SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 of 15(d) of the Securities
----- Exchange Act of 1934 for the quarterly period ended February 28, 2002,
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. 1-14187
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RPM, Inc.
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(Exact Name of Registrant as Specified in its charter)
OHIO 34-6550857
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(State or Other jurisdiction (IRS Employer Identification No.)
Of incorporation or organization)
P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO 44258
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (330) 273-5090
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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 10, 2002
114,551,882 RPM Inc. Common Shares were outstanding.
RPM, INC. AND SUBSIDIARIES
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INDEX
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PAGE NO.
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Part I. Financial Information
-----------------------------
Consolidated Balance Sheets
February 28, 2002 and May 31, 2001 3
Consolidated Statements of Income
Three Months and Nine Months
Ended February 28, 2002 and 2001 4
Consolidated Statements of Cash Flows
Nine Months Ended
February 28, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Part II. Other Information 16
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PART I. -- FINANCIAL INFORMATION 3
--------------------------------
ITEM 1. -- FINANCIAL STATEMENTS
-------------------------------
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
(In thousands, except per share amounts)
ASSETS
------
February 28, 2002 May 31, 2001
----------------- ------------
Current Assets
Cash and short-term investments $ 42,856 $ 23,926
Trade accounts receivable (less allowance for doubtful
accounts $15,450 and $17,705, respectively) 325,250 411,718
Inventories 264,753 277,494
Prepaid expenses and other current assets 103,876 106,282
----------- -----------
Total current assets 736,735 819,420
----------- -----------
Property, Plant and Equipment, At Cost 636,569 623,054
Less: accumulated depreciation and amortization (291,243) (261,018)
----------- -----------
Property, plant and equipment, net 345,326 362,036
----------- -----------
Other Assets
Goodwill, net of amortization 599,266 571,276
Intangible assets, net of amortization 262,548 300,372
Other 24,320 25,386
----------- -----------
Total other assets 886,134 897,034
----------- -----------
Total Assets $ 1,968,195 $ 2,078,490
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Notes and accounts payable $ 130,443 $ 152,307
Current portion of long term debt 81,021 7,379
Accrued compensation and benefits 66,320 74,888
Accrued loss reserves 53,197 55,416
Other accrued liabilities 52,034 75,022
Income taxes payable 2,937 10,756
----------- -----------
Total current liabilities 385,952 375,768
----------- -----------
Long-term Liabilities
Long-term debt, less current maturities 814,606 955,399
Other long-term liabilities 48,902 53,479
Deferred income taxes 54,107 54,134
----------- -----------
Total long-term liabilities 917,615 1,063,012
----------- -----------
Shareholders' Equity
Common shares, stated value $.015 per share;
authorized 200,000 shares;
outstanding 102,819 shares and
102,211 shares, respectively 1,626 1,619
Paid-in capital 429,598 430,015
Treasury shares, at cost (92,743) (99,308)
Accumulated other comprehensive loss (60,477) (53,074)
Retained earnings 386,624 360,458
----------- -----------
Total shareholders' equity 664,628 639,710
----------- -----------
Total Liabilities And Shareholders' Equity $ 1,968,195 $ 2,078,490
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
RPM, INC. AND SUBSIDIARIES 4
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
(In thousands, except per share amounts)
Nine Months Ended Three Months Ended
February 28, February 28,
-------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Sales $1,428,693 $1,460,227 $ 407,538 $ 405,400
Cost of Sales 777,415 804,513 228,902 234,162
---------- ---------- ---------- ----------
Gross Profit 651,278 655,714 178,636 171,238
Selling, General and Administrative
Expenses 521,720 542,138 166,025 165,104
Interest Expense, Net 32,083 51,156 7,660 17,453
---------- ---------- ---------- ----------
Income (Loss) Before Income Taxes 97,475 62,420 4,951 (11,319)
Provision for Income Taxes 33,142 23,720 1,677 (4,301)
---------- ---------- ---------- ----------
Net Income (Loss) $ 64,333 $ 38,700 $ 3,274 $ (7,018)
========== ========== ========== ==========
Basic and diluted earnings (loss)
per common share $ 0.63 $ 0.38 $ 0.03 $ (0.07)
========== ========== ========== ==========
Average Number of Common
Shares Outstanding:
Basic 102,346 102,199 102,508 102,209
========== ========== ========== ==========
Diluted 102,857 102,208 103,720 102,216
========== ========== ========== ==========
Dividends per common share $ 0.3750 $ 0.3725 $ 0.1250 $ 0.1250
========== ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
RPM, INC. AND SUBSIDIARIES 5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(In thousands)
Nine Months Ended February 28,
------------------------------
2002 2001
--------- ---------
Cash Flows From Operating Activities:
Net Income $ 64,333 $ 38,700
Depreciation and amortization 41,785 58,938
Items not affecting cash and other (8,716) (14,510)
Changes in operating working capital 34,037 (33,256)
--------- ---------
131,439 49,872
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Cash Flows From Investing Activities:
Additions to property and equipment (16,241) (43,513)
Acquisition of new businesses, net of cash - (3,341)
--------- ---------
(16,241) (46,854)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from stock option exercises 4,932 598
Repurchase of common shares - (11,101)
Increase (decrease) in debt (63,033) 43,217
Dividends (38,167) (37,890)
--------- ---------
(96,268) (5,176)
--------- ---------
Net Increase (Decrease) in Cash 18,930 (2,158)
Cash at Beginning of Period 23,926 31,340
--------- ---------
Cash at End of Period $ 42,856 $ 29,182
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2002
(UNAUDITED)
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NOTE A - BASIS OF PRESENTATION
------------------------------
The accompanying unaudited consolidated 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 month periods ended
February 28, 2002 and 2001. 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, 2001.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation. In an effort to achieve improved reporting
consistency across divisions, and in conjunction with the migration to a new
reporting and consolidation system, the Company has adopted a new chart of
accounts. Accordingly, the Company has elected to reclassify certain internal
distribution costs from cost of sales to selling, general and administrative
expenses. Additionally, a portion of those costs are offset by the movement of
certain employee benefits costs related to manufacturing personnel out of
selling, general and administrative expenses and into cost of sales. For the
three and nine month periods ended February 28, 2001, the net effect of the
reclassification of these expenses resulted in the movement of approximately
$3.8 million and $19.8 million, respectively, from cost of sales to selling,
general and administrative expenses.
