<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, 2000, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ________.
COMMISSION FILE NO. 1-14187
-------
RPM, INC.
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-6550857
--------------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO 44258
--------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE (330) 273-5090
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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 10, 2001,
102,209,314 RPM INC. COMMON SHARES WERE OUTSTANDING.
<PAGE> 2
RPM, INC. AND SUBSIDIARIES
--------------------------
INDEX
-----
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
------- ---------------------
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2000 AND MAY 31, 2000 3
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS
ENDED NOVEMBER 30, 2000 AND 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 2000 AND 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 9
PART II. OTHER INFORMATION 16
---------------------------
<PAGE> 3
3
PART I. -- FINANCIAL INFORMATION
--------------------------------
ITEM 1. -- FINANCIAL STATEMENTS
-------------------------------
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS
------
November 30, 2000 May 31, 2000
----------------- ------------
<S> <C> <C>
Current Assets
Cash and short-term investments $ 30,737 $ 31,340
Trade accounts receivable (less allowance for doubtful
accounts $16,177 and $16,248) 375,107 399,683
Inventories 263,712 244,559
Prepaid expenses and other current assets 104,557 109,510
----------- -----------
Total current assets 774,113 785,092
----------- -----------
Property, Plant and Equipment, At Cost 629,510 599,679
Less: accumulated depreciation and amortization 252,986 233,451
----------- -----------
Property, plant and equipment, net 376,524 366,228
----------- -----------
Other Assets
Costs of businesses over net assets acquired, net of amortization 582,084 595,106
Intangible assets, net of amortization 313,347 320,631
Other 35,132 32,146
----------- -----------
Total other assets 930,563 947,883
----------- -----------
Total Assets $ 2,081,200 $ 2,099,203
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current portion of long term debt $ 13,687 $ 4,987
Notes and accounts payable 131,562 154,256
Accrued compensation and benefits 76,432 68,938
Accrued loss reserves 62,680 64,765
Other accrued liabilities 57,642 68,702
Restructuring reserve 8,346 13,540
Income taxes payable 696 1,014
----------- -----------
Total current liabilities 351,045 376,202
----------- -----------
Long-term Liabilities
Long-term debt, less current maturities 971,014 959,330
Deferred income taxes 60,056 60,566
Other long-term liabilities 54,570 57,381
----------- -----------
Total long-term liabilities 1,085,640 1,077,277
----------- -----------
Shareholders' Equity
Common shares, stated value $.015 per share;
authorized 200,000,000 shares;
outstanding 102,209,000 and
103,134,000 shares, respectively 1,617 1,616
Paid-in capital 424,674 424,077
Treasury shares, at cost (99,617) (88,516)
Accumulated other comprehensive loss (50,805) (39,555)
Retained earnings 368,646 348,102
----------- -----------
Total shareholders' equity 644,515 645,724
----------- -----------
Total Liabilities And Shareholders' Equity $ 2,081,200 $ 2,099,203
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE> 4
4
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
November 30, November 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $1,050,894 $ 995,959 $ 498,078 $ 500,417
Cost of Sales 586,473 555,720 280,802 286,141
---------- ---------- ---------- ----------
Gross Profit 464,421 440,239 217,276 214,276
Selling, General and Administrative
Expenses 356,979 324,904 172,943 166,142
Restructuring Charge 45,000
Interest Expense, Net 33,703 23,507 17,127 13,618
---------- ---------- ---------- ----------
Income Before Income Taxes 73,739 46,828 27,206 34,516
Provision for Income Taxes 28,021 19,200 10,338 14,152
---------- ---------- ---------- ----------
Net Income $ 45,718 $ 27,628 $ 16,868 $ 20,364
========== ========== ========== ==========
Basic earnings per common share $ 0.45 $ 0.25 $ 0.17 $ 0.19
========== ========== ========== ==========
Diluted earnings per common share $ 0.45 $ 0.25 $ 0.17 $ 0.19
========== ========== ========== ==========
Dividends per common share $ 0.2475 $ 0.2400 $ 0.1250 $ 0.1225
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE> 5
5
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended November 30,
------------------------------
2000 1999
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 45,718 $ 27,628
Depreciation and amortization 38,681 37,779
Items not affecting cash and other (15,747) (6,706)
Changes in working capital (23,202) 24,323
--------- ---------
45,450 83,024
--------- ---------
Cash Flows From Investing Activities:
Additions to property and equipment (29,084) (29,726)
Sale of business assets, net of cash transferred 17,481
Acquisition of new businesses, net of cash (1,641) (298,008)
--------- ---------
(30,725) (310,253)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from stock option exercises 598 508
Increase (decrease) in debt 20,349 287,296
Repurchase of common shares (11,101) (25,091)
Dividends (25,174) (26,048)
--------- ---------
(15,328) 236,665
--------- ---------
Net Increase (Decrease) in Cash (603) 9,436
Cash at Beginning of Period 31,340 19,729
--------- ---------
Cash at End of Period $ 30,737 $ 29,165
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE> 6
6
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
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, 2000 and November
30, 1999. For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended May 31, 2000.
