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 NOVEMBER 30, 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 January 13, 1998, 98,259,288 RPM, Inc. Common Shares were outstanding.
2 RPM, INC. AND SUBSIDIARIES -------------------------- <TABLE> <CAPTION> INDEX ----- PART I. FINANCIAL INFORMATION Page No. ------------------------------ -------- <S> <C> Consolidated Balance Sheets November 30, 1997 and May 31, 1997 3 Consolidated Statements of Income Six Months and Three Months Ended November 30, 1997 and 1996 4 Consolidated Statements of Cash Flows Six Months Ended November 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Results of Operations and Financial Condition 7 PART II. OTHER INFORMATION 11 --------------------------- </TABLE>
3 3 RPM, INC. AND SUBSIDIARIES -------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> ASSETS ------ November 30, 1997 May 31, 1997 ---------------- ---------------- <S> <C> <C> Current Assets Cash and short-term investments $43,889 $37,442 Trade accounts receivable (less allowance for doubtful accounts $11,962 and $12,006) 287,194 291,923 Inventories 229,999 215,306 Prepaid expenses and other current assets 47,557 68,156 Businesses held for sale 107,494 ---------------- ---------------- Total current assets 608,639 720,321 ---------------- ---------------- Property, Plant and Equipment, At Cost 477,201 460,096 Less: accumulated depreciation and amortization 203,068 189,812 ---------------- ---------------- Property, plant and equipment, net 274,133 270,284 ---------------- ---------------- Other Assets Costs of businesses over net assets acquired, net of amortization 369,025 375,606 Intangible assets, net of amortization 214,237 219,098 Equity in unconsolidated affiliates 19,477 18,758 Other 35,667 29,161 ---------------- ---------------- Total other assets 638,406 642,623 ---------------- ---------------- Total Assets $1,521,178 $1,633,228 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities Current portion of long term debt $3,991 $3,967 Accounts payable 108,534 109,400 Accrued compensation and benefits 47,995 40,641 Accrued loss reserves 37,053 37,699 Other accrued liabilities 33,212 40,141 Income taxes payable 8,504 9,938 ---------------- ---------------- Total current liabilities 239,289 241,786 ---------------- ---------------- Long-term Liabilities Long-term debt, less current maturities 641,341 784,439 Deferred income taxes 67,414 70,210 Other long-term liabilities 52,715 43,497 ---------------- ---------------- Total long-term liabilities 761,470 898,146 ---------------- ---------------- Shareholders' Equity Common shares, stated value $.014 per share; authorized 200,000,000 shares; issued and outstanding 98,258,000 and 98,029,000 shares, respectively * 1,429 1,428 Paid-in capital 230,536 229,619 Retained earnings 298,896 270,465 Cumulative translation adjustment (10,442) (8,216) ---------------- ---------------- Total shareholders' equity 520,419 493,296 ---------------- ---------------- Total Liabilities And Shareholders' Equity $1,521,178 $1,633,228 ================ ================ </TABLE> * Data at May 31, 1997 has been restated to reflect a 25% stock dividend issued on December 8, 1997. The accompanying notes to consolidated financial statements are an integral part of these statements.
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, ------------------------------- ------------------------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net Sales $812,810 $645,307 $397,757 $316,076 Cost of Sales 454,376 368,565 223,404 182,030 -------------- -------------- -------------- -------------- Gross Profit 358,434 276,742 174,353 134,046 Selling, General and Administrative Expenses 252,659 187,386 127,441 93,980 Interest Expense, Net 19,461 15,462 9,617 7,834 -------------- -------------- -------------- -------------- Income Before Income Taxes 86,314 73,894 37,295 32,232 Provision for Income Taxes 36,683 31,405 15,850 13,699 -------------- -------------- -------------- -------------- Net Income $49,631 $42,489 $21,445 $18,533 ============== ============== ============== ============== Earnings per common share and common share equivalent (Exhibit 11.1) * $0.50 $0.44 $0.22 $0.19 ============== ============== ============== ============== Earnings per common share assuming full dilution (Exhibit 11.1) * $0.47 $0.41 $0.21 $0.18 ============== ============== ============== ============== Dividends per common share * $0.216 $0.20 $0.112 $0.104 ============== ============== ============== ============== </TABLE> * Data for November 30, 1996 has been restated to reflect a 25% stock dividend issued on December 8, 1997. The accompanying notes to consolidated financial statements are an integral part of these statements.
