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 Nine Months Commission File
Ended July 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 August 31, 1996, The Valspar Corporation had 22,008,047 shares of common
stock outstanding, excluding 4,652,609 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 July 26, 1996
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PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
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Condensed Consolidated Balance Sheets - July 26, 1996, July 28, 1995, and October
27, 1995...................................................................... 2 & 3
Condensed Consolidated Statements of Income - Three months and nine months ended
July 26, 1996 and July 28, 1995............................................... 4
Condensed Consolidated Statements of Cash Flows - Nine months ended July 26, 1996
and July 28, 1995............................................................. 5
Notes to Condensed Consolidated Financial Statements - July 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 6. Exhibits and Reports on Form 8-K................................................ 9
SIGNATURES.................................................................................... 10
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
July 26, July 28, October 27,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 3,734 $ 3,584 $ 4,875
Accounts receivable less allowance
(7/26/96-$1,929; 7/28/95-$1,164;
10/27/95-$911) 162,200 139,533 129,954
Inventories:
Manufactured products 55,946 52,321 46,284
Raw material, supplies
and work in process 25,069 26,320 30,609
--------- --------- ---------
81,015 78,641 76,893
Other current assets 27,053 19,130 25,186
--------- --------- ---------
TOTAL CURRENT ASSETS 274,002 240,888 236,908
OTHER ASSETS 53,504 34,077 30,887
PROPERTY, PLANT AND EQUIPMENT 295,689 241,216 247,540
Less allowance for depreciation (145,325) (114,168) (117,136)
--------- --------- ---------
150,364 127,048 130,404
--------- --------- ---------
$ 477,870 $ 402,013 $ 398,199
========= ========= =========
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.
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
July 26, July 28, October 27,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 6,158 $ 28,899 $ 5,288
Trade accounts payable 82,138 61,570 68,575
Income taxes 7,293 9,156 9,098
Accrued liabilities 66,025 56,603 62,719
Current portion of long-term debt 265 235 233
--------- --------- ---------
TOTAL CURRENT LIABILITIES 161,879 156,463 145,913
LONG-TERM DEBT 56,508 25,099 21,658
DEFERRED LIABILITIES 18,544 20,064 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 12,775 6,849 10,348
Retained earnings 263,003 226,436 235,361
(3,435) (2,595) (3,436)
--------- --------- ---------
Other 285,673 244,020 255,603
Less cost of Common Stock in treasury
(7/26/96-4,587,839 shares; 7/28/95-4,687,937
shares; 10/27/95-4,672,046 shares) 44,734 43,633 43,488
--------- --------- ---------
240,939 200,387 212,115
--------- --------- ---------
$ 477,870 $ 402,013 $ 398,199
========= ========= =========
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
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ------------------------------
July 26, July 28, July 26, July 28,
1996 1995 1996 1995
------------ ------------ ------------ ------------
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Net sales $ 247,481 $ 216,310 $ 621,244 $ 584,571
Costs and expenses:
Cost of sales 171,516 152,084 435,839 418,819
Research and development 8,470 7,033 23,285 20,892
Selling and administration 36,683 30,275 96,945 87,338
Interest expense 1,050 1,122 2,216 2,984
Other (income)/expense - net (663) (78) (1,527) (459)
------------ ------------ ------------ ------------
Income before income taxes 30,425 25,874 64,486 54,997
Income taxes 12,231 10,401 25,923 21,977
------------ ------------ ------------ ------------
Net income $ 18,194 $ 15,473 $ 38,563 $ 33,020
============ ============ ============ ============
Per common share (Note 2)
Net income $ 0.82 $ 0.70 $ 1.74 $ 1.50
============ ============ ============ ============
Average number of common shares
outstanding 22,226,984 22,102,853 22,212,684 22,079,446
Dividends paid per common share $ 0.165 $ 0.15 $ 0.495 $ 0.45
See Notes to Condensed Consolidated Financial Statements.
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
----------------------
July 26, July 28,
1996 1995
-------- --------
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OPERATING ACTIVITIES:
Net income $ 38,563 $ 33,020
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 16,801 15,441
Provisions for:
Other deferred liabilities (136) 431
Loss of sales or abandonment of property, plant and
equipment 87 103
Increase (decrease) in cash due to changes in net
operating assets net of assets acquired:
Accounts and notes receivable (12,506) (26,641)
Inventories and prepaid assets 10,121 10,908
Trade accounts payable and accrued liabilities 3,812 8,932
Income taxes payable (1,805) 707
Other (227) 93
-------- --------
Net Cash Provided by Operating Activities 54,710 42,994
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (16,243) (31,837)
Acquired business, net of cash (51,369) --
Other (764) (1,500)
-------- --------
Net Cash Used in Investing Activities (68,376) (33,337)
FINANCING ACTIVITIES:
Net proceeds from borrowings 24,387 3,566
Proceeds from sale of treasury stock 1,648 1,209
Purchase of shares of Common Stock for treasury (2,589) (3,604)
Dividends paid (10,921) (9,824)
Other -- --
-------- --------
Net Cash Provided by (Used in) Financing Activities 12,525 (8,653)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (1,141) 1,004
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,875 2,580
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,734 $ 3,584
======== ========
See Notes to Condensed Consolidated Financial Statements.
