<PAGE> 1
Exhibit 13.1
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Reportable Segment and Geographic Area Information
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information, requires disclosure of
segment information using the management approach, or the basis used internally
for evaluating operating performance and to decide resource allocations.
The Company has determined that it has two such 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 division, 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 divisions based on
earnings before interest and taxes since interest expense is essentially related
to corporate acquisitions, as opposed to segment operations.
The Industrial Division has operations throughout North America and
accounts for most of the Company's sales in Europe, South America, Asia, South
Africa, Australia and the Middle East. The Industrial product line is primarily
sold to distributors, contractors and to end users, such as industrial
manufacturing facilities, educational and governmental institutions and
commercial establishments. Industrial Division products reach their markets
through a combination of direct sales, sales representative organizations,
distributor sales and sales of licensees and joint ventures.
The Consumer Division's products are sold throughout North America by
mass merchandisers, home centers, hardware stores, paint stores, automotive
supply stores and craft shops. Major customers include The Home Depot, Lowe's
Home Centers, Wal-Mart, Kmart, Sherwin-Williams, Ace Hardware Stores and Cotter
& Company. Consumer Division products are sold to retailers through a
combination of direct sales, sales representative organizations and distributor
sales.
Sales to the major home improvement centers represent approximately
16%, 12% and 11% of consolidated net sales for the years ended May 31, 2000,
1999 and 1998, respectively. These sales are predominantly within the Consumer
Division and comprise approximately 37%, 32% and 29% of the division's sales for
the respective periods.
In addition to the two operating segments, there are certain business
activities, referred to as Corporate/Other, that do not constitute an operating
segment, including corporate headquarters and related administrative expenses,
results of the Company's captive insurance company, gains or losses on the sales
of certain assets and other expenses not directly associated with either
operating segment. Related assets consist primarily of investments, prepaid
expenses, deferred pension assets, and headquarters property and equipment.
These corporate and other assets and expenses reconcile operating segment data
to total consolidated net external sales, EBIT, identifiable assets, capital
expenditures, and depreciation and amortization, as follows on page 13.
Sales for the years ended May 31, 2000, 1999 and 1998, do not include
sales of Company products by joint ventures and licensees of approximately
$35,000,000, $72,000,000, and $88,000,000, respectively. The Company reflects
income from joint ventures on the equity method and receives royalties from its
licensees. Export sales were less than 10% of total consolidated revenue for
each of the three years.
12
<PAGE> 2
<TABLE>
<CAPTION>
REPORTABLE SEGMENT INFORMATION
------------------------------------------------------------------------------------------------------------------------------
DIVISION INFORMATION (IN THOUSANDS)
Year Ended May 31, 2000 1999 1998
==============================================================================================================================
<S> <C> <C> <C>
Net external sales
Industrial Division $1,082,733 $1,052,825 $ 998,069
Consumer Division 871,398 659,329 616,836
Corporate/Other 369
------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,954,131 $1,712,154 $1,615,274
==============================================================================================================================
Earnings before interest and taxes (EBIT) (1) (2)
Industrial Division $120,363 $ 98,980 $ 135,632 $ 125,537
Consumer Division 73,550 47,907 71,294 74,435
Corporate/Other (18,389) (23,333) (14,548) (13,716)
------------------------------------------------------------------------------------------------------------------------------
TOTAL $175,524 $ 123,554 $ 192,378 $ 186,256
==============================================================================================================================
Identifiable assets
Industrial Division $1,120,801 $1,102,531 $1,035,419
Consumer Division 914,334 586,846 586,864
Corporate/Other 64,068 47,859 63,634
------------------------------------------------------------------------------------------------------------------------------
TOTAL $2,099,203 $1,737,236 $1,685,917
==============================================================================================================================
Capital expenditures
Industrial Division $ 34,331 $ 35,779 $ 32,813
Consumer Division 27,929 26,648 26,490
Corporate/Other 925 979 1,040
------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 63,185 $ 63,406 $ 60,343
==============================================================================================================================
Depreciation and amortization
Industrial Division $ 38,519 $ 32,668 $ 29,607
Consumer Division 39,862 28,387 27,225
Corporate/Other 769 1,080 177
------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 79,150 $ 62,135 $ 57,009
==============================================================================================================================
(1) Before restructuring and asset impairment charge
(2) As reported
GEOGRAPHIC INFORMATION (IN THOUSANDS)
Year Ended May 31, 2000 1999 1998
==============================================================================================================================
Net external sales (based on shipping locations)
United States $1,529,568 $1,320,410 $1,303,032
Foreign
Canada 167,574 145,123 102,317
Europe 176,160 175,741 151,376
Other Foreign 80,829 70,880 58,549
------------------------------------------------------------------------------------------------------------------------------
Total Foreign 424,563 391,744 312,242
------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,954,131 $1,712,154 $1,615,274
==============================================================================================================================
Assets employed
United States $1,740,882 $1,445,599 $1,436,557
Foreign
Canada 133,899 88,965 82,040
Europe 155,330 144,636 127,552
Other Foreign 69,092 58,036 39,768
------------------------------------------------------------------------------------------------------------------------------
Total Foreign 358,321 291,637 249,360
------------------------------------------------------------------------------------------------------------------------------
TOTAL $2,099,203 $1,737,236 $1,685,917
==============================================================================================================================
</TABLE>
13
<PAGE> 3
Results of Operations
FISCAL 2000 COMPARED TO FISCAL 1999
The Company's fiscal 2000 net sales of $1.95 billion were $242 million, or 14%,
greater than in 1999, resulting in the 53rd consecutive year of business growth
for RPM, Inc. The vast majority of this increase came as a net result of the
August 1999 acquisition of DAP Products, Inc. and DAP Canada Corp. (collectively
"DAP"), and several product line additions, net of divestitures. DAP,
headquartered in Baltimore, Maryland, 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's brand names, which include DAP, Kwik Seal and Durabond, are
well known throughout the U.S. and Canada. DAP was neutral to the Company's
earnings results in fiscal 2000, but is anticipated to be a positive contributor
hereafter. DAP accounted for 67% of the Company's year 2000 sales increase,
adjusted for divestitures during 2000 and for foreign exchange differences
between years. Growth within the Industrial and Consumer Divisions' base
businesses, not impacted by acquisitions or divestitures, was approximately 3%
and 4%, respectively. These growth rates include several product line additions
and are generally reflective of real unit volume increases as price levels
year-to-year remained fairly stable.
Gross profit margins this year declined 2.2%, ending at 43.7%, compared
to last year's 45.9% performance. The Industrial Division's deterioration was
lower at 0.8%, falling to 45.2% from 46%. The key influence to this change was
due to the difficulties experienced in combining Carboline into the StonCor
organization, most notably at non-U.S. operations. Additionally, there were
sales mix differences and minor raw material price increases during the year.
The Company believes that such cost increases can be effectively managed,
prospectively, as activities continue in its Purchasing Action Group. This group
focuses on purchasing major common raw materials used across all business units,
and will continue its effort to identify and expand into other opportunities
during 2001. The Consumer Division year 2000 margins of 42% were 3.6% lower than
in 1999, when a 45.6% level was experienced. Approximately 56% of this margin
reduction resulted from the DAP acquisition. DAP's entire cost structure differs
from other Company business units. It has much lower gross margins, but requires
lower support levels in the selling, general and administrative areas. The
Consumer Division also incurred the majority of the $7.9 million in inventory
discontinuation costs associated with the restructuring program, further
described below. In addition, the Consumer Division experienced raw material
price movements similar to those described for the Industrial Division, and
likewise should be able to effectively manage such cost movements going forward,
albeit at a somewhat slower pace as there is less pricing flexibility within
this division.
