10-QPeriod: Q2 FY2017

SHERWIN WILLIAMS CO Quarterly Report for Q2 Ended Jun 30, 2017

Filed July 26, 2017For Securities:SHW

Summary

Sherwin-Williams Company (SHW) reported its second-quarter and first-half 2017 results, heavily influenced by the recent acquisition of The Valspar Corporation (Valspar) on June 1, 2017. While consolidated net sales saw a significant increase of 16.0% in the quarter and 12.1% year-to-date, driven substantially by Valspar's contribution, profitability metrics faced pressure. Diluted net income per share decreased to $3.36 for the quarter and increased slightly to $5.90 for the six months. This performance was impacted by acquisition-related costs, amortization of purchase accounting adjustments, and higher raw material costs. Despite the near-term earnings dilution, the acquisition significantly expands Sherwin-Williams' global footprint and product portfolio, particularly in packaging and coil coatings. The company has managed the financing for this large acquisition through substantial debt issuance. Management is focused on integrating Valspar and realizing expected synergies, while navigating increased leverage and managing operational costs. Investors should monitor the integration progress and the impact of increased debt on future financial flexibility.

Financial Highlights

53 data points
Beta

Revenue

$3.74B

46.4% Gross Margin

Net Income

$319.11M

8.5% Net Margin

EPS (Diluted)

$1.12

Total Assets

$20.72B

Cash & Equivalents

$210.05M

Free Cash Flow

$354.32M

Financial Statements
Beta
Revenue$3.74B
Cost of Revenue$2.00B
Gross Profit$1.73B
SG&A Expenses$1.15B
Operating Income$671.10M
Interest Expense$56.73M
Net Income$319.11M
EPS (Basic)$1.15
EPS (Diluted)$1.12
Shares Outstanding (Basic)278.52M
Shares Outstanding (Diluted)284.91M

Key Highlights

  • 1Consolidated net sales increased 16.0% to $3.74 billion in Q2 2017 and 12.1% to $6.50 billion in H1 2017, primarily due to the acquisition of Valspar.
  • 2Diluted net income per share decreased to $3.36 in Q2 2017 from $3.99 in Q2 2016, and increased to $5.90 in H1 2017 from $5.76 in H1 2016.
  • 3The company incurred approximately $8.9 billion in debt to finance the acquisition of Valspar, significantly increasing its total debt to $11.5 billion as of June 30, 2017.
  • 4Gross profit margin decreased to 46.5% in Q2 2017 from 50.8% in Q2 2016, impacted by inventory step-up amortization from the Valspar acquisition and higher raw material costs.
  • 5Selling, general, and administrative (SG&A) expenses as a percentage of sales decreased to 30.7% in Q2 2017 from 32.6% in Q2 2016, partly due to the operational scale from Valspar.
  • 6Net operating cash improved in the first six months of 2017, reaching $586.1 million from $509.9 million in the prior year period.
  • 7The company reported a charge of $0.45 per share related to the divestiture of Valspar's North American industrial wood coatings business.

Frequently Asked Questions

The primary driver for the significant increase in net sales during the second quarter and first six months of 2017 was the acquisition of The Valspar Corporation (Valspar), which was completed on June 1, 2017. Valspar contributed $381.0 million in net sales for the month of June alone.

The acquisition of Valspar for $8.9 billion was financed through a combination of debt, including $6.0 billion in senior notes issued in May 2017. As a result, total debt increased significantly to $11.5 billion as of June 30, 2017, up from $1.97 billion a year prior. This led to a substantial increase in the debt-to-capitalization ratio, indicating higher financial leverage.

The key challenge is the successful integration of Valspar, managing the increased debt burden, and realizing expected cost synergies. The opportunity lies in expanding Sherwin-Williams' global reach, diversifying its product portfolio, and strengthening its position in key markets. Investors will be looking for evidence of successful integration and synergy realization to offset the initial earnings dilution and increased financial risk.

Yes, Sherwin-Williams faces ongoing litigation, particularly related to lead pigment and lead-based paint claims, which represent a material uncertainty. While the company believes it has meritorious defenses, potential liabilities are significant and difficult to estimate. Additionally, environmental-related liabilities for past operations are accrued, with the majority concentrated in three manufacturing sites, and could materially impact future earnings if estimates increase significantly.