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To the Associates,
Customers and
Shareholders of RPM:
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Five years ago, I was given the opportunity to lead a business founded by my
grandfather 55 years prior, and then nurtured and built by my father for more than
three decades. From an $11 million business producing a single product line, RPM
had grown to become a leader in the specialty coatings industry, with a stable of
leading brands generating revenue of $2 billion and net income of $100 million. At that time,
Tom Sullivan and his lifelong business partner, Jim Karman, passed the torch of leadership to
a young, untested management team.
Strategically, our holding company approach that keeps operating units close to their
customers was time-tested. And we were guided by Frank C. Sullivan’s founding philosophy:
“Hire the best people you can find. Create an atmosphere that will keep them. Then let them
do their jobs.” He instilled in us The Value of 168, which represents the number of hours in a
week, and reminds us to use our time
productively, in our workplace, with
our families and in our communities.
With this foundation, we established
a five-year plan to grow RPM to
$3.35 billion in sales, while doubling
net income to $200 million. One key component of this plan was to enhance our presence
in Europe, growing from a $180 million base of business to $500 million. Achieving this
plan did not come easy. Our people were battle-tested, not only by the day-to-day challenges
of a competitive marketplace, but also by the two-edged sword of an unanticipated asbestos
liability crisis and skyrocketing raw material costs.
Despite these challenges, we achieved our goals. During this five-year period, sales and
earnings grew at a compounded annual rate (excluding asbestos items) of 11 percent and
15 percent respectively, including the contributions from a now $600 million European base
of business. Our cash dividend to shareholders increased by 40 percent, while our payout
ratio was reduced to 42 percent from 52 percent. Our net debt-to-total capitalization ratio
remained steady at 43 percent despite $450 million of debt-funded acquisitions and
$598 million of pre-tax asbestos liability charges negatively impacting stockholders’ equity.
Sitting here today, words cannot express how grateful and proud I am of our corporate
management team, operating company leadership and 9,400 employees worldwide who came
together to meet these ambitious growth targets.
During this past fiscal year, the journey has been punctuated with victories in the marketplace,
both large and small; by challenges and opportunities; and by macroeconomic forces and
market trends impacting each of our business units. As a result of this wide variety of topics, we
have adopted a magazine format to tell the RPM story for fiscal 2007 and hope you enjoy it.
Operating conditions in fiscal 2007 were far from ideal. Severe raw material price pressures
that began in fiscal 2006 continued to affect our margins. While most of our product
applications involve maintenance or improvement, we were not completely immune from the
decline in new housing starts or the decline in sales of existing homes in the U.S., which had a
negative effect on a number of RPM businesses. Our consumer segment also felt the impact of
well-publicized difficulties facing many of our retail customers.
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Yet, despite these challenges, sales increased
11 percent to $3.3 billion from $3.0 billion
in fiscal 2006. Net income was a record
$208.3 million, or $1.64 per diluted share,
compared to a loss of $76.2 million, or
$0.65 per diluted share, a year ago. Fiscal
2006 results included a $380.0 million charge
to cover current and future asbestos liabilities.
Fiscal 2007 results included a $15.0 million
pre-tax gain from the settlement of asbestosrelated
claims against an insurance carrier.
Excluding asbestos items in both years,
net income increased 18 percent, to
$198.6 million, from $168.1 million, a year
ago. Diluted per share earnings were up
16 percent, to a record $1.57 from $1.35 in
fiscal 2006.
The company’s industrial segment enjoyed
another year of strong growth, with sales
up 16 percent to $2.1 billion and EBIT
(earnings before interest and taxes) up
16 percent to $235.1 million. Organic sales
growth was 10.3 percent, while acquisitions
added another 5.6 percent. Nearly all
industrial businesses posted solid sales gains,
with particular strength internationally.
Consumer segment sales grew 4 percent, to
more than $1.2 billion, from $1.2 billion in
fiscal 2006, while EBIT declined 3 percent,
to $154.4 million, from $159.3 million a
year ago. Organic sales grew 1.1 percent,
while acquisitions added 2.4 percent. Our
consumer business units faced tough sales
challenges as our major retail customers
addressed a sluggish retail climate through
uneven buying patterns and inventory
reductions. Continuing a trend of the last
few years, we gained market share across
virtually all consumer product lines through
a combination of improved distribution,
stronger advertising and ongoing partnering
with retail customers. These share gains
bode well for our sales outlook as market
conditions improve for this segment.
