RPM International Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 |
for the quarterly period ended February 28, 2007,
or
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o |
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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)
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DELAWARE
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02-0642224 |
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.) |
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P.O. BOX 777; 2628 PEARL ROAD; MEDINA, OHIO
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44258 |
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(Address of principal executive offices)
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(Zip Code) |
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Registrants telephone number including area code
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(330) 273-5090 |
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Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 such filing requirements for the past 90 days.
Yes þ No o.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ.
As of April 4, 2007
120,891,741 Shares of RPM International Inc. Common Stock were outstanding.
RPM INTERNATIONAL INC. AND SUBSIDIARIES*
INDEX
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* |
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As used herein, the terms RPM and the Company refer to RPM International Inc. and its
subsidiaries, unless the context indicates otherwise. |
3
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RPM INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
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February 28, 2007 |
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May 31, 2006 |
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(Unaudited) |
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ASSETS |
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Current Assets |
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Cash and short-term investments |
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$ |
137,697 |
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$ |
108,616 |
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Trade accounts receivable (less allowances of
$19,810 and $20,252, respectively) |
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481,916 |
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650,945 |
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Inventories |
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453,285 |
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399,014 |
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Deferred income taxes |
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56,286 |
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48,885 |
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Prepaid expenses and other current assets |
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190,568 |
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161,758 |
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Total current assets |
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1,319,752 |
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1,369,218 |
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Property, Plant and Equipment, at Cost |
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909,844 |
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887,276 |
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Allowance for depreciation and amortization |
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(471,341 |
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(442,584 |
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Property, plant and equipment, net |
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438,503 |
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444,692 |
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Other Assets |
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Goodwill |
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792,854 |
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750,635 |
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Other intangible assets, net of amortization |
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336,884 |
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321,942 |
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Other |
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91,593 |
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93,731 |
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Total other assets |
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1,221,331 |
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1,166,308 |
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Total Assets |
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$ |
2,979,586 |
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$ |
2,980,218 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Accounts payable |
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$ |
250,775 |
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$ |
333,684 |
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Current portion of long-term debt |
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3,514 |
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6,141 |
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Accrued compensation and benefits |
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112,127 |
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136,384 |
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Accrued loss reserves |
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68,434 |
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66,678 |
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Asbestos-related liabilities |
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57,925 |
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58,925 |
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Other accrued liabilities |
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104,363 |
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111,688 |
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Total current liabilities |
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597,138 |
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713,500 |
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Long-Term Liabilities |
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Long-term debt, less current maturities |
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933,027 |
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870,415 |
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Asbestos-related liabilities |
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314,935 |
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362,360 |
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Other long-term liabilities |
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102,215 |
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108,002 |
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Deferred income taxes |
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2,878 |
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Total long-term liabilities |
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1,353,055 |
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1,340,777 |
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Stockholders Equity |
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Preferred stock, par value $0.01; authorized 50,000 shares;
none issued |
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Common stock, par value $0.01 authorized 300,000 shares;
issued and outstanding 120,772 as of February 2007;
issued and outstanding 118,743 as of May 2006 |
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1,208 |
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1,187 |
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Paid-in capital |
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574,932 |
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545,422 |
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Treasury stock, at cost |
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Accumulated other comprehensive income |
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40,375 |
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29,839 |
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Retained earnings |
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412,878 |
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349,493 |
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Total stockholders equity |
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1,029,393 |
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925,941 |
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Total Liabilities and Stockholders Equity |
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$ |
2,979,586 |
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$ |
2,980,218 |
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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)
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Nine Months Ended |
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Three Months Ended |
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February 28, |
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February 28, |
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2007 |
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2006 |
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2007 |
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2006 |
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Net Sales |
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$ |
2,333,041 |
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$ |
2,099,177 |
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$ |
679,494 |
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$ |
612,475 |
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Cost of Sales |
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1,398,412 |
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1,242,494 |
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416,009 |
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369,096 |
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Gross Profit |
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934,629 |
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856,683 |
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263,485 |
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243,379 |
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Selling, General and Administrative Expenses |
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728,264 |
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683,290 |
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240,964 |
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223,696 |
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Asbestos (Income)/Charge |
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(15,000 |
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45,000 |
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15,000 |
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Interest Expense, Net |
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35,664 |
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28,391 |
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11,146 |
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9,962 |
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Income
(Loss) Before Income Taxes |
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185,701 |
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100,002 |
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11,375 |
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(5,279 |
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Provision
(Benefit) for Income Taxes |
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61,367 |
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34,201 |
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1,323 |
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(2,592 |
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Net
Income (Loss) |
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$ |
124,334 |
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$ |
65,801 |
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$ |
10,052 |
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$ |
(2,687 |
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Average Number of Shares of Common Stock Outstanding: |
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Basic |
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117,817 |
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116,710 |
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118,430 |
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116,881 |
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Diluted |
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128,371 |
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127,533 |
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129,001 |
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116,881 |
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Basic
earnings (loss) per share of common stock |
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$ |
1.06 |
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$ |
0.56 |
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$ |
0.08 |
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$ |
(0.02 |
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Diluted
earnings (loss) per share of common stock |
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$ |
0.99 |
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$ |
0.54 |
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$ |
0.08 |
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$ |
(0.02 |
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Cash dividends per share of common stock |
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$ |
0.510 |
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$ |
0.470 |
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$ |
0.175 |
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$ |
0.160 |
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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)
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Nine Months Ended |
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February 28, |
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2007 |
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2006 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
124,334 |
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$ |
65,801 |
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Depreciation and amortization |
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59,046 |
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53,216 |
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Items not affecting cash and other |
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(4,975 |
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(1,123 |
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Changes in operating working capital |
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(13,575 |
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(5,633 |
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Changes in asbestos-related liabilities, net of tax |
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(30,991 |
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(872 |
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133,839 |
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111,389 |
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Cash Flows From Investing Activities: |
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Capital expenditures |
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(34,111 |
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(31,194 |
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Acquisition of businesses, net of cash acquired |
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(75,018 |
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(162,241 |
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Purchases of marketable securities |
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(69,539 |
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(46,637 |
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Proceeds from the sale of marketable securities |
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52,026 |
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36,500 |
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Proceeds from the sale of assets |
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10,575 |
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Other |
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1,158 |
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1,349 |
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(125,484 |
) |
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(191,648 |
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Cash Flows From Financing Activities: |
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Additions to long-term and short-term debt |
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308,375 |
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188,914 |
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Reductions of long-term and short-term debt |
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(252,833 |
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(151,841 |
) |
Cash dividends |
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(60,949 |
) |
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(55,447 |
) |
Exercise of stock options |
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23,933 |
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7,101 |
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18,526 |
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(11,273 |
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Effect of Exchange Rate Changes on Cash and Short-Term Investments |
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2,200 |
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469 |
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Increase (Decrease) in Cash and Short-Term Investments |
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29,081 |
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(91,063 |
) |
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Cash and Short-Term Investments at Beginning of Period |
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108,616 |
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184,140 |
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Cash and Short-Term Investments at End of Period |
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$ |
137,697 |
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$ |
93,077 |
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|
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, 2007
(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 (GAAP) in the U.S. 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, 2007 and 2006. For further information, refer to the Consolidated Financial
Statements and Notes included in our Annual Report on Form 10-K for the year ended May 31, 2006.
Our business is dependent on external weather factors. Historically, we have experienced strong
sales and net income in our first, second and fourth fiscal quarters comprised of the three month
periods ending August 31, November 30 and May 31, respectively, with weaker performance in our
third fiscal quarter (December through February).
Certain reclassifications have been made to prior year amounts to conform to the current year
presentation.
NOTE B NEW ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48). FIN 48, which clarifies the accounting for uncertainty, if any, in income taxes as recognized
in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes,
represents a significant change in the accounting and reporting of income taxes.
FIN 48 prescribes the accounting for uncertainty in income taxes by providing guidance on the
recognition threshold and measurement of a position taken in a tax return or a position expected to
be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.
The effective date of FIN 48 is for fiscal years beginning after December 15, 2006. Accordingly,
FIN 48 becomes effective for the first quarter of our fiscal year ending May 31, 2008. We are currently evaluating the
impact of the adoption of FIN 48 on our financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. Statement 157
clarifies the definition of fair value, establishes a framework for measuring fair value, and
expands the disclosures on fair value measurements. This statement is effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact, if any, the adoption of
this statement will have on our financial statements.
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R). Statement 158 requires an employer to recognize a net liability or asset and an
offsetting adjustment to accumulated other comprehensive income to report the funded status of
defined benefit
7
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
pension and other postretirement benefit plans. Statement 158 requires prospective
application, and the recognition and disclosure requirements are effective for our fiscal year
ending May 31, 2007. Additionally, Statement 158 requires employers to measure plan assets and
obligations at their year-end balance sheet date. In accordance with this requirement, which is
effective for our fiscal year ending May 31, 2009, we will change our current February 28
measurement date to May 31. We are currently evaluating the impact the adoption of Statement 158
will have on our financial statements.
NOTE C STOCK-BASED COMPENSATION
Effective June 1, 2004, we voluntarily adopted the preferable fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, for our stock-based employee compensation plans by applying the modified prospective
method as outlined by SFAS No. 148, Accounting for Stock-Based Compensation Transition and
Disclosure. On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004) (SFAS
No. 123(R)), Share Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) also
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. The approach outlined in SFAS No. 123(R) is generally
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognized in
the income statement based on their fair values.
Effective June 1, 2006, we adopted the provisions of SFAS No. 123(R), utilizing the
modified-prospective method of accounting. Due to our previous adoption of the fair value
recognition provisions under SFAS No. 123, and due to the fact that all unvested awards at the time
of adoption were being recognized under a fair value approach, our adoption of SFAS No. 123(R) did
not impact our operating income or cash flows for the three and nine month periods ended February
28, 2007.
As of February 28, 2007, we had six share-based compensation plans for employees and/or directors
of the company, as further described below. Total compensation expense recognized in the
consolidated statements of income for share-based compensation arrangements was $5.7 million and
$4.9 million for each of the nine month periods ended
February 28, 2007 and 2006, respectively, and $2.2 million
and $1.9 million for each of the three month
periods ended February 28, 2007 and 2006, respectively.
The total income tax benefit recognized for share-based compensation arrangements was approximately
$1.7 million and $1.3 million for the nine month periods ended February 28, 2007 and 2006,
respectively, and $0.7 million and $0.5 million for the three month
periods ended February 28, 2007 and 2006, respectively. There was no compensation cost capitalized as inventory or fixed assets during
either of the nine month periods ended February 28, 2007 or 2006.
Effective October 10, 2003, the RPM International Inc. 2003 Restricted Stock Plan for Directors
(the 2003 Plan) was approved by our stockholders. The plan was established primarily for the
purpose of recruiting and retaining directors, and to align the interests of directors with the
interests of our stockholders. Only directors who are not employees of RPM International Inc. are
eligible to participate. Under the 2003 Plan,
up to 500,000 shares of our common stock may be awarded, with awards vesting over a 3-year period.
Nonvested restricted shares of common stock under the 2003 Plan are eligible for dividend payments.
8
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
On October 8, 2004, our stockholders approved the RPM International Inc. Omnibus Equity and
Incentive Plan (the Omnibus Plan). The Omnibus Plan is intended to be the primary stock-based
award program for covered employees. A wide variety of stock and stock-based awards, as well as
dollar-denominated performance-based awards, may be granted under the Omnibus Plan. A total of
6,000,000 shares of our common stock may be subject to awards under the Omnibus Plan. Of the
6,000,000 shares of common stock issuable under the Omnibus Plan, up to 3,000,000 shares may be
subject to full-value awards such as restricted stock, restricted stock unit, performance stock
and performance stock unit awards. In October 2006, we granted 378,600 shares of
performance-earned restricted stock under the Omnibus Plan at a weighted-average grant price of
$18.80. The restricted stock cliff vests after three years. Nonvested restricted shares of common
stock under the Omnibus Plan are eligible for dividend payments.
