1
Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
- ---------------------------------------------------------------------------
CONDITION
---------
RPM, Inc. and Subsidiaries
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
The Company acquired TCI, Inc. on January 12, 1996 on a pooling-of-interests
basis. TCI is a leading manufacturer of powdered coatings with annual sales of
approximately $20 million. Powdered coatings are the fastest growing line of the
paint and coatings industry and TCI is evidence of this fact, having achieved a
53% compounded annual growth rate during the past five years. Prior years'
results have been restated to reflect this pooling [Refer to Note A].
Dryvit Systems, Inc. was acquired on September 21, 1995. Dryvit, with annual
sales of approximately $75 million, is the leading North American manufacturer
of exterior insulating and finishing systems [EIFS], used in the construction
and renovation of commercial buildings and increasingly on homes. The
acquisition of Dryvit and several smaller businesses this year, plus that of
Rust-Oleum Corporation on June 28, 1994, accounted for approximately two-thirds
of the 1996 sales increase. The Company's existing operations generated the
balance of sales growth from a combination of pricing adjustments, that averaged
approximately 2% year-to-year, and higher unit volume. Exchange rate differences
and several small product line additions had a slight, yet positive effect on
sales.
The Company's gross profit margin improved to 42.8% from 42.7% a year ago.
Strength in certain industrial lines, most notably floorings, coupled with
leveraged purchasing of significant materials, resulted in improved overall
margins among the industrial businesses. In addition, the recent acquisitions
combined have comparatively higher gross profit margins. These positive effects
on margin were partly offset by certain higher material costs among primarily
the consumer lines. Raw material price increases have somewhat stabilized and
the Company is confident that any further increases will continue to be
effectively managed.
Selling, general and administrative expenses remained at 30% of sales this year.
The Company had initiated an expense reduction campaign during the second
quarter of 1996 in consideration of the slower than planned sales growth.
During this past year, the Company disposed of certain assets and businesses
that no longer conformed to management's long-term objectives. The net gains
that resulted were offset by costs associated with several product line
discontinuations.
Interest expense increased $5.6 million in 1996, reflecting primarily the
indebtedness associated with Rust-Oleum, Dryvit and other acquisitions with the
balance attributable to comparatively higher interest rates and the LYONs
[Refer to Note B] interest accretion. Debt reductions of approximately $30
million during the past year and slightly higher interest income reduced net
interest expense comparatively.
The tax attributes of TCI, prior to acquisition, had historically passed through
to its respective shareholders as a Subchapter S Corporation. Consequently, on a
restatement basis, last year's provision for income taxes appears as a lower
percentage of pre-tax income than this year's from the effects of this pooling.
Upward pressures on the tax rate from revised tax laws, continual upward trends
in state and local taxes, and unfavorable tax treatment of certain acquisition
related expenses were effectively mitigated through generally improved
operations throughout Europe where previous tax disadvantaged losses were
significantly reduced or eliminated [Refer to Note I for geographic breakout of
results of operations].
The Company's environmental obligations continue to be appropriately addressed
and, based upon the latest available information, it is not anticipated that the
outcome of such matters will materially affect the Company's results of
operations or financial position. However, such costs could be material to
results of operations in a future period [Refer to Note H].
The Company's European and other foreign sales and results of operations are
subject to the impact of foreign currency fluctuations. Since most of the
Company's foreign operations are in Belgium, and the Belgian franc has been a
fairly stable currency in relation to the majority of other currencies in which
those operations transact business, this effect has been minimal. In addition,
foreign debt is denominated in the respective foreign currency thereby
eliminating any related translation impact on earnings.
The Company's earnings per share this year were affected by the averaging of
Company shares issued in connection with the Dryvit acquisition [more fully
described in Capital Resources and Liquidity-Financing Activities]. As a result,
a 10% increase in earnings this year equates to a 6% increase in earnings per
share. Previously reported per share data has been restated to reflect the 25%
stock dividend issued December 8, 1995.
Subsequent to year-end, on June 13, 1996, the Company completed its acquisition
of Okura Holdings, Inc., Dallas, Texas. With sales of approximately $35 million,
Okura is a leading global manufacturer of molded and pultruded fiberglass
reinforced plastic grating products, used for pedestrian walkways, platforms,
staircases and similar types of industrial structures. Okura has posted a strong
growth record under the leading brand names Fibergrate and Chemgrate. Okura
offers the Company an attractive opportunity to capitalize on market, product
and customer synergies. This acquisition is not expected to be dilutive in 1997.
FISCAL 1995 COMPARED TO FISCAL 1994
On June 28, 1994, the Company acquired Rust-Oleum Corporation, the leading North
American producer of consumer rust-preventative coatings. Nearly two-thirds of
Rust-Oleum sales are consumer products and the balance industrial, both
complementing the Company's existing product lines. Rust-Oleum accounted for
$139 million, or approximately 70%, of the $205 million sales increase. The
Com-pany's existing operations generated the balance of sales growth mainly from
higher unit volume, approximately two-thirds industrial and the balance
consumer. Pricing adjustments were somewhat more in 1995 than in the recent past
to compensate for nearly universal supplier cost increases, averaging less than
3%. Exchange rate differences and several small product line additions had a
slight, yet positive effect on sales.
