<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 NOVEMBER 30, 1999
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
incorporation or organization) Identification No.)
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 January 12, 2000,
106,521,447 RPM Inc. Common Shares were outstanding.
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RPM, INC. AND SUBSIDIARIES
--------------------------
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Consolidated Balance Sheets
November 30, 1999 and May 31, 1999 3
Consolidated Months Statements of Income
Six Months and Three Months 4
Ended November 30, 1999 and 1998
Consolidated Statements of Cash Flows
Six Months Ended November 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results 9
for Operations and Financial Condition
PART II. OTHER INFORMATION 15
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<TABLE>
<CAPTION>
PART I. -- FINANCIAL INFORMATION 3
--------------------------------
ITEM 1. -- FINANCIAL STATEMENTS
-------------------------------
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
------
NOVEMBER 30, 1999 MAY 31, 1999
----------------- --------------
<S> <C> <C>
Current Assets
Cash and short-term investments $29,165 $19,729
Trade accounts receivable (less allowance for doubtful
accounts $18,157 and $14,248) 360,311 362,611
Inventories 242,491 242,445
Prepaid expenses and other current assets 85,895 80,634
--------------- -------------
Total current assets 717,862 705,419
--------------- -------------
Property, Plant and Equipment, At Cost 647,138 572,690
Less: accumulated depreciation and amortization 251,979 232,993
--------------- -------------
Property, plant and equipment, net 395,159 339,697
--------------- -------------
Other Assets
Costs of businesses over net assets acquired, net of amortization 583,040 425,951
Intangible assets, net of amortization 324,108 232,556
Other 37,673 33,613
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Total other assets 944,821 692,120
--------------- -------------
Total Assets $2,057,842 $1,737,236
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current portion of long term debt $7,355 $3,764
Notes and accounts payable 124,797 131,118
Accrued compensation and benefits 56,854 58,277
Accrued loss reserves 46,147 49,296
Other accrued liabilities 52,963 50,843
Restructuring reserve 36,356
Income taxes payable (14,766) 9,251
--------------- -------------
Total current liabilities 309,706 302,549
--------------- -------------
Long-term Liabilities
Long-term Debt, less current maturities 867,142 582,109
Deferred income taxes 99,275 53,870
Other long-term liabilities 65,664 55,832
--------------- -------------
Total long-term liabilities 1,032,081 691,811
--------------- -------------
Shareholders' Equity
Common shares, stated value $.015 per share;
authorized 200,000,000 shares;
outstanding 107,607,000
and 110,739,000 shares, respectively 1,614 1,613
Paid-in capital 423,714 423,204
Treasury shares, at cost (42,135) (17,044)
Retained earnings 360,591 359,011
Accumulated other comprehensive income:
Cumulative translation adjustment (27,729) (23,908)
--------------- -------------
Total shareholders' equity 716,055 742,876
--------------- -------------
Total Liabilities and Shareholders' Equity $2,057,842 $1,737,236
=============== =============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
4
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------- ----------------------------
1999 1998 1999 1998
---------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Net Sales $995,959 $863,857 $500,417 $415,725
Cost of Sales 555,720 471,572 286,141 227,842
---------------- --------------- -------------- ----------
Gross Profit 440,239 392,285 214,276 187,883
Selling, General and Administrative
Expenses 324,904 285,160 165,492 143,570
Restructuring Charge 45,000
Interest Expense, Net 23,507 17,565 13,618 8,127
---------------- --------------- -------------- ----------
Income Before Income Taxes 46,828 89,560 35,166 36,186
Provision for Income Taxes 19,200 36,624 14,418 14,474
---------------- --------------- -------------- ----------
Net Income $27,628 $52,936 $20,748 $21,712
================ =============== ============== ==========
Basic earnings per common share $0.25 $0.49 $0.19 $0.20
================ =============== ============== ==========
Diluted earnings per common share $0.25 $0.48 $0.19 $0.20
================ =============== ============== ==========
Dividends per common share $0.2400 $0.2295 $0.1225 $0.1175
================ =============== ============== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
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<TABLE>
<CAPTION>
RPM, INC. AND SUBSIDIARIES 5
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED NOVEMBER 30,
------------------------------------------------------
1999 1998
------------------------ -------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $27,628 $52,936
