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 25, 1997 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 30, 1997, The Valspar Corporation had 43,791,100 shares of common
stock outstanding, excluding 9,530,212 shares held in treasury (as adjusted to
reflect a 2-for-1 stock split, effected in the form of a 100% stock dividend,
with a record date of March 7, 1997). The Company had no other classes of stock
outstanding.
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended April 25, 1997
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 25, 1997,
April 26, 1996, and October 25, 1996.......................... 2 & 3
Condensed Consolidated Statements of Income - Three
months and six months ended April 25, 1997 and April 26,
1996.......................................................... 4
Condensed Consolidated Statements of Cash Flows - Six
months ended April 25, 1997 and April 26, 1996................ 5
Notes to Condensed Consolidated Financial Statements -
April 25, 1997................................................ 6 & 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 9
Item 2. Changes in Securities........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 10
Item 6. Exhibits and Reports on Form 8-K................................ 10
SIGNATURES................................................................ 11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<CAPTION>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
April 25, April 26, October 25,
1997 1996 1996
--------- --------- ---------
(Unaudited) (Unaudited) (Note)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents $ 8,121 $ 3,382 $ 7,112
Accounts receivable less allowance
(4/25/97-$1,629; 4/26/96-$1,238;
10/25/96-$1,260) 172,681 136,897 152,842
Inventories:
Manufactured products 78,214 53,723 58,591
Raw material, supplies and work in
process 31,724 23,035 25,595
--------- --------- ---------
109,938 76,758 84,186
Other current assets 36,194 26,361 31,060
--------- --------- ---------
TOTAL CURRENT ASSETS 326,934 243,398 275,200
OTHER ASSETS 70,033 36,937 57,421
PROPERTY, PLANT AND EQUIPMENT 326,398 257,756 302,565
Less allowance for depreciation (159,655) (125,832) (148,746)
--------- --------- ---------
166,743 131,924 153,819
--------- --------- ---------
$ 563,710 $ 412,259 $ 486,440
========= ========= =========
Note: The Balance Sheet at October 25, 1996 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
April 25, April 26, October 25,
1997 1996 1996
--------- --------- ---------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 67,271 $ 17,838 $ 14,665
Trade accounts payable 91,392 68,629 80,125
Income taxes 7,555 7,960 8,123
Accrued liabilities 72,883 52,680 75,911
Current portion of long-term debt 273 237 246
--------- --------- ---------
TOTAL CURRENT LIABILITIES 239,374 147,344 179,070
LONG-TERM DEBT 37,084 21,538 31,948
DEFERRED LIABILITIES 19,909 18,413 21,719
STOCKHOLDERS' EQUITY:
Common Stock (Par Value-$.50;
Authorized 120,000,000 shares;
Shares issued, including shares in
treasury--53,321,312) 26,660 13,330 13,330
Additional paid-in capital 16,595 12,804 13,957
Retained earnings 280,496 246,956 276,679
Other 1,014 (4,996) (593)
--------- --------- ---------
324,765 268,094 303,373
Less cost of Common Stock in treasury
(4/25/97-9,532,590 shares; 4/26/96-
9,104,368 shares; 10/25/96-9,376,786
shares) 57,422 43,130 49,670
--------- --------- ---------
267,343 224,964 253,703
--------- --------- ---------
$ 563,710 $ 412,259 $ 486,440
========= ========= =========
Note: The Balance Sheet at October 25, 1996 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
April 25, April 26, April 25, April 26,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 252,768 $ 208,459 $ 442,056 $ 373,763
Costs and expenses:
Cost of sales 169,959 143,872 305,809 264,323
Research and development 10,043 8,095 18,272 14,815
Selling and administration 43,178 32,726 75,017 60,262
Interest expense 1,309 703 1,916 1,166
Other income - net 311 576 810 864
----------- ----------- ----------- -----------
Income before income taxes 28,590 23,639 41,852 34,061
Income taxes 11,487 9,502 16,821 13,692
----------- ----------- ----------- -----------
Net income $ 17,103 $ 14,137 $ 25,031 $ 20,369
=========== =========== =========== ===========
Per common share (Note 2)
Net income $ 0.39 $ 0.32 $ 0.57 $ 0.46
=========== =========== =========== ===========
Average number of common
shares outstanding 44,250,630 44,495,110 44,238,690 44,410,262
Dividends paid per common
share $ 0.09 $ 0.0825 $ 0.18 $ 0.165
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
-----------------------
April 25, April 26,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 25,031 $ 20,369
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,919 11,296
Increase (decrease) in cash due to changes in net
operating assets, net of effects of acquired
businesses:
Accounts and notes receivable (16,807) (6,943)
Inventories and prepaid assets (27,587) (1,040)
Trade accounts payable and accrued liabilities 8,646 (7,699)
Income taxes payable (2,621) (1,138)
Other deferred liabilities 173 56
Other (1,809) (1,014)
-------- --------
Net Cash (Used In)/Provided By Operating Activities (3,055) 13,887
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (18,531) (11,702)
Acquired businesses/assets, net of cash (24,299) (9,529)
Other investments/advances to joint ventures 4,808 0
-------- --------
Net Cash Used In Investing Activities (38,022) (21,231)
FINANCING ACTIVITIES:
Net proceeds from borrowings 57,727 12,434
Proceeds from sale of treasury stock 1,071 1,657
Purchase of shares of Common Stock for treasury (8,826) (965)
Dividends paid (7,886) (7,275)
-------- --------
Net Cash Provided By Financing Activities 42,086 5,851
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,009 (1,493)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,112 4,875
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,121 $ 3,382
======== ========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 25, 1997
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 25, 1997 are not necessarily indicative of the results that
may be expected for the year ended October 31, 1997. 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
25, 1996.
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 $15.3 million at April 25, 1997 and $12.4
million at April 26, 1996 of issued checks which had not cleared the Company's
bank accounts.
NOTE 4: Effective January 1, 1997, the Company completed the second phase of its
acquisition of TOTAL SA's Coates Coatings ("Coates") operations. The second
phase consisted of packaging coatings and metal decorating inks businesses in
Hong Kong and China. The acquisition was made with the Company's joint venture
partner, China Merchants Hai Hong Holdings Company, Ltd. The transaction was
accounted for as a purchase. Accordingly, the net assets and operating results
have been included in the Company's financial statements from the date of
acquisition. The transaction was not material to the results of operations
reported for the period ended April 25, 1997.
The Acquisition Agreement between the Company and Coates Brothers plc calls for
the purchase of certain other Coates operations in subsequent phases over a
period of up to five years, and will include operations in South Africa, India,
and several countries in Southeast Asia. The additional phases of the
transaction are subject to various conditions and regulatory approvals.
In addition to the above, during the second quarter the Company completed its
acquisition of Sureguard, Incorporated, an industrial coatings manufacturer, and
completed a transaction with Ameron International Corporation (Ameron) to
exchange selected assets of the Company's Maintenance Coatings division for
selected assets of the Product Finishes business of Ameron.
NOTE 5: In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share", which
is required to be adopted for the quarter ended January, 1998. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of this statement on the calculation
of primary earnings per share is not expected to be material.
NOTE 6: The Company's Board of Directors declared a 2-for-1 stock split,
effected in the form of a 100% stock dividend, for stockholders of record March
7, 1997. Information regarding shares outstanding, earnings per share and
dividends per share has been restated to give retroactive effect to the stock
split.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Acquisitions & Divestitures: Effective January 1, 1997, the Company
completed the second phase of its acquisition of TOTAL SA's Coates
Coatings ("Coates") operations. The second phase consisted of packaging
coatings and metal decorating inks businesses in Hong Kong and China.
The acquisition was made with the Company's joint venture partner,
China Merchants Hai Hong Holdings Company, Ltd. The transaction was
accounted for as a purchase. Accordingly, the net assets and operating
results have been included in the Company's financial statements from
the date of acquisition. This transaction was not material to the
results of operations reported for the six month period ended April 25,
1997.
The Acquisition Agreement between the Company and Coates Brothers plc
calls for the purchase of certain other Coates operations in subsequent
phases over a period of up to five years. The additional phases of the
transaction are subject to various conditions and regulatory approvals.
In addition to the above, during the second quarter the Company
completed its acquisition of Sureguard, Incorporated, an industrial
coatings manufacturer, and completed a transaction with Ameron
International Corporation (Ameron) to exchange selected assets of the
Company's Maintenance Coatings division for selected assets of the
Product Finishes business of Ameron, none of which were material.
The discussion of operations below includes the combined effect of the
acquisition of the first and second phases of Coates and other
acquisitions and divestitures which occurred during fiscal 1996 and the
first six months of fiscal 1997.
Operations: Net sales increased 21.3% to $252,768,000 and 18.3% to
$442,056,000 in the three and six month periods ended April 25, 1997,
respectively, over net sales for the comparable periods one year ago.
Excluding the results of acquisitions and divestitures, net sales
increased 12.0% for the three month period and 9.1% for the six month
period. The second quarter and year to date increases were primarily
driven by volume increases in the Consumer Group and in certain
business lines within the Special Products Group. Due to the seasonal
nature of the Company's business, sales for the quarter and six month
periods are not necessarily indicative of sales for the full year.
The gross profit margin improved from 31.0% to 32.8% during the second
quarter and from 29.3% to 30.8% for the first six months over the
comparable periods last year. The increases were primarily the result
of a modest decline in raw material costs over the comparable periods
in the prior year. Raw material costs continued to be stable in the
first six months of 1997 and the Company does not expect a significant
upward trend in raw material costs over the next several months.
Operating expenses (research and development, selling, and
administrative) increased 30.4% to $53,221,000 (21.1% of net sales) in
the second quarter of 1997 compared with $40,821,000 (19.6% of net
sales) in the second quarter of 1996. Year to date, operating expenses
increased 24.3% to $93,289,000 (21.1% of net sales) compared with
$75,077,000 (20.1% of net sales) for the same period last year.
Excluding the results of acquisitions and divestitures, operating
expenses increased 17.6% for the quarter and 12.6% year to date. This
increase was primarily the result of additional advertising and
promotional costs for large Consumer Group customers, additional
selling expenses in all business groups, and higher information systems
expenditures as the Company continues to replace its existing systems.
Net income in the second quarter of 1997 increased 21.0% to
$14,137,000, or $0.39 per share over the second quarter of 1996. Year
to date, net income increased 22.9% to $25,031,000, or $0.57 per share
over the prior year. Both increases were primarily driven by higher
sales levels and gross profit margin rates.
Financial Condition: The net cash used by the Company's operations was
$3,055,000 for the first six months of 1997, compared with cash
provided by operations of $13,887,000 for the first six months of 1996.
The additional cash usage was the result of an increase in net working
capital requirements. The cash used in operating activities combined
with $24,299,000 of acquisition expenditures, $18,531,000 of capital
expenditures, $8,826,000 in payments for share repurchases, and
$7,886,000 in dividend payments were funded through $62,535,000 in
proceeds from bank borrowings and other investing activities. Cash
balances decreased $1,009,000 during the first six months of 1997.
During the first six months of 1997, accounts receivable increased
$16,807,000 as sales volume increased. Inventory increased $22,662,000
as the Consumer Group increased production for seasonal sales and moved
inventory into two additional warehouses to better meet customer needs.
Accounts payable and accrued liabilities increased $8,646,000 as a
result of the increase in inventories and the timing of accounts
payable disbursements.
Capital expenditures for property, plant, and equipment were
$18,539,000 in the first six months of 1997, compared with $11,702,000
in the first six months of 1996. The Company continues to upgrade and
replace its existing management information systems. Additionally, the
Packaging Group is completing a new laboratory in Pittsburgh. Aside
from these projects, capital spending was distributed among the four
business groups with no other major single expenditure.
The Company's total debt to capital ratio increased to 28.1% at the end
of the second quarter from 15.6% at the close of fiscal 1996. The total
debt to capital ratio as of April 26, 1996 was 15.0%. 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 25,
1996.
ITEM 2. CHANGES IN SECURITIES:
The Company completed a 2-for-1 stock split, effected in the form of a
100% stock dividend, for all common stockholders of record on March 7,
1997 which was distributed on March 21, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders was held at the Research Center of
the Corporation at 312 South 11th Avenue, Minneapolis, Minnesota, on
February 26, 1997. The stockholders took the following actions: (i) The
stockholders elected two 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 For Votes Withheld
--------- --------------
Susan S. Boren 18,885,219 25,931
Robert E. Pajor 18,875,626 35,524
(ii) The stockholders approved an increase in the shares reserved under
the Corporation's 1991 Stock Option Plan. 18,338,111 votes were cast
for the resolution; 534,449 votes were cast against the resolution;
38,590 votes abstained; and there were no broker non-votes.
(iii) The stockholders took action on a proposed amendment of Article
Fourth of the Corporation's Certificate of Incorporation to increase
the authorized number of shares of stock. 17,823,348 votes were cast
for the resolution; 1,025,706 votes were cast against the resolution;
shares representing 62,096 votes abstained; and there were no broker
non-votes.
(iv) The stockholders ratified the appointment of Ernst & Young LLP as
the Company's independent auditors for fiscal 1997. 18,847,310 votes
were cast for the resolution; 27,192 votes were cast against the
resolution; shares representing 36,648 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 25, 1997.
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 9, 1997 By /s/R. Engh
--------------------------------
R. Engh
Secretary
Date: June 9, 1997 By /s/P. C. Reyelts
--------------------------------
P. C. Reyelts
Vice President, Finance
(Chief Financial Officer)
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-25-1997
<CASH> 8,121
<SECURITIES> 0
<RECEIVABLES> 174,310
<ALLOWANCES> (1,629)
<INVENTORY> 109,938
<