The Company's gross profit margin strengthened during 1995 to 42.7% from 41.5%
in 1994. This improvement reflects Rust-Oleum's higher gross profit margin,
positive shifts in product mix, and the benefit of increased sales volume among
the existing businesses. Management was able to effectively control a number of
raw material and packaging cost increases through the leverage of combined
purchasing of significant materials, pricing adjustments where necessary, and
product reformulations.
20
2
Selling, general and administrative expenses increased to 30.0% of sales from
29.1% the previous year as a result of Rust-Oleum's higher percentage in this
category plus related acquisition expenses. Higher sales volume and increased
joint venture income had slightly offsetting favorable effects.
Interest expense increased $10.8 million from indebtedness associated with the
Rust-Oleum acquisition. Slightly higher interest rates and the LYONs [Refer to
Note B] interest accretion added to interest expense in 1995, while the 1994
Eurobond conversion, debt refinancing in both years and debt reductions totaling
nearly $40 million during 1995 reduced interest expense comparatively.
The tax attributes of TCI, acquired during 1996, and those of Dynatron/Bondo and
Stonhard, acquired during 1994, had historically passed through to the
respective shareholders as Subchapter S Corporations. Consequently, the restated
39.7% provision for income taxes in 1994 [Refer to Note C] was comparably low.
As a result and as expected, the 1995 effective tax rate increased from the
reported 1994 rate, to 42.3%. This higher rate was driven by revised tax laws,
certain foreign tax loss carryforwards, continuing upward trends in state and
local taxes, and unfavorable tax treatment of certain acquisition related
expenses.
As a result of the expenses associated with the acquisition of Rust-Oleum and
the tax rate differences discussed above, the Company's net income margin
declined to 6.1% from 6.5% in 1994. Rust-Oleum contributed approximately a third
of the earnings increase in 1995.
CAPITAL RESOURCES AND LIQUIDITY
CASH PROVIDED FROM OPERATIONS
The Company generated cash from operations of $87 million in 1996, or $18
million more than net income for the year from non-cash expenses less
growth-related increases in working capital. Cash flow from operations continues
to be the primary source of financing the Company's internal growth.
During 1995, the Company had embarked on a campaign to reduce its working
capital requirements, and thereby generate additional cash flow. This program
has produced positive results, evidenced by the decline in the current ratio
from 2.8:1 to 2.5:1 this past year. Dryvit contributed to this improvement,
having a relatively lower investment in working capital. Notably, there had been
a significant one-time reduction of working capital at Rust-Oleum upon its
acquisition in June 1994, without which cash generation from operations this
year would have exceeded that of last year to a much greater extent.
INVESTING ACTIVITIES
The Company annually invests in capital expenditures primarily to improve
production and distribution efficiency and capacity. Such expenditures generally
do not exceed depreciation and amortization in a given year. Capital
expenditures amounted to $33 million in 1996 compared with depreciation and
amortization of $43 million.
The investment of $45.4 million in businesses this year reflects primarily the
cash portion of Dryvit, along with several smaller acquisitions, net of cash
acquired. The Company historically has acquired complementary businesses and
this trend is expected to continue.
The Company's captive insurance company generates trades in marketable
securities in the ordinary course of conducting its operations and this activity
will continue.
The Company divested a small business and certain assets during 1996, as
previously discussed under Results of Operations.
FINANCING ACTIVITIES
On June 15, 1995 the Company issued and sold $150 million [aggregate principal]
of 7% senior unsecured notes due 2005. The total net proceeds of this offering
were used to reduce the $190 million balance of the Company's $300 million
revolving credit agreement to $40 million. The Company thereafter reduced the
limit of its revolving credit facility to $150 million and extended its final
maturity to 2000.
The Company completed the acquisition of Dryvit Systems, Inc. on September 21,
1995 for approximately $32 million in cash, the retirement of approximately
$14.5 million of Dryvit's existing long-term debt, and the issuance of 4 million
[restated for the December 8, 1995 stock split] Company shares. The Company's
revolving credit facility was utilized for the cash and debt retirement portions
of this transaction. This instrument had an outstanding balance of $82 million
at May 31, 1996, having been reduced by nearly $30 million during 1996 through
cash provided from operations, after exchange rate differences and net of the
uses of this facility for acquisitions. Interest accretion on the LYONs issue
added $8.7 million to long-term debt during 1996. LYONs interest to be accreted
in 1997 will be $9.1 million.
As a result of the above transactions, the Company's debt to capital ratio
improved to 50% at May 31, 1996 from 54% a year ago.
The acquisition of Okura, subsequent to year-end, was financed through the
Company's revolving credit agreement. The Company has since renegotiated this
facility to $250 million and extended its final maturity to 2001.
The Company maintains excellent relations with its banks and other financial
institutions to further enable the financing of future growth opportunities.