Depreciation and amortization 37,779 28,909
Items not affecting cash and other (6,706) 2,366
Changes in working capital 24,323 2,042
------------------------ -------------------------
83,024 86,253
------------------------ -------------------------
Cash Flows From Investing Activities:
Additions to property and equipment (29,726) (30,977)
Sale of business assets, net of cash transferred 17,481 --
Acquisition of new businesses, net of cash (298,008) (21,188)
------------------------ -------------------------
(310,253) (52,165)
------------------------ -------------------------
Cash Flows From Financing Activities:
Proceeds from stock option exercises 508 2,136
Increase (decrease) in debt 287,296 16,337
Treasury shares purchased (25,091)
Dividends (26,048) (24,619)
------------------------ -------------------------
236,665 (6,146)
------------------------ -------------------------
Net Increase (Decrease) in Cash 9,436 27,942
Cash At Beginning of Period 19,729 40,783
------------------------ -------------------------
Cash At End of Period $29,165 $68,725
======================== =========================
Supplemental Schedule of Non-Cash Investing and Financing Activities:
- ---------------------------------------------------------------------
Conversion of Debt to Equity -- $157,042
Interest accreted on LYONs -- $1,696
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<PAGE> 6
6
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal, recurring accruals) considered necessary for a fair presentation have
been included for the six and three months ended November 30, 1999 and November
30, 1998. 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:
NOVEMBER 30, 1999 (1) MAY 31, 1999
--------------------- ------------
Raw material and supplies $ 80,909 $ 80,827
Finished goods 161,582 161,618
--------- ---------
$ 242,491 $ 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 six and three months ended
November 30, 1999 and November 30, 1998. 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
NOVEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
------------------ --------------------
ENDED NOVEMBER 30, ENDED NOVEMBER 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $1,039,997 $986,535 $500,417 $476,490
Net Income $27,314 $50,218 $20,364 $20,377
Basic earnings per $.25 $.47 $.19 $.18
common share
Diluted earnings per $.25 $.46 $.19 $.18
common share
</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
loss, amounted to $17,179 and $24,111 during the second quarter of fiscal years
2000 and 1999, respectively, and $23,808 and $53,364 for the six months ended
November 30, 1999 and 1998, respectively.
NOTE E - RESTRUCTURING CHARGE
- -----------------------------
In August 1999, the Company recorded a restructuring charge of $45,000,000
($26,550,000 after tax, or $.24 per diluted share). Included in this total are
facility closures and write-downs of property, plant and equipment of
$21,000,000, write-downs of intangibles of $3,400,000, severance and other
employee related costs of $17,000,000, and contract exit and termination costs
of $3,600,000 (refer to Management Discussion and Analysis of Results of
Operations for further discussion.)
As of November 30, 1999, the Company has paid or incurred $8,644,000 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.
<TABLE>
<CAPTION>
AUGUST 1999 UTILIZED THROUGH
CHARGE 11/30/99 BALANCE AT 11/30/99
------ ------- ------------------
<S> <C> <C> <C>
Property, plant and equipment $21,000,000 $2,892,000 $18,108,000
Intangibles 3,400,000 3,678,000 (278,000)
Severance Costs 17,000,000 2,074,000 14,926,000
Exit and termination costs 3,600,000 --- 3,600,000
----------- ---------- -----------
$45,000,000 $8,644,000 $36,356,000
=========== ========== ===========
</TABLE>
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8
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The facility closure costs represent estimated losses on the closure and sale of
facilities, primarily in North America. The charge for property, plant and
equipment represents write-downs to net realizable value of less efficient and
duplicate machinery and equipment not needed in the combined restructured
manufacturing operations. The severance and other employee related costs provide
for a reduction of approximately 730 employees related to the facility closures
and the streamlining of operations related to cost reduction initiatives. The
costs of exit and contract termination costs are comprised primarily of
non-cancelable lease obligations on the facilities to be closed. Approximately
$1,900,000 of the property, plant and equipment write-down, $2,700,000 of the
intangible write-down, $1,600,000 of the severance costs to be incurred and
$2,600,000 of the exit and termination costs to be incurred, or approximately
$8,800,000 in total, are related to the purchase of DAP Products Inc. (Note C),
which rendered these assets and contracts redundant.
