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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended February 28, 1997 or
_____Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________to________.
Commission File No. 0-5132
------
RPM, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-6550857
- --------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 777; 2628 Pearl Road; Medina, Ohio 44258
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (330) 273-5090
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to the
filing requirements for the past 90 days.
Yes x No
--- ---
As of April 11, 1997, 78,382,629 RPM, Inc. Common Shares were outstanding.
Exhibit Index on Page 12 of 14 pages.
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RPM, INC. AND SUBSIDIARIES
--------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Consolidated Balance Sheets
February 28, 1997 and May 31, 1996 3
Consolidated Statements of Income
Nine Months and Three Months Ended
February 28, 1997 and February 29, 1996 4
Consolidated Statements of Cash Flows
Nine Months Ended
February 28, 1997 and February 29, 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
PART II. OTHER INFORMATION 11
- ---------------------------
3
RPM, INC. AND SUBSIDIARIES 3
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
(In thousands, except per share amounts)
ASSETS
------
February 28, 1997 May 31, 1996
----------------- ----------------
Current Assets
Cash $ 33,596 $ 19,855
Marketable securities, at cost 12,525 14,422
Trade accounts receivable (less allowance for doubt-
ful accounts $12,801 and $9,993) 251,544 231,560
Inventories 233,027 178,929
Prepaid expenses 33,263 20,360
----------- -----------
Total current assets 563,955 465,126
----------- -----------
Property, Plant and Equipment, At Cost 516,423 399,580
Less: accumulated depreciation and amortization 224,691 174,920
----------- -----------
Property, plant and equipment, net 291,732 224,660
----------- -----------
Other Assets
Costs of businesses over net assets acquired 371,253 268,492
Intangible Assets 310,049 159,798
Equity in unconsolidated affiliates 18,468 16,623
Other 32,240 20,377
----------- -----------
Total other assets 732,010 465,290
----------- -----------
Total Assets $ 1,587,697 $ 1,155,076
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current portion of long term debt $ 1,431 $ 1,747
Accounts payable 90,727 85,874
Accrued compensation and benefits 39,916 29,678
Accrued warranty and loss reserves 31,228 33,731
Other accrued liabilities 42,988 26,910
Income taxes payable (1,333) 11,464
----------- -----------
Total current liabilities 204,957 189,404
----------- -----------
Long-term Liabilities
Long-term debt, less current maturities 785,469 447,654
Other long-term liabilities 35,422 14,375
Deferred income taxes 85,689 57,810
----------- -----------
Total long-term liabilities 906,580 519,839
----------- -----------
Shareholders' Equity
Common shares, stated value $.018 per share;
authorized 200,000,000 shares;
issued and outstanding 78,373,000
and 77,449,000 shares, respectively 1,426 1,410
Paid-in capital 229,259 215,019
Retained earnings 252,336 231,896
Cumulative translation adjustment (6,861) (2,492)
----------- -----------
Total shareholders' equity 476,160 445,833
----------- -----------
Total Liabilities And Shareholders' Equity $ 1,587,697 $ 1,155,076
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF INCOME 4
---------------------------------
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
------------------------- ---------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
----------- ------------ ----------- ------------
Net Sales $942,484 $819,513 $297,177 $255,157
Cost of Sales 539,949 477,454 171,384 150,191
-------- -------- -------- --------
Gross Profit 402,535 342,059 125,793 104,966
Selling, General and Administrative
Expenses 291,287 245,916 103,901 84,322
Interest Expense, Net 24,296 19,530 8,834 6,743
-------- -------- -------- --------
Income Before Income Taxes 86,952 76,613 13,058 13,901
Provision for Income Taxes 36,955 32,315 5,550 5,854
-------- -------- -------- --------
Net Income $ 49,997 $ 44,298 $ 7,508 $ 8,047
======== ======== ======== ========
Earnings per common share and common
share equivalent (Exhibit 11.1) $ 0.64 $ 0.58 $ 0.10 $ 0.11
======== ======== ======== ========
Earnings per common share assuming full
dilution (Exhibit 11.1) $ 0.61 $ 0.56 $ 0.10 $ 0.11
======== ======== ======== ========
Dividends per common share $ 0.38 $ 0.35 $ 0.13 $ 0.12
======== ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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RPM, INC. AND SUBSIDIARIES 5
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended
----------------------------
February 28, February 29,
1997 1996
----------- ----------
Cash Flows From Operating Activities:
Net Income $ 49,997 $ 44,298
Depreciation and amortization 35,730 31,906
Items not affecting cash and other (11,781) (9,569)
Changes in operating working capital (27,450) (3,234)
--------- ---------
46,496 63,401
--------- ---------
Cash Flows From Investing Activities:
Additions to property and equipment (20,456) (22,109)
Sale of businesses, net of cash transferred 7,465 0
Acquisition of new businesses, net of cash (327,188) (45,820)
--------- ---------
(340,179) (67,929)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from stock option exercises 906 1,014
Increase (decrease) in debt 336,075 37,034
Dividends (29,557) (27,372)
--------- ---------
307,424 10,676
--------- ---------
Net Increase (Decrease) in Cash 13,741 6,148
Cash at Beginning of Period 19,855 19,834
--------- ---------
Cash at End of Period $ 33,596 $ 25,982
========= =========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
- ---------------------------------------------------------------------
Issuance of shares in connection with acquisition of new business $ 13,600 $ 65,200
Interest accreted on LYONs 6,795 6,452
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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RPM, INC. AND SUBSIDIARIES
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1997
-----------------
(Unaudited)
(In thousands, except per share amounts)
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of
the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal, recurring accruals)
considered necessary for a fair presentation have been included for the
nine and three months ended February 28, 1997 and February 29, 1996.