NOTE B - BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS
--------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards, ("SFAS") No. 141, "Business Combinations",
which eliminates the pooling method of accounting for all business combinations
initiated after June 30, 2001, and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. The Company has adopted this accounting standard for business
combinations initiated after June 30, 2001.
The Company also adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective June 1, 2001. Under SFAS No. 142, goodwill is no longer amortized, but
is reviewed for impairment annually, or more frequently if certain indicators
arise. The Company has completed the transitional impairment test required upon
adoption of SFAS No. 142. The transitional test, which involved the use of
estimates related to the fair market values of the business operations with
which goodwill is associated, did not result in any impairment loss.
Prospectively, any losses resulting from the required annual impairment tests
will be reflected in operating income in the income statement.
7
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2002
(UNAUDITED)
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Had the Company been accounting for its goodwill and other intangible assets
under SFAS No. 142 for all periods presented, the Company's net income (in
thousands) and earnings per share would have been as follows:
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FOR THE NINE MONTHS FOR THE THREE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- -------
NET INCOME:
Reported Net Income $ 64,333 $ 38,700 $ 3,274 $(7,018)
Add back goodwill amortization, net of tax -- 14,770 -- 5,181
Add back workforce amortization, net of tax -- 1,203 -- 401
Add back tradename amortization, net of tax -- 995 -- 751
---------- ---------- ---------- -------
Adjusted net income $ 64,333 $ 55,668 $ 3,274 $ (685)
========== ========== ========== =======
BASIC AND DILUTED EARNINGS PER SHARE:
Reported net income $ 0.63 $ 0.38 $ 0.03 $ (0.07)
Goodwill amortization, net of tax -- 0.14 -- 0.05
Workforce amortization, net of tax -- 0.01 -- --
Tradename amortization, net of tax -- 0.01 -- 0.01
---------- ---------- ---------- -------
Adjusted net income $ 0.63 $ 0.54 $ 0.03 $ (0.01)
========== ========== ========== =======
NOTE C - INVENTORIES
--------------------
Inventories were composed of the following major classes:
FEBRUARY 28, 2002 MAY 31, 2001
----------------- ------------
(IN THOUSANDS)
Raw Materials and supplies $86,150 $89,071
Finished Goods 178,603 188,423
-------------- ---------------
$264,753 $277,494
============== ===============
NOTE D - COMPREHENSIVE INCOME
-----------------------------
Other comprehensive income includes foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains or losses on
securities. Total comprehensive income, comprised of net income and other
comprehensive income, amounted to $(4,327,000) and $20,000 during the third
quarter of fiscal years 2002 and 2001, respectively, and $56,930,000 and
$34,488,000 for the nine months ended February 28, 2002 and 2001, respectively.
NOTE E - SUBSEQUENT EVENT
-------------------------
The Company issued 11.5 million shares of common stock at $14.25 per share in a
public offering, which closed on April 2, 2002. The transaction generated net
proceeds of $157 million, all of which were used to permanently pay down a
portion of the $200 million term loan due July 12, 2002. This offering is
expected to have a $0.01 and $0.07 per share dilutive impact in the fiscal
years ended May 31, 2002 and 2003, respectively.
8
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2002
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
Our consolidated financial statements include accounts of RPM and all
majority-owned subsidiaries. Preparation of our financial statements requires
the use of estimates and judgments that affect the amounts of our assets,
liabilities, revenues and expenses. We continually evaluate these estimates,
including those related to allowances for doubtful accounts, inventories,
allowances for recoverable taxes, restructuring of our operations, useful lives
of property, plant and equipment, goodwill, contingent liabilities, income tax
valuation allowances, pension plans and the fair value of financial instruments.
