1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RPM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Results of Operations
Fiscal 1998 Compared To Fiscal 1997
The Company achieved its 51st consecutive record year of sales and
earnings in the 1998 fiscal year. Sales reached $1.62 billion, a 20% increase
over 1997, while earnings grew 12%, to $87.8 million.
On March 31, 1998, the Company acquired The Flecto Company, Inc.
("Flecto"), a leading manufacturer of wood finishes and equipment for the retail
do-it-yourself wood and floor finishing markets [refer to Note A (2)]. With
annual sales of approximately $50 million, Flecto has the leading market share
position in Canada and substantial market share in the United States and will
complement the Company's other leading consumer name brand companies targeting
the retail do-it-yourself market, such as Rust-Oleum, Zinsser, Bondex and Bondo.
The Flecto acquisition and that of Tremco, Inc. on February 1, 1997,
along with several smaller acquisitions and joint ventures, net of several small
divestitures, accounted for approximately 65% of the 1998 sales increase. The
Company's existing operations generated the balance of the sales increase,
growing at the rate of 7% for the year, almost entirely from higher unit volume
as pricing adjustments have been negligible. The consumer businesses grew
slightly faster than the industrial in 1998. Exchange rate differences had a
slight negative effect of less than 1% of sales versus last year and, should the
dollar continue to strengthen, this trend will continue.
The UPS strike affected shipments and caused some loss of business early
in the year, and generally slower retail markets affected consumer operations
during the first half of the year. Substantially all operating units experienced
generally stronger growth in the second half.
The Company's gross profit margin has continued to strengthen, improving
to 44.8% from 44.3% a year ago. This is the result of the stronger average
margins of the recently acquired companies, Tremco and Flecto, coupled with
margin improvements at Tremco throughout the year, mainly from purchasing
savings by being part of a larger group, and the successful restructuring of its
operations which is on schedule. Raw material price changes were not a
significant issue this year and the Company is confident that such changes in
the foreseeable future will continue to be effectively managed.
Selling, general and administrative expenses increased to 33.3% of sales
from 31.8% in 1997. Tremco and Flecto, with their proportionately higher costs
in this category, plus acquisition related expenses, account for the majority of
this increase. Existing operations increased certain promotional and related
spending to further the Company's growth, as planned. The consumer businesses,
in particular, also incurred higher freight costs in 1998 to meet the increasing
demands for smaller, more frequent shipments to their customers, while the Far
East economic situation precipitated certain bad debts and exchange losses among
the industrial businesses.
Interest expense increased $6.2 million in 1998 [refer to Note A(11)],
reflecting the additional indebtedness to acquire Tremco, Flecto, and other
smaller acquisitions, plus non-cash interest accretion. Debt reductions and
fractionally lower interest rates between years reduced net interest expense,
comparatively.
The tax rate improved in 1998 [refer to Note C], with the most
significant improvements coming from the foreign sales corporation (FSC)
resulting in more favorable tax treatment of the Company's exports from the
U.S., proportionately lower state and local taxes, and fewer tax disadvantaged
losses among foreign countries.
Approximately half the growth in earnings and earnings per share was
generated by existing operations, and the balance from the net effect of
acquisitions and divestitures.
The decline in the Company's net income margin to 5.4% from 5.8% a year
ago is the result of the Tremco acquisition and its comparatively lower return
on sales, primarily as a result of related acquisition costs. Tremco's return
improved significantly this year and should continue to improve with growth
combined with the savings that have been generated through continuing
restructuring programs.
The Company's earnings per share this year were affected by the averaging
of Company shares issued in connection with Flecto and a smaller acquisition,
causing a 12% increase in earnings to relate to an 11% increase in diluted
earnings per share. All previously reported per share data have been restated to
reflect a 25% stock dividend issued December 8, 1997.
Subsequent to year-end, on July 8, 1998, the Company called for the
redemption of all of its $400 million face value at maturity Liquid Yield Option
Notes (LYONs) due 2012 [refer to Note B]. The accreted value of the LYONs
securities on the August 10, 1998 redemption date was approximately $192
million. Bondholders converted approximately $160 million of this amount into
10.1 million Company shares, which will correspondingly increase the Company's
basic shares outstanding. The remaining 2.1 million shares that had been
reserved for this conversion will now be removed from the calculation of diluted
earnings per share. The first-year interest savings resulting from the LYONs
converted into Company shares will amount to approximately $8 million on an
annualized basis.
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 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 fairly stable currencies, such as Belgium and
Canada, this effect has not been significant. In addition, foreign debt is
denominated in the
22
2
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 [refer to Note I].
The Company has evaluated its existing information systems to identify
the changes needed for Year 2000 compliance. Because the Company is highly
decentralized, comprised of multiple operating companies, the need to upgrade or
replace a large system does not exist, thereby minimizing the complexity of the
required modifications. The Year 2000 evaluation effort has included the use of
outside consultants to independently test the effectiveness of planned
modifications. Although conclusive cost estimates have not been determined, it
is anticipated that Year 2000 costs will result in increased expenses and
capital expenditures during fiscal years 1999 and 2000. The Company does not
anticipate, however, that Year 2000 compliance costs will have a material effect
on its financial position or results of operations in those fiscal years.
