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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 NOVEMBER 30, 1997 or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the transition period from to .
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Commission File No. 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 January 13, 1998, 98,259,288 RPM, Inc. Common Shares were outstanding.
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RPM, INC. AND SUBSIDIARIES
--------------------------
INDEX
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PART I. FINANCIAL INFORMATION Page No.
------------------------------ --------
Consolidated Balance Sheets
November 30, 1997 and May 31, 1997 3
Consolidated Statements of Income
Six Months and Three Months Ended November 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six Months Ended November 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results
of Operations and Financial Condition 7
PART II. OTHER INFORMATION 11
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RPM, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
(In thousands, except per share amounts)
ASSETS
------
November 30, 1997 May 31, 1997
---------------- ----------------
Current Assets
Cash and short-term investments $43,889 $37,442
Trade accounts receivable (less allowance for
doubtful accounts $11,962 and $12,006) 287,194 291,923
Inventories 229,999 215,306
Prepaid expenses and other current assets 47,557 68,156
Businesses held for sale 107,494
---------------- ----------------
Total current assets 608,639 720,321
---------------- ----------------
Property, Plant and Equipment, At Cost 477,201 460,096
Less: accumulated depreciation and amortization 203,068 189,812
---------------- ----------------
Property, plant and equipment, net 274,133 270,284
---------------- ----------------
Other Assets
Costs of businesses over net assets acquired, net of amortization 369,025 375,606
Intangible assets, net of amortization 214,237 219,098
Equity in unconsolidated affiliates 19,477 18,758
Other 35,667 29,161
---------------- ----------------
Total other assets 638,406 642,623
---------------- ----------------
Total Assets $1,521,178 $1,633,228
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current portion of long term debt $3,991 $3,967
Accounts payable 108,534 109,400
Accrued compensation and benefits 47,995 40,641
Accrued loss reserves 37,053 37,699
Other accrued liabilities 33,212 40,141
Income taxes payable 8,504 9,938
---------------- ----------------
Total current liabilities 239,289 241,786
---------------- ----------------
Long-term Liabilities
Long-term debt, less current maturities 641,341 784,439
Deferred income taxes 67,414 70,210
Other long-term liabilities 52,715 43,497
---------------- ----------------
Total long-term liabilities 761,470 898,146
---------------- ----------------
Shareholders' Equity
Common shares, stated value $.014 per share;
authorized 200,000,000 shares;
issued and outstanding 98,258,000
and 98,029,000 shares, respectively * 1,429 1,428
Paid-in capital 230,536 229,619
Retained earnings 298,896 270,465
Cumulative translation adjustment (10,442) (8,216)
---------------- ----------------
Total shareholders' equity 520,419 493,296
---------------- ----------------
Total Liabilities And Shareholders' Equity $1,521,178 $1,633,228
================ ================
* Data at May 31, 1997 has been restated to reflect a 25% stock dividend issued
on December 8, 1997.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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RPM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended Three Months Ended
November 30, November 30,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
Net Sales $812,810 $645,307 $397,757 $316,076
Cost of Sales 454,376 368,565 223,404 182,030
-------------- -------------- -------------- --------------
Gross Profit 358,434 276,742 174,353 134,046
Selling, General and Administrative
Expenses 252,659 187,386 127,441 93,980
Interest Expense, Net 19,461 15,462 9,617 7,834
-------------- -------------- -------------- --------------
Income Before Income Taxes 86,314 73,894 37,295 32,232
Provision for Income Taxes 36,683 31,405 15,850 13,699
-------------- -------------- -------------- --------------
Net Income $49,631 $42,489 $21,445 $18,533
============== ============== ============== ==============
Earnings per common share and common
share equivalent (Exhibit 11.1) * $0.50 $0.44 $0.22 $0.19
============== ============== ============== ==============
Earnings per common share assuming full
dilution (Exhibit 11.1) * $0.47 $0.41 $0.21 $0.18
============== ============== ============== ==============
Dividends per common share * $0.216 $0.20 $0.112 $0.104
============== ============== ============== ==============
* Data for November 30, 1996 has been restated to reflect a 25% stock dividend
issued on December 8, 1997.