Selling, general and administrative ("SG&A") expenses were essentially
unchanged from 1999 as a percentage of sales, ending the year at the 34.7%
level. The base businesses' cost levels for both the Industrial and Consumer
Divisions were modestly up as a percent of sales; Industrial was up 0.2% to 34%,
and Consumer ended at 35.2%, up 0.4%. The Industrial Division on an all-in
basis, spent at a 34.1% level, 1% higher than a year ago, with this increase
almost totally driven by the divestiture of business units which experienced
much lower SG&A expense levels. Conversely, in the Consumer Division, the all-in
spending level of 33.5% is 1.3% lower than 1999 as a result of the lower SG&A
structure of DAP.
Excluding the restructuring and asset impairment charge of $52 million,
and the related $7.9 million of additional cost of sales, earnings before
interest and taxes (EBIT) were $183.4 million in the year 2000, a $9.0 million
reduction from the 1999 amount of $192.4 million. As set forth above, within the
Industrial Division, the earnings benefits of modest volume increases were
principally offset by costs incurred in combining the Carboline business into
the StonCor organization and other cost increases not recovered by price
increases. The Consumer Division year-over-year comparisons disclose similar
occurrences; however, the DAP acquisition helped to more than offset the
earnings reduction. Absent the DAP effect, within the Consumer Division,
selected business unit difficulties, in particular at Bondo, and general cost
increases not recovered in prices, drove a net cost increase which exceeded the
benefits realized from modest sales volume growth.
Basic corporate and other expenses increased just over 10%, and the
investment initiative for e-commerce infrastructure development provided the
balance of this cost increase.
In August 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 pre-tax restructuring and asset impairment charge of $52 million ($.29 per
share after tax) was taken during the first and fourth quarters 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 year-end
14
<PAGE> 4
2000, the Company had incurred $38.4 million of these charges, primarily
associated with facility shutdown costs and the write-down of certain designated
property and intangibles (refer to Note I to the Consolidated Financial
Statements). The net cash requirements of the restructuring program are
estimated at approximately $10 million.
The Company divested two non-core product lines, with annual sales of
$65 million, for a net gain during the year. This net gain was offset by
non-recurring expenses during the year.
Net interest expense increased $19.0 million in 2000 [refer to Note A
(12)], reflecting primarily the additional indebtedness to acquire DAP and
smaller acquisitions throughout the year, and to repurchase common shares of the
Company. These increases were partly offset by interest saved from the August
10, 1998 redemption of the Company's convertible debt securities, which reduced
interest expense by $1.3 million, and from debt paydowns during the past year.
Fractionally higher interest rates in 2000 further increased net interest
expense.
The effective income tax rate in 2000 was 42.9%, compared to a 1999
rate of 40.8%. The higher rate is totally attributable to the restructuring and
asset impairment charge of $52 million and related costs (principally for
inventory write-offs on certain discontinued product lines) of $7.9 million, all
being tax credited incrementally, at only the U.S. statutory rate (35%), plus
the net state and local income tax rates. The resultant net effective tax credit
rate of 37.2% increases the Company's effective tax rate for "normal" operations
to 40.3% and results in the reported effective rate of 42.9%.
Net income of $41 million, or $0.38 per diluted share, in the year 2000
was $53.5 million lower than in 1999 when net income totaled $94.5 million, or
$0.86 per diluted share. As described above, in 2000, the Company incurred a
combined $59.8 million pre-tax charge for restructuring, asset impairment
charges and related costs ($37.6 million after income taxes). Prior to such
costs, the 2000 net income was $78.6 million, or $0.73 per diluted share.
Changes in average common shares outstanding in these calculations had little or
no effect year-to-year.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company achieved its 52nd consecutive record year of sales and earnings in
the 1999 fiscal year. Sales grew 6%, to $1.7 billion, while earnings grew 8%, to
$94.5 million.
Effective February 1, 1999, the Company acquired the remaining 50% of
The Euclid Chemical Company ("Euclid") from the Company's former partner,
Holderbank Financiere Glaris Ltd. As part of the Tremco Group within the
Industrial Division, Euclid offers a full line of concrete and masonry repair
and maintenance products marketed under the Euco name and is pursuing its
strategy of global expansion in the concrete and masonry industry.
Approximately 60% of the 1999 sales increase was attributable to net
acquisitions, most notably that of Euclid and of The Flecto Company, Inc.
("Flecto") on March 31, 1998. The Company's existing operations and several
product line additions generated the balance of the sales increase, growing at
the rate of approximately 2% for the year, almost entirely from higher unit
volume as pricing adjustments were flat to somewhat soft, particularly in the
Consumer Division. Exchange rate differences had a slight negative effect of
less than 1% on year-to-year sales.
Internal sales grew much more slowly than anticipated in 1999. Growth
slowed to approximately 2.5% in the Industrial Division from a softening North
American market and continued depressed overseas markets, particularly in the
financially troubled Asian and South American economies. A stronger dollar
against most foreign currencies further reduced demand for the Company's
products outside North America. Growth slowed in the Consumer Division to
approximately 1% from continuing consolidation in the do-it-yourself (D-I-Y)
retailing industry; inventory reductions at a number of major D-I-Y accounts,
despite solid sell-through rates; and continued weakness in the automobile
aftermarket.
The gross profit margin strengthened to 45.9% compared with 1998's
44.8%, with the Industrial Division improving to 46.0% from 44.3% and the
Consumer Division achieving 45.6% compared with 45.5% the prior year. This
improvement reflects generally lower raw material costs, including lower costs
on goods sourced outside the U.S. from the strength of the dollar. Margin
improvement also continued at Tremco, within the Industrial Division, through
1999, mainly from ongoing purchasing savings and the successful restructuring of
its operations, since its acquisition in February 1997. Other margin improvement
came from Flecto in the Consumer Division and Euclid in the Industrial Division,
with their comparatively higher margins. The positive effects of Flecto and
lower raw material costs more than offset certain product mix and market
share-driven lower margins within the Consumer Division.
15
<PAGE> 5
Selling, general and administrative expenses of 34.6% of sales compared
with 33.3% the prior year. The Industrial Division expenses increased to 33.1%
of sales from 31.8% and the Consumer Division expenses increased to 34.8% from
33.5% in 1998. Both divisions continued with many of their product and market
development, promotional and other growth-related initiatives to set the stage
for stronger sales growth in the future. The Consumer Division, in particular,
incurred higher freight and handling costs to accommodate increased demands for
smaller, more frequent shipments of products. Flecto also has proportionately
much higher costs in this category, including acquisition-related expenses. The
Industrial Division incurred costs associated with certain minor restructurings
during 1999, and there were certain timing differences on a number of expenses
between years.
The Industrial Division generated the EBIT growth in 1999, primarily
from existing operations, while slower sales growth, coupled with the higher
servicing and development costs, adversely affected the Consumer Division.
The August 10, 1998 redemption of the Company's convertible debt
securities (refer to Liquidity and Capital Resources) lowered interest expense
by $6.8 million in 1999, more than offsetting $4.3 million of additional
interest expense from increased indebtedness to acquire Flecto, Euclid and other
smaller acquisitions. Debt repayments throughout 1999, higher interest income,
and slightly lower interest rates between years further reduced net interest
expense, comparatively [refer to Note A(12)].
