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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 FEBRUARY 28, 2003, 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 INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0642224
- ------------------------------- ---------------------------------
(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 [ ].
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
YES [X] NO [ ].
AS OF APRIL 10, 2003
115,593,666 SHARES OF RPM INTERNATIONAL INC. COMMON STOCK WERE OUTSTANDING.
RPM INTERNATIONAL INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED):
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 26
CERTIFICATION OF CHIEF FINANCIAL OFFICER 27
3
PART I. -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FEBRUARY 28, 2003 MAY 31, 2002
----------------- ------------
ASSETS
--------
CURRENT ASSETS
CASH AND SHORT-TERM INVESTMENTS $ 62,156 $ 42,172
TRADE ACCOUNTS RECEIVABLE (LESS ALLOWANCES OF
$18,054 AND $15,884, RESPECTIVELY) 319,218 397,659
INVENTORIES 262,883 251,446
PREPAID EXPENSES AND OTHER CURRENT ASSETS 121,939 110,037
----------- -----------
TOTAL CURRENT ASSETS 766,196 801,314
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 690,564 655,841
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION (333,400) (300,044)
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET 357,164 355,797
----------- -----------
OTHER ASSETS
GOODWILL 601,998 592,329
OTHER INTANGIBLE ASSETS, NET OF AMORTIZATION 259,876 264,530
OTHER 32,549 22,433
----------- -----------
TOTAL OTHER ASSETS 894,423 879,292
----------- -----------
TOTAL ASSETS $ 2,017,783 $ 2,036,403
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 117,004 $ 160,767
CURRENT PORTION OF LONG-TERM DEBT 4,800 5,876
ACCRUED COMPENSATION AND BENEFITS 63,332 80,530
ACCRUED LOSS RESERVES 63,121 51,914
OTHER ACCRUED LIABILITIES 53,341 58,144
INCOME TAXES PAYABLE 716 7,483
----------- -----------
TOTAL CURRENT LIABILITIES 302,314 364,714
----------- -----------
LONG-TERM LIABILITIES
LONG-TERM DEBT, LESS CURRENT MATURITIES 694,774 707,921
OTHER LONG-TERM LIABILITIES 54,355 55,458
DEFERRED INCOME TAXES 46,886 50,204
----------- -----------
TOTAL LONG-TERM LIABILITIES 796,015 813,583
----------- -----------
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $0.01 PAR VALUE; AUTHORIZED
50,000 SHARES; NONE ISSUED - -
COMMON STOCK, PAR VALUE $0.01 AND WITHOUT PAR VALUE WITH A STATED
VALUE OF $.015 PER SHARE AS OF FEBRUARY 2003 AND MAY 2002,
RESPECTIVELY; AUTHORIZED 300,000 AND 200,000 SHARES, RESPECTIVELY;
OUTSTANDING 115,594 SHARES AND 114,696 SHARES, RESPECTIVELY 1,156 1,786
PAID-IN CAPITAL 508,397 585,566
TREASURY STOCK, AT COST - (88,364)
ACCUMULATED OTHER COMPREHENSIVE LOSS (34,275) (50,485)
RETAINED EARNINGS 444,176 409,603
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 919,454 858,106
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,017,783 $ 2,036,403
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
4
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- --------- ---------
NET SALES $ 1,493,943 $ 1,428,693 $ 433,562 $ 407,538
COST OF SALES 813,639 777,415 246,610 228,902
----------- ----------- --------- ---------
GROSS PROFIT 680,304 651,278 186,952 178,636
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 538,944 521,720 173,338 166,025
INTEREST EXPENSE, NET 20,290 32,083 6,102 7,660
----------- ----------- --------- ---------
INCOME BEFORE INCOME TAXES 121,070 97,475 7,512 4,951
PROVISION FOR INCOME TAXES 42,374 33,142 2,629 1,677
----------- ----------- --------- ---------
NET INCOME $ 78,696 $ 64,333 $ 4,883 $ 3,274
=========== =========== ========= =========
AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING:
BASIC 115,193 102,346 115,583 102,508
=========== =========== ========= =========
DILUTED 116,022 102,857 116,121 103,720
=========== =========== ========= =========
BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 0.68 $ 0.63 $ 0.04 $ 0.03
=========== =========== ========= =========
CASH DIVIDENDS PER SHARE OF COMMON STOCK $ 0.3850 $ 0.3750 $ 0.1300 $ 0.1250
=========== =========== ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
5
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED FEBRUARY 28,
------------------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 78,696 $ 64,333
DEPRECIATION AND AMORTIZATION 42,285 41,785
ITEMS NOT AFFECTING CASH AND OTHER 563 (8,716)
CHANGES IN OPERATING WORKING CAPITAL (4,237) 34,037
-------- --------
117,307 131,439
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (22,017) (16,241)
ACQUISITION OF NEW BUSINESSES, NET OF CASH ACQUIRED (19,547)
-------- --------
(41,564) (16,241)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(DECREASE) IN DEBT (14,922) (63,033)
CASH DIVIDENDS (44,123) (38,167)
EXERCISE OF STOCK OPTIONS 3,286 4,932
-------- --------
(55,759) (96,268)
-------- --------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 19,984 18,930
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 42,172 23,926
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 62,156 $ 42,856
======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
6
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated 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 three and nine month periods ended
February 28, 2003 and 2002. 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, 2002.
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
NOTE B - INVENTORIES
- --------------------
Inventories were composed of the following major classes:
FEBRUARY 28, 2003 MAY 31, 2002
----------------- ------------
(IN THOUSANDS)
Raw materials and supplies $ 91,576 $ 75,080
Finished goods 171,307 176,366
-------- --------
$262,883 $251,446
======== ========
NOTE C - 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, amounted to $19,031,000 and $(4,327,000) during the third
quarter of fiscal years 2003 and 2002, respectively, and $94,906,000 and
$56,930,000 for the nine months ended February 28, 2003 and 2002, respectively.