We base our estimates on historical experience and other assumptions, which we
believe to be reasonable under the circumstances. These estimates form the basis
for making judgments about the carrying value of our assets and liabilities.
Actual results may differ from these estimates under different assumptions and
conditions. We have identified below the accounting policies that are critical
to our financial statements.
REVENUE RECOGNITION
Our revenues are recognized when title and risk of loss passes to customers. The
Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition," provides guidance on the application of Generally
Accepted Accounting Principles in the U.S. to selected revenue recognition
issues. Our management has concluded that our revenue recognition policy is
appropriate and in accordance with generally accepted accounting principles and
SAB No. 101.
CONTINGENCIES
We are party to claims and lawsuits arising in the normal course of business.
Although we cannot precisely predict the amount of any liability that may
ultimately arise with respect to any of these matters, we record provisions when
we consider the liability probable and reasonably estimable. The provisions are
based on historical experience and legal advice, are reviewed quarterly and are
adjusted according to developments. Changes in the amount of the provisions
affect our consolidated statements of income.
GOODWILL
We adopted two new accounting standards issued by the Financial Accounting
Standards Board in June 2001. Statement of Financial Accounting Standards, or
SFAS, No. 141, "Business Combinations," eliminates the pooling method of
accounting for all business combinations initiated after June 30, 2001, and
addresses the initial recognition and measurement of goodwill and intangible
assets acquired in a business combination. Accordingly, we apply the provisions
of SFAS No. 141 to all business combinations initiated after its effective date.
We also adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective
June 1, 2001. Goodwill amortization ceased upon adoption of the standard, and
the required initial impairment tests were performed. Results of these
impairment tests have not generated any impairment loss to date.
Prospectively, goodwill will be tested on an annual basis, or more frequently as
impairment indicators arise. Impairment tests, which involve the use of
estimates related to the fair market values of the business operations with
which goodwill is associated, are performed at the end of our first quarter.
Losses, if any, resulting from impairment tests will be reflected in operating
income in our income statement.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Our reporting currency is the U.S. dollar. However, the functional currency of
all of our foreign subsidiaries is their local currency. We translate the
amounts included in the consolidated statements of income of our foreign
subsidiaries into U.S. dollars at year-to-date average exchange rates, which we
believe are representative of the actual exchange rates on the dates of the
transactions. Our foreign subsidiaries' assets and liabilities are translated
into U.S. dollars from local currency at the actual exchange rates as of the end
of each reporting date, and we record the resulting foreign exchange translation
adjustments in our consolidated balance sheets as a component of accumulated
other comprehensive income (loss). If we determine that the functional currency
of any of our foreign subsidiaries should be the U.S. dollar, our financial
statements would be affected. Should this occur, we would adjust our reporting
to appropriately account for these changes.
We use permanently invested intercompany loans as a source of capital to reduce
the exposure to foreign currency fluctuations in our foreign subsidiaries. These
loans are treated as analogous to equity for accounting purposes. Therefore, the
foreign exchange gains or losses on these intercompany loans are recorded in
other comprehensive income (loss). If we were to determine that the functional
currency of any of our subsidiaries should be the U.S. dollar, we would no
longer record foreign exchange gains or losses on these intercompany loans.
OTHER LONG-LIVED ASSETS
We assess for impairment of identifiable non-goodwill intangibles and other
long-lived assets whenever events or changes in facts and circumstances indicate
the possibility that the carrying value may not be recoverable. Factors
considered important which might trigger an impairment evaluation, include the
following:
- significant under-performance relative to historical
or projected future operating results;
- significant changes in the manner of our use of the
acquired assets or the strategy for our overall
business; and
- significant negative industry or economic trends.
When we determine that the carrying value of non-goodwill intangibles and other
long-lived assets may not be recoverable based upon the existence of one or more
of the above described indicators, any impairment would be measured based on
projected net cash flows expected from that asset, including eventual
disposition.