The tax rate improved in 1999 to 40.8% from 41.3% in 1998 [refer to
Note C], with the largest improvement coming from proportionately lower state
and local taxes.
Approximately two-thirds of the growth in earnings and diluted earnings
per share was internal, mainly within the Industrial Division, with the balance
of growth resulting from the net effect of acquisitions and divestitures. The
Company's net income margin improved to 5.5% from 5.4% in 1998. The issuance of
common shares in connection with the August 10, 1998 redemption of the Company's
convertible debt securities negatively impacted the calculation of basic
earnings per share compared with 1998. This redemption was also the principal
cause of the comparative difference between the percentage changes in net income
and earnings per share between years. This effect was much less after the first
quarter of fiscal 2000.
Liquidity and Capital Resources
CASH PROVIDED FROM OPERATIONS
The Company generated $103 million in cash from operations during 2000, $15
million less than during 1999. The $59.8 million (pre-tax) restructuring, asset
impairment and related charges are the major factors impacting net income and
represent the primary difference when comparing 2000 cash flow with 1999. When
comparing 1999 cash flow with 1998, other than normal timing differences within
the balance sheets, certain inventories had been built up during 1998 to
accommodate increased retail business in the Consumer Division. These built-up
inventories have since come down significantly along with other inventory
reductions, primarily within the Consumer Division, in order to conserve working
capital.
The Company's strong cash flow from operations continues to be its
primary source of financing 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. Capital expenditures in 2000 of $63 million compare with
depreciation and amortization of $79 million. Approximately $17 million of these
expenditures were information technology (IT) related, including major new
installations ongoing at Rust-Oleum's North American operations. The more
significant IT systems changeovers have now taken place, and capital spending in
this area is expected to trend downward over the next few years.
The investment of $323 million in new businesses reflects the
acquisitions of DAP and several smaller businesses and product lines, net of
cash acquired. The Company has historically acquired complementary businesses
and this trend is expected to continue.
The Company's captive insurance company invests in marketable
securities in the ordinary course of conducting its operations, and this
activity will continue. The differences between the years are primarily
attributable to the timing of investments.
During 2000, the Company received proceeds of $55.2 million associated
with sales of the majority of the business assets of two business units, in
addition to the sale of several real estate properties.
16
<PAGE> 6
FINANCING ACTIVITIES
On January 22, 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 May 31, 2000, the Company had repurchased 7.8
million of its common shares at an average price of $11.33 per share.
During 2000, $333 million of additional debt was incurred primarily
related to acquisitions, $72 million of debt was incurred related to the share
repurchase program, and approximately $27 million of debt was repaid. The
acquisitions were financed through issuance of debt through a $700 million
Commercial Paper Program fully backed by two revolving credit agreements [Refer
to Note B]. The Company's debt to capitalization ratio has increased to 60% from
44% at May 31, 1999, mainly as a result of the DAP acquisition and the share
repurchase program.
Subsequent to year end, on July 14, 2000, the Company refinanced its
existing $300 million revolving credit facility and its $400 million revolving
credit facility with a $200 million 364-day revolving credit facility, and a
$500 million 5-year revolving credit facility. The credit facilities are mainly
used to back up the Company's $700 million Commercial Paper Program.
The stronger dollar effect on the Company's foreign net assets tended
to further reduce shareholder's equity this past year, 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 (refer to Note H to the Consolidated Financial Statements).
Market Risk
The Company is exposed to market risk from changes in interest rates and foreign
currency exchange rates since it funds its operations through long- and
short-term borrowings and denominates its business transactions in a variety of
foreign currencies. A summary of the Company's primary market risk exposures is
presented below.
INTEREST RATE RISK
The Company's primary interest rate risk exposure results from floating rate
debt including various revolving credit and other lines of credit. At May 31,
2000, approximately 73% of the Company's total long-term debt consisted of
floating rate debt. If interest rates were to increase 100 basis points (1%)
from May 31, 2000 rates, and assuming no changes in long-term debt from the May
31, 2000 levels, the additional annual expense would be approximately $7.0
million on a pre-tax basis. The Company currently does not hedge its exposure to
floating interest rate risk.
17
<PAGE> 7
FOREIGN CURRENCY RISK
The Company's foreign sales and results of operations are subject to the impact
of foreign currency fluctuations. As most of the Company's foreign operations
are in countries with fairly stable currencies, such as the United Kingdom,
Belgium and Canada, this effect has not been material. In addition, foreign debt
is denominated in the respective foreign currency, thereby eliminating any
related translation impact on earnings. If the dollar continues to strengthen,
the Company's foreign results of operations will be negatively impacted, but the
effect is not expected to be material. A 10% adverse change in foreign currency
exchange rates would not have resulted in a material impact in the Company's net
income for the year ended May 31, 2000. The Company does not currently hedge
against the risk of exchange rate fluctuations.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen members of the European Union adopted
a new European currency unit (the "euro") as their common legal currency. The
participating countries' national currencies will remain legal tender as
denominations of the euro from January 1, 1999 through January 1, 2002, and the
exchange rates between the euro and such national currency units will be fixed.
The Company has assessed the potential impact of the euro currency conversion on
its operating results and financial condition. The impact of pricing differences
on country-to-country indebtedness is not expected to be material. The Company
converted its European operations to the euro currency basis effective June 1,
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 titanium
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 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.