NOTE D - REINCORPORATION
- ------------------------
At the annual shareholders meeting on October 11, 2002, RPM shareholders
approved a plan to change RPM's legal place of incorporation from Ohio to
Delaware. Under the plan, a new legal entity, RPM International Inc., was
incorporated in Delaware and became the parent holding company of Ohio-based
RPM, Inc. and several other intermediate holding companies and wholly owned
subsidiaries. In addition to the creation of a newly formed Delaware legal
entity, the legal structure of various operating companies were realigned in
consistency with their respective business objectives. All of the outstanding
treasury shares of RPM, Inc. were cancelled and retired without any
consideration. In addition, each common share of RPM, Inc. issued and
outstanding on October 15, 2002 was converted into one share of the Company,
with a $0.01 par value per share. This transaction did not have any effect on
the book value per share, post-reincorporation.
7
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Our consolidated financial statements include the accounts of RPM International
Inc. and its majority-owned subsidiaries. Preparation of our financial
statements requires the use of estimates and assumptions that affect the
reported amounts of our assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We continually evaluate these estimates, including those
related to allowances for doubtful accounts, inventories, allowances for
recoverable taxes, useful lives of property, plant and equipment, goodwill,
environmental and other contingent liabilities, income tax valuation allowances,
pension plans and the fair value of financial instruments. We base our estimates
on historical experience and other assumptions, which we believe to be
reasonable under the circumstances. These estimates form the basis for making
judgments about the carrying value of our assets and liabilities. Actual results
may differ from these estimates under different assumptions and conditions.
We have identified below the accounting policies that are critical to our
financial statements.
REVENUE RECOGNITION
Revenues are recognized when title and risk of loss passes to customers. The
Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition," provides guidance on the application of Generally
Accepted Accounting Principles (GAAP) in the U.S. to selected revenue
recognition issues. We have concluded that our revenue recognition policy is
appropriate and in accordance with GAAP and SAB No. 101.
TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Our reporting currency is the U.S. dollar. However, the functional currency of
all of our foreign subsidiaries is their local currency. We translate the
amounts included in our consolidated statements of income from our foreign
subsidiaries into U.S. dollars at year-to-date average exchange rates, which we
believe are fairly representative of the actual exchange rates on the dates of
the transactions. Our foreign subsidiaries' assets and liabilities are
translated into U.S. dollars from local currency at the actual exchange rates as
of the end of each reporting date, and we record the resulting foreign exchange
translation adjustments in our consolidated balance sheets as a component of
accumulated other comprehensive income (loss). If we determine that the
functional currency of any of our foreign subsidiaries should be the U.S.
dollar, our financial statements would be affected. Should this occur, we would
adjust our reporting to appropriately account for such change(s).
8
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
As appropriate, we use permanently invested intercompany loans as a source of
capital to reduce exposure to foreign currency fluctuations at our foreign
subsidiaries. These loans are treated as analogous to equity for accounting
purposes. Therefore, foreign exchange gains or losses on these intercompany
loans are recorded in other comprehensive income (loss). If we were to determine
that the functional currency of any of our subsidiaries should be the U.S.
dollar, we would no longer record foreign exchange gains or losses on such
intercompany loans.
GOODWILL
We adopted two new accounting standards issued by the Financial Accounting
Standards Board in June 2001. Statement of Financial Accounting Standards, or
SFAS, No. 141, "Business Combinations," eliminates the pooling method of
accounting for all business combinations initiated after June 30, 2001, and
addresses the initial recognition and measurement of goodwill and intangible
assets acquired in a business combination. Accordingly, we apply the provisions
of SFAS No. 141 to all business combinations initiated after its effective date.
We also adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective
June 1, 2001. Goodwill amortization ceased upon adoption of the standard, and
the required initial impairment tests were performed. Results of these
impairment tests have not generated any impairment loss to date.
Prospectively, goodwill will be tested on an annual basis, or more frequently as
impairment indicators arise. Impairment tests, which involve the use of
estimates related to the fair market values of the business operations with
which goodwill is associated, are performed at the end of our first quarter.
Losses, if any, resulting from impairment tests will be reflected in operating
income in our income statement.
OTHER LONG-LIVED ASSETS
We assess for impairment of identifiable non-goodwill intangibles and other
long-lived assets whenever events or changes in facts and circumstances indicate
the possibility that the carrying value may not be recoverable. Factors
considered important which might trigger an impairment evaluation, include the
following:
- significant under-performance relative to historical or projected
future operating results;
- significant changes in the manner of our use of the acquired assets or
the strategy for our overall business; and
- significant negative industry or economic trends.
When we determine that the carrying value of non-goodwill intangibles and other
long-lived assets may not be recoverable based upon the existence of one or more
of the above described indicators, any impairment would be measured based on
projected net cash flows expected from the asset(s), including eventual
disposition.
9
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
CONTINGENCIES
We are party to claims and lawsuits arising in the normal course of business.
Although we cannot precisely predict the amount of any liability that may
ultimately arise with respect to any of these matters, we record provisions when
we consider the liability probable and reasonably estimable. The provisions are
based on historical experience and legal advice, are reviewed quarterly and are
adjusted according to developments. Changes in the amount of the provisions
affect our consolidated statements of income. Due to the inherent uncertainties
in the loss reserve estimation process, actual results may differ.
Computing our net liability for open asbestos claims requires making judgments
regarding the most likely outcome of litigation, future settlements and
judgments to be paid for those open claims and estimating amounts we will
recover from insurance companies. As a result of anticipated increasing cases
and settlement costs, the Company expects that its remaining third party
insurer's available coverage will be depleted in the coming months. For asbestos
related costs through the end of the current fiscal year associated with the
portion of its known claims which is not covered by insurance, the Company has
established a financial reserve in an amount which it deems to be adequate
through the end of the current fiscal year. The Company's current insurance and
financial reserves may not, however, be adequate to cover the costs associated
with its claims in future periods which has resulted in the Company's decision
to undertake a process of estimating the costs of its future asbestos
liabilities. While the timing and outcome of this process is uncertain, the
Company expects to complete this process with the reporting of its 2003 year-end
results. At the conclusion of this process, the Company expects to accrue a
material liability sufficient to cover the estimate of its potential future
asbestos related claims. (Additionally, refer to Item 1. Legal Proceedings, Part
II - Other Information contained elsewhere in this report.)
