<PAGE> 1
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 29, 2000
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
-------
RPM, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-6550857
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO 44258
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (330) 273-5090
- --------------------------------------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO THE FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO .
---- ----
AS OF APRIL 10, 2000
105,209,543 RPM INC. COMMON SHARES WERE OUTSTANDING.
<PAGE> 2
RPM, INC. AND SUBSIDIARIES
--------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
CONSOLIDATED BALANCE SHEETS 3
FEBRUARY 29, 2000 AND MAY 31, 1999
CONSOLIDATED STATEMENTS OF INCOME 4
NINE MONTHS AND THREE MONTHS
ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NINE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 9 - 14
RESULTS FOR OPERATIONS AND FINANCIAL CONDITION
PART II. OTHER INFORMATION 15 - 17
- ---------------------------
<PAGE> 3
3
PART I. -- FINANCIAL INFORMATION
--------------------------------
ITEM 1. -- FINANCIAL STATEMENTS
-------------------------------
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
------
FEBRUARY 29, 2000 MAY 31, 1999
----------------- -------------
<S> <C> <C>
CURRENT ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 15,923 $ 19,729
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCE FOR DOUBTFUL
ACCOUNTS $19,034 AND $14,248) 306,296 362,611
INVENTORIES 255,074 242,445
PREPAID EXPENSES AND OTHER CURRENT ASSETS 83,000 80,634
----------- -----------
TOTAL CURRENT ASSETS 660,293 705,419
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 645,641 572,690
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 253,878 232,993
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 391,763 339,697
----------- -----------
OTHER ASSETS
COSTS OF BUSINESSES OVER NET ASSETS ACQUIRED, NET OF AMORTIZATION 591,589 425,951
INTANGIBLE ASSETS, NET OF AMORTIZATION 322,052 232,556
OTHER 37,359 33,613
----------- -----------
TOTAL OTHER ASSETS 951,000 692,120
----------- -----------
TOTAL ASSETS $ 2,003,056 $ 1,737,236
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
CURRENT PORTION OF LONG-TERM DEBT $ 3,362 $ 3,764
NOTES AND ACCOUNTS PAYABLE 125,018 131,118
ACCRUED COMPENSATION AND BENEFITS 52,237 58,277
ACCRUED LOSS RESERVES 47,655 49,296
OTHER ACCRUED LIABILITIES 55,240 50,843
RESTRUCTURING RESERVE 27,596
INCOME TAXES PAYABLE (28,977) 9,251
----------- -----------
TOTAL CURRENT LIABILITIES 282,131 302,549
----------- -----------
LONG-TERM LIABILITIES
LONG-TERM DEBT, LESS CURRENT MATURITIES 877,411 582,109
DEFERRED INCOME TAXES 99,334 53,870
OTHER LONG-TERM LIABILITIES 63,472 55,832
----------- -----------
TOTAL LONG-TERM LIABILITIES 1,040,217 691,811
----------- -----------
SHAREHOLDERS' EQUITY
COMMON SHARES, STATED VALUE $.015 PER SHARE;
AUTHORIZED 200,000,000 SHARES;
OUTSTANDING 105,388,000
AND 110,739,000 SHARES, RESPECTIVELY 1,615 1,613
PAID-IN CAPITAL 424,068 423,204
TREASURY SHARES, AT COST (65,423) (17,044)
RETAINED EARNINGS 351,320 359,011
ACCUMULATED OTHER COMPREHENSIVE LOSS (NOTE D) (30,872) (23,908)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 680,708 742,876
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,003,056 $ 1,737,236
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE> 4
4
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------------ ----------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $1,407,357 $1,236,864 $ 411,398 $ 373,007
COST OF SALES 792,835 679,953 237,115 208,381
---------- ---------- ---------- ----------
GROSS PROFIT 614,522 556,911 174,283 164,626
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 480,412 432,014 155,508 146,854
RESTRUCTURING CHARGE 45,000
INTEREST EXPENSE, NET 35,958 24,947 12,451 7,382
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 53,152 99,950 6,324 10,390
PROVISION FOR INCOME TAXES 21,793 40,884 2,593 4,260
---------- ---------- ---------- ----------
NET INCOME $ 31,359 $ 59,066 $ 3,731 $ 6,130
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.29 $ 0.55 $ 0.04 $ 0.06
========== ========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.29 $ 0.54 $ 0.04 $ 0.06
========== ========== ========== ==========
DIVIDENDS PER COMMON SHARE $ 0.3625 $ 0.3470 $ 0.1225 $ 0.1175
========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE> 5
5