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At year-end, RPM’s asbestos reserve stood
at $354.3 million following the draw down
of $67.0 million of reserves during the year.
We believe that the worst of the asbestos
issue is behind us and that it will continue
to diminish in impact over time. New case
filings are declining and resolution of prior
cases is accelerating, as is the dismissal rate
for specious cases. We also continue to press
forward with litigation against insurance
carriers in an attempt to recover both past
and future asbestos-related costs.
More detail on the asbestos issue may
be found in Management’s Discussion
and Analysis, as well as in Note I to the
Consolidated Financial Statements, which
may be found on page 58 of this annual
report. A Reconciliation of EBIT to Income
(Loss) Before Income Taxes can be found in
Management’s Discussion and Analysis.
During the five-year strategic plan period
ended May 31, 2007, RPM invested
$450 million in 28 transactions to acquire
businesses or product lines that generated
$490 million in annual sales their first year
as part of RPM. Of these, 16 were product
lines that were integrated into existing RPM
businesses. While these tend to be relatively
small transactions, the returns on investments
are huge, given the ability of our companies
to leverage these acquired product lines across
established sales and distribution platforms.
Ten acquisitions were of freestanding
companies where the management team
has stayed to run the business, further
proof that RPM remains the best home for
entrepreneurial companies in our industry.
One transaction, illbruck in Germany,
is what we consider a major strategic
acquisition. illbruck provides us with the
leadership position in the European building
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component tapes and sealants market. The
last of these 28 transactions is our joint
venture with Kemrock Industries in India.
You are likely to see additional transactions
similar to this joint venture as we more
aggressively investigate the opportunities for
growth in developing countries.
Six transactions representing an investment
of $140 million were completed in fiscal
2007 (see Acquisition News Briefs on
page 9). With our net debt-to-total
capitalization ratio at a comfortable
43 percent and liquidity of nearly
$500 million, representing a combination
of cash and unused long-term committed
credit facilities, we have ample resources
to successfully pursue and complete the
acquisition piece of our growth strategy.
With one of our outside directors retiring
during the 2007 fiscal year and another
planning retirement at our annual meeting
in October, it is appropriate to comment
broadly on the quality of our Board and its
impact on our growth and success.
Outside directors have comprised a majority
of RPM’s Board since 1977. In recent years,
they have been instrumental in counseling
us on a number of critical issues, including
implementing requirements of the
Sarbanes-Oxley Act, addressing the challenge
of asbestos lawsuits and establishing a
succession planning process at both the
corporate and operating level.
On January 26, 2007, we announced the
retirement from our Board of Dr. Max D.
Amstutz, who brought important expertise
in international markets and a tremendous
passion for RPM for 12 years as we grew
from $1 billion to more than $3 billion.
Max’s insight and advice will be missed.
Replacing Dr. Amstutz is Frederick R. Nance,
the regional managing partner and member
of the management committee of Squire,
Sanders & Dempsey L.L.P., an international
law firm based in Cleveland, Ohio, with more
than 800 attorneys in 30 offices worldwide.
Mr. Nance brings tremendous negotiating
and transaction skills and experience to RPM.
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As you will see in the proxy statement
accompanying this annual report, David
A. Daberko has been nominated to replace
Edward B. Brandon, who will retire at the
annual meeting following 18 years of service
on the RPM Board. Ed joined RPM when it
had only $445 million in sales. He has ably
served as chairman of RPM’s Compensation
Committee for a decade. Ed’s expertise
in financial markets and common sense
approach to governance and business issues
has been invaluable.
Mr. Daberko is currently chairman of
National City Corporation, a financial
holding company with $140 billion in total
assets and offices throughout the Midwest and
Florida. His knowledge of capital markets,
acquisition skills and experience in running a
large complex organization will serve RPM’s
shareholders well in the coming years.
I am pleased that in this era of heightened
director liability, we have been able to attract
two individuals of the quality and expertise of
Messrs. Nance and Daberko, and on behalf
of RPM associates and shareholders, I would
like to express our great appreciation for the
longstanding service of both Max Amstutz
and Ed Brandon.
We are focusing even more resources on our
core businesses by putting a management
structure in place to lead RPM to the next
level of growth. In October, we announced
that the Board elected the following
individuals to key positions at RPM:
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Ronald A. Rice was elected executive
vice president and chief operating officer,
with each of RPM’s five operating group
presidents reporting to him. He joined
RPM in 1995 as director of employee
benefits and most recently served as senior
vice president – administration.