Results of Operations
FISCAL 1997 COMPARED TO FISCAL 1996
Fibergrate Composite Structures Incorporated (Fibergrate), formerly known
as Okura Holdings, Inc., was acquired on June 13, 1996. With annual sales of
approximately $40 million, Fibergrate 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.
Fibergrate offers the Company an attractive opportunity to capitalize on market,
product and customer synergies with its sister companies, particularly Stonhard
in flooring systems.
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
maintenance market. Tremco's product lines and distribution network complement
many of the Company's operations. Upon its acquisition, Tremco began major
restructuring and, in June 1997, the Company completed the sale of Tremco's $70
million insulating glass unit (Swiggle) and $10 million Autoglass division, both
of which served OEM markets unrelated to RPM's core business. In accordance with
accounting standards, the Company's results of operations did not include the
results of Swiggle or Autoglass or the associated interest expense related to
the respective borrowings being repaid with the sale proceeds [refer to Note A
(2)]. As a result of these transactions, Tremco had a restructured annual
revenue base of approximately $230 million.
The Fibergrate 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 approximately
60% of the 1997 sales increase. The Company's existing operations generated the
balance of the sales increase, approximately 8%, net of divestitures, slightly
favoring the industrial lines, and almost entirely from higher unit volume as
pricing adjustments were negligible year-to-year. Exchange rate differences had
a slight negative effect on sales in 1997 versus 1996.
The Company's gross profit margin strengthened to 44.3% in 1997 from
42.8% in 1996. Nearly half of the 1997 improvement came from the efforts of
existing operations, where leveraged purchasing of significant materials
resulted in a number of lower raw material costs, primarily among consumer
lines, and where conversion costs continue to be appropriately controlled. The
balance of the gross profit margin improvement was the result of stronger
average margins among the acquired companies, particularly Fibergrate and
Tremco, coupled with weaker margins among the companies recently divested.
Selling, general and administrative expenses increased in 1997 to 31.8%
of sales compared with 30.0% in 1996. A $2 million insurance recovery plus
several other non-recurring expense reductions during 1996, coupled with planned
increases in promotional spending to further the Company's growth, and the
timing of certain expenses in 1997, caused the majority of the percentage change
in this expense category. The recent acquisitions, especially Tremco, and
divestitures accounted for the remainder of this percentage difference.
During 1997, certain businesses and assets were divested in pursuit of
management's commitment to its core markets and the reduction of debt created by
the Tremco acquisition. The net gains that resulted from these divestitures were
not material to the Company's results.
Interest expense increased $6.8 million in 1997, driven primarily by
additional indebtedness associated with Tremco, Fibergrate, Dryvit and other
acquisitions. The reduction of debt from year-to-year, and fractionally lower
interest rates between years, reduced net interest expense comparatively.
The tax rate improved in 1997, primarily through the establishment of a
foreign sales corporation. This benefit was somewhat reduced, however, by tax
disadvantaged losses of Tremco in several foreign countries.
The 1997 decline in the Company's net income margin to 5.8% from 6.1% in
1996 was the result of the Tremco acquisition, which added approximately $74
million to fiscal 1997 sales and, as expected, did not contribute to earnings
due to the seasonality of their product lines and related acquisition costs. The
Company's 1997 net income margin would have been 6.1% were it not for this
effect.
The Company's earnings per share in 1997 were affected by the averaging
of Company shares issued in connection with the September 1995 Dryvit
acquisition, causing the 14% increase in earnings to compare with a 10% increase
in diluted earnings per share.
23
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RPM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Capital Resources and Liquidity
CASH PROVIDED FROM OPERATIONS
The Company generated cash from operations of $111 million in 1998, $42
million more than during 1997, on an earnings increase of $9.5 million. This is
primarily attributable to the seasonality of Tremco's business between its date
of acquisition, February 1, 1997, and May 31, 1997. There were also temporary
accumulations of certain inventories a year ago to take advantage of pricing
opportunities and to accommodate several new product introductions.
Cash flow from operations continues to be the primary source of financing
the Company's internal growth, with limited use of short-term credit.
INVESTING ACTIVITIES
The Company is not capital intensive, but continually invests in capital
expenditures primarily to accommodate the Company's continued growth through
improved production and distribution efficiency and capacity, and enhanced
administration. Such expenditures generally do not exceed depreciation and
amortization in a given year. Capital expenditures in 1998 amounted to $60
million compared with depreciation and amortization of $57 million.
The investment of $48 million in new businesses this year reflects the
acquisition of Flecto and several other smaller businesses and assets this year,
net of cash acquired. The Company historically has acquired complementary
businesses and this trend is expected to continue.
