Liquid Assets

by guest columnist

P. Kelly Tompkins

Executive Vice President -
Administration and
Chief Financial Officer

Financial management at RPM starts with several fundamental goals:

• Align RPM’s overall capital structure with key strategic and operational objectives;
• Maintain and enhance access to capital on a worldwide basis at the lowest cost to fund both internal growth initiatives and external growth through acquisitions;
• Strategically and proactively anticipate, respond to and manage external threats, challenges and opportunities to protect assets, cash flow and income through prudent risk management;
• Ensure the company has adequate liquidity to meet its short- and long-term obligations; and
• Fund a cash dividend that is anticipated to grow every year. Since the end of fiscal 2001, our cash dividend has increased 49.7 percent, while the payout ratio has declined from 80.4 percent to 38.9 percent, after adjustment for asbestos items.

Cash Dividends
Per Share

Investors who have not taken an in-depth look at RPM’s balance sheet for a few years may be favorably surprised by the advances the company has made in its overall capital structure, liquidity and financial flexibility to address both large and small acquisition opportunities. Strong performance by RPM’s operating companies have allowed the company to fund a consistently increasing cash dividend and, since fiscal 2004, absorb some $331 million in asbestos liability cash costs, while achieving these significant improvements in overall financial structure.

An Improved, More Resilient Capital Structure

Over the past few years, RPM’s capital structure has shifted from its historic reliance on floating rate bank debt with short maturities to emphasize longer term fixed rate public debt with more balanced and manageable maturity profiles. For example, this past February, we sold $250 million of 6.50 percent Notes due 2018, with some $150 million of those proceeds used to retire short-term bank borrowings.

Debt Structure

During the 2007 fiscal year, RPM’s wholly owned subsidiary, RPM United Kingdom G.P., sold $150 million in Senior Unsecured Notes due 2015. Carrying an interest rate of 6.7 percent, these notes were used primarily to retire short-term debt used to finance the fiscal 2006 acquisition of illbruck Sealant Systems.

Of the company’s $1.1 billion in long-term debt as of May 31, 2008, about 70 percent is fixed rate. Further, RPM’s net (of cash) debtto- total capitalization ratio was 42.6 percent, which is at the low end of our historic norms. On a pro-forma basis, this ratio further improved to 35.0 percent as a result of redemption of our Senior Convertible Notes Due May 13, 2033 in July 2008.

Creditworthiness Improves

In January 2008, both Standard & Poor’s and Moody’s Investor Services upgraded their outlook on RPM’s credit rating to positive and stable, respectively. We also secured comparable ratings from Fitch Ratings Ltd. This improvement in our ratings, coupled with the stability of our businesses and strong cash flow, was reflected in the February 2008 bond issue, which was over-subscribed in a very challenging capital market.

Steady performance by our operations, including strong cash flow generation, along with a demonstrated ability to effectively manage the asbestos challenge, has resulted in a more resilient capital structure and given us wide access to capital markets on favorable terms.

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In a tough credit market environment, it is crucial to maintain a broad base of capital market partners. Through the excellent work of our finance team, RPM has been able to maintain a diverse group of banking partners, including investment banks, regional banks and foreign banks, each of which brings its particular expertise and capabilities to RPM’s needs.

Plenty of “Dry Powder” Available

Entering fiscal 2009, RPM has $626 million in liquidity, including a $400 million revolving credit facility, an accounts receivable facility of $125 million and cash from our operations. Outside the U.S., we have recently put in place a cash pooling program to more efficiently access and optimally use our significant cash flow in Canada and Europe to fund day-to-day operating needs, reduce debt or support acquisitions.

Ultimately, our goal is to make sure that RPM has plenty of “dry powder” available to pursue acquisition opportunities around the world. Our low debt-to-capitalization ratio also creates the possibility of additional borrowing to support a larger acquisition, along with the flexibility of using equitybased financing when appropriate. This strong financial position puts RPM in great shape to meet the challenges and opportunities of the coming years.