21
3
CONSOLIDATED BALANCE SHEETS
- ----------------------------
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
MAY 31
------
1996 1995
---- ----
(Restated)
ASSETS
CURRENT ASSETS
Cash and short-term investments (Note A) $ 19,855 $ 19,834
Marketable securities, at cost (Note A) 14,422 8,132
Trade accounts receivable (less allowances of $9,993 in 1996 and $9,813 in 1995) 231,560 209,886
Inventories (Note A) 178,929 170,920
Prepaid expenses and other current assets 20,360 16,659
----------- --------
TOTAL CURRENT ASSETS 465,126 425,431
----------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE A)
Land 20,969 18,886
Buildings and leasehold improvements 143,478 131,734
Machinery and equipment 235,133 212,942
----------- --------
399,580 363,562
Less allowance for depreciation and amortization 174,920 157,259
----------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 224,660 206,303
----------- --------
OTHER ASSETS
Cost of businesses over net assets acquired, net of amortization (Note A) 268,492 211,781
Other intangible assets, net of amortization (Note A) 159,798 85,375
Equity in unconsolidated affiliates 16,623 14,857
Other 20,377 21,776
----------- --------
TOTAL OTHER ASSETS 465,290 333,789
----------- --------
TOTAL ASSETS $ 1,155,076 $965,523
----------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 85,874 $ 71,987
Current portion of long-term debt (Note B) 1,747 1,312
Accrued compensation and benefits 29,678 30,187
Accrued loss reserves (Note H) 33,731 23,897
Other accrued liabilities 26,910 20,325
Income taxes payable (Notes A and C) 11,464 6,088
----------- --------
TOTAL CURRENT LIABILITIES 189,404 153,796
LONG - TERM LIABILITIES
Long-term debt, less current maturities (Note B) 447,654 407,041
Other long-term liabilities 14,375 14,405
Deferred income taxes (Notes A and C) 57,810 39,812
----------- --------
TOTAL LIABILITIES 709,243 615,054
----------- --------
SHAREHOLDERS' EQUITY
Common shares, stated value $.018 per share; authorized 100,000,000 shares,
issued and outstanding 77,449,000; 73,302,000 in 1995 (Note D) 1,410 1,334
Paid-in capital 215,019 149,028
Cumulative translation adjustment (Note A) (2,492) 580
Retained earnings 231,896 199,527
----------- --------
TOTAL SHAREHOLDERS' EQUITY 445,833 350,469
----------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,155,076 $965,523
----------- --------
<FN>
- ------------------------
See Notes to Consolidated Financial Statements.
22
4
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
YEAR ENDED MAY 31
-----------------
1996 1995 1994
---- ---- ----
(Restated) (Restated)
NET SALES $1,136,396 $1,030,736 $825,292
Cost of sales 649,819 590,394 482,658
---------- ---------- --------
Gross profit 486,577 440,342 342,634
Selling, general and administrative expenses 340,851 309,069 239,861
Interest expense, net 25,840 22,781 13,566
---------- ---------- --------
Income before income taxes 119,886 108,492 89,207
Provision for income taxes (Note C) 50,957 45,876 35,454
---------- ---------- --------
NET INCOME $ 68,929 $ 62,616 $ 53,753
---------- ---------- --------
Average shares outstanding (Note D) 76,548 73,660 73,003
---------- ---------- --------
Earnings per common share and common share equivalents (Note D) $ .90 $ .85 $ .74
---------- ---------- --------
Earnings per common share assuming full dilution (Note D) $ .86 $ .81 $ .70
---------- ---------- --------
Cash dividends per common share $ .47 $ .44 $ .41
---------- ---------- --------
<FN>
- ------------------------
See Notes to Consolidated Financial Statements.
23
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
COMMON SHARES
-------------
NUMBER CUMULATIVE
OF SHARES STATED PAID-IN TRANSLATION RETAINED
(NOTE D) VALUE CAPITAL ADJUSTMENT EARNINGS TOTAL
-------- ------ ------- ---------- -------- -----
BALANCE AT MAY 31, 1993 (RESTATED) 68,356 $ 1,244 $ 97,390 $ (673) $147,173 $245,134
Net income 53,753 53,753
Dividends paid (27,949) (27,949)
Sub S Corp. income 3,290 (3,290)
Sub S Corp. distributions (1,994) (1,994)
Stock option exercises 94 1 566 567
Conversion of debt 4,595 84 48,466 48,550
Translation adjustments (1,617) (1,617)
------ ------- -------- ------- --------- ---------
BALANCE AT MAY 31, 1994 (RESTATED) 73,045 1,329 147,718 (2,290) 169,687 316,444
Net income 62,616 62,616
Dividends paid (31,259) (31,259)
Sub S Corp. income 1,517 (1,517)
Sub S Corp. distributions (607) (607)
Business combinations 135 3 (252) (249)
Stock option exercises 122 2 652 654
Translation adjustments 2,870 2,870
------ ------- -------- ------- --------- ---------
BALANCE AT MAY 31, 1995 (RESTATED) 73,302 1,334 149,028 580 199,527 350,469
Net income 68,929 68,929
Dividends paid (4) (78) (35,598) (35,676)
Sub S Corp. income 962 (962)
Sub S Corp. distributions (1,067) (1,067)
Business combinations 4,000 73 65,127 65,200
Stock option exercises 151 3 1,047 1,050
Translation adjustments (3,072) (3,072)
------ ------- -------- ------- --------- ---------
BALANCE AT MAY 31, 1996 77,449 $ 1,410 $215,019 $ (2,492) $231,896 $445,833
------ ------- -------- ------- --------- ---------
- ------------------------
<FN>
See Notes to Consolidated Financial Statements.
