SECURITIES AND EXCHANGE COMMISSION
Washington, DC
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Six Months Commission File
Ended April 29, 1994 Number: 1-3011
THE VALSPAR CORPORATION
State of Incorporation: IRS Employer ID No:
Delaware 36-2443580
Principal Executive Offices:
1101 Third Street South
Minneapolis, MN 55415
Telephone Number: 612/332-7371
The registrant has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.
As of May 31, 1994, The Valspar Corporation has 21,709,064 shares
of common stock outstanding, excluding 4,951,592 shares held in
treasury. The Company had no other classes of stock outstanding.
THE VALSPAR CORPORATION
Index to Form 10-Q
for quarter ended April 29, 1994
PART I.
FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 29, 1994,
April 30, 1993, and October 29, 1993 . . . . . . 2&3
Condensed Consolidated Statements of Income -
Three months and six months ended April 29, 1994
and April 30, 1993 . . . . . . . . . . . . . . . 4
Condensed Statements of Consolidated Cash Flows - Six
months ended April 29, 1994 and April 30, 1993 . 5
Notes to Condensed Consolidated Financial Statements -
April 29, 1994 . . . . . . . . . . . . . . . . . 6&7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 8-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
April 29, April 30, October 29,
1994 1993 1993
(Unaudited)(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,748 $ 2,776 $ 1,637
Accounts receivable less
allowance (4/29/94-$1,058;
4/30/93-$1,438;
10/29/93-$985) 127,289 106,397 105,505
Inventories:
Manufactured products 54,148 46,770 42,587
Raw material, supplies and
work in process 25,665 26,255 25,688
Jobbed and sundry goods 102 145 115
79,915 73,170 68,390
Other current assets 18,010 15,933 21,948
TOTAL CURRENT ASSETS 227,962 198,276 197,480
OTHER ASSETS 34,488 37,299 36,179
PROPERTY, PLANT AND EQUIPMENT 190,854 196,820 207,168
Less allowance
for depreciation (95,719) (96,732) (104,029)
95,135 100,088 103,139
$357,585 $335,663 $336,798
Note: The Balance Sheet at October 29, 1993 has been derived from
the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
April 29, April 30, October 29,
1994 1993 1993
(Unaudited) (Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 30,300 $ 37,686 $ 3,500
Trade accounts payable 54,418 47,632 44,746
Income taxes 7,873 8,600 11,412
Accrued liabilities 48,550 42,996 53,035
Current portion of
long-term debt 205 780 788
TOTAL CURRENT LIABILITIES 141,346 137,694 113,481
LONG-TERM DEBT 42,591 9,820 7,890
DEFERRED LIABILITIES 17,090 14,523 18,909
STOCKHOLDERS' EQUITY:
Common stock (Par Value-$.50;
Authorized 30,000,000 shares;
Shares issued, including shares
in treasury--26,660,656) 13,330 13,330 13,330
Additional paid-in capital 5,106 1,350 2,269
Retained earnings 179,861 201,602 223,483
Other (1,542) (1,255) (1,109)
196,755 215,027 237,973
Less cost of common stock in
treasury (4/29/94-4,953,684
shares; 4/30/93-5,169,162 shares;
10/29/93-5,154,506 shares) 40,197 41,401 41,455
156,558 173,626 196,518
$357,585 $335,663 $336,798
Note: The Balance Sheet at October 29, 1993 has been
derived from the audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
April 29, April 30, April 29, April 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net sales $245,634 $179,043 $393,606 $316,210
Costs and expenses:
Cost of sales 180,597 129,353 289,261 231,788
Research 7,639 6,195 13,506 11,843
Selling and administration 32,637 25,980 56,856 48,942
Interest expense 890 535 1,115 970
Other (income)/expense - net (114) 151 1,716 232
221,649 162,214 362,454 293,775
Income before income taxes 23,985 16,829 31,152 22,435
Income taxes 9,714 6,648 12,617 8,862
Net income $ 14,271 $ 10,181 $ 18,535 $ 13,573
Per common share (Note 2)
Net income $ 0.65 $ 0.47 $ 0.85 $ 0.63
Average number of common
shares outstanding 21,806,760 21,648,678 21,765,291 21,707,884
Dividends paid per
common share $ 0.13 $ 0.11 $ 0.26 $ 0.22
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
April 29, April 30,
1994 1993
OPERATING ACTIVITIES:
Net income $ 18,535 $ 13,573
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,829 10,416
Provisions for:
Other deferred liabilities 680 248
Loss on sales or abandonment of
property, plant and equipment 2,532 256
Increase (decrease) in cash due
to changes in net operating assets,
net of effects of acquired and
spun-off businesses:
Accounts and notes receivable (62,170) (14,171)
Inventories and prepaid assets (14,482) 1,630
Trade accounts payable and
accrued liabilities 37,827 (6,225)
Income taxes payable (2,782) 1,226
Other 1,145 (131)
Net Cash (Used In) Provided
by Operating Activities (8,886) 6,822
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (13,689) (7,593)
Acquired businesses/assets, net of cash (75,385) 0
Investment in joint ventures 0 (3,484)
Other 0 (25)
Net Cash Used in Investing Activities (89,074) (11,102)
FINANCING ACTIVITIES:
Net proceeds from borrowings, net of effects
of spun-off businesses 103,751 14,729
Proceeds from sale of treasury stock 3,161 813
Purchase of shares of common stock
for treasury (474) (5,491)
Dividends paid (5,625) (4,743)
Other (1,742) (32)
Net Cash Provided by Financing Activities 99,071 5,276
INCREASE IN CASH 1,111 996
CASH AT BEGINNING OF YEAR 1,637 1,780
CASH AT END OF PERIOD $ 2,748 $ 2,776
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 29, 1994
NOTE 1: The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report on Form 10-K for the year
ended October 29, 1993. Operating results for the three month and six month
periods ended April 29, 1994 are not necessarily indicative of the results
that may be expected for the fiscal year ending October 28, 1994.
NOTE 2: Net income per share is based on the weighted average number of Common
Shares outstanding during each period plus common stock equivalents on
stock options.
NOTE 3:On February 18, 1994, Valspar's wholly-owned subsidiary, McWhorter, Inc.
purchased substantially all of the assets, consisting primarily of
inventory and fixed assets, but excluding accounts receivable, of the Resin
Products Division of Cargill, Incorporated for approximately $76 million.
McWhorter's financing for the Resin Products Division acquisition was
derived from two sources: $44 million in cash received upon collection of
an intercompany balance due from Valspar and $32 million in bank financing.
Valspar utilized existing credit facilities to finance payment of the
intercompany balance owed to McWhorter. Immediately after the acquisition,
McWhorter, Inc., was merged into McWhorter Technologies, Inc.
("McWhorter"), with the surviving Delaware corporation remaining a wholly-
owned subsidiary of the Company.
At the close of business on April 29, 1994, all of the assets of the Resin
Products Division and the assets and liabilities of McWhorter's operations
located in Philadelphia, Pennsylvania; Carpentersville, Illinois; and
Portland, Oregon were distributed to the Valspar shareholders in the form
of a stock dividend. The April 29, 1994 Balance Sheet reflects this
distribution. In accordance with the Distribution Agreement dated February
18, 1994 between Valspar and McWhorter, prior to the distribution McWhorter
transferred to Valspar resin assets located at facilities in Los Angeles,
California; Rockford and Kankakee, Illinois; and Garland, Texas.
The significant assets and liabilities of the spun-off entity are as
follows:
Assets:
Accounts receivable $40,386
Inventory 21,435
Other assets 3,734
Property and plant
equipment (net) 69,523
Liabilities:
Notes to bank (12,700)
Accounts payable (22,382)
Accrued liabilities (11,250)
Long-term debt (30,133)
Other liabilities (2,791)
Net assets $55,822
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -
CONTINUED
APRIL 29, 1994
The following supplemental unaudited consolidated pro forma information
shows condensed results of operations as though the McWhorter spin-off had
occurred at the beginning of fiscal 1993. The quarterly unaudited
consolidated pro forma financial information is provided for information
purposes only and does not purport to be indicative of the future results
or financial position of Valspar or what the results of operations or
financial position would have been had the McWhorter spin-off occurred as
described above.