9
REPORTABLE SEGMENT INFORMATION
------------------------------
The Company has determined that it has two operating segments -- Industrial and
Consumer -- based on the nature of business activities, products and services;
the structure of management; and the structure of information as presented to
the Board of Directors. Within each segment, individual operating companies or
groups of companies generally address common markets, utilize similar
technologies, and can share manufacturing or distribution capabilities. The
Company evaluates the profit performance of the two segments based on earnings
before interest and taxes since interest expense is essentially related to
corporate acquisitions, as opposed to segment operations. Comparative nine month
and third quarter results on this basis are as follows:
NINE MONTHS ENDED FEBRUARY 28, QUARTER ENDED FEBRUARY 28,
----------------------------- -----------------------------
(In thousands) 2002 2001 2002 2001
----------- ----------- ----------- -----------
Net External Sales
Industrial Segment $ 771,564 $ 809,632 $ 211,682 $ 220,821
Consumer Segment 657,129 650,595 195,856 184,579
----------- ----------- ----------- -----------
TOTALS: $ 1,428,693 $ 1,460,227 $ 407,538 $ 405,400
=========== =========== =========== ===========
Earnings Before Interest and Taxes (EBIT)(a)
Industrial Segment $ 76,897 $ 88,858 $ 6,960 $ 9,476
Consumer Segment 72,393 40,503 13,874 942
Corporate/Other (19,732) (15,785) (8,223) (4,284)
----------- ----------- ----------- -----------
TOTALS: $ 129,558 $ 113,576 $ 12,611 $ 6,134
=========== =========== =========== ===========
Identifiable Assets FEBRUARY 28, 2002 MAY 31, 2001
----------------- ------------
Industrial Segment $ 922,960 $ 1,002,209
Consumer Segment 967,967 1,016,067
Corporate/Other 77,268 60,214
----------- -----------
TOTALS: $ 1,968,195 $ 2,078,490
=========== ===========
(a) EBIT is defined as earnings before interest and taxes. EBIT is presented
because it is a widely accepted financial indicator used by certain
investors and analysts to analyze and compare companies on the basis of
operating performance. EBIT is not intended to represent cash flows for the
period, nor is it presented as an alternative to operating income or as an
indicator of operating performance. EBIT should not be considered in
isolation, but with Generally Accepted Accounting Principles in the U.S.,
and it is not indicative of operating income or cash flow from operations
as determined by those principles. Our method of computation may or may not
be comparable to other similarly titled measures of other companies. EBIT
may not be indicative of our historical operating results nor is it meant to
be predictive of potential future results.
10
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED FEBRUARY 28, 2002 AND 2001
Consolidated net sales of $407.5 million increased $2.1 million over last year's
third quarter, or 0.5 percent. The overall net increase is due primarily to
growth in customer demand across various product lines in the consumer segment,
which resulted in a 6 percent increase in consumer segment sales in comparison
to last year's third quarter. The improvement in the consumer segment more than
offset the effect of the March 2001 divestiture of DAP's $30 million commercial
Durabond unit, which accounted for a difference of $7.2 million in net sales
quarter over quarter, and the 4 percent decline in sales experienced by the
industrial segment. Excluding the effect of the divestiture, comparable net
sales were ahead by $9.3 million or 2.3 percent. Foreign exchange differences
also continued to have a negative effect on sales year over year, amounting to
approximately 1 percent. Comparable industrial net sales, adjusted for the
effect of foreign exchange, were off 2.8 percent as a number of flooring,
roofing and other maintenance projects were postponed or canceled, primarily
within the private sector. Comparable consumer net sales, on the other hand,
were ahead 11.1 percent, in sharp contrast to last year when the larger
retailers in particular were reducing their inventories. Comparable
consolidated net sales, adjusted for the divestiture and foreign exchange, were
ahead 3.4 percent during the quarter.
Consolidated gross profit as a percent of sales improved to 43.8 percent,
compared with last year's 42.2 percent. While the decline in flooring and
roofing sales in the industrial segment had a negative impact on gross margin,
there were a number of offsetting internal margin improvements, including
certain reduced raw material costs as well as reduced conversion costs resulting
from the fiscal 2000 and 2001 restructuring program. By segment, industrial
margins declined to 44.8 percent from 45.4 percent, while consumer margins
improved to 42.8 percent from 38.5 percent. The divestiture of the lower margin
Durabond unit contributed in part to the consumer margin improvement.
Consolidated selling, general and administrative (SG&A) expenses overall
remained at 40.7 percent of sales quarter over quarter. The impact of the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," as of the
beginning of this fiscal year, is reflected in SG&A. On a pro forma basis, last
year's SG&A percentage under SFAS No. 142 would have been 39.0 percent of sales.
The divested Durabond unit of DAP within the consumer segment had carried a
lower SG&A percentage, having an approximate negative effect of 0.6 percent of
sales year over year. The devaluation of the Argentinean peso during the quarter
resulted in a charge of $2.1 million, having an additional negative effect of
0.5 percent of sales. Compared to last year on a pro forma basis as if SFAS No.
142 had been adopted, industrial SG&A as a percent of sales this third quarter
increased to 41.5 over last year's 39.5 percent, while consumer SG&A as a
percent of sales this third quarter improved to 35.7 percent, compared with 36.0
percent in the same quarter last year. The decline in industrial sales volume,
particularly flooring and roofing at higher than average margins, was the main
factor driving that segment's higher SG&A percentage this year, along with the
Argentinean peso devaluation and
11
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2002
--------------------------------------------------------------------------------
higher distribution costs. Higher distribution costs also affected the consumer
percentage year over year. The increase in consolidated SG&A, which includes
Corporate/other costs, reflects the impact of rising health care and other
employee benefit costs, as well as increases in certain professional services
and legal costs year over year. Also included in SG&A are credits derived from
license fees and royalty income approximating $405,000 and $337,000 for the
three month periods ended February 28, 2002 and 2001, respectively.