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
FEBRUARY 29, FEBRUARY 28,
2000 1999
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 31,359 $ 59,066
DEPRECIATION AND AMORTIZATION 58,132 45,116
ITEMS NOT AFFECTING CASH AND OTHER (19,973) (6,412)
CHANGES IN WORKING CAPITAL 54,464 (7,784)
--------- ---------
123,982 89,986
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
ADDITIONS TO PROPERTY AND EQUIPMENT (42,155) (42,366)
SALE OF BUSINESS ASSETS, NET OF CASH TRANSFERRED 17,002 --
ACQUISITION OF NEW BUSINESSES, NET OF CASH (303,336) (47,233)
--------- ---------
(328,489) (89,599)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM STOCK OPTION EXERCISES 866 2,272
REPURCHASE OF COMMON SHARES (48,379) (647)
INCREASE (DECREASE) IN DEBT 287,264 26,880
DIVIDENDS (39,050) (37,593)
--------- ---------
200,701 (9,088)
--------- ---------
NET INCREASE (DECREASE) IN CASH (3,806) (8,701)
CASH AT BEGINNING OF PERIOD 19,729 40,783
--------- ---------
CASH AT END OF PERIOD $ 15,923 $ 32,082
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
CONVERSION OF DEBT TO EQUITY - $ 157,042
INTEREST ACCRETED ON CONVERTIBLE SECURITIES - $ 1,696
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE> 6
6
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for a fair presentation have
been included for the nine and three months ended February 29, 2000 and February
28, 1999. 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, 1999.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
NOTE B - INVENTORIES
- --------------------
Inventories were composed of the following major classes:
February 29, 2000 (1) May 31, 1999
--------------------- ------------
Raw materials and supplies $ 85,039 $ 80,827
Finished goods 170,035 161,618
---------- ----------
$ 255,074 $ 242,445
========== ==========
(1) Estimated, based on components at May 31, 1999
NOTE C - ACQUISITIONS
- ---------------------
On August 3, 1999, the Company acquired all the outstanding shares of DAP
Products Inc. DAP, headquartered in Baltimore, Maryland, is a leading
manufacturer of sealants, caulks, patch and repair compounds, wood preservatives
and water repellents and adhesives, for the retail do-it-yourself market.
This acquisition has been accounted for by the purchase method of accounting.
The following data summarizes, on an unaudited proforma basis, the combined
results of operations of the companies for the nine and three months ended
February 29, 2000 and February 28, 1999. The proforma 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.
<PAGE> 7
7
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
----------------------------------- --------------------------------------
02/29/00 02/28/99 02/29/00 02/28/99
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $1,451,396 $1,407,638 $411,398 $421,102
Net Income $31,045 $53,071 $3,731 $2,854
Basic earnings per
Common share $.29 $.49 $.04 $.03
Diluted Earnings per
Common share $.29 $.48 $.04 $.03
</TABLE>
NOTES D - COMPREHENSIVE INCOME
- ------------------------------
As of June 1, 1998, the Company adopted SFAS No. 130 Reporting Comprehensive
Income. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income. SFAS No. 130 requires other
comprehensive income to include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains or losses on
securities which, prior to adoption, were reported separately. Accordingly,
total comprehensive income, comprised of net income and other comprehensive
income (loss), amounted to $588 and ($1,068) during the third quarter of fiscal
years 2000 and 1999, respectively, and $24,395 and $52,296 for the nine months
ended February 29, 2000 and February 28, 1999, respectively.
NOTE E - RESTRUCTURING CHARGE
- -----------------------------
In August 1999, the Company recorded a restructuring charge of $45,000 ($26,550
after-tax, or $.25 per diluted share). Included in this total are facility
closures and write-downs of property, plant and equipment of $21,000,
write-downs of intangibles of $3,400, severance and other employee related costs
of $17,000, and contract exit and termination costs of $3,600 (refer to
Management's Discussion and Analysis of Results of Operations for further
discussion).
As of February 29, 2000, the Company has paid or incurred $17,404 related to the
restructuring charges. The Company anticipates that substantially all of the
remaining restructuring and plant rationalization costs will be paid or incurred
by May 31, 2001.
