Liquidity and Capital Resources
Operating Activities
Operating activities generated positive cash flow
of $160.6 million during fiscal 2003 compared with
$191.4 million a year ago, a decrease of $30.8 million. After adding back the $140.0 million ($87.5 million after
tax) effect of the asbestos charge, which did not affect cash flow, our adjusted net income of $122.8 million represents a $21.2 million increase over the prior year’s $101.6 million. Depreciation and amortization were flat year over year as capital expenditures have remained relatively flat over the past two years and the effects of SFAS No. 142 are no longer a differentiating factor in the yearly comparative results. The most significant movement in cash flow
generated from operating assets was in accounts receivable, where a cash usage of $37.3 million was caused mainly by an increase in sales in the fourth quarter versus relatively flat sales in the prior year’s quarter-over-quarter sales results; additionally, approximately $14 million of the increase in cash flow used related to receivables is a result of translating our foreign-denominated receivables at
higher asset values as the dollar weakened against virtually all major foreign currencies as of May 31, 2003 versus
May 31, 2002. Cash flow generated from inventories was $1.3 million as the effect of Class A manufacturing
continued to provide benefits over the last two fiscal years. Inventories were negatively affected by approximately
$8 million as a result of the translation of foreign-denominated inventories at this year’s year-end spot rates versus those of the prior year. The Company continues a strong focus on improving accounts receivable collections and managing inventories lower as a result of strengthened information technology systems and continuous improvements in operating techniques, such as Class A manufacturing, and these efforts will continue. Prepaid and other current assets increased mostly as a result of recording a receivable due from insurance companies of approximately $16.6 million. Accrued loss reserves were increased by $15.4 million, mainly as a result of recording additional loss provisions related to the insurance receivable.
As disclosed in the Company’s "Critical Accounting Policies and Estimates" and its discussion on asbestos
litigation (refer to Note H - "Contingencies and Loss Reserves"), as a result of a significant increase in asbestos claims activity and inequitable joint and several liability determinations against Bondex, our third-party insurance will be depleted within the first quarter of 2004. As a result, the Company will then be required to fund costs presently covered by insurance with its then-existing cash
from operations.
Cash provided from operations remains our primary source of financing internal growth, with limited use of short-term credit.
Investing Activities
Capital expenditures, other than for ordinary repairs and replacements, are made to accommodate our continued growth through improved production and distribution
efficiencies and capacity, and to enhance administration. Capital expenditures in fiscal 2003 of $41.8 million compare with depreciation and amortization of $58.7 million. We are not capital intensive and capital expenditures
generally do not exceed depreciation and amortization in
a given year. Capital spending is expected to hold at approximately the fiscal 2003 level for the next several years as many larger spending needs have been accomplished in recent years, such as those to accommodate the restructuring program, plus several major information
technology platform conversions. We believe there is
adequate production capacity to meet our needs for the next several years at normal growth rates.
During fiscal 2003, there were investments totaling $66.0 million (refer to Note A [2]) for seven product line acquisitions and one minority interest acquisition.
Our captive insurance companies invest in marketable securities in the ordinary course of conducting their operations, and this activity will continue (refer to Note A [7]). Differences in these activities between years are attributable to the timing and performance of their investments.
Financing Activities
During March 2002, we sold 11.5 million common shares through a follow-on public offering at $14.25 per share, closing April 2, 2002. The entire proceeds of the offering, $156 million, were used to permanently pay down the outstanding balance under the $200 million term loan facility, which was then retired.
On June 6, 2002, we entered into a $125 million accounts receivable securitization transaction with several banks through June 4, 2005, which is subject to continuation by an annual renewal by the banks. The securitized accounts receivable are owned in their entirety by RPM Funding Corporation, a wholly owned consolidated
special-purpose entity (SPE), and are not available to satisfy claims of the Company’s creditors until the participating banks’ obligations have been paid in full. This securitization is being accomplished by having certain subsidiaries sell various of their accounts receivable to the SPE, and by
having the SPE then transfer those receivables to a conduit administered by the banks. This securitization did not
constitute a form of off-balance sheet financing, and is
fully reflected in our financial statements. The amounts available under this program are subject to changes in the credit ratings of the Company’s customers, customer
concentration levels and certain characteristics of the underlying accounts receivable. This transaction increases our liquidity and reduces our financing costs by replacing up to $125 million of existing borrowing at lower interest rates. As of May 31, 2003, $91 million was securitized under this agreement, the proceeds of which were used
to reduce the outstanding balance under the $500 million revolving credit agreement.
On February 12, 2003, the Company announced the authorization of a share repurchase program, allowing the repurchase of up to 10 million shares of RPM common stock over a period of 12 months. As of May 31, 2003,
the Company had repurchased 100,000 of its shares at an average price of $11.67 per share.