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P. Kelly Tompkins was elected executive
vice president and chief administrative
officer, responsible for all of RPM’s
worldwide financial, legal, public affairs
and risk management functions. He joined
the company in 1996 as assistant general
counsel and most recently was senior vice
president, general counsel and secretary.
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•
Paul G. Hoogenboom was elected senior
vice president – manufacturing and
operations, and chief information officer,
having previously been vice president
– operations and chief information
officer. He joined RPM in 1999 to lead
our e-commerce subsidiary, which was
subsequently merged into RPM.
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Steven J. Knoop was elected senior vice
president – corporate development, having
previously been vice president – corporate
development. He joined the company in
1996 as director of corporate development.
Later that month, we announced that Edward
W. Moore had joined RPM as vice president,
general counsel and secretary, succeeding
Kelly Tompkins. He was previously a partner
with Calfee, Halter & Griswold LLP, where
he was co-chair of the Securities and Capital
Markets Group and also served as lead
counsel to RPM.
Robert L. Matejka, RPM’s chief financial
officer, plans to retire later in the 2008
fiscal year. Bob played a key role as our
CFO during a very challenging time for
public companies, successfully leading RPM
through the implementation of Sarbanes-
Oxley requirements and the transition from
a regional outside auditing firm to a global
auditing firm.
Ernest Thomas joined the company as
senior vice president at the end of our fiscal
year, and succeeded Bob as RPM’s CFO
on August 1, 2007. Ernie was formerly
senior vice president and CFO of
CF Industries Holdings, Inc. In his career,
he served in various financial and operational
management positions for companies
that included Tower Automotive, Modine
Manufacturing Company, Eaton Corp. and
General Motors Corporation.
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Don Zikmund retired at the end of this fiscal
year as president of our Stonhard business.
Don joined Stonhard in 1977, when it had
sales of less than $10 million, and continued
in a leadership role after RPM’s acquisition of
this worldwide leading producer of industrial
polymer flooring.
Ulf Eriksson retired this year after 40 years
with RPM. He first planted RPM’s flag in
Europe in the 1960s. Ulf played a critical
role in our growth and development in this
important marketplace, culminating in his
leadership in establishing RPM Europe and
accomplishing our most recent European
growth goals.
On a sad note, during this past year we
lost Dennis Finn, RPM’s vice president of
environmental and regulatory affairs. He
was a bear of a man with a big smile and an
eagerness to travel anywhere in the world on
behalf of RPM. Business associates, friends
and particularly family will tell you that
Dennis truly lived “The Value of 168.”
I mention these as the most prominent
examples of the people who say good-bye
to RPM each year, but in doing so leave
their mark on our company. To all, I express
our great thanks and appreciation for your
investment of time and talent in RPM’s
growth and success.
As we prepare a new strategic plan, we will
establish growth goals covering the next three
years to 2010. We expect to communicate
the details of this strategic plan at our
annual meeting of shareholders, which will
be held on Thursday, October 4, 2007 in
Strongsville, Ohio. We hope to see you there.
Preliminary indications suggest compounded
annual growth in sales of 10 percent and
earnings of 10 to 12 percent over this
three-year period. This earnings growth
level is somewhat less positively leveraged
as a result of expected greater investment
opportunities in developing countries in the
coming years. The biggest variable in earnings
over this period will come from the impact
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of raw material costs. At this point in time,
we are not forecasting any change from the
current historic high-cost levels.
During this three-year period, shareholders
should expect continuing disciplined
acquisition growth consistent with our
recent transactions and a cash dividend that
increases each year.
For our 2008 fiscal year, we anticipate growth
in revenues and earnings of approximately
8 percent as a result of positive internal
growth, the impact of small- to mediumsized
acquisitions, and an increase in growth
investments in developing countries such
as India and China. While there will be a
small drag on earnings growth in the near
term, we are excited about the prospects
for accelerating sales and earnings growth in
the coming years in these exciting parts of
the world.
In a business world that is often focused on
pennies per share per quarter, we established
a long-range vision and then achieved it.
RPM’s track record of longevity, sustainable
growth and recent accomplishments in the
face of tremendous challenges is testimony
to our entrepreneurial operating philosophy,
deliberate strategic balance between industrial
and consumer businesses, and the hard work
of every RPM associate.
On behalf of the RPM associates worldwide,
we thank our customers for the business
we do and the partnerships we enjoy. To
our fellow shareholders, thank you for
your continued confidence and investment
in RPM.
Very truly yours,
Frank C. Sullivan
President and Chief Executive Officer
August 20, 2007
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