24
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
YEAR ENDED MAY 31
-----------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (RESTATED) (RESTATED)
Net income $ 68,929 $ 62,616 $ 53,753
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 42,562 37,123 26,050
(Decrease) in deferred liabilities (5,696) (578) (916)
(Earnings) of unconsolidated affiliates (2,120) (2,638) (1,732)
Changes in assets and liabilities, net of effect from purchases and sales of
businesses:
Decrease (increase) in marketable securities 212 (9) 623
(Increase) in accounts and notes receivable (17,249) (10,852) (1,749)
(Increase) in inventory (4,441) (20,566) (2,690)
(Increase) in prepaid and other assets (3,319) (627) (7,176)
Increase (decrease) in accounts payable 9,808 11,238 (9,683)
Increase (decrease) in accrued liabilities (728) 8,132 (1,974)
Other (935) (233) (745)
--------- ---------- --------
87,023 83,606 53,761
--------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (33,196) (28,796) (26,331)
Acquisition of new businesses, net of cash acquired (45,375) (173,483) (4,094)
Payments for the purchase of marketable securities (17,453) (7,330) (7,813)
Proceeds from maturities or redemptions of marketable securities 10,951 6,235 4,815
Distribution from joint ventures 1,571 1,000 1,220
Investments in joint ventures (1,663) (368) (36)
Proceeds from sale of assets and businesses 11,666
--------- ---------- --------
(73,499) (202,742) (32,239)
--------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt 227,785 251,806 73,324
Reductions of long-term and short-term debt (205,595) (99,615) (70,200)
Cash dividends/distributions paid (36,743) (31,866) (29,943)
Exercise of stock options 1,050 654 567
Other (249)
--------- ---------- --------
(13,503) 120,730 (26,252)
--------- ---------- --------
NET INCREASE (DECREASE) IN CASH 21 1,594 (4,730)
CASH AT BEGINNING OF YEAR 19,834 18,240 22,970
--------- ---------- --------
CASH AT END OF YEAR $ 19,855 $ 19,834 $ 18,240
--------- ---------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 14,369 $ 15,734 $ 7,601
Income taxes 59,277 42,086 37,708
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion from debt to equity 48,550
Interest accreted on LYONs 8,666 8,228 7,812
Common shares issued for acquisition 65,200
--------- ---------- --------
- -----------------------------
<FN>
See Notes to Consolidated Financial Statements.
25
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MAY 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------
RPM, Inc. and Subsidiaries
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 domestic and foreign subsidiaries. The Company accounts for its
investment in less than majority owned joint ventures under the equity method.
Income and distributions recognized from Subchapter S Corporations are solely a
result of the Company's acquisitions of these subsidiaries on a
pooling-of-interests basis. Intercompany accounts, transactions and unrealized
profits and losses are eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
2. BUSINESS COMBINATIONS
During the two year period ended May 31, 1996, the Company completed several
acquisitions.
As reported last year, on June 28, 1994, the Company acquired all the
outstanding shares of Rust-Oleum Corporation. Rust-Oleum manufactures and
markets primarily rust-preventative coatings for the consumer market.
On August 10, 1995, the Company acquired all of the outstanding shares of Star
Finishing Products. Located in Illinois, Star manufactures and sells furniture
finishes.
On September 21, 1995, the Company acquired all of the outstanding shares of
Dryvit Systems, Inc. Dryvit, based in Rhode Island, manufactures and sells
exterior insulation and finishing systems used in the construction and
renovation of both commercial and residential properties.
These acquisitions as well as several small product line acquisitions have been
accounted for by the purchase method of accounting and the difference of
approximately $70,000,000 between the fair value of net assets acquired and the
purchase consideration of $119,500,000 ($52,500,000 in cash, $1,800,000 in notes
and 4,000,000 of the Company's shares) has been allocated to goodwill. The
assets, liabilities and operating results of these companies are reflected in
the Company's financial statements from their respective dates of acquisition
forward.
The following data summarizes, on an unaudited pro-forma basis, the combined
results of operations of the Company and the busi-nesses acquired accounted for
by the purchase method for the two years ended May 31, 1996. The pro-forma
amounts give effect to appropriate adjustments resulting from the combination,
but are not necessarily indicative of future results of operations or of what
results would have been for the combined companies.
YEAR ENDED
MAY 31
1996 1995
---------- ----------
(Unaudited)
(In thousands, except
per share amounts)
Net sales $1,165,396 $1,126,107
---------- ----------
Net income $ 68,091 $ 60,828
---------- ----------
Earnings per common share and common share equivalent $ .88 $ .78
---------- ----------
Earnings per common share assuming full dilution $ .83 $ .75
---------- ----------
In addition, on January 12, 1996, the Company acquired all the outstanding
shares of TCI, Inc., a manufacturer of powdered coatings located in Ellaville,
Georgia in exchange for 2,106,000 shares of the Company's common stock. This
acquisition has been accounted for as a pooling-of-interests. Accordingly,
historical financial data presented in this report has been restated to include
the accounts and transactions of TCI, Inc. as though TCI was acquired as of June
1, 1993. The following table reconciles combined net sales and net income of
the separate companies for the two years ended May 31, 1995 and the nine months
ended February 29, 1996:
JUNE 1, 1995 YEAR ENDED
THROUGH MAY 31
FEBRUARY 29,1996 1995 1994
---------------- ----------------
NET SALES (In thousands)
RPM, Inc. $807,158 $1,016,954 $815,598
TCI, Inc. 12,355 13,782 9,694
-------- ---------- --------
Combined $819,513 $1,030,736 $825,292
-------- ---------- --------
NET INCOME (In thousands)
RPM, Inc. $ 43,040 $ 61,099 $ 52,640
TCI, Inc. 1,258 1,517 1,113
-------- ---------- --------
Combined $ 44,298 $ 62,616 $ 53,753
-------- ---------- --------
3. FOREIGN CURRENCY
For the periods presented, assets and liabilities have been translated using
exchange rates prevailing at year end. Income and expense for the periods have
been translated using an average exchange rate. The resulting translation
adjustments have been recorded in 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.