In addition to the restricted shares outstanding under the Omnibus Plan, we have restricted shares
outstanding under two equity compensation plans for employees the Performance Accelerated
Restricted Stock Plan (the PARS Plan) and the 1997 Restricted Stock Plan (1997 Plan). Under
the terms of the PARS plan, up to 1,000,000 shares may be awarded to certain employees, generally
subject to forfeiture until the completion of ten years of service or the attainment of certain
performance goals. No shares were issued under the PARS Plan in fiscal 2006 or during the nine
months ended February 28, 2007. Under the 1997 Plan, up to 1,562,500 shares may be awarded to
certain employees, generally subject to forfeiture. The shares vest upon the latter of attainment
of age 55 and the fifth anniversary of the May 31st immediately preceeding the date of
the grant. During the nine months ended February 28, 2007, 38,149 shares were awarded under the
1997 Plan at a weighted average price of $18.52. Nonvested restricted shares of common stock under
each of these plans are eligible for dividend payments.
The following table summarizes nonvested restricted share activity under the Plans as of and for
the nine month period ended February 28, 2007:
Nonvested Restricted Shares
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
Weighted Average |
|
|
Grant-Date |
|
Number of |
|
Remaining |
|
|
Fair Value |
|
Shares |
|
Contractual Term |
|
Nonvested, June 1, 2006 |
|
$ |
14.92 |
|
|
|
1,367 |
|
|
|
|
|
Granted |
|
$ |
18.78 |
|
|
|
444 |
|
|
|
|
|
Vested |
|
$ |
14.48 |
|
|
|
(19 |
) |
|
|
|
|
Forfeited/expired |
|
$ |
13.26 |
|
|
|
(72 |
) |
|
|
|
|
|
Nonvested, February 28, 2007 |
|
$ |
15.99 |
|
|
|
1,720 |
|
|
|
3.69 |
|
|
The fair value of the nonvested restricted share awards have been calculated using the market
value of the shares on the date of issuance. We anticipate that approximately 1.6 million shares
at a weighted-average exercise price of $15.85 and a weighted-average remaining contractual term of
3.79 years will
9
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
ultimately vest, based upon the unique terms and participants of each plan.
Approximately 10,000 shares of restricted stock were vested at June 1, 2006, with 5,971 restricted
shares vested as of February 28, 2007. As of February 28, 2007, total unrecognized compensation
cost related to nonvested restricted shares of common stock awards granted was $16.8 million. That
cost is expected to be recognized over a weighted-average period of 3.79 years.
We have options outstanding under the 1996 Key Employees Stock Option Plan, which provides for the
granting of options for up to 9,000,000 shares. Stock options are granted to employees and
directors at an exercise price equal to the fair market value of RPM International Inc. stock at
the date of grant. These options are generally exercisable cumulatively in equal annual
installments commencing one year from the grant date, and have expiration dates ranging from
October 2007 to October 2014. Compensation cost for these
awards is recognized on a straight-line basis over the related
vesting period. The total fair value of shares vested during the nine months ended
February 28, 2007 was $35.6 million. Shares of common stock under option are not eligible for
dividend payments until the shares are exercised.
We also grant stock appreciation rights (SARs) to employees under the Omnibus Plan. The SARs are
issued at fair value at the date of grant, have up to ten-year terms and vest over four years.
Currently all SARs outstanding are to be settled with stock. SARs granted during the nine month
periods ended February 28, 2007 and 2006 were 380,000 shares at a weighted-average grant price of
$18.80 and 560,000 shares at a weighted-average grant price of $17.65, respectively. As of
February 28, 2007, there were 921,500 SARs outstanding. The fair
value of all nonvested share-based payment awards have been
calculated using the market value of the shares on the date of
issuance. The fair value of stock options and SARs
granted is estimated as of the date of the grant using a Black-Scholes option-pricing model with
the following weighted average assumptions for each of the following years ended May 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
Risk-free interest rate |
|
|
4.6 |
% |
|
|
4.2 |
% |
Expected life of option |
|
6.7 yrs |
|
|
6.0 yrs |
|
Expected dividend yield |
|
|
3.7 |
% |
|
|
3.6 |
% |
Expected volatility rate |
|
|
27.4 |
% |
|
|
27.7 |
% |
The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. The risk-free rate
for periods within the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected life of options granted is derived from the input of the
option-pricing model and represents the period of time that options granted are expected to be
outstanding. Expected volatilities are based on historical volatility of our shares of common
stock.
The following table summarizes stock based award activity under the Plans as of and for the nine
month period ended February 28, 2007:
10
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
Shares Under Option
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
Number of |
|
Weighted Average |
|
|
Exercise |
|
Shares Under |
|
Remaining |
|
|
Price |
|
Option |
|
Contractual Term |
|
Outstanding, June 1, 2006 |
|
$ |
14.34 |
|
|
|
6,414 |
|
|
|
|
|
Granted |
|
$ |
18.80 |
|
|
|
380 |
|
|
|
|
|
Canceled/expired |
|
$ |
14.75 |
|
|
|
(42 |
) |
|
|
|
|
Exercised |
|
$ |
14.44 |
|
|
|
(1,661 |
) |
|
|
|
|
|
Outstanding, February 28, 2007 |
|
$ |
14.64 |
|
|
|
5,091 |
|
|
|
5.65 |
|
|
Exercisable, February 28, 2007 |
|
$ |
13.71 |
|
|
|
3,757 |
|
|
|
4.71 |
|
|
The total intrinsic value of options exercised during the nine months ended February 28, 2007
and 2006 was $11.4 million and $3.0 million, respectively. As of February 28, 2007, the aggregate
intrinsic value of both outstanding and exercisable options was $36.4 million and the aggregate
fair value was $14.8 million.
The aggregate intrinsic value of options both vested and outstanding, 3.76 million shares, and
those ultimately expected to vest, 1.25 million shares, for all
stock option plans was $44.0 million. The
weighted-average exercise price for all outstanding shares under
option is $14.64, with a weighted-average remaining contractual term of 5.65
years.
Cash received from option exercises under all share-based payment arrangements for the nine month
periods ended February 28, 2007 and 2006 was $23.9 million and $7.1 million, respectively. There
was no tax benefit realized for the tax deductions from option exercises of the share-based payment
for either of the nine month periods ended February 28, 2007 and 2006.
We anticipate that approximately 1.25 million shares
at a weighted-average exercise price of $4.21 and a weighted-average remaining contractual term of
8.29 years will ultimately vest under these plans. A summary of the status of our nonvested
share-based payment awards as of February 28, 2007, and the changes during the nine month period
then-ended, is incorporated in the following table:
11
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
Nonvested Shares Under Option
(Shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Number of |
|
|
|
|
Average |
|
Shares |
|
Weighted Average |
|
|
Grant-Date |
|
Under |
|
Remaining |
|
|
Fair Value |
|
Option |
|
Contractual Term |
|
Nonvested, June 1, 2006 |
|
$ |
4.16 |
|
|
|
1,829 |
|
|
|
|
|
Granted |
|
$ |
4.34 |
|
|
|
380 |
|
|
|
|
|
Vested |
|
$ |
4.15 |
|
|
|
(845 |
) |
|
|
|
|
Forfeited/expired |
|
$ |
4.12 |
|
|
|
(30 |
) |
|
|
|
|
|
Nonvested, February 28, 2007 |
|
$ |
4.21 |
|
|
|
1,334 |
|
|
|
8.29 |
|
|
NOTE D INVENTORIES
Inventories were composed of the following major classes:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2007 |
|
May 31, 2006 |
(In thousands) |
|
|
|
|
|
|
|
|
Raw material and supplies |
|
$ |
138,254 |
|
|
$ |
124,573 |
|
Finished goods |
|
|
315,031 |
|
|
|
274,441 |
|
|
Total Inventory |
|
$ |
453,285 |
|
|
$ |
399,014 |
|
|
NOTE E COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation adjustments, minimum pension
liability adjustments, unrealized gains or losses on securities and income or loss from
derivatives. Total comprehensive income, comprised of net income and other comprehensive income,
amounted to $134.9 million and $81.6 million during the nine month periods ended February 28, 2007
and 2006, respectively, and $4.7 million and $4.6 million for the three month periods ended
February 28, 2007 and 2006, respectively. The following table illustrates the components of total
comprehensive income for each respective period.
12
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Three Months Ended |
|
|
February 28, |
|
February 28, |
(In thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Net income |
|
$ |
124,334 |
|
|
$ |
65,801 |
|
|
$ |
10,052 |
|
|
$ |
(2,687 |
) |
Foreign currency
translation adjustments |
|
|
(945 |
) |
|
|
15,440 |
|
|
|
(5,675 |
) |
|
|
6,773 |
|
Minimum pension
liability adjustments |
|
|
365 |
|
|
|
(1,062 |
) |
|
|
246 |
|
|
|
(95 |
) |
Unrealized gain (loss)
on securities |
|
|
4,079 |
|
|
|
1,324 |
|
|
|
(2,670 |
) |
|
|
579 |
|
Derivatives
income (loss) |
|
|
7,038 |
|
|
|
51 |
|
|
|
2,766 |
|
|
|
51 |
|
|
Total Comprehensive Income |
|
$ |
134,871 |
|
|
$ |
81,554 |
|
|
$ |
4,719 |
|
|
$ |
4,621 |
|
|
NOTE F CONTINGENCIES AND LOSS RESERVES
Certain of our wholly-owned subsidiaries, principally Bondex International, Inc. (collectively
referred to as the subsidiaries), are defendants in various asbestos-related bodily injury lawsuits
filed in various state courts with the vast majority of current claims pending in five states
Illinois, Ohio, Mississippi, Texas and Florida. These cases generally seek unspecified damages for
asbestos-related diseases based on alleged exposures to asbestos-containing products previously
manufactured by our subsidiaries or others.
Our subsidiaries vigorously defend these asbestos-related lawsuits and in many cases, the
plaintiffs are unable to demonstrate that any injuries they have incurred, in fact, resulted from
exposure to a product for which one of our subsidiaries is responsible. In such cases, the
subsidiaries are generally dismissed without payment. With respect to those cases where
compensable disease, exposure and causation are established with respect to a product for which one
of our subsidiaries is responsible, the subsidiaries generally settle for amounts that reflect the
confirmed disease, the particular jurisdiction, applicable law, the number and solvency of other
parties in the case and various other factors which may influence the settlement value each party
assigns to a particular case at the time.
As of February 28, 2007, our subsidiaries had a total of 10,846 active asbestos cases compared to a
total of 10,175 cases as of February 28, 2006. For the quarter ended February 28, 2007, our
subsidiaries secured dismissals and/or settlements of 736 claims and made total payments of $18.2
million, which included defense costs paid during the current quarter of $7.2 million. For the
comparable period ended February 28, 2006, dismissals and/or settlements covered 213 claims and
total payments were $17.1 million, which included defense costs paid during the quarter of $7.0
million. Excluding defense costs, the average costs to resolve a claim, including dismissed
claims, were $14,946 and $47,418 for each of the quarters ended February 28, 2007 and 2006,
respectively. The amount and timing of dismissals and settlements can fluctuate significantly from
period to period resulting in volatility in the average costs to resolve claims in any given
quarter or year. In addition, in some jurisdictions, cases may involve more
13
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
than one individual
claimant. As a result, settlement or dismissal statistics on a per case basis are not necessarily
reflective of the payment amounts on a per claimant basis and the amounts and rates can vary widely
depending on a variety of factors including the mix of malignancy and non-malignancy claims and the
amount of defense costs incurred during the period.
