To the Shareholders and Associates of RPM,
Almost a year ago, I had the honor of becoming RPM’s third chief executive officer. Now, with some distance from this event, I want to share with you a few thoughts shaped by my new perspective as well as provide you with some insight into RPM’s long-term growth strategy.
Reflections on The Value of 168 From my first days at RPM, I was impressed by the abundance of talent and dedication I observed in our people. And, as CEO, I am well aware of how much they mean to the success of the company. Because of their efforts, fiscal 2003 was notable for RPM and memorable for me. I evoke RPM's heritage of people who care because it speaks directly to the theme of this annual report, The Value of 168. For my late grandfather, who founded this company, the figure 168 the number of hours in a week had special meaning. For him, 168 was a figurative hourglass, a reminder that time passes quickly, and every hour should be celebrated because it can never be recaptured. He approached each situation that way, and his spirit drives us to this day.
	For RPM, the value of 168 lies in the answer to the question: How have we been able to sustain our superb performance for the better part of five-plus decades? We have done it because we bring a passion to our business and its growth that springs from our rich history. We have done it because of pride that permeates not only RPM, but also our operating companies where, in many cases, second- and third-generation family members still run their businesses. We have done it because we have been able to attract, retain and motivate the people who have created our success.
I feel a deep obligation to nurture the value of 168 on my watch so that the people of RPM will continue to enjoy the proportion of those hours they spend on the job and, consequently, our customers will grow with us and our shareholders will receive the increasing returns they seek and deserve. A Year of Accomplishment Fiscal 2003 was a strong year for RPM, as the following highlights attest: In a very tough economic environment, we generated sales growth of 5 percent, to a record $2.1 billion, principally through the focused efforts of our employee base and sales force, which continued to grow market share. Revenue growth combined with strong operational focus resulted in a 21 percent net income gain, to $122.8 million, and an earnings per share increase of 9 percent, to $1.06, both before our charge to increase reserves for asbestos liabilities. After a hiatus of almost three years necessitated by our successful restructuring, we reactivated our acquisition program. In the process, we acquired at fair value businesses with approximately $70 million in annualized revenues. In line with our established criteria, we added top brand name products and great management teams willing to stay and run the businesses as part of RPM; instead of selling out, they bought into our operating philosophy. Consistent with our acquisition strategy, we retained the sales forces that underpin the success of these companies. Our 30-year track record with acquisitions refutes the theory that we must do ever-larger deals as RPM grows. The execution of our acquisition strategy does not hinge on large, splashy transactions. What we consistently seek are the right deals at the right prices with the right management teams. We further improved our financial profile by refinancing approximately $150 million in debt from shorter-term floating rate obligations to longer-term convertible bonds with a fixed rate of 2.75 percent. We continued to generate strong cash flow. We have all seen how unscrupulous companies can inflate earnings, but cash flow cannot be manufactured. RPM shareholders can look to this as a reliable barometer of the company's financial health. For the 29th consecutive year, we raised our cash dividend. This action underscores our abiding commitment to shareholders through our strong dividend yield and our enviable track record of dividend growth. This move preceded congressional passage of the tax cut bill that President Bush signed in May. The enactment of this measure, which equalizes the taxation of dividends and capital gains, is very good news for RPM shareholders. Finally, we drove this performance with skilled, energetic leaders working together at both the corporate and operating company levels. Despite a difficult economy, these teams rose to the occasion and prevailed. I have boundless respect for these professionals, who give me confidence that we have the strategy, structure and people we need to support our next level of growth.