<PAGE> 8
8
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 1999 UTILIZED THROUGH BALANCE
----------- ---------------- -------
CHARGE 02/29/00 AT 02/29/00
------ -------- -----------
<S> <C> <C> <C>
Property, plant and equipment $21,000 $5,536 $15,464
Intangibles 3,400 3,678 (278)
Severance Costs 17,000 7,628 9,372
Exit and termination costs 3,600 562 3,038
-------------------- ---------------------- ---------------------
$45,000 $17,404 $27,596
==================== ====================== =====================
</TABLE>
<PAGE> 9
9
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REPORTABLE SEGMENT INFORMATION
- ------------------------------
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, was adopted by the Company effective May 31,
1999. This Standard requires disclosure of segment information using the
management approach, or the basis used internally to evaluate operating
performance and to decide resource allocations. Comparative nine months and
third quarter results on this basis are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED QUARTER ENDED
------------------------------ ----------------------------
(000S) (000S)
------------------------------ ----------------------------
02/29/00 02/28/99 02/29/00 02/28/99
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net External Sales
Industrial Division $807,047 $773,798 $225,027 $230,873
Consumer Division 600,310 463.066 186,371 142,134
-------- ------- ------- -------
Totals: $1,407,357 $1,236,864 $411,398 $373,007
========== ========== ======== ========
Earnings Before Interest and Taxes (EBIT)
(2) (1)
Industrial Division $ 100,871 $ 86,871 $ 98,811 $ 16,193 $ 15,640
Consumer Division 46,471 17,171 36,967 6,784 6,978
Corporate/Other (13,232) (14,932) (10,881) (4,202) (4,846)
-------- -------- -------- ------- -------
Totals: $134,110 $ 89,110 $124,897 $ 18,775 $ 17,772
======== ======== ======== ======== ========
Identifiable Assets MAY 31, 1999
------------
Industrial Division $947,625 $1,102,531
Consumer Division 1,008,835 586,846
Corporate/Other 46,596 47,859
--------- ------
Totals: $2,003,056 $1,737,236
========== ==========
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) = as reported, including restructuring charge
(2) = proforma nine month results, before restructuring charge
RESULTS OF OPERATIONS
- ---------------------
On August 3, 1999, the Company completed its acquisition of DAP Products Inc.
and DAP Canada Corp. (collectively "DAP"), headquartered in Baltimore, Maryland.
DAP has annual sales of approximately $250 million, and is a leading North
American manufacturer and marketer of caulks and sealants, spackling and glazing
compounds, contact cements, and other specialty adhesives. DAP is reported
within the Consumer Division and is expected to be neutral to the Company's
earnings results in fiscal year 2000, but will contribute thereafter.
<PAGE> 10
10
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
The Company's sales were ahead 14% and earnings were behind 2% in the first
nine months compared to last year, before exchange rate differences and before
a $45 million pre-tax restructuring charge taken during the first quarter,
further discussed below. Including the restructuring charge, earnings were 47%
lower than the first nine months a year ago. During the third quarter, the
Company's sales gained 11%, before exchange rate differences, but earnings were
39% behind last year's third quarter, almost entirely caused by the DAP
acquisition and a second quarter divestiture, as internal performance was
essentially flat during the quarter.
The DAP acquisition accounted for approximately 70% of the nine months' sales
increase and all of the third quarter sales increase. The Company's existing
operations plus several product line additions, net of the divestiture,
generated the balance of the nine months' sales increase, almost entirely from
higher unit volume as pricing adjustments have been negligible. Foreign exchange
rate differences have negatively affected year-to-year sales by less than 1%.
Sales may continue to be negatively affected if the dollar continues to
strengthen.
During the third quarter, internal sales in total were flat with last year, with
Industrial Division sales growing over 2%, while Consumer Division sales
declined 5% because of the timing of orders received, continued weakness in the
automotive aftermarket and hobby market, and from the loss of some wood finishes
business. Year-to-date internal sales growth has averaged approximately 5% in
total, adjusted for foreign exchange rate differences between periods, and
favoring the Industrial Division. Internal sales growth through nine months has
fallen short of expectations, however, for the same reasons that affected the
Consumer Division in the third quarter, plus weather-related factors earlier in
the year, while the Industrial Division has experienced slower than planned
North American construction, and fewer than planned exports to a number of
still-recovering overseas markets.