Our environmental-related accruals are similarly established and/or adjusted as
information becomes available upon which costs can be reasonably estimated. Here
again, actual costs may vary from these estimates because of the inherent
uncertainties involved, including the identification of new sites and the
development of new information about contamination. Certain sites are still
being investigated and therefore we have been unable to fully evaluate the
ultimate cost for those sites. As a result, reserves have not been taken for
certain of these sites and costs may ultimately exceed existing reserves for
other sites. We have received indemnities for potential environmental issues
from purchasers of certain of our properties and businesses and from sellers of
properties or businesses we have acquired. We have also purchased insurance to
cover potential environmental liabilities at certain sites. If the indemnifying
or insuring party fails to, or becomes unable to, fulfill its obligations under
those agreements or policies, we may incur additional environmental costs in
addition to any amounts reserved, which could have a material adverse effect on
our financial condition, results of operations or cash flows.
10
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
REPORTABLE SEGMENT INFORMATION
- ------------------------------
The Company has determined that it has two operating segments -- Industrial and
Consumer -- based on the nature of business activities, products and services;
the structure of management; and the structure of information as presented to
the Board of Directors. Within each segment, individual operating companies or
groups of companies generally address common markets, utilize similar
technologies, and can share manufacturing or distribution capabilities. The
Company evaluates the profit performance of its two operating segments based on
earnings before interest and taxes since interest expense is essentially related
to corporate acquisitions, as opposed to segment operations. In addition to the
two operating segments, there are certain business activities, referred to as
corporate/other, that do not constitute an operating segment, including
corporate headquarters and related administrative expenses, results of our
captive insurance company, gains or losses on the sales of certain assets and
other expenses not directly associated with either operating segment. Related
assets consist primarily of investments, prepaid expenses, deferred pension
assets, and headquarters property and equipment. Comparative nine-month and
third quarter results on this basis are as follows:
NINE MONTHS ENDED FEBRUARY 28, QUARTER ENDED FEBRUARY 28,
------------------------------------- ----------------------------
(In thousands) 2003 2002 2003 2002
----------------- ------------ --------- ---------
NET SALES:
Industrial Segment $ 813,755 $ 771,564 $ 235,193 $ 211,682
Consumer Segment 680,188 657,129 198,369 195,856
----------------- ------------ --------- ---------
TOTAL $ 1,493,943 $ 1,428,693 $ 433,562 $ 407,538
================= ============ ========= =========
INCOME BEFORE INCOME TAXES:
Earnings Before Interest and Taxes (EBIT) (a)
Industrial Segment $ 88,160 $ 76,897 $ 8,580 $ 6,960
Consumer Segment 85,102 72,393 16,663 13,874
Corporate/Other (31,902) (19,732) (11,629) (8,223)
----------------- ------------ --------- ---------
Total EBIT 141,360 129,558 13,614 $ 12,611
Consolidated Interest Expense, Net (20,290) (32,083) (6,102) (7,660)
----------------- ------------ --------- ---------
TOTAL $ 121,070 $ 97,475 $ 7,512 $ 4,951
================= ============ ========= =========
IDENTIFIABLE ASSETS: FEBRUARY 28, 2003 MAY 31, 2002
----------------- ------------
Industrial Segment $ 970,714 $ 962,742
Consumer Segment 970,954 1,000,928
Corporate/Other 76,115 72,733
----------------- ------------
TOTAL $ 2,017,783 $ 2,036,403
================= ============
(a) EBIT is defined as earnings before interest and taxes. EBIT is presented
because it is a widely accepted financial indicator used by certain investors
and analysts to analyze and compare companies on the basis of operating
performance. EBIT is not intended to represent cash flows for the period, nor is
it presented as an alternative to operating income or as an indicator of
operating performance. EBIT should not be considered in isolation, but with
Generally Accepted Accounting Principles in the U.S., and it is not indicative
of operating income or cash flow from operations as determined by those
principles. Our method of computation may or may not be comparable to other
similarly titled measures of other companies. EBIT may not be indicative of
historical operating results nor is it meant to be predictive of potential
future results.
11
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
- ---------------------------------------------
NET SALES
Consolidated third quarter net sales of $433.6 million increased $26.0 million
over last year's third quarter sales of $407.5 million, or 6.4 percent. The
overall net increase is primarily attributable to increased demand for
maintenance and installation services, in particular, in the industrial segment,
combined with slight gains experienced by our consumer segment, despite
declining demand in a soft retail environment. Favorable foreign exchange
differences, resulting primarily from the Euro, along with current year
acquisitions, provided approximately 3.0 percent of the growth this quarter on a
consolidated basis. Industrial segment sales grew to $235.2 million from $211.7
million during last year's third quarter, an improvement of 11.1 percent.
Excluding the impact of favorable foreign exchange and current year
acquisitions, the industrial segment experienced growth of 7.9% over last year's
third quarter, which resulted from the increased demand for maintenance and
installation services. Consumer segment sales grew by 1.3 percent to $198.4
million over last year's third quarter, despite soft retail sales, as a result
of favorable foreign exchange and current year acquisitions. Comparable consumer
net sales, adjusted for the effect of foreign exchange and current year
acquisitions, declined by 1.4 percent this quarter, but this decline is viewed
as temporary.
GROSS PROFIT MARGIN
Consolidated gross profit as a percent of sales declined slightly to 43.1
percent in the third quarter from last year's 43.8 percent. By segment,
industrial margins declined to 43.0 percent from 44.8 percent, while consumer
margins improved to 43.3 percent from 42.8 percent. As previously discussed, the
higher volume sales of maintenance and installation services experienced by the
industrial segment provided significantly lower margins, while the consumer
segment's margin improvement reflects reduced conversion costs from ongoing
Class A manufacturing initiatives. Material cost for both segments are showing
improvements from last year; continuation of these improvements will come under
pressure prospectively given the current volatility of oil prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Consolidated SG&A expenses overall improved slightly to 40.0 percent of sales in
the third quarter compared to last year's 40.7 percent. During the prior year
the Company was negatively impacted by the Argentinean peso devaluation.
Additionally, significant sales growth in the relatively newer but lower margin
services areas referred to above drove this change. The Industrial segment SG&A
improved to 39.3 percent from 41.5 percent, an improvement of 2.2 percent of
sales. The growth in industrial sales volume, particularly maintenance and
installation services, was the main factor driving that segment's lower SG&A
percentage this quarter, along with cost savings initiatives made during fiscal
2002 which continued in the current fiscal year. Consumer SG&A improved
12
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
to 34.9 percent from 35.7 percent, as a result of similar cost-containment
efforts. Included in these improvements were some reduced freight and
distribution costs.
