SHERWIN WILLIAMS CO Quarterly Report for Q1 Ended Mar 31, 2018

Summary

The Sherwin-Williams Company (SHW) reported its first quarter results for 2018, which were significantly impacted by the acquisition of Valspar. Net sales surged by 43.6% to $3.97 billion compared to the prior year, largely driven by Valspar's contribution, which added 38.6% to the top line. While sales increased substantially, gross profit as a percentage of net sales declined to 42.5% from 48.6% in the prior year. This margin compression was primarily attributed to higher raw material costs, though partially offset by increased paint volume and favorable currency impacts. Despite higher interest expenses due to acquisition-related debt, diluted earnings per share (EPS) saw a modest increase to $2.62 from $2.53 in the first quarter of 2017. The company benefited from a lower effective tax rate of 17.6% in 2018, down from 22.0% in 2017, primarily due to the Tax Cuts and Jobs Act. Integration efforts and synergy realization from the Valspar acquisition are ongoing, with management highlighting reduced selling, general, and administrative expenses as a percentage of sales as a positive outcome of these synergies.

Key Highlights

• 1Net sales increased 43.6% to $3.97 billion, primarily driven by the Valspar acquisition.
• 2Gross profit margin decreased to 42.5% from 48.6% due to higher raw material costs.
• 3Selling, General, and Administrative (SG&A) expenses as a percentage of sales decreased to 30.6% from 36.6%, largely due to realized administrative synergies from the Valspar acquisition.
• 4Diluted EPS increased to $2.62 from $2.53, despite higher acquisition-related costs and amortization.
• 5The effective tax rate decreased to 17.6% from 22.0% due to the Tax Cuts and Jobs Act.
• 6Interest expense significantly increased by $65.9 million due to debt taken on for the Valspar acquisition.
• 7The company has provided updated pro forma financial information reflecting the Valspar acquisition's impact.

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