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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RPM, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended November 30,
------------------------------------
1997 1996
---------------- ----------------
Cash Flows From Operating Activities:
Net Income $49,631 $42,489
Depreciation and amortization 26,672 23,236
Items not affecting cash and other (3,481) (6,561)
Changes in operating working capital (6,044) (23,029)
---------------- ----------------
66,778 36,135
---------------- ----------------
Cash Flows From Investing Activities:
Additions to property and equipment (18,377) (13,053)
(Increase) decrease in marketable securities (9,157) 1,964
Proceeds from sales of businesses, net of cash 130,809
Acquisition of new businesses, net of cash (78,335)
---------------- ----------------
103,275 (89,424)
---------------- ----------------
Cash Flows From Financing Activities:
Proceeds from stock option exercises 668 584
Increase (decrease) in debt (143,074) 80,016
Dividends (21,200) (19,370)
---------------- ----------------
(163,606) 61,230
---------------- ----------------
Net Increase (Decrease) in Cash 6,447 7,941
Cash at Beginning of Period 37,442 19,855
---------------- ----------------
Cash at End of Period $43,889 $27,796
================ ================
Supplemental Schedule of Non-Cash Investing and Financing Activities:
- ---------------------------------------------------------------------
Interest accreted on LYONS $4,743 $4,504
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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RPM, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOVEMBER 30, 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
six and three months ended November 30, 1997 and November 30, 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, 1997.
NOTE B - INVENTORIES
- --------------------
Inventories were composed of the following major classes:
November 30, May 31,
1997(1) 1997
------------ -------
Raw material and supplies $ 85,815 $ 80,333
Finished goods 144,184 134,973
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$229,999 $215,306
======== ========
(1) Estimated, based on components at May 31, 1997
NOTE C - ACQUISITIONS
- ---------------------
On June 13, 1996, the Company acquired all the outstanding shares of
Composite Structures International, Inc. formerly known as Okura
Holdings, Inc.
On February 1, 1997, the Company acquired all the outstanding shares of
Tremco, Inc.
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 six and three
months ended November 30, 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 Six For The Three
Months Ended Months Ended
11/30/96 11/30/96
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Net Sales $799,786 $388,872
======== ========
Net Income $44,525 $19,526
======== ========
Earnings per common share and common
share equivalent $.46 $.20
==== ====
Earnings per common share assuming full
dilution $.41 $.19
==== ====
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RPM, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
SIX MONTHS ENDED NOVEMBER 30, 1997
----------------------------------
RESULTS OF OPERATIONS
- ---------------------
The Company's sales and earnings advanced 26% and 16%, respectively, in
the second quarter and 26% and 17%, respectively, in the first six
months of the current fiscal year compared to last year's results.
The Tremco acquisition on February 1, 1997, and several smaller
acquisitions and joint ventures, net of several divestitures, accounted
for approximately 80% of the increase in sales in the first six months
and approximately 70% of the sales increase in the second quarter,
compared to last year. Existing operations generated the balance of
sales growth, favoring the industrial lines.
The UPS strike during the summer affected shipments, and caused some
loss of business. In addition, a generally slower retail market
affected consumer operations, particularly during the first quarter.
The internal sales growth was essentially from higher unit volume, as
prices have been fairly steady year-to-year. Exchange rate differences
had a slight, negative effect on sales this year versus last and, with
the dollar continuing to strengthen, this trend will most likely
continue.
The gross profit margin strengthened from last year, with the second
quarter achieving a 43.8% margin compared with 42.4% a year ago,
bringing the year-to-date this year to 44.1% compared with 42.9% last
year. Tremco's comparatively higher margins account for this change,
net of slightly lower margins from product mix and lower than planned
sales volume at various operations.