4. 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.
5. MARKETABLE SECURITIES
Marketable securities are included in the accompanying consolidated balance
sheets at cost, which approximates market.
6. 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 (IN THOUSANDS) 1996 1995
- ---------------------------------------------------------
Raw materials and supplies $ 64,995 $ 60,385
Finished goods 113,934 110,535
-------- --------
Total inventory $178,929 $170,920
-------- --------
26
8
7. DEPRECIATION
Depreciation is computed over the estimated useful lives of the assets primarily
using the straight-line method. The annual depreciation rates are based on the
following ranges of useful lives:
Land improvements 5 to 25 years
Buildings and improvements 10 to 50 years
Machinery and equipment 3 to 20 years
8. INTANGIBLES
The excess of cost over the underlying value of the net assets of companies
acquired is being amortized on the straight-line basis, primarily over 40 years.
Amortization expense charged to operations for the three years ended May 31,
1996 was $7,562,000, $5,888,000 and $3,688,000, respectively. Cost of businesses
over net assets acquired is shown net of accumulated amortization of $33,079,000
at May 31, 1996 ($26,630,000 at May 31, 1995).
Intangible assets also represent costs allocated to formulae, trademarks,
tradenames and other specifically identifiable assets arising from business
acquisitions. These assets are being amortized using the straight-line method
over periods of 10 to 40 years. The Company assesses the recoverability of the
excess of cost over the assigned value of net assets acquired by determining
whether the amortization of the balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operations.
Amortization expense charged to operations for the three years ended May 31,
1996, was $7,553,000, $4,991,000 and $1,142,000, respectively.
Other intangible assets were composed of the following major classes:
MAY 31 (IN THOUSANDS) 1996 1995
- --------------------- ---- ----
Trademarks $ 65,530 $ 37,436
Formulae 62,995 35,120
Other 51,706 25,759
------- -------
180,231 98,315
Accumulated amortization 20,433 12,940
------- -------
Other intangible assets, net $159,798 $ 85,375
------- -------
9. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged for the three years ended
May 31, 1996, were $13,712,000, $12,337,000 and $11,081,000, respectively. The
customer sponsored portion of such expenditures was not significant.
10. INTEREST EXPENSE, NET
Interest expense is shown net of investment income which consists of interest
and dividends. Investment income for the three years ended May 31, 1996 was
$2,005,000, $1,739,000 and $856,000, respectively.
11. 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, 1996, is shown as a noncurrent liability of $57,810,000 (net of a noncurrent
asset of $29,366,000). At May 31, 1995, the noncurrent liability was $39,812,000
(net of a noncurrent asset of $11,396,000). The Company does not intend to
distribute the accumulated earnings of consolidated foreign subsidiaries
amounting to $31,826,000 at May 31, 1996, and $26,347,000 at May 31, 1995, and
therefore no provision has been made for the taxes which would result if such
earnings were remitted to the Company.
12. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
NOTE B - BORROWINGS
A description of long-term debt follows:
MAY 31 1996 1995
- ------ ---- ----
(In thousands)
$400 million face value at maturity Liquid Yield Option Notes (LYONs)
due 2012. The 5.25% LYONs are zero coupon (In thousands) subordinated notes
currently convertible at $17.57 ($16.68 at May 31, 1995) and are redeemable by
the holder for the issuance price plus accrued original issue discount in
September 1997, 2002 and 2007. There are 9,767,000 shares reserved for the
conversion of this debt. $171,589 $162,923
Revolving credit agreement for $150,000,000 ($300,000,000 at May 31, 1995) with
nine banks through August 2, 2000. Interest, which is tied to one of various
rates, was 5.87% at May 31, 1996. The Chairman of the Board and Chief Executive
Officer of the Company is a director of one of the banks providing this
facility. 82,000 190,000
7% unsecured senior notes due June 15, 2005, the proceeds of which were used to
reduce the credit agreement described above. 150,000 --
Multi-currency revolving credit agreement for $45,000,000 with a bank through
December 14, 1998. Interest, which is tied to one of various rates, averaged
3.14% on the $14,667,000 Dutch Guilder component and 3.71% on the $14,500,000
Belgian Franc component at May 31, 1996. 29,167 39,163
6.75% unsecured senior notes due to an insurance company in annual installments
from 1997 through 2003. 12,000 12,000
Other notes and mortgages payable at various rates of interest due in
installments through 2005, substantiallysecured by property. 4,645 4,267
------- -------
449,401 408,353
Less current portion 1,747 1,312
------- -------
Total long-term debt, less current maturities $447,654 $407,041
------- -------
- -----------------------------------
<FN>
Additionally, at May 31, 1996, the Company had an unused short-term line of
credit with a bank for $30,000,000.