The gross profit margin of 42.4% during the third quarter compared with 44.1% a
year ago. The Industrial Division margin of 44.2% compared with 44.5% a year
ago, mainly from differences in sales mix between years, while the Consumer
Division margin moved from 43.5% a year ago to 40.1% this quarter, reflecting
the lower margin impact of DAP. Similarly, through nine months, this year's
gross profit margin of 43.7% compares with 45.0% a year ago, with the Industrial
Division margin nearly even at 45.0% from 45.2%, off slightly due to sales mix,
while the Consumer Division margin has come down from 44.8% to 41.9% because of
DAP. Raw material price changes have not been a significant factor so far this
year, and though there have been increases and others are anticipated, the
Company remains confident that raw material prices will continue to be
effectively managed overall, in order to minimize any impact on margins.
The Company's selling, general and administrative (SG&A) expenses improved to
37.8% of sales in the third quarter from 39.4% a year ago. Industrial Division
expenses declined to 37.0% of sales this quarter from 37.8% last year,
reflecting primarily sales mix differences and certain timing-related benefits,
coupled with expense controls. The Consumer Division expenses also declined, to
36.5% of sales from 38.6% in 1999, from the lower SG&A percentage at DAP, but
partly offset by lower volume-related factors. Corporate/Other expenses between
quarters reflect favorable timing differences on
<PAGE> 11
11
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
coordinated insurance and benefit programs between years, net of primarily
e-commerce development initiatives this year. Through nine months, SG&A expenses
of 34.1% of sales compare favorably with 34.9% of sales a year ago. The
Industrial Division, at 32.5% of sales, nearly equals last year's 32.4%. The
Consumer Division, at 34.1% of sales, compares favorably with 36.8% of sales
after nine months a year ago, mainly from the lower SG&A percentage impact of
DAP, coupled with expense controls. The change in Corporate/Other expenses
through nine months mainly reflects the Company's e-commerce development
initiatives this year.
On August 9, 1999, the Company announced a restructuring program to generate
manufacturing, distribution and administrative efficiencies, and to better
position the Company for increased profitability and long-term growth. The
related pre-tax restructuring charge of $45 million ($.25 per share after tax)
was taken during the first quarter of this year. The program is expected to
generate annualized pre-tax savings of approximately $23 million ($.13 per share
after tax), once completed. These savings will phase in over the next two years,
with the full savings expected beginning in fiscal year 2002. Through February
29, 2000, the Company had paid or incurred $17.4 million of these charges,
primarily associated with facility shutdown costs and the write-down of certain
designated property and intangibles (refer to Note E). Related savings from the
program of $2.9 million to date have more than offset $2.5 million of one-time
costs that have been triggered by the program, and expensed through the P&L. The
net cash requirements of the restructuring program are estimated at
approximately $4 million.
The Company further plans to divest non-core product lines having annual sales
of approximately $100 million, over the next 2 years, but with no net loss
anticipated from these transactions. One such business, with annual sales of $45
million, was divested for a net gain during the second quarter. This transaction
also generated an additional $3.5 million restructuring charge, but sufficient
savings will be realized as the original $45 million program unfolds, in the way
of real estate sales gains, depreciation recapture, sub-leasing certain
contracts, and in other areas, to effectively offset this additional charge.
Subsequent to quarter end, another non-core business was divested, with annual
sales of $20 million, also for a net gain.
Comparing EBIT for the third quarters, the Industrial Division improved
slightly, while the Consumer Division was essentially flat. Factoring out DAP,
however, EBIT in the Consumer Division was lower because of the lower sales
performance. Principally because of the restructuring charge, EBIT after nine
months has declined dramatically in the two operating Divisions, and in
Corporate/Other, compared with last year. Excluding the restructuring charge,
the proforma EBIT results show improvement in both Divisions through nine
months, mainly reflecting the product line additions less the divestiture within
the Industrial Division, and mainly reflecting the impact of DAP in the Consumer
Division. The EBIT outlook remains positive as sales growth continues, expense
controls remain firmly in place, and the restructuring savings continue to have
more of a favorable impact.
<PAGE> 12
12
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
Interest expense has increased this year, primarily from increased indebtedness
to acquire DAP and other product line additions, and to repurchase common shares
of the Company (refer to Liquidity and Capital Resources - Financing
Activities). These increases were partly offset by interest saved from the
August 10, 1998 redemption of the Company's convertible debt securities, which
has reduced interest expense by $1.3 million this year, and from debt paydowns
during the past year.