Certain reclassifications may 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:
<TABLE>
<CAPTION>
NOVEMBER 30, 2000 (1) MAY 31, 2000
--------------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials and supplies $93,549 $86,755
Finished Goods 170,163 157,804
------------ ------------
$263,712 $244,559
============ ============
</TABLE>
(1) Estimated, based on components at May 31, 2000.
NOTE C - ACQUISITIONS
---------------------
On August 3, 1999, the Company acquired all the outstanding shares of DAP
Products Inc. and DAP Canada Corp. (collectively, "DAP"). 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 months ended November 30,
1999. The proforma amounts give effect to appropriate adjustments resulting from
the combination, but are not necessarily indicative of future results of
operations or of what results would have been for the combined companies.
<PAGE> 7
7
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30, 1999
----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C>
Net Sales $1,039,997
Net Income $27,314
Basic earnings per common share $0.25
Diluted earnings per common share $0.25
</TABLE>
NOTES D - COMPREHENSIVE INCOME
------------------------------
Other comprehensive income includes foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains or losses on
securities. Total comprehensive income, comprised of net income and other
comprehensive income (loss), amounted to $6,164,000 and $16,794,000 during the
second quarter of fiscal years 2001 and 2000, respectively, and $34,468,000 and
$23,807,000 for the six months ended November 30, 2000 and 1999, respectively.
NOTE E - RESTRUCTURING CHARGE
-----------------------------
In August 1999, the Company recorded a restructuring and asset impairment charge
of $45,000,000 ($26,550,000 after-tax, or $.24 per basic and diluted shares).
Subsequently, in last year's fourth quarter, as the program's aggregate impact
was finalized, an additional $6,970,000 was charged to income. Included in these
charges are severance and other employee related costs, contract exit and
termination costs, facility closures and write-downs of property, plant and
equipment, and write-downs of intangibles.
As of November 30, 2000, the Company has paid or incurred $43,624,000 related to
these charges. The Company anticipates that substantially all of the remaining
restructuring and plant rationalization costs will be paid or incurred by May
31, 2001.
<PAGE> 8
8
RPM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
Following is a summary of the aggregate charge, the amounts paid or incurred
to date, and the reserved balance at this quarter's end:
<TABLE>
<CAPTION>
UTILIZED THROUGH BALANCE AT
TOTAL CHARGE NOVEMBER 30, 2000 NOVEMBER 30, 2000
------------ ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Severance Costs $21,986 $14,535 $7,451
Exit and Termination Costs 2,059 1,164 895
Property, Plant and Equipment 22,342 22,342 0
Intangibles 5,583 5,583 0
---------- ----------- -----------
$51,970 $43,624 $8,346
========== =========== ===========
</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 charges for property, plant and
equipment and intangibles represent write-downs to net realizable value of less
efficient and duplicate facilities, machinery and equipment and intangibles no
longer needed in the combined restructured manufacturing operations.
