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 26, 1996 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, 1996, The Valspar Corporation had 22,071,606 shares of common
stock outstanding, excluding 4,589,050 shares held in treasury. The Company had
no other classes of stock outstanding.
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended April 26, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 26, 1996, April 28, 1995, and
October 27, 1995.............................................................. 2 & 3
Condensed Consolidated Statements of Income - Three months and six months ended
April 26, 1996 and April 28, 1995............................................. 4
Condensed Consolidated Statements of Cash Flows - Six months ended April 26, 1996
and April 28, 1995............................................................ 5
Notes to Condensed Consolidated Financial Statements - April 26, 1996........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 7 & 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............................. 9
Item 6. Exhibits and Reports on Form 8-K................................................ 9
SIGNATURES............................................................................... 10
</TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
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<CAPTION>
April 26, April 28, October 27,
1996 1995 1995
--------- --------- ---------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,382 $ 1,168 $ 4,875
Accounts receivable less allowance (4/26/96-$1,238;
4/28/95-$1,029; 10/27/95-$911) 136,897 137,125 129,954
Inventories:
Manufactured products 53,723 60,514 46,284
Raw material, supplies and work in process 23,035 28,757 30,609
--------- --------- ---------
76,758 89,271 76,893
Other current assets 26,361 18,378 25,186
--------- --------- ---------
TOTAL CURRENT ASSETS 243,398 245,942 236,908
OTHER ASSETS 36,937 34,802 30,887
PROPERTY, PLANT AND EQUIPMENT 257,756 233,814 247,540
Less allowance for depreciation (125,832) (109,999) (117,136)
--------- --------- ---------
131,924 123,815 130,404
--------- --------- ---------
$ 412,259 $ 404,559 $ 398,199
========= ========= =========
</TABLE>
Note: The Balance Sheet at October 27, 1995 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)
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<CAPTION>
April 26, April 28, October 27,
1996 1995 1995
--------- --------- ---------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 17,838 $ 52,468 $ 5,288
Trade accounts payable 68,629 57,187 68,575
Income taxes 7,960 8,193 9,098
Accrued liabilities 52,680 51,883 62,719
Current portion of long-term debt 237 229 233
--------- --------- ---------
TOTAL CURRENT LIABILITIES 147,344 169,960 145,913
LONG-TERM DEBT 21,538 25,213 21,658
DEFERRED LIABILITIES 18,413 19,788 18,513
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 12,804 6,805 10,348
Retained earnings 246,956 214,196 235,361
Other (4,996) (2,138) (3,436)
--------- --------- ---------
268,094 232,193 255,603
Less cost of Common Stock in treasury
(4/26/96-4,552,184 shares; 4/28/95-4,664,449
shares; 10/27/95-4,672,046 shares) 43,130 42,595 43,488
--------- --------- ---------
224,964 189,598 212,115
--------- --------- ---------
$ 412,259 $ 404,559 $ 398,199
========= ========= =========
</TABLE>
Note: The Balance Sheet at October 27, 1995 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)
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
April 26, April 28, April 26, April 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
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Net sales $ 208,459 $ 205,041 $ 373,763 $ 368,261
Costs and expenses:
Cost of sales 143,872 146,604 264,323 266,735
Research and development 8,095 7,409 14,815 13,859
Selling and administration 32,726 29,859 60,262 57,063
Interest expense 703 1,162 1,166 1,862
Other income - net 576 131 864 381
----------- ----------- ----------- -----------
Income before income taxes 23,639 20,138 34,061 29,123
Income taxes 9,502 7,970 13,692 11,576
----------- ----------- ----------- -----------
Net income $ 14,137 $ 12,168 $ 20,369 $ 17,547
=========== =========== =========== ===========
Per common share (Note 2)
Net income $ 0.64 $ 0.55 $ 0.92 $ 0.80
=========== =========== =========== ===========
Average number of common shares outstanding 22,247,555 22,104,817 22,205,131 22,067,145
Dividends paid per common share $ 0.165 $ 0.15 $ 0.33 $ 0.30
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
April 26, April 28,
1996 1995
-------- --------
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OPERATING ACTIVITIES:
Net income $ 20,369 $ 17,547
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,296 10,334
Provisions for:
Other deferred liabilities 56 156
Loss of sales or abandonment of property, plant and equipment 54 78
Increase (decrease) in cash due to changes in net operating assets:
Accounts and notes receivable (6,943) (24,233)
Inventories and prepaid assets (1,040) 1,029
Trade accounts payable and accrued liabilities (7,699) (171)
Income taxes payable (1,138) (256)
Other (1,068) (909)
-------- --------
Net Cash Provided by Operating Activities 13,887 3,575
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (11,702) (24,352)
Acquired business, net of cash (9,529) --
-------- --------
Net Cash Used in Investing Activities (21,231) (24,352)
FINANCING ACTIVITIES:
Net proceeds from borrowings 12,434 27,243
Proceeds from sale of treasury stock 1,657 1,099
Purchase of shares of Common Stock for treasury (965) (2,500)
Dividends paid (7,275) (6,575)
Other -- 98
-------- --------
Net Cash Provided by Financing Activities 5,851 19,365
DECREASE IN CASH AND CASH EQUIVALENTS (1,493) (1,412)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,875 2,580
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,382 $ 1,168
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 26, 1996
NOTE 1: The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they 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. Operating results for the three and six month
periods ended April 26, 1996 are not necessarily indicative of the results that
may be expected for the year ended October 25, 1996. For further information
refer to the consolidated financial statements and footnotes thereto included in
The Valspar Corporation's annual report on Form 10-K for the year ended October
27, 1995.