The rate at which plaintiffs filed asbestos-related suits against our subsidiaries, particularly
Bondex, increased since the fourth fiscal quarter of 2002, influenced by the bankruptcy filings of
numerous other defendants in asbestos-related litigation. Based on the significant increase in
asbestos claims activity,
which in many cases disproportionately increased Bondexs exposure in joint and several liability
law states, our third-party insurance was depleted within the first fiscal quarter of 2004. Our
third-party insurers historically had been responsible, under various cost-sharing arrangements,
for the payment of approximately 90% of the indemnity and defense costs associated with our
asbestos litigation. Prior to this sudden precipitous increase in loss rates, the combination of
book loss reserves and insurance coverage was expected to adequately cover asbestos claims for the
foreseeable future. We have reserved our rights with respect to several of our third-party
insurers claims of exhaustion, and in late calendar 2002 commenced a review of our known insurance
policies to determine whether other insurance limits may be available to cover our asbestos
liabilities.
As a result of an examination of our subsidiaries historical insurance, as previously disclosed,
certain of our subsidiaries filed a complaint in July 2003 for declaratory judgment, breach of
contract and bad faith against various third-party insurers, challenging their assertion that their
policies covering asbestos-related claims have been exhausted. The coverage litigation involves,
among other matters, insurance coverage for claims arising out of alleged exposure to asbestos
containing products manufactured by the previous owner of the Bondex tradename before March 1,
1966. On March 1, 1966, Republic Powdered Metals Inc. (as it was known then), purchased the assets
and assumed the liabilities of the previous owner of the Bondex tradename. That previous owner
subsequently dissolved and was never a subsidiary of Republic Powdered Metals, Bondex, RPM, Inc. or
the Company. Because of the earlier assumption of liabilities, however, Bondex has historically
and must continue to respond to lawsuits alleging exposure to these asbestos containing products.
The Company discovered that the defendant insurance companies in the coverage litigation had
wrongfully used cases alleging exposure to these pre-1966 products to erode their aggregate limits.
This conduct, apparently known by the insurance industry based on discovery conducted to date, was
in breach of the insurers policy language. While this pending litigation could, in the future,
result in third party coverage for a substantial amount of these future asbestos claims, we have
not considered any such future recovery in determining the scope and amount of its reserve for
future unknown asbestos claims. Two of the defendant insurers have filed counterclaims seeking to
recoup certain monies should the plaintiffs prevail on their claims. Pursuant to a case management
order, which is subject to change by the court, the parties have substantially completed all fact
and expert discovery relating to the liability phase of the case. The parties will next file
dispositive motions (including motions for summary judgment) and related briefs. It is difficult
to predict when any such motions will be decided by the court or when the court will set a
definitive trial date, although our subsidiaries anticipate a trial during the 2007 calendar year.
14
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
During the quarter ended November 30, 2006, Bondex reached a cash settlement of $15.0 million, the
terms of which are confidential by agreement of the parties, with one of the defendant insurers.
The settling defendant has been dismissed from the case. Our subsidiaries are aggressively
pursuing their claims against the remaining insurers based on the terms of their respective
policies.
We are unable at the present time to predict the timing or ultimate outcome of this insurance
coverage litigation or whether there will be any further settlements. Consequently, we are unable
to predict whether, or to what extent, any additional insurance may be available to cover a portion
of our subsidiaries asbestos liabilities. We have not included any potential benefits from this
litigation in
calculating our current asbestos reserve. Our wholly-owned captive insurance companies have not
provided any insurance or reinsurance coverage for any of our subsidiaries asbestos-related
claims.
Claim filings in Mississippi, Ohio, Texas, Florida and Illinois at the quarter ended February 28,
2007, comprise approximately 75% of the total aggregate claims filed against Bondex. Three of
these states (Mississippi, Ohio and Texas) provide for liability to be determined on a
proportional cause basis, thereby limiting Bondexs responsibility to only its share of the
alleged asbestos exposure. Two of the three previously mentioned states have passed additional
legislation impacting medical criteria and product identification in asbestos-related litigation.
While there have been some changes in the type of claims filed in certain of these states, the
ultimate influence these law changes will have on future claims activity and costs is still
developing.
Estimating the future cost of asbestos related contingent liabilities was and continues to be
subject to many uncertainties, including (i) the ultimate number of claims filed; (ii) the cost of
resolving both current known and future unknown claims; (iii) the amount of insurance, if any,
available to cover such claims, including the outcome of coverage litigation against the
subsidiaries third party insurers; (iv) future earnings and cash flow of our subsidiaries; (v) the
impact of bankruptcies of other companies whose share of liability may be imposed on our
subsidiaries under certain state liability laws; (vi) the unpredictable aspects of the litigation
process including a changing trial docket and the jurisdictions in which trials are scheduled;
(vii) the outcome of any such trials including judgments or jury verdicts, as a result of our more
aggressive defense posture which includes taking selective cases to verdict; (viii) the lack of
specific information in many cases concerning exposure to the subsidiaries products and the
claimants diseases; (ix) potential changes in applicable federal and/or state law; and (x) the
potential impact of various proposed structured settlement transactions or subsidiary bankruptcies
by other companies, some of which are the subject of federal appellate court review, the outcome of
which could materially affect any future asbestos-related liability estimates. In addition to the
foregoing, ongoing debate in the Senate concerning the establishment of a trust fund to pay future
asbestos related claims and remove such cases from federal and state courts with industry and
insurers funding the trust continues to be a significant variable that makes it increasingly
difficult to predict with certainty the full exposure of future, unknown asbestos-related claims.
As part of our ongoing assessment of our asbestos liability exposure, during last years third
fiscal quarter we considered whether (i) our recent verdict experience; (ii) venue reforms; (iii)
medical criteria requirements; and (iv) proportionate share liability and other known tort reforms
provided sufficient,
15
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
relevant and reliable information to reasonably estimate our future liability
for asbestos-related claims. Accordingly, as previously disclosed, we retained Crawford &
Winiarski (C&W), an independent, third-party consulting firm with expertise in the area of
asbestos valuation work, to assist us in calculating an estimate of our liability for unasserted
potential future asbestos-related claims.
The methodology used by C&W to project our liability for unasserted potential future
asbestos-related claims included C&W doing an analysis of (a) widely accepted forecast of the
population likely to have been exposed to asbestos; (b) epidemiological studies estimating the
number of people likely to develop asbestos-related diseases; (c) historical rate at which
mesothelioma incidences resulted in the payment of
claims by us; (d) historical settlement averages to value the projected number of future
compensable mesothelioma claims; (e) historical ratio of mesothelioma related indemnity payments to
non-mesothelioma indemnity payments; and (f) historical defense costs and their relationship with
total indemnity payments.
As a result, at the end of fiscal 2006, we increased our reserve for asbestos claims by
approximately $335.0 million, while paying out $12.9 million for dismissals and/or settlements
resulting in our reserve moving from $99.2 million at February 28, 2006 to $421.3 million at May
31, 2006. This reserve increase was based upon C&Ws analysis of our total estimated liability for
pending and unasserted potential future claims through May 31, 2016. This amount was calculated on
a pre-tax basis and was not discounted for the time value of money. In light of the uncertainties
inherent in making long-term projections, we have determined that the ten-year period through 2016
is the most reasonable time period over which reasonably accurate estimates might still be made for
projecting asbestos liabilities and defense costs and, accordingly, the reserve does not include
asbestos liabilities for any period past 2016. As of February 28, 2007, total reserves were
approximately $372.9 million, of which $314.9 million was reserved for unasserted potential future
claims and $58.0 million was reserved for pending known claims. The material components of the
accruals are: (i) the gross number of open malignancy claims (principally mesothelioma claims) as
these claims have the most significant impact on our asbestos settlement costs; (ii) historical and
current settlement costs and dismissal rates by various categories; (iii) analysis of the
jurisdiction and governing law of the states in which these claims are pending; (iv) outside
defense counsels opinions and recommendations with respect to the merits of such claims; and (v)
analysis of projected liability for unasserted potential future claims.
In determining the amount of our asbestos reserves, we relied on assumptions that are based on
currently known facts and projection models. Our actual expenses could be significantly higher or
lower than those recorded if assumptions used in our or C&Ws calculations vary significantly from
actual results. Key variables in these assumptions include the period of exposure to asbestos
claims, the number and type of new claims to be filed each year, the rate at which mesothelioma
incidences result in compensable claims against us, the average cost of disposing of each such new
claim, the dismissal rates each year and the related annual defense costs. Furthermore,
predictions with respect to these variables are subject to greater uncertainty as the projections
period lengthens. A significant upward or downward trend in the number of claims filed, depending
on the nature of the alleged injury, the jurisdiction where filed, the average cost of resolving
each such claim and the quality of the product identification, could change our estimated
liability, as could any substantial adverse verdict at trial. A federal legislative
16
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
solution,
further state tort reform or structured settlement transaction could also change the estimated
liability.
Subject to the foregoing variables, based on currently available data and upon the analysis of C&W,
we believe that our current asbestos reserves are sufficient to cover asbestos-related cash flow
requirements for our known pending and unasserted potential future asbestos-related claims.
However, given the uncertainties associated with projecting matters into the future and numerous
other factors outside of our control, we believe that it is reasonably possible we may incur
asbestos liabilities for the period through 2016 and beyond in excess of the C&W projection. While
it is reasonably possible that such excess
liabilities could be material to operating results in any given quarter or year, we do not believe
that it is reasonably possible that such excess liabilities would have a material adverse effect on
our long-term results of operations, liquidity or consolidated financial position.
We recognize that future facts, events and legislation, both state and/or federal, may alter our
estimates of pending claims and can impact our ability to estimate unasserted potential future
claims. With our outside advisors, we will continue to monitor the number and mix (disease type)
of claims filed and paid each period against the estimates calculated by our asbestos liability
model, the impact of state law changes and the evolving nature of federal legislative efforts to
address asbestos litigation including the pending federal criminal investigation into the conduct
of at least three plaintiffs law firms (all of whom have filed claims against our subsidiaries and
many other defendants) with respect to their asbestos claim-filing practices. This federal
investigation, coupled with recent judicial findings in Texas that are being considered by other
judges in other jurisdictions, calls into question from a medical and legal perspective, the
veracity of a significant number of asbestos claims for all defendants, including our subsidiaries.
We will continue to explore all feasible alternatives available to resolve our asbestos-related
exposure in a manner consistent with the best interests of our stockholders.
The following table illustrates the movement of current and long-term asbestos-related liabilities
through February 28, 2007:
Asbestos Liability Movement
(Current and Long-Term)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Additions to |
|
Deductions |
|
Balance |
|
|
Beginning |
|
Asbestos |
|
(Primarily |
|
at End of |
(In thousands) |
|
of Period |
|
Charge |
|
Claims Paid) |
|
Period |
|
Nine Months Ended February 28, 2007 |
|
$ |
421,285 |
|
|
|
|
|
|
$ |
48,425 |
|
|
$ |
372,860 |
|
Year Ended May 31, 2006 |
|
|
101,172 |
|
|
$ |
380,000 |
|
|
|
59,887 |
|
|
|
421,285 |
|
Year Ended May 31, 2005 |
|
|
90,607 |
|
|
|
78,000 |
|
|
|
67,435 |
|
|
|
101,172 |
|
|
We provide, through our wholly-owned insurance subsidiaries, certain insurance coverage,
primarily product liability, to our other subsidiaries. Excess coverage is provided by third party
insurers. Our
17
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
reserves provide for these potential losses as well as other uninsured claims. As
of February 28, 2007, the current portion of these reserves amounted to $52.1 million as compared
with $53.8 million at May 31, 2006 and $53.7 million at February 28, 2006, while the total
long-term reserves of $7.0 million at February 28, 2007 compare with $13.3 million at May 31, 2006
and $11.8 million a year ago. Product warranty expense is recorded within selling, general and
administrative expense. The changes in the reserve balance have occurred primarily as a result of
our continuing evaluation of our liability under a
class action lawsuit settlement covering our Dryvit residential exterior insulated finish systems
product line (EIFS).
