# To the Associates, Customers and Shareholders of RPM

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NYSE_RPM_2017/NYSE_RPM_2017.mmd` · pages 0-6_

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To the Associates, Customers and Shareholders of RPM

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"As I continued to learn more about RPM and the culture of 'The Value of 168,' instilled by your grandfather, it seemed to me that our company might be a good fit as an RPM subsidiary."

~ Dave Barton
President and Owner, Prime Resins

About a year ago, I received a letter from a gentleman named David Barton, the president and owner of Prime Resins. He explained that his company was a manufacturer of specialty chemicals used to maintain and repair infrastructure. Dave had been researching RPM and wrote, "As I continued to learn more about RPM and the culture of 'The Value of 168,' instilled by your grandfather, it seemed to me that our company might be a good fit as an RPM subsidiary." Financial information, an analysis of the company's performance versus its competitors, a map of where it conducted business around the world and some product literature were enclosed with his letter.
I had never met Dave and was not familiar with Prime Resins. Yet here he was, sharing all this confidential information with me. Periodically, I get unsolicited letters like the one Dave sent me. I suspect few CEOs in our industry, or any other industry for that matter, receive such overtures. These letters are born from RPM's incredible reputation in the specialty coatings industry as being the best home for entrepreneurial companies. It's a reputation my father, Tom, spent decades building by being open, honest and trustworthy in his dealings with entrepreneurial business owners like Dave. It's something I strive to maintain because it is an incredible competitive advantage that enables us to attract the best businesses and people in the industry.

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So, I picked up the phone and called Dave. I learned that he was in his early 70s and, typical of an entrepreneur fueled by passion for his business, was just starting to consider slowing down. Two weeks later, I visited him outside of Atlanta and we had a good conversation. I genuinely liked what I saw from Dave, his people and the company. I got some of our operating people involved and said to them, "If it's a good fit and we can negotiate a full, fair price, we'll do it, and if it's not a good fit, let's be straightforward with him." A team then evaluated the business and how it would mesh with our Performance Coatings Group. It found that Prime Resins' products could fill a gap within RPM's product portfolio. At the same time, we felt we could accelerate Prime Resins' growth through shared technologies and connections with other RPM operating companies. Six months later, we closed the deal.

This story inspired the theme for this year's annual report. I share it because, while we've just concluded a sub-par fiscal year by RPM's standards (after seven straight years of strong sales and earnings growth), it's indicative that being the best home for entrepreneurial companies is a strategy that continues to work over the long term. In fact, counting Prime Resins, we acquired a total of nine businesses this fiscal year. They are comprised of passionate entrepreneurs, like Dave, who will continue running their businesses as part of RPM. We are providing them with resources to develop new products and services, and connecting them to like-minded entrepreneurs within the RPM family of companies worldwide so they can share technologies, manufacturing facilities and distribution channels. You will find success stories that have resulted from the implementation of this strategy on the pages following this letter.

Being the best home for entrepreneurial companies is a strategy that continues to work over the long term. In fact, counting Prime Resins, we acquired a total of nine businesses this fiscal year.

## Full-Year Results

For our fiscal year that ended May 31, 2017, consolidated net sales increased 3.0 percent to \(4.96 billion from \)4.81 billion in fiscal 2016. Net income declined 48.7 percent to \(181.8 million from \)354.7 million reported in fiscal 2016. Diluted earnings per share of \(1.36 were down 48.3 percent from \)2.63 a year ago. Income before income taxes (IBT) was down 49.5 percent to \(244.3 million from \)483.5 million in fiscal 2016. Consolidated earnings before interest and taxes (EBIT) was down 42.0 percent to \(327.3 million from \)564.8 million last year.

A number of factors weighed on our results this fiscal year. As a result, we implemented a plan of $27.3 million in expense reduction and restructuring actions across our businesses.

RPM HAS COMPLETED

70+ Acquisitions
OVER THE PAST DECADE
170+ Acquisitions
OVER THE PAST 30 YEARS

Among them was the closure of underperforming businesses in the Middle East and Europe. We expect that these cost reduction measures will be one element in our return to solid top- and bottom-line growth in fiscal 2018.

Additionally, we took a goodwill impairment charge of \(188.3 million as a result of underperformance at our Kirker nail enamel business. After completing more than 170 successful acquisitions over the past 30 years, Kirker was a rare miss for us. We bought the company at the peak of its cycle and poor management decisions led to market share losses in a declining market. A new senior management team has been put in place, which stabilized the business and established a base from which it can resume growth.