Net interest expense was $9.8 million lower than a year ago, mainly as a result
of lower interest rates on variable-rate debt, which represents approximately 75
percent of total debt, as well as reduced debt levels during the past year.
The reduction of the income tax rate this third quarter to 34 percent, compared
to last year's 38 percent, reflects the adoption of SFAS No. 142.
The net income increase of $10.3 million, or 147 percent, reflects the lower
interest costs, the adoption of SFAS No. 142, and the slightly improved EBIT
performance from operations when adjusted for the $2.1 million effect from the
Argentinean peso devaluation. Diluted earnings per share improved $.10, or 143
percent, to $.03 from last year's negative $.07. On a pro forma basis, last
year's diluted earnings per share would have been $.06 higher under SFAS No.
142.
NINE MONTHS ENDED FEBRUARY 28, 2002 AND 2001
The first nine months consolidated net sales of $1,428.7 million were $31.5
million, or 2.2 percent, lower than during the same period a year ago. The March
2001 divestiture of the Durabond unit accounted for three-quarters of the
difference and the foreign exchange translation effect from the stronger US
dollar accounted for the remainder of the difference. Comparable industrial net
sales, adjusted for foreign exchange, were off 3.6 percent, while comparable
consumer net sales, excluding the impact of the divestiture as well as foreign
exchange, were ahead 5.2 percent, both for the same reasons given above for the
third quarter results. Excluding the effect of the divestiture and foreign
exchange, consolidated net sales were slightly ahead year over year, up 0.2
percent.
The consolidated gross profit margin has improved to 45.6 percent from last
year's 44.9 percent. Internal margin improvements, including reduced conversion
costs resulting from the restructuring program, and effective cost controls in
light of the softness in sales, have been able to overcome the decline in higher
margin sales of flooring and roofing products year over year. The divested
Durabond unit had also carried lower than average gross margins. By segment, the
industrial margin of 46.7 percent fell behind last year's 47.2 percent, while
the consumer margin improved to 44.3 percent from 42.0 percent during the first
nine months of fiscal 2001.
Consolidated SG&A expenses have improved to 36.5 percent of sales from 37.1
percent last year. On a pro forma basis, last year's SG&A percentage under SFAS
No. 142 accounting would have been 35.9 percent of sales. The Durabond
divestiture within the consumer segment had carried
12
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2002
--------------------------------------------------------------------------------
a lower SG&A percentage, having a negative effect of approximately 0.5 percent
of sales year over year. This year's third quarter charge related to the
devaluation of the Argentinean peso accounted for another 0.2 percent of nine
month net sales. Adjusting last year's percentage for both SFAS No. 142 and the
divestiture, and adjusting this year's percentage for the peso devaluation, both
year's SG&A percentages would approximate 36.4 percent of sales. By segment and
comparing to last year on a pro forma basis as if SFAS No. 142 had already been
adopted, the industrial SG&A this first nine months was 36.7 percent, compared
with 35.2 percent last year, while consumer SG&A has improved to 33.3 percent of
sales from 34.3 percent a year ago. The decline in industrial sales volume has
been the main factor driving that segment's higher SG&A percentage this year.
Corporate/other expenditures were slightly higher for the same reasons given
above for the third quarter results. Also included in SG&A are credits derived
from license fees and royalty income approximating $1.3 million for each of the
nine month periods presented.
Net interest expense was $19.1 million lower than a year ago, principally as a
result of lower interest rates, along with reduced debt levels during the past
year. The overall effective interest rate of 4.7 percent this first nine months
compares with 7.0 percent during the same period last year.
The change in the income tax rate to 34 percent compared to last year's 38
percent rate is driven by the adoption of SFAS No. 142.
Net income through nine months has increased $25.6 million, or 66 percent, to
$64.3 million, and reflects the lower interest costs, the adoption of SFAS No.
142, and slightly improved EBIT performance from operations, when adjusted for
the divestiture and the Argentinean peso devaluation. Diluted earnings per share
have improved $.25, or 66 percent, to $.63 from last year's $.38. On a pro forma
basis, last year's diluted earnings per share would have been $.16 higher under
SFAS No. 142.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH PROVIDED FROM OPERATIONS
-----------------------------
The Company generated $131.4 million of cash from operations during the past
nine months compared with $49.9 million a year ago, a 164% increase. The most
significant factor contributing to the increase was the positive change in
working capital year-over-year of $67.3 million, impacted by a strong focus on
improved collections and inventory management. Also contributing to the increase
was the earnings improvement of $25.6 million, as previously discussed.
The Company's cash flows from operations will continue as its primary source of
financing internal growth.