Third party excess insurers have historically paid varying shares of Dryvits defense and
settlement costs for individual commercial and residential EIFS lawsuits under various cost-sharing
agreements. Dryvit has assumed a greater share of the costs associated with its EIFS litigation as
it seeks funding commitments from our third party excess insurers and will likely continue to do so
pending the outcome of coverage litigation involving these same third party insurers. One of our
excess insurers filed suit seeking a declaration with respect to its rights and obligations for
EIFS related claims under its applicable policies. During last years fiscal third quarter, the
court granted Dryvits motion to stay the federal filing based on a more complete state court
complaint filed against these same insurers and the Companys insurance broker. The coverage case
is now proceeding in state court. Discovery in this litigation is ongoing. The trial is scheduled
for December 3, 2007. A previously set scheduling order is
likely to be amended by the court in
April 2007. This anticipated amended scheduling order may include a change in the current trial
date.
NOTE G ACQUISITIONS
On August 31, 2005, Tremco, Inc., a wholly-owned subsidiary of RPM, completed its acquisition of
privately-owned illbruck Sealant Systems, located in Leverkusen, Germany, for approximately $134.2
million, plus debt assumption of approximately $10.3 million. The purchase price is reflective of
certain post-closing adjustments finalized in February 2007, which reduced the final purchase
price by approximately $2.5 million. illbruck, a leading manufacturer of high-performance sealants
and installation systems for pre-fabricated construction elements and for window and door
applications, had sales of approximately $190.0 million for its fiscal year ended December 31,
2004. The acquisition has extended Tremcos product line offerings to include joint sealing tapes,
flashing tapes, cartridge sealants and adhesives, strips, foils and accessories marketed under
brand names such as illbruck, Festix, Perennator and Coco.
The purchase price has been allocated to the underlying assets acquired and liabilities assumed
based upon their fair values at the date of acquisition. We have determined the estimated fair
values based on independent appraisals, discounted cash flow analyses, quoted market prices and
estimates made by management. Goodwill has been recorded to the extent the purchase price exceeded
the fair values of the net identifiable tangible and intangible assets acquired. The following
table summarizes the fair values of the assets acquired and liabilities assumed at the date of
acquisition.
18
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(In thousands) |
|
Life (In Years) |
|
illbruck |
|
Current assets |
|
|
|
$ |
63,740 |
|
Property, plant and equipment |
|
|
|
|
32,562 |
|
Goodwill |
|
N/A |
|
|
50,867 |
|
Tradenames indefinitely lived |
|
N/A |
|
|
27,190 |
|
Tradenames other |
|
12 - 15 |
|
|
1,639 |
|
Other intangible assets |
|
4 - 12 |
|
|
21,805 |
|
|
Total Assets Acquired |
|
|
|
$ |
197,803 |
|
|
Liabilities assumed |
|
|
|
|
(63,633 |
) |
|
Net Assets Acquired |
|
|
|
$ |
134,170 |
|
|
Our consolidated financial statements reflect the results of operations of this business as of
the date of acquisition.
During the first nine months of the current fiscal year, we completed four relatively smaller
product line acquisitions. In July, we acquired the Watco Group, which manufactures and markets
industrial coatings and concrete floor coatings, with annual sales of $20.0 million and approximate
goodwill of $19.5 million. During November, we completed three separate acquisitions, first
acquiring certain assets of Nu-Chem, Inc., which includes intumescent fireproofing products and
epoxy intumescents for petrochemical and offshore oil markets, and Permaquick Corp., a supplier of
a number of waterproofing, epoxy and sealant products. The combination of these two acquisitions
is expected to add approximately $12.0 million to consolidated sales annually and approximate
goodwill of $9.1 million. Additionally, during November, we acquired the Dane Group in Manchester,
England, which manufactures daylight fluorescent, phosphorescent and thermochromatic pigments, has
estimated goodwill of $11.9 million and is expected to contribute approximately $20.0 million in
annual sales.
NOTE H PENSION AND POSTRETIREMENT HEALTH CARE BENEFITS
We offer defined benefit pension plans, defined contribution pension plans, as well as several
unfunded health care benefit plans primarily for certain of our retired employees. The following
tables provide the retirement-related benefit plans impact on income before income taxes for the
nine and three month periods ended February 28, 2007 and 2006:
19
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
Pension Benefits
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
February 28, |
|
February 28, |
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Service cost |
|
$ |
9,918 |
|
|
$ |
9,953 |
|
|
$ |
2,316 |
|
|
$ |
1,856 |
|
Interest cost |
|
|
6,797 |
|
|
|
6,184 |
|
|
|
3,804 |
|
|
|
3,555 |
|
Expected return on plan assets |
|
|
(8,571 |
) |
|
|
(7,581 |
) |
|
|
(3,782 |
) |
|
|
(3,449 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
145 |
|
|
|
145 |
|
|
|
16 |
|
|
|
|
|
Net gain on adoption of SFAS No. 87 |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
Net actuarial (gains) losses recognized |
|
|
1,798 |
|
|
|
1,781 |
|
|
|
1,352 |
|
|
|
1,133 |
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
10,087 |
|
|
$ |
10,480 |
|
|
$ |
3,706 |
|
|
$ |
3,095 |
|
|
|
|
|
|
|
Postretirement Benefits |
|
(In thousands) |
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
February 28, |
|
February 28, |
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
330 |
|
|
$ |
252 |
|
Interest cost |
|
|
407 |
|
|
|
461 |
|
|
|
442 |
|
|
|
372 |
|
Prior service cost |
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
Net actuarial (gains) losses recognized |
|
|
(21 |
) |
|
|
44 |
|
|
|
68 |
|
|
|
32 |
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
386 |
|
|
$ |
485 |
|
|
$ |
840 |
|
|
$ |
656 |
|
|
|
|
|
|
20
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
Pension Benefits
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
February 28, |
|
February 28, |
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Service cost |
|
$ |
3,306 |
|
|
$ |
3,318 |
|
|
$ |
772 |
|
|
$ |
619 |
|
Interest cost |
|
|
2,265 |
|
|
|
2,061 |
|
|
|
1,268 |
|
|
|
1,185 |
|
Expected return on plan assets |
|
|
(2,857 |
) |
|
|
(2,527 |
) |
|
|
(1,261 |
) |
|
|
(1,150 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
49 |
|
|
|
48 |
|
|
|
5 |
|
|
|
|
|
Net gain on adoption of SFAS No. 87 |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Net actuarial (gains) losses recognized |
|
|
599 |
|
|
|
594 |
|
|
|
451 |
|
|
|
378 |
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
3,362 |
|
|
$ |
3,493 |
|
|
$ |
1,235 |
|
|
$ |
1,032 |
|
|
|
|
|
|
Postretirement Benefits
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans |
|
Non-U.S. Plans |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
February 28, |
|
February 28, |
|
February 28, |
|
February 28, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
110 |
|
|
$ |
84 |
|
Interest cost |
|
|
136 |
|
|
|
154 |
|
|
|
147 |
|
|
|
124 |
|
Prior service cost |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
Net actuarial (gains) losses recognized |
|
|
(7 |
) |
|
|
15 |
|
|
|
23 |
|
|
|
11 |
|
|
|
|
|
|
Net Periodic Benefit Cost |
|
$ |
129 |
|
|
$ |
162 |
|
|
$ |
280 |
|
|
$ |
219 |
|
|
|
|
|
|
We previously disclosed in our financial statements for the fiscal year ended May 31, 2006
that we expected to contribute approximately $11.9 million to the Retirement Plans in the U.S. and
approximately $4.1 million to plans outside the U.S. during the current fiscal year. The non-U.S.
expected contribution amount was updated as of November 30, 2006 to be approximately $7.2 million.
As of February 28, 2007, we do not anticipate any changes to these contribution levels.
We have determined that our postretirement medical plan provides prescription drug benefits that
will qualify for the federal subsidy provided by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act). For our current retirees who are not subject to cost caps,
we have assumed that we will be eligible for the subsidy beginning in 2006 and for all future
years. For our current and future retirees who are subject to cost caps, we have assumed that we
will be eligible for the subsidy beginning in 2006 and ending on average in 2012.
21
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
NOTE I INCOME TAXES
The effective income tax expense rate was 11.6% for the three months ended February 28, 2007
compared to an effective income tax benefit rate of 49.1% for the three months ended February 28,
2006.
For the three months ended February 28, 2007 and to a lesser extent for the three months ended
February 28, 2006, the effective income tax rate differed from the federal statutory rate due to
decreases in the effective tax rate principally as a result of certain tax credits and by the U.S.
federal tax impact of foreign operations. Furthermore, for the three months ended February 28,
2007, a decrease in the effective income tax expense rate resulted from a one-time benefit related
to the resolution of prior years tax liabilities in the amount of $2.1 million. The decreases in
the effective tax rate were partially offset by valuation allowances associated with losses
incurred by certain of our foreign businesses, valuation allowances related to U.S. federal foreign
tax credit carryforwards, state and local income taxes and other non-deductible business operating
expenses.
NOTE J SEGMENT INFORMATION
We operate a portfolio of businesses that manufacture and sell a variety of specialty paints,
protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by
organizing our
businesses into two reportable 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.
In addition to the two reportable 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 companies, gains
or losses on the sales of certain assets, and other expenses, including asbestos-related charges,
many of which are not directly associated with either reportable operating segment. Related assets
consist primarily of investments, prepaid expenses, deferred pension assets, and headquarters
property and equipment. These corporate and other expenses reconcile reportable operating segment
data to total consolidated income before income taxes and identifiable assets. Comparative nine
month and three month results on this basis are illustrated in the following table.
22
RPM INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
|
February 28, |
|
|
February 28, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment |
|
$ |
1,499,478 |
|
|
$ |
1,274,722 |
|
|
$ |
425,655 |
|
|
$ |
378,286 |
|
Consumer Segment |
|
|
833,563 |
|
|
|
824,455 |
|
|
|
253,839 |
|
|
|
234,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
2,333,041 |
|
|
$ |
2,099,177 |
|
|
$ |
679,494 |
|
|
$ |
612,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment |
|
$ |
156,131 |
|
|
$ |
133,466 |
|
|
$ |
17,936 |
|
|
$ |
17,998 |
|
Consumer Segment |
|
|
83,881 |
|
|
|
87,026 |
|
|
|
16,010 |
|
|
|
14,533 |
|
Corporate/Other |
|
|
(54,311 |
) |
|
|
(120,490 |
) |
|
|
(22,571 |
) |
|
|
(37,810 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
185,701 |
|
|
$ |
100,002 |
|
|
$ |
11,375 |
|
|
$ |
(5,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2007 |
|
|
May 31, 2006 |
|
|
|
|
|
|
|
|
|
Identifiable Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment |
|
$ |
1,554,915 |
|
|
$ |
1,628,038 |
|
|
|
|
|
|
|
|
|
Consumer Segment |
|
|
1,090,000 |
|
|
|
1,102,687 |
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
334,671 |
|
|
|
249,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
2,979,586 |
|
|
$ |
2,980,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE K DEBT
On December 29, 2006, we refinanced our $330.0 million revolving credit facility with a $400.0
million 5-year credit facility (the New Facility). The New Facility will be used for working
capital needs, general corporate purposes, including acquisitions and to provide back-up liquidity
for the issuance of commercial paper. The New Facility provides for borrowings in U.S. dollars and
several foreign currencies and provides sublimits for the issuance of letters of credit in an
aggregate amount of up to
$35.0 million and a swing-line of up to $20.0 million for short-term borrowings of less than 15
days. In addition, the size of the New Facility may be expanded upon our request by up to an
additional $175.0 million, thus potentially expanding the New Facility to $575.0 million, subject
to lender approval.