Consolidated SG&A also includes corporate/other costs, which increased by $3.4
million to $11.6 million in comparison to the $8.2 million recorded in the third
quarter last year. This change reflects the increase in product liability costs
of approximately $2.4 million this quarter, as well as a change in export sales
incentive tax legislation that went into effect this fiscal year, causing
another $1.0 million of the increase in corporate/other costs. Consolidated SG&A
is not affected by this tax law change, however, since this increase in
corporate/other expense is offset by corresponding reductions of expense in the
industrial and consumer operating segments. This approximate difference will
continue through the end of this fiscal year, as a result of the change in tax
legislation. License fees and royalty income approximating $243,000 and $405,000
for the three month periods ended February 28, 2003 and 2002, respectively, are
reflected as credits to consolidated SG&A expenses.
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
We believe that EBIT best reflects the performance of our operating segments, as
interest expense and income taxes are not consistently allocated to operating
segments by the various constituencies utilizing our financial statements.
Requests for operating performance measures received from research analysts,
financial institutions and rating agencies typically focus on EBIT, and we
believe EBIT disclosure is responsive to our investors.
Consolidated EBIT improved by $1.0 million, or 8.0 percent on a 6.4 percent
increase in sales, to $13.6 million during the third quarter of fiscal 2003.
Industrial EBIT improved 23.3 percent on growth of 11.1 percent in sales, to
$8.6 million, or 3.6 percent of sales, compared to the prior year third quarter
EBIT of $7.0 million, or 3.3 percent of sales. Consumer EBIT improved 20.1
percent on a 1.3 percent growth in sales, to $16.7 million, or 8.4 percent of
sales, compared to the prior year third quarter EBIT of $13.9 million, or 7.1
percent of sales. Generally, these EBIT improvements reflect the combination of
the benefits from higher sales levels, the previously discussed charge taken for
the devaluation in the Argentinean peso last year, improvements in material
cost, and continued cost-containment efforts throughout both operating segments.
Offsetting the EBIT improvements achieved at both operating segments were the
additional corporate/other expenses previously discussed.
NET INTEREST EXPENSE
Net interest expense was $1.6 million lower than the same quarter a year ago,
mainly as a result of a combination of lower interest rates on the portion of
debt carrying variable rates, as well as reduced debt levels during the past
year. Approximately 70 percent of the current debt structure is subject to
variable interest rates. The average effective interest rate declined to 3.7
percent for the three months ended February 28, 2003 from 4.0 percent during the
same period last year, accounting for approximately $0.4 million of the interest
savings quarter over quarter. Additionally, debt
13
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
levels averaged approximately $217.4 million lower this quarter compared to last
year's third quarter, accounting for approximately $2.2 million of the interest
savings this year. Offsetting interest expense in the prior year were
approximately $1.0 million of gains realized on the sale of marketable
securities that were not realized again this year.
INCOME TAX RATE
The effective income tax rate this third quarter of 35 percent compares to last
year's 34 percent. The effective income tax rate will tend to increase as our
earnings grow and the one-time static benefit from the June 1, 2001 adoption of
Statement of Financial Accounting Standards No. 142, related to the elimination
of non-tax deductible goodwill amortization, becomes less and less significant.
NET INCOME
This year's third quarter net income of $4.9 million increased $1.6 million, or
49.1 percent, from last year's third quarter result of $3.3 million. Earnings
per share of common stock improved $.01, or 33.3 percent, to $.04 from $.03 for
last year's third quarter.
During March 2002, RPM sold 11.5 million common shares (see Financing Activities
below) through a follow-on public equity offering. This transaction had no
dilutive effect per share on this year's third quarter earnings.
NINE MONTHS ENDED FEBRUARY 28, 2003 AND 2002
- --------------------------------------------
NET SALES
The first nine months consolidated net sales of $1,493.9 million were $65.2
million, or 4.6 percent, higher than last year's sales of $1,428.7 million for
the comparable period. This growth in sales primarily results from higher unit
volume across both segments, as pricing adjustments have remained negligible.
Favorable foreign exchange, resulting primarily from the Euro, along with
current year acquisitions, provided only 1.0 percent of the growth experienced
these past nine months on a consolidated basis. For the balance of fiscal 2003,
we continue to anticipate modest growth in industrial volume, and some challenge
to the growth rates experienced earlier this year in our consumer segment.
Industrial segment sales grew 5.5 percent to $813.8 million, from $771.6 million
during this period last year, while consumer sales grew to $680.2 million from
$657.1 million during the same period last year. Comparable industrial net
sales, adjusted for foreign exchange and current year acquisitions, were ahead
4.4 percent, while comparable consumer net sales, excluding the impact of
current year acquisitions and foreign exchange, were ahead 2.5 percent. The
growth in industrial segment sales results primarily from the increased demand
for lower margin maintenance and installation products and services, as
discussed previously for the third quarter. The increase in consumer segment
sales these first nine months reflects the growth in demand for our main
consumer/do-it-yourself product lines. Excluding the effect of
14
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
acquisitions and foreign exchange, consolidated net sales were ahead year over
year by 3.5 percent.
GROSS PROFIT MARGIN
Consolidated gross profit increased $29.0 million to $680.3 million this first
nine months compared to $651.3 million from the same period last year, while
consolidated gross margin has held fairly steady at 45.5 percent of sales from
45.6 percent a year ago. Higher sales volume along with a number of favorable
raw material costs were the primary factors contributing to the gross profit
growth. By segment, the industrial gross profit margin declined to 45.8 percent
from 46.7 percent a year ago, as the benefits from improved sales levels and a
number of lower raw material costs were more than offset by the lower-margin
sales mix previously discussed. The consumer segment gross margin improved to
45.2 percent from 44.3 percent last year, reflecting continued improvements in
efficiency and cost savings initiatives, as well as a number of favorable raw
material costs. Additionally, manufacturing efficiencies from expanded Class A
manufacturing initiatives are being realized in both operating segments, and
these efforts will continue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Consolidated SG&A expense as a percentage of sales improved to 36.1 percent from
36.5 percent during the first nine months last year, which is largely
attributable to the significant sales growth in the relatively newer but lower
margin services areas referred to above. By segment, industrial SG&A of 35.0
percent compares favorably against 36.7 percent from the prior year. This
improvement reflects the benefits of higher sales volume this year, cost savings
initiatives made during fiscal 2002, and continued cost-containment efforts
throughout the segment in the current fiscal year. Consumer segment SG&A of 32.7
percent this year also compares favorably against 33.3 percent a year ago, as a
result of higher sales volume and continued cost-containment efforts throughout
this segment.