<PAGE> 9
9
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
REPORTABLE SEGMENT INFORMATION
------------------------------
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, was adopted by the Company effective May 31,
1999. This Standard requires disclosure of segment information using the
management approach, or the basis used internally to evaluate operating
performance and to decide resource allocations. Comparative six month and second
quarter results on this basis are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED NOVEMBER 30, QUARTER ENDED NOVEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net External Sales
Industrial Division $ 582,936 $ 582,020 $ 278,302 $ 280,011
Consumer Division 467,958 413,939 219,776 220,406
----------- ----------- ----------- -----------
Totals: $ 1,050,894 $ 995,959 $ 498,078 $ 500,417
=========== =========== =========== ===========
Earnings Before Interest and Taxes (EBIT)
Industrial Division $ 79,382 $ 70,678 $ 33,216 $ 37,805
Consumer Division 39,561 10,387 15,769 16,312
Corporate/Other (11,501) (10,730) (4,652) (5,983)
----------- ----------- ----------- -----------
Totals: $ 107,442 $ 70,335 $ 44,333 $ 48,134
=========== =========== =========== ===========
NOVEMBER 30, 2000 MAY 31, 2000
----------------- ------------
Identifiable Assets
Industrial Division $ 997,465 $ 993,239
Consumer Division 1,015,707 1,041,896
Corporate/Other 68,028 64,068
----------- -----------
Totals: $ 2,081,200 $ 2,099,203
=========== ===========
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 10
10
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED NOVEMBER 30, 2000
------------------------------------
The Company's sales of $498 million were essentially unchanged from the prior
year's comparable quarter. Both the Industrial and Consumer Divisions were at
the same volume levels as in the second quarter of last year. Exchange rate
differences had a slight negative effect on quarter-over-quarter sales costing
approximately 1.5 points of growth. While sales generated in foreign markets
may continue to be negatively impacted if the dollar continues strengthening,
early currency movements in the Company's third fiscal quarter showed a
weakening of the U.S. dollar. The Industrial Division did realize a 2% growth
in sales prior to considering the impact of two business units which were
disposed of before the beginning of this year's quarter. Late in this quarter,
we experienced a general softening of demand in our served markets and in many
of our southern U.S. markets, extreme, often record-setting cold temperatures
dampened sales volume. Construction and maintenance work in our Industrial
markets and off-the-shelf sales of the Company's do-it-yourself products were
delayed.
Gross profit margin increased 0.8 points, ending at 43.6% of sales compared to
last year's quarter performance of 42.8%. The Industrial Division experienced a
1.2 point margin improvement to 45.6% of sales versus last year's 44.4% gross
profit level. While a portion of this improvement came as a result of product
line divestitures, the vast majority resulted from improved product mix, firm
pricing posture and cost controls. The Consumer Division gross profit margins of
40.8% last year modestly improved 0.3 points to 41.1%. As reported in the
Company's prior quarter report, since the portion of the sales increase that is
attributable to mass merchandisers and home centers is increasing, margin
percentages will generally come under pressure, while aggregate gross margin
dollars can increase. For both Divisions, raw material price changes have not
yet been a significant negative factor, however, downward pressure on margins
has come from that portion of raw materials that are oil-based. Pricing actions
and product formulations will continue being modified to offset as much of this
negative impact as possible. As the Company nears completion of the
manufacturing, distribution and administration consolidations that are part of
its restructuring plan, certain cost redundancies exist and will continue during
these transitions. The most severe cost duplications exist within the Company's
Wood Finishes Group, the last major business unit to execute the restructuring
plan.
Selling, general and administrative expenses increased just over 4% from the
prior year levels. As a percent of sales, these costs were 34.7%, 1.5 points
higher than in last year's second quarter. The vast majority of the increase was
in the Industrial Division, where expenses were 33.7% of sales compared to 30.9%
last year; the Consumer Division expenses increased to 33.9% from 33.4%. Despite
relatively flat volume levels, both operating divisions continued with product
and market development, promotional and other growth-related initiatives to set
the stage for higher sales growth, prospectively. Within the Consumer Division,
the Wood Finishes Group distribution consolidation resulted in increased freight
costs. These increases were
<PAGE> 11
11
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
partially offset at the Corporate level as constraint over expenses in general
and specifically over consulting and advisory services reduced costs
year-over-year. In spite of this focus on cost constraint, certain Corporate
level costs related to professional fees due to legal and regulatory expenses
were nonetheless considerably higher this period than a year ago.
