1 Page 1 of 14 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended February 28, 1997 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. 0-5132 ------ RPM, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Ohio 34-6550857 - --------------------------------------- ----------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) P.O. Box 777; 2628 Pearl Road; Medina, Ohio 44258 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (330) 273-5090 - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to the filing requirements for the past 90 days. Yes x No --- --- As of April 11, 1997, 78,382,629 RPM, Inc. Common Shares were outstanding. Exhibit Index on Page 12 of 14 pages.
2 RPM, INC. AND SUBSIDIARIES -------------------------- INDEX ----- PART I. FINANCIAL INFORMATION Page No. - ------------------------------ -------- Consolidated Balance Sheets February 28, 1997 and May 31, 1996 3 Consolidated Statements of Income Nine Months and Three Months Ended February 28, 1997 and February 29, 1996 4 Consolidated Statements of Cash Flows Nine Months Ended February 28, 1997 and February 29, 1996 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 8 PART II. OTHER INFORMATION 11 - ---------------------------
3 RPM, INC. AND SUBSIDIARIES 3 -------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> ASSETS ------ February 28, 1997 May 31, 1996 ----------------- ---------------- <S> <C> <C> Current Assets Cash $ 33,596 $ 19,855 Marketable securities, at cost 12,525 14,422 Trade accounts receivable (less allowance for doubt- ful accounts $12,801 and $9,993) 251,544 231,560 Inventories 233,027 178,929 Prepaid expenses 33,263 20,360 ----------- ----------- Total current assets 563,955 465,126 ----------- ----------- Property, Plant and Equipment, At Cost 516,423 399,580 Less: accumulated depreciation and amortization 224,691 174,920 ----------- ----------- Property, plant and equipment, net 291,732 224,660 ----------- ----------- Other Assets Costs of businesses over net assets acquired 371,253 268,492 Intangible Assets 310,049 159,798 Equity in unconsolidated affiliates 18,468 16,623 Other 32,240 20,377 ----------- ----------- Total other assets 732,010 465,290 ----------- ----------- Total Assets $ 1,587,697 $ 1,155,076 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities Current portion of long term debt $ 1,431 $ 1,747 Accounts payable 90,727 85,874 Accrued compensation and benefits 39,916 29,678 Accrued warranty and loss reserves 31,228 33,731 Other accrued liabilities 42,988 26,910 Income taxes payable (1,333) 11,464 ----------- ----------- Total current liabilities 204,957 189,404 ----------- ----------- Long-term Liabilities Long-term debt, less current maturities 785,469 447,654 Other long-term liabilities 35,422 14,375 Deferred income taxes 85,689 57,810 ----------- ----------- Total long-term liabilities 906,580 519,839 ----------- ----------- Shareholders' Equity Common shares, stated value $.018 per share; authorized 200,000,000 shares; issued and outstanding 78,373,000 and 77,449,000 shares, respectively 1,426 1,410 Paid-in capital 229,259 215,019 Retained earnings 252,336 231,896 Cumulative translation adjustment (6,861) (2,492) ----------- ----------- Total shareholders' equity 476,160 445,833 ----------- ----------- Total Liabilities And Shareholders' Equity $ 1,587,697 $ 1,155,076 =========== =========== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements.
4 RPM, INC. AND SUBSIDIARIES -------------------------- CONSOLIDATED STATEMENTS OF INCOME 4 --------------------------------- (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Nine Months Ended Three Months Ended ------------------------- --------------------------- February 28, February 29, February 28, February 29, 1997 1996 1997 1996 ----------- ------------ ----------- ------------ <S> <C> <C> <C> <C> Net Sales $942,484 $819,513 $297,177 $255,157 Cost of Sales 539,949 477,454 171,384 150,191 -------- -------- -------- -------- Gross Profit 402,535 342,059 125,793 104,966 Selling, General and Administrative Expenses 291,287 245,916 103,901 84,322 Interest Expense, Net 24,296 19,530 8,834 6,743 -------- -------- -------- -------- Income Before Income Taxes 86,952 76,613 13,058 13,901 Provision for Income Taxes 36,955 32,315 5,550 5,854 -------- -------- -------- -------- Net Income $ 49,997 $ 44,298 $ 7,508 $ 8,047 ======== ======== ======== ======== Earnings per common share and common share equivalent (Exhibit 11.1) $ 0.64 $ 0.58 $ 0.10 $ 0.11 ======== ======== ======== ======== Earnings per common share assuming full dilution (Exhibit 11.1) $ 0.61 $ 0.56 $ 0.10 $ 0.11 ======== ======== ======== ======== Dividends per common share $ 0.38 $ 0.35 $ 0.13 $ 0.12 ======== ======== ======== ======== </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements.