Corporate/Other costs, another component of SG&A expense, amounted to $31.9
million this year compared with $19.7 million during the first nine months last
year. This change includes increased product liability costs of $5.4 million and
a change in export sales incentive tax legislation that went into effect this
fiscal year, causing another $3.2 million of the increase in corporate/other
costs. Consolidated SG&A is not affected by this tax law change, however, since
this increase in corporate/other expense is offset by corresponding reductions
of expense in the industrial and consumer operating segments. This approximate
difference will continue through the end of this fiscal year, as a result of the
change in tax legislation. The remainder of the increase in corporate SG&A
expense resulted from costs related to the company's reincorporation into
Delaware from Ohio ($1.1 million), rising health care and other employee
benefit costs, and increases in certain professional service costs. License fee
and joint venture income of $0.8 million and $1.3 million during the nine month
periods ended February 28, 2003 and 2002, respectively, are reflected as credits
to consolidated SG&A expenses.
15
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
We believe that EBIT best reflects the performance of our operating segments, as
interest expense and income taxes are not consistently allocated to operating
segments by the various constituencies utilizing our financial statements.
Requests for operating performance measures received from research analysts,
financial institutions and rating agencies typically focus on EBIT, and we
believe EBIT disclosure is responsive to investors.
Consolidated EBIT improved by $11.8 million on a 4.6 percent increase in sales,
or 9.1 percent, to $141.4 million during the first nine months of fiscal 2003.
Industrial EBIT improved 14.6 percent on a 5.5 percent growth in sales, to $88.2
million, or 10.8 percent of sales, compared to the prior year EBIT of $76.9
million, or 10.0 percent of sales. Consumer EBIT improved 17.6 percent on a 3.5
percent growth in sales, to $85.1 million, or 12.5 percent of sales, from $72.4
million, or 11.0 percent of sales for the same period a year ago. Generally,
these EBIT improvements reflect the combination of the benefits from higher
sales levels, certain lower raw material costs and continued cost-containment
efforts throughout both operating segments. Offsetting the EBIT improvements
achieved at both operating segments were the additional corporate/other SG&A
expenses discussed above.
NET INTEREST EXPENSE
Net interest expense was $11.8 million lower than the same period a year ago as
a result of a combination of lower interest rates on the portion of debt
carrying variable rates, and much lower debt levels year over year.
Approximately 70 percent of the current debt structure is subject to variable
interest rates. The average effective interest rate during this first nine
months was 3.9 percent compared with 4.7 percent a year ago, accounting for
approximately $4.2 million of the interest savings these first nine months.
Additionally, debt levels averaged $232.5 million lower this year than during
last year's first nine months, accounting for approximately $8.6 million of the
interest savings this year. Offsetting interest expense in the prior year were
approximately $1.0 million of gains realized on the sale of marketable
securities that were not realized again this year.
INCOME TAX RATE
The effective income tax rate provision this year of 35.0 percent compares with
34.0 percent a year ago. The effective income tax rate will tend to increase as
our earnings grow and the one-time static benefit from the June 1, 2001 adoption
of Statement of Financial Accounting Standards No. 142, related to the
elimination of non-tax deductible goodwill amortization, becomes less and less
significant.
16
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
NET INCOME
Net income of $78.7 million for the first nine months this year and earnings per
share of common stock of $0.68 increased 22.3 percent and 7.9 percent,
respectively, from the same period a year ago.
During March 2002, we sold 11.5 million common shares (see Financing Activities
below) through a follow-on public equity offering, and this transaction had a
dilutive effect of $.05 per share on this year's first nine months' earnings.
For all of fiscal 2003, this transaction is expected to have a dilutive effect
on earnings of approximately $.07 per share, based on fiscal 2002 average
interest rates.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS FROM:
OPERATING ACTIVITIES
There was $117.3 million of cash generated from operations during the first nine
months of fiscal 2003 compared with $131.4 million during the same period a year
ago. This difference mainly resides in the $38.3 million change in working
capital year over year, offset by the $14.4 million improvement in net income
during the same period and a $9.3 million positive change in, "items not
affecting cash and other." The majority of the change associated with this
latter item is mostly a result of the positive changes in other comprehensive
income caused by the dollar weakening against most other major currencies.
Additionally, at May 31, 2001 as we completed our restructuring program, there
was a build-up in accounts receivable and inventory, which was worked down
during the first nine months a year ago, generating an abnormally high amount of
cash flow from operations. This fiscal year, we are back to a more normal
relationship pattern of working capital relative to sales growth. Lastly, there
was a higher payout of accrued incentives during the past nine months, as the
fiscal year 2002 performance significantly surpassed that of the year ended May
31, 2001, and accounts payable have been negatively affected year over year as a
result of the timing of quarter-end payments to vendors, and a reduction in
purchases as inventories have been accumulated to satisfactory levels.
As disclosed in the Company's "Critical Accounting Policies and Estimates" and
its discussion on "Asbestos Litigation" in the "Legal Proceedings, Part II -
Other Information" Section, as a result of anticipated increasing cases and
settlement costs, the Company expects that its remaining third party insurer's
available coverage will be depleted in the coming months and, as a result, the
Company will then be required to fund costs presently covered by insurance with
its then-existing cash from operations.
Cash provided from operations remains our primary source of financing internal
growth, with limited use of short-term credit.
INVESTING ACTIVITIES
Capital expenditures, other than for ordinary repairs and replacements, are made
to accommodate our continued growth through improved production and distribution
efficiencies and capacity and to enhance administration. Capital expenditures
during the first nine months of fiscal 2003 of $22.0 million compare with
depreciation of $33.1 million, well within the maintenance level
17
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
of spending. We are not capital intensive and capital expenditures generally do
not exceed depreciation in a given year. Capital spending is expected to hold at
approximately the maintenance level of between $40 and $50 million annually for
the next several years, as many larger spending needs have been accomplished in
recent years, accommodating the restructuring program and upgrading several
major information technology platforms. We believe there is adequate production
capacity to meet our needs for the next several years at normal growth rates.