<PAGE> 9
9
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
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 six months and
second quarter results on this basis are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Six Months Ended Nov. 30, Quarter Ended Nov. 30,
(000s) (000s)
----------------------------- ----------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net External Sales
Industrial Division $582,020 $542,925 $280,011 $262,100
Consumer Division 413,939 320,932 220,406 153,625
-------- -------- -------- --------
Totals: $995,959 $863,857 $500,417 $415,725
======== ======== ======== ========
Earnings Before Interest and Taxes (EBIT)
(2) (1)
Industrial Division $84,678 $ 70,678 $ 83,171 $ 37,805 $ 35,846
Consumer Division 39,687 10,387 29,989 16,312 12,084
Corporate/Other (9,030) (10,730) (6,035) (5,983) (3,617)
-------- -------- -------- -------- --------
Totals: $115,335 $ 70,335 $107,125 $ 48,134 $ 44,313
======== ======== ======== ======== ========
Identifiable Assets May 31, 1999
------------
Industrial Division $988,136 $1,102,531
Consumer Division 1,016,748 586,846
Corporate/Other 52,958 47,859
---------- ----------
Totals: $2,057,842 $1,737,236
========== ==========
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</TABLE>
(1) = as reported, including restructuring charge
(2) = proforma six month results, before restructuring charge
RESULTS OF OPERATIONS
- ---------------------
The Company's sales and earnings were ahead 16% and 2%, respectively, in the
first six 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 48% lower than the first six months a year ago. During the second quarter,
the Company's sales gained 21%, before exchange rate differences, but earnings
were 6% behind last year's second quarter results.
<PAGE> 10
10
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
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.
The DAP acquisition accounted for approximately 60% of the six months' sales
increase and 70% of the 2nd quarter sales increase. The Company's existing
operations and several product line additions, net of a divestiture, generated
the balance of the 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 second quarter, internal growth within the Industrial Division
strengthened to 5%, and growth within the Consumer Division improved to 4%,
despite continued weakness in the automobile aftermarket. Year-to-date internal
growth now averages between 4-5% in both Divisions, adjusted for foreign
exchange rate differences between periods. Internal growth this year has
generally fallen short of expectations, however, from slower than planned North
American construction, lower than planned exports to a number of recovering
overseas markets, and weather-related factors earlier in the year.
The gross profit margin of 42.8% during the second quarter compares with 45.2% a
year ago. The Industrial Division margin of 44.4% compares with 45.3% a year
ago, mainly from certain differences in sales mix so far this year, while the
Consumer Division has moved down from 44.9% a year ago to 40.9% this quarter,
principally reflecting the lower margin impact of DAP. Similarly, through six
months, this year's gross profit margin of 44.2% compares with 45.4% a year ago,
with the Industrial Division margin nearly even at 45.3% vs. 45.5%, while the
Consumer Division margin has declined significantly from 45.4% to 42.7% because
of DAP. Raw material price changes have not been a significant factor so far
this year, and though there are other increases anticipated, such as titanium
dioxide, the Company remains confident that raw material prices will continue to
be effectively managed to minimize any impact on margins.
The Company's selling, general and administrative (SG&A) expenses improved to
33.2% of sales in the 2nd quarter from 34.5% a year ago. Industrial Division
expenses declined to 30.9% of sales this quarter from 31.7% last year,
reflecting primarily higher sales volume and certain timing-related benefits,
coupled with expense controls. The Consumer Division expenses decreased to 33.5%
of sales from 37.1% in 1999, mainly from the lower expense percentage at DAP,
and partly from higher volume-related benefits, coupled with expense controls.
Corporate/Other expenses between quarters reflect unfavorable timing differences
on coordinated insurance and benefit programs between years, as well as
E-commerce development initiatives this year. Through 6 months, SG&A expenses of
32.6% of sales compare favorably with 33.0% of sales a year ago. The Industrial
Division, at 30.7% of sales, remains higher than last year's 30.1%, but their
trend is favorable from increasing sales volume, coupled with continued expense
controls. The Consumer Division expenses after 6 months at 33.1% of sales
compare
<PAGE> 11
11
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
favorably with 36.0% of sales after 6 months a year ago, mainly from the lower
expense percentage impact of DAP, but also from their increased volume this
year, coupled with effective expense controls. The change in Corporate/Other
expenses after 6 months mainly reflects the 2nd quarter differences discussed.