5 RPM, INC. AND SUBSIDIARIES 5 -------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Nine Months Ended ---------------------------- February 28, February 29, 1997 1996 ----------- ---------- <S> <C> <C> Cash Flows From Operating Activities: Net Income $ 49,997 $ 44,298 Depreciation and amortization 35,730 31,906 Items not affecting cash and other (11,781) (9,569) Changes in operating working capital (27,450) (3,234) --------- --------- 46,496 63,401 --------- --------- Cash Flows From Investing Activities: Additions to property and equipment (20,456) (22,109) Sale of businesses, net of cash transferred 7,465 0 Acquisition of new businesses, net of cash (327,188) (45,820) --------- --------- (340,179) (67,929) --------- --------- Cash Flows From Financing Activities: Proceeds from stock option exercises 906 1,014 Increase (decrease) in debt 336,075 37,034 Dividends (29,557) (27,372) --------- --------- 307,424 10,676 --------- --------- Net Increase (Decrease) in Cash 13,741 6,148 Cash at Beginning of Period 19,855 19,834 --------- --------- Cash at End of Period $ 33,596 $ 25,982 ========= ========= Supplemental Schedule of Non-Cash Investing and Financing Activities: - --------------------------------------------------------------------- Issuance of shares in connection with acquisition of new business $ 13,600 $ 65,200 Interest accreted on LYONs 6,795 6,452 </TABLE> The accompanying notes to consolidated financial statements are an integral part of these statements.
6 6 RPM, INC. AND SUBSIDIARIES -------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ FEBRUARY 28, 1997 ----------------- (Unaudited) (In thousands, except per share amounts) NOTE A - BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included for the nine and three months ended February 28, 1997 and February 29, 1996. 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, 1996. NOTE B - INVENTORIES - -------------------- Inventories were composed of the following major classes: <TABLE> <CAPTION> February 28, May 31, 1997 (1) 1996 ---- ---- <S> <C> <C> Raw material and supplies $ 84,646 $ 64,995 Finished goods 148,381 113,934 -------- -------- $233,027 $178,929 ======== ======== <FN> (1) Estimated, based on components at May 31, 1996 </TABLE> NOTE C - ACQUISITIONS - --------------------- On August 10, 1995, the Company acquired all of the outstanding shares of Star Finishing Products, Inc. On September 21, 1995, the Company acquired all of the outstanding shares of Dryvit Systems, Inc. On June 13, 1996, the Company acquired all the outstanding shares of Okura Holdings, Inc. for $73,000,000 in cash. Okura manufactures and markets fiberglass reinforced plastic grating products.
7 7 RPM, INC. AND SUBSIDIARIES -------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ FEBRUARY 28, 1997 ----------------- (Unaudited) (In thousands, except per share amounts) NOTE C - ACQUISITIONS - Continued - --------------------- On February 1, 1997, the Company acquired all the outstanding shares of Tremco, Inc. a B.F. Goodrich Company subsidiary for approximately $243,000,000. Tremco manufactures and sells roofing systems, sealants and coatings to customers primarily in the building, construction, building maintenance and retail markets. These acquisitions as well as several small product line acquisitions have been accounted for by the purchase method of accounting. The following data summarizes, on an unaudited pro-forma basis, the combined results of operations of the companies for the nine and three months ended February 28, 1997 and February 29, 1996. 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. <TABLE> <CAPTION> For The Nine For The Three Months Ended Months Ended ------------ ------------ February 28, February 29, February 28, February 29, 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales $1,184,457 $1,106,334 $342,315 $319,631 ========== ========== ======== ======== Net Income $ 53,545 $ 39,907 $ 307 $ (2,098) ========== ========== ======== ======== Earnings per common share and common share equivalent $.68 $.51 $-0- $(.03) ==== ==== ==== ===== Earnings per common share assuming full dilution $.65 $.50 $-0- $(.03) ==== ==== ==== ===== </TABLE>
8 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 1997 ----------------------------------- RESULTS OF OPERATIONS - --------------------- Sales were ahead 16% in the third quarter and 15% in the first nine months of the current fiscal year compared to last year's results. The Company acquired Composite Structures International, Inc. (CSI), formerly known as Okura Holdings, Inc., on June 13, 1996. With annual sales of approximately $35 million, CSI is a leading global manufacturer of molded and pultruded fiberglass reinforced plastic grating products, used for pedestrian walkways, platforms, staircases and similar types of industrial structures. CSI has posted a strong growth record under the leading brand names Fibergrate and Chemgrate. CSI offers the Company an attractive opportunity to capitalize on market, product and customer synergies with other RPM operating companies. On February 1, 1997, the Company completed the acquisition of Tremco, Inc., Cleveland, Ohio. Tremco manufactures roofing systems, sealants and coatings under the Tremco brand name, selling primarily to the building, construction, building maintenance and retail markets, and had annual sales in 1995 of approximately $330 million. Tremco's product lines and distribution network offer highly complementary synergies with many of the Company's operations. The CSI and Tremco acquisitions and that of Dryvit Systems, Inc. (Dryvit) on September 21, 1995, along with several smaller acquisitions and joint ventures, net of several small divestitures, accounted for just over half of the increase in sales for the first nine