Excluding the first quarter restructuring charge, nine month earnings have
declined 2%, to $57.9 million, and diluted earnings per share (EPS) remain flat
at $.54 per share. These proforma effects, and the corresponding margin decline
to 4.1% from 4.8% a year ago, mainly reflect the impacts of DAP and its
acquisition costs, and the second quarter divestiture. The issuance of 10.1
million common shares in connection with the August 10, 1998 redemption of the
Company's convertible debt securities has unfavorably impacted the calculation
of basic EPS compared with last year, while the averaging of the Company's
shares repurchased as of February 29, 2000 has had a favorable impact on both
basic and diluted EPS. The restructuring charge has reduced nine-month net
earnings by $26.5 million, and basic and diluted EPS by $.25.
LIQUIDITY AND CAPITAL RESOURCES
CASH PROVIDED FROM OPERATIONS
The Company has generated cash from operations of $124.0 million during the past
nine months, compared with $90.0 million a year ago. The $45 million (pre-tax)
restructuring charge and its related current liability are the major impacts to
net income and changes in working capital, respectively, between periods. In
addition, DAP has had negative timing differences in its working capitals
between its date of acquisition and February 29, 2000, of approximately $2.5
million. Among existing operations, other than normal timing differences within
the balance sheet, certain inventories had been built up during fiscal 1998 and
into fiscal 1999 to accommodate increased retail business in the Consumer
Division at that time. These built-up inventory levels have since been reduced
significantly, along with accounts receivable and other inventories in both
Divisions, in order to conserve working capital.
The Company's strong cash flow from operations continues to be its primary
source of financing and internal growth with limited use of short-term credit.
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.
<PAGE> 13
13
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
During the second quarter, the Company sold a non-core business with annual
sales of $45 million for $17.0 million, net of cash transferred, for a net gain
(refer to Results of Operations).
Subsequent to quarter end, the Company sold another non-core business, with
annual sales of $20 million, also for a net gain.
The investment of $303 million in new businesses this year reflects the
acquisition of DAP and other product line additions, net of cash acquired. The
Company historically has acquired complementary businesses, and this trend is
expected to continue.
FINANCING ACTIVITIES
In January 1999, the Company announced the authorization of a share repurchase
program, allowing the repurchase of up to 5 million of the Company's common
shares over a period of 12 months. On October 8, 1999, the Company announced the
authorized expansion of this repurchase program to a total of 10 million common
shares. As of April 7, 2000, the Company had repurchased 5.7 million of its
common shares at an average price of $11.69 per share.
The acquisition of DAP was financed with a bridge loan arranged through one of
the Company's lead banks. This transaction has since been refinanced through a
$700 million commercial paper program, fully backed by the Company's existing
$300 million revolving credit facility, plus a new $400 million revolving credit
facility. As a result of this transaction plus the active share repurchase
program, less the proceeds from the sale of a non-core business, the Company's
debt to capital ratio has increased to 56%, from 44% at May 31, 1999.
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 foreign net assets continues.
The Company maintains excellent relations with its banks and other financial
institutions to further enable the financing of future growth opportunities.
OTHER MATTERS
- -------------
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Company has completed its Year 2000 remediation efforts and, since the turn
of the century, has not experienced any significant problems internally or with
suppliers and customers in connection with this event. Nevertheless, there
still remain some future dates that could potentially cause computer systems
problems.
The Company's most reasonably likely worst case scenario would be a short-term
slowdown or cessation of manufacturing operations at one or more of its
facilities and a short-term inability of the Company to process orders and
billings in a timely manner, and to deliver product to customers. Because the
Company has not, to date, experienced any significant problems in the Year 2000,
it does not anticipate any major impact in its operations.
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.
