Resilience is evidenced by the improved sales and operating income from most of our 50 business units during fiscal 2011, despite a host of challenges.

A combination of top-line growth, product reformulations and price increases helped most of our operating companies overcome raw material shortages and rapidly escalating costs. This situation was brought about by high worldwide raw material demand, particularly in Asia and emerging markets, coupled with a decline in supplier capacity due to industry consolidation and plant closures resulting from the recent worldwide recession.

While we do not see the raw material picture improving over the near term, our business units are well positioned to manage this challenge. The ongoing globalization of many of RPM’s industrial businesses helped mitigate the impact of the sluggish economies in our more established North American and European markets.

RPM’s commercial construction related businesses achieved significant gains in market share, despite the overall decline in commercial construction in North America and Europe, our two primary continents of operation. Following a period of greatly curtailed capital spending by business due to the recession, we are seeing signs that pent-up demand, along with a strengthening economy, will further improve results of our commercial construction-oriented businesses, which resumed growth during the second half of fiscal 2011.

Frank C. Sullivan, RPM International Inc. chairman and CEO, addresses Tremco employees, government officials and suppliers at a June 17, 2011 event to celebrate the completion of Tremco’s sustainable headquarters renovation and dedicate the building to its retired president, Jeffrey L. Korach. The facility’s vegetated roof is featured on the cover of this annual report, and more information about the project can be found below and at www.TremcoGreenHQ.com.

Our consumer businesses created new market categories, introduced a host of new products – including some at substantially higher price points than our consumer lines have traditionally participated in – and gained market share over the competition in addressing an anemic U.S. housing market. New U.S. housing starts in 2010 were 72 percent below 2005 levels and sales of existing housing units remained stubbornly below their 2005 peak. Yet our consumer segment business units that are impacted by housing held their own in the face of this challenge.

A real differentiator for RPM in a challenging climate such as we faced in fiscal 2011 is our entrepreneurial operating culture. This culture puts decision making close to the marketplace and facilitates a quick response to changing market and supply conditions. This nimble posture in a difficult economy puts RPM at a decided advantage over more bureaucratic business structures.

Protection has been a cornerstone of the RPM value proposition for our customers since the company’s founding in 1947. Our products and services offer protection from the effects of weather, corrosion, fire, water and other elements. As a result of performing invaluable functions at a small percentage of our customers’ annual operating costs, RPM products are able to command higher value-added pricing in their marketplaces. A more detailed review of the protection foundation of RPM is contained on pages 8 through 11 of this annual report.

Momentum is reflected in our two traditional avenues of growth: acquisitions and internal initiatives such as new products, new distribution and new geographic penetration. Both avenues are extremely robust as we enter fiscal 2012. Because of our long-standing practice of having acquired businesses operate largely independently under their existing management as part of RPM, we have earned the reputation as “the best home for entrepreneurial businesses” in our industry. This reputation is proving to have widespread attraction to entrepreneurs as we expand our acquisition program in Asia, Europe, South America and the Middle East.

Our internal growth story is also compelling, including major successes from Rust-Oleum in its newer automotive care product line and from Tremco illbruck in gaining a significant foothold in the European highperformance building industry. More information on momentum for both internal growth and acquisitions follows on pages 12 through 15.

Sales, Net Income Up Sharply vs. Pro-Forma Prior Year

Sales for the 2011 fiscal year ended May 31, 2011, increased 8.5 percent to $3.38 billion from a pro-forma $3.12 billion a year ago. Net income of $189.1 million was a 16.1 percent improvement over the pro-forma $162.9 million earned in fiscal 2010. Diluted earnings per share attributable to RPM International Inc. stockholders grew 15.1 percent to $1.45 from a pro-forma $1.26 a year ago. Consolidated EBIT (earnings before interest and taxes) improved 10.5 percent to $344.8 million from a pro-forma $312.1 million in fiscal 2010.

Most of our 50 business units posted improved sales versus prior-year pro-forma results. In the industrial segment, sales increased to $2.26 billion, an 11.3 percent improvement over the $2.03 billion in pro-forma net sales recorded in fiscal 2010. Industrial segment EBIT was up 15.4 percent to $235.8 million from a pro-forma $204.4 million a year ago.