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. Potential dilution from the exercise of stock options is not material.
NOTE 3: Trade accounts payable include $12.4 million at April 26, 1996 of issued
checks which had not cleared the Company's bank accounts.
NOTE 4: Effective April 30, 1996, the Company completed the first phase of its
acquisition of Coates Coatings (Coates) pursuant to an acquisition agreement
between Coates Brothers PLC, an affiliate of TOTAL SA, and the Company dated
February 26, 1996. The first phase included the Coates European businesses,
which consists of packaging coatings and metal decorating inks businesses in the
United Kingdom, France, Norway, Germany and Spain. These operations will be
combined with the Company's existing European packaging coatings business and
will be known as ValsparCoates-Europe. Also included were the Coates Australian
and United States operations which will be combined with the Company's existing
businesses in these countries. The Coates operations included in the first phase
represent consolidated sales of approximately $73 million for the year ended
December 31, 1995. The transaction will be accounted for as a purchase.
The acquisition agreement calls for several subsequent phases for the
acquisition of certain other Coates operations. Worldwide sales for Coates and
all of its affiliates were approximately $125 million in 1995. Subsequent phases
of the transaction are subject to various conditions and regulatory approvals,
where applicable.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Acquisition: Effective April 30, 1996 the Company completed the first
phase of its acquisition of TOTAL SA's Coates Coatings operations.
These operations accounted for approximately $73 million in sales for
the year ended December 31, 1995. The transaction, recorded in the
Company's third quarter, will be accounted for as a purchase and had no
effect on the results of operations reported for the period ended April
26, 1996. Proforma financial information on the acquisition will be
provided in a Form 8-K/A to be filed on or about July 16, 1996.
The total consideration for this first phase of the transaction was
approximately $50 million in cash; including approximately $40 million
paid for the assets and stock of certain Coates Coatings affiliates,
and approximately $10 million paid to acquire intercompany debts owed
by certain of the acquired Coates Coatings affiliates. The transaction
was financed through credit facilities with the Company's existing
banking group.
Operations: Net sales increased 1.7% to $208,459,000 and 1.5% to
$373,763,000 in the three and six month periods ended April 26, 1996,
respectively, over net sales for the comparable periods one year ago.
The second quarter and year to date sales increase was driven by volume
increases in the Consumer, Sunbelt, EPS resin and Color Corp. colorant
businesses and pricing actions taken in substantially all of the
businesses during the prior fiscal year in response to rising raw
material costs. The increase was partially offset by lower sales in
Industrial, Packaging, Federal and Maintenance driven by lower volumes
sold in those businesses. Due to the seasonal nature of the Company's
business, sales for the quarter and six months are not necessarily
indicative of the sales for the full year.
The gross profit margin improved from 28.5% in 1995 to 31.0% in 1996
for the second quarter and from 27.6% in 1995 to 29.3% in 1996 for the
first six months, with Consumer, EPS, Color Corp. and Sunbelt showing
the most improvement. The increase in this year's margin is impacted by
reduced production and distribution costs with the three new facilities
fully operational this year whereas they were in various start-up
stages last year at this time. Raw material costs were stable in the
second quarter, however, the Company expects margin pressure will
resume towards the end of its fiscal year. The Company intends to
offset higher raw material costs by continuing to improve its operating
efficiency and seeking price increases where necessary.