As of the end of our third fiscal quarter, which ended February 28, 2007, the sale price of RPMs
common stock exceeded the conversion trigger price per share as set forth in the Indenture related
to our Senior Convertible Notes due 2033, for at least 20 trading days in a period of 30
consecutive trading days ending on the last trading day of such fiscal quarter. Based on this
condition, the Indenture provides that the Notes are convertible during our fourth fiscal quarter,
which commenced on March 1, 2007. Such right to convert based on the sale price of RPMs common
stock may be extended, extinguished or reinstated in subsequent fiscal quarters depending on the
sale price of RPMs common stock during the 30 consecutive trading days ending on the last trading
day of the preceding fiscal quarter.
23
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
ITEM 2. MANAGEMENTS 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 realized or realizable, and when earned. In general, this is when
title and risk of loss pass to the customer. Further, revenues are realizable when we have
persuasive evidence of a sales arrangement, the product has been shipped or the services have been
provided to the customer, the sales price is fixed or determinable, and collectibility is
reasonably assured. We reduce our revenues for estimated customer returns and allowances, certain
rebates, sales incentives and promotions in the same period the related sales are recorded.
We also record revenues generated under long-term construction-type contracts, mainly in connection
with the installation of specialized roofing and flooring systems, and related services. In
general, we account for long-term construction-type contracts under the percentage-of-completion
method, and therefore record contract revenues and related costs as our contracts progress. This
method recognizes the economic results of contract performance on a timelier basis than does the
completed-contract method; however, application of this method requires reasonably dependable
estimates of progress toward completion, as well as other dependable estimates. When reasonably
dependable estimates cannot be made, or if other factors make
estimates doubtful, the completed-contract method is applied. Under the completed-contract method, billings and costs are
accumulated on the balance sheet as the contract progresses, but no revenue is recognized until the
contract is complete or substantially complete.
24
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
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 weighted 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). Translation adjustments will be
included in net earnings in the event of a sale or liquidation of any of our underlying foreign
investments, or in the event that we distribute the accumulated earnings of consolidated foreign
subsidiaries. If we determined 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).
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 accumulated 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 apply the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which addresses the initial recognition and measurement of goodwill and intangible
assets acquired in a business combination. We also apply the provisions of SFAS No. 142, Goodwill
and Other Intangible Assets, which requires that goodwill be tested on an annual basis, or more
frequently as impairment indicators arise. We have elected to perform the required impairment
tests, which involve the use of estimates related to the fair market values of the business
operations with which goodwill is associated, during our fourth fiscal quarter. Calculating the
fair market value of the reporting units requires significant estimates and assumptions by
management. We estimate the fair value of our reporting units by applying third-party market value
indicators to the respective reporting units annual projected earnings before interest, taxes,
depreciation and amortization. In applying this methodology, we rely on a number of factors,
including future business plans, actual operating results and market data. In the event that our
calculations indicate that goodwill is impaired, a fair value estimate of each tangible and
intangible asset would be established. This process would require the application of discounted
cash flows expected to be generated by each asset in addition to independent asset appraisals, as
appropriate. Cash flow estimates are based on our historical experience and our internal business
plans, and appropriate discount rates are applied. Losses, if any, resulting from goodwill
impairment tests would be reflected in operating income in our income statement.
25
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
Other Long-Lived Assets
We assess identifiable non-goodwill intangibles and other long-lived assets for impairment 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; |
|
|
§ |
|
significant changes in the strategy for our overall business; and |
|
|
§ |
|
significant negative industry or economic trends. |
Additionally, we test all indefinitely-lived intangible assets for impairment annually. Measuring
a potential impairment of non-goodwill intangibles and other long-lived assets requires various
estimates and assumptions, including determining which cash flows are directly related to the asset
being evaluated, the useful life over which those cash flows will occur, their amount and the
assets residual value, if any. If we determine that the carrying value of these 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. The determination of impairment loss would be based on the best
information available, including internal discounted cash flows, quoted market prices when
available and independent appraisals as appropriate to determine fair value. Cash flow estimates
would be based on our historical experience and our internal business plans, with appropriate
discount rates applied. We have not incurred any such impairment loss to date.
Deferred Income Taxes
The provision for income taxes is calculated in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, which requires the recognition of deferred income
taxes using the liability method. Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and certain changes in valuation allowances. We
provide valuation allowances against deferred tax assets if, based on available evidence, it is
more likely than not that some portion or all of the deferred tax assets will not be realized.
In determining the adequacy of the valuation allowance management considers cumulative and
anticipated amounts of domestic and international earnings or losses, anticipated amounts of
foreign source income, as well as the anticipated taxable income resulting from the reversal of
future taxable temporary differences.
26
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
We intend to maintain the recorded valuation allowances until sufficient positive evidence (for
example, cumulative positive foreign earnings or additional foreign source income) exists to
support a reversal of the tax valuation allowances.
Contingencies
We are party to claims and lawsuits arising in the normal course of business, including the various
asbestos-related suits discussed in Note F to our Consolidated Financial Statements. 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. Estimating probable losses requires analysis
of multiple forecasted factors that often depend on judgments about potential actions by third
parties such as regulators, courts and state and federal legislatures. Changes in the amount of
the provisions affect our consolidated statements of income. Due to the inherent uncertainties in
the loss reserve estimation process, we are unable to estimate an additional range of loss in
excess of our accruals. We may incur asbestos costs in addition to any amounts reserved, which may
have a material adverse effect on our financial condition, results of operations or cash flows.
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 some of the 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 environmental costs in addition to any amounts reserved, which may have a material adverse
effect on our financial condition, results of operations or cash flows.
REPORTABLE SEGMENT INFORMATION
We operate a portfolio of businesses that manufacture and sell a variety of specialty paints,
protective coatings and roofing systems, sealants and adhesives. We manage our portfolio by
organizing our businesses into two reportable 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,
27
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
utilize similar technologies, and can share manufacturing or distribution capabilities. We
evaluate the profit performance of our segments based on income before income taxes, but also look
to earnings before interest and taxes (EBIT) as a performance evaluation measure because interest
expense is essentially related to corporate acquisitions, as opposed to segment operations.
In addition to the two reportable 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 companies, gains
or losses on the sales of certain assets, and other expenses, including asbestos-related charges,
many of which are not directly associated with either operating segment. Related assets consist
primarily of investments, prepaid expenses, deferred pension assets, and headquarters property and
equipment. These corporate and other expenses reconcile reportable operating segment data to total
consolidated net sales, income before income taxes and identifiable assets. Comparative nine month
and three month results on this basis are illustrated in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Three Months Ended |
|
|
|
February 28, |
|
|
February 28, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment |
|
$ |
1,499,478 |
|
|
$ |
1,274,722 |
|
|
$ |
425,655 |
|
|
$ |
378,286 |
|
Consumer Segment |
|
|
833,563 |
|
|
|
824,455 |
|
|
|
253,839 |
|
|
|
234,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
2,333,041 |
|
|
$ |
2,099,177 |
|
|
$ |
679,494 |
|
|
$ |
612,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes (a) |
|
$ |
156,131 |
|
|
$ |
133,466 |
|
|
$ |
17,936 |
|
|
$ |
17,998 |
|
Interest (Expense), Net |
|
|
(276 |
) |
|
|
(603 |
) |
|
|
(167 |
) |
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (b) |
|
$ |
156,407 |
|
|
$ |
134,069 |
|
|
$ |
18,103 |
|
|
$ |
18,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes (a) |
|
$ |
83,881 |
|
|
$ |
87,026 |
|
|
$ |
16,010 |
|
|
$ |
14,533 |
|
Interest (Expense), Net |
|
|
(2,271 |
) |
|
|
31 |
|
|
|
(871 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (b) |
|
$ |
86,152 |
|
|
$ |
86,995 |
|
|
$ |
16,881 |
|
|
$ |
14,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Expense) Before Income Taxes (a) |
|
$ |
(54,311 |
) |
|
$ |
(120,490 |
) |
|
$ |
(22,571 |
) |
|
$ |
(37,810 |
) |
Interest (Expense), Net |
|
|
(33,117 |
) |
|
|
(27,819 |
) |
|
|
(10,108 |
) |
|
|
(9,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (b) |
|
$ |
(21,194 |
) |
|
$ |
(92,671 |
) |
|
$ |
(12,463 |
) |
|
$ |
(28,060 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes (a) |
|
$ |
185,701 |
|
|
$ |
100,002 |
|
|
$ |
11,375 |
|
|
$ |
(5,279 |
) |
Interest (Expense), Net |
|
|
(35,664 |
) |
|
|
(28,391 |
) |
|
|
(11,146 |
) |
|
|
(9,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (b) |
|
$ |
221,365 |
|
|
$ |
128,393 |
|
|
$ |
22,521 |
|
|
$ |
4,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The presentation includes a reconciliation of Income (Loss) Before Income Taxes, a measure
defined by Generally Accepted Accounting Principles (GAAP) in the U.S., to EBIT. |
|
(b) |
|
EBIT is defined as earnings before interest and taxes. We evaluate the profit performance of
our segments based on income before income taxes, but also look to EBIT as a performance evaluation
measure because interest expense is essentially related to corporate acquisitions, as opposed to
segment operations. We believe EBIT is useful to investors for this purpose as well, using EBIT as
a metric in their investment decisions. EBIT should not be considered an alternative to, or more
meaningful than, operating income as determined in accordance with GAAP, since EBIT omits the
impact of interest and taxes in determining operating performance, which represent items necessary
to our continued operations, given our level of indebtedness and ongoing tax obligations.
Nonetheless, EBIT is a key measure expected by and useful to our fixed income investors, rating
agencies and the banking community all of whom believe, and we concur, that this measure is
critical to the capital markets analysis of our segments core operating performance. We also
evaluate EBIT because it is clear that movements in EBIT impact our ability to attract financing.
Our underwriters and bankers consistently require inclusion of this measure in offering memoranda
in conjunction with any debt underwriting or bank financing. EBIT may not be indicative of our
historical operating results, nor is it meant to be predictive of potential future results. |
28
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
RESULTS OF OPERATIONS
Three Months Ended February 28, 2007
Net Sales
On a consolidated basis, net sales of $679.5 million for the third quarter ended February 28, 2007
grew 10.9 percent, or $67.0 million, over net sales of $612.5 million during the same period last
year. Eight small acquisitions, net of a small divestiture, contributed 2.6 percent, or $15.8
million, to the growth over last year. Organic sales growth of 8.3 percent, or $51.2 million,
included 0.6 percent from pricing initiatives and 1.3 percent from net favorable foreign exchange
rates year-over-year, primarily against the stronger euro, offset slightly by certain weaker
Canadian, Latin American and other currencies.
Industrial segment net sales, which comprised 62.6 percent of the current quarters consolidated
net sales, totaled $425.7 million; growing 12.5 percent from last years $378.3 million. This
segments net sales growth resulted from the combination of six small acquisitions, which
contributed 2.6 percent, plus organic sales growth of 9.9 percent, including 1.7 percent from
pricing and 1.9 percent from net favorable foreign exchange differences. There were strong organic
sales improvements throughout this segment, with much of this growth related to ongoing industrial
and commercial maintenance and improvement activities primarily in North America, but also in
Europe, Latin America and other regions of the world, as well as increased new construction in
those sectors. We continue to secure new business and grow market share among our industrial
segment operations.
