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EXHIBIT 99.4
RPM, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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YEAR ENDED 5/31/94
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RESULTS OF OPERATIONS
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The Company acquired Dynatron/Bondo Corporation in June 1993 and Stonhard,
Inc. in October 1993, both on a pooling-of-interests basis. Dynatron/Bondo
is a $45 million supplier of automotive repair products for both the
professional and consumer after-markets, complementing the Company's Talsol
line of specialty automotive repair coatings. Stonhard is a $110 million
worldwide leader of industrial and commercial polymer flooring and related
products, having synergy with other of the Company's existing industrial
product lines. Prior years' results have been restated to reflect these
poolings (refer to Note A). The successful assimilation of these companies
during the year produced operating results more indicative of future
expectations as well as when compared to prior years on an unrestated basis.
The Company's operating results for fiscal 1994 again achieved record levels
as sales and net income climbed 6% and 33%, respectively. This compares with
fiscal 1993 when sales had grown 13% and earnings increased 3% over fiscal
1992. Over the past ten years, the Company's sales and
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earnings have grown at compounded annual rates of 14% and 18%, respectively.
Core businesses accounted for 80% of the current year's sales growth, nearly
split between industrial and consumer, reflecting primarily unit growth as
pricing adjustments continue to be minor. Acquisitions, primarily of Day-Glo
Color Corp. in October 1991 and Martin Mathys N.V. in March 1992, accounted
for nearly 60% of the sales growth during 1993. Existing businesses grew
approximately 6% during 1993 generating the remaining 40% of overall sales
growth that year.
The Company's gross profit margin has remained stable over the past two years
with the current year at 41.6% and the prior year at 41.7%. Planned
improvements in product mix and plant efficiencies, mainly among industrial
businesses, along with prior year plant restructuring at Dynatron/Bondo were
offset by certain temporarily higher raw material costs in consumer business.
Other raw material prices have remained fairly stable over the past three
years and similar results are expected during fiscal 1995. The introduction
of a new product line at Stonhard in 1992 was the principal cause of the
change in gross profit margin in 1993.
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The Company's selling, general and administrative expenses have changed as
a percentage of sales over the past three years from 30.7% in 1992 to 30.8%
in 1993 to 29.2% in 1994. These differences were essentially brought about
by the adjustment of both Dynatron/Bondo and Stonhard from Subchapter S
status and the incurrence of approximately $3 million in restructuring
charges at Stonhard's foreign operations in 1993. This category further
reflects the benefits of higher sales and planned expense reductions offset
in part by reduced joint venture income over the years presented. The
Company had adopted Statement of Financial Accounting Standards (SFAS) No.
106 "Employer's Accounting for Post-Retirement Benefits Other Than Pensions"
(Refer to Note H) in 1993. Environmental obligations have been appropriately
addressed and related expenditures have been and are expected to continue to
be immaterial.
In June 1993, the Company called for the redemption of the $50 million 6.75%
Convertible Subordinated Eurobond Debentures due 2005 (more fully discussed
under Capital Resources and Liquidity), accounting for $3 million of the
decline in net interest expense in 1994. The lower rate refinancing of debt
assumed through the Stonhard acquisition reduced interest expense
approximately $1 million. The interest savings from generally lower interest
rates, primarily in Europe, were offset by the accrued interest accretion on
the Liquid Yield Option Notes(TM) (LYONs(TM)) due 2012 (Refer to Note B).
During
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1993, net interest expense had increased by $.7 million reflecting $2.3
million of additional interest costs associated with borrowing to finance
acquisitions during that year, offset by $1.6 million of reduced interest
expense from lower interest rates and debt reduction.
The tax attributes of the Dynatron/Bondo and Stonhard acquisitions had
historically passed through to the respective shareholders as Subchapter S
Corporations. Consequently, on a restatement basis, this year's 40.3%
provision for income taxes (Refer to Note C) equals last year's when, in
fact, the new tax laws, growth of foreign income at comparatively higher tax
rates and an upward trend in state and local taxes would have otherwise
caused the 1994 effective tax rate to increase (41.5% in 1994 compared with
40.5% in 1993). Accordingly, the effective tax rate in 1995 is expected to
increase by 2% to 3%. The pooled acquisitions had a more significant impact
on the 1992 effective tax rate of 37.0%. The Company had adopted SFAS No.
109 "Accounting for Income Taxes" during 1993.