18
<PAGE> 8
CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
RPM, Inc. and Subsidiaries
<TABLE>
<CAPTION>
May 31 2000 1999
===============================================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments (Note A) $ 31,340 $ 19,729
Trade accounts receivable (less allowances of $16,248 in 2000 and $14,248 in 1999) 399,683 362,611
Inventories (Note A) 244,559 242,445
Prepaid expenses and other current assets 109,510 80,634
-------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 785,092 705,419
-------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE A)
Land 24,055 27,887
Buildings and leasehold improvements 190,658 197,567
Machinery and equipment 384,966 347,236
------------------------------------------------------------------------------------------------------------------------------
599,679 572,690
Less allowance for depreciation and amortization 233,451 232,993
-------------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 366,228 339,697
-------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Cost of businesses over net assets acquired, net of amortization (Note A) 595,106 425,951
Other intangible assets, net of amortization (Note A) 320,631 232,556
Other 32,146 33,613
-------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 947,883 692,120
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,099,203 $1,737,236
================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable $ 154,256 $ 131,118
Current portion of long-term debt (Note B) 4,987 3,764
Accrued compensation and benefits 68,938 58,277
Accrued loss reserves (Note H) 64,765 49,296
Accrued restructuring reserve (Note I) 13,540
Other accrued liabilities 68,702 50,843
Income taxes payable (Notes A and C) 1,014 9,251
-------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 376,202 302,549
-------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities (Note B) 959,330 582,109
Other long-term liabilities 57,381 55,832
Deferred income taxes (Notes A and C) 60,566 53,870
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 1,077,277 691,811
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,453,479 994,360
-------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares, stated value $.015 per share; authorized 200,000,000 shares;
issued 110,947,000 and outstanding 103,134,000 in 2000; issued
110,739,000 and outstanding 109,443,000 in 1999 (Note D) 1,616 1,613
Paid-in capital 424,077 423,204
Treasury shares, at cost (Note D) (88,516) (17,044)
Accumulated other comprehensive loss (Note A) (39,555) (23,908)
Retained earnings 348,102 359,011
-------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 645,724 742,876
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,099,203 $1,737,236
===============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 9
Consolidated Statements of Income
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended May 31 2000 1999 1998
==================================================================================================================================
<S> <C> <C> <C>
NET SALES $1,954,131 $1,712,154 $1,615,274
Cost of sales 1,099,637 927,110 891,862
---------------------------------------------------------------------------------------------------------------------------------
Gross profit 854,494 785,044 723,412
Selling, general and administrative expenses 678,970 592,666 537,156
Restructuring and asset impairment charge (Note I) 51,970
Interest expense, net 51,793 32,781 36,700
---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 71,761 159,597 149,556
Provision for income taxes (Note C) 30,769 65,051 61,719
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 40,992 $ 94,546 $ 87,837
==================================================================================================================================
Average shares outstanding (Note D) 107,221 108,731 98,527
==================================================================================================================================
Basic earnings per common share (Note D) $.38 $.87 $.89
==================================================================================================================================
Diluted earnings per common share (Note D) $.38 $.86 $.84
==================================================================================================================================
Cash dividends per common share $.49 $.46 $.44
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE> 10
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY RPM, Inc. and Subsidiaries (In thousands, except per share amounts)
Common Shares Accumulated
-------------------- Other
Number Comprehensive
Of Shares Stated Paid-In Treasury Loss Retained
(Note D) Value Capital Shares (Note A) Earnings Total
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1997 98,029 $ 1,428 $229,619 $ (8,114) $270,465 $493,398
--------
Comprehensive income
Net income 87,837 87,837
Other comprehensive loss (6,428) (6,428)
--------
Comprehensive income 81,409
Dividends paid (6) (83) (43,391) (43,474)
Debt conversion 32 499 499
Business combinations 1,813 26 32,259 32,285
Stock option exercises 276 4 2,216 2,220
Restricted share awards 110 2 (2)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 100,254 1,460 264,508 (14,542) 314,911 566,337
Comprehensive income
Net income 94,546 94,546
Reclassification adjustments (65) (65)
Other comprehensive loss (9,301) (9,301)
Comprehensive income 85,180
Dividends paid (50,446) (50,446)
Debt conversion 10,135 148 156,896 157,044
Business combinations (24) (417) (417)
Repurchase of shares (1,296) (17,044) (17,044)
Stock option exercises 281 4 2,218 2,222
Restricted share awards 93 1 (1)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 109,443 1,613 423,204 (17,044) (23,908) 359,011 742,876
--------
Comprehensive income
Net income 40,992 40,992
Reclassification adjustments 738 738
Other comprehensive loss (16,385) (16,385)
--------
Comprehensive income 25,345
Dividends paid (51,901) (51,901)
Repurchase of shares (6,517) (71,472) (71,472)
Stock option exercises 100 1 875 876
Restricted share awards 108 2 (2)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2000 103,134 $ 1,616 $424,077 $(88,516) $(39,555) $348,102 $645,724
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE> 11
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows RPM, Inc. and Subsidiaries (In thousands, except per share mounts)
Year Ended May 31 2000 1999 1998
================================================================================================================================
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 40,992 $ 94,546 $ 87,837
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 42,290 34,803 30,823
Amortization of goodwill 18,352 13,625 12,435
Other amortization 18,508 13,707 13,751
Asset impairment charge, net of gains 6,940
(Decrease) in deferred liabilities (31,081) (4,189) (10,459)
(Earnings) of unconsolidated affiliates (435) (2,332) (2,217)
Non-cash interest expense 1,696 9,599
Changes in assets and liabilities, net of effect
from purchases and sales of businesses:
(Increase) decrease in accounts receivable 6,251 (27,828) (26,944)
(Increase) decrease in inventory 4,716 11,089 (19,727)
(Increase) in prepaid and other assets (13,484) (11,523) (4,163)
Increase (decrease) in accounts payable 1,615 (6,349) 6,138
Increase in accrued restructuring 13,540
Increase (decrease) in accrued liabilities (11,285) 7,639 18,413
Other 5,659 (7,163) (3,883)
----------------------------------------------------------------------------------------------------------------------------
Cash From Operating Activities 102,578 117,721 111,603
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (63,185) (63,406) (60,343)
Acquisition of businesses, net of cash acquired (323,033) (34,551) (47,709)
Purchase of marketable securities (19,816) (31,666) (27,224)
Proceeds from marketable securities 13,142 29,895 17,355
Distributions from joint ventures 1,063 592
Investments in joint ventures (500) (2,702)
Proceeds from sale of assets and businesses 55,290 565 131,222
----------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Investing Activities (338,102) (98,100) 11,191
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term and short-term debt 2,147,077 1,169,127 1,238,371
Reductions of long-term and short-term debt (1,776,610) (1,144,022) (1,316,000)
Cash dividends (51,901) (50,446) (43,474)
Exercise of stock options 876 2,222 2,220
Repurchase of shares (71,472) (17,044)
----------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Financing Activities 247,970 (40,163) (118,883)
----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (835) (512) (570)
----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 11,611 (21,054) 3,341
CASH AT BEGINNING OF YEAR 19,729 40,783 37,442
----------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 31,340 $ 19,729 $ 40,783
============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
============================================================================================================================
Cash paid during the year for:
Interest $ 55,253 $ 36,155 $ 32,375
Income taxes $ 70,086 $ 71,904 $ 70,189
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Interest accreted on LYONs $ $ 1,696 $ 9,599
Shares issued (returned) in business combinations $ $ (417) $ 32,285
Conversion of debt to equity $ $ 157,044 $ 499
Receivables (debt) from business combinations $ (6,724) $ (1,557) $
</TABLE>
Additions and reductions to long-term and short-term debt relate to periodic
rollovers of amounts borrowed under the Company's Commercial Paper Program.
<PAGE> 12
May 31, 2000, 1999 and 1998
NOTE A - Summary of Significant Accounting Principles
(1) POLICIES OF CONSOLIDATION: The consolidated financial statements
include the accounts of RPM, Inc. and its majority owned domestic and foreign
subsidiaries. The Company accounts for its investment in less than majority
owned joint ventures under the equity method. Intercompany accounts,
transactions and unrealized profits and losses are eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to
conform with the current year presentation.
(2) BUSINESS COMBINATIONS: During the two year period ended May 31,
2000, the Company completed several acquisitions. In August 1999, the Company
acquired all the outstanding shares of DAP Products, Inc. This acquisition and
several other smaller acquisitions have been accounted for by the purchase
method of accounting. The difference of approximately $216,341,000 between the
fair value of net assets acquired and the purchase consideration of $395,100,000
has been allocated to goodwill. The assets, liabilities and operating results of
these companies are reflected in the Company's financial statements from their
respective dates of acquisition forward.
The Company also completed several divestitures of businesses and
product lines during the past two years, realizing proceeds of approximately
$51,000,000. The resulting gain of approximately $12,000,000, when netted
against non-recurring costs, had an immaterial effect on net income.
The following data summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and DAP Products for the year
ended May 31, 1999. The pro forma amounts give effect to appropriate adjustments
resulting from the combination, but are not necessarily indicative of future
results of operations, or of what results would have been for the combined
companies. Pro forma results for the year ended May 31, 2000, were immaterial
and consequently are not presented.