The aggregate maturities of long-term debt for the five years subsequent to May
31, 1996, are as follows: 1997 - $1,747,000; 1998 - $2,922,000; 1999 -
$31,974,000; 2000 - $2,087,000; 2001 - $83,889,000.
27
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MAY 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------
RPM, Inc. and Subsidiaries
Note C - Taxes
The provision for taxes on income includes the following:
YEAR ENDED MAY 31 (IN THOUSANDS) 1996 1995 1994
- -------------------------------- ---- ---- ----
Federal income tax rate of 35% applied to income before income taxes $ 41,960 $ 37,972 $ 31,222
Increase (decrease) in taxes resulting from:
Tax credits (585) (411) (439)
State and local taxes - Net of Federal income tax benefit 5,323 4,870 3,705
Foreign taxes in excess of U.S. Federal tax rate 500 1,440 1,282
Permanent differences between tax and book basis, related to acquisitions 3,411 1,880 1,093
Difference between tax and book income, related to pooled entities (404) (572) (1,526)
All other items, none of which exceed 5% of computed tax 752 697 117
------ ------ ------
Actual tax expense $ 50,957 $ 45,876 $ 35,454
------ ------ ------
Actual tax rate 42.50% 42.29% 39.74%
------ ------ ------
The provision for income taxes consists of the following:
Current
Federal $ 43,992 $ 34,292 $ 24,674
State 8,189 7,492 5,700
Foreign 4,473 4,789 3,717
------ ------ ------
56,654 46,573 34,091
Deferred
Federal (5,814) (809) 2,059
Foreign 117 112 (696)
------ ------ ------
Actual tax expense $ 50,957 $ 45,876 $ 35,454
------ ------ ------
Deferred income taxes result from timing differences in recognition of revenue
and expense for book and tax purposes, primarily from the tax timing differences
relating to business combinations.
NOTE D - COMMON SHARES
There are 100,000,000 common shares authorized with a stated value of $.018 per
share. At May 31, 1996 and 1995, there were 77,449,000 and 73,302,000 shares
outstanding respectively, each of which is entitled to one vote.
Share data for May 31, 1995 and May 31, 1994, has been re-stated to reflect a
25% stock dividend in December 1995 and the acquisition of TCI, Inc. in which
2,106,000 common shares were exchanged for all of the outstanding shares of TCI
in a transaction accounted for as a pooling of interests. See consolidated
statements of shareholders' equity for more information.
Earnings per share are based on the weighted average number of common shares and
common share equivalents outstanding during each year (76,548,000 in 1996,
73,660,000 in 1995 and 73,003,000 in 1994). In computing such average number of
shares outstanding, the number of common shares was increased by common stock
options with exercisable prices lower than the average market prices of common
shares during each year and reduced by the number of shares assumed to have been
purchased with the proceeds from the exercise of the options.
The Company has options outstanding under two stock option plans: the 1979
Nonqualified Stock Option Plan, which, prior to its expiration in September
1989, provided for the granting of options for up to 2,104,000 shares; and the
1989 Stock Option Plan, which provides for the granting of options for up to
3,516,000 shares at a price equal to the fair market value at the date of grant.
These options are exercisable cumulatively in equal annual installments
commencing one year from the grant date and have expiration dates ranging from
September 1997 to October 2005. At May 31, 1996, 1,177,000 shares (1,791,000 May
31, 1995) were available for future grant. The Company does not expect to adopt
the recognition provisions of the recently issued SFAS No. 123 "Accounting for
Stock-Based Compensation." Disclosures required by the new accounting standard
will be included in future financial statements pursuant to the effective date
criteria.
28
10
Transactions during the two years are summarized as follows:
SHARES UNDER OPTION (IN THOUSANDS) 1996 1995
- ---------------------------------- ---- ----
Outstanding, beginning of year 1,828 1,565
Granted during the year 614 452
Expired during the year (33) (29)
Exercised during the year (at prices
ranging from $5.40 to $15.40 per share) (164) (160)
----- -----
Outstanding, end of year (at an average
price of $12.97 ranging from $5.48 to
$15.80 per share) 2,245 1,828
----- -----
Exercisable, end of year (at an average
price of $10.89 ranging from $5.48 to
$15.40 per share) 1,087 935
----- -----
NOTE E - LEASES
At May 31, 1996, 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, 1996, for all noncancellable leases are as follows:
MAY 31 (IN THOUSANDS)
- ---------------------
1997 $3,982
1998 3,045
1999 1,753
2000 785
2001 545
Thereafter 478
------
Total minimum lease commitments $10,588
------
Rental expenses for all operating leases totalled $6,614,000 in 1996, $6,290,000
in 1995 and $5,185,000 in 1994. Capitalized leases were insignificant for the
three year period ended May 31, 1996.
