RPM Operating Companies
Post Another Banner Year

In the face of the stiffest headwinds our industry has seen in recent memory, RPM associates once again delivered record operating performance for the fiscal year ended May 31, 2008. At the same time, we took a bold step that we believe will put RPM’s asbestos liability issue more permanently behind us by taking a pre-tax charge of $288 million that increases our total accrual for asbestos liabilities to $560 million and extends the period covered by this accrual from 10 to 20 years.

Unprecedented high raw materials costs continued throughout the fiscal year. Record high gasoline and diesel fuel prices dramatically increased shipping and distribution costs. Domestic sales of both new and existing homes sank to levels not seen in decades, having serious impact on our consumer segment retail customers and certain RPM businesses.

We capitalized on the fact that many of our products address the desire by both businesses and consumers to repair and maintain existing assets.

Yet, RPM operating companies found ways to win in this challenging environment. Our deliberate focus on becoming a more global company in recent years continued to pay dividends as overseas markets were relatively strong compared to weakness in the U.S. Our industrial businesses focused their efforts on worldwide economic sectors that are growing, increasing RPM’s penetration of markets such as oil and gas, power generation, infrastructure improvement, pharmaceuticals and health care. Our consumer businesses worked to gain market share and improve margins by introducing high valueadded products and improving distribution and market coverage. In both segments, we capitalized on the fact that many of our products address the desire by both businesses and consumers to repair and maintain existing assets and to find ways to cut energy consumption in the face of today’s record high energy costs.

We also capitalized on RPM’s balanced business model, which addresses both industrial and consumer markets, combines acquisitions with organic growth and, increasingly, focuses on global growth in addition to our strong North American presence. Based on the positive response we received regarding last year’s magazine-format annual report, we are using a similar format this year to tell the story of how RPM’s balanced approach to our business resulted in a winning performance in fiscal 2008, and how we will build on these successes in the years ahead.

Record Operating Results Achieved, Prior to Asbestos Charge

RPM operations achieved on-plan performance in fiscal 2008, resulting in record levels of sales, net income and earnings per diluted share, prior to asbestos charges.

Sales in fiscal 2008 increased 9.1 percent to $3.6 billion from $3.3 billion a year ago. Net income for the year was $47.7 million, or $0.39 per diluted share, including the asbestos charge. Fiscal 2007 net income was $208.3 million, or $1.64 per diluted share, including a $15.0 million gain from the settlement of asbestos-related claims against an insurance carrier.

Prior to asbestos-related items in both years, RPM’s net income grew 17.2 percent in fiscal 2008, to a record $232.8 million from $198.6 million a year ago. Earnings per diluted share increased 15.3 percent to $1.81 from $1.57 in the prior year. As a result of the asbestos charge and certain other factors, our tax rate was lower in fiscal 2008 than in the prior year. Excluding these non-recurring items, RPM would have posted a still-healthy 11.0 percent increase to $1.75 per diluted share.

RPM’s industrial segment sales were up 12.6 percent, to $2.4 billion from $2.1 billion in fiscal 2007. Acquisitions represented 3.7 percent of the increase, with organic growth accounting for 8.9 percent, including 3.9 percent in net foreign exchange gains. Particularly strong performance was reported by our Carboline, Stonhard, Dryvit and Tremco Roofing businesses. Industrial segment EBIT (earnings before interest and taxes) increased 11.3 percent to $261.7 million from $235.1 million in fiscal 2007.

Consumer segment sales for fiscal 2008 were $1.3 billion, up 3.2 percent from $1.2 billion a year ago, all of which was organic. The increase included a 1.6 percent net foreign exchange gain, while acquisitions less divestitures were a negative 0.2 percent, reflecting the sale of our Bondo subsidiary during the fiscal year. EBIT for the consumer segment improved 4.4 percent, to $161.2 million in fiscal 2008 from $154.4 million. These positive results were in sharp contrast to our consumer company competitors, most of whom are reporting significant declines in both sales and earnings to their investors.

These positive results were in sharp contrast to our consumer company competitors.

