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The Sherwin-Williams Company Reports 2017 Second Quarter Financial Results

As a result of the Valspar acquisition and integration, the Company made important changes to its organizational and reporting structure that resulted in establishing three new reportable operating segments. The Americas Group reportable operating segment includes Sherwin-Williams' previous Paint Stores Group and Latin America Coatings Group. The Consumer Brands Group reportable operating segment includes Sherwin-Williams' Consumer Group and Valspar's Consumer Paints segment, excluding Valspar's Automotive Refinishes products business. The Performance Coatings Group reportable operating segment includes Sherwin-Williams' Global Finishes Group and Valspar's Coatings Group along with Valspar's Automotive Refinishes products business. Valspar's North American Industrial Wood Coatings business, which was previously reported under Valspar's Coatings Group, was divested in order to secure regulatory approval to complete the Valspar acquisition.

Compared to the same periods in 2016, consolidated net sales increased $516.3 million, or 16.0%, to $3.74 billion in the quarter and increased $703.7 million, or 12.1%, to $6.50 billion in six months due primarily to the addition of Valspar sales for the month of June and higher paint sales volume in The Americas Group and the Performance Coatings Group. The previously announced change in revenue classification increased sales 2.2% both in the quarter and six months. This change primarily impacted The Americas Group and the Performance Coatings Group. It had no impact on segment profit, but reduced the segment profit as a percent to net sales of the affected Groups.

Diluted net income per common share in the quarter decreased to $3.36 per share from $3.99 per share in 2016. Diluted net income per common share in six months increased to $5.90 per share from $5.76 per share in 2016. Diluted net income per common share from continuing operations (excluding a $.44 per share charge related to the divestiture) in the quarter and six months was $3.80 and $6.34 per share, respectively. Second quarter and six months 2017 diluted net income per common share include a $.72 and $.80 per share charge, respectively, from acquisition-related costs, inventory purchase accounting adjustments and increased amortization of intangibles. Valspar operations increased EPS by $.10 per share in the quarter, including a $.19 per share charge from interest expense on new debt. Second quarter and six months 2016 diluted net income per common share included a $.16 and $.40 per share charge from acquisition-related costs, respectively. Currency translation rate changes did not have a significant impact on diluted net income per common share in the quarter and six months.

Net sales in The Americas Group increased 8.7% to $2.44 billion in the quarter and increased 10.2% to $4.39 billion in six months due primarily to higher architectural paint sales volume across most end market segments, the impact of the change in revenue classification and selling price increases. Latin America region net sales, stated in U.S. dollars, increased 1.2% in the quarter and increased 6.9% in six months over last year's comparable period. Net sales from stores in U.S. and Canada open for more than twelve calendar months, excluding the change in revenue classification, increased 4.9% in the quarter and increased 6.0% in six months over last year's comparable periods. The Americas Group segment profit increased $33.3 million to $532.7 million in the quarter and increased $86.0 million to $837.9 million in six months due primarily to higher paint sales volume and selling price increases partially offset by increased raw material costs. Segment profit as a percent to net sales decreased in the quarter to 21.8% from 22.2% last year. Six months segment profit margin increased to 19.1% from 18.8% last year. Excluding the change in revenue classification, segment profit margin was 22.6% and 19.7% in the quarter and six months, respectively.

Net sales of the Consumer Brands Group increased 16.0% to $536.4 million in the quarter and increased 4.0% to $859.8 million in six months due primarily to the inclusion of Valspar sales for the month of June, partially offset by lower volume sales to most of the Group's retail and commercial customers. Valspar sales increased Group net sales 27.9% and 15.6% in the quarter and six months, respectively. Segment profit decreased to $76.1 million in the quarter from $103.2 million last year and decreased to $132.0 million in six months from $163.0 million last year due primarily to lower organic sales volumes, increasing raw material costs and acquisition-related purchase accounting adjustments to inventory and increased amortization costs totaling $20.5 million in the quarter. 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 14.2% from 22.3% last year and decreased in six months to 15.4% from 19.7% last year due primarily to higher raw material costs and acquisition-related costs, which reduced segment profit as a percent to sales in the quarter and six months by 3.8% and 2.4%, respectively.

The Performance Coatings Group's net sales stated in U.S. dollars increased 48.0% to $761.1 million in the quarter and increased 26.9% to $1.25 billion in six months due primarily to one month of Valspar sales, higher paint sales volume and selling price increases. Valspar sales contributed 48.8% and 25.6% to Group net sales in the quarter and six months, respectively. Stated in U.S. dollars, segment profit decreased in the quarter to $62.3 million from $70.4 million last year and decreased in six months to $119.5 million from $123.1 million last year due primarily to acquisition-related costs, including purchase accounting adjustments to inventory and increased amortization costs of $38.3 million in the quarter. Currency translation rate changes had a minimal impact on segment profit in the quarter and six months. As a percent to net external sales, segment profit decreased in the quarter to 8.2% from 13.7% last year and decreased in six months to 9.6% from 12.5%. Acquisition-related expenses decreased segment profit as a percent to sales in the quarter and six months by 5.0% and 3.1%, respectively.

The Company made no open market purchases of its common stock in the six months ended June 30, 2017. At June 30, 2017, the Company had cash on hand of $210 million that will be utilized to reduce debt. In the first six months, the Company opened 33 net...


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