The Company's selling, general and administrative expenses increased to
32.0% of sales in the second quarter from 29.7% a year ago, and to
31.1% after six months compared with 29.0% last year. Tremco accounts
for this difference, incurring typically higher costs in this category,
along with its acquisition related expenses. Existing operations have
continued their planned increases in promotional and related spending
to further the Company's growth.
Increased interest expense reflects the additional indebtedness to
acquire Tremco, CSI (June 1996) and other smaller acquisitions, plus
non-cash interest accretion. Reduction of debt of approximately $40
million throughout the past year reduced net interest expense
comparatively.
As expected, first half sales and earnings were positively impacted by
the strong seasonal operations of Tremco during this period, plus
related restructuring is proceeding on plan and ahead of schedule. The
winter months are seasonally much slower months for
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RPM, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
SIX MONTHS ENDED NOVEMBER 30, 1997
----------------------------------
Tremco, accentuating the already seasonal nature of the Company, and
will result in lower third quarter earnings versus the prior year.
Tremco is expected to have a strong additive effect on the fourth
quarter and fiscal year 1998 results, with increasing contributions to
sales and earnings in future fiscal years.
The Company's foreign sales and results of operations are subject to
the impact of foreign currency fluctuations. As most of the Company's
foreign operations are in countries with a fairly stable currency, such
as Belgium and Canada, this effect has been minimal. In addition,
foreign debt is denominated in the respective foreign currency, thereby
eliminating any related translation impact on earnings. Should the
dollar continue to strengthen, the Company's foreign results of
operations will be negatively impacted; to date, the effect has not
been significant. The Company does not currently hedge against the risk
of exchange rate fluctuations.
The present economic situation in Southeast Asia has not had, nor is it
expected to have, material negative effects on the Company.
All previously reported per share data have been restated to reflect
the 25% stock dividend issued December 8, 1997, treated as a 5-for-4
stock split.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
CASH PROVIDED FROM OPERATIONS
The Company generated cash from operations of $67 million during the
first six months of the current fiscal year, up from $36 million during
the same period last year. Other than the positive earnings
performance, the main difference in operating cash flow is attributable
to Tremco and its strong seasonality, plus a number of timing
differences. Cash flow from operations continues to be the primary
source of financing the Company's internal growth.
INVESTING ACTIVITIES
The Company is not capital intensive, but does invest in capital
primarily to accommodate the Company's continued growth, through
improved production and distribution efficiency and capacity, and to
enhance administration. Such expenditures generally do not exceed
depreciation and amortization in a given year.
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RPM, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
SIX MONTHS ENDED NOVEMBER 30, 1997
----------------------------------
The Company's captive insurance company invests in marketable securities in
the ordinary course of conducting its operations. The difference between
years is primarily attributable to the timing of investments.
Earlier this year, the Company collected a $23.3 million May 31, 1997
receivable associated with the sale of a business, and completed the sale
of Tremco's insulating glass unit and auto glass division for a net amount
of $107.5 million.
FINANCING ACTIVITIES
The $130.8 million net proceeds mentioned above were used to reduce the
Company's long-term debt (revolving credit facility), along with $17
million of additional debt reduction through internal cash generation, net
of $5 million of non-cash interest accretion added to long-term debt. The
difference is mainly related to currency translation changes.
As a result of these transactions, the Company has a debt-to-capital ratio
of 55%, compared to 62% at May 31, 1997, while interest coverage is five
times on a reported basis and six times on a cash basis. On a fully diluted
basis, which assumes conversion of the zero-coupon issue, the Company's
debt-to-capital ratio would be reduced to 39%.
Working capital decreased to $369 million from $479 million at May 31,
1997. The largest decrease was the use of the $130.8 million proceeds from
the sales of businesses to reduce long-term debt. The current ratio moved
to 2.5:1 from 3.0:1, respectively.