Excluding these items, as well as last fiscal year's Kirker earnout reversal of \(14.5 million, adjusted net income for the year declined 3.5 percent to \)333.4 million from \(345.5 million in fiscal 2016 and adjusted EPS declined 3.9 percent to \)2.47 from \(2.57 last fiscal year. Adjusted EBIT declined 1.3 percent in fiscal 2017 to \)542.9 million from $550.3 million a year ago.

## Fiscal 2017 Results by Segment

During fiscal 2017, sales in our industrial segment improved 2.9 percent to \(2.56 billion from \)2.49 billion in fiscal 2016. The improvement in industrial sales was driven predominantly by fiscal 2017 acquisitions, which contributed 2.9 percent, along with organic growth of 2.0 percent. Foreign currency translation offset sales growth by 2.0 percent. The industrial segment's IBT declined 5.4 percent to \(243.3 million from \)257.2 million in fiscal 2016. EBIT in the segment dropped 4.5 percent to \(251.3 million from \)263.3 million in fiscal 2016. Excluding the \(12.3 million charge to shut down the Flowcrete facility in the Middle East during the second quarter and a severance charge in the fourth quarter of \)7.7 million, industrial EBIT increased 3.1 percent to \(271.3 million from a year ago.

Specialty segment sales increased 4.2 percent in fiscal 2017 to \(713.6 million from \)684.6 million the prior year. Organic sales improved by a solid 2.8 percent and recent acquisitions added 3.1 percent to growth. Foreign currency translation

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## Acquisitions

COMPLETED IN FISCAL 2017

DURAM 195

WATERPROOFING
MEMBRANE

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ARNETTE POLYMERS, LLC

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PRIME RESINS

PROCHEM

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## Adhere Industrial Tapes Ltd.

In November 2016, tremco ilbruck acquired Adhere Industrial Tapes, a UK-based manufacturer of foam tapes for use in construction and industrial applications with annual net sales of $6 million.

## Applied Polymeric, Inc. &

Marketing Associates, Inc. (API/MAI)
RPM acquired API/MAI in July 2016 as part of its USL business. API/MAI, a North Carolina-based manufacturer, supplier and installer of specialist construction products for use in major structures, has annual net sales of $14 million. It will enable USL to introduce its products in the U.S.

## Arnette Polymers, LLC

RPM, in January 2017, acquired 80 percent of Arnette Polymers as part of its RPM Performance Coatings Group. Located in Richmond, Missouri, Arnette Polymers is a manufacturer and supplier of specialty chemical raw materials with annual net sales of $20 million.

## Duram Industries Pty Limited

In July 2016, Tremco Group acquired the assets of Duram Industries, an Australian manufacturer of commercial waterproofing products with annual net sales of $6 million.

## Prime Resins

RPM acquired Prime Resins in January 2017 as part of its USL business. Prime Resins, a Georgia-based manufacturer of specialty chemicals and equipment for use in infrastructure construction and repair, has annual net sales of $7 million.

## Prochem

Legend Brands, in January 2017, acquired Prochem. Located in Chandler, Arizona, Prochem is a manufacturer of commercial carpet and floor cleaning equipment and chemicals with annual net sales of $22 million.
Specialty Polymer Coatings, Inc. (SPC)
In September 2016, RPM acquired SPC as part of its RPM Performance Coatings Group. SPC is a Canadian manufacturer of high-performance coatings for the global oil and gas pipeline market with annual net sales of $26 million.

## SPS Group

RPM acquired SPS Group in February 2017 as part of its Rust-Oleum European business. SPS Group, a Netherlands-based manufacturer of decorative and specialty coatings for maintenance and renovation applications, has annual net sales of $60 million.

## Touch 'n Foam

RPM, in January 2017, acquired the foam division of Missouri-based Clayton Corporation as part of its DAP group. Best known for its consumer spray-polyurethane foam brand Touch 'n Foam and its industrial brand Touch 'n Seal, the foam division has annual net sales of $60 million.

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reduced sales by 1.7 percent. Specialty segment IBT was up 0.3 percent to \(107.9 million from \)107.5 million a year ago. EBIT increased 0.6 percent to \(107.4 million from \)106.7 million in fiscal 2016. Excluding a severance charge in the fourth quarter of \(2.9 million, specialty EBIT increased 3.3 percent to \)110.3 million from fiscal 2016.