--------------------------------------------------------------------------------
May 31,
(In thousands, except per share amounts [Unaudited]) 1999
--------------------------------------------------------------------------------
Net sales $1,944,880
==========
Net income $ 86,876
==========
Basic earnings per common share $.80
====
Diluted earnings per common share $.79
====
--------------------------------------------------------------------------------
(3) FOREIGN CURRENCY: The functional currency of foreign subsidiaries
is their local currency. Accordingly, for the periods presented, assets and
liabilities have been translated using exchange rates prevailing at year end
while income and expense for the periods have been translated using an average
exchange rate. The resulting translation adjustments have been recorded in
Other Comprehensive Loss, a component of shareholders' equity, and will be
included in net earnings only upon the sale or liquidation of the underlying
foreign investment, which is not contemplated at this time. Transaction gains
and losses have been immaterial during the past three fiscal years.
23
<PAGE> 13
(4) COMPREHENSIVE INCOME: Accumulated other comprehensive loss (which
is shown net of taxes) consists of the following components:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
FOREIGN MINIMUM UNREALIZED
CURRENCY PENSION GAIN(LOSS)
TRANSLATION LIABILITY ON
(IN THOUSANDS) ADJUSTMENTS ADJUSTMENTS SECURITIES TOTAL
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at May 31, 1997 $ (8,216) $ $ 102 $ (8,114)
Other comprehensive loss (5,605) (786) (37) (6,428)
---------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1998 (13,821) (786) 65 (14,542)
Less: Reclassification adjustments for
(gains) losses included in net income (65) (65)
Other comprehensive loss (8,496) (67) (738) (9,301)
---------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1999 (22,317) (853) (738) (23,908)
Less: Reclassification adjustments for
(gains) losses included in net income 738 738
Other comprehensive loss (16,223) 853 (1,015) (16,385)
---------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 2000 $(38,540) $ $ (1,015) $(39,555)
===========================================================================================================================
</TABLE>
(5) CASH AND SHORT-TERM INVESTMENTS: For purposes of the statement of
cash flows, the Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. The Company does
not believe it is exposed to any significant credit risk on cash and short-term
investments.
(6) MARKETABLE SECURITIES: Marketable securities, all of which are
classified as available for sale, total $29,277,000 and $23,351,000 at May 31,
2000 and 1999, respectively. The estimated fair values of these securities are
included in other current assets and are based on quoted market prices.
(7) FINANCIAL INSTRUMENTS: The Company's financial instruments recorded
on the balance sheet include cash and short-term investments, accounts
receivable, notes and accounts payable, and debt. The carrying amount of cash
and short-term investments, accounts receivable and notes and accounts payable
approximates fair value because of their short-term maturity.
The carrying amount of the Company's debt instruments approximates fair
value based on quoted market prices, variable interest rates, or borrowing rates
for similar types of debt arrangements.
(8) INVENTORIES: Inventories are stated at the lower of cost or market,
cost being determined substantially on a first-in, first-out (FIFO) basis and
market being determined on the basis of replacement cost or net realizable
value. Inventory costs include raw material, labor and manufacturing overhead.
Inventories were composed of the following major classes:
May 31
-----------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------
Raw material and supplies $ 86,755 $ 80,827
Finished goods 157,804 161,618
--------------------------------------------------------------------
TOTAL INVENTORIES $244,559 $242,445
======================================================================
24
<PAGE> 14
(9) DEPRECIATION: Depreciation is computed over the estimated useful
lives of the assets primarily using the straight-line method. Depreciation
expense charged to operations for the three years ended May 31, 2000 was
$42,290,000, $34,803,000 and $30,823,000, respectively. The annual depreciation
rates are based on the following ranges of useful lives:
Land improvements 10 to 50 years
Buildings and improvements 5 to 50 years
Machinery and equipment 3 to 20 years
(10) INTANGIBLES: The excess of cost over the underlying value of the
net assets of companies acquired is being amortized on the straight-line basis,
primarily over forty years. Amortization expense charged to operations for the
three years ended May 31, 2000 was $18,352,000, $13,625,000 and $12,435,000,
respectively. Cost of businesses over net assets acquired is shown net of
accumulated amortization of $88,060,000 at May 31, 2000 ($71,150,000 at May 31,
1999).
Intangible assets also represent costs allocated to formulae,
trademarks and other specifically identifiable assets arising from business
acquisitions. These assets are being amortized using the straight-line method
over periods of 7 to 40 years. The Company assesses the recoverability of the
excess of cost over the assigned value of net assets acquired by determining
whether the amortization of the balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operations.
Amortization expense charged to operations for the three years ended May 31,
2000 was $17,084,000, $12,504,000 and $11,473,000, respectively.
Other intangible assets consist of the following major classes:
<TABLE>
<CAPTION>
May 31
-------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Formulae $170,146 $ 89,358
Trademarks 106,363 84,194
Distributor networks 39,076 39,000
Workforce 40,589 37,433
Patents 11,080 10,987
Licenses 10,672 10,215
Other 12,883 13,169
--------------------------------------------------------------------------------------
390,809 284,356
Accumulated amortization 70,178 51,800
--------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS, NET $320,631 $232,556
======================================================================================
</TABLE>
(11) RESEARCH AND DEVELOPMENT: Research and development costs are
charged to operations when incurred and are included in operating expenses. The
amounts charged for the three years ended May 31, 2000 were $22,328,000,
$18,022,000 and $15,815,000, respectively. The customer sponsored portion of
such expenditures was not significant.
(12) INTEREST EXPENSE, NET: Interest expense is shown net of investment
income which consists of interest, dividends and capital gains. Investment
income for the three years ended May 31, 2000 was $2,643,000, $4,880,000 and
$4,154,000, respectively.
(13) INCOME TAXES: The Company and its wholly owned domestic
subsidiaries file a consolidated federal income tax return. The tax effects of
transactions are recognized in the year in which they enter into the
determination of net income, regardless of when they are recognized for tax
purposes. As a result, income tax expense differs from actual taxes payable.
The accumulation of these differences at May 31, 2000 is shown as a noncurrent
liability of $60,566,000 (net of a noncurrent asset of $70,691,000). At May 31,
1999, the noncurrent liability was $53,870,000 (net of a noncurrent asset of
$40,333,000). The Company does not intend to distribute the accumulated
earnings of consolidated foreign subsidiaries amounting to $92,706,000 at May
31, 2000, and $92,021,000 at May 31, 1999, and therefore no provision has been
made for the taxes which would result if such earnings were remitted to the
Company.
25
<PAGE> 15
(14) ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(15) REPORTABLE SEGMENTS: Reportable segment information appears on
page 12 of this report.
Note B - Borrowings
<TABLE>
<CAPTION>
A description of long-term debt follows:
----------------------------------------------------------------------------------------------------
May 31
-------------------------
(In thousands) 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreement for $300,000,000 with ten
banks through February 2, 2002. The chairman of the
board and chief executive officer of the Company is a
director of one of the banks providing this facility. $ $215,000
Commercial paper with a weighted average interest
rate at May 31, 2000 of 6.75%. These obligations
along with other short-term borrowings were
reclassified as long-term debt reflecting the
Company's intent and ability through unused credit
facilities, to refinance these obligations. 604,000
Short-term borrowings with a bank bearing interest
of 6.82% at May 31, 2000. 75,000 85,000
7.00% unsecured senior notes due June 15, 2005. 150,000 150,000
6.50% unsecured notes due March 1, 2008. 100,000 100,000
Revolving 364 day multi-currency credit agreement for
$23,445,000 with a bank. Interest, which is tied to
one of various rates, averaged 5.30% at May 31, 2000 17,553 19,884
6.75% unsecured senior notes due to an insurance company in annual
installments through 2003. 6,857 8,571
Other notes and mortgages payable at various rates of interest
due in installments through 2008, substantially secured by property. 10,907 7,418
----------------------------------------------------------------------------------------------------
964,317 585,873
Less current portion 4,987 3,764
----------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT, LESS CURRENT MATURITIES $959,330 $582,109
====================================================================================================
</TABLE>
In addition to the $300,000,000 revolving credit facility, the Company
had a $400,000,000 one-year credit facility, the combination of which are used
as back up to the Company's borrowings in the Commercial Paper market.