Consumer segment net sales, which comprised 37.4 percent of the current quarters consolidated net
sales, increased 8.4 percent to $253.8 million from last years $234.2 million. Organic sales
improved 5.8 percent, including net discounts and other price reductions of 1.1 percent, and
including 0.4 percent from net favorable foreign exchange differences. The solid organic sales
performance in this segment is principally the result of improved retail buying behavior among
major retail customers, offset by declines in existing homes turnover and, to a lesser extent, new
housing starts, which have affected several lines of the business. The balance of the consumer
segment sales increase results from acquisitions of two small product lines, partly offset by the
January 2006 divestiture, for a net contribution of 2.6 percent to sales.
Gross Profit Margin
Consolidated gross profit margin declined to 38.8 percent of net sales this third quarter from 39.7
percent the same period a year ago. While there were continued higher costs of a number of our raw
materials, such as zinc, asphalts and various resins that weighed on this margin (approximately 130
bps), there were a number of price increases that have been initiated throughout the operating
segments during the past year to help recover these higher material costs (approximately 40 bps).
29
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
Industrial segment gross profit margin for the third quarter declined to 40.0 percent of net sales
from 41.4 percent last year. The decline resulted from continued higher raw material costs during
the quarter (approximately 180 bps), partially offset by higher pricing initiatives (90 bps).
Productivity gains from 6.3 percent organic unit sales growth slightly offset increased
lower-margin services sales.
Consumer segment gross profit margin for this third quarter slightly declined to 36.8 percent of
net sales from 37.0 percent last year. This slight decline, of approximately 20 bps, results
principally from net higher raw material costs (approximately 110 bps) and a change in delivery
terms with a major customer (approximately 50 bps), offset by productivity gains from 6.5 percent
organic unit sales growth this quarter.
Selling, General and Administrative Expenses (SG&A)
Consolidated SG&A expense levels improved 100 bps to 35.5 percent of net sales compared with 36.5
percent a year ago. Reflected in the improvement is primarily the leverage from the 7.0 percent
organic growth in sales, including higher pricing, in addition to tighter spending controls and a
change in delivery terms with a major customer.
Industrial segment SG&A improved by 90 bps to 35.7 percent of net sales this third quarter from
36.6 percent a year ago, reflecting principally the leverage of organic sales growth and the
movement in mix.
Consumer segment SG&A as a percent of net sales this third quarter declined by 60 bps to 30.1
percent compared with 30.7 percent a year ago, reflecting effective cost containment and other
savings programs, in addition to the change in delivery terms with a major customer.
Corporate/Other SG&A expenses decreased during this years third quarter to $12.5 million from
$13.1 million during last years third quarter. This decline is mainly the result of reductions in
certain insurance-related costs, partially offset by higher compensation-related costs, including
additional grants made under the Omnibus Plan.
License fee and joint venture income of approximately $0.4 million and $0.5 million for each of the
quarters ended February 28, 2007 and 2006, respectively, are reflected as reductions of
consolidated SG&A expenses.
We recorded total net periodic pension and postretirement benefit cost of $5.0 million and $4.9
million for the quarters ended February 28, 2007 and 2006, respectively. This increased pension
expense of $0.1 million was attributable to increased pension service and interest cost
approximating $0.4 million, in combination with additional net actuarial losses incurred of $0.1
million, offset by an improvement in the expected return on plan assets of $0.4 million. We expect
that pension expense will fluctuate on a year-to-year basis depending upon the investment
30
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
performance of plan assets, but such changes are not expected to be material as a percentage of
income before income taxes.
Asbestos Charge (Income)
As described in Note F to the Consolidated Financial Statements, we recorded a pre-tax asbestos
charge during last years third quarter of $15.0 million, and a total of $380.0 million for the
fiscal year ended May 31, 2006 in connection with the completion of a calculation of our liability
for unasserted potential future asbestos-related claims by an independent consulting firm. No
additional charges have been taken or incurred during the current fiscal year. During this years
second fiscal quarter ended November 30, 2006, our Bondex subsidiary reached a settlement with one
of the defendant insurers for $15.0 million, the terms of which are confidential by agreement of
the parties. For additional information, refer to Note F to the Consolidated Financial Statements.
Net Interest Expense
Net interest expense was $1.2 million higher in the third quarter of fiscal 2007 than 2006.
Interest rates overall averaged 5.5 percent during the quarter, compared with 5.2 percent in the
prior year third quarter, accounting for $0.3 million of the interest cost increase. Higher
average net borrowings associated with recent acquisitions, approximating $98.7 million, combined
with slight increases in other debt, added $1.5 million of interest cost, while improved investment
income performance year-over-year provided approximately $0.6 million of additional income.
Income Before Income Taxes (IBT)
Consolidated IBT for this years third quarter improved by $16.7 million, or 315.5 percent, to
$11.4 million from a loss of $5.3 million during last years third quarter, with margin comparisons
of 1.7 percent of net sales versus negative 0.9 percent a year ago. Prior year IBT reflects the
impact of a pre-tax asbestos reserve charge of $15.0 million. Excluding the impact of the prior
year asbestos charge, IBT for this years third quarter would have improved by 17.0 percent, while
current year margin of 1.7 percent would compare with last years adjusted margin of 1.6 percent.
Industrial segment IBT decreased slightly by $0.1 million, to $17.9 million from last years $18.0
million. Consumer segment IBT improved by 10.2 percent, to $16.0 million from $14.5 million last
year, as a result of the favorable impact of acquisitions, net of a divestiture, in addition to
tighter spending controls.
31
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
Income Tax Rate
The effective income tax expense rate was 11.6% for the three months ended February 28, 2007
compared to an effective income tax benefit rate of 49.1% for the three months ended February 28,
2006.
For the three months ended February 28, 2007 and to a lesser extent for the three months ended
February 28, 2006, the effective income tax rate differed from the federal statutory rate due to
decreases in the effective tax rate principally as a result of certain tax credits and by the U.S.
federal tax impact of foreign operations. Furthermore, for the three months ended February 28,
2007, a decrease in the effective income tax expense rate resulted from a one-time benefit related
to the resolution of prior years tax liabilities in the amount of $2.1 million. The decreases in
the effective tax rate were partially offset by valuation allowances associated with losses
incurred by certain of our foreign businesses, valuation allowances related to U.S. federal foreign
tax credit carryforwards, state and local income taxes and other non-deductible business operating
expenses.
As of February 28, 2007, we have determined, based on the available evidence, that it is uncertain
whether we will be able to recognize certain deferred tax assets and have provided a valuation
allowance against such deferred tax assets. The valuation allowance relates to U.S. federal
foreign tax credit carryforwards, certain foreign net operating losses and net foreign deferred tax
assets recorded in purchase accounting. A portion of the valuation allowance is associated with
deferred tax assets recorded in purchase accounting. Any reversal of the valuation allowance that
was recorded in purchase accounting would reduce goodwill.
There was no asbestos liability charge during the three months ended February 28, 2007. However,
the impact of the prior quarter $15.0 million asbestos liability adjustment related to the cash
settlement received by our Bondex subsidiary impacts the pro-forma annualized effective tax rate
computations. Excluding the impact of the asbestos liability adjustment, the effective income tax
rate for this years third quarter would have been adjusted to a pro-forma effective income tax
rate of 10.2%. The effective income tax rate for the three months ended February 28, 2006 reflects
the impact of the $15.0 million asbestos charge recorded during the quarter. Excluding the asbestos
charge, the effective income tax rate for last years third quarter would have been adjusted to a
pro-forma effective income tax rate of 28.9%.
Net Income
Net income of $10.1 million for the three months ended February 28, 2007 compares to net loss of
$2.7 million for the same period last year. Net income for last years third quarter reflects the
impact of an after-tax asbestos reserve charge of $9.6 million, while the current quarter reflects
the impact of a non-recurring gain of $2.1 million related to the resolution of prior years tax
liabilities, as previously discussed. Excluding the impact of the prior year asbestos-related
charge, this years third quarter net income would have reflected an improvement of $3.3
32
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
million, or 47.9 percent, to $10.2 million from last years adjusted $6.9 million. Adjusted margin
on sales of 1.5 percent during this years third quarter compares to last years adjusted 1.1
percent, excluding the asbestos-related impact, with this 40 bps margin difference mostly the
result of the combination of higher organic unit sales volume, the impact of pricing initiatives,
and tighter spending controls.
Diluted earnings per common share for this years third quarter, which include $0.02 relating to
the one-time tax-related gain, improved to $0.08 from a loss of $0.02 a year ago. Excluding the
impact of the prior year asbestos charge, diluted earnings per common share for this years third
quarter improved to $0.09, or by 50.0 percent, compared with last years adjusted $0.06.
Nine months ended February 28, 2007
Net Sales
On a consolidated basis, net sales of $2,333.0 million for the first nine months ended February 28,
2007 grew 11.1 percent, or $233.9 million, over net sales of $2,099.2 million during the comparable
period last year. The August 31, 2005 acquisition of illbruck Sealant Systems (illbruck), plus
eight other smaller acquisitions, slightly offset by one small divestiture, contributed 4.7
percent, or $99.8 million, to the growth over last year. Organic sales growth of 6.4 percent, or
$134.1 million, included 2.0 percent from pricing initiatives and 1.2 percent from net favorable
foreign exchange rates year over year, primarily against the stronger euro and Canadian dollar,
offset slightly by certain weaker Latin American and other currencies.
Industrial segment net sales, which comprised 64.3 percent of the current years consolidated net
sales, totaled $1,499.5 million; growing 17.6 percent from last years $1,274.7 million. This
segments net sales growth resulted from the combination of the acquisition of illbruck, plus six
other smaller acquisitions, which contributed 7.0 percent, plus organic sales growth of 9.0
percent, including 2.5 percent from pricing. Net favorable foreign exchange differences provided
additional sales growth of 1.6 percent.
Consumer segment net sales, which comprised 35.7 percent of the current years consolidated net
sales, increased 1.1 percent to $833.6 million from last years $824.5 million. Organic sales
declined 0.2 percent, which includes pricing of 1.1 percent and 0.6 percent from net favorable
foreign exchange differences. Contributions to sales from acquisitions of two small product lines
were slightly offset by the January 2006 divestiture, for a net contribution of 1.3 percent to
sales. The organic decline in this segment is principally the result of fluctuating order patterns
among major retail customers in their efforts to manage their inventories, as well as declines in
existing homes turnover and, to a lesser extent, new housing starts, which have affected several
lines of the business.
33
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
Gross Profit Margin
Consolidated gross profit margin of 40.1 percent of net sales this first nine months declined from
40.8 percent a year ago. This margin decline of 70 bps is the result of several factors, a main
one being continued higher costs of a number of our raw materials, such as asphalts and various
resins, net of higher pricing initiatives (approximately 40 bps). Numerous price increases have
been initiated throughout the operating segments during the past year to help compensate or recover
these higher material costs, a number of which are beginning to moderate. Several recent
acquisitions, particularly illbruck, also carry inherently lower gross margin structures and
further impacted gross margin this quarter, by approximately 10 bps. In addition, a comparatively
lower-margin mix of sales, including increased services sales which also generate structurally
lower gross margin, further weighed on this margin.
Industrial segment gross profit margin for this years first nine months declined to 41.3 percent
of net sales from 42.5 percent last year. This 120 bps margin decline in this segment essentially
relates to the lower-margin illbruck acquisition (approximately 20 bps), higher raw material costs
(approximately 50 bps) and the mainly service-driven lower-margin mix of sales.
Consumer segment gross profit margin for this first nine months slightly declined to 37.8 percent
of net sales from 38.3 percent last year, principally a function of the organic sales decline in
this segment and the change in delivery terms with a major customer during this years second
quarter.
Selling, General and Administrative Expenses (SG&A)
Consolidated SG&A expense levels for this years first nine months decreased 130 bps to 31.3
percent of net sales compared with 32.6 percent a year ago. Reflected in the improvement is the
leverage from the 5.2% organic sales growth, including higher pricing, in addition to last years
$10.2 million of one-time costs, which included the finalization of the Dryvit national residential
class action settlement, the sale of a small subsidiary, hurricane-related costs, and certain costs
incurred for a European pension plan. The mix of increased service sales over the prior year,
which are characterized by relatively lower SG&A support requirements, along with the change in
delivery terms with a major customer during this years second quarter, and tighter spending
controls, also contributed to the improvement.