months and third quarter compared to last year. Existing operations generated the balance of sales growth, slightly favoring the industrial lines and predominantly from higher unit volume as pricing adjustments have been nominal year-to-year. Exchange rate differences have had a slight negative effect on sales this year versus last. Gross profit margin strengthened during the third quarter to 42.3% from 41.1% a year ago, bringing the year-to-date comparison to 42.7% from 41.7% last year. The majority of this improvement year-to-date comes from existing operations and the positive effects of certain lower raw material costs, favorable product mix including greater increases in industrial sales, higher volume effects, and conversion cost controls. The balance of the margin improvement is the result of the recent acquisitions, net of divestitures. Selling, general and administrative expenses increased to 30.9% for nine months, compared with 30% last year. During the second quarter of last year, the Company recovered approximately $2 million from insurance carriers toward previously incurred environmental costs. This recovery, plus several non-recurring expense reductions in the year ago period, and planned increases in promotional spending and the timing of certain expenses this year, caused substantially all of the nine month percentage difference in this category, with acquisition costs
9 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 1997 ----------------------------------- accounting for the difference. In the third quarter, S,G&A expenses increased to 35% of sales from 33% a year ago, principally as a result of product line mix and planned promotional spending increases, with the balance attributable to net acquisition related expenses, mainly from Tremco. Increase interest expense reflects the additional indebtedness associated with Dryvit, CSI, Tremco and other acquisitions, plus non-cash interest accretion. Reductions in debt of approximately $14 million during the past year and slightly lower interest rates reduced interest expense comparatively. As expected, third quarter earnings were negatively (approximately $.02 per share) impacted by the slow seasonal operations and acquisition costs of Tremco. Earnings per share comparisons are further affected this year by Company shares issued in connection with the Dryvit acquisition. The Company's foreign sales and results of operations are subject to the impact of foreign currency fluctuations. Most of the Company's foreign operations are in Belgium, and with the Belgian franc being a fairly stable currency, this effect has been minimal. Foreign debt is denominated in the respective foreign currency, thereby eliminating any related translation impact on earnings. The CSI and Tremco acquisitions are not expected to have a dilutive effect on 1997 results, and in future years, both acquisitions are expected to be positive contributors to Company performance. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- CASH PROVIDED FROM OPERATIONS The Company generated cash from operations of $46 million during the first nine months compared with $63 million during the same period a year ago. This difference is mainly the result of temporary accumulations of certain inventories to take advantage of pricing opportunities (the benefits of which are reflected in the improved gross profit margin discussed above) and to accommodate several new product introductions, and timing differences. Cash flow from operations continues to be the primary source of financing the Company's internal growth.
10 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 1997 ----------------------------------- INVESTING ACTIVITIES The Company is not capital intensive, but invests in capital expenditures primarily to improve production and distribution efficiency and capacity. Such expenditures generally do not exceed depreciation and amortization in a given year. The Company invested $327 million to purchase CSI, Tremco and several smaller businesses and joint ventures this year, net of cash acquired. The Company historically has acquired complementary businesses and this trend is expected to continue. Several small businesses were sold this year for a net amount of $7 million. FINANCING ACTIVITIES The Company renegotiated its revolving credit facility on July 19, 1996 to $250 million and extended its final maturity to 2001 to finance the acquisition of CSI. On February 3, 1997, in conjunction with the acquisition of Tremco, the Company entered into a new $500 million revolving credit agreement, maturing in 2002. At the time of the acquisition, $257 million of this facility was used to finance the purchase, including fees and other cash requirements. In addition, $160 million was used to retire the outstanding balance of the $250 million revolving credit agreement. The new instrument had an outstanding balance of $417 million at February 28, 1997. As a result of these transactions, the Company has a debt-to-capital ratio of 62% compared to 50% at May 31, 1996, while interest coverage remains at over 5 times on a reported basis, and over 6 times on a cash basis. The Company intends to reduce its debt level by approximately $150 million within the next year through the sale of a number of Tremco and other product lines and the sale of certain assets. Presently, on a fully diluted basis, the Company's debt-to-capital ratio is 48%. Working capital increased to $359 million from $276 million at May 31, 1996, $55 million of this difference attributable to the CSI and Tremco acquisitions. The current ratio moved to 2.8:1 from 2.5:1, respectively. The Company maintains excellent relations with its banks and other financial institutions to further enable the financing of future growth opportunities.