13
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2002
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INVESTING ACTIVITIES
--------------------
The Company is not capital intensive, and capital expenditures generally do not
exceed depreciation and amortization in a given year. Capital expenditures are
made primarily to accommodate the Company's continued growth through improved
production and distribution efficiencies and capacity, and to enhance
administration. In this year's first nine months, enhanced management review and
control over the capital investment process allowed for the majority of the
realized $27 million reduction in cash outlays when compared to the same period
a year ago. The focus is continuing prospectively.
FINANCING ACTIVITIES
--------------------
During this year's first nine months, the Company refinanced its $200 million
revolving credit facility with a $200 million 364-day term loan due July 12,
2002. In addition, on November 27, 2001, the Company issued and sold $30 million
aggregate principal amount of 7.3% Senior Unsecured Notes due 2008, $10 million
aggregate principal amount of 6.61% Senior Unsecured Notes due 2006, and $15
million aggregate principal amount of 6.12% Senior Unsecured Notes due 2004. The
proceeds from these unsecured notes were used to reduce the outstanding balances
under the Company's $500 million revolving credit agreement. Since the beginning
of this fiscal year, the Company's total debt has decreased by approximately $63
million. The Company will continue to reduce our outstanding revolving credit
facility through internally generated cash flow. The Company's debt-to-capital
ratio was 57.5% at February 28, 2002 compared to 60.1% at May 31, 2001.
Subsequent to the Company's third quarter end on February 28, 2002, the Company
issued 11.5 million common shares at $14.25 per share in a public offering which
closed on April 2, 2002. The proceeds of the offering, $157 million, were used
to permanently pay down a portion of the $200 million term loan due July 12,
2002. This offering is expected to have a $0.01 and $0.07 per share dilutive
impact in the fiscal years ended May 31, 2002 and 2003, respectively. Had the
equity offering taken place during the quarter, and the resulting proceeds been
received by the Company on February 28, 2002, the Company's debt-to-capital
ratio would have been 47.5%.
The following summarizes our financial obligations and their expected
maturities at February 28, 2002, and the effect such obligations are expected
to have on our liquidity and cash flow in the periods indicated:
February 28, 2002
-------------------------------------------------
Less than After
Total 1 year 1-3 years 3 years
----- ------ --------- -------
Other short term borrowings.................. $ 85.1 $ 85.1 $ -- $ --
Long-term debt............................... 814.6 -- 24.2 790.4
Non-cancelable operating lease obligations(1) 58.1 13.6 17.1 27.4
------- ------- ------- -------
$ 957.8 $ 98.7 $ 41.3 $ 817.8
======= ======= ======= =======
----------
(1) We calculate non-cancelable operating lease obligations on an
annual basis and consequently such information is not
available at February 28, 2002. Therefore, the amounts shown
above are for the fiscal year end May 31, 2001.
We are currently negotiating with several banks the terms of a securitization
transaction for certain of our subsidiaries and the related documentation
providing for a wholly-owned special purpose entity, or SPE, to receive
investments of up to $125 million. This securitization will be accomplished by
having certain of our subsidiaries sell various of their accounts receivable
to the SPE and by having the SPE transfer these receivables to a conduit
administered by the banks. The proposed securitization transaction will be
reflected in our financial statements and thus will not be an off-balance
sheet financing. We expect that the proposed transaction will reduce financing
costs by replacing up to $125 million of existing borrowings at financing costs
lower than current borrowing spreads. The securitization transaction is expected
to close in May 2002.
The effect in this third quarter of the strengthening dollar on the Company's
foreign net assets has tended to decrease shareholders' equity, and this trend
could continue if the dollar continues to strengthen. The Argentinean peso was
the principal currency weakening against the dollar.
The Company maintains excellent relations with its banks and other financial
institutions to further enable the financing of future growth opportunities.
OFF-BALANCE SHEET FINANCINGS
We do not have any off-balance sheet financings. We have no subsidiaries that
are not included in our financial statements, nor do we have any interests in or
relationships with any special purpose entities that are not reflected in our
financial statements.
14
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2002
--------------------------------------------------------------------------------
OTHER MATTERS
-------------
ENVIRONMENTAL MATTERS
---------------------
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
condition. Our environmental-related accruals are established and/or adjusted as
information becomes available upon which more accurate costs can be reasonably
estimated. Actual costs may vary from these estimates because of the inherent
uncertainties involved, including the identification of new sites and the
development of new information about contamination. Certain sites are still
being investigated and therefore we have been unable to fully evaluate the
ultimate cost for those sites. As a result, reserves have not been taken for
some of these sites and for other sites costs may exceed existing reserves. We
have received indemnities for potential environmental issues from purchasers of
certain of our properties and businesses and from sellers of properties or
businesses we have acquired. We have also purchased insurance to cover potential
environmental liabilities at certain sites. If the indemnifying or insuring
party fails to, or becomes unable to, fulfill its obligations under those
agreements or policies, we may incur additional environmental costs in addition
to any amounts reserved which may have a material adverse effect on our
financial condition, results of operations or cash flows (refer to Note H to
the Consolidated Financial Statements contained in our Annual Report on Form
10-K for the year ended May 31, 2001).