Industrial segment SG&A improved by 100 bps to 30.9 percent of net sales this first nine months
from 31.9 percent a year ago, reflecting principally the leverage of organic sales growth, the
movement in mix, and the influence of favorable acquisitions.
Consumer segment SG&A as a percent of net sales this first nine months improved slightly to 27.5
percent compared with 27.7 percent a year ago, reflecting the change in delivery terms with a major
customer, effective cost containment and other savings programs.
34
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
Corporate/Other SG&A expenses decreased during this years first nine months to $36.2 million from
$47.7 million for the comparable period last year, principally reflecting last years $10.2 million
of one-time costs, as previously discussed. Excluding the one-time costs from the prior year, SG&A
expenses further decreased by approximately $1.4 million during this years first nine months,
mainly from reductions in certain employment-related costs, including insurance and pensions.
Certain other increases in employment-related costs, including compensation and additional grants
made under the Omnibus Plan, slightly offset these savings.
License fee and joint venture income of approximately $1.5 million and $1.4 million for the nine
month periods ended February 28, 2007 and 2006, respectively, are reflected as reductions of
consolidated SG&A expenses.
We recorded total net periodic pension and postretirement benefit cost of $15.0 million and $14.7
million for the nine months ended February 28, 2007 and 2006, respectively. This increased pension
expense of $0.3 million was attributable to increased pension service and interest cost
approximating $1.4 million, in combination with additional net actuarial losses incurred of $0.2
million, offset by an improvement in the expected return on plan assets of $1.3 million. We expect
that pension expense will fluctuate on a year-to-year basis depending upon the investment
performance of plan assets, but such changes are not expected to be material as a percentage of
income before income taxes.
Asbestos Charge (Income)
As described in Note F to the Consolidated Financial Statements, we recorded a pre-tax asbestos
charge during last years first nine months of $45.0 million, and a total of $380.0 million for the
fiscal year ended May 31, 2006 in connection with the completion of a calculation of our liability
for unasserted potential future asbestos-related claims by an independent consulting firm. There
was no related charge taken or incurred during this years first nine months ended February 28,
2007; however, our Bondex subsidiary reached a cash settlement of $15.0 million during the quarter
ended November 30, 2006, the terms of which are confidential by agreement of the parties, with one
of the defendant insurers. For additional information, refer to Note F to the Consolidated
Financial Statements.
Net Interest Expense
Net interest expense was $7.3 million higher in the first nine months of fiscal 2007 than 2006.
Included in this increase is $1.1 million paid in association with the early retirement of our
Private Placement Senior Notes during the quarter ended August 31, 2006 (refer to Liquidity and
Capital Resources Financing Activities, below). Interest rates overall averaged 5.4 percent
during the first nine months, compared with 5.1 percent in the prior year first nine months,
accounting for $2.0 million of the interest cost increase. Higher average net borrowings
associated with recent acquisitions, approximating $100.8 million, combined with increases in
35
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
debt added $6.1 million of interest cost, while improved investment income performance
year-over-year provided $1.9 million of additional income.
Income Before Income Taxes (IBT)
Consolidated IBT for this years first nine months improved by $86.0 million, or 85.7 percent, to
$185.7 million from $100.0 million during last years first nine months, with margin comparisons of
8.0 percent of net sales versus 4.8 percent a year ago. While prior year IBT includes a pre-tax
asbestos reserve charge of $45.0 million, the current nine-month IBT includes pre-tax
asbestos-related settlement income of $15.0 million. Excluding the impact of the asbestos-related
items, IBT for this years first nine months would have improved by 17.7 percent, while current
year margin of 7.3 percent would compare with last years adjusted margin of 6.9 percent.
Industrial segment IBT grew by $22.7 million, or 17.0 percent, to $156.1 million from last years
$133.5 million, primarily from this segments organic unit sales growth. Consumer segment IBT
declined by 3.6 percent, to $83.9 million from $87.0 million last year, mainly as a result of
organic unit sales decline, partly offset by spending controls.
Income Tax Rate
The effective income tax rate was 33.0% for the nine months ended February 28, 2007 compared to an
effective income tax rate of 34.2% for the nine months ended February 28, 2006.
For the nine months ended February 28, 2007 and, to a lesser extent for the nine months ended
February 28, 2006, the effective tax rate differed from the federal statutory rate due to decreases
in the effective tax rate principally as a result of certain tax credits and by the U.S. federal
tax impact of foreign operations. Furthermore, during the nine months ended February 28, 2007, a
decrease in the effective income tax expense rate resulted from a one-time benefit relating to the
resolution of prior years tax liabilities in the amount of $2.1 million. The nine months ended
February 28, 2006, was impacted by a decrease in the effective tax rate as a result of a one-time
state income tax benefit related to changes in Ohio tax laws, including the effect of lower tax
rates, enacted on June 30, 2005. The decreases in the effective tax rate were partially offset by
valuation allowances associated with losses incurred by certain of our foreign businesses,
valuation allowances related to U.S. federal foreign tax credit carryforwards, state and local
income taxes and other non-deductible business operating expenses.
As described in this Managements Discussion and Analysis of Financial Condition and Results of
Operations for the three month period ended February 28, 2007, there is uncertainty as to whether
we will be able to recognize certain deferred tax assets. Refer to the section of this filing
mentioned above for further information.
36
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
The effective income tax rate for the nine months ended February 28, 2007 reflects the impact of a
prior quarter $15.0 million asbestos liability adjustment related to the cash settlement received
by our Bondex subsidiary. Excluding the asbestos liability adjustment, the effective income tax
rate for this years first nine months would have been adjusted to a pro-forma annualized effective
income tax rate of 32.9%. The effective income tax rate for the nine months ended February 28,
2006 reflects the impact of the $45.0 million asbestos charge. Excluding the asbestos charge, the
effective income tax rate for the first nine months of last year would have been adjusted to a
pro-forma effective income tax rate of 34.8%.
Net Income
Net income of $124.3 million for the nine months ended February 28, 2007 compares to net income of
$65.8 million for the comparable period last year. Prior year net income reflects the impact of an
after-tax asbestos reserve charge of $28.7 million, while the current year reflects a one-time gain
of $2.1 million relating to the settlement of prior years tax liabilities, and the impact of a
cash settlement received from one of the defendant insurers for $9.7 million (after-tax), as
discussed previously. Excluding the impact of the asbestos-related items, this years first nine
months net income would have reflected an improvement of $20.1 million, or 21.2 percent, to $114.6
million from last years adjusted $94.5 million. Margin on sales of 4.9 percent this year compares
to last years adjusted 4.5 percent, excluding the asbestos items, with this 40 bps margin
difference mostly the result of the combination of higher organic unit sales volume, the one-time
costs a year ago, the movement in sales mix, and the influence of several favorable acquisitions.
Diluted earnings per common share for this years first nine months improved by 83.3 percent, to
$0.99 from $0.54 a year ago. Excluding the asbestos-related items, diluted earnings per common
share for this years first nine months improved by 19.7 percent, to $0.91, compared with last
years adjusted $0.76.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From:
Operating Activities
Operating activities generated positive cash flow of $133.8 million during the first nine months of
fiscal 2007 compared with $111.4 million generated during the same nine month period of fiscal
2006. Nine month net income of $124.3 million represents a $58.5 million increase over the first
nine months of fiscal 2006 net income of $65.8 million. Adjusted net income (excluding $28.7
million after-tax asbestos charges made through February of fiscal 2006 and the $9.7 million
after-tax gain this fiscal year) would have been $114.6 million in fiscal 2007 versus $94.5 million
in February 2006, resulting in a change of $20.1 million year-over-year, or an
37
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
increase from 2006 of 21.2 percent. Cash flow from operations during the first nine months was
positively impacted by additional depreciation and amortization of $5.8 million versus the prior
period.
Changes in operating working capital required an additional $7.9 million use of cash
period-over-period. More specifically, trade accounts receivable provided $29.4 million in
favorable changes in cash flow period-over-period. Inventories required $6.8 million in additional
operating cash period-over-period as a result of increased days outstanding in inventory since May
31, 2006, primarily related to certain strategic raw material inventory builds and in consideration
of certain regulatory changes ahead. Accounts payable required $9.2 million additional cash
period-over-period, mainly as a result of the higher inventory levels and the timing of payments.
All other remaining balance sheet changes related to changes in working capital had a net
unfavorable impact of $21.3 million.
Changes in items not affecting cash and other was a use of cash of $3.9 million.
Changes in long-term and short-term asbestos related reserves, net of taxes, of $31.0 million in
the first nine months of fiscal 2007 versus $0.9 million in the comparable period of fiscal 2006
reflects the $28.7 million after-tax asbestos charge taken a year ago, as the related payments were
approximately the same each period.
Cash provided from operations remains our primary source of financing internal growth, with limited
use of short-term debt.
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 this years first nine months of $34.1 million
compare with depreciation of $44.3 million. While we are not a capital intensive business and
capital expenditures generally do not exceed depreciation in a given year, capital spending is
expected to slightly outpace our depreciation levels for the next several years as additional
capacity is brought on-line to support our continued growth. With this additional minor plant
expansion, we believe there will be adequate production capacity to meet our needs for the next
several years at normal growth rates.
During this years first nine months, we invested a total of $75.0 million for acquisitions of
businesses.
Our captive insurance companies invest in marketable securities in the ordinary course of
conducting their operations, and this activity will continue. Differences in these activities
between years are attributable to the timing and performance of their investments.
38
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
Financing Activities
As of the end of our third fiscal quarter, our 2.75% Convertible Notes due 2033 (the Notes)
became convertible into 8,034,355 shares of RPM common stock. The Indenture under which the Notes
were issued provides that the Notes are convertible in any fiscal quarter if, as of the last day of
the preceding quarter, the sale price of RPMs common stock exceeded the conversion trigger price
per share for at least 20 trading days in a period of 30 consecutive trading days ending on the
last trading day of such preceding fiscal quarter.
On December 29, 2006, we refinanced our $330.0 million revolving credit facility with a $400.0
million 5-year credit facility (the New Facility). The New Facility will be used for working
capital needs, general corporate purposes, including acquisitions and to provide back-up liquidity
for the issuance of commercial paper. The New Facility provides for borrowings in U.S. dollars and
several foreign currencies and provides sublimits for the issuance of letters of credit in an
aggregate amount of up to $35.0 million and a swing-line of up to $20.0 million for short-term
borrowings of less than 15 days. In addition, the size of the New Facility may be expanded upon
our request by up to an additional $175.0 million, thus potentially expanding the New Facility to
$575.0 million, subject to lender approval.
On July 18, 2006, we prepaid our 6.61% Senior Notes, Series B, due November 15, 2006, and our 7.30%
Senior Notes, Series C, due November 15, 2008 (collectively, the Notes). We paid all amounts due
pursuant to the terms of the Purchase Agreement and did not incur any material early termination
penalties in connection with our termination of the Notes.
In July 2006, we amended both our accounts receivable securitization and revolving credit facility
agreements to redefine EBITDA, effective May 31, 2006.