The stronger dollar effect on the Company's foreign net assets has tended
to reduce shareholders' equity and this trend could continue if the dollar
continues to strengthen, and the growth of net assets continues.
The Company maintains excellent relations with its banks and other
financial institutions to further enable the financing of future growth
opportunities.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing discussion includes forward-looking statements relating to
the business of the Company. These forward-looking statements, or other
statements made by the Company, are made based on management's expectations
and beliefs concerning future events impacting the Company and are subject
to uncertainties and factors (including those specified below) which are
difficult to predict and, in many instances, are beyond the control of the
Company. As a result, actual results
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RPM, INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
SIX MONTHS ENDED NOVEMBER 30, 1997
----------------------------------
of the Company could differ materially from those expressed in or implied
by any such forward-looking statements. These uncertainties and factors
include (a) the price and supply of raw materials, particularly titanium
dioxide, certain resins, aerosols and solvents; (b) continued growth in
demand for the Company's products; (c) risks associated with environmental
liability inherent in the nature of a chemical coatings business; (d) the
effect of changes in interest rates; (e) the effect of fluctuations in
currency exchange rates upon the Company's foreign operations; and (f) the
effect of non-currency risks of investing in and conducting operations in
foreign countries, including those relating to political, social, economic
and regulatory factors.
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RPM, Inc. and Subsidiaries
Part II. -- Other Information
ITEM 1 -- LEGAL PROCEEDINGS
- ---------------------------
As previously reported in the Company's Annual Report on Form 10-K for
the fiscal year ended May 31, 1997, and as updated in the Company's Quarterly
Report on Form 10-Q for the quarter ended August 31, 1997, Bondex
International, Inc., a wholly-owned subsidiary of the Company ("Bondex"), was
one of numerous corporate defendants in 464 then pending asbestos-related bodily
injury lawsuits filed on behalf of various individuals in various jurisdictions
of the United States. Subsequently, an additional 12 such cases have been filed
and 6 such cases which had been filed were dismissed with prejudice without
payment, leaving a total of 470 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.
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RPM, Inc. and Subsidiaries
Part II. -- Other Information
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on October 17,
1997. The following matters were voted on at the meeting.
1. Election of Laurie Gustin, James A. Karman, Donald K. Miller and Kevin
O'Donnell as Directors of the Company. The nominees were elected as Directors
with the following votes:
LAURIE GUSTIN
-------------
For 65,050,667
Withheld 873,527
Broker non-votes -0-
JAMES A. KARMAN
---------------
For 65,452,668
Withheld 471,526
Broker non-votes -0-
DONALD K. MILLER
----------------
For 65,211,747
Withheld 712,447
Broker non-votes -0-
KEVIN O'DONNELL
---------------
For 65,118,753
Withheld 805,441
Broker non-votes -0-
2. Approval and adaptation of the RPM, Inc. 1997 Restricted Stock Plan:
For 65,248,237
Against 2,892,844
Abstain 524,691
Broker non-votes 258,422
For information on how the votes for the above matter have been
tabulated, see the Company's definitive Proxy Statement used in connection with
the Annual Meeting of Shareholders on October 17, 1997.
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RPM, Inc. and Subsidiaries
Part II. -- Other Information
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
OFFICIAL EXHIBIT NUMBER DESCRIPTION
----------------------- -----------
10.1 RPM, Inc. 1997 Restricted Stock Plan,
and form of Acceptance and Escrow
Agreement to be used in connection
therewith.
11.1 Statement regarding computation of per
share earnings
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
-------------------
There were no reports on Form 8-K filed during the three months ended
November 30, 1997.
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SIGNATURES
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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/ Thomas C. Sullivan
------------------------------
Thomas C. Sullivan
Chairman & Chief Executive Officer
By /s/ Frank C. Sullivan
-------------------------------
Frank C. Sullivan
Chief Financial Officer
Date: 1/14/98