Net interest expense increased $3.5 million in this year's second quarter,
reflecting partially the additional indebtedness incurred to repurchase common
shares of the Company. Average interest rates this quarter were up over last
year by more than 100 basis points, further increasing net expense.
The effective income tax rate for this year's quarter of 38% represents an
improvement over last year. The change is primarily caused by the favorable mix
of differing tax rates and sourced income amounts in the various countries in
which the Company operates. The Company expects this improvement to continue
throughout this fiscal year.
Net income decreased 17% on the unchanged volume levels, with the margin
declining to 3.4% from 4.1% last year. Improvements in earnings from gross
profit increases and the improvement in the income tax rate were more than
offset by higher interest costs, marketing, product development and professional
fee expenditures. The resulting earnings per share this year at $0.17 (both
basic and diluted) is $0.02 lower than a year ago. The change in average shares
outstanding resulting from the Company's share repurchase program did provide a
minor benefit to earnings per share.
SIX MONTHS ENDED NOVEMBER 30, 2000
----------------------------------
The Company's sales of $1,051 million reflect an increase of $55 million, or
5.5%, in the first half year of fiscal 2001 when compared to last year. Net
income increased $18 million, 65% over last year's first six months' result,
largely due to the $27 million after-tax restructuring and asset impairment
charge last year. Without the restructuring and asset impairment charge, net
income decreased $8.4 million period-over-period.
On August 3, 1999, the Company completed its acquisition of DAP Products Inc.
and DAP Canada Corp. (collectively "DAP"). DAP, with annual sales of
approximately $250 million, is a leading North American manufacturer and
marketer of caulks and sealants, spackling and glazing compounds, contact
cements, and other specialty adhesives. DAP, reported within the Consumer
Division, was neutral to earnings this period.
The DAP acquisition accounted for approximately 43% of the first half sales
increase. The Company's existing operations and product line additions, net of
several Industrial Division product line divestitures, generated the balance of
the sales increase, almost entirely from higher unit volumes as pricing
adjustments have not yet been significant. Exchange rate differences had a
slight negative effect on year-to-year sales, costing approximately 1.5
percentage points of growth. Internal growth within the Industrial Division
increased approximately 4% in the first
<PAGE> 12
12
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
half of fiscal 2001. Within the Consumer Division, core sales were up
approximately 2% over last year's comparative volume level. Late in the second
quarter, we experienced a general softening of demand in our served markets and
the severe weather issues noted in the preceding quarterly comments impact six
month comparisons although to a lesser degree.
Gross profit margin was unchanged from last year, at 44.2% of sales. The
Industrial Division improved to 46.6% from 45.3%, approximately half from the
impact of product line divestitures, with the remainder the result of product
mix changes, firm price posture and cost control. Within the Consumer Division,
margins moved from 42.7% a year ago to 41.2% this quarter, with at least one
half the decrease attributable to the lower margins inherent in the cost
structure at DAP. This DAP impact will no longer be an issue in future
quarters. The comments relative to the influence of mass merchandisers and home
centers, oil-based raw materials and certain transitional cost redundancies
resulting from the Company's restructuring plan made in the previous
sub-section covering the three months ended November 30, 2000, also have impact
here relative to the six month period.
Selling, general and administrative expenses at 34% of sales compare with 32.6%
a year ago. With respect to the aggregate $32 million increase in this expense
compared to the comparable period last year, more than 30% is the result of the
DAP acquisition. This year a full six months of DAP spending is included in
operations while last year's results only include August through November
spending. The Industrial Division expenses increased to 32.9% of sales from
30.7% while the Consumer Division expenses decreased to 32.8% from 33.1% in
1999. The Consumer Division benefited mainly from increased volume coupled with
overall ongoing expense control, and a lower SG&A percentage at DAP. Both
Divisions continued with product and market development, promotional and other
growth-related initiatives to set the stage for stronger sales growth in the
future, including accelerated e-commerce related initiatives within the
Corporate/Other segment. The Wood Finishes Group freight costs also negatively
impacted this year's first half results. At the corporate level, professional
fees were also higher than normal principally due to increased legal and
regulatory expenses, other consulting and advisory services. (See Part II, Item
1)
In August of 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 cost
of the program and related asset impairment was estimated at $45 million before
taxes ($0.24 per common share); subsequently, in last year's fourth quarter, an
additional $7 million was charged as the program's aggregate impact was
finalized. The program is expected to generate annualized before tax savings of
approximately $23 million upon completion. Phased in over fiscal years 2000 and
2001, the full savings expectation should be realized beginning in fiscal 2002.