On October 19, 2005, we issued and sold $150.0 million aggregate principal amount of 6.7% Senior
Unsecured Notes due 2015 (6.7% Senior Unsecured Notes) of our indirect wholly owned subsidiary,
RPM United Kingdom G.P. RPM International Inc. has fully and unconditionally guaranteed the
payment obligations under the 6.7% Senior Unsecured Notes. The net proceeds of the offering of the
6.7% Senior Unsecured Notes were used by RPM United Kingdom G.P. for refinancing $138.0 million of
revolving credit facility borrowings associated with the August 31, 2005 acquisition of illbruck
and for other general corporate purposes. Concurrent with the issuance of the 6.7% Senior Unsecured
Notes, RPM United Kingdom G.P. entered into a cross currency swap, which fixed the interest and
principal payments in euros for the life of the 6.7% Senior Unsecured Notes and results in an
effective euro fixed rate borrowing of 5.31%. The 6.7% Senior Unsecured Notes were offered to
qualified institutional buyers under Rule 144A of the Securities Act of 1933. The Notes have not
been and will not be registered under the Securities Act of 1933 or any state securities laws.
We are exposed to market risk associated with interest rates. We do not use financial derivative
instruments for trading purposes, nor do we engage in foreign currency, commodity or interest
39
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
rate speculation. In addition to the hedge risk associated with our 6.7% Senior Unsecured Notes
discussed above, our only other hedged risks are associated with certain fixed debt whereby we have
a $200.0 million notional amount interest rate swap contract designated as a fair value hedge to
pay floating rates of interest based on six-month LIBOR that matures in fiscal 2010. Because
critical terms of the debt and interest rate swap match, the hedge is considered perfectly
effective against changes in fair value of debt, and therefore, there is no need to periodically
reassess the effectiveness during the term of the hedge.
Our available liquidity beyond our cash balance at February 28, 2007 stood at $444.5 million. Our
debt-to-capital ratio was 47.6% at February 28, 2007 compared with 48.6% at May 31, 2006. Had we
been able to reduce our total outstanding debt by all of our cash and short-term investments
available as of February 28, 2007 and May 31, 2006, our adjusted net (of cash) debt-to-capital
ratio would have been 43.7% and 45.3%, respectively.
The following table summarizes our financial obligations and their expected maturities at February
28, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in the
periods indicated.
Contractual Obligations
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Contractual |
|
|
|
|
|
|
Payment |
|
|
Payments Due In |
|
|
|
Stream |
|
|
2008 |
|
|
2009-10 |
|
|
2011-12 |
|
|
After 2012 |
|
|
Long-term debt obligations |
|
$ |
936,541 |
|
|
$ |
3,514 |
|
|
$ |
579,870 |
|
|
$ |
611 |
|
|
$ |
352,546 |
|
Operating lease obligations |
|
|
92,905 |
|
|
|
27,235 |
|
|
|
33,424 |
|
|
|
13,990 |
|
|
|
18,256 |
|
Other long-term liabilities (1) |
|
|
374,811 |
|
|
|
61,924 |
|
|
|
86,186 |
|
|
|
79,546 |
|
|
|
147,155 |
|
|
Total |
|
$ |
1,404,257 |
|
|
$ |
92,673 |
|
|
$ |
699,480 |
|
|
$ |
94,147 |
|
|
$ |
517,957 |
|
|
|
|
|
(1) |
|
These amounts represent our estimated cash contributions to be made in the periods
indicated for our pension and postretirement plans, assuming no actuarial gains or losses,
assumption changes or plan changes occur in any period. The projection results assume $11.9
million will be contributed to the U.S. plan in fiscal 2007; all other plans and years assume the
required minimum contribution will be contributed. Also included are expected interest payments on
long-term debt. |
We maintain excellent relations with our banks and other financial institutions to provide
continual access to financing for future growth opportunities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financings, other than the minimum operating lease commitments
included per the above Contractual Obligations table. 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.
40
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
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 Companys 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. (For
additional information, refer to Part II, Item 1. Legal Proceedings.)
FORWARDLOOKING 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 managements 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, supply and capacity of raw materials, including assorted resins and
solvents; packaging, including plastic containers; and transportation services, including fuel
surcharges; (c) continued growth in demand for the Companys products; (d) legal, environmental and
litigation risks inherent in the Companys construction and chemicals businesses and risks related
to the adequacy of the Companys insurance coverage for such matters; (e) the effect of changes in
interest rates; (f) the effect of fluctuations in currency exchange rates upon the Companys
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 Companys ongoing
acquisition and divestiture activities; (i) risks related to the adequacy of its contingent
liability reserves, including for asbestos-related claims; and (j) other risks detailed in the
Companys filings with the Securities and Exchange Commission, including the risk factors set forth
in the Companys Annual Report on Form 10-K for the year ended May 31, 2006, as the same may be
updated from time to time. The Company does not undertake any obligation to publicly update or
revise any forward-looking statements to reflect future events, information or circumstances that
arise after the filing date of this document.
41
RPM INTERNATIONAL INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED FEBRUARY 28, 2007
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign exchange rates since we
fund our operations through long- and short-term borrowings and denominate our business
transactions in a variety of foreign currencies. There were no material changes in our exposure to
market risk since May 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Companys Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of February 28, 2007 (the Evaluation Date), have concluded that as of the
Evaluation Date, the Companys 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 (1) is recorded, processed, summarized and reported, within the time periods specified
in the Commissions rules and forms, and (2) is accumulated and communicated to the Companys
management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate
to allow for timely decisions regarding required disclosure.
(b) CHANGES IN INTERNAL CONTROL.
There were no changes in the Companys internal control over financial reporting that occurred
during the fiscal quarter ended February 28, 2007 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
42
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos Litigation
Certain of our wholly-owned subsidiaries, principally Bondex International, Inc. (collectively
referred to as the subsidiaries), are defendants in various asbestos-related bodily injury lawsuits
filed in various state courts with the vast majority of current claims pending in five states
Illinois, Ohio, Mississippi, Texas and Florida. These cases generally seek unspecified damages for
asbestos-related diseases based on alleged exposures to asbestos-containing products previously
manufactured by our subsidiaries or others.
Our subsidiaries vigorously defend these asbestos-related lawsuits and in many cases, the
plaintiffs are unable to demonstrate that any injuries they have incurred, in fact, resulted from
exposure to a product for which one of our subsidiaries is responsible. In such cases, the
subsidiaries are generally dismissed without payment. With respect to those cases where compensable
disease, exposure and causation are established with respect to a product for which one of our
subsidiaries is responsible, the subsidiaries generally settle for amounts that reflect the
confirmed disease, the particular jurisdiction, applicable law, the number and solvency of other
parties in the case and various other factors which may influence the settlement value each party
assigns to a particular case at the time.
As of February 28, 2007, our subsidiaries had a total of 10,846 active asbestos cases compared to a
total of 10,175 cases as of February 28, 2006. For the quarter ended February 28, 2007, our
subsidiaries secured dismissals and/or settlements of 736 claims and made total payments of $18.2
million, which included defense costs paid during the current quarter of $7.2 million. For the
comparable period ended February 28, 2006, dismissals and/or settlements covered 213 claims and
total payments were $17.1 million, which included defense costs paid during the quarter of $7.0
million. Excluding defense costs, the average costs to resolve a claim, including dismissed claims,
were $14,946 and $47,418 for each of the quarters ended February 28, 2007 and 2006,
respectively. The amount and timing of dismissals and settlements can fluctuate significantly from
period to period resulting in volatility in the average costs to resolve claims in any given
quarter or year. In addition, in some jurisdictions, cases may involve more than one individual
claimant. As a result, settlement or dismissal statistics on a per case basis are not necessarily
reflective of the payment amounts on a per claimant basis and the amounts and rates can vary widely
depending on a variety of factors including the mix of malignancy and non-malignancy claims and the
amount of defense costs incurred during the period.
For additional information on our asbestos litigation, including a discussion of our asbestos
reserve, see Note F of the Notes to Consolidated Financial Statements.
EIFS Litigation
As of February 28, 2007, Dryvit was a defendant or co-defendant in various single family
residential exterior insulated finish systems (EIFS) cases, the majority of which are pending in
the southeastern region of the country. Dryvit is also defending EIFS lawsuits involving
43
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
commercial structures, townhouses and condominiums. The vast majority of Dryvits EIFS lawsuits
seek monetary relief for water intrusion related property damages, although some claims in certain
lawsuits allege personal injuries from exposure to mold.
Dryvit is a defendant in a class action lawsuit 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). A preliminary approval
order was entered on April 8, 2002 in the Posey case for a proposed nationwide class action
settlement which was subsequently approved after several appeals. The deadline for filing claims in
the Posey class action expired on June 5, 2004 and claims have been processed during the pendency
of the various appeals. On September 15, 2005, a final, non-appealable order was entered finally
approving the nationwide class. As of February 28, 2007, approximately 7,198 total claims had been
filed as of the June 5, 2004 claim filing deadline. Of these 7,198 claims, approximately 4,410
claims have been rejected or closed for various reasons under the terms of the settlement.
Approximately 1,184 of the remaining claims are at various stages of review and processing under
the terms of the settlement and it is possible that some of these claims will be rejected or closed
without payment. As of February 28, 2007, a total of 1,604 claims have been paid for a total of
approximately $13.5 million. Additional payments have and will continue to be made under the terms
of the settlement agreement which include inspection costs, third party warranties and class
counsel attorneys fees.
Third party excess insurers have historically paid varying shares of Dryvits defense and
settlement costs in the individual commercial and residential EIFS lawsuits under various
cost-sharing agreements. Dryvit has assumed a greater share of the costs associated with its EIFS
litigation as it seeks funding commitments from our third party excess insurers and will likely
continue to do so pending the outcome of coverage litigation involving these same third party
insurers. One of our excess insurers filed suit seeking a declaration with respect to its rights
and obligations for EIFS related claims under its applicable policies. During last years third
fiscal quarter, the court granted Dryvits motion to stay the federal filing based on a more
complete state court complaint filed against these same insurers and the Companys insurance
broker. The coverage case is now proceeding in state court. Discovery in this litigation is
ongoing. The trial is scheduled for December 3, 2007. A previously set scheduling order is likely
to be amended by the Court in April 2007. This anticipated amended scheduling order may include a
change in the current trial date. For a discussion of the existing reserves related to our Dryvit
EIFS litigation, see Note F to the Consolidated Financial Statements.
Environmental Proceedings
As previously reported, several of our subsidiaries are, from time to time, identified as a
potentially responsible party under the federal Comprehensive Environmental Response,
Compensation and Liability Act and similar state environmental statutes. In some cases, our
subsidiaries are participating in the cost of certain clean-up efforts or other remedial actions.
Our share of such costs, however, has not been material and management believes that these
environmental proceedings will not have a material adverse effect on our consolidated financial
condition or results of operations. See Item 2. Managements Discussion and Analysis of
44
RPM INTERNATIONAL INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Financial Condition and Results of Operations Other Matters, in Part I of this Quarterly Report
on Form 10-Q.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the
risk factors disclosed in Item 1A of the Companys Annual Report on Form 10-K for the fiscal year
ended May 31, 2006.
ITEM 6. EXHIBITS
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Exhibit Number |
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Description |
10.1
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Credit Agreement among RPM International Inc., the Borrowers party
thereto, the Lenders party thereto and National City Bank, as
Administrative Agent, dated as of December 29, 2006, which is
incorporated herein by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K, as filed with the Commission on January 4, 2007 (File
No. 001-14187). |
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11.1
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Computation of Net Income Per Share of Common Stock. (x) |
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31.1
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Rule 13a-14(a) Certification of the Companys Chief Executive Officer. (x) |
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31.2
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Rule 13a-14(a) Certification of the Companys Chief Financial Officer. (x) |
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32.1
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Section 1350 Certification of the Companys Chief Executive Officer. (x) |
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32.2
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Section 1350 Certification of the Companys Chief Financial Officer. (x) |
45
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.
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RPM International Inc. |
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By
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/s/ Frank C. Sullivan |
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Frank C. Sullivan |
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President and Chief Executive Officer |
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By
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/s/ Robert L. Matejka |
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Robert L. Matejka |
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Vice President, Chief Financial Officer and Controller |
Dated: April 9, 2007