NOTE F - RETIREMENT PLANS
To provide uniform retirement income for its non-union employees, the
Company has a defined benefit retirement plan in which substantially all
non-union employees participate. The Retirement Plan is a non-contributory plan
fully paid for by the Company, with accrued benefits vesting after five years of
service. This plan provides benefits that are based on years of service and
average compensation. Benefits for union employees are provided by separate
plans and are generally based on 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.
The net periodic pension cost for the three years ended May 31, 1996, included
the following components:
MAY 31 (IN THOUSANDS) 1996 1995 1994
- --------------------- ---- ---- ----
Service cost - Benefits
earned during
the period $ 3,086 $ 3,524 $ 2,750
Interest cost on projected
benefit obligations 4,428 2,533 2,171
Actual return on
plan assets (7,367) 1,753 (1,678)
Net amortization
and deferral 3,946 (3,540) (514)
----- ----- -----
Net pension cost $ 4,093 $ 4,270 $ 2,729
----- ----- -----
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligations
were 7.75% (8.5% for May 31, 1995) and 5%, respectively. The expected long-term
rate of return on assets was 8.5%. The plans' assets consist primarily of
stocks, bonds and fixed income securities.
The following table sets forth the funded status of the Company's pension plans
and the amounts reflected in the accompanying balance sheets:
MAY 31 (IN THOUSANDS) 1996 1995
- --------------------- ---- ----
Actuarial present value of projected benefit
obligation:
Vested employees $ 45,706 $ 41,970
Nonvested employees 2,206 1,359
------ ------
Accumulated benefit obligation 47,912 43,329
Additional amount related to projected
salary increases 10,293 7,297
------ ------
Total projected benefit obligation 58,205 50,626
Funded assets at fair value 50,154 41,542
------ ------
Projected benefit obligation in excess of assets (8,051) (9,084)
Unamortized net asset existing at date
of adoption (518) (586)
Unrecognized prior service cost 769 731
Unrecognized net loss 4,603 3,994
------ ------
Accrued pension cost $ (3,197) $ (4,945)
------ ------
Some subsidiaries contribute to multi-employer defined benefit plans for their
collective bargaining groups. Contributions to these plans were immaterial for
the three year period ended May 31, 1996. In addition, the Company maintains a
non-contributory 401(k) Plan for substantially all non-union employees in the
United States.
29
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MAY 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------
RPM, Inc. and Subsidiaries
NOTE G - POSTRETIREMENT HEALTH CARE BENEFITS
In addition to the defined benefit pension plan, the Company also provides
health care benefits to certain of its retired employees through unfunded plans.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The components of this expense for the three years ended
May 31, 1996 were as follows:
MAY 31 (IN THOUSANDS) 1996 1995 1994
- --------------------- ---- ---- ----
Service cost - Benefits
earned during
the period $ 4 $ 47 $--
Interest cost on the
accumulated obligation 673 763 199
Net amortization (113) 20 --
--- --- ---
Net periodic post-retirement
expense $ 564 $830 $199
--- --- ---
The accumulated post-retirement obligation recognized on the May 31, 1996 and
May 31, 1995 balance sheets are comprised of the following components:
MAY 31 (IN THOUSANDS) 1996 1995
- --------------------- ---- ----
Current retirees $8,231 $ 8,385
Future retirees 798 1,427
Unrecognized net gain (loss) 595 (315)
----- -----
Accumulated post-retirement benefit
obligation $9,624 $ 9,497
----- -----
A 7.75% (8.5% at May 31, 1995) discount rate was used in determining the
accumulated post-retirement benefit obligation. A 12% increase in the cost of
covered health care benefits was assumed for fiscal 1996, except for one
subsidiary where a 9% rate was assumed. This trend rate in all cases is assumed
to decrease incrementally to 5% after several years and remain at that level
thereafter except for various union plans which will cap at alternate benefit
levels. A 1% increase in the health care costs trend rate would have increased
the accumulated post-retirement benefit obligation as of May 31, 1996 by
$694,000 and the net post-retirement expense by $54,000.
NOTE H - CONTINGENCIES AND LOSS RESERVES
Accrued loss reserves consisted of the following classes:
MAY 31 (IN THOUSANDS) 1996 1995
- --------------------- ---- ----
Accrued product liability reserves $15,429 $13,485
Accrued environmental reserves 5,546 5,554
Accrued warranty reserves 10,364 2,401
Other 2,392 2,457
------ ------
Accrued loss reserves $33,731 $23,897
------ ------
The Company, through its wholly-owned insurance subsidiary, provides certain
insurance coverages, primarily product liability, to the Company's other
domestic subsidiaries. Excess coverage is provided by outside carriers. The
Company has provided the reserves reflected above to provide for these losses as
well as other uninsured claims.
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. Because of the
uncertainty inherent in the estimation process, it is at least reasonably
possible that actual costs will differ from estimates, but, based upon
information presently available, such future costs are not expected to have a
material adverse effect on the Company's competitive or financial position or
its ongoing results of operations. However, such costs could be material to
results of operations in a future period.
Provision for estimated warranty costs is recorded at the time of sale and
periodically adjusted to reflect actual experience. Included at May 31, 1996 in
the amount of $7,761,000 is the warranty reserve of a subsidiary which was
acquired during the year.