For further information, refer to the consolidated financial statements
and notes included in the Company's Annual Report on Form 10-K for the
year ended May 31, 1996.
NOTE B - INVENTORIES
- --------------------
Inventories were composed of the following major classes:
February 28, May 31,
1997 (1) 1996
---- ----
Raw material and supplies $ 84,646 $ 64,995
Finished goods 148,381 113,934
-------- --------
$233,027 $178,929
======== ========
<FN>
(1) Estimated, based on components at May 31, 1996
NOTE C - ACQUISITIONS
- ---------------------
On August 10, 1995, the Company acquired all of the outstanding shares
of Star Finishing Products, Inc.
On September 21, 1995, the Company acquired all of the outstanding
shares of Dryvit Systems, Inc.
On June 13, 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.
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RPM, INC. AND SUBSIDIARIES
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 1997
-----------------
(Unaudited)
(In thousands, except per share amounts)
NOTE C - ACQUISITIONS - Continued
- ---------------------
On February 1, 1997, the Company acquired all the outstanding shares of
Tremco, Inc. a B.F. Goodrich Company subsidiary for approximately
$243,000,000. Tremco manufactures and sells roofing systems, sealants
and coatings to customers primarily in the building, construction,
building maintenance and retail markets.
These acquisitions as well as several small product line acquisitions
have been accounted for by the purchase method of accounting. The
following data summarizes, on an unaudited pro-forma basis, the
combined results of operations of the companies for the nine and three
months ended February 28, 1997 and February 29, 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.
For The Nine For The Three
Months Ended Months Ended
------------ ------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $1,184,457 $1,106,334 $342,315 $319,631
========== ========== ======== ========
Net Income $ 53,545 $ 39,907 $ 307 $ (2,098)
========== ========== ======== ========
Earnings per common
share and common
share equivalent $.68 $.51 $-0- $(.03)
==== ==== ==== =====
Earnings per common
share assuming full
dilution $.65 $.50 $-0- $(.03)
==== ==== ==== =====
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RPM, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
NINE MONTHS ENDED FEBRUARY 28, 1997
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
Sales were ahead 16% in the third quarter and 15% in the first nine
months of the current fiscal year compared to last year's results.
The Company acquired Composite Structures International, Inc. (CSI),
formerly known as Okura Holdings, Inc., on June 13, 1996. With annual
sales of approximately $35 million, CSI 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. CSI has posted a strong
growth record under the leading brand names Fibergrate and Chemgrate.
CSI offers the Company an attractive opportunity to capitalize on
market, product and customer synergies with other RPM operating
companies.
On February 1, 1997, the Company completed the acquisition of Tremco,
Inc., Cleveland, Ohio. Tremco manufactures roofing systems, sealants
and coatings under the Tremco brand name, selling primarily to the
building, construction, building maintenance and retail markets, and
had annual sales in 1995 of approximately $330 million. Tremco's
product lines and distribution network offer highly complementary
synergies with many of the Company's operations.
The CSI and Tremco acquisitions and that of Dryvit Systems, Inc.
(Dryvit) on September 21, 1995, along with several smaller
acquisitions and joint ventures, net of several small divestitures,
accounted for just over half of the increase in sales for the first
nine months and third quarter compared to last year. Existing
operations generated the balance of sales growth, slightly favoring
the industrial lines and predominantly from higher unit volume as
pricing adjustments have been nominal year-to-year. Exchange rate
differences have had a slight negative effect on sales this year
versus last.