Through November 30, 2000, the Company had paid or incurred $44 million of these
charges, approximately 64% of which was associated with the write-down of
property and intangibles with the remainder covering severance, exit and
termination costs (refer to Note E). The net cash requirements of the
restructuring program are estimated to total approximately $10 million.
<PAGE> 13
13
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
Net interest expense increased $10.2 million in this year's first half,
reflecting primarily the additional indebtedness to acquire DAP and to
repurchase common shares of the Company. Average interest rates this year's
first six months were up over last year by more than 100 basis points, further
increasing net interest expense.
The effective income tax rate this year of 38% represents an improvement over
last year. The change is primarily caused by the favorable mix of differing tax
rates and sourced income amounts in the various countries in which the Company
operates. The Company expects this improvement to continue throughout this
fiscal year.
Before the restructuring charge, net income decreased 16% on the 5.5% sales
increase, with the margin declining to 4.4% from 5.4% last year. Improvements in
earnings from gross profit increases and the improvement in the income tax rate
were more than offset by higher interest costs, marketing and product
development expenditures, legal and professional fees and e-commerce
initiatives. DAP's acquisition costs plus the earnings foregone through product
lines divested also served to reduce earnings margins. The resulting earnings
per share this year at $0.45 (both basic and diluted) is $0.05 lower than a year
ago, excluding the impact of the fiscal 2000 restructuring and asset impairment
charge. The change in average shares outstanding resulting from the company's
share repurchase program is providing a minor benefit to earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH PROVIDED FROM OPERATIONS
-----------------------------
The Company generated $45.5 million of cash from operations during the past six
months, compared with $83.0 million a year ago. The restructuring and asset
impairment charge during last year's first quarter is the major factor
contributing to the $18.1 million increase in this year's net income when
compared to last year. The restructure activity last year also caused decreases
in working capital of $18 million while this year it increased working capital
$5 million; this difference accounts for $13 million of the $48 million
year-to-year working capital change. The remainder of the change in working
capital components, $25 million, results from modestly higher receivable and
inventory increases, a decrease in current income taxes payable, and the
settling of larger liability side components of working capital which existed at
May 31, 2000 when compared to May 31, 1999.
The Company's cash flows from operations will continue as its primary source of
financing internal growth.
<PAGE> 14
14
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
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. The investment of $293 million in new businesses in last year's
first half reflects the acquisition of DAP and other product line additions, net
of cash acquired. In addition, during the second quarter last year, the Company
sold a non-core business for $17.5 million, net of cash transferred for a net
gain.
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 November 30, 2000, the Company had repurchased 9
million of its common shares at an average price of $11.11 per share. No future
repurchases are anticipated at this time.
The acquisition of DAP was financed with a bridge loan arranged through one of
the Company's lead banks. This transaction was subsequently 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. During this year's first half, the Company refinanced its $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 new credit facilities are available to back up
the Company's $700 million commercial paper program to the extent the facilities
are not drawn upon. As of November 30, 2000, the Company had drawn on the
revolving credit facilities an aggregate of $589.5 million and had outstanding
commercial paper of $45.1 million. Due to the Company's current public debt
ratings, access to the commercial paper market is limited. The Company's
debt-to-capital ratio is now at 60%, unchanged from May 31, 2000.
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 support the Company's current portfolio of business.
<PAGE> 15
15
RPM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 2000
--------------------------------------------------------------------------------
OTHER MATTERS
-------------
YEAR 2000 READINESS DISCLOSURE
------------------------------
The Company had completed its Year 2000 remediation efforts and during calendar
2000 had not experienced any significant problems internally or with suppliers
and customers in connection with this event. Prospectively, this issue will no
longer be addressed.
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.