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 ($0.25 per share after tax)
was taken during the 1st quarter of this year, and the program is expected to
generate annualized pre-tax savings of $23 million ($.13 per share after tax),
once completed. These savings will phase in over the next 2 years, with the full
savings expected beginning in Fiscal Year 2002. The company expanded the scope
of the restructuring program to include two additional locations that were
closed during the second quarter. The restructuring costs associated with
closing the two locations were $3.5 million, but sufficient savings will be
realized as the original $45 million program unfolds, in the way of depreciation
recapture, sub-leasing certain contracts, and in other areas, to effectively
offset this additional charge. The net cash requirements of the entire
restructuring program are still estimated to be approximately $4 million.
Through November 30, 1999, the Company had paid or incurred $8.6 million of the
restructuring 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 $1.5 million to date have nearly offset $1.8
million of additional one-time costs that have been triggered by the program,
and expensed through continuing operations.
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. To date, one such business, with annual
sales of approximately $25 million, has been divested for a net gain.
During the 2nd quarter, EBIT declined in Corporate/Other for the reasons cited
above, but operational EBIT improved in both the Industrial and Consumer
Divisions. These Divisional improvements to date mainly stem from the DAP
acquisition and other product line additions. The EBIT outlook remains positive
as sales increase, and expense controls are firmly in place, and the
restructuring savings continue to grow. Principally because of the restructuring
charge, EBIT after 6 months has declined dramatically in both Divisions and in
Corporate/Other versus last year. Excluding the restructuring charge, the
proforma EBIT results show the Industrial Division slightly ahead from
year-to-year, as 1st quarter adverse timing differences within SG&A expenses
have reduced the otherwise greater Industrial EBIT growth that has mainly come
from additional product lines, while the Consumer Division has generated 32%
EBIT growth so far this year, mainly because of DAP, but also from internal unit
growth year-over-year. Corporate/Other expenses have increased primarily from
the timing of expenses and E-commerce initiatives cited above.
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
<PAGE> 12
12
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
August 10, 1998 redemption of the Company's convertible debt securities, which
has reduced interest expense by $1.3 million this year, from debt paydowns and
from slightly lower interest rates than a year ago.
Excluding the 1st quarter restructuring charge, 6 month earnings have increased
2% to $54.2 million and diluted earnings per share have increased by $.02, or
4%, to $.50 per share. The corresponding margin decline to 5.4% from 6.1% a year
ago reflects the impact of DAP and its acquisition costs. These proforma
earnings and EPS increases stem largely from the recent product line additions.
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 earnings per share compared with last year,
while the averaging of shares repurchased as of November 30, 1999 has had a
favorable impact. The restructuring charge has reduced 6-month net earnings by
$26.5 million, and basic and diluted earnings per share by $.25.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH PROVIDED FROM OPERATIONS
- -----------------------------
The Company has generated cash from operations of $83.0 million during the past
6 months, compared with $86.3 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 November 30, 1999, of approximately $7
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.
During the 2nd quarter, the Company sold a non-core business for $17.5 million,
net of cash transferred, for a net gain (refer to Results of Operations).
<PAGE> 13
13
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
The investment of $298 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 January 14, 2000, the Company had repurchased 4.6 million of its
common shares at an average price of $12.12 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 and 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 55%, 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 on in its operations.
<PAGE> 14
14
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SIX MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
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.
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, 1999.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing discussion includes forward-looking statements relating to the
business of the Company. These forward-looking statements, or other statements
made by the Company, are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors (including those specified below) which are difficult to predict
and, in many instances, are beyond the control of the Company. As a result,
actual results of the Company could differ materially from those expressed in or
implied by any such forward-looking statements. These uncertainties and factors
include (a) the price and supply of raw materials, particularly 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) the
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 EIFS 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.
<PAGE> 15
15
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 -- LEGAL PROCEEDINGS
- ---------------------------
BONDEX
As previously reported, Bondex International, Inc., a wholly-owned subsidiary of
the Company ("Bondex"), is one of numerous corporate defendants in certain
pending asbestos-related bodily injury lawsuits filed on behalf of various
individuals in various jurisdictions of the United States. Since October 1,
1999, an additional 38 such cases have been filed and 67 such cases which had
been filed were voluntarily dismissed and/or settled, leaving a total of 470
such cases pending. Bondex continues to vigorously defend all asbestos-related
lawsuits. Under a cost-sharing agreement among Bondex and its insurers, the
insurers are responsible for payment of a substantial portion of defense costs
and indemnity payments with Bondex responsible for the balance. The Company
believes that the ultimate resolution of the matters will not have a material
adverse effect on the Company's financial position or results of operations.