Consumer segment sales grew a more modest 3.4 percent, to $1.12 billion from a pro-forma $1.08 billion in fiscal 2010. Consumer EBIT declined less than one percent, to $146.0 million from a pro-forma $147.3 million last year. Higher raw material costs negatively impacted the EBIT of both segments.

Using its own products and those of many RPM sister companies, Tremco transformed its 40-year-old headquarters into a high-performance building that is energy efficient, uses less water, employs renewable energy sources and reduces operating costs substantially from prior levels. Among its many features are four types of Tremco sustainable roofing systems; Tremco sealants, gaskets, and engineered transition assemblies; Stonhard polymer flooring and an electricity generating wind turbine. It is expected to attain LEED Gold certification.

Pro-forma figures exclude our deconsolidated Specialty Products Holding Corp. (SPHC) and its subsidiaries from our fiscal 2010 results. We believe that this provides an “apples-to-apples” comparison of RPM’s financial performance in fiscal 2011 versus 2010.

You will recall that on May 31, 2010, we announced action to permanently resolve the asbestos-related Bondex legacy liability contained within our SPHC subsidiary, itself the holding company for Bondex and certain other RPM subsidiaries. At that time, SPHC and Bondex filed Chapter 11 bankruptcy proceedings in Delaware. These filings caused the removal of the asbestos liability from our balance sheet and also halted additional Bondex asbestos cases and their related cash costs. As a consequence of these filings, SPHC results were no longer consolidated as part of RPM’s financial results, beginning with the first quarter of fiscal 2011. All told, deconsolidated SPHC subsidiaries, most of which were in our industrial segment, had sales of $319.6 million and $11.1 million in net income in fiscal 2010.

The ultimate effect of these filings was to allow RPM to grow from a fiscal 2010 pro-forma revenue base of $3.1 billion and no longer be impacted by Bondex asbestos liability claims or related costs, which had affected RPM’s financial performance for several years.

Reported results for fiscal 2010 are included in the financial highlights and financial statements of this annual report, while further information on the SPHC deconsolidation and bankruptcy proceedings is contained in Note N to the Consolidated Financial Statements.

Financial Position Strengthens from a Solid Base

RPM’s cash flow, capital position and liquidity further improved in fiscal 2011 over their strong levels at the end of fiscal 2010.

• Cash from operations was up 16.7 percent, to $238 million from $204 million in fiscal 2010. It funded our 37th consecutive year of increases in the cash dividend and some $40 million in capital expenditures, while supporting $39 million in acquisition spending.
• Our net (of cash) debt-to-total capital ratio remained low by historic comparisons, which has often ranged from 40 percent to 60 percent. The ratio in fiscal 2011 was 34.8 percent, compared to 39.8 percent at the end of the prior fiscal year.
• Total available liquidity at the end of fiscal 2011 was $887 million. This high level of liquidity gives us the financial flexibility to act on the current robust deal flow in our acquisition pipeline.
• At May 31, 2011, the company’s long-term debt was $1.1 billion, with 95.8 percent of this amount at fixed rates averaging 6.32 percent.

Included in the long-term debt at May 31, 2011 is the $150 million in aggregate principal amount of 6.125 percent notes due October 15, 2019, which were sold May 27, 2011 at a premium to yield 4.934 percent. Underwriters were led by Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC. Net proceeds of the offering were approximately $162 million and are being used for general corporate purposes, including working capital and acquisitions. The notes are a further issuance of the $300 million aggregate principal amount of 6.125 percent notes due in 2019 and initially issued by the company on October 9, 2009.

Dividend Program, High Yield Help Boost Total Return

Once again, RPM’s cumulative total return to investors significantly outpaced both our peer group and the S&P 500 for both the past five-year and ten-year periods. Our ten-year total return was more than 95 percent higher than the peer group and more than 221 percent higher than the S&P 500. Over the past five years, the RPM performance premium over our peer group was 13 percent and we outperformed the S&P 500 by 31 percent. Full details on RPM’s total return is reflected in the charts on the inside front cover of this annual report.

RPM’s cumulative total return has outperformed the S&P 500 by 221% over the past 10 years.

A significant component of total return involves reinvested dividends, and RPM has been committed to a growing dividend since we began paying one 37 years ago. This past fiscal year was no exception. On October 7, 2010, the company’s board of directors increased the quarterly cash dividend by 2.4 percent, to $0.210 per share from $0.205 per share, marking the 37th consecutive annual increase in the quarterly cash dividend.