Operating expenses (research, selling and administrative) for the
second quarter and the first six months of 1996 were 9.5% and 5.9%
higher, respectively, than the comparable periods of 1995. The increase
stems from additional advertising and other promotional costs for large
Consumer customers, increased research spending, costs associated with
the upgrade and replacement of the Company's information systems and
costs incurred in the Company's international sales offices.
Net income for 1996 was 16% higher in the second quarter and the first
six months than in the comparable periods for 1995 primarily driven by
the higher gross margin. Lower interest expense due to reduced
borrowing levels and interest rates and higher income from the
Company's unconsolidated joint ventures also contributed to the
increase in earnings for those periods.
Financial Condition: The net cash provided by the Company's operations
was $13,887,000 for the first six months of 1996 compared to $3,575,000
for the first six months of 1995. The additional cash was provided by
increases in net income and depreciation and amortization and reduced
net working capital requirements. Accounts receivable did not increase
to the same extent it did in the first six months of 1995 due to the
lower sales increase rate in the first two quarters of 1996. Inventory
levels remained approximately flat in comparison to year end levels due
to improved inventory management programs. Accounts payable and accrued
liabilities decreased in the first two quarters as a result of payments
of various year-end accruals and the timing of accounts payable
disbursements.
Net cash provided by operations, coupled with bank borrowings, were
used to finance capital expenditures of $11,702,000; pay dividends of
$7,275,000; and finance acquisition expenditures of $9,529,000. The
Company continues to upgrade and replace its existing management
information systems. Aside from this project, capital spending was
evenly distributed among the four business groups with no other single
major expenditure. The reduction in capital spending from the prior
year relates to the completion of new production facilities in
Statesville, North Carolina and Marengo, Illinois during 1995.
The Company's total debt to capital ratio increased to 15.0% at the end
of the second quarter from 11.4% at the close of fiscal 1995 due to the
seasonality in the cash flow generated by the business. The total debt
to capital ratio as of April 28, 1995 was 29.1%. The Company believes
its existing lines of credit will be sufficient to meet its current and
projected needs for financing.
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 pending legal proceedings that were previously
reported on the Company's Form 10-K for the year ended October 27,
1995.
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 28, 1996. The stockholders took the following actions: (i) The
stockholders elected four 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
Thomas R. McBurney 20,485,471 41,900
Richard M. Rompala 20,489,121 38,250
Michael P. Sullivan 20,488,980 38,391
C. Angus Wurtele 20,490,303 37,068
(ii) The stockholders approved an increase in the shares reserved under
the Key Employee Annual Bonus Plan from 200,000 shares to 700,000
shares. 19,746,540 votes were cast for the resolution; 661,584 votes
were cast against the resolution; 119,247 votes abstained; and there
were no broker non-votes.
(iii) The stockholders ratified the appointment of Ernst & Young LLP as
the Company's independent auditors for fiscal 1996. 20,427,543 votes
were cast for the resolution; 76,289 votes were cast against the
resolution; shares representing 23,539 votes abstained; and there were
no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 27 - Financial Data Schedule (submitted in electronic
format for use of Commission only).
(b) The registrant did not file any reports on Form 8-K during the
three months ended April 26, 1996, but the Company did file a
report on Form 8-K on May 17, 1996.
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 10, 1996 By /s/ R. Engh
R. Engh
Secretary
Date: June 10, 1996 By /s/ P. C. Reyelts
P. C. Reyelts
Vice President, Finance
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-25-1996
<PERIOD-END> APR-26-1996
<CASH> 3,382
<SECURITIES> 0
<RECEIVABLES> 138,135
<ALLOWANCES> (1,238)
<INVENTORY> 76,758
<CURRENT-ASSETS> 243,398
<PP&E> 257,756
<DEPRECIATION> (125,832)
<TOTAL-ASSETS> 412,259
<CURRENT-LIABILITIES> 147,344
<BONDS> 0
0
0
<COMMON> 13,330
<OTHER-SE> (4,996)
<TOTAL-LIABILITY-AND-EQUITY> 412,259
<SALES> 373,763
<TOTAL-REVENUES> 373,763
<CGS> 264,323
<TOTAL-COSTS> 74,772
<OTHER-EXPENSES> (864)
<LOSS-PROVISION> 305
<INTEREST-EXPENSE> 1,166
<INCOME-PRETAX> 34,061
<INCOME-TAX> 13,692
<INCOME-CONTINUING> 20,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,369
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
</TABLE>