In May 2003, the Company issued $297 million face value at maturity unsecured 2.75% Senior Convertible Notes ("2.75% Notes") due May 13, 2033. The Company generated net proceeds of $150 million from the sale of the 2.75% Notes. The 2.75% Notes areconvertible into 8,034,355 shares of the Company’s common stock at a price of $18.68 per share, subject to adjustments, during any fiscal quarter for which the closing price of the Company’s common stock is greater than $22.41 per share for a defined duration of time. The 2.75% Notes are also convertible during any period in which the credit rating
of the Company is below a specified level, or if specified
corporate transactions have occurred. The 2.75% Notes are redeemable by the holder for the issuance price plus accrued original issue discount in May 2008, 2013, 2018, 2023, 2028 and 2033. Interest on the 2.75% Notes is payable at a rate of 2.75% beginning November 13, 2003 until May 13, 2008, depending upon the market price of the Notes. After that date, cash interest will only accrete and will not be paid prior to maturity, subject to certain contingencies.
In May 2003, the Company established a $200 million non-rated commercial paper ("CP") program under which borrowings are unsecured for terms of 270 days or less. This CP program currently allows for lower interest cost than that available under the Company’s $500 million revolving credit facility. The $500 million credit facility is available to back up our CP program to the extent it is not drawn upon. As of May 31, 2003, there was $51.7 million outstanding under this CP program, the proceeds of which were used to reduce the outstanding balance of the revolver mentioned above.
Our debt-to-capital ratio was 45% at May 31, 2003, unchanged from May 31, 2002.
The table below summarizes our financial obligations and their expected maturities at May 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flow in the periods indicated.
The condition of the U.S.dollar has fluctuated
throughout the year, and was moderately weaker at fiscal
year end over the previous year end, causing a favorable
change in the "Accumulated Other Comprehensive Loss"
(refer to Note A [5 ]) component of stockholders’ equity of
$39.9 million this year versus $3.4 million last year. This
change was offset by a decrease of $5.9 million related to
adjustments required to certain foreign subsidiaries’
Minimum Pension Liability.
We maintain excellent relations with our banks and
other financial institutions to provide continual access to
financing for future growth opportunities.
Off-Balance Sheet Financings
We do not have any off-balance sheet financings,
other than the minimum leasing commitments described in
Note E.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.
Qualitative and Quantitative Disclosures
About Market Risk
We are exposed to market risk from changes in
interest rates and foreign currency exchange rates because
we fund our operations through long-and short-term
borrowings and denominate our business transactions in a
variety of foreign currencies. A summary of our primary
market risk exposures follows.
Interest Rate Risk
Our primary interest rate risk exposure results from
our floating rate debt, including various revolving and
other lines of credit (refer to Note B). At May 31,2003,
approximately 51% of our total debt was subject to floating
interest rates. If interest rates were to increase 100 basis
points (1%) from May 31,2003 rates,and assuming no
changes in debt from the May 31,2003 levels,the
additional annual interest expense would amount to
approximately $3.7 million on a pre-tax basis. We currently
do not hedge our exposure to floating interest rate risk.
Foreign Currency Risk
Our foreign sales and results of operations are subject
to the impact of foreign currency fluctuations (refer to
Note A [4 ]). As most of our foreign operations are in
countries with fairly stable currencies,such as Belgium,
Canada and the United Kingdom, this effect has not generally
been material. In addition,foreign debt is denominated
in the respective foreign currency, thereby eliminating any
related translation impact on earnings.
If the U.S.dollar continues to weaken, our foreign
results of operations will be positively impacted, but the
effect is not expected to be material.A 10% change in
foreign currency exchange rates would not have resulted
in a material impact to net income for the year ended
May 31,2003. We do not currently hedge against the risk
of exchange rate fluctuations.
Forward-looking Statements
The foregoing discussion includes forward-looking
statements relating to our business. These forward-looking
statements, or other statements made by us, are made
based on our expectations and beliefs concerning future
events impacting us and are subject to uncertainties and
factors (including those specified below) that are difficult
to predict and, in many instances,are beyond our control.
As a result, our actual results could differ materially from
those expressed in or implied by any such forward-looking
statements. These uncertainties and factors include
(a)general economic conditions; (b)the price and supply
of raw materials,particularly titanium dioxide,certain
resins,aerosols and solvents; (c)continued growth in
demand for our products; (d)legal, environmental and litigation
risks inherent in RPM ’s construction and chemicals
businesses and risks related to the adequacy of our reserves
and insurance coverage for such matters; (e)the effect of
changes in interest rates; (f)the effect of fluctuations in
currency exchange rates upon our 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 our ongoing acquisition and divestiture
activities; (i)risks inherent in our contingent liability
reserves,including asbestos; and other risks detailed in
our other reports and statements filed with the Securities
and Exchange Commission, including the risk factors set
forth in our prospectus and prospectus supplement
included as part of our Registration Statement on Form S-3
(File No.333-77028), as the same may be amended from
time to time.
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