Sales in our consumer segment for fiscal 2017 increased 2.6 percent to \(1.68 billion from \)1.64 billion in fiscal 2016. Organic sales increased by 0.6 percent and acquisition growth added 3.4 percent. Currency translation negatively impacted sales by 1.4 percent. Weighing on consumer sales was continued underperformance at our Kirker nail enamel business, as well as higher rainfall and cooler temperatures during the fourth quarter, which slowed home maintenance and repair activities. Consumer IBT declined 78.1 percent to \(58.7 million from \)268.2 million in fiscal 2016. Consumer segment EBIT decreased 78.0 percent, to \(59.0 million from \)268.2 million a year ago. Excluding the Kirker goodwill impairment charge in the second quarter and a severance charge of $4.3 million in the fourth quarter, as well as the Kirker earnout reversal last year, consumer EBIT decreased 0.8 percent to \(251.6 million from \)253.7 million a year ago.

## Financial Position Remains Strong

We maintain a strong financial position, allowing continuation of our robust acquisition program and capital spending for plant improvements. During the fourth quarter, we prepaid the December 2017 524(g) trust obligation in the amount of $120.0 million, as well as the fiscal 2018 U.S. Pension Plan contribution in the amount of $52.8 million.

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Cash from operations for fiscal 2017 was \(386.1 million, down 18.7 percent from \)474.7 million in fiscal 2016. The decrease was principally attributable to an increase in inventory and the pension plan pre-funding. Total debt at the end of fiscal 2017 was \(2.09 billion, compared to \)1.64 billion at the end of fiscal 2016. The increase is largely due to cash used for fiscal 2017 acquisitions of \(254.2 million, payments to the 52(4)(g) trust and the pension plan pre-funding. RPM's net (of cash) debt-to-total capitalization ratio was 54.8 percent, compared to 50.0 percent at May 31, 2016. Capital spending in fiscal 2017 was \)126.1 million, up from $117.2 million a year ago. Liquidity, including cash and cash equivalents and amounts available under our committed credit facilities, stood at $1.15 billion at May 31, 2017.

## Pace of Acquisitions Accelerates

As mentioned at the beginning of this letter, we were quite active on the acquisition front during fiscal 2017. Including Prime Resins, we acquired a total of nine businesses with combined annual net sales of $221 million. You can read about them in detail on page 3. What is significant about these transactions is that each of our six business groups made at least one acquisition during the past fiscal year. This is due, in part, to the fact that we have grown our corporate development infrastructure over the last few years. Our mergers and acquisitions team now extends beyond the RPM corporate headquarters to the group level. This has enhanced our visibility into the markets we serve and made our acquisition pipeline even more robust.

In fact, we tapped that pipeline during the first quarter of fiscal 2018 with the acquisition of Key Resin Company, a manufacturer of polymer flooring and coating systems. It will operate as one of our Euclid Group's companies. Headquartered near Cincinnati, Ohio, Key Resin has annual net sales of approximately $25 million. This transaction expands our Euclid Group's flooring product offering and market share in North America, and positions it as a significant player in terrazzo systems. Key Resin will continue to be run by Jeff Cain, a second-generation family leader of the business, and his strong management team.

## Total Return Outpaces S&P 500 and Peers

RPM's cumulative total return, which is based on stock price appreciation, plus the reinvestment of dividends, has outpaced both the Standard & Poor's 500 Index and our current peer group over the past decade. As the chart at left indicates, RPM's 10-year total return was 70 percent higher than the S&P 500 and 28 percent higher than our current peer group. Over the past five years, we bested the S&P 500 by 14 percent and were on par with our peer group, the performance of which was impacted by some significant merger and acquisition activity among members of the group.

## Board Transitions
Bring New Perspectives

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After nearly 12 years of service to RPM, Charles A. Ratner (pictured above, left) retired from our board of directors in January 2017, which came on the heels of his retirement from Forest City Realty Trust, Inc. (formerly Forest City Enterprises, Inc.) in December. He had served Forest City for five decades, in positions that included chairman, president and CEO. Chuck often applied his leadership experiences with Forest City to RPM's benefit. Personally, I am immensely grateful to him for the advice and guidance he provided, particularly through some difficult decisions and challenging situations I have faced over the years.

Another one of our long-time directors, Dr. Jerry Sue Thornton (pictured above, right), retired from the board on July 18, 2017. Jerry Sue had been a director since 1999. Previously, she had served as president of Cuyahoga Community College from 1992 to 2013. She brought to the board tremendous perspectives on leadership, management and community engagement for which I am very thankful.

The contributions of both Jerry Sue and Chuck played a key role in RPM's strong performance during their tenures. Under their watchful guidance, sales grew from \(1.7 billion and \)2.6 billion, respectively, to \(5.0 billion and the annual dividend to shareholders increased from \)0.465 and $0.60 per share, respectively, to $1.20.

It is with mixed feelings that I share with you these transitions to our board of directors. On one hand, I will miss the counsel and friendship of two directors who have served RPM and its shareholders well for many years. On the other, I welcome the new ideas and perspectives that will be gleaned from the two directors who replace them, Julie A. Lagacy and Robert A. Livingston. Julie was appointed to the board on July 18, 2017, to replace Jerry Sue. Both Julie and Bob will stand for election at our annual meeting in October.