The Company's captive insurance company invests in and trades marketable
securities in the ordinary course of conducting its operations, and this
activity will continue. The differences between years are 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 sales of
Tremco's insulating glass unit and Autoglass division for a net amount of $107.5
million, as previously discussed under Results of Operations.
FINANCING ACTIVITIES
The $130.8 million net proceeds mentioned above were used to reduce the
Company's revolving credit facility, $51 million of additional debt was incurred
to finance acquisitions during the year and $9.6 million of non-cash accretion
was 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 56% compared to 62% at May 31, 1997, while interest coverage is five
times on a reported basis and nearly seven times on a cash basis. The LYONs
redemption subsequent to year-end, referred to above, has resulted in a decrease
in long-term debt of approximately $160 million and an equivalent increase in
shareholders' equity. The Company's revolving credit facility was used to fund
the LYONs securities redeemed for cash in the amount of approximately $32
million. The Company's debt-to-capital ratio has been reduced to 44% and
interest coverage has improved to six times as a result of this redemption.
On March 5, 1998, the Company completed a public offering of $100 million
of Notes due 2008 (the "Notes"). The Notes are unsecured obligations of the
Company and rank pari passu with all other unsecured obligations of the Company.
During the first two years, the Notes will bear interest, payable semi-annually
in arrears, at a rate per annum equal to the London Interbank Offered Rate
("LIBOR") for U.S. dollar deposits for a period of six months, minus 5 basis
points. During any subsequent period, the Notes will bear interest, payable
semi-annually in arrears, at a rate of 6.50% per annum, or the three month LIBOR
rate.
The total net proceeds of this offering of approximately $99 million were
used to reduce the outstanding balance of the Company's $500 million revolving
line of credit. The Company subsequently reduced the limit of this credit
facility to $300 million.
The Company acquired Flecto for a combination of cash and the issuance of
Company shares, with the Company's revolving credit facility being utilized for
the cash portion of this transaction.
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 these 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 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; (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; (g) the impact of future acquisitions; and (h) the potential
future impact of Year 2000-related software conversion issues which may result
from the actions or inactions of third parties with whom the Company and its
operating companies do business.
24
4
CONSOLIDATED BALANCE SHEETS
RPM, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
May 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and short-term investments (Note A) $ 40,783 $ 37,442
Trade accounts receivable (less allowances of $12,718 in 1998 and $12,006 in 1997) 332,944 291,923
Inventories (Note A) 243,249 215,306
Prepaid expenses and other current assets 55,498 68,156
Businesses held for sale (Note A) 107,494
=========================================================================================================================
TOTAL CURRENT ASSETS 672,474 720,321
- -------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE A)
Land 27,510 23,903
Buildings and leasehold improvements 187,405 168,132
Machinery and equipment 300,995 268,061
- -------------------------------------------------------------------------------------------------------------------------
515,910 460,096
Less allowance for depreciation and amortization 210,013 189,812
- -------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 305,897 270,284
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Cost of businesses over net assets acquired, net of amortization (Note A) 423,304 375,606
Other intangible assets, net of amortization (Note A) 232,614 219,098
Equity in unconsolidated affiliates 20,536 18,758
Other 28,454 29,161
=========================================================================================================================
TOTAL OTHER ASSETS 704,908 642,623
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,683,279 $ 1,633,228
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 119,882 $ 109,400
Current portion of long-term debt (Note B) 6,316 3,967
Accrued compensation and benefits 52,941 40,641
Accrued loss reserves (Note H) 43,332 37,699
Other accrued liabilities 51,383 40,141
Income taxes payable (Notes A and C) 11,915 9,938
=========================================================================================================================
TOTAL CURRENT LIABILITIES 285,769 241,786
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities (Note B) 715,689 784,439
Other long-term liabilities 56,704 43,497
Deferred income taxes (Notes A and C) 58,059 70,210
=========================================================================================================================
TOTAL LIABILITIES 1,116,221 1,139,932
- -------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares, stated value $.015 per share; authorized 200,000,000 shares,
issued and outstanding 100,254,000; 98,029,000 in 1997 (Note D) 1,460 1,428
Paid-in capital 264,508 229,619
Cumulative translation adjustment (Note A) (13,821) (8,216)
Retained earnings 314,911 270,465
=========================================================================================================================
TOTAL SHAREHOLDERS' EQUITY 567,058 493,296
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,683,279 $ 1,633,228
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
25
5
CONSOLIDATED STATEMENTS OF INCOME
RPM, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended May 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
NET SALES $1,615,274 $1,350,537 $1,136,396
Cost of sales 891,862 752,391 649,819
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 723,412 598,146 486,577
Selling, general and administrative expenses 537,156 429,838 340,851
Interest expense, net 36,700 32,580 25,840
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 149,556 135,728 119,886
Provision for income taxes (Note C) 61,719 57,413 50,957
