 2,030
Currency exchange rate changes (1,276) (2,600)
Curtailment/settlement (gains) losses (721)
Plan amendments 516
Acquisitions 445
- --------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 96,217 $ 87,199 $ 35,244 $ 34,175
====================================================================================================================
Fair value of plan assets at beginning of year $ 93,899 $ 101,502 $ 37,557 $ 40,921
Actual return on plan assets (4,748) (2,543) (2,101) 186
Employer contributions 10,216 7,202 360 500
Participant contributions 385 428
Benefits paid (14,022) (12,785) (1,476) (1,641)
Currency exchange rate changes (1,248) (2,837)
Acquisitions 523
- --------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 85,345 $ 93,899 $ 33,477 $ 37,557
====================================================================================================================
Excess (deficit) of plan assets versus
benefit obligations at end of year $ (10,872) $ 6,700 $ (1,767) $ 3,382
Contributions after measurement date 2,661 2,537 104 93
Unrecognized actuarial (gains) losses 23,571 2,715 8,439 3,514
Unrecognized prior service cost 1,896 1,568
Unrecognized net transitional asset (113) (198)
- --------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 17,143 $ 13,322 $ 6,776 $ 6,989
====================================================================================================================
44
U.S. Plans Non-U.S. Plans
------------------------- ------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------
(In thousands)
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 17,688 $ 14,057 $ 7,739 $ 7,974
Accrued benefit liability (792) (781) (1,106) (1,041)
Accumulated other comprehensive loss 247 46 143 56
- --------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 17,143 $ 13,322 $ 6,776 $ 6,989
========================================================================================================
For domestic plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value of assets were $1,293,000, $1,293,000 and $414,000, respectively, as
of May 31, 2002 and $781,000, $781,000 and $ -0- , respectively, as of May 31,
2001.
For foreign plans with accumulated benefit obligations in excess of plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
of assets were $1,159,000, $1,106,000 and $ -0- , respectively, as of May 31,
2002 and $1,145,000, $1,042,000 and $ -0- , as of May 31, 2001.
The following weighted average assumptions were used to determine the Company's
obligations under the plans:
U.S. Plans Non-U.S. Plans
---------------------- ---------------------
2002 2001 2002 2001
Discount rate 7.25% 7.50% 6.63% 6.63%
Expected return on plan assets 9.00% 9.00% 8.13% 8.25%
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
The plans' assets consist primarily of stocks, bonds and fixed income
securities.
The Company also sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code, which covers substantially all non-union employees in the
United States. The Plan provides for matching contributions in Company shares
based upon qualified employee contributions. Matching contributions charged to
income were $5,149,000, $5,170,000 and $4,925,000 for years ending May 31, 2002,
2001 and 2000, respectively.
45
- --------------------------------------------------------------------------------
Note G - Post-retirement Health Care Benefits
In addition to the defined benefit pension plan, the Company also provides
health care benefits to certain of its retired employees through unfunded plans.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The components of this expense for the three years ended
May 31, 2002 were as follows:
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost - Benefits earned during this period $ 131 $ 81 $110
Interest cost on the accumulated obligation 945 918 890
Amortization of unrecognized (gains) (51) (124) (55)
- --------------------------------------------------------------------------------------------------------------------------
NET PERIODIC POST-RETIREMENT EXPENSE $1,025 $875 $945
==========================================================================================================================
The changes in the benefit obligations of the plans at May 31, 2002 and 2001,
were as follows:
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
Accumulated post-retirement benefit obligation at beginning of year $12,615 $11,928
Service cost 131 81
Interest cost 945 918
Benefit payments (904) (972)
Actuarial (gains) losses 804 791
Currency exchange rate changes (109) (131)
- --------------------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation at end of year 13,482 12,615
Unrecognized actuarial gains (losses) 973 1,874
- --------------------------------------------------------------------------------------------------------------------------
ACCRUED POST-RETIREMENT HEALTH CARE BENEFITS $14,455 $14,489
==========================================================================================================================
A 7.25% general discount rate was used in determining the accumulated
post-retirement benefit obligation as of May 31, 2002 (7.50% for May 31, 2001).
An 8.00% increase in the cost of covered health care benefits was generally
assumed for fiscal 2002 (7.00% for fiscal 2001). This trend rate in all cases is
assumed to decrease to 5.00% after several years and remain at that level
thereafter except for various union plans which will cap at alternate benefit
levels. A 1.00% increase in the health care costs trend rate would have
increased the accumulated post-retirement benefit obligation as of May 31, 2002
by $1,460,000 and the net post-retirement expense by $143,000. A 1.00% decrease
in the health care costs trend rate would have decreased the accumulated
post-retirement benefit obligation as of May 31, 2002 by $1,244,000 and the net
post-retirement expense by $117,000.
Note H - Contingencies and Loss Reserves
Accrued loss reserves consist of the following:
May 31 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
Accrued product liability reserves $39,337 $39,054
Accrued warranty reserves - Current 5,412 5,170
Accrued environmental reserves 6,455 9,557
Accrued other 710 1,635
- -------------------------------------------------------------------------------------------------------------------------
Accrued loss reserves - Current 51,914 55,416
Accrued warranty reserves - Long-term 9,655 11,959
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ACCRUED LOSS RESERVES $61,569 $67,375
==========================================================================================================================
46
- --------------------------------------------------------------------------------
The Company, through its wholly owned insurance subsidiary, provides certain
insurance coverage, primarily product liability, to the Company's other domestic
subsidiaries. Excess coverage is provided by outside carriers. The reserves
reflected above provide for these potential losses as well as other uninsured
claims. Provision for estimated warranty costs is recorded at the time of sale
and periodically adjusted to reflect actual experience.