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, ------------------------------------ 1997 1996 ---------------- ---------------- <S> <C> <C> Cash Flows From Operating Activities: Net Income $49,631 $42,489 Depreciation and amortization 26,672 23,236 Items not affecting cash and other (3,481) (6,561) Changes in operating working capital (6,044) (23,029) ---------------- ---------------- 66,778 36,135 ---------------- ---------------- Cash Flows From Investing Activities: Additions to property and equipment (18,377) (13,053) (Increase) decrease in marketable securities (9,157) 1,964 Proceeds from sales of businesses, net of cash 130,809 Acquisition of new businesses, net of cash (78,335) ---------------- ---------------- 103,275 (89,424) ---------------- ---------------- Cash Flows From Financing Activities: Proceeds from stock option exercises 668 584 Increase (decrease) in debt (143,074) 80,016 Dividends (21,200) (19,370) ---------------- ---------------- (163,606) 61,230 ---------------- ---------------- Net Increase (Decrease) in Cash 6,447 7,941 Cash at Beginning of Period 37,442 19,855 ---------------- ---------------- Cash at End of Period $43,889 $27,796 ================ ================ Supplemental Schedule of Non-Cash Investing and Financing Activities: - --------------------------------------------------------------------- Interest accreted on LYONS $4,743 $4,504 </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 ------------------------------------------ NOVEMBER 30, 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 six and three months ended November 30, 1997 and November 30, 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, 1997. NOTE B - INVENTORIES - -------------------- Inventories were composed of the following major classes: <TABLE> <CAPTION> November 30, May 31, 1997(1) 1997 ------------ ------- <S> <C> <C> Raw material and supplies $ 85,815 $ 80,333 Finished goods 144,184 134,973 -------- -------- $229,999 $215,306 ======== ======== </TABLE> (1) Estimated, based on components at May 31, 1997 NOTE C - ACQUISITIONS - --------------------- On June 13, 1996, the Company acquired all the outstanding shares of Composite Structures International, Inc. formerly known as Okura Holdings, Inc. On February 1, 1997, the Company acquired all the outstanding shares of Tremco, Inc. 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 six and three months ended November 30, 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 Six For The Three Months Ended Months Ended 11/30/96 11/30/96 ----------- ------------- <S> <C> <C> Net Sales $799,786 $388,872 ======== ======== Net Income $44,525 $19,526 ======== ======== Earnings per common share and common share equivalent $.46 $.20 ==== ==== Earnings per common share assuming full dilution $.41 $.19 ==== ==== </TABLE>
7 7 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1997 ---------------------------------- RESULTS OF OPERATIONS - --------------------- The Company's sales and earnings advanced 26% and 16%, respectively, in the second quarter and 26% and 17%, respectively, in the first six months of the current fiscal year compared to last year's results. The Tremco acquisition on February 1, 1997, and several smaller acquisitions and joint ventures, net of several divestitures, accounted for approximately 80% of the increase in sales in the first six months and approximately 70% of the sales increase in the second quarter, compared to last year. Existing operations generated the balance of sales growth, favoring the industrial lines. The UPS strike during the summer affected shipments, and caused some loss of business. In addition, a generally slower retail market affected consumer operations, particularly during the first quarter. The internal sales growth was essentially from higher unit volume, as prices have been fairly steady year-to-year. Exchange rate differences had a slight, negative effect on sales this year versus last and, with the dollar continuing to strengthen, this trend will most likely continue. The gross profit margin strengthened from last year, with the second quarter achieving a 43.8% margin compared with 42.4% a year ago, bringing the year-to-date this year to 44.1% compared with 42.9% last year. Tremco's comparatively higher margins account for this change, net of slightly lower margins from product mix and lower than planned sales volume at various operations. The Company's selling, general and administrative expenses increased to 32.0% of sales in the second quarter from 29.7% a year ago, and to 31.1% after six months compared with 29.0% last year. Tremco accounts for this difference, incurring typically higher costs in this category, along with its acquisition related expenses. Existing operations have continued their planned increases in promotional and related spending to further the Company's growth. Increased interest expense reflects the additional indebtedness to acquire Tremco, CSI (June 1996) and other smaller acquisitions, plus non-cash interest accretion. Reduction of debt of approximately $40 million throughout the past year reduced net interest expense comparatively. As expected, first half sales and earnings were positively impacted by the strong seasonal operations of Tremco during this period, plus related restructuring is proceeding on plan and ahead of schedule. The winter months are seasonally much slower months for
8 8 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1997 ---------------------------------- Tremco, accentuating the already seasonal nature of the Company, and will result in lower third quarter earnings versus the prior year. Tremco is expected to have a strong additive effect on the fourth quarter and fiscal year 1998 results, with increasing contributions to sales and earnings in future fiscal years. 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 a fairly stable currency, such as Belgium and Canada, this effect has been minimal. In addition, foreign debt is denominated in the respective foreign currency, thereby eliminating any related translation impact on earnings. Should the dollar continue to strengthen, the Company's foreign results of operations will be negatively impacted; to date, the effect has not been significant. The Company does not currently hedge against the risk of exchange rate fluctuations. The present economic situation in Southeast Asia has not had, nor is it expected to have, material negative effects on the Company. All previously reported per share data have been restated to reflect the 25% stock dividend issued December 8, 1997, treated as a 5-for-4 stock split. CAPITAL RESOURCES AND LIQUIDITY - ------------------------------- CASH PROVIDED FROM OPERATIONS The Company generated cash from operations of $67 million during the first six months of the current fiscal year, up from $36 million during the same period last year. Other than the positive earnings performance, the main difference in operating cash flow is attributable to Tremco and its strong seasonality, plus a number of timing differences. Cash flow from operations continues to be the primary source of financing the Company's internal growth. INVESTING ACTIVITIES The Company is not capital intensive, but does invest in capital primarily to accommodate the Company's continued growth, through improved production and distribution efficiency and capacity, and to enhance administration. Such expenditures generally do not exceed depreciation and amortization in a given year.