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 oil-based
feedstocks, 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) the Company's ability to
make future acquisitions and its ability to effectively integrate such
acquisitions; (i) liability risks inherent in the Company's EIFS and asbestos
litigation and the continuation of insurance coverage for such risks; and (j)
the ability of the Company to realize the projected pre-tax savings associated
with the restructuring and consolidation program, and to divest non-core product
lines.
ITEM 3. QUANTITATIVE AND QUALITATIVE
-------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
The Company is exposed to market risk from changes in interest rates and foreign
exchange rates since it funds its operations through long- and short-term
borrowings and denominates its business transactions in a variety of foreign
currencies. There were no material changes in the Company's exposure to market
risk from May 31, 2000.
<PAGE> 16
16
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
--------------------------
BONDEX
------
As previously reported, the Company, its wholly-owned subsidiaries, Bondex
International, Inc. ("Bondex") and Republic Powdered Metals, Inc. ("Republic"),
are each defendants or co-defendants in asbestos-related bodily injury lawsuits
filed on behalf of various individuals in various jurisdictions including
Illinois, Missouri, Texas, New York and Pennsylvania. These cases seek damages
for asbestos-related diseases based on alleged exposures to asbestos-containing
products previously manufactured by the Company, Bondex or Republic. In many
cases, the plaintiffs are unable to demonstrate that any injuries they have
incurred, in fact, resulted from exposure to Bondex, Republic or Company
products. Bondex, Republic or the Company are generally dismissed from those
cases. With respect to those cases where compensable disease, exposure and
causation are established, Bondex, Republic and the Company generally settle for
amounts each considers reasonable given the facts and circumstances of each
case. Settlement demands vary for specific cases in particular jurisdictions
depending on (1) the seriousness of each case, (2) the number of co-defendants
in the case, and (3) the higher risk of an adverse verdict in certain
jurisdictions. The amounts paid to defend and settle cases filed against Bondex,
Republic and the Company continue to be substantially covered by product
liability insurance.
As of August 31, 2000, Bondex, Republic and the Company had a total of 715
active asbestos cases. As of November 30, 2000, Bondex, Republic and the Company
had a total of 826 active asbestos cases. Bondex, Republic and the Company
secured dismissals and/or settlements, the total cost of which collectively to
Bondex, Republic and the Company, net of insurer contributions, amounted to
$814,000 for the quarter ended August 31, 2000 and $77,080 for the quarter ended
November 30, 2000.
Bondex, Republic and the Company continue to vigorously defend all
asbestos-related lawsuits. Under a cost-sharing arrangement among the Company,
Bondex, Republic and its insurers, the insurers are responsible for payment of a
substantial portion of defense costs and indemnity payments with the Company,
Bondex and Republic each responsible for the balance. Recent developments
including the bankruptcy filings of various other asbestos litigation defendants
could, however, result in higher future settlement demands for certain cases in
certain jurisdictions. The Company continues to believe that its existing
asbestos litigation will not have a material adverse effect on the Company's
consolidated 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 lawsuits seeking
damages for structures clad with exterior insulated finish systems ("EIFS")
products manufactured by Dryvit and other EIFS manufacturers. As of January 11,
2001, Dryvit was a defendant or co-defendant in approximately 650 single-family
residential cases, the vast majority of which are pending in North Carolina,
South Carolina and Alabama. Dryvit also has several EIFS lawsuits involving
<PAGE> 17
17
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
condominium complexes and office buildings. While the vast majority of Dryvit's
EIFS lawsuits claim water intrusion and related property damages, plaintiffs in
a few EIFS lawsuits also claim respiratory-based personal injuries from alleged
exposure to mold. Dryvit is vigorously challenging these mold allegations and
does not believe there is adequate scientific basis to sustain such a personal
injury action against Dryvit.
As previously reported, Dryvit settled the North Carolina class action styled
Ruff, et al. v. Parex, Inc., et al. As of January 11, 2001, a total of 441
claims have been submitted to the claims administrator for verification and
validation. Of these 441 claims, 43 have been approved for payment.
Approximately $600,000 has been paid to date on these 43 claims. The remaining
claims are currently under review and investigation by the claims administrator.
Dryvit continues to believe that it has adequate insurance commitments to cover
its obligations under the Ruff settlement.