During the first nine months of fiscal 2003, the Company had investments
totaling $19.5 million for several minor product line and minority interest
acquisitions.
FINANCING ACTIVITIES
During the first quarter of fiscal 2002, our $200 million revolving credit
facility was refinanced with a one-year term loan due July 12, 2002. During
March 2002, we sold 11.5 million common shares through a follow-on public
offering at $14.25 per share, closing on April 2, 2002. The entire proceeds of
the offering, $156 million, were used to permanently pay down the outstanding
balance under this $200 million term loan facility, which was then retired.
On November 27, 2001, we issued and sold $30 million aggregate principal amount
of 7.3 percent senior unsecured notes due 2008, $10 million aggregate principal
amount of 6.61 percent senior unsecured notes due 2006, and $15 million
aggregate principal amount of 6.12 percent senior unsecured notes due 2004 to
various insurance companies. The proceeds from these notes were used to reduce
the outstanding balance under the $500 million revolving credit agreement.
On June 6, 2002, we entered into a securitization transaction with several banks
for certain of our subsidiaries, providing for a wholly-owned special purpose
entity (SPE) to receive investments of up to $125 million. This securitization
is being accomplished by having certain subsidiaries sell various of their
accounts receivable to the SPE, and by having the SPE then transfer those
receivables to a conduit administered by the banks. This securitization
transaction did not constitute a form of off-balance sheet financing, and is
fully reflected in our financial statements. This transaction increases our
liquidity and reduces our financing costs by replacing up to $125 million of
existing borrowings at lower interest rates. As of February 28, 2003, $61
million was securitized under this agreement, which was used to reduce the
outstanding balance of the $500 million revolver to $310 million, leaving $190
million of liquidity then available under that facility.
On February 13, 2003, the Company announced the authorization of a share
repurchase program allowing the repurchase of up to 10 million shares of the
Company's common stock over a period of 12 months. As of February 28, 2003, the
Company had not repurchased any shares.
Our debt-to-capital ratio improved to 43 percent at February 28, 2003 compared
with 45 percent at year-end May 31, 2002.
18
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
The following summarizes our financial obligations and their expected maturities
at February 28, 2003 and the effect such obligations are expected to have on our
liquidity and cash flow in the periods indicated.
Less than After
Total 1 year 1-3 years 3 years
----- --------- --------- -------
($ in millions)
Current portion of long-term debt $ 4.8 $ 4.8 $ - $ -
Long-term debt 694.8 - 554.6 140.2
Non-cancelable operating lease obligations(1) 62.2 16.4 19.3 26.5
------- ----- ------- ------
$ 761.8 $21.2 $ 573.9 $166.7
======= ===== ======= ======
(1) We calculate non-cancelable operating lease obligations on an annual basis
and consequently such information is not available at February 28, 2003. The
amounts shown above are for the fiscal year end May 31, 2002.
The strength of the U.S. dollar has fluctuated against various foreign
currencies, as mentioned above, with the net effect causing foreign net assets
to slightly increase stockholders' equity compared to this past year end, May
31, 2002. This trend could continue if the dollar continues to weaken against,
principally, the Canadian dollar or the Euro.
We maintain excellent relations with our banks and other financial institutions
to provide continual access to financing for future growth opportunities.
STOCKHOLDERS' EQUITY
- --------------------
Effective October 15, 2002, the Company changed its legal place of incorporation
from Ohio to Delaware, following approval by its shareholders of a plan of
reincorporation at its annual meeting on October 11, 2002. Under the plan, RPM
International Inc. became the parent holding company of Ohio-based RPM, Inc. and
several other intermediate holding companies and wholly-owned subsidiaries. In
addition to the creation of a newly formed Delaware legal entity, the legal
structure of various operating companies were realigned in consistency with
their respective business objectives. In connection with the reincorporation,
shareholders approved and adopted the Company's amended and restated certificate
of incorporation, which authorizes the issuance of up to 300,000,000 shares of
Common Stock and 50,000,000 shares of Preferred Stock, both at a par value of
$0.01 per share. In conjunction with reincorporation, all of the outstanding
treasury shares of RPM, Inc. were cancelled and retired without any
consideration. In addition, each common share of RPM, Inc. issued and
outstanding on October 15, 2002 was converted into one share of the Company,
with a $0.01 par value per share. This transaction did not have any effect on
the book value per share, post-reincorporation.
19
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
OFF-BALANCE SHEET FINANCINGS
- ----------------------------
We do not have any off-balance sheet financings. We have no subsidiaries that
are not included in our financial statements, nor do we have any interests in or
relationships with any special purpose entities that are not reflected in our
financial statements.
OTHER MATTERS
- -------------
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. Our critical accounting policies and estimates set forth above
describe our method of establishing and adjusting environmental-related accruals
and should be read in conjunction with this disclosure. (Additionally refer to
Note H to the Consolidated Financial Statements contained in our Annual Report
on Form 10-K for the year ended May 31, 2002).
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) general economic conditions; (b) the price and supply of raw
materials, particularly titanium dioxide, certain resins, aerosols and solvents;
(c) continued growth in demand for the Company's products; (d) legal,
environmental and litigation risks inherent in the Company's construction and
chemicals businesses and risks related to the adequacy of insurance and reserves
for such matters; (e) the effect of changes in interest rates; (f) the effect of
fluctuations in currency exchange rates upon the Company's foreign operations;
(g) the effect of non-currency risks of investing in and conducting operations
in foreign countries, including those relating to domestic and international
political, social, economic and regulatory factors; (h) risks and uncertainties
associated with the Company's ongoing acquisition and divestiture activities;
and other risks detailed in the Company's other reports and statements filed
with the Securities and Exchange Commission, including the risk factors set
forth in the Company's prospectus and prospectus supplement included as part of
the Company's Registration Statement on Form S-3 (File No. 333-77028), as the
same may be amended from time to time.
20
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2003
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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
(a) Evaluation of disclosure controls and procedures.