Gross profit margin strengthened during the third quarter to 42.3% from
41.1% a year ago, bringing the year-to-date comparison to 42.7% from
41.7% last year. The majority of this improvement year-to-date comes
from existing operations and the positive effects of certain lower raw
material costs, favorable product mix including greater increases in
industrial sales, higher volume effects, and conversion cost controls.
The balance of the margin improvement is the result of the recent
acquisitions, net of divestitures.
Selling, general and administrative expenses increased to 30.9% for
nine months, compared with 30% last year. During the second quarter of
last year, the Company recovered approximately $2 million from
insurance carriers toward previously incurred environmental costs.
This recovery, plus several non-recurring expense reductions in the
year ago period, and planned increases in promotional spending and
the timing of certain expenses this year, caused substantially all of
the nine month percentage difference in this category, with
acquisition costs
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RPM, INC. AND SUBSIDIARIES
--------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
NINE MONTHS ENDED FEBRUARY 28, 1997
-----------------------------------
accounting for the difference. In the third quarter, S,G&A expenses
increased to 35% of sales from 33% a year ago, principally as a result
of product line mix and planned promotional spending increases, with
the balance attributable to net acquisition related expenses, mainly
from Tremco.
Increase interest expense reflects the additional indebtedness
associated with Dryvit, CSI, Tremco and other acquisitions, plus
non-cash interest accretion. Reductions in debt of approximately $14
million during the past year and slightly lower interest rates reduced
interest expense comparatively.
As expected, third quarter earnings were negatively (approximately
$.02 per share) impacted by the slow seasonal operations and
acquisition costs of Tremco. Earnings per share comparisons are
further affected this year by Company shares issued in connection
with the Dryvit acquisition.
The Company's foreign sales and results of operations are subject to
the impact of foreign currency fluctuations. Most of the
Company's foreign operations are in Belgium, and with the Belgian
franc being a fairly stable currency, this effect has been minimal.
Foreign debt is denominated in the respective foreign currency,
thereby eliminating any related translation impact on earnings.
The CSI and Tremco acquisitions are not expected to have a dilutive
effect on 1997 results, and in future years, both acquisitions are
expected to be positive contributors to Company performance.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
CASH PROVIDED FROM OPERATIONS
The Company generated cash from operations of $46 million during the
first nine months compared with $63 million during the same period a
year ago. This difference is mainly the result of temporary
accumulations of certain inventories to take advantage of pricing
opportunities (the benefits of which are reflected in the improved
gross profit margin discussed above) and to accommodate several new
product introductions, and timing differences. Cash flow from
operations continues to be the primary source of financing the
Company's internal growth.
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RPM, INC. AND SUBSIDIARIES
--------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
NINE MONTHS ENDED FEBRUARY 28, 1997
-----------------------------------
INVESTING ACTIVITIES
The Company is not capital intensive, but 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.
The Company invested $327 million to purchase CSI, Tremco and several
smaller businesses and joint ventures this year, net of cash acquired.
The Company historically has acquired complementary businesses and this
trend is expected to continue. Several small businesses were sold this
year for a net amount of $7 million.
FINANCING ACTIVITIES
The Company renegotiated its revolving credit facility on July 19, 1996
to $250 million and extended its final maturity to 2001 to finance the
acquisition of CSI.
On February 3, 1997, in conjunction with the acquisition of Tremco,
the Company entered into a new $500 million revolving credit agreement,
maturing in 2002. At the time of the acquisition, $257 million of this
facility was used to finance the purchase, including fees and other
cash requirements. In addition, $160 million was used to retire the
outstanding balance of the $250 million revolving credit agreement.
The new instrument had an outstanding balance of $417 million at
February 28, 1997.
As a result of these transactions, the Company has a debt-to-capital
ratio of 62% compared to 50% at May 31, 1996, while interest coverage
remains at over 5 times on a reported basis, and over 6 times on a cash
basis. The Company intends to reduce its debt level by approximately
$150 million within the next year through the sale of a number of
Tremco and other product lines and the sale of certain assets.
Presently, on a fully diluted basis, the Company's debt-to-capital
ratio is 48%.
Working capital increased to $359 million from $276 million at May 31,
1996, $55 million of this difference attributable to the CSI and Tremco
acquisitions. The current ratio moved to 2.8:1 from 2.5:1,
respectively.