30
12
NOTE I - INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company operates principally in one business segment -- the manufacture and
sale of protective coatings. In computing net income for foreign subsidiaries,
no allocations of general corporate expenses have been made.
Information concerning the Company's operations in different geographical areas
of the Company's business at May 31, 1996, 1995 and 1994 and for the years then
ended is summarized as follows:
Other
United European Foreign
(In thousands) States Operations Operations Total
- -------------- ------ ---------- ---------- -----
Net Sales
May 31, 1996 $1,001,706 $90,880 $ 43,810 $1,136,396
May 31, 1995 913,119 85,537 32,080 1,030,736
May 31, 1994 724,662 71,912 28,718 825,292
------------ ------- ------ ------ -------
Gross Profit
May 31, 1996 431,493 41,366 13,718 486,577
May 31, 1995 392,244 37,913 10,185 440,342
May 31, 1994 304,812 32,373 5,449 342,634
------------ ------- ------ ----- -------
Interest Expense, Net
May 31, 1996 22,785 2,738 317 25,840
May 31, 1995 20,159 2,334 288 22,781
May 31, 1994 10,926 2,571 69 13,566
------------ ------ ----- -- ------
Income Before Tax
May 31, 1996 108,589 8,773 2,524 119,886
May 31, 1995 100,721 6,665 1,106 108,492
May 31, 1994 85,203 4,248 (244) 89,207
------------ ------ ----- ----- ------
Net Income
May 31, 1996 62,080 5,130 1,719 68,929
May 31, 1995 59,336 2,404 876 62,616
May 31, 1994 53,171 502 80 53,753
------------ ------ --- -- ------
Assets Employed
May 31, 1996 1,041,726 86,275 27,075 1,155,076
May 31, 1995 858,257 90,340 16,926 965,523
May 31, 1994 570,672 79,396 15,899 665,967
------------ ------- ------ ------ -------
The above sales do not include sales of Company products by joint ventures and
licensees of approximately $104,000,000. The Company reflects income from joint
ventures on the equity method and receives royalties from its licensees.
Export sales were less than 10% of total consolidated revenue for each of the
three years.
31
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MAY 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------
RPM, Inc. and Subsidiaries
NOTE J - INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended May 31, 1996 and 1995:
The Three Months Ended (In thousands, except per share amounts)
AUGUST 31 NOVEMBER 30 FEBRUARY 29 MAY 31
- -----------------------------------------------------------------------------------------------
1996
Net sales $282,954 $281,402 $255,157 $316,883
- -----------------------------------------------------------------------------------------------
Gross profit $119,641 $117,452 $104,966 $144,518
- -----------------------------------------------------------------------------------------------
Net income $ 19,993 $ 16,258 $ 8,047 $ 24,631
- -----------------------------------------------------------------------------------------------
Primary earnings per share $ .27 $ .22 $ .11 $ .32
- -----------------------------------------------------------------------------------------------
Fully diluted earnings per share $ .25 $ .21 $ .11 $ .30
===============================================================================================
Three Months Ended (In thousands, except per share amounts)
AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
- -----------------------------------------------------------------------------------------------
1995
Net sales $256,425 $256,719 $233,384 $284,208
- -----------------------------------------------------------------------------------------------
Gross profit $107,956 $108,284 $ 96,523 $127,579
- -----------------------------------------------------------------------------------------------
Net income $ 18,740 $ 15,686 $ 7,686 $ 20,504
- -----------------------------------------------------------------------------------------------
Primary earnings per share $ .26 $ .21 $ .10 $ .28
- -----------------------------------------------------------------------------------------------
Fully diluted earnings per share $ .24 $ .20 $ .10 $ .26
===============================================================================================
The computation of fully diluted earnings per share reflects additional shares
issuable assuming conversion of convertible securities.
Quarterly earnings per share do not total to the earnings per share due to the
weighted average number of shares outstanding in each quarter.
NOTE K - SUBSEQUENT EVENTS
On June 12, 1996, the Company acquired all the outstanding shares of Okura
Holdings, Inc. for $73,000,000 in cash. Okura manufactures and markets
fiberglass reinforced plastic grating products. This acquisition will be
accounted for by the purchase method of accounting and the difference of
approximately $29,000,000 between the fair value of net assets acquired and the
purchase consideration will be allocated to goodwill. The Company's financial
statements will reflect the assets, liabilities and operating results of Okura
from the date of acquisition forward.
Pro-forma amounts as if Okura had been acquired on June 1, 1994, are as follows:
Year Ended May 31 1996 1995
- ----------------- ---- ----
(Unaudited)
(In thousands, except per
share amounts)
Net sales $ 1,172,193 $ 1,061,516
--------- ---------
Net income $ 68,280 $ 63,222
--------- ---------
Earnings per common share and common
share equivalent $ .89 $ .86
--------- ---------
Earnings per common share assuming
full dilution $ .85 $ .81
--------- ---------
INDEPENDENT AUDITOR'S REPORT
- -----------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS
RPM, INC.
MEDINA, OHIO
We have audited the accompanying consolidated balance sheets of RPM, Inc. and
Subsidiaries as of May 31, 1996 and 1995, 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, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ciulla, Smith & Dale, LLP
- -----------------------------
Cleveland, Ohio
July 3, 1996
32