Asbestos Adjustment Addresses Potential Claims for 20 Years

At the end of fiscal 2006, RPM took a $321 million non-cash charge against earnings following a comprehensive thirdparty review of potential future asbestosrelated liabilities. This charge was expected to cover these liabilities for approximately 10 years. In looking at our trends and with more experience in hand, we were better able to project our future asbestos exposure over a longer period. As a result, RPM took another non-cash adjustment for future asbestos-related liabilities of $288 million at the end of fiscal 2008. This additional charge, coupled with the $272 million remaining of the fiscal 2006 accrual, is expected to cover asbestos costs for 20 years.

We continue to be encouraged by the decline in new case filings, the increase in resolution of prior cases and dismissal rates for questionable claims. Moreover, we are awaiting the judge’s ruling in our lawsuit against insurance carriers to recover both past and future asbestos costs. Should we be successful in this lawsuit, our balance sheet and cash flows statements will be strengthened by the amounts recovered.

Over the last five years, including the latest asbestos liability charge, we have expensed nearly $900 million through our income statement and, as a result of our dispute with insurance carriers, used roughly $330 million of our cash flow in addressing the asbestos situation. Despite these huge numbers, as a result of good capital structure management and the tremendous cash flow generation from the RPM operations, our financial condition is as strong as it has ever been – a testament to the resiliency and strength of our company.

The asbestos issue is discussed in depth in the financial section of this annual report, including Management’s Discussion and Analysis and Note I to the Consolidated Financial Statements. Its impact on RPM and America’s manufacturing base is also covered in my commentary ("What's Stifling American Manufacturing").

We are encouraged with the accelerating pace of acquisition opportunities we are evaluating.

Healthy Cash Flow Prompts 34th Consecutive Year of Dividend Increases

The financial strength of RPM is perhaps best represented by our continued strong cash flow generation. Including the higher asbestos cash costs in fiscal 2008, after-tax cash from operations grew 16 percent to a record $235 million.

Based on our healthy cash flow and highly positive operating results, the board of directors increased the cash dividend on common stock for the 34th consecutive year on October 4, 2007. The 8.6 percent increase, to $0.19 from $0.175, results in a yield of more than 3 percent, based on recent stock price history.

Acquisition Pace Accelerates

Our strong cash flow and borrowing capacity allowed us to continue RPM’s well-recognized acquisition program in fiscal 2008. We acquired nine businesses producing a total of nearly $200 million in annual revenue.

Moreover, we are encouraged with the accelerating pace of acquisition opportunities we are evaluating. The tightening of credit markets has dampened the ability of financial buyers to use extremely high leverage to pay higher multiples for businesses, which works to the favor of strategic buyers like RPM. We expect, in the coming years, to be able to pursue larger transactions at more reasonable historic values and continue to complete small- and medium-sized deals that bring new products and new management teams to the family of RPM companies.

Strong Balance Sheet to Aid Acquisitions

The net (of cash) debt-to-total capital ratio at year-end improved to 42.6 percent, towards the low range of our historic norms. Subsequent to year-end, we announced on June 13, 2008 a call for redemption of all of RPM’s outstanding Senior Convertible Notes due May 13, 2033. On July 14, 2008, as anticipated, virtually all noteholders chose to redeem their holdings for RPM stock resulting in the conversion of this debt to equity. From a balance sheet standpoint, the conversion improved our net (of cash) debt-to-capital ratio to 35.0 percent on a pro-forma basis.

At year-end, our available liquidity – defined as long-term committed, but unused, credit facilities plus cash – totaled $626 million. This liquidity, our ongoing ability to generate cash, plus our long-standing reputation as “the best home for entrepreneurial companies in our industry,” put us in a highly favorable position for acquisitions, particularly in this difficult credit environment.

For more information on RPM’s financial condition, refer to the article by Kelly Tompkins, RPM executive vice president - administration and chief financial officer, as well as the financial statements.

New Director Adds International Perspective

We announced, on January 24, 2008, the appointment of retired U.S. Army General John P. Abizaid to RPM’s board of directors and with it the expansion of the board size to 13. Gen. Abizaid retired from the Army in 2007 following 34 years of service, during which he rose from an infantry platoon leader to become a four-star general and the longest serving commander of U.S. Central Command. During a distinguished military career, his assignments ranged from infantry combat to delicate international negotiations.

His unique perspective on leadership and range of international experiences will serve RPM well in our efforts to grow our businesses globally.