Subsequent to the year end the Company refinanced both of these facilities with
two new facilities, a $500,000,000 five-year revolving credit facility and a
$200,000,000 one-year credit facility.
At May 31, 2000, the Company has unused short-term lines of credit with
several banks totalling $21,751,000.
The aggregate maturities of long-term debt for the five years
subsequent to May 31, 2000 are as follows: 2001 - $4,987,000; 2002 -
$201,750,000; 2003 - $3,536,000; 2004 - $3,023,000; 2005 - $929,000.
26
<PAGE> 16
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
NOTE C - Income Taxes
Consolidated income before taxes consists of the following:
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31
---------------------------------------------------
<S> <C> <C> <C>
(In thousands) 2000 1999 1998
United States $ 41,424 $ 124,965 $ 118,011
Foreign 30,337 34,632 31,545
-----------------------------------------------------------------------------------------------------------------------------------
$ 71,761 $ 159,597 $ 149,556
====================================================================================================================================
Provision for income taxes consists of the following:
Current:
U.S. federal $ 43,174 $ 48,609 $ 49,802
State and local 3,547 7,448 9,281
Foreign income and withholding taxes 15,129 13,183 13,096
-----------------------------------------------------------------------------------------------------------------------------------
61,850 69,240 72,179
-----------------------------------------------------------------------------------------------------------------------------------
Deferred:
U.S. federal (29,028) (6,238) (9,970)
Foreign (2,053) 2,049 (490)
-----------------------------------------------------------------------------------------------------------------------------------
(31,081) (4,189) (10,460)
-----------------------------------------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $ 30,769 $ 65,051 $ 61,719
====================================================================================================================================
A reconciliation between the actual income tax expense provided and the income tax expense computed by applying the statutory
federal income tax rate of 35% to income before tax is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31
---------------------------------------------------
(In thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes at U.S. statutory rate $ 25,116 $ 55,859 $ 52,345
Excess of foreign taxes over the U.S. statutory rate 2,458 1,032 433
State and local income taxes net of federal income tax benefit 2,306 4,841 6,033
Tax credits (340) (660) (1,132)
Amortization of goodwill 4,285 3,326 3,346
Tax benefits from foreign sales corporation (1,725) (1,860) (1,400)
Other items, none of which exceed 5% of computed tax (1,331) 2,513 2,094
-----------------------------------------------------------------------------------------------------------------------------------
ACTUAL TAX EXPENSE $ 30,769 $ 65,051 $ 61,719
====================================================================================================================================
ACTUAL TAX RATE 42.88% 40.76% 41.27%
====================================================================================================================================
</TABLE>
Deferred income taxes result from temporary differences in recognition of
revenue and expense for book and tax purposes, primarily from the temporary tax
differences relating to business combinations.
Note D - Common Shares
There are 200,000,000 common shares authorized with a stated value of $.015 per
share. At May 31, 2000 and 1999, there were 103,134,000 and 109,443,000 shares
outstanding respectively, each of which is entitled to one vote.
Basic earnings per share is computed by dividing income available to
common shareholders, the numerator, by the weighted average number of common
shares outstanding during each year, the denominator (107,221,000 in 2000,
108,731,000 in 1999 and 98,527,000 in 1998). In computing diluted earnings per
share, the net income was increased in 1999 and 1998 by the add back of interest
expense, net of tax, on convertible securities assumed to be converted. In
addition, the number of common shares was
27
<PAGE> 17
increased by common stock options with exercisable prices lower than the average
market prices of common shares during each year and reduced by the number of
shares assumed to have been purchased with proceeds from the exercised options.
In 1999 and 1998 the number of common shares was also increased by additional
shares issuable assuming conversion of convertible securities.
In April 1997, the Company adopted a Restricted Stock Plan. The Plan is
intended to replace, over a period of time, the Company's existing cash based
Benefit Restoration Plan. Under the terms of the Plan, up to 1,563,000 shares
may be awarded to certain employees through May 2007. For the year ended May 31,
2000, 108,000 shares were awarded under this Plan net of forfeitures (93,000
shares in 1999). None of these awards, which generally are subject to forfeiture
until the completion of five years of service, were vested at May 31, 2000 or
May 31, 1999.
In 1999, the Company authorized the repurchase of up to 10,000,000 of
its common shares. The repurchase of shares under this program may be made in
the open market or in private transactions, at times and in amounts and prices
that management deems appropriate. The Company may terminate or limit the
repurchase program at any time. Through May 31, 2000, the Company had
repurchased 7,813,000 shares (1,296,000 in 1999) at an aggregate cost of
$88,516,000 ($17,044,000 in 1999). Shares repurchased under this program are
held at cost and are included in Shareholders' Equity as Treasury Shares.
In April 1999, the Company adopted a Shareholder Rights Plan and
declared a dividend distribution of one right for each outstanding common share.
The Plan provides existing shareholders the right to purchase shares of the
Company at a discount in certain circumstances as defined by the Plan. The
rights are not exercisable at May 31, 2000 and expire in May 2009.
The Company has options outstanding under two stock option plans, the
1989 Stock Option Plan and the 1996 Key Employees Stock Option Plan, which
provides for the granting of options for up to 4,500,000 shares. These options
are generally exercisable cumulatively in equal annual installments commencing
one year from the grant date and have expiration dates ranging from July 2000 to
February 2010. At May 31, 2000, 291,000 shares (2,134,000 at May 31, 1999) were
available for future grants.