-------------------------------------------------
The Company's Chief Executive Officer and Chief Financial Officer,
after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-14) as of a date
within 90 days prior to the filing date of this quarterly report (the
"Evaluation Date"), have concluded that as of the Evaluation Date, the
Company's disclosure controls and procedures were effective in ensuring
that information required to be disclosed by the Company in the reports
it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the
Commission's rules and forms.
(b) Changes in internal controls.
-----------------------------
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls
subsequent to the Evaluation Date.
21
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
EIFS LITIGATION
- ---------------
As previously reported, Dryvit is a defendant or co-defendant in numerous
exterior insulated finish systems ("EIFS") related lawsuits. As of February 28,
2003, Dryvit was a defendant or co-defendant in approximately 650 single
family residential EIFS cases, the vast majority of which are pending in North
Carolina, South Carolina and Alabama. Dryvit is also defending EIFS lawsuits
involving commercial structures and condominiums. The vast majority of Dryvit's
EIFS lawsuits seek monetary relief for water intrusion related property damages,
although some claims in certain lawsuits allege personal injuries from exposure
to mold.
As previously reported, Dryvit settled the North Carolina class action styled
Ruff, et al. v. Parex, Inc., et al. ("Ruff"). As of March 26, 2003, a cumulative
total of 724 claims had been submitted to the Ruff claims administrator for
verification and validation since the January 17, 2000 notice to the Ruff class.
Of these 724 claims, 151 claims were rejected and 327 claims were paid in the
aggregate amount of approximately $5.4 million pursuant to funding arrangements
with Dryvit's insurers. The claim period for filing claims in the Ruff class
action expired on January 17, 2003. The remaining submitted claims are at
various stages of investigation, review and validation by the Ruff claims
administrator. Based on the funding commitments in place to cover the Ruff
claims, Dryvit does not expect the costs of resolving the residual claims to be
material.
As previously reported, Dryvit is a defendant in an attempted state class action
filed on November 14, 2000 in Jefferson County, Tennessee styled Bobby R. Posey,
et al. v. Dryvit Systems, Inc. (formerly styled William J. Humphrey, et al. v.
Dryvit Systems, Inc.) (Case No. 17,715-IV) ("Posey"). As previously reported, a
preliminary approval order was entered on April 8, 2002 in the Posey case for a
proposed nationwide class action settlement covering, "All Persons who, as of
June 5, 2002, in any State other than North Carolina, in whole or in part, with
Dryvit EIFS installed after January 1, 1989, except persons who (1) prior to
June 5, 2002, have settled with Dryvit, providing a release of claims relating
to Dryvit EIFS; or (2) have not obtained a judgment against Settling Defendant
for a Dryvit EIFS claim, or had a judgment entered against them on such a claim
in Settling Defendants' favor; and (3) any employees of Dryvit." Nationwide
notice to all eligible class members began on or about June 13, 2002. Any person
who wished to be excluded from the Posey settlement were provided an opportunity
to individually "opt out" and thus not be bound by the final Posey order.
A fairness hearing was held on October 1, 2002 (which continued on December 16,
2002), for the court to determine whether the proposed settlement is fair,
reasonable and adequate. An order and judgment granting final approval of the
settlement was entered on January 14, 2003. Subsequent to the Final Order, two
class members filed motions to amend or alter the Final Order. These motions
were denied by the Posey trial court on March 7, 2003. By virtue of the filing
of these motions, the time period for filing any notices of appeal was extended
until April 8, 2003. Several notices of appeal have been filed by class members
and/or persons seeking to intervene including a group of builders and general
contractors whom the trial court found had
22
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
no standing to complain about the settlement. Dryvit intends to vigorously
challenge any appeals and expects that the Final Order will be upheld.
Certain of Dryvit's insurers have paid or are currently paying a portion of
Dryvit's defense costs in the class actions, and individual commercial and
residential EIFS lawsuits. Dryvit, the Company's wholly-owned captive insurer,
First Colonial Insurance Company, and certain of Dryvit's umbrella insurers have
been parties to cost-sharing agreements the terms of which have been subject to
periodic renegotiation. Under the current cost-sharing agreements and funding
obtained from one of Dryvit's historical carriers, Dryvit's insurers have
covered a substantial portion of Dryvit's indemnity and defense costs and Dryvit
expects that its future EIFS litigation costs will continue to be substantially
covered by insurance. Dryvit has secured sufficient funding commitments to cover
a substantial portion of the anticipated costs of the Posey settlement. Based on
consultation with its legal counsel, management believes that to the extent some
of the Posey settlement costs are not covered by insurance commitments, such
amounts will not have a material adverse effect on the Company's consolidated
financial condition, results of operations or cash flows.
ASBESTOS LITIGATION
As previously reported, certain of the Company's wholly-owned
subsidiaries, principally Bondex International, Inc. (collectively referred to
as "the Subsidiaries"), are defendants in various asbestos-related bodily injury
lawsuits. These cases generally seek unspecified damages for asbestos-related
diseases based on alleged exposures to asbestos-containing products previously
manufactured by the Subsidiaries.
The Company continues to vigorously defend these asbestos-related lawsuits. In
many cases, the plaintiffs are unable to demonstrate that any injuries they have
incurred, in fact, resulted from exposure to one of the Subsidiaries' products.
In such cases, the Subsidiary is generally dismissed without payment. With
respect to those cases where compensable disease, exposure and causation are
established with respect to one of the Subsidiaries' products, the Subsidiary
generally settles for amounts that reflect the confirmed disease, the
seriousness of the case, the particular jurisdiction and the number and solvency
of other parties in the case.
As of February 28, 2003, the Company had a total of 1,767 active asbestos
cases compared to 1,490 cases at November 30, 2002, the end of the last fiscal
quarter. The Company had a total of 1,865 cases as of February 28, 2002.
For the quarter ended February 28, 2003, the Company secured dismissals and/or
settlements of 364 plaintiffs (125 cases), the total cost of which collectively
to the Company, net of insurer payments and defense costs, amounted to $630,031.
The Company secured dismissals and/or settlements of 1,090 plaintiffs (1,086
cases) for $1,342,250 for the last fiscal quarter ended November 30,2002. The
Company secured dismissals and/or settlements of 71 plaintiffs (68 cases) for
$396,000 for the quarter ended February 28, 2002.
