10-QPeriod: Q3 FY2017

SHERWIN WILLIAMS CO Quarterly Report for Q3 Ended Sep 30, 2017

Filed October 25, 2017For Securities:SHW

Summary

The Sherwin-Williams Company (SHW) reported a significant shift in its financial performance for the nine months ending September 30, 2017, largely driven by the transformative acquisition of Valspar Corporation. While consolidated net sales surged by 21.3% to $11.004 billion compared to the prior year, this growth was heavily influenced by the inclusion of Valspar's sales. Diluted earnings per share (EPS) saw a decline, with EPS from continuing operations at $9.67 for the nine months, down from $9.85 in the prior year. This decrease was attributed to acquisition-related costs, purchase accounting adjustments, and increased amortization of intangibles. Despite the EPS dip, the company highlighted strong operational performance in The Americas Group and a general increase in paint sales volume. However, gross profit margins compressed from 50.0% to 45.3% for the nine-month period, primarily due to the impact of Valspar's purchase accounting and rising raw material costs. The company's financial structure underwent a significant change with total debt increasing substantially to fund the acquisition, leading to a higher debt-to-capitalization ratio. Nevertheless, SHW reported continued strength in operating cash flow, which increased by $292.3 million.

Financial Statements
Beta

Key Highlights

  • 1Consolidated net sales increased by 21.3% to $11.0 billion for the nine months ended September 30, 2017, largely due to the acquisition of Valspar.
  • 2Diluted net income per share decreased to $9.23 for the nine months ended September 30, 2017, from $9.85 in the prior year, impacted by acquisition-related costs and amortization.
  • 3Gross profit margin declined to 45.3% for the nine months ended September 30, 2017, from 50.0% in the prior year, due to purchase accounting adjustments and higher raw material costs.
  • 4Total debt increased significantly to $10.9 billion as of September 30, 2017, from $1.96 billion a year prior, reflecting debt incurred to finance the Valspar acquisition.
  • 5Operating cash flow improved by $292.3 million to $1.26 billion for the nine months ended September 30, 2017.
  • 6The company completed the acquisition of Valspar on June 1, 2017, for approximately $8.9 billion, integrating it into three new reportable segments: The Americas Group, Consumer Brands Group, and Performance Coatings Group.
  • 7The Americas Group showed continued strength with a 7.3% increase in income before taxes for the nine months, while the Consumer Brands Group and Performance Coatings Group experienced declines in income before taxes.

Frequently Asked Questions

The primary driver of the significant increase in Sherwin-Williams' net sales for the nine months ended September 30, 2017, was the acquisition of Valspar Corporation, which closed on June 1, 2017. This acquisition contributed substantially to the reported net sales figures.

Despite increased sales, EPS declined due to several factors related to the Valspar acquisition. These included acquisition-related costs, purchase accounting adjustments (such as amortization of acquired intangibles and inventory step-up), and increased interest expense from the debt taken on to finance the acquisition. These items offset the revenue growth and impacted profitability on a per-share basis.

The Valspar acquisition significantly impacted Sherwin-Williams' financial structure. Total debt increased substantially, rising from approximately $1.96 billion at the end of September 2016 to $10.9 billion at the end of September 2017. This increase reflects the substantial debt incurred to finance the $8.9 billion acquisition, leading to a higher debt-to-capitalization ratio.

The acquisition of Valspar, combined with rising raw material costs, led to a compression of gross profit margins. For the nine months ended September 30, 2017, gross profit as a percentage of net sales decreased to 45.3% from 50.0% in the comparable prior-year period. This was primarily attributed to purchase accounting adjustments on Valspar's inventory and higher input costs.