A graduate of the U.S. Military Academy, John also holds a master of arts degree in Middle Eastern studies from Harvard University and received an Olmsted Scholarship at the University of Jordan, Amman. His unique perspective on leadership and range of international experiences will serve RPM well in our efforts to grow our businesses globally.

Corporate Management Team Enhanced

On October 4, 2007, we announced the promotions of four executives to vice president. They include:

• Russell L. Gordon to vice president - corporate planning. Previously director of corporate planning, Rusty joined RPM in 1995 after serving in various financial analysis positions with Goodrich Corporation.
• Janeen B. Kastner to vice president - corporate benefits and risk management. Most recently director of human resources and administration, Janeen joined RPM in 1997 from Watson Wyatt & Company where she was a benefits consultant.
• Randell McShepard to vice president - public affairs. Randy had been director of community relations since joining RPM in 2001. He was previously executive director of City Year Cleveland, and held positions with the Cleveland Bicentennial Commission and Vocational Guidance Services.
• Thomas C. Sullivan, Jr., to vice president - corporate development. Tom served in various sales and management capacities with RPM subsidiaries from 1987 until 2003 (including a three-year position in Asia), when he joined the corporate office as director of corporate development.

I am extremely proud of the dedicated and capable leadership team we have assembled at RPM headquarters.

Also augmenting the corporate development team under the direction of Steve Knoop, senior vice president, is John F. Kramer, who joined RPM as vice president - corporate development on November 15, 2007. He previously was senior corporate counsel at The Sherwin-Williams Company, where he managed the legal aspects of its international acquisitions and divestitures.

Subsequent to year-end, we announced two significant changes in RPM’s finance department. P. Kelly Tompkins, executive vice president and chief administrative officer since 2006, assumed the additional duties of chief financial officer on June 23, 2008. In this capacity, he succeeded Ernest P. Thomas, chief financial officer since August 2007, who left the company to pursue other business interests. Prior to becoming chief administrative officer with responsibility for all of RPM’s finance, legal and communication functions, including investor relations, Kelly was senior vice president, general counsel and secretary. He joined RPM in 1996.

On July 1, 2008, Barry M. Slifstein joined RPM as vice president and controller, succeeding Robert L. Matejka, who had been acting in that capacity prior to his retirement and who had served as chief financial officer until August 2007. Barry comes to RPM from our DAP Products Inc. operating group, where he had been vice president of finance, chief financial officer and treasurer. Prior to joining DAP in 1999, he had served in financial management positions at three pharmaceutical companies.

Leadership is critical to growing any business, and I am extremely proud of the dedicated and capable leadership team we have assembled at RPM headquarters.

Fiscal 2009 Outlook Anticipates Modest Sales and Earnings Growth

At RPM, we are especially proud of our annual planning process, which Ron Rice, executive vice president and chief operating officer, describes in depth in his article on page 12. At present, the combination of plans from our operating units anticipates modest single-digit growth in both revenues and net income for fiscal 2009, which would result in RPM continuing to outperform our industry.

While we expect pre-tax income to mirror revenue growth, we will return to more normalized tax rates in fiscal 2009, which will result in net income slightly lagging revenue growth. This outlook for the coming year excludes the affect of future acquisitions, though we fully expect to add new companies and product lines to RPM in fiscal 2009.

Great companies find a way to win regardless of the challenges they face.

Great companies find a way to win regardless of the challenges they face. And, while we believe that the corporate-led strategies you will read about in this annual report – the balance between consumer and industrial businesses, internal and acquisition growth, and expansion into international markets – are a vital part of our success, the real secret to RPM’s ability to grow in any environment is the leadership at each one of our nearly 50 independent operating company units. These leaders and their teams of dedicated employees find a way to win each and every year and they will do so again in 2009.

We are most grateful for our customers’ confidence and business, and are committed to continuing to add value as we partner, not only to survive, but thrive, in these challenging times. Lastly, to our shareholders, we are grateful that you have entrusted your capital to us. I believe that our 2008 results and the stock price performance charts on the inside front cover are proof that we have used it well. Rest assured that we are committed to generating another year of growth and positive returns on your investment.

Very truly yours, Frank C. Sullivan President and Chief Executive Officer August 20, 2008