<PAGE> 14
14
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
NINE MONTHS ENDED FEBRUARY 29, 2000
- --------------------------------------------------------------------------------
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 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 titantium
dioxide, certain resins, aerosols and solvents; (b) continued growth in demand
for the Company's products; (c) environmental liability risks inherent in the
chemical coatings business; (d) the effect of changes in interest rates; (e)
effect of fluctuations in currency exchange rates upon the Company's foreign
operations; (f) the potential impact of the Euro currency conversion; (g) 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; (h) future acquisitions and the Company's ability to
effectively integrate such acquisitions; (i) the potential future impact of Year
2000 related software conversion issues; the potential impact of the Company's
suppliers, customers and other third parties ability to identify and resolve
their own Year 2000 obligations in such a way as to allow them to continue
normal business operations or furnish raw materials, products, services or data
to the Company and its operating companies without interruption; (j) liability
risks inherent in the Company's EIFS and asbestos litigation; and (k) the
ability of the Company to realize the projected pre-tax savings associated with
the restructuring and consolidation program, and to divest non-core product
lines.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISLOSURES 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 those disclosed in the Company's Annual Report on Form 10-K for the
year ended May 31, 1999.
<PAGE> 15
15
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 -- LEGAL PROCEEDINGS
- ---------------------------
BONDEX
- ------
The Company, its wholly-owned subsidiaries, Bondex International, Inc.
("Bondex") and Republic Powdered Metals, Inc. ("Republic"), are each defendants
or co-defendants in asbestos-related bodily injury lawsuits filed on behalf of
various individuals in various jurisdictions of the United States alleging
personal injuries as a result of exposure to asbestos-containing products. These
suits allege a variety of lung and other diseases based on alleged exposure to
products previously manufactured by either the Company, Bondex or Republic. In
many cases the plaintiffs are unable to demonstrate that they have suffered any
compensable loss as a result of such exposure or that any injuries they have
incurred, in fact, resulted from exposure to Bondex, Republic or Company
products. Bondex, Republic and the Company generally settle asbestos cases for
amounts each considers reasonable given the facts and circumstances of each
case. The amounts paid to defend and settle these cases continue to be
substantially covered by product liability insurance.
As of May 31, 1999, Bondex had 471 active asbestos cases. Since May 31, 1999,
Bondex has dismissed and/or settled 87 cases for a total of $1,630,000 through
February 29, 2000. As of February 29, 2000, Bondex had 500 active asbestos
cases. As of May 31, 1999, Republic had 1 active asbestos case and since May 31,
1999, Republic has not secured any dismissals or settlements through February
29, 2000. As of February 29, 2000, Republic had 1 active asbestos case. As of
May 31, 1999, the Company had 54 active asbestos cases. Since May 31, 1999, the
Company has dismissed and/or settled 1 case for a total of $7,500 through
February 29, 2000. As of February 29, 2000, the Company had 80 active asbestos
cases. Bondex, Republic and Company settlements are each substantially covered
by insurer indemnity payments under the cost-sharing agreement discussed below.
Bondex, Republic and the Company continue to vigorously defend all
asbestos-related lawsuits. Under a cost-sharing agreement among the Company,
Bondex, Republic and its insurers, the insurers are responsible for payment of a
substantial portion of defense costs and indemnity payments with the Company,
Bondex and Republic each responsible for the balance. The Company believes that
the ultimate resolution of its asbestos cases will not have a material adverse
effect on the Company's financial position or results of operations.
<PAGE> 16
16
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
DRYVIT
- ------
As previously reported, Dryvit Systems, Inc., a wholly-owned subsidiary of the
Company ("Dryvit"), is a defendant or co-defendant in numerous lawsuits seeking
damages for structures clad with exterior insulated finish systems ("EIFS")
products manufactured by Dryvit and other EIFS manufacturers. As of April 10,
2000, Dryvit was a defendant or co-defendant in approximately 500 single family
residential EIFS cases and approximately 25 commercial cases. In addition, some
of Dryvit's EIFS lawsuits have sought to certify classes comprised of owners of
structures clad with EIFS products manufactured by Dryvit and other EIFS
manufacturers. With the exception of the North Carolina Ruff class action
discussed below, none of these attempted class actions have been certified and
Dryvit continues to vigorously oppose class certifications. Dryvit, the
Company's captive insurer, First Colonial Insurance Company, and one of Dryvit's
umbrella carriers, are parties to cost-sharing agreements which are providing
defense and indemnity for these residential, commercial and class action EIFS
cases. Dryvit believes that the damages sought by the plaintiffs in these cases
are covered by its existing insurance, including that provided by First Colonial
and other umbrella and excess carriers, and that such insurance is adequate.