15
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) general economic conditions; (b) the price and supply of raw
materials, particularly titanium dioxide, certain resins, aerosols and solvents;
(c) continued growth in demand for the Company's products; (d) legal,
environmental and litigation risks inherent in the Company's construction and
chemicals businesses and risks related to insurance coverage inherent in the
Company's disclosed litigation; (e) the effect of changes in interest rates;
(f) the effect of fluctuations in currency exchange rates upon the Company's
foreign operations; (g) the potential impact of the euro currency conversion;
(h) the effect of non-currency risks of investing in and conducting operations
in foreign countries, including those relating to domestic and international
political, social, economic and regulatory factors; (i) risks and uncertainties
associated with the Company's ongoing acquisition and divestiture activities;
and other risks detailed in the Company's other reports and statements filed
with the Securities and Exchange Commission, including the risk factors set
forth in the Company's prospectus and prospectus supplement included as part of
the Company's recently filed Registration Statement on Form S-3 (File No.
333-77028), as the same may be amended from time to time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates and foreign
exchange rates since it funds its operations through long- and short-term
borrowings and denominates its business transactions in a variety of foreign
currencies. There were no material changes in the Company's exposure to market
risk from May 31, 2001.
16
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
-------------------------
EIFS LITIGATION
As previously reported, Dryvit is a defendant in an attempted state class action
filed in Jefferson County, Tennessee styled Bobby R. Posey, et al. v. Dryvit
Systems, Inc. (formerly styled William J. Humphrey, et al. v. Dryvit Systems,
Inc.) (Case No. 17,715-IV). The Posey case is an attempted state-wide class
action which seeks various types of damages on behalf of all similarly situated
persons who paid for the purchase of a structure clad with a Dryvit exterior
insulating finish system, or EIFS, in the State of Tennessee during the period
beginning November 14, 1990 to the date of the complaint.
On April 8, 2002, an order was entered in the Posey case preliminarily approving
a nationwide class action settlement of a substantial portion of Dryvit's
residential EIFS litigation. The proposed settlement encompasses all persons or
entities who own a one- or two-family residential dwelling or townhouse clad
with Dryvit EIFS installed after January 1, 1989 except persons who (1) prior to
the notice date (which is expected to be on or about June 1, 2002) have settled
with Dryvit, providing a release of claims relating to Dryvit EIFS, or (2) have
obtained a judgment against Dryvit for a Dryvit EIFS claim, or had a final
judgment entered against them on such claim in Dryvit's favor. A fairness
hearing is set for on or about October 1, 2002 to seek final court approval of
the proposed settlement. Subject to the limited right of claimants to opt out of
the proposed settlement class and Dryvit's right to terminate the settlement if,
in Dryvit's opinion, such opt outs are excessive, all of the pending individual
EIFS lawsuits and attempted state class actions will be dismissed upon entry by
the court of a final order approving the settlement. As previously reported,
Dryvit is a defendant in various attempted state class actions including cases
filed in Madison County, Illinois styled Osborne, et. al. v. Dryvit Systems,
Inc. (Case No. 00L000395) and in Mobile County, Alabama styled Tony Bryan, et.
al. v. Dryvit Systems, Inc. (Case No. CV-01-00761 JSJ). Dryvit is a defendant or
co-defendant in numerous individual EIFS lawsuits seeking damages. As of
February 28, 2002, Dryvit was a defendant or co-defendant in approximately 780
single family residential EIFS cases, the vast majority of which are pending in
North Carolina, South Carolina and Alabama. Dryvit is also defending EIFS
lawsuits involving office buildings or other commercial structures.
As previously reported, Dryvit settled the North Carolina class action styled
Ruff, et al. v. Parex, Inc., et al. ("Ruff"). As of March 29, 2002, a total of
581 claims had been submitted to the claims administrator for verification and
validation. Of these 581 claims, 272 were actually paid through April 1, 2002 in
the amount of $4,371,219. The remaining claims are at various stages of
investigation, review and validation by the claims administrator. Dryvit
continues to believe that it has adequate insurance commitments in place to
cover its obligations under the Ruff settlement.
As previously reported, Dryvit is a defendant in an attempted class action filed
in the U.S. District Court for the Eastern District of North Carolina
(5:99-CV-4700-BR(3)), styled Lienhart, et al. v. Dryvit Systems, Inc. et al.,
involving its Fastrak System 4000 product ("Lienhart"). On
June 26, 2001, the 4th Circuit U.S. Court of Appeals vacated the District
Court's December 18, 2000 class certification order ruling that certification
was not appropriate because it is likely that individual issues necessary to
adjudicate Dryvit's liability will predominate over class issues. The Court of
Appeals remanded the Lienhart case to the District Court for further proceedings
in accordance with its order. On March 25, 2002, the District
17
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
Court denied plaintiffs' supplemental motion for class certification finding
that common issues did not predominate over individual issues.