The Company and certain of its subsidiaries, principally Bondex, are named as
defendants in a number of asbestos related bodily injury cases. In many cases,
the plaintiffs are unable to demonstrate that any injuries they have incurred
resulted from exposure to one of the Companies' products. These cases are
generally dismissed with no payment. With respect to cases where compensable
disease, exposure and causation are established, the companies generally settle
for amounts each considers reasonable given the facts and circumstances of each
case. Bondex's outside insurance carriers have historically been responsible,
under a cost sharing agreement, for the payment of approximately 90% of defense
and indemnity costs. Bondex has established a reserve to provide for its 10%
share of these potential losses. Bondex expects that its outside insurance
carriers will continue to cover a substantial portion of the costs associated
with its asbestos litigation at least into the 2004 fiscal year period.
In addition, the Company, like others in similar businesses, is involved in
several proceedings relating to environmental matters. It is the Company's
policy to accrue remediation costs when it is probable that such efforts will be
required and the related costs can be reasonably estimated. These liabilities
are undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds or claims against third parties.
Due to the uncertainty inherent in the loss reserve estimation process, the
Company is unable to estimate an additional range of loss in excess of its
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 the Company's financial
position or its results of operations. However, such costs could be material to
the Company's financial position or results of operations in a future period.
Note I - Restructuring and Asset Impairment Charge
For the year ended May 31, 2000, the Company recorded a restructuring charge of
$51,970,000. Included in this charge were severance and other employee related
costs of $21,986,000, contract exit and termination costs of $2,059,000,
facility closures and write-downs of property, plant and equipment and
intangibles of $22,342,000 and $5,583,000, respectively.
In addition to the $51,970,000 restructuring charge, related costs were incurred
during the May 31, 2000 year primarily to account for inventory of certain
product lines that were being discontinued, totaling $7,876,000, and these costs
were charged to earnings and classified as a component of cost of sales.
The severance and other employee related costs provided for a reduction of
approximately 780 employees related to facility closures and streamlining of
operations for cost reduction initiatives. The costs of exit and contract
termination were comprised primarily of non-cancelable lease obligations on the
closed facilities. The charge for property, plant and equipment represented
write-downs to net realizable value of less efficient and duplicate facilities
and machinery and equipment no longer needed in the combined restructured
manufacturing operations.
47
- --------------------------------------------------------------------------------
Note J - Interim Financial Information (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended May 31, 2002 and 2001:
Three Months Ended
-------------------------------------------------
August 31 November 30 February 28 May 31
- --------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
2002
- --------------------------------------------------------------------------------------------
Net sales $533,275 $487,880 $407,538 $557,433
- --------------------------------------------------------------------------------------------
Gross profit $250,674 $221,968 $178,636 $260,938
- --------------------------------------------------------------------------------------------
Net income $ 36,569 $ 24,490 $3,274 $ 37,221
- --------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $.36 $.24 $.03 $.34
============================================================================================
DILUTED EARNINGS PER SHARE $.36 $.24 $.03 $.33
============================================================================================
DIVIDENDS PER SHARE $.1250 $.1250 $.1250 $.1250
============================================================================================
Three Months Ended
-------------------------------------------------
August 31 November 30 February 28 May 31
- --------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
2001
- --------------------------------------------------------------------------------------------
Net sales $554,923 $499,904 $405,400 $547,535
- --------------------------------------------------------------------------------------------
Gross profit $256,316 $228,160 $171,238 $250,631
- --------------------------------------------------------------------------------------------
Net income (loss) $ 28,850 $16,868 $(7,018) $ 24,261
- --------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE $.28 $.17 $(.07) $.24
============================================================================================
DILUTED EARNINGS (LOSS) PER SHARE $.28 $.17 $(.07) $.24
============================================================================================
DIVIDENDS PER SHARE $.1225 $.1250 $.1250 $.1250
============================================================================================
Quarterly earnings per share do not total to the yearly earnings per share due
to the weighted average number of shares outstanding in each quarter.
48
Independent Auditor's Report
To The Board of Directors and Shareholders - RPM, Inc. and Subsidiaries
Medina, Ohio
We have audited the accompanying consolidated balance sheets of RPM, Inc.
and Subsidiaries as of May 31, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
years in the three year period ended May 31, 2002. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RPM,
Inc. and Subsidiaries at May 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three year
period ended May 31, 2002, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" effective June 1,
2001.
/s/Ciulla, Smith & Dale, LLP
Cleveland, Ohio
July 3, 2002
QUARTERLY STOCK PRICE AND DIVIDEND INFORMATION
RPM, Inc. common shares are traded on the New York Stock Exchange under the
symbol RPM. The high and low sale prices for the common shares, and the cash and
stock dividends paid on the common shares, for each quarter of the two most
recent fiscal years is set forth in the table below.
RANGE OF MARKET PRICES
Fiscal 2002 High Low Dividends paid per share
- --------------------------------------------------------------------------------
1st Quarter $11.15 $ 8.02 $ 0.1250
2nd Quarter 15.05 7.91 0.1250
3rd Quarter 17.08 12.90 0.1250
4th Quarter 17.87 14.15 0.1250
Fiscal 2001 High Low Dividends paid per share
- --------------------------------------------------------------------------------
1st Quarter $10.75 $ 8.63 $ 0.1225
2nd Quarter 10.25 7.75 0.1250
3rd Quarter 9.94 8.25 0.1250
4th Quarter 10.50 8.25 0.1250
Source: The Wall Street Journal
The number of holders of record of RPM, Inc. Common Shares as of July 12, 2002
was 40,231.
49