Dryvit was named in an attempted class action, Lienhart, et al. v. Dryvit
Systems, Inc., et al. (5:99-CV-4700-BR(3)), in the Eastern District of North
Carolina seeking a class comprised of owners of structures clad with a direct
applied EIFS-type product known as Fastrak System 4000 ("DEFS"). Dryvit
challenged class certification and has joined numerous third parties for
indemnification and contribution. On December 18, 2000, the U.S. District Court
certified a class of "homes, condominiums, apartment complexes or commercial
buildings which have been constructed after January 1, 1992, using an exterior
cladding system known as Fastrak System 4000." Dryvit estimates there are less
than 500 DEFS-clad homes in North Carolina. The class certification was limited
to two issues: (1) whether Dryvit's product was defectively designed and (2)
whether Dryvit had breached a duty to warn homeowners of hazards inherent in the
use of their products. Dryvit's third-party claims were severed and stayed for
all purposes until after the plaintiff's case is tried. In addition to existing
cost-sharing arrangements with its insurers to cover defense and indemnity on
these DEFS claims, Dryvit has a cost-sharing arrangement with the manufacturer
of the substrate upon which the DEFS was applied. Dryvit has filed an
interlocutory appeal with the U.S. Court of Appeals (Fourth Circuit) requesting
the appellate court to exercise its discretion and permit an immediate appeal of
the district court's class certification ruling.
On December 1, 2000, Dryvit received a class action Complaint filed in Jefferson
County, Tennessee styled William J. Humphrey, et al. v. Dryvit Systems, Inc.
(Case No. 17,715-IV) ("Humphrey"). The Humphrey case is an attempted state-wide
class action which seeks various types of damages on behalf of all similarly
situated persons who paid for the purchase of a Dryvit EIFS-clad structure in
the State of Tennessee during the period beginning November 14, 1990 to the date
of the Complaint. Dryvit intends to vigorously oppose class certification in
Humphrey.
Dryvit, the Company's captive insurer, First Colonial Insurance Company, and one
of Dryvit's umbrella carriers, are parties to various cost-sharing agreements
which are currently providing defense and indemnity for Dryvit's EIFS and DEFS
lawsuits. Dryvit believes that the damages sought by the plaintiffs in these
cases are covered by its existing insurance and that such insurance is presently
adequate. Based on the continuation of its existing insurance
<PAGE> 18
18
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
arrangements, the Company continues to believe that this litigation will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
The Annual Meeting of Shareholders of the Company was held on October 12, 2000.
The following matter was voted on at the meeting.
1. Election of Lorrie Gustin, James A. Karman and Donald K. Miller as
Directors of the Company. The nominees were elected as Directors with the
following votes:
Lorrie Gustin
-------------
For 75,198,853
Withheld 16,521,977
Broker non-votes -0-
James A. Karman
---------------
For 86,202,142
Withheld 4,691,289
Broker non-votes -0-
Donald K. Miller
----------------
For 86,357,530
Withheld 4,535,901
Broker non-votes -0-
In addition to the directors above, the following directors' terms of
office continued after the Annual Meeting of Shareholders: Dr. Max D.
Amstutz; Edward B. Brandon; E. Bradley Jones; William A. Papenbrock; Albert
B. Ratner; Frank C. Sullivan; Thomas C. Sullivan and Dr. Jerry Sue Thornton
2. Adoption and Approval of Amendment to the RPM, Inc. 1996 Key Employees
Stock Option Plan. An amendment to the RPM, Inc. 1996 Key Employees Stock
Option Plan increasing the number of shares for which options may be
granted from 4,500,000 to 9,000,000 was adopted and approved by the
following vote:
For 74,668,316
Against 15,019,289
Abstain 1,206,815
<PAGE> 19
19
RPM, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
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 12, 2000.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
--------
Official Exhibit Number Description
----------------------- -----------
11.1 Statement regarding computation of
per share earnings.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the three
months ended November 30, 2000.
<PAGE> 20
20
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/ JAMES A. KARMAN
--------------------------------
JAMES A. KARMAN
VICE CHAIRMAN AND CHIEF FINANCIAL OFFICER
JANUARY 16, 2001