Julie is the chief information officer of Caterpillar Inc. and vice president of its Global Information Services Division. With 2016 sales and revenues of $38.5 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It is traded on the New York Stock Exchange (NYSE) under the symbol "CAT." I expect that Julie's broad background in information technology, finance, human resources and acquisitions will serve RPM well in the coming years.

Bob is the president and CEO of Dover Corporation, a position he has held since 2008. Dover is a diversified global manufacturer with annual revenue exceeding $7 billion. The company provides equipment and components, specialty systems, consumable supplies, software and digital solutions, and support services. Dover trades on the NYSE under the symbol "DOV" and has 29,000 employees worldwide. It has many commonalities with RPM, including its structure, entrepreneurial culture and an enviable dividend history, having annually increased its cash dividend for 61 straight years. I anticipate that Bob's experience leading and growing a company similar to RPM will provide great benefit to RPM and its shareholders.

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Paying a dividend and increasing it annually, which we have done for 43 consecutive years, is a key to the impressive total return we have been able to deliver to our shareholders. Very few companies can boast of such a record. In fact, less than half of one percent of all 19,000 publicly traded companies have paid an increasing cash dividend for this period of time or longer, according to the Mergent Handbook of Dividend Achievers. We last increased the dividend on October 6, 2016, by 9.1 percent to $1.20 per share annually. It is a track record of which we are very proud and intend to continue, rewarding our long-term shareholders for their loyalty.

## Outlook Optimistic for Fiscal 2018

In our industrial segment, we expect economic activity in North America to continue its current steady pace and benefit our companies serving commercial construction markets. We believe our businesses serving the oil and gas sector will bottom out during the first half of the fiscal year, start positive growth in the back half and, ultimately, end the year neutral. Our European businesses should contribute positively to top- and bottom-line results in the coming fiscal year. With this backdrop, we expect our industrial segment to grow sales in the low-to-mid-single-digit range.

In our specialty segment, we forecast low-single-digit sales growth with fiscal 2017 acquisitions contributing 2.0 percent and the balance as organic growth, driven by our fluorescent pigment and wood treatment businesses. Included in the specialty segment's projections for fiscal 2018 are the anticipated lower sales resulting from a patent expiration in our edible coatings business.

Our consumer segment should experience favorable market conditions, enabling its growth to continue at a steady pace in fiscal 2018. We expect that consumer businesses in the U.S., UK and mainland Europe will contribute favorably to results, as will recent acquisitions. Organic sales growth is expected to be in the low-to-mid-single-digit range, supported by new product introductions and further market penetration. Our DAP business' capacity issues have been resolved, allowing it to manage the recent uptick in growth momentum. The Kirker business, which has underperformed in recent years, has been stabilized with a new management team and should no longer mask core consumer segment sales growth and profitability. Given these assumptions, we anticipate sales in the consumer segment to grow in the mid-single-digit range for fiscal 2018.

Our diluted earnings per share guidance for fiscal 2018 is a range of \(2.85 to \)2.95. Our ability to achieve the upper end of this target is based on the variability of organic sales growth, with a baseline goal of 3.0 percent, and how effectively we manage the impact of rising raw material costs.
When I was RPM's chief financial officer, I tracked our various financial ratios – such as return on equity, return on invested capital and others – and gauged where RPM stood against its industry peers. It was my desire that RPM be among the best in class in every category. When I became CEO in 2002, it took me a few years to realize that while understanding these ratios is helpful, they simply reflect where we stand at a given point in time. What is most important is momentum. It is my job, and that of RPM's leadership team, to affect positive momentum in all categories. Doing so has served us well, most recently resulting in the run of seven consecutive years of adjusted double-digit earnings growth and, of course, our enviable dividend track record. In fiscal 2017, we lost that momentum for the several reasons identified in this letter. Through a combination of the actions taken during fiscal 2017, a continuation of our industry-leading acquisition program and the proven entrepreneurial operating philosophy of RPM, we are positioned to regain momentum and return to double-digit earnings growth in fiscal 2018 and beyond.

In closing, I would like to thank our 14,000 associates worldwide for competing and winning in the markets they serve. Thanks also to our customers for your ongoing support. We will continue to work hard to earn your business every day. Lastly, I extend my gratitude to our investors for your trust and confidence that we will continue to generate solid returns and make your investment in RPM a rewarding one.

Very truly yours,

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Frank C. Sullivan
Chairman and Chief Executive Officer

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August 24, 2017