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SW 3rd Quarter Sales at Record High

The Sherwin-Williams Company (NYSE: SHW) announced its financial results for the third quarter ended September 30, 2017.

Compared to the same periods in 2016, consolidated net sales increased $1.23 billion, or 37.4%, to $4.51 billion in the quarter and increased $1.93 billion, or 21.3%, to $11.00 billion in nine months due primarily to the addition of Valspar sales since the month of June and higher paint sales volume in The Americas and Performance Coatings Groups, partially offset by the impact of the natural disasters in Texas, Florida and the Caribbean. Excluding sales from Valspar, net sales from core Sherwin-Williams operations increased 4.6% in the quarter and 5.2% in nine months.

Diluted net income per common share in the quarter decreased to $3.33 per share from $4.08 per share in 2016. Diluted net income per common share in nine months decreased to $9.23 per share from $9.85 per share in 2016. Diluted net income per common share from continuing operations (excluding a $.44 per share charge related to the divestiture) in nine months was $9.67 per share. Third quarter and nine months 2017 diluted net income per common share included a $1.42 and $2.22 per share charge, respectively, from acquisition-related costs, inventory purchase accounting adjustments and increased amortization of intangibles.

Valspar operations increased EPS by $.49 per share in the quarter, including a $.39 per share charge from interest expense on new debt. Third quarter and nine months 2016 diluted net income per common share included a $.24 and $.64 per share charge from acquisition-related costs, respectively. Third quarter 2017 EPS was negatively impacted by approximately $.27 per share from lost sales, increased raw material costs and recovery expenses resulting from the natural disasters. Currency translation rate changes did not have a significant impact on diluted net income per common share in the quarter and nine months.

Net sales in The Americas Group increased 6.5% to $2.54 billion in the quarter and increased 8.8% to $6.93 billion in nine months due primarily to higher architectural paint sales volume across most end market segments and selling price increases, partially offset by the impact of the natural disasters. Latin America region net sales, stated in U.S. dollars, increased 4.9% in the quarter and increased 6.1% in nine months over last year’s comparable period. Net sales from stores in U.S. and Canada open for more than twelve calendar months increased 5.2% in the quarter and 5.7% in nine months over last year’s comparable periods.

The Americas Group segment profit increased $6.3 million to $525.6 million in the quarter and increased $92.3 million to $1.36 billion in nine months due primarily to higher paint sales volume and selling price increases partially offset by increased raw material costs and approximately $36.0 million related to the natural disasters. Segment profit as a percent to net sales decreased in the quarter to 20.7% from 21.8% last year and decreased in nine months to 19.7% from 20.0% last year.

Net sales of the Consumer Brands Group increased 81.6% to $723.3 million in the quarter and increased 29.2% to $1.58 billion in nine months due primarily to the inclusion of Valspar sales since the month of June, partially offset by lower volume sales to some of the Group’s retail customers. Valspar sales increased Group net sales 84.4% and 37.9% in the quarter and nine months, respectively. Segment profit decreased to $70.4 million in the quarter from $87.2 million last year and decreased to $202.4 million in nine months from $250.2 million last year due primarily to acquisition-related purchase accounting adjustments to inventory and increased amortization costs, and increasing raw material costs.

The impacts were partially offset by improved operating efficiencies, good expense control and selling price increases. As a percent to net external sales, segment profit decreased in the quarter to 9.7% from 21.9% last year and decreased in nine months to 12.8% from 20.4% last year due primarily to higher raw material costs and acquisition-related impacts. In the quarter and nine months, segment profit decreased due to purchase accounting amortization expense of $54.6 million and $74.8 million, respectively, partially offset by Valspar operations profit of $38.1 million and $51.1 million, respectively.

The Performance Coatings Group’s net sales stated in U.S. dollars increased 150.8% to $1.24 billion in the quarter and increased 68.4% to $2.49 billion in nine months due primarily to the inclusion of Valspar sales, higher paint sales volumes and selling price increases. Valspar sales contributed 148.7% and 66.9% to Group net sales in the quarter and nine months, respectively. Stated in U.S. dollars, segment profit decreased in the quarter to $59.6 million from $68.0 million last year and decreased in nine months to $179.1 million from $191.1 million last year due primarily to acquisition-related costs, including purchase accounting adjustments to inventory and increased amortization costs.

Currency translation rate changes increased segment profit 3.6% and 1.2% in the quarter and nine months, respectively. As a percent to net external sales, segment profit decreased in the quarter to 4.8% from 13.7% last year and decreased in nine months to 7.2% from 12.9%. In the quarter and nine months, segment profit was increased by Valspar operations profit of $104.4 million and $140.3 million, respectively, partially offset by purchase accounting amortization expense of $102.0 million and $140.9 million, respectively.

The Company made no open market purchases of its common stock in the nine months ended September 30, 2017. Net operating cash increased to a record $1.26 billion in the nine months. At September 30, 2017, the Company had cash on hand of $208 million that will be utilized to reduce debt and fund operations. In the first nine months, the Company opened 61 net new store locations in The Americas Group.

Incremental depreciation and amortization related to Valspar acquisition purchase accounting has been updated to be approximately $300 million on an annual basis. Purchase accounting inventory adjustments of $115 million were amortized over the three months of June, July and August 2017. The balance sheet reflects preliminary purchase accounting balances and incremental debt of approximately $9.5 billion used to fund the acquisition. Net payments of long-term debt of approximately $700 million were made in the nine months ended September 30, 2017.

Commenting on the third quarter, John G. Morikis, Chairman, President and Chief Executive Officer, said, “The string of natural disasters impacting Texas, Florida, the Caribbean and Mexico in recent months was unprecedented, and so was the response of the Sherwin-Williams team members in those communities. Our associates committed countless hours of work toward disaster relief, clean up and customer assistance. Thanks to their efforts, the impact of these events on our business was at the low end of the expectations we communicated on September 28.

“The sales momentum we saw across most of our businesses leading up to the storms was encouraging. Comparable store sales growth in our North American paint stores was running in the high single digits, and the Consumer Brands Group and the Performance Coatings Group were both showing sequential improvement. Unfortunately, the natural disasters disproportionately affected profitability in the quarter as lost sales and gross profit could not be offset by reduced operating expenses.

“As we indicated at our Financial Community Presentation on October 3, the Valspar integration plans and synergy progress is in line with our expectations. We remain focused on strengthening the performance of our core businesses and our newly acquired businesses. We have implemented appropriate pricing initiatives to offset increasing raw material costs, and continue to focus on volume improvements in all businesses and all regions. Our success in driving improvements in our operating results and implementing integration plans will create a highly differentiated enterprise better equipped to serve paint and coatings customers around the corner and across the globe.

“For the fourth quarter, we anticipate our Sherwin-Williams’ core net sales will increase a mid-to-high single digit percentage compared to last year’s fourth quarter. In addition, we expect incremental sales from the Valspar acquisition to be approximately $1.0 billion in the fourth quarter… For the full year 2017, we expect Sherwin-Williams’ core net sales to increase by a mid single digit percentage compared to full year 2016. In addition, we expect incremental sales from the Valspar acquisition to be approximately $2.5 billion in 2017…”

Editor’s note: for the complete report go to sherwin-williams.com

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Sherwin-Williams