Transactions during the last two years are summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
SHARES UNDER OPTION 2000 1999
(In thousands)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year (weighted average price of $13.54 ranging from
$5.84 to $17.25 per share) 4,708 4,432
Granted (weighted average price of $11.43 ranging from $9.56 to $15.00 per share) 1,843 722
Cancelled (weighted average price of $13.14 ranging from $9.56 to $16.35 per share) (208) (101)
Exercised (weighted average price of $8.79 ranging from $5.84 to $12.36 per share) (100) (345)
-----------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, END OF YEAR (WEIGHTED AVERAGE PRICE OF $13.01 RANGING FROM
$5.84 TO $17.25 PER SHARE) 6,243 4,708
===================================================================================================================================
EXERCISABLE, END OF YEAR (WEIGHTED AVERAGE PRICE OF $12.96 RANGING FROM
$5.84 TO $17.25 PER SHARE) 3,103 2,362
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT MAY 31, 2000 AT MAY 31, 2000
-------------------------------------------------------- ------------------------------------
Weighted Weighted Weighted
Range of Shares Average Average Shares Average
Exercise Prices (000's) Remaining Life Price (000's) Price
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00 - $ 9.99 1,288 8.1 $ 9.39 250 $ 8.67
$10.00 - $14.99 2,701 5.8 $12.65 1,947 $12.29
$15.00 - $17.25 2,254 7.6 $15.50 906 $15.59
----- -----
6,243 6.9 $13.01 3,103 $12.96
===== =====
</TABLE>
28
<PAGE> 18
The Company is accounting for its stock option plans under the provisions
of APB Opinion No. 25 and, accordingly, no compensation cost has been
recognized. If compensation cost had been determined based on the fair value at
the grant date for awards under this plan consistent with the method prescribed
by SFAS No. 123, the Company's net income and earnings per share for the years
ended May 31, 2000 and 1999, would have been reduced to the pro forma amounts
indicated in the following table:
--------------------------------------------------------------------------------
(In thousands, except per share amounts) 2000 1999
--------------------------------------------------------------------------------
Pro Forma Net Income $ 38,169 $ 92,239
================================================================================
Pro Forma Earnings Per Share:
Basic $.36 $.85
================================================================================
DILUTED $.36 $.84
================================================================================
The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions. The expected volatility rate is 28.9% for shares granted in 2000
and 28.7% for 1999. The expected life is 7.5 and 7.3 years, with dividend yields
of 3.3% and 3.0% and risk-free interest rates of 6.4% and 5.0%, for 2000 and
1999, respectively.
Note E - Leases
At May 31, 2000, certain property, plant and equipment were leased by the
Company under long-term leases. Certain of these leases provide for increased
rental based upon an increase in the cost-of-living index. Future minimum lease
commitments as of May 31, 2000 for all non-cancelable leases are as follows:
--------------------------------------------------------------------------------
May 31 (In thousands)
--------------------------------------------------------------------------------
2001 $ 10,791
2002 8,127
2003 6,368
2004 3,005
2005 2,354
Thereafter 12,749
--------------------------------------------------------------------------------
TOTAL MINIMUM LEASE COMMITMENTS $ 43,394
================================================================================
Rental expenses for all operating leases totalled $17,183,000 in 2000,
$13,934,000 in 1999 and $9,654,000 in 1998. Capitalized leases were
insignificant for the three years ended May 31, 2000.
Note F - Retirement Plans
The Company sponsors a non-contributory defined benefit pension plan (The
Retirement Plan) covering substantially all domestic non-union employees.
Pension coverage for employees of the Company's foreign subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. In addition, benefits for
domestic union employees are provided by separate plans.
The Retirement Plan provides benefits that are based upon years of service
and average compensation with accrued benefits vesting after five years.
Benefits for union employees are generally based upon years of service. The
Company's funding policy is to contribute annually an amount that can be
deducted for federal income tax purposes using a different actuarial cost method
and different assumptions from those used for financial reporting.
29
<PAGE> 19
-------------------------------------------------------------------------------
Effective June 1, 1998, the Company adopted SFAS No. 132, Employers'
Disclosure About Pension and Other Postretirement Benefits. SFAS No. 132 does
not change the measurement or recognition of those plans, but revises the
disclosure requirements for pension and other postretirement benefit plans for
all years presented.
Net periodic pension cost (income) consisted of the following for the three
years ended May 31, 2000:
--------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
------------------------- --------------------------
(In thousands) 2000 1999 1998 2000 1999 1998
-------------------------------------------------------------------------------
Service cost $ 6,650 $ 7,247 $ 5,575 $ 1,122 $ 1,041 $ 881
Interest cost 5,678 5,253 5,353 2,176 2,263 2,122
Expected return
on plan assets (6,123) (6,071) (4,930) (3,026) (3,183) (2,899)
Amortization of:
Prior service cost 132 114 110
Net gain on adoption
of SFAS No. 87 (96) (100) (100)
Net actuarial (gain)
loss recognized 439 71 (6) 91 1 (60)
Curtailment/settlement
(gains) losses 103 (1,728) (808) (24) (308)
--------------------------------------------------------------------------------
NET PENSION COST $ 6,783 $ 4,786 $ 5,194 $ 339 $ (186) $ 44
================================================================================
30
<PAGE> 20
The changes in benefit obligations and plan assets, as well as the funded
status of the Company's pension plans at May 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
----------------------- ----------------------
(In thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 76,328 $ 74,091 $ 33,006 $ 32,093
Service cost 6,650 7,247 1,122 1,041
Interest cost 5,678 5,253 2,176 2,263
Benefits paid (3,820) (11,000) (1,376) (1,538)
Participant contributions 404 398
Actuarial (gain) loss (5,884) 2,755 (3,520) 1,126
Currency exchange rate changes 683 (1,466)
Curtailment/settlement (gains) losses (11,184) (2,018) (152) (911)
Plan amendments 2,786
Acquisitions 11,338
----------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 81,892 $ 76,328 $ 32,343 $ 33,006
================================================================================================================
Fair value of plan assets at beginning of year $ 61,715 $ 64,132 $ 36,469 $ 38,106
Actual return on plan assets 22,675 607 4,138 871
Employer contributions 9,772 7,976 421 429
Participant contributions 404 398
Benefits paid (3,820) (11,000) (1,376) (1,702)
Currency exchange rate changes 865 (1,633)
Curtailment/settlement gains (losses) (6,092)
Acquisitions 17,252
----------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 101,502 $ 61,715 $ 40,921 $ 36,469
================================================================================================================
Excess (deficit) of plan assets versus
benefit obligations at end of year $ 19,610 $ (14,613) $ 8,577 $ 3,463
Contributions after measurement date 15 1,527 108 104
Unrecognized actuarial (gain) loss (13,191) 13,161 (1,811) 2,989
Unrecognized prior service cost 1,732 824
Unrecognized net transitional asset (285) (408)
----------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 7,881 $ 491 $ 6,874 $ 6,556
================================================================================================================
</TABLE>
31
<PAGE> 21
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
----------------------- ----------------------
(In thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amounts recognized in the
consolidated balance sheets consist of:
Prepaid benefit cost $ 9,401 $ 2,788 $ 7,874 $ 7,446
Accrued benefit liability (1,520) (3,146) (1,000) (1,018)
Intangible asset (SFAS No. 87) 124
Accumulated other comprehensive loss (net of tax) 725 128
----------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 7,881 $ 491 $ 6,874 $ 6,556
================================================================================================================
</TABLE>
For domestic plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value of assets were $1,243,000, $124,000 and $ -0- , respectively, as of
May 31, 2000 and $4,000,000, $4,000,000 and $839,000, respectively, as of May
31, 1999. For foreign plans with accumulated benefit obligations in excess of
plan assets, the projected benefit obligation, accumulated benefit obligation
and fair value of assets were $1,088,000, $944,000 and $ -0- , respectively as
of May 31, 2000 and $1,018,000, $1,018,000 and $ -0- , respectively, as of May
31, 1999.
The following weighted average assumptions were used to determine the
Company's obligations under the plans:
--------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
----------------- ---------------
2000 1999 2000 1999
--------------------------------------------------------------------------------
Discount rate 8.00% 7.00% 6.17% 5.83%
Expected return on plan assets 9.00% 9.00% 8.25% 8.25%
Rate of compensation increase 4.50% 4.50% 4.25% 4.25%
--------------------------------------------------------------------------------
The plans' assets consist primarily of stocks, bonds and fixed income
securities. The Company also sponsors an employee savings plan under Section
401(k) of the Internal Revenue Code which covers substantially all non-union
employees in the United States. The Plan provides for matching contributions in
Company shares based upon qualified employee contributions. Matching
contributions charged to income were $4,925,000, $4,304,000 and $4,001,000 for
years ended May 31, 2000, 1999 and 1998, respectively.