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 87,837 $ 78,315 $ 68,929
- ---------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (Note D) 98,527 97,285 95,208
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share (Note D) $ .89 $ .81 $ .72
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share (Note D) $ .84 $ .76 $ .69
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ .44 $ .41 $ .38
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
26
6
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, 1995 91,628 $ 1,334 $ 149,028 $ 580 $ 199,527 $ 350,469
Net income 68,929 68,929
Dividends paid (5) (1,145) (35,598) (36,743)
Business combinations 5,000 73 66,089 (962) 65,200
Stock option exercises, net 188 3 1,047 1,050
Translation adjustments (3,072) (3,072)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1996 96,811 1,410 215,019 (2,492) 231,896 445,833
Net income 78,315 78,315
Dividends paid (39,746) (39,746)
Amendment of articles (250) (250)
Business combinations 965 14 13,586 13,600
Stock option exercises, net 253 4 1,264 1,268
Translation adjustments (5,724) (5,724)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1997 98,029 1,428 229,619 (8,216) 270,465 493,296
Net income 87,837 87,837
Dividends paid (6) (83) (43,391) (43,474)
Debt conversion 32 499 499
Business combinations 1,813 26 32,259 32,285
Stock option exercises, net 276 4 2,216 2,220
Restricted stock grants 110 2 (2)
Translation adjustments (5,605) (5,605)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 100,254 $ 1,460 $ 264,508 $ (13,821) $ 314,911 $ 567,058
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
* Restated
27
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
RPM, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
YEAR ENDED MAY 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $87,837 $78,315 $68,929
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 57,009 51,145 42,562
(Decrease) in deferred liabilities (10,459) (7,400) (5,696)
(Earnings) of unconsolidated affiliates (2,217) (2,275) (2,120)
Non-cash interest expense 9,599 9,127 8,666
Changes in assets and liabilities, net of effect
from purchases and sales of businesses:
(Increase) in accounts receivable (26,944) (34,934) (17,249)
(Increase) in inventory (19,727) (11,722) (4,441)
(Increase) in prepaid and other assets (4,163) (9,520) (3,319)
Increase in accounts payable 6,138 3,489 9,808
Increase (decrease) in accrued liabilities 18,413 (4,568) (728)
Other (4,453) (2,706) (723)
- ---------------------------------------------------------------------------------------------------------------------------
Cash From Operating Activities 111,033 68,951 95,689
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (60,343) (35,825) (33,196)
Acquisition of businesses, net of cash acquired (47,709) (315,960) (45,375)
Purchase of marketable securities (27,224) (13,428) (17,453)
Proceeds from marketable securities 17,355 14,992 10,951
Distributions from joint ventures 592 261 1,571
Investments in joint ventures (2,702) (200) (1,663)
Proceeds from sale of assets and businesses 131,222 8,930 11,666
- ---------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Investing Activities 11,191 (341,230) (73,499)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term and short-term debt 292,117 508,528 219,119
Reductions of long-term and short-term debt (369,746) (179,934) (205,595)
Cash dividends/distributions paid (43,474) (39,746) (36,743)
Exercise of stock options 2,220 1,268 1,050
Other (250)
- ---------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Financing Activities (118,883) 289,866 (22,169)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 3,341 17,587 21
CASH AT BEGINNING OF YEAR 37,442 19,855 19,834
- ---------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $40,783 $37,442 $19,855
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $32,375 $23,454 $14,369
Income taxes $70,189 $67,842 $59,277
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Interest accreted on LYONs $ 9,599 $ 9,127 $ 8,666
Common shares issued for acquisitions $32,285 $13,600 $65,200
Receivables from disposition of businesses $ $26,728 $
Conversion of debt to equity $ 499 $ $
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- MAY 31, 1998, 1997 AND 1996
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. 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, 1998, the Company completed several
acquisitions. As reported last year, the Company acquired all the outstanding
shares of Tremco, Incorporated and Fibergrate Composite Structures, Inc. On
March 31, 1998, the Company acquired all the outstanding shares of The Flecto
Company, Inc. and affiliates.
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 $187,000,000 between the fair value of net assets acquired and
the purchase consideration of $427,000,000 ($381,000,000 in cash and 2,777,000
of the Company's shares) has been allocated to goodwill. The purchase price
allocations have been based on preliminary estimates, which may be revised at a
later date. The assets, liabilities and operating results of these companies are
reflected in the Company's financial statements from their respective dates of
acquisition forward.
As reported last year, the Company completed the sale of Tremco's Windows
and Autoglass businesses for $107,000,000. In addition, the Company also
completed several other divestitures and product line restructurings during the
past two years resulting in an immaterial gain with additional proceeds
to the Company of approximately $36,000,000.
The following data summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and the significant businesses
acquired for the two years ended May 31, 1998. 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 1998 1997
- --------------------------------------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Net Sales $ 1,648,453 $1,586,482
- --------------------------------------------------------------------------------
Net Income $ 88,133 $ 82,962
- --------------------------------------------------------------------------------
Basic Earnings Per Common Share $ .88 $ .84
- --------------------------------------------------------------------------------
Diluted Earnings Per Common Share $ .83 $ .79
- --------------------------------------------------------------------------------
3. FOREIGN CURRENCY
The functional currency of foreign subsidiaries is their local currency.