(Dollar in Thousands)
Net Net Net Income
Sales Income Per Share
Quarter Ended:
January 28, 1994 $137,567 $4,877 $.22
April 29, 1994 192,994 11,712 .54
January 29, 1993 128,357 2,931 $.13
April 30, 1993 168,284 9,038 .42
July 30, 1993 184,667 13,198 .61
October 29, 1993 169,148 10,149 .47
$650,466 $35,316 $1.63
Year To Date:
April 29, 1994 $330,561 $16,589 $.76
April 30, 1993 296,641 11,969 .55
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operations: Valspar's operations for the second quarter include the
results for the Resin Products Division, which was acquired from
Cargill, Incorporated by McWhorter, Inc. from the date of its
acquisition on February 18, 1994. At the close of business on April
29, 1994, all of the assets of the Resin Products Division and the
assets and liabilities of McWhorter's operations located in
Philadelphia, Pennsylvania; Carpentersville, Illinois; and Portland,
Oregon were distributed to Valspar shareholders in the form of a stock
dividend of one share of McWhorter for every two shares of Valspar
common stock held. The April 29, 1994 Balance Sheet has been adjusted
to reflect the distribution. Note 3 included herein should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations for the second quarter which
follows.
The Company's sales increased 37.2% and 24.5% in the three and six
months periods ended April 29, 1994, respectively, over the comparable
periods of the prior year. Excluding the results of McWhorter for the
second quarter and first half of 1994 and from the comparable periods
in 1993, sales increased 14.7% to $192,994,000 for the quarter and
11.4% to $330,561,000 for the first six months over the comparable
periods of 1993. Sales within the Consumer, Industrial, Packaging,
Color Corp. and Marine Business Groups were all above last year's
levels for both the quarter and first half of the year primarily due
to additional volume sold. Due to the seasonal nature of the Company's
business, the sales for the first six months are not necessarily
indicative of the business to be expected by the Company for the
balance of the fiscal year.
Gross profit margin for both the quarter and first half of 1994 was
26.5%, down 1.3% from the second quarter and .2% from the first half
of 1993. The decrease in this year's gross profit margin for both the
quarter and year-to-date results was attributable to the increased
sales level of lower margin resin products resulting from the
acquisition of the Resin Products Division. Excluding McWhorter, the
Company's gross profit margin increased from 27.9% to 29.0% for the
second quarter and from 27.0% to 28.2% for the first six months of
1994. This year's improvement in gross profit margin for the Company's
continuing businesses was due to increased sales of higher margin
Consumer Group products, reduced manufacturing unit costs resulting
from improved productivity and higher capacity utilization coupled
with lower overall raw material prices in effect for the first half of
1994.
Operating expenses (research, selling, administrative) for the second
quarter and first six months of 1994 were 25.2% and 15.8% higher,
respectively, than the comparable periods of the prior year. This
year's increase in operating expenses was due to acquisition related
expenses, additional operating expenses associated with the acquired
business, increased direct selling expenses and a higher level of
promotional and advertising programs associated with our Consumer
Group's new business efforts. Although operating expenses for the
second quarter and first half of 1994 increased over the comparable
periods of 1993, as a percent of sales, operating expenses declined
from 18.0% during the second quarter 1993 to 16.4% during the second
quarter this year and from 19.2% during the first half of 1993 to
17.9% in the first half this year. Excluding McWhorter, comparable
operating expenses for the Company's continuing businesses increased
16.0% for the quarter and 10.8% for the first half over the comparable
periods of 1993. This increase in operating expenses for Valspar's
continuing businesses was mainly attributable to an increase in direct
selling expenses and additional Consumer Group promotional and
advertising programs as noted above.
Interest expense increased by 66.4% for the quarter and 15.8% year-
to-date, as compared to last year. This increase was due to a higher
level of borrowing resulting from the acquisition of the Resin
Products Division. Other expense - net for the first half of 1994
included $2,474,000 of expense recognized during the first quarter of
1994 for the write-down to appraised fair value of a resin plant which
was sold to Valspar at the time McWhorter acquired the Resin Products
Division assets from Cargill.
The Company's effective income tax rate for 1994 increased due to the
change in the federal statutory rate during 1993. The impact of this
change on the results for the second quarter and first half of 1994
was to reduce net income by approximately $.02 per share.
Increased sales from the acquired business, along with the additional
volume sold and improved gross profit margins within the Company's
continuing businesses, coupled with controlled operating expenses,
resulted in an increase in net income of 40.2% for the second quarter
and 36.6% for the first half of 1994 over the comparable periods of
the prior year. Excluding McWhorter for the second quarter and first
half of 1994 along with the comparable periods last year, net income
increased 29.6% to $11,712,000 ($.54 per share) for the quarter and
38.6% to $16,589,000 ($.76 per share) for the first half of 1994 over
the comparable periods of the prior year.