Certain of Dryvit's insurers have paid or are currently paying a portion of
Dryvit's defense costs in the attempted class actions, and individual commercial
building and homeowner lawsuits. In addition, these insurance carriers have
regularly funded settlement of the individual homeowner and commercial building
cases when appropriate. Two of Dryvit's primary insurance carriers have reported
that they have exhausted their policy limits through the payment of settlements.
In addition, Dryvit has settled with and released two of its other primary
insurers. As a result, Dryvit has sought participation in the EIFS litigation
from First Colonial Insurance Company, our wholly-owned captive insurance
company, and certain umbrella insurance companies. Dryvit, First Colonial and
two of Dryvit's umbrella carriers have entered into two defense cost sharing
agreements to cover both the individual and class action cases; these agreements
have been subject to periodic renegotiations. Under these cost-sharing
agreements, Dryvit's insurers have covered a substantial portion of the EIFS
indemnity and defense costs. Dryvit is currently in discussions with these same
insurers to secure coverage for Dryvit's obligations under the proposed class
action settlement. Dryvit believes that it will obtain adequate insurance to
cover a significant portion of its anticipated obligations under the proposed
settlement. Certain of Dryvit's obligations under the settlement may not,
however, be entirely covered by insurance. Based on Dryvit's existing insurance
arrangements, anticipated insurance recoveries and the terms of the proposed
class action settlement, the Company believes that the EIFS litigation will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
ASBESTOS LITIGATION
As previously reported, the Company, certain of its wholly-owned subsidiaries,
including Bondex International, Inc. ("Bondex") and Republic Powdered Metals,
Inc. ("Republic"), are defendants or co-defendants ("Defendants") in
asbestos-related bodily injury lawsuits filed on behalf of various individuals
in various jurisdictions. These cases generally seek damages for
asbestos-related diseases based on alleged exposures to asbestos-containing
products previously manufactured by the Defendants. In many cases, the
plaintiffs are unable to demonstrate that any injuries they have incurred, in
fact, resulted from exposure to one of Defendants' products. Defendants are
generally dismissed from those cases. With respect to those cases where
compensable disease, exposure and causation are established, Defendants
generally settle for
18
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
various amounts based on the seriousness of the case, the particular
jurisdiction and the number and solvency of co-defendants in a given case.
As of February 28, 2002, Defendants had a total of 1,865 active asbestos cases
compared to 919 as of February 28, 2001. During the quarter ended February 28,
2002, Defendants secured dismissals and/or settlements of 71 claims for
$396,000, net of insurer payments and excluding defense costs, compared to 13
dismissals and/or settlements for $164,193 for the same quarter ended February
28, 2001. This increase in the number of cases filed is due, in part, to the
bankruptcy filings of various other asbestos litigation defendants.
Defendants continue to vigorously defend all asbestos-related lawsuits. Under
cost-sharing arrangements with our insurers, our insurers have covered
substantially all of the indemnity and defense costs and Defendants have paid
the balance. We cannot, however, assure you that the aggregate limits of such
insurance will be adequate to cover the costs of future asbestos claims.
We do not believe that our current asbestos suits will have a material adverse
effect on our business or operations. However, the potential cost of liabilities
associated with asbestos claims is subject to many uncertainties including the
ultimate number of claims filed, the cost of such claims, the impact of
bankruptcies of other companies currently involved in asbestos litigation,
unpredictable aspects of the litigation process from jurisdiction to
jurisdiction and from case to case, as well as potential legislative changes.
Accordingly, we cannot assure you that any additional suits will not have a
material adverse effect on our business, financial condition, results of
operations or cash flows.
In addition to the foregoing legal proceedings, various of the Company's
subsidiaries are, from time to time, parties to legal proceedings associated
with their businesses and operations. It is not possible to predict the outcome
of these proceedings, but management believes that these other proceedings will
not have a material adverse effect on the Company's consolidated financial
position or results of operations.
ENVIRONMENTAL PROCEEDINGS
As previously reported, various of the Company's subsidiaries are, from time to
time, identified as a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act and similar state
environmental statutes. In some cases, the Company's subsidiaries are
participating in the cost of certain clean-up efforts or other remedial actions.
However, the Company's share of such costs has not been material and the Company
believes that these environmental proceedings will not have a material adverse
effect upon the Company's consolidated financial position or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
(a) EXHIBITS
Official Exhibit Number Description
----------------------- -----------
11.1 Statement regarding computation of per share
earnings.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three
months ended February 28, 2002.
19
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/ THOMAS C. SULLIVAN
------------------------------------------
THOMAS C. SULLIVAN
CHAIRMAN & CHIEF EXECUTIVE OFFICER
BY /s/ ROBERT L. MATEJKA
------------------------------------------
ROBERT L. MATEJKA
VICE PRESIDENT - CHIEF FINANCIAL OFFICER AND
CONTROLLER
DATED: APRIL 15, 2002