10-QPeriod: Q2 FY2018

SHERWIN WILLIAMS CO Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 25, 2018For Securities:SHW

Summary

Sherwin-Williams Company (SHW) reported strong financial performance for the quarter and six months ended June 30, 2018, largely driven by the successful integration of the Valspar acquisition. Net sales saw a significant increase year-over-year, with the Valspar acquisition contributing substantially to revenue growth across all segments, particularly in the Performance Coatings and Consumer Brands Groups. Despite an increase in costs, including raw materials and acquisition-related expenses, the company managed to improve operating efficiency and leverage synergies, leading to higher net income and diluted earnings per share compared to the prior year. Key financial metrics indicate robust operational health. Gross profit margins experienced a slight contraction primarily due to increased raw material costs and acquisition-related impacts, but selling, general, and administrative expenses as a percentage of net sales decreased, reflecting successful synergy realization. The company's liquidity remains strong, with adequate cash on hand and available borrowing capacity to support ongoing operations and strategic initiatives. Management remains focused on continued integration, cost management, and driving profitable growth across its diversified business segments.

Financial Highlights

54 data points
Beta

Revenue

$4.77B

42.7% Gross Margin

Net Income

$403.60M

8.5% Net Margin

EPS (Diluted)

$1.42

Total Assets

$20.10B

Cash & Equivalents

$154.97M

Free Cash Flow

$538.35M

Financial Statements
Beta
Revenue$4.77B
Cost of Revenue$2.74B
Gross Profit$2.04B
SG&A Expenses$1.31B
Operating Income$804.99M
Interest Expense$93.51M
Net Income$403.60M
EPS (Basic)$1.45
EPS (Diluted)$1.42
Shares Outstanding (Basic)278.78M
Shares Outstanding (Diluted)284.65M

Key Highlights

  • 1Consolidated net sales increased by 27.8% in Q2 2018 and 34.5% for the first six months of 2018, primarily driven by the Valspar acquisition.
  • 2Diluted net income per common share increased to $4.25 in Q2 2018 and $6.86 for the first six months of 2018, up from $3.36 and $5.90 respectively in the prior year periods.
  • 3Gross profit margin decreased to 42.7% in Q2 2018 from 46.4% in Q2 2017, attributed to higher raw material costs and acquisition impacts.
  • 4Selling, General, and Administrative (SG&A) expenses as a percentage of net sales decreased to 27.4% in Q2 2018 from 30.9% in Q2 2017, reflecting realized administrative synergies from the Valspar acquisition.
  • 5Interest expense increased significantly due to higher debt levels incurred to finance the Valspar acquisition.
  • 6The effective tax rate decreased to 25.0% in Q2 2018 and 22.3% for the first six months of 2018, largely due to the favorable impact of the Tax Cuts and Jobs Act.
  • 7The company's liquidity remains strong, with sufficient cash and available borrowing capacity, and it was in compliance with its financial covenants.

Frequently Asked Questions

The Valspar acquisition was the primary driver of increased net sales, contributing significantly to all reportable segments. While it increased costs, including amortization and interest expenses, the company also realized administrative synergies, leading to a reduction in SG&A as a percentage of net sales and contributing to overall earnings growth.

The gross profit margin decreased in the second quarter of 2018 compared to the prior year primarily due to higher raw material costs and the impact of acquisition-related purchase accounting adjustments. These factors were partially offset by increased paint sales volume and selling price increases.

The company continues to accrue for environmental-related activities and is involved in ongoing litigation, most notably the lead pigment and lead-based paint litigation. While the company believes it is probable that a loss has occurred in some litigation, it cannot reasonably estimate the range of potential losses due to numerous uncertainties. The company does not believe its environmental-related matters will have a material adverse effect on its financial condition, liquidity, or cash flow due to the extended resolution period, but significant future liabilities could materially impact net income in the period they are accrued.

The Tax Cuts and Jobs Act has had a favorable impact on the company's effective tax rate. The reduction in the corporate domestic income tax rate from 35% to 21% and a deduction related to foreign-derived intangible income contributed to a lower effective tax rate in both the second quarter and the first six months of 2018 compared to the prior year. However, this was partially offset by the elimination of the domestic manufacturing deduction and other factors.