11 RPM, INC. AND SUBSIDIARIES PART II. - OTHER INFORMATION ITEM 1-- LEGAL PROCEEDINGS - -------------------------- Bondex International -------------------- As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, and as updated in the Company's Quarterly Reports on Form 10-Q for the quarters ended August 31, 1996 and November 30, 1996, Bondex International, Inc., a wholly-owned subsidiary of the Company ("Bondex"), is one of numerous corporate defendants in 449 then pending asbestos-related bodily injury lawsuits filed on behalf of various individuals in various jurisdictions of the United States. Subsequently, an additional 13 such cases have been filed and 7 such cases which had been filed were dismissed with prejudice without payment pursuant to summary judgment or stipulation of the parties, leaving a total of 455 such cases pending. Bondex continues to deny liability in all asbestos-related lawsuits and continues to vigorously defend them. Under a cost-sharing agreement among Bondex and its insurers effected in 1994, the insurers are responsible for payment of a substantial portion of defense costs and indemnity payments, if any, with Bondex responsible for a minor portion of each. Dryvit ------ As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, and as updated in the Company's Quarterly Reports on Form 10-Q for the quarters ended August 31, 1996 and November 30, 1996, Dryvit Systems, Inc., a wholly-owned subsidiary of the Company ("Dryvit"), is a co-defendant in several separate but related lawsuits, some of which have sought to certify classes comprised of owners of structures clad with exterior insulation finish systems ("EIFS") products manufactured by Dryvit and other EIFS manufacturers. On September 18, 1996, the North Carolina court presiding over one of the State Court cases, RUFF ET AL. V. PAREX, INC., ET AL. (96-CVS-0059), entered an order certifying a class of North Carolina owners of single family or multi-family residential dwellings which had an EIFS system installed during the period 1969 to present. On October 4, 1996, the Judicial Panel on Multi-District Litigation ordered that the nine pending federal court actions be transferred to the Eastern District Court of North Carolina for coordinated or consolidated pre-trial proceedings. Subsequent to that order, one additional federal court case, HILLMAN V. DRYVIT SYSTEMS, INC., ET (3-96-1096), was filed in U.S. District Court for the District of Minnesota. Pursuant to the Multi-District Litigation Rules, that case has been consolidated with the other nine cases under the designation IN RE: STUCCO LITIGATION. Dryvit is also a co-defendant in a Georgia class action proceeding, HARDY, ET AL. V. DRYVIT SYSTEMS, INC., ET AL., 97-CA-E55319. Dryvit's insurers are paying Dryvit's defense costs, including attorneys fees and expenses as well as expert witness fees. Dryvit, through a joint defense arrangement, continues to contest these class certification requests and challenge the merits of the plaintiffs' claims. Dryvit and its
12 RPM, INC. AND SUBSIDIARIES PART II. - OTHER INFORMATION insurers are participating, along with the other EIFS manufacturers and their insurers, in a mediation process coordinated through the CPR Institute for Dispute Resolution. ITEM 2--CHANGES IN SECURITIES - ----------------------------- Part II (c) Recent Sales of Unregistered Securities. No securities of the Company that were not registered under the Securities Act of 1933 have been issued or sold by the Company during the period covered by this Quarterly Report on Form 10-Q other than the following: (i) On January 14, 1997, in connection with the purchase by RPM and its wholly owned subsidiary, Bondo/Mar-Hyde Corporation (the successor corporation to Dynatron/Bondo Corporation) of all of the assets, and the assumption of certain liabilities, of the business conducted by Marson Corporation, a Delaware corporation and Marson Canada Inc., a Canadian corporation, as the Marson Automotive Division, the Company issued 771,632 shares of Common Stock to Marson Corporation, as consideration for the $13,600,000 purchase price. Registration under the Securities Act of 1933 was not effected with respect to the transaction described above in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933. Item 6. Exhibits and Reports on 8-K. (a) Exhibits. Sequential Exhibit No. Description Page No. - ----------- ----------- -------- 10.1 Credit Agreement, dated as of February 3, 1997, between the Company, the Banks identified on the Signature Pages thereto, National City Bank as Documentation Agent, and The Chase Manhattan Bank as Administrative Agent. 11.1 Statement Regarding Computation of Per Share Earnings. 27.1 Financial Data Schedule. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K, dated February 1, 1997, reporting under Item 2 the Company's acquisition of Tremco Incorporated as of February 1, 1997. The following financial statements were filed therewith: Tremco Incorporated Combined financial Statements as of October 31, 1996 Report of Independent Auditors Combined Statement of Assets to be Acquired and Liabilities to be Assumed Combined Statement of Revenues and Expenses Combined Statement of Cash Flows Notes to Combined Financial Statements
13 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/ Frank C. Sullivan ----------------------------- Frank C. Sullivan Chief Financial Officer (Duly Authorized Officer and Chief Financial Officer) Date: 4/14/97