Accordingly, for the periods presented, assets and liabilities have been
translated using exchange rates prevailing at year-end while 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 of $21,319,000 and $11,338,000 at May 31, 1998 and
1997, respectively, are included in other current assets and are stated at cost
which approximates their fair market value.
6. FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include
cash and short-term investments, accounts receivable, accounts payable and debt.
The carrying amount of cash and short-term investments, accounts receivable and
accounts payable approximates fair value because of their short term maturity.
The carrying amount of the Company's debt instruments approximates fair
value based on quoted market prices, variable interest rates, or borrowing rates
for similar types of debt arrangements.
7. 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 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------
Raw material and supplies $ 77,173 $ 75,333
Finished goods 166,076 139,973
- --------------------------------------------------------------------------------
Total Inventory $ 243,249 $ 215,306
29
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- MAY 31, 1998, 1997 AND 1996
(CONT.)
RPM, INC. AND SUBSIDIARIES
8. 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 35 years
Buildings and improvements 5 to 50 years
Machinery and equipment 3 to 20 years
9. 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
forty years. Amortization expense charged to operations for the three years
ended May 31, 1998 was $12,435,000, $9,916,000 and $7,562,000, respectively.
Cost of businesses over net assets acquired is shown net of accumulated
amortization of $56,611,000 at May 31, 1998 ($44,351,000 at May 31, 1997).
Intangible assets also represent costs allocated to formulae, trademarks,
trade names and other specifically identifiable assets arising from business
acquisitions. These assets are being amortized using the straight-line method
over periods of 5 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,
1998, was $11,473,000, $10,936,000 and $7,553,000 respectively.
Other intangible assets consist of the following major classes:
MAY 31 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------
Trademarks $ 83,621 $ 85,472
Formulae 89,648 83,693
Distributor network 37,500 37,500
Workforce 36,783 33,300
Patents 10,518 4,778
Other 16,162 5,421
- --------------------------------------------------------------------------------
274,232 250,164
Accumulated amortization 41,618 31,066
- --------------------------------------------------------------------------------
Other Intangible Assets, Net $ 232,614 $219,098
- --------------------------------------------------------------------------------
10. 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, 1998, were $15,815,000, $14,610,000 and $13,712,000, respectively.
The customer sponsored portion of such expenditures was not significant.
11. INTEREST EXPENSE, NET
Interest expense is shown net of investment income which consists of
interest, dividends and capital gains. Investment income for the three years
ended May 31, 1998, was $4,154,000, $2,059,000 and $2,005,000, respectively.
12. 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, 1998, is shown as a noncurrent liability of $58,059,000 (net of a
noncurrent asset of $40,984,000). At May 31, 1997, the noncurrent liability was
$70,210,000 (net of a noncurrent asset of $31,773,000). The Company does not
intend to distribute the accumulated earnings of consolidated foreign
subsidiaries amounting to $69,691,000 at May 31, 1998, and $48,453,000 at May
31, 1997, and therefore no provision has been made for the taxes which would
result if such earnings were remitted to the Company.
13. 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,
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.
30
10
Note B -- Borrowings
A description of long-term debt follows:
MAY 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
$400 million face value at maturity Liquid Yield Option Notes (LYONs) due 2012.
The 5.25% LYONs are zero coupon subordinated notes convertible at $15.59 at May
31, 1998 ($14.80 at May 31, 1997). Subsequent to May 31, 1998, the Company gave
notice to redeem the entire issue on August 10, 1998 for $191,722,000. Holders
may convert until that date at the rate of 30.52 shares per $1,000 face value at
maturity note. There are 12,175,000 shares reserved for the conversion. $189,809 $180,716
Revolving credit agreement for $300,000,000 ($500 million at May 31, 1997) with
nine banks through February 2, 2002. Interest, which is tied to one of various
rates, was 5.88% at May 31, 1998. The Chairman of the Board and Chief Executive
Officer of the Company is a director of one of the banks providing this
facility. 243,000 417,000
7% unsecured senior notes due June 15, 2005. 150,000 150,000
Unsecured notes due 2008 bearing interest for two years at the six month LIBOR
rate minus five basis points (5.75% at May 31, 1998). 100,000
Multi-currency revolving credit agreement for $45,000,000 with a bank through
December 14, 2001. Interest, which is tied to one of various rates, averaged
4.00% on the $10,551,000 Dutch Guilder component, 4.37% on the $5,335,000
Belgian Franc component and 4.01% on the $4,990,000 French Franc component
at May 31, 1998. 20,876 23,799
6.75% unsecured senior notes due to an insurance company in annual installments
from 1998 through 2003. 10,286 12,000
Other notes and mortgages payable at various rates of interest due in installments
through 2006, substantially secured by property. 8,034 4,891
- ----------------------------------------------------------------------------------------------------------------------------
722,005 788,406
Less current portion 6,316 3,967
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt, less current maturities $715,689 $784,439
- ---------------------------------------------------------------------------------------------------------------------------
Additionally, at May 31, 1998, the Company had unused short-term lines of credit
with several banks totalling $108,883,000.