9 9 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1997 ---------------------------------- The Company's captive insurance company invests in marketable securities in the ordinary course of conducting its operations. The difference between years is primarily attributable to the timing of investments. Earlier this year, the Company collected a $23.3 million May 31, 1997 receivable associated with the sale of a business, and completed the sale of Tremco's insulating glass unit and auto glass division for a net amount of $107.5 million. FINANCING ACTIVITIES The $130.8 million net proceeds mentioned above were used to reduce the Company's long-term debt (revolving credit facility), along with $17 million of additional debt reduction through internal cash generation, net of $5 million of non-cash interest accretion added to long-term debt. The difference is mainly related to currency translation changes. As a result of these transactions, the Company has a debt-to-capital ratio of 55%, compared to 62% at May 31, 1997, while interest coverage is five times on a reported basis and six times on a cash basis. On a fully diluted basis, which assumes conversion of the zero-coupon issue, the Company's debt-to-capital ratio would be reduced to 39%. Working capital decreased to $369 million from $479 million at May 31, 1997. The largest decrease was the use of the $130.8 million proceeds from the sales of businesses to reduce long-term debt. The current ratio moved to 2.5:1 from 3.0:1, respectively. 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 net assets continues. The Company maintains excellent relations with its banks and other financial institutions to further enable the financing of future growth opportunities. 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
10 10 RPM, INC. AND SUBSIDIARIES -------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- RESULTS OF OPERATIONS AND FINANCIAL CONDITION --------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1997 ---------------------------------- 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) risks associated with environmental liability inherent in the nature of a 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; and (f) 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.
11 11 RPM, Inc. and Subsidiaries Part II. -- Other Information ITEM 1 -- LEGAL PROCEEDINGS - --------------------------- As previously reported in the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1997, and as updated in the Company's Quarterly Report on Form 10-Q for the quarter ended August 31, 1997, Bondex International, Inc., a wholly-owned subsidiary of the Company ("Bondex"), was one of numerous corporate defendants in 464 then pending asbestos-related bodily injury lawsuits filed on behalf of various individuals in various jurisdictions of the United States. Subsequently, an additional 12 such cases have been filed and 6 such cases which had been filed were dismissed with prejudice without payment, leaving a total of 470 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.
12 12 RPM, Inc. and Subsidiaries Part II. -- Other Information ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ The Annual Meeting of Shareholders of the Company was held on October 17, 1997. The following matters were voted on at the meeting. 1. Election of Laurie Gustin, James A. Karman, Donald K. Miller and Kevin O'Donnell as Directors of the Company. The nominees were elected as Directors with the following votes: <TABLE> <CAPTION> <S> <C> LAURIE GUSTIN ------------- For 65,050,667 Withheld 873,527 Broker non-votes -0- JAMES A. KARMAN --------------- For 65,452,668 Withheld 471,526 Broker non-votes -0- DONALD K. MILLER ---------------- For 65,211,747 Withheld 712,447 Broker non-votes -0- KEVIN O'DONNELL --------------- For 65,118,753 Withheld 805,441 Broker non-votes -0- 2. Approval and adaptation of the RPM, Inc. 1997 Restricted Stock Plan: For 65,248,237 Against 2,892,844 Abstain 524,691 Broker non-votes 258,422 </TABLE> For information on how the votes for the above matter have been tabulated, see the Company's definitive Proxy Statement used in connection with the Annual Meeting of Shareholders on October 17, 1997.
13 13 RPM, Inc. and Subsidiaries Part II. -- Other Information ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) EXHIBITS <TABLE> <CAPTION> OFFICIAL EXHIBIT NUMBER DESCRIPTION ----------------------- ----------- <S> <C> <C> 10.1 RPM, Inc. 1997 Restricted Stock Plan, and form of Acceptance and Escrow Agreement to be used in connection therewith. 11.1 Statement regarding computation of per share earnings 27.1 Financial Data Schedule </TABLE> (b) REPORTS ON FORM 8-K ------------------- There were no reports on Form 8-K filed during the three months ended November 30, 1997.
14 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/ Frank C. Sullivan ------------------------------- Frank C. Sullivan Chief Financial Officer Date: 1/14/98