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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 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 nine month
periods ended July 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 $11.8 million at July 26, 1996 and $13.7
million at July 28, 1995 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 transaction was accounted for as a purchase.
Accordingly, the net assets and operating results are included in the Company's
financial statements from the date of acquisition. The transaction had an
immaterial effect on the results of operations reported for the period ended
July 26, 1996.
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.
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. The transaction was
accounted for as a purchase and had an immaterial effect on the results of
operations reported for the period ended July 26, 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 14.4% to $247,481,000 and 6.3% to $621,244,000
in the three and nine month periods ended July 26, 1996, respectively, over net
sales for the comparable periods one year ago. Excluding the results of the
acquired Coates businesses, net sales increased 9.1% for the three months and
4.3% for the nine months ended July 26, 1996. In addition to the acquisition,
the third quarter and year-to-date sales increase was driven by volume increases
in the Consumer, Industrial, 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 Packaging, Maintenance and
Federal resulting from lower volumes sold in those businesses. Due to the
seasonal nature of the Company's business, sales for the quarter and nine months
are not necessarily indicative of sales for the full year.
The gross profit margin improved from 29.7% in 1995 to 30.7% in 1996 for the
third quarter. The gross profit margin for the first nine months was 29.8% in
1996 compared to 28.4% in 1995, with Consumer, Industrial, Color Corp. and
Sunbelt driving the improvement for both periods. 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. In addition, the margin for the nine months ended July 28, 1995 was
lower due to escalating raw material costs during that period. Raw material
costs continued stable in the third quarter of 1996. While the Company does not
forecast a significant upward trend in raw material costs over the next several
months, it is experiencing cost pressures on selected items.
Operating expenses (research, selling and administrative) increased 21.0% for
the third quarter and 11.1% for the first nine months of 1996 from the
comparable periods in 1995. Excluding the impact of Coates, the increases would
have been 12.4% and 8.1% for the three and nine month periods, respectively. The
remaining increases result primarily 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 increased 17.6% in the third quarter and 16.8% for the first
nine months from the comparable periods for 1995, primarily driven by higher
sales levels and gross profit margin rates. Improved results from the Company's
unconsolidated joint ventures also contributed to the increase in earnings for
both periods reported. Interest expense was lower due to reduced borrowing
levels prior to the Coates acquisition.
Financial Condition: The net cash provided by the Company's operations was
$54,710,000 for the first nine months of 1996 compared to $42,994,000 for the
first nine months of 1995. The additional cash was provided by increases in net
income and depreciation and amortization and a reduction in net working capital
requirements, primarily for accounts receivable. Days sales outstanding as of
July 1996 were consistent with July 1995.
Net cash provided by operations, coupled with bank borrowings, were used to
finance capital expenditures of $16,243,000; pay dividends of $10,921,000; and
finance acquisition expenditures, primarily related to the Coates acquisition,
of $51,369,000. The Company continues to upgrade and replace its existing
management information systems. Aside from this project, capital spending was
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 20.7% at the end of the
third quarter from 11.4% at the close of fiscal 1995 as the cash flow generated
by the business was offset by borrowings incurred to fund the acquisition. The
total debt to capital ratio as of July 28, 1995 was 21.3%. 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 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 27 - Financial Data Schedule (submitted in electronic
format for use of Commission only).
(b) During the three months ended July 26, 1996, a report on Form
8-K, dated May 2, 1996, was filed on May 17, 1996, covering
the acquisition by the Company of the Coates Coatings
affiliates of TOTAL SA. Additionally, a report on Form 8-K/A
was filed on July 16, 1996, providing the required financial
information which was not previously available.
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: September 9, 1996 By /s/ R. Engh
---------------------------------
R. Engh
Secretary
Date: September 9, 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> 3-MOS
<FISCAL-YEAR-END> OCT-25-1996
<PERIOD-END> JUL-26-1996
<CASH> 3,734
<SECURITIES> 0
<RECEIVABLES> 164,129
<ALLOWANCES> (1,929)
<INVENTORY> 81,015
<CURRENT-ASSETS> 274,002
<PP&E> 295,689
<DEPRECIATION> (145,325)
<TOTAL-ASSETS> 477,870
<CURRENT-LIABILITIES> 161,879
<BONDS> 0
0
0
<COMMON> 13,330
<OTHER-SE> (3,435)
<TOTAL-LIABILITY-AND-EQUITY> 477,870
<SALES> 621,244
<TOTAL-REVENUES> 621,244
<CGS> 435,839
<TOTAL-COSTS> 119,675
<OTHER-EXPENSES> (1,527)
<LOSS-PROVISION> 555
<INTEREST-EXPENSE> 2,216
<INCOME-PRETAX> 64,486
<INCOME-TAX> 25,923
<INCOME-CONTINUING> 38,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,563
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
</TABLE>