Financial Condition: As reported previously in the Company's Form 10-Q
for the quarter ended January 28, 1994 and in Forms 8-K and 8-K/A
dated March 7, 1994 and May 6, 1994, respectively, the Company
completed the acquisition of Cargill's Resin Products Division during
the second quarter of fiscal 1994 and distributed the common stock of
McWhorter Technologies, Inc. to Valspar shareholders on a tax-free
basis at the close of business on April 29, 1994.
As a result of this transaction, the Company's stockholders' equity
decreased $55,822,000 and total debt increased approximately
$44,000,000. Following the transaction, the Company's total debt to
capital ratio was 31.82% at the close of the second quarter compared
to 5.83% at the end of fiscal 1993.
As noted above, the Company's balance sheet at April 29, 1994 excludes
the assets and liabilities of McWhorter Technologies, Inc. The balance
sheets as of April 30, 1993 and October 29, 1993 include the assets
and liabilities of McWhorter prior to the acquisition of the Resin
Products Division. Activity presented in the Statement of Consolidated
Cash Flows includes activity related to McWhorter (including the Resin
Products Division from February 18, 1994 through April 29, 1994).
During the first six months of fiscal 1994, the Company's accounts
receivable increased $62,170,000. McWhorter's business accounted for
$33,645,000 of this increase primarily due to the fact that the Resin
Products Division's accounts receivable were not included as part of
the acquisition. Investment in this working capital item occurred
subsequent to February 18, 1994. The balance of the increase in
Valspar's receivables was due to increased sales levels as well as an
increase in extended payment terms. Inventories and prepaid assets
increased by a net $14,482,000 during the first six months of 1994
compared to a net decrease of $1,630,000 during the prior year. The
majority of the increase was due to an increase in Valspar's
(excluding McWhorter) inventory levels to support the increase in 1994
business levels.
Trade accounts payable and accrued liabilities increased $37,827,000
during the first six months of 1994 compared to a decrease of
$6,225,000 during the first half of 1993. Approximately $21,000,000 of
this increase was attributable to McWhorter - again primarily a result
of the fact that Trade Accounts Payable and Accrued Liabilities
related to the Resin Products Division business were not included in
the acquisition. Growth of the Resin Products Division liabilities to
normal business levels thus began to occur during the February 18,
1994 to April 29, 1994 time period.
Capital expenditures for fiscal 1994 continue at a stronger pace than
for 1993. In addition to the first quarter expenditure of $3,000,000
for the Statesville, North Carolina distribution center, other
significant expenditures include expansion of the Company's Colorant
production facilities in Louisville, Kentucky and investment in the
Company's computer processing systems.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
During the period covered by this report, there were no legal
proceedings instituted that are reportable, and there were no material
developments in any of the legal proceedings that were previously
reported on the Company's Form 10-K for the year ended October 29,
1993.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders was held at the offices of the
Corporation at 1101 Third Street South, Minneapolis, Minnesota, on
February 23, 1994. The stockholders took the following actions: (i)
The stockholders elected three directors to serve for three- year
terms. The stockholders present in person or by proxy cast the
following numbers of votes in connection with the election of
directors, resulting in the election of all nominees:
Votes Votes
For Withheld
Susan S. Boren 19,748,571 61,431
Richard N. Cardozo 19,751,239 58,763
Robert E. Pajor 19,747,580 62,422
(ii) The stockholders ratified the appointment of Ernst & Young as the
Company's independent auditors for fiscal 1994. 19,682,005 votes were
cast for the resolution; 66,602 votes were cast against the
resolution; shares representing 61,394 votes abstained; and there were
no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a)No exhibits are included herein.
(b)During the three months ended April 29, 1994, a report on Form 8-K,
dated February 18, 1994, was filed on March 7, 1994, covering the
acquisition of certain assets of the Resin Products Division of
Cargill, Incorporated by McWhorter, Inc. Additionally, a report on
Form 8-K/A, dated March 7, 1994, was filed on May 6, 1994, covering
the spin-off of McWhorter Technologies, Inc. to Valspar shareholders
in the form of a stock dividend as of the close of business on April
29, 1994.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE VALSPAR CORPORATION
Date: June 13, 1994 By /s/R. Engh
R. Engh
Secretary
Date: June 13, 1994 By /s/P. C. Reyelts
P. C. Reyelts
Vice President, Finance
(Chief Financial Officer)