On March 24, 2000, Judge Tennille signed a Final Order and Judgment Granting
Final Approval of Settlement for Dryvit's settlement of the North Carolina class
action styled Ruff et al. v. Parex, Inc. et al. The approved settlement class
includes all persons or entities who as of September 18, 1996, owned or formerly
owned a one or two family residential dwelling or townhouse in the State of
North Carolina clad with Dryvit's EIFS. Claimants must submit to a third party
administrator inter alia an extensive claim form; the home must be inspected by
a third party inspector to verify the structure is clad with Dryvit's EIFS and
that the requisite moisture levels are present to validate the claim before the
claim is paid. Eligible claimants with valid claims are entitled to recover
$6.00 per square foot of EIFS. The deadline for filing claims is January 17,
2003.
Dryvit has secured commitments from one of its third party insurers and First
Colonial to provide funding for the Ruff settlement. Based upon the terms of the
final settlement, the anticipated claims rate and attorney fee award, the
Company believes that Dryvit has arranged adequate financial commitments and
other insurance to cover its obligations under the Ruff settlement and the
Company does not believe the Ruff settlement will have a material adverse effect
on the Company's financial position or results of operation. The Company
currently estimates that settlement amounts will be paid out over a number of
years and will not exceed $15 million in the aggregate.
<PAGE> 17
17
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibits
--------
Official Exhibit Number Description
----------------------- ------------
11.1 Statement regarding computation of
per share earnings
27.1 Financial Data Schedule
b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the three months
ended February 29, 2000.
<PAGE> 18
18
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/ DAVID P. REIF
------------------------------
DAVID P. REIF
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
DATE: 04/14/00
<PAGE> 1
19
RPM, INC. AND SUBSIDIARIES
-------------------------
CONSOLIDATED STATEMENTS OF COMPUTATIONS OF EARNINGS
---------------------------------------------------
PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
---------------------------------------------
(UNAUDITED)
EXHIBIT 11.1
------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
------------------------------ ------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SHARES OUTSTANDING
- ------------------
FOR COMPOSITION OF BASIC EARNINGS PER
COMMON SHARE
WEIGHTED AVERAGE SHARES 108,068 108,366 106,466 110,707
------------ ------------ ------------ ------------
TOTAL SHARES FOR BASIC EARNINGS
PER SHARE 108,068 108,366 106,466 110,707
FOR COMPUTATION OF DILUTED EARNINGS
PER COMMON SHARE
NET ISSUABLE COMMON SHARE EQUIVALENTS 151 653 44 528
ADDITIONAL SHARES ASSOCIATED WITH
CONVERSION OF CONVERTIBLE SECURITIES -- 2,773 -- --
------------ ------------ ------------ ------------
TOTAL SHARE FOR DILUTED
EARNINGS PER SHARE 108,219 111,792 106,510 111,235
============ ============ ============ ============
NET INCOME
- ----------
NET INCOME APPLICABLE TO COMMON SHARES FOR
BASIC EARNINGS PER SHARE $31,359 $59,066 $3,731 $6,130
ADD BACK INTEREST NET OF TAX ON CONVERTIBLE
SECURITIES ASSUMED TO BE CONVERTED -- 1,002 -- --
------------ ------------ ------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES FOR
DILUTED EARNINGS $31,359 $60,068 $3,731 $6,130
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $.29 $.55 $.04 $.06
==== ==== ==== ====
DILUTED EARNINGS PER COMMON SHARE $.29 $.54 $.04 $.06
==== ==== ==== ====
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> FEB-29-2000
<EXCHANGE-RATE> 1.0
<CASH> 15,923
<SECURITIES> 0
<RECEIVABLES> 325,330
<ALLOWANCES> 19,034
<INVENTORY> 255,074
<CURRENT-ASSETS> 660,293
<PP&E> 645,641
<DEPRECIATION> 253,878
<TOTAL-ASSETS> 2,003,056
<CURRENT-LIABILITIES> 282,131
<BONDS> 877,411
0
0
<COMMON> 1,615
<OTHER-SE> 679,093
<TOTAL-LIABILITY-AND-EQUITY> 2,003,056
<SALES> 1,407,357
<TOTAL-REVENUES> 1,407,357
<CGS> 792,835
<TOTAL-COSTS> 1,273,247
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,958
<INCOME-PRETAX> 53,152
<INCOME-TAX> 21,793
<INCOME-CONTINUING> 31,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,359
<EPS-BASIC> 0.29
<EPS-DILUTED> 0.29
</TABLE>