32
<PAGE> 22
NOTE G - Postretirement Health Care Benefits
In addition to the defined benefit pension plan, the Company also provides
health care benefits to certain of its retired employees through unfunded plans.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The components of this expense for the three years ended
May 31, 2000 were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - Benefits earned during this period $ 110 $ 99 $ 90
Interest cost on the accumulated obligation 890 784 915
Amortization of unrecognized (gains) (55) (40) (52)
-----------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT EXPENSE $ 945 $ 843 $ 953
===================================================================================================================================
</TABLE>
The changes in the benefit obligations of the plans at May 31, 2000 and 1999,
were as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation at beginning of year $11,548 $14,661
Service cost 110 99
Interest cost 890 784
Settlement/curtailment (gains) losses (221)
Acquisitions 1,629
Benefit payments (902) (693)
Actuarial (gains) losses (1,238) (3,102)
Currency exchange rate changes 112 (201)
-----------------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation at end of year 11,928 11,548
Unrecognized actuarial gains (losses) 2,881 1,625
-----------------------------------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS $14,809 $13,173
===================================================================================================================================
</TABLE>
An 8% general discount rate was used in determining the accumulated
postretirement benefit obligation as of May 31, 2000 (7% for May 31, 1999). An
8% increase in the cost of covered health care benefits was generally assumed
for fiscal 2000 (9% for fiscal 1999). This trend rate in all cases is assumed tO
decrease to 5% after several years and remain at that level thereafter except
for various union plans which will cap at alternate benefit levels. A 1%
increase in the health care costs trend rate would have increased the
accumulated postretirement benefit obligation as of May 31, 2000 by $1,174,000
and the net postretirement expense by $119,000. A 1% decrease in the health care
costs trend rate would have decreased the accumulated postretirement benefit
obligation as of May 31, 2000 by $989,000 and the net postretirement expense by
$97,000.
<PAGE> 23
NOTE H - Contingencies and Loss Reserves
Accrued loss reserves consisted of the following classes:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
May 31
---------------------------------
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued product liability reserves $ 41,176 $ 34,566
Accrued warranty reserves - current 7,908 8,234
Accrued environmental reserves 14,116 5,214
Accrued other 1,565 1,282
-----------------------------------------------------------------------------------------------------------------------------------
Accrued loss reserves - current 64,765 49,296
Accrued warranty reserves - long-term 13,740 18,816
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCRUED LOSS RESERVES $ 78,505 $ 68,112
===================================================================================================================================
</TABLE>
The Company, through its wholly owned insurance subsidiary, provides
certain insurance coverage, primarily product liability, to the Company's other
domestic subsidiaries. Excess coverage is provided by outside carriers. The
reserves reflected above provide for these potential losses as well as other
uninsured claims. Provision for estimated warranty costs is recorded at the time
of sale and periodically adjusted to reflect actual experience.
In addition, the Company, like others in similar businesses, is involved in
several proceedings relating to environmental matters. It is the Company's
policy to accrue remediation costs when it is probable that such efforts will be
required and the related costs can be reasonably estimated. These liabilities
are undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds or claims against third parties. Included at May 31,
2000 are $7,000,000 of environmental reserves related to acquisitions during the
year.
Due to the uncertainty inherent in the loss reserve estimation process, it
is at least reasonably possible that actual costs will differ from estimates,
but, based upon information presently available, such future costs are not
expected to have a material adverse effect on the Company's competitive or
financial position or its ongoing results of operations. However, such costs
could be material to results of operations in a future period.
<PAGE> 24
NOTE I - Restructuring and Asset Impairment Charge
For the year ended May 31, 2000, the Company recorded a restructuring charge of
$45,000,000 in the first quarter plus $6,970,000 in the fourth quarter, for a
total of $51,970,000. Included in this charge are severance and other employee
related costs of $21,986,000, contract exit and termination costs of $2,059,000,
facility closures and write-downs of property, plant and equipment of
$22,342,000 and write-downs of intangibles of $5,583,000.
In addition to the $51,970,000 restructuring charge, related costs were
incurred during the year primarily to account for inventory of certain product
lines that are being discontinued, totalling $7,876,000, and these costs have
been charged to earnings and classified as a component of cost of sales.
Through May 31, 2000, the Company has paid or incurred $38,430,000 of the
$51,970,000 restructuring charge. The Company anticipates that substantially all
of the remaining restructuring costs will be paid by May 31, 2001.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Incurred
Total Through Balance
(In thousands) Charge May 31, 2000 May 31, 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance costs $21,986 $ 9,928 $12,058
Exit and termination costs 2,059 577 1,482
Property, plant and equipment 22,342 22,342
Intangibles 5,583 5,583
-----------------------------------------------------------------------------------------------------------------------------------
$51,970 $38,430 $13,540
===================================================================================================================================
</TABLE>
The severance and other employee related costs provide for a reduction of
approximately 760 employees related to the facility closures and the
streamlining of operations related to cost reduction initiatives. The costs of
exit and contract termination are comprised primarily of non-cancelable lease
obligations on the closed facilities. The charge for property, plant and
equipment represents write-downs to net realizable value of less efficient and
duplicate facilities and machinery and equipment no longer needed in the
combined restructured manufacturing operations.
<PAGE> 25
NOTE J - Interim Financial Information (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
the years ended May 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
(In thousands, except per share amounts) August 31 November 30 February 29 May 31
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Net sales $495,542 $500,417 $411,398 $546,774
Gross profit $225,963 $214,276 $174,283 $239,972
Net income $ 7,264 $ 20,364 $ 3,731 $ 9,633
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $.07 $.19 $.04 $.09
==================================================================================================================================
DILUTED EARNINGS PER SHARE $.07 $.19 $.04 $.09
==================================================================================================================================
DIVIDENDS PER SHARE $.1175 $.1225 $.1225 $.1225
==================================================================================================================================
<CAPTION>
Three Months Ended
------------------------------------------------------------
(In thousands, except per share amounts) August 31 November 30 February 28 May 31
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net sales $448,132 $415,725 $373,007 $475,290
Gross profit $204,402 $187,883 $164,626 $228,133
Net income $ 31,224 $ 21,712 $ 6,130 $ 35,480
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $.30 $.20 $.06 $.32
===================================================================================================================================
DILUTED EARNINGS PER SHARE $.29 $.20 $.06 $.32
===================================================================================================================================
DIVIDENDS PER SHARE $.1120 $.1175 $.1175 $.1175
===================================================================================================================================
</TABLE>
Quarterly earnings per share do not total to the yearly earnings per share
due to the weighted average number of shares outstanding in each quarter.
<PAGE> 26
<TABLE>
<S> <C> <C>
V Independent Auditor's Report
To The Board of Directors and Shareholders RPM, Inc. and Subsidiaries Medina, Ohio
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
We have audited the accompanying consolidated balance sheets of RPM, Inc.
and Subsidiaries as of May 31, 2000 and 1999, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three year period ended May 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RPM, Inc.
and Subsidiaries at May 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three year period ended May
31, 2000, in conformity with generally accepted accounting principles.
/s/ Ciulla, Smith & Dale, LLP
Cleveland, Ohio
July 7, 2000