23
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
During the past fiscal year, the Company has incurred higher settlement and
defense costs resulting from higher settlement demands in certain jurisdictions
due primarily to the insolvency of other co-defendants in the asbestos
litigation which has, in many cases, disproportionately increased the Company's
exposure. Based on trial settings in many of these same jurisdictions, and
recent settlement demands in many of its current cases, the Company expects that
it will experience higher settlement and defense costs in the coming months,
some of which may also be caused by the anticipation of potential federal and/or
state legislative changes.
The Company's third party insurers have historically been responsible, under
various cost sharing arrangements, for the payment of approximately 90% of the
indemnity and defense costs associated with the Company's asbestos litigation.
At the present time, there is only one third party insurer currently covering
the Company's asbestos litigation costs under the foregoing cost sharing
arrangement. As a result of an anticipated increase in cases and settlement
costs, the Company expects that its remaining third party insurer's available
coverage will be depleted in the coming months. The Company has reserved its
rights with respect to various of its third party insurers' claims of exhaustion
and is in the process of reviewing its known (and is searching for any
additional) insurance policies to determine whether or not other insurance
limits may be available to cover its asbestos liabilities. The Company is unable
at the present time to predict whether or to what extent any additional
insurance may cover its asbestos liabilities.
For asbestos related costs through the end of the current fiscal year associated
with the portion of its known claims which is not covered by insurance, the
Company has established a financial reserve in an amount which it deems to be
adequate. The Company's current insurance and financial reserves may not,
however, be adequate to cover the costs associated with its asbestos claims in
future periods which has resulted in the Company's decision to undertake a
process of estimating the costs of its future asbestos liabilities.
In view of the anticipated depletion of its remaining insurance, and subject to
the Company's continuing efforts to secure additional insurance, the Company
expects to be funding all of its asbestos related costs after this fiscal year.
Evaluating the future cost of the Company's asbestos related contingent
liabilities is subject to many uncertainties, including (i) the ultimate number
of claims filed against the Subsidiaries, (ii) the cost of resolving both its
current known and future unknown claims, (iii) the amount of insurance available
to cover such claims as discussed above, (iv) future earnings and cash flow of
the Company, (v) the impact of bankruptcies of other companies whose share of
liability may be imposed on the Company under certain state liability laws, (vi)
the unpredictable aspects of the litigation process including the scheduling of
trial dates and the jurisdictions in which trials are scheduled, (vii) the lack
of specific information in many cases concerning exposure to the Subsidiaries'
products and the claimants' diseases, and (viii) potential federal and/or state
legislative changes. Accordingly, the Company has decided to engage in a formal
process to develop an estimate of its potential future asbestos related
contingent liabilities. While the timing and outcome of this process is
uncertain, the Company expects to complete this process with the reporting of
its 2003 year-end results. At the conclusion of this process, the Company
expects to accrue a material liability sufficient to cover the estimate of its
potential future asbestos related claims.
24
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ENVIRONMENTAL PROCEEDINGS
- -------------------------
As previously reported, various of the Company's subsidiaries are, from time to
time, identified as a "potentially responsible party" under the Comprehensive
Environmental Response, Compensation and Liability Act and similar state
environmental statutes. In some cases, the Company's subsidiaries are
participating in the cost of certain clean-up efforts or other remedial actions.
The Company's share of such costs, however, has not been material and management
believes that these environmental proceedings will not have a material adverse
effect on the Company's consolidated financial condition or results of
operations. See "Business-Environmental Matters," in the Company's Annual Report
on Form 10-K for the year ended May 31, 2002.
ITEM 5 -- OTHER INFORMATION
- ---------------------------
The information under this Item is being provided as required by Item 11 of Form
8-K. Participants in the RPM International Inc. 401(k) Trust and Plan and the
RPM International Inc. Union 401(k) Retirement Savings Trust and Plan were
subject to a "blackout period," as defined in Regulation BTR (Blackout Trading
Restriction) as a result of the transition of the plan administrator under each
of the plans from Key Bank to Wachovia Corporation. The blackout period
commenced on February 21, 2003 and ended on March 11, 2003.
During the blackout period, the ability of all participants in the affected
plans to purchase, sell, or otherwise acquire or transfer an interest in plan
assets, to make changes in investment options and to initiate distributions or
loans was suspended. The ability of the Company's Directors and officers to
purchase, sell, or otherwise transfer (with the exception of transfers involving
bona fide gifts) any equity securities of the Company (or derivative securities
of those equity securities) was also suspended. All of the Company's equity
securities, namely, the Company's Common Stock, were subject to the blackout
period. The person designated by the Company to respond to inquiries about the
blackout period was P. Kelly Tompkins, 2628 Pearl Road, P.O. Box 777, Medina,
Ohio 44258, (330) 273-8883.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) EXHIBITS
--------
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
*10.1 Employment Agreement between the Company and Dennis F. Finn - Vice President -
Environmental & Regulatory Affairs. (x)
*10.2 RPM International Inc. 2002 Performance Accelerated Restricted Stock Plan (f/k/a the RPM,
Inc. 2002 Performance Accelerated Restricted Stock Plan). (x)
*10.3 Amendment No. 1 to the RPM International Inc. 2002 Performance Accelerated Restricted
Stock Plan. (x)
*10.4 Amendment No. 1 to the RPM International Inc. Benefit Restoration Plan (f/k/a the RPM,
Inc. Benefit Restoration Plan). (x)
*10.5 Fourth Amendment to the 1997 RPM International Inc. Restricted Stock Plan. (x)
11.1 Computation of Net Income per share of Common Stock. (x)
- -------------
(x) Filed herewith.
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
-------------------
There were no Current Reports on Form 8-K filed during the three
months ended February 28, 2003.
25
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 INTERNATIONAL INC.
BY /s/ Frank C. Sullivan
------------------------------------
FRANK C. SULLIVAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BY /s/ Robert L. Matejka
------------------------------------
ROBERT L. MATEJKA
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND CONTROLLER
DATED: APRIL 14, 2003
26
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Frank C. Sullivan, President and Chief Executive Officer of RPM International
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of RPM International Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Frank C. Sullivan
Frank C. Sullivan
President and Chief Executive Officer
April 14, 2003
27
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Robert L. Matejka, Vice President, Chief Financial Officer and Controller of
RPM International Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of RPM International Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Robert L. Matejka
Robert L. Matejka
Vice President, Chief Financial Officer and Controller
April 14, 2003