Primarily as a result of product mix, cost reductions, and eliminations
reflected upon pooling, along with higher sales and the income tax benefits
associated with the acquisitions, the net income margin improved to 6.5% from
5.1% in 1993 and 5.7% in 1992. The July 1993 Eurobond conversion impacted
1994 primary earnings per share by $.02.
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Comparative net income levels of the European operations have been affected
by the restatement required by the Stonhard acquisition. Significant
restructuring had taken place at Stonhard Europe in recent years and
accordingly future results are expected to show improvement. The Company's
European and other foreign sales are impacted from time to time as a result
of currency fluctuations. Comparative strengthening of the dollar against
European and Canadian currencies over the past year had a $9 million negative
impact on reported sales. Foreign acquisition debt is denominated in the
respective foreign currency, thereby limiting the impact on earnings of
transaction losses, and protecting against foreign currency rate risk.
Subsequent to year end, the Company purchased Rust-Oleum Corporation on June
28, 1994 (Refer to Note L). Rust-Oleum is the leading North American
producer of consumer rust-preventative coatings with nearly two-thirds of its
$140 million in sales generated in consumer and the balance in industrial
products. Both lines will highly complement the Company's existing product
lines. Rust-Oleum is expected to be anti-dilutive in the 1995 fiscal year.
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CAPITAL RESOURCES AND LIQUIDITY
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CASH PROVIDED FROM OPERATIONS
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The Company generated cash from operations of $51 million in 1994 compared
with $62 million in 1993. Although net income increased $13 million and
non-cash items exceeded 1993 by $4 million, current liabilities were reduced
by $28 million. A substantial portion of this reduction in current
liabilities is the result of year end timing of certain payments. In
addition, $3 million in short term borrowings in place at the end of 1993
were paid in 1994 and, with the acquisitions of Dynatron/Bondo and Stonhard,
cash became available to reduce certain other outstanding current
liabilities.
INVESTING ACTIVITIES
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Every year the Company invests in capital expenditures to primarily improve
production and distribution efficiency and capacity. Such expenditures
generally do not exceed depreciation and amortization in a given year. The
Company's capital expenditures amounted to $20 million in 1994, an increase
of $2 million from 1993. In addition, $5.7 million was expended for a
building and equipment in conjunction with the acquisition of Dynatron/Bondo.
The Company additionally acquired one small business and a product line from
another company in 1994 totalling $4 million. This compares with 1993
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when there was one purchase acquisition for $10 million. The Company
historically has acquired complementary businesses and this trend is expected
to continue.
FINANCING ACTIVITIES
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In June 1993, the Company called for the redemption of the $50 million 6.75%
Convertible Subordinated Eurobond Debentures due 2005 at the restated per
share price of $13.60. All bond holders had exercised their conversion
rights by the end of July 1993. As a result, the Company's balance sheet
reflected a $50 million reduction of long-term debt and a corresponding
increase in shareholders' equity.
The Company entered into a $10 million revolving credit agreement in June
1993 in association with the acquisition of Dynatron/Bondo. In October 1993,
this facility was increased to $55 million to refinance debt assumed through
the acquisition of Stonhard. There was $45 million of this line outstanding
at May 31, 1994. In addition, the Company increased the multi-currency
revolver to $30 million from $22 million in 1993 to finance the final
payments to former shareholders of Martin Mathys, acquired in 1992.
Long-term debt increased by an additional $7.8 million in 1994 as a result
of accrued interest accreted on the LYONs(TM) issue. The reduction of
interest payments in 1994 reflects the non-
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cash aspects of this interest. LYONs(TM) interest to be accreted in 1995
will be $8.2 million.
Subsequent to 1994, the Company entered into a $300 million revolving credit
agreement with a syndicate of nine banks. Of the initial $233 million drawn
on this line, $176.5 million was used to finance the purchase of Rust-Oleum
Corporation in June 1994 with the remaining $56.5 million used to retire the
$47 million balance of the $55 million revolving credit agreement and to
refinance certain acquired Rust-Oleum debt.
The Company's debt to capital ratio improved to 42.6% from 51.5% at May 31,
1993, but will increase to approximately 56% by the end of the first quarter
of 1995 as a result of the Rust-Oleum acquisition. Working capital increased
to $227 million from $192 million a year ago, with the current ratio
increasing to 3.1:1 from 2.4:1. These latter changes are largely the result
of the 1994 payment of $18 million of debt associated with the acquisition of
Martin Mathys.
The Company maintains excellent relations with its banks and other financial
institutions to further enable the financing of future growth opportunities.
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