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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RPM, INC. AND SUBSIDIARIES
PART II. - OTHER INFORMATION
ITEM 1-- LEGAL PROCEEDINGS
- --------------------------
Bondex International
--------------------
As previously reported in the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1996, and as updated in the Company's
Quarterly Reports on Form 10-Q for the quarters ended August 31, 1996 and
November 30, 1996, Bondex International, Inc., a wholly-owned subsidiary of the
Company ("Bondex"), is one of numerous corporate defendants in 449 then pending
asbestos-related bodily injury lawsuits filed on behalf of various individuals
in various jurisdictions of the United States. Subsequently, an additional 13
such cases have been filed and 7 such cases which had been filed were dismissed
with prejudice without payment pursuant to summary judgment or stipulation of
the parties, leaving a total of 455 such cases pending. Bondex continues to deny
liability in all asbestos-related lawsuits and continues to vigorously defend
them. Under a cost-sharing agreement among Bondex and its insurers effected in
1994, the insurers are responsible for payment of a substantial portion of
defense costs and indemnity payments, if any, with Bondex responsible for a
minor portion of each.
Dryvit
------
As previously reported in the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1996, and as updated in the Company's
Quarterly Reports on Form 10-Q for the quarters ended August 31, 1996 and
November 30, 1996, Dryvit Systems, Inc., a wholly-owned subsidiary of the
Company ("Dryvit"), is a co-defendant in several separate but related lawsuits,
some of which have sought to certify classes comprised of owners of structures
clad with exterior insulation finish systems ("EIFS") products manufactured by
Dryvit and other EIFS manufacturers. On September 18, 1996, the North Carolina
court presiding over one of the State Court cases, RUFF ET AL. V. PAREX, INC.,
ET AL. (96-CVS-0059), entered an order certifying a class of North Carolina
owners of single family or multi-family residential dwellings which had an EIFS
system installed during the period 1969 to present. On October 4, 1996, the
Judicial Panel on Multi-District Litigation ordered that the nine pending
federal court actions be transferred to the Eastern District Court of North
Carolina for coordinated or consolidated pre-trial proceedings. Subsequent to
that order, one additional federal court case, HILLMAN V. DRYVIT SYSTEMS, INC.,
ET (3-96-1096), was filed in U.S. District Court for the District of Minnesota.
Pursuant to the Multi-District Litigation Rules, that case has been consolidated
with the other nine cases under the designation IN RE: STUCCO LITIGATION. Dryvit
is also a co-defendant in a Georgia class action proceeding, HARDY, ET AL. V.
DRYVIT SYSTEMS, INC., ET AL., 97-CA-E55319. Dryvit's insurers are paying
Dryvit's defense costs, including attorneys fees and expenses as well as expert
witness fees. Dryvit, through a joint defense arrangement, continues to contest
these class certification requests and challenge the merits of the plaintiffs'
claims. Dryvit and its
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RPM, INC. AND SUBSIDIARIES
PART II. - OTHER INFORMATION
insurers are participating, along with the other EIFS manufacturers and their
insurers, in a mediation process coordinated through the CPR Institute for
Dispute Resolution.
ITEM 2--CHANGES IN SECURITIES
- -----------------------------
Part II
(c) Recent Sales of Unregistered Securities.
No securities of the Company that were not registered under the Securities
Act of 1933 have been issued or sold by the Company during the period
covered by this Quarterly Report on Form 10-Q other than the following:
(i) On January 14, 1997, in connection with the purchase by RPM and its
wholly owned subsidiary, Bondo/Mar-Hyde Corporation (the successor
corporation to Dynatron/Bondo Corporation) of all of the assets, and
the assumption of certain liabilities, of the business conducted by
Marson Corporation, a Delaware corporation and Marson Canada Inc., a
Canadian corporation, as the Marson Automotive Division, the Company
issued 771,632 shares of Common Stock to Marson Corporation, as
consideration for the $13,600,000 purchase price. Registration under
the Securities Act of 1933 was not effected with respect to the
transaction described above in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on 8-K.
(a) Exhibits.
Sequential
Exhibit No. Description Page No.
- ----------- ----------- --------
10.1 Credit Agreement, dated as of February 3, 1997,
between the Company, the Banks identified on
the Signature Pages thereto, National City Bank
as Documentation Agent, and The Chase
Manhattan Bank as Administrative Agent.
11.1 Statement Regarding Computation of Per Share
Earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated February 1, 1997,
reporting under Item 2 the Company's acquisition of Tremco Incorporated as
of February 1, 1997. The following financial statements were filed
therewith:
Tremco Incorporated Combined financial Statements as of October 31, 1996
Report of Independent Auditors
Combined Statement of Assets to be Acquired and Liabilities to be Assumed
Combined Statement of Revenues and Expenses
Combined Statement of Cash Flows
Notes to Combined Financial Statements
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RPM, Inc.
By /s/ Frank C. Sullivan
-----------------------------
Frank C. Sullivan
Chief Financial Officer
(Duly Authorized Officer and
Chief Financial Officer)
Date: 4/14/97