Less than half of 1 percent of all 19,000 publicly traded U.S. companies has paid an increasing cash dividend for this period of time or longer, according to the summer 2011 edition of the Mergent Handbook of Dividend Achievers. Both individual and institutional investors are increasingly showing interest in dividends as a significant component of total return and also a validation of the quality of a company’s earnings. RPM continues to enjoy strong investment community interest, due in part to our earnings performance, but also due to our dividend track record.

We were encouraged during the past year when the U.S. Congress voted on legislation to continue through 2012 the maximum 15 percent tax rate on qualified dividends, which was originally passed in 2003. The 2003 legislation treated dividends in the same category as capital gains. They were previously treated like ordinary income and taxed up to the maximum federal rate of 39.6 percent. The 2003 change was predicated on the fact that corporate profits in the U.S. were already taxed at rates among the highest in the world and then taxed again when a corporation’s shareholders received dividends. This double tax on shareholders receiving dividends – either directly or through mutual funds – provided a huge disincentive for investment. As a result, we welcomed the extension of the 2003 dividend tax policy, and we encourage you to support its permanent continuation with your federal elected officials.

Acquisition Pipeline Percolating

We were pleased with the quality and strategic fit of the acquisitions RPM completed during the fiscal year. These included:

• Hummervoll Industribelegg AS, a supplier and installer of industrial flooring systems based in Bergen, Norway, with more than $11 million in annual sales. Acquired by RPM’s Performance Coatings Group on June 10, 2010, Hummervoll nicely complements our existing Stonhard and Flowcrete flooring systems businesses, and provides both geographic market expansion in Scandanavia as well as product capabilities extensions in the offshore oil industry.
• Park Dis Ticaret A.S., which supplies sealants, tapes and membranes in Turkey and nearby markets in the Middle East and former Soviet Union republics. Acquired by our Building Solutions Group on September 28, 2010, this $10 million business will extend our geographic reach while adding existing RPM product lines to its own portfolio in its core markets.
• Pipeline & Drainage Systems Ltd. (PDS), a producer of curb, bridge and channel drainage products for construction and infrastructure markets in the United Kingdom and Ireland. Based in Wakefield, England, PDS has annual sales of approximately $8 million and was acquired by our Performance Coatings Group on December 21, 2010.
• PSI Packaging, Inc., a $6 million producer of micro- and macro-fibers for the ready-mixed and pre-cast concrete market, based in LaFayette, Georgia. Acquired by The Euclid Chemical Company, a unit of RPM’s Building Solutions Group, on February 10, 2011, PSI is expected to add both product line extensions for Euclid, as well as manufacturing capacity and expertise.

Subsequent to the end of the 2011 fiscal year, our Performance Coatings Group announced the acquisition of API S.p.A. on August 3, 2011. API is a $28 million producer and installer of polyurethane and urethanebased flooring and decking solutions for cruise ships, mega-yachts and naval applications and is based in Genoa, Italy. In addition to its primary focus on the marine market, API also produces epoxy and polyurethane flooring systems for the Italian building market. API enhances RPM’s capabilities in decorative flooring and complements the strengths of our Stonhard and Flowcrete commercial polymer flooring businesses.

Each of these acquisitions is expected to be accretive to earnings within one year, and all of them continue with their existing management and employees, which further demonstrates why RPM is known as “the best home for entrepreneurial businesses” in our industry.

Innovation and acquisitions fueled our growth in fiscal 2011 and will propel RPM in fiscal 2012 as well.

Additionally, in May 2011, we increased our minority interest in Kemrock Industries and Exports Ltd, a fully integrated fiberglass reinforced plastic composites manufacturer with more than $200 million in annual sales that is based in Vadodara, Gujarat State, India. The increase in ownership – from 14.9 percent to 18.3 percent – triggered a requirement under Indian law for RPM to make a tender offer for up to an additional 20 percent of Kemrock. RPM’s ownership of Kemrock may increase further when the required tender offer is completed.

We expect to continue to realize benefits from the aggressive corporate development efforts of the past couple of years. As a result, we anticipate that the annual sales volume of businesses acquired in fiscal 2012 will be substantially higher than that of businesses acquired in fiscal 2011.