DRYVIT
As previously reported, Dryvit Systems, Inc., a wholly-owned subsidiary of the
Company ("Dryvit"), is a defendant or co-defendant in numerous separate but
related lawsuits, some of which have sought to certify classes comprised of
owners of structures clad with exterior insulated finish systems ("EIFS")
products manufactured by Dryvit and other EIFS manufacturers. With the exception
of the North Carolina Ruff class action, no other attempted class actions have
been certified and the Company continues to vigorously oppose all other
attempted class certifications.
On December 23, 1999, Judge Tennille signed the Preliminary Approval Order for
Dryvit's settlement of the North Carolina class-action styled Ruff et al. v.
Parex, Inc. et al. Final court approval of the settlement is expected to occur
after the March 17, 2000 fairness hearing. Dryvit has secured commitments from
both its third party primary insurers and the Company's captive insurer First
Colonial on funding for the Ruff settlement. The amount and specific terms of
the funding requirements for the Ruff settlement, however, are subject to the
court's review and approval at the fairness hearing. Attorney fees for
plaintiffs' counsel will also be determined by the court upon application by
class counsel and will be awarded separately from settlement amounts paid to
members of the class. Based upon the terms of the proposed settlement and the
anticipated attorney fee award, the Company does not believe the Ruff settlement
will have a material adverse effect on the Company's financial position or
results of operation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on October 8, 1999.
The following matter was voted on at the meeting.
<PAGE> 16
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
16
1. Election of Dr. Max D. Amstutz, E. Bradley Jones, Albert B. Ratner and Dr.
Jerry Sue Thornton as Directors of the Company. The nominees were elected
as Directors with the following votes:
For Withheld Broker Non-Votes
--- -------- ----------------
Dr. Max D. Amstutz 89,848,535 5,815,778 -0-
E. Bradley Jones 89,915,447 5,748,866 -0-
Albert B. Ratner 93,335,327 2,328,986 -0-
Dr. Jerry Sue Thorton 89,673,952 5,990,361 -0-
For information on how the votes for the above matters have been tabulated, see
the Company's definitive Proxy Statement used in connection with the Annual
Meeting of Shareholders on October 8, 1999.
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 November 30, 1999.
<PAGE> 17
17
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: January 14, 2000
<PAGE> 1
<TABLE>
<CAPTION>
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)
SIX MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------------ ----------------------------
1999 1998 1999 1998
--------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Shares Outstanding
- ------------------
For computation of basic earnings per
common share
Weighted average shares 108,871 107,216 108,270 110,630
--------------- --------------- ------------ -------------
Total shares for basic earnings
per share 108,871 107,216 108,270 110,630
For computation of diluted earnings
per common share
Net issuable common share equivalents 273 717 155 617
Additional shares associated with
conversion of convertible securities --- 4,137 --- ---
--------------- --------------- ------------ -------------
Total shares for diluted
earnings per share 109,144 112,070 108,425 111,247
=============== =============== ============ =============
Net Income
- ----------
Net income applicable to common shares for
basic earnings per share $27,628 $52,936 $20,748 $21,712
Add back interest net of tax on convertible
securities assumed to be converted --- 1,002 --- ---
--------------- --------------- ------------ -------------
Net income applicable to common shares for
diluted earnings $27,628 $53,938 $20,748 $21,712
=============== =============== ============ =============
Basic Earnings Per Common Share $.25 $.49 $.19 $.20
==== ==== ==== ====
Diluted Earnings Per Common Share $.25 $.48 $.19 $.20
==== ==== ==== ====
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 29,165
<SECURITIES> 0
<RECEIVABLES> 378,468
<ALLOWANCES> 18,157
<INVENTORY> 242,491
<CURRENT-ASSETS> 717,862
<PP&E> 647,138
<DEPRECIATION> 251,979
<TOTAL-ASSETS> 2,057,842
<CURRENT-LIABILITIES> 309,706
<BONDS> 867,142
0
0
<COMMON> 1,614
<OTHER-SE> 714,441
<TOTAL-LIABILITY-AND-EQUITY> 716,055
<SALES> 995,959
<TOTAL-REVENUES> 995,959
<CGS> 555,720
<TOTAL-COSTS> 880,624
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,507
<INCOME-PRETAX> 46,828
<INCOME-TAX> 19,200
<INCOME-CONTINUING> 27,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,628
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.25
</TABLE>