The Next Level Our growth strategy is anchored by three primary components: internal growth, acquisitions and enhanced profitability. Internal - Our goal is to achieve 5 percent internal growth annually through leadership in niche markets; value-added, customer-oriented solutions; product line development and extension; growth with customers; new markets for existing products; and effective cross selling. Acquisitions - We will look to match internal growth each year by acquiring strong entrepreneurial businesses and synergistic product lines, and by occasionally adding strategic platforms in new categories serving the markets we already know. Our acquisition activity will center increasingly on Europe, which presents many attractive growth opportunities. Currently, we have a $180 million base of business on which to build; our goal is to develop a $500 million base of business in the European marketplace within the next three years. As we grow more aggressively in Europe, we will face the inevitable challenges of different cultures, languages, and monetary and tax systems. But this is where RPM traditionally shines – and clearly demonstrates the value of 168. As the best home for entrepreneurial companies in the markets we serve, we have a corporate culture that accommodates multiple cultures. Moreover, we have deep respect for the unique history, heritage and culture of the various RPM companies. In Europe, we understand that good, well-run businesses often are buttressed by generations of proud family history. Nobody manages better than we do in that environment. Enhanced profitability - The final element of our strategy is tied to continued operating leverage from our restructuring efforts and the inherent synergies from our acquisition program. Companies in the RPM family retain considerable operational autonomy and yet, where appropriate, we integrate business functions such as finance, treasury, benefits administration, purchasing and, in some cases, manufacturing to capture synergies and improve overall operating results. We believe this combination of decentralized management with the strengths and synergies of a large global corporation is the best way to deliver value to customers and shareholders. By executing these components, we will achieve our vision for 2007.
Addressing the Asbestos Challenge Earlier this year, we announced that the insurance available to our Bondex subsidiary to cover asbestos litigation would be depleted by early fiscal 2004. Accordingly, RPM took a charge of $88 million after tax in fourth-quarter 2003, which we believe is an appropriate step in our ongoing efforts to address this significant risk management issue. I encourage you to read Note H to our financial statements in this annual report as well as RPM's Form 10-K annual report filed with the Securities and Exchange Commission for the scope and details associated with this asbestos charge. We believe that recent law changes in a number of states, coupled with congressional moves toward some form of federal legislation on this issue, will have a positive impact over time on our ability to more clearly define RPM's ultimate asbestos liability outlook. In the meantime, no matter what the outcome in Washington, D.C., RPM will move forward with its growth plans. Based on the strength of our operating results, balance sheet and cash flow as well as the numerous legal, defense and reserve strategies available to us, we will successfully manage this issue, just as we have met every economic, competitive and legal challenge since our founding. The Power of Momentum The overriding impression I hope to convey in this, my first annual report to RPM shareholders, is that your company continues to gain momentum. To me, “momentum” is the most important word relative to a business or company because it goes beyond current value to imply continuing long-term success. Despite economic and legal challenges, we are growing at record levels. As fiscal 2004 unfolds, we are projecting mid-single-digit sales growth even in the expected absence of a major economic turnaround. In conjunction with the impact of acquisitions, this level should give us the ability to achieve earnings growth of 10 percent to 12 percent and to continue building momentum for future growth.   In closing, I want to acknowledge RPM's 7,700 employees, whose loyalty and tireless efforts to deliver for our valued customers have helped to make this a deeply rewarding period for everyone associated with RPM. It is our job to keep the value of 168 alive and meaningful to our continuing growth and success.   I also want to thank our Board of Directors, whose prudent counsel has been indispensable to a first-year CEO, and whose decades of adherence to strong corporate governance principles have been the backbone of our long-term success for shareholders.   Finally, to my fellow shareholders: I thank you for your commitment, support and belief in our ability to be good stewards of your capital. You allow us to do what we love and create value in the process.
Frank C. Sullivan    President and Chief Executive Officer    August 29, 2003
The Footprints of Visionaries It is humbling to follow two inspired leaders of the caliber of my father, Tom Sullivan, who took over Republic Powdered Metals upon the death of my grandfather in 1971, and Jim Karman, the college friend who became his inseparable business partner.   The numbers prove that Tom and Jim were great stewards of financial capital. I firmly believe, however, that RPM's financial success derived from their enlightened stewardship of human capital. Like my grandfather, they were convinced that when employees have the opportunity to realize their aspirations, they will be energized in their work, to the advantage of both customers and shareholders. It is a philosophy we mean to sustain.   RPM is a great company today not because we just had a strong year, but because we had so many strong years under the leadership of Tom and Jim. They knew how to grow a business, and they did it with an infectious spirit and pride that spread to the people who worked with them. I salute their singular contributions. They embody The Value of 168.