The aggregate maturities of long-term debt for the five years subsequent to May
31, 1998, are as follows: 1999 - $6,316,000; 2000 - $3,019,000; 2001 -
$2,706,000; 2002 - $266,232,000; 2003 - $1,951,000.
Note C -- Taxes
The provision for taxes on income includes the following:
YEAR ENDED MAY 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Federal income tax rate of 35% applied to income before income taxes $ 52,345 $ 47,505 $ 41,960
Increase (decrease) in taxes resulting from:
Tax credits (1,132) (291) (585)
State and local taxes - Net of federal income tax benefit 6,033 5,994 5,323
Foreign taxes in excess of U.S. federal tax rate 433 1,161 500
Amortization of goodwill 3,346 2,144 3,411
All other items, none of which exceed 5% of computed tax 694 900 348
- ---------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 61,719 $ 57,413 $ 50,957
- ---------------------------------------------------------------------------------------------------------------------------
Actual tax rate 41.27% 42.30% 42.50%
- ---------------------------------------------------------------------------------------------------------------------------
The provision for income taxes consists of the following:
Current
Federal $ 49,802 $ 48,363 $ 43,992
State 9,281 9,222 8,189
Foreign 13,096 7,228 4,473
- ---------------------------------------------------------------------------------------------------------------------------
72,179 64,813 56,654
Deferred
Federal (9,970) (7,681) (5,814)
Foreign (490) 281 117
- ---------------------------------------------------------------------------------------------------------------------------
Actual tax expense $ 61,719 $ 57,413 $ 50,957
- ---------------------------------------------------------------------------------------------------------------------------
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.
31
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- MAY 31, 1998, 1997 AND 1996
(CONT.)
RPM, INC. AND SUBSIDIARIES
Note D -- Common Shares
There are 200,000,000 common shares authorized with a stated value of
$.015 per share. At May 31, 1998 and 1997, there were 100,254,000 and 98,029,000
shares outstanding respectively, each of which is entitled to one vote.
Share data for May 31, 1997 and May 31, 1996, have been restated to
reflect a 25% stock dividend in December 1997.
Basic earnings per share are based on the weighted average number of
common shares outstanding during each year (98,527,000 in 1998, 97,285,000 in
1997 and 95,208,000 in 1996). In computing diluted earnings per share, 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 proceeds
from the exercised options.
The Company has options outstanding under three stock option plans, the
1979 Nonqualified Stock Option Plan, the 1989 Stock Option Plan and the 1996 Key
Employees Stock Option Plan which provide for the granting of options for up to
4,500,000 shares. These options are generally exercisable cumulatively in equal
annual installments commencing one year from the grant date and have expiration
dates ranging from September 1998 to May 2008. At May 31, 1998, 2,856,000 shares
(4,500,000 May 31, 1997) were available for future grant.
Transactions during the last two years are summarized as follows:
SHARES UNDER OPTION 1998 1997
- --------------------------------------------------------------------------------
(In thousands)
- --------------------------------------------------------------------------------
Outstanding, beginning of year (weighted
average price of $11.29 ranging from $4.89
to $13.80 per share) 3,204 2,806
Granted (weighted average price of $15.56
ranging from $15.15 to $17.25 per share) 1,644 754
Canceled (weighted average price of $12.97
ranging from $5.03 to $16.35 per share) (94) (30)
Exercised (weighted average price of $9.20
ranging from $4.89 to $13.80 per share) (322) (326)
- --------------------------------------------------------------------------------
Outstanding, end of year (weighted average
price of $12.99 ranging from $5.03 to $17.25
per share) 4,432 3,204
- --------------------------------------------------------------------------------
Exercisable, end of year (weighted average
price of $11.01 ranging from $5.03 to $16.35
per share) 1,889 1,533
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT MAY 31, 1998 AT MAY 31, 1998
RANGE OF SHARES AVERAGE AVERAGE SHARES AVERAGE
EXERCISE PRICES (000'S) YEARS PRICE (000'S) PRICE
$ 5.00 - $ 9.99 434 2.8 $ 7.99 434 $ 7.99
$10.00 - $14.99 2,380 6.8 $ 12.17 1,454 $ 11.91
$15.00 - $17.25 1,618 9.2 $ 15.56 1 $ 16.35
----- -----
4,432 7.3 $ 12.99 1,889 $ 11.01
===== =====
The Company is accounting for its stock option plans under the provisions
of APB Opinion No. 25 and, accordingly, no compensation cost has been
recognized. If compensation cost had been determined based on the fair value at
the grant date for awards under this plan consistent with the method prescribed
by SFAS No. 123, the Company's net income and earnings per share for the years
ended May 31, 1998 and 1997, would have been reduced to the pro forma amounts
indicated in the following table:
YEAR ENDED MAY 31 1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Pro Forma Net Income $ 85,920 $ 77,315
- --------------------------------------------------------------------------------
Pro Forma Earnings Per Share:
Basic $ .87 $ .79
- --------------------------------------------------------------------------------
Diluted $ .82 $ .75
- --------------------------------------------------------------------------------
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: the expected volatility rate is 27.1% for shares granted in 1998
and 27.5% for 1997; the expected life is 7.0 and 6.9 years, with dividend yields
of 2.9% and 2.8% and risk-free interest rates of 6.2%
and 6.3%, for 1998 and 1997, respectively.
Note E -- Leases
At May 31, 1998, 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, 1998, for all noncancellable leases are as follows:
MAY 31 (IN THOUSANDS)
- --------------------------------------------------------------------------------
1999 $ 7,830
2000 4,943
2001 3,135
2002 2,087
2003 2,610
Thereafter 1,031
- --------------------------------------------------------------------------------
Total minimum lease commitments $ 21,636
Rental expenses for all operating leases totalled $9,654,000 in 1998,
$8,804,000 in 1997 and $6,614,000 in 1996. Capitalized leases were insignificant
for the three years ended May 31, 1998.
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
32
12
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, 1998,
included the following components:
1998 1997 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Service cost - Benefits earned
during the period $ 6,712 $ 4,417 $ 3,086
Interest cost on projected
benefit obligations 7,475 5,038 4,428
Actual return on plan assets (16,325) (7,388) (7,367)
Net amortization and deferral 8,440 3,336 3,946
- --------------------------------------------------------------------------------
Net pension cost $ 6,302 $ 5,403 $ 4,093
- --------------------------------------------------------------------------------
The general discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligations were 7% (8% for May 31, 1997) and 4.5% (5% for May 31, 1997),
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.
In addition, the Company recognized $1,065,000 in pension income during
the year ended May 31, 1998, due to various one-time curtailment and/or
settlement events.
Pursuant to the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," intangible assets of $143,000 and $148,000 were recorded as of May
31, 1998 and 1997, respectively, in order to recognize the required minimum
liability.
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 1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Actuarial present value of projected
benefit obligation:
Vested employees $ (81,612) $ (71,681)
Nonvested employees (3,154) (2,358)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (84,766) (74,039)
Additional amount related to
projected salary increases (21,418) (18,537)
- --------------------------------------------------------------------------------
Total projected benefit obligation (106,184) (92,576)
Funded assets at fair value 103,519 92,027
- --------------------------------------------------------------------------------
Projected benefit obligation in
excess of assets (2,665) (549)
Unamortized net asset existing at date
of adoption (507) (450)
Unrecognized prior service cost 1,003 1,458
Unrecognized net loss 5,412 2,304
Adjustment required to recognize
minimum liability (929) (148)
- --------------------------------------------------------------------------------
Prepaid pension cost $ 2,314 $ 2,615
- --------------------------------------------------------------------------------
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, 1998. In addition to the defined benefit
plans described above, the Company sponsors an employee savings plan under
Section 401(k) of the Internal Revenue Code. The Plan covers substantially all
non-union employees in the United States. The Plan provides for matching
contributions in Company shares based upon qualified employee contributions.
Matching contributions charged to income were $4,001,000 and $2,229,000 for
years ended May 31, 1998 and 1997, respectively.
Note G -- Post-Retirement Health Care Benefits
In addition to the defined benefit pension plan, the Company also
provides health care benefits to certain of its retired employees through
unfunded plans. Employees become eligible for these benefits if they meet
minimum age and service requirements. The components of this expense for the
three years ended May 31, 1998 were as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Service cost - Benefits earned
during this period $ 90 $ 36 $ 4
Interest cost on the
accumulated obligation 915 714 673
Net amortization (52) (113)
- --------------------------------------------------------------------------------
Net periodic post-retirement
expense $ 953 $ 750 $ 564
- --------------------------------------------------------------------------------
In addition, the Company recognized $181,000 in income due to the
curtailment of these benefits at a union location.
The accumulated post-retirement obligation recognized on the May 31,
1998 and May 31, 1997 balance sheets are comprised of the following components:
1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Current retirees $ 10,848 $ 8,705
Future retirees 3,814 3,344
Unrecognized net gain (loss) (1,407) 1,313
- --------------------------------------------------------------------------------
Accumulated post-retirement
benefit obligation $ 13,255 $ 13,362
- --------------------------------------------------------------------------------
The general discount rate used in determining the accumulated
post-retirement benefit obligation as of May 31, 1998 was 7% (8% at May 31,
1997). A 10% increase in the cost of covered health care benefits was generally
assumed for fiscal 1998 (12% for fiscal 1997). This trend rate in all cases is
assumed to decrease 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, 1998 by
$1,296,000 and the net post-retirement expense by $115,000.
33
13
Note H -- Contingencies and Loss Reserves
Accrued loss reserves consisted of the following classes:
MAY 31 1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Accrued product liability reserves $ 23,446 $ 17,145
Accrued warranty reserves - Current 13,983 11,848
Accrued environmental reserves 4,891 6,332
Other 1,012 2,374
- --------------------------------------------------------------------------------
Accrued loss reserves - Current 43,332 37,699
Accrued warranty reserves - Long-term 30,606 17,762
- --------------------------------------------------------------------------------
Total Accrued Loss Reserves $ 73,938 $ 55,461
- --------------------------------------------------------------------------------
The Company, through its wholly owned insurance subsidiary, provides
certain insurance coverage, primarily product liability, to the Company's other
domestic subsidiaries. Excess coverage is provided by outside carriers. The
Company has provided the reserves reflected above to provide for these losses as
well as other uninsured claims. Provision for estimated warranty costs is
recorded at the time of sale and periodically adjusted to reflect actual
experience.
In addition, the Company, like others in similar businesses, is involved
in several proceedings relating to environmental matters. It is the Company's
policy to accrue remediation costs when it is probable that such efforts will be
required and the related costs can be reasonably estimated. These liabilities
are undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds or claims against third parties. Due to the
uncertainty inherent in the 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.
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, 1998, 1997 and 1996 and for the years
then ended is summarized as follows:
UNITED EUROPEAN OTHER FOREIGN
STATES OPERATIONS OPERATIONS TOTAL
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
NET SALES
May 31, 1998 $1,303,032 $151,376 $ 160,866 $1,615,274
May 31, 1997 1,149,348 115,299 85,890 1,350,537
May 31, 1996 1,001,706 90,880 43,810 1,136,396
- ---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT
May 31, 1998 587,419 67,459 68,534 723,412
May 31, 1997 520,461 46,660 31,025 598,146
May 31, 1996 431,493 41,366 13,718 486,577
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE, NET
May 31, 1998 35,792 462 446 36,700
May 31, 1997 31,473 605 502 32,580
May 31, 1996 22,785 2,738 317 25,840
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAX
May 31, 1998 119,504 12,805 17,247 149,556
May 31, 1997 118,108 10,337 7,283 135,728
May 31, 1996 108,589 8,773 2,524 119,886
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME
May 31, 1998 69,762 8,519 9,556 87,837
May 31, 1997 68,843 5,444 4,028 78,315
May 31, 1996 62,080 5,130 1,719 68,929
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS EMPLOYED
May 31, 1998 1,433,919 127,552 121,808 1,683,279
May 31, 1997 1,412,157 114,350 106,721 1,633,228
May 31, 1996 1,041,726 86,275 27,075 1,155,076
- ---------------------------------------------------------------------------------------------------------------------------
The above sales for the year ended May 31, 1998, do not include sales of Company
products by joint ventures and licensees of approximately $90,000,000. 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.
34
14
Note J -- Interim Financial Information (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for the years ended May 31, 1998 and 1997:
THREE MONTHS ENDED AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998
Net Sales $415,053 $397,757 $350,456 $452,008
- ---------------------------------------------------------------------------------------------------------------------------
Gross Profit 184,081 174,353 146,313 218,665
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 28,186 21,445 5,526 32,680
Basic Earnings Per Share $ .29 $ .22 $ .06 $ .33
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ .27 $ .21 $ .06 $ .30
- ---------------------------------------------------------------------------------------------------------------------------
Dividends Per Share $ .104 $ .112 $ .112 $ .112
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED AUGUST 31 NOVEMBER 30 FEBRUARY 28 MAY 31
- ---------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Net Sales $329,231 $316,076 $297,177 $408,053
- ---------------------------------------------------------------------------------------------------------------------------
Gross Profit 142,696 134,046 125,793 195,611
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 23,956 18,533 7,508 28,318
- ---------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ .25 $ .19 $ .08 $ .29
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share $ .23 $ .18 $ .08 $ .27
Dividends Per Share $ .096 $ .104 $ .104 $ .104
- ---------------------------------------------------------------------------------------------------------------------------
The computation of diluted earnings per share reflects additional shares
issuable assuming conversion of convertible securities. Quarterly earnings per
share do not total to the yearly earnings per share due to the weighted average
number of shares outstanding in each quarter.
Note K -- Recently Issued Accounting Standards
The FASB recently issued SFAS No. 130, Reporting Comprehensive Income,
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information and SFAS No. 132, Employers' Disclosure about Pensions and Other
Post-retirement Benefits. SFAS No. 130 provides for the reporting and
presentation of comprehensive income and its components. SFAS No. 131
establishes standards for defining operating segments and reporting certain
information about such segments. SFAS No. 132 revised disclosure requirements
relative to pension and other post-retirement benefits. Since these statements
only impact how financial information is disclosed in interim and annual
periods, the adoption of these standards in 1999 will not impact the Company's
financial condition or results of operations.
Independent Auditors Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
RPM, INC. AND SUBSIDIARIES
MEDINA, OHIO
We have audited the accompanying consolidated balance sheets of RPM, Inc.
and Subsidiaries as of May 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended May 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ciulla, Smith & Dale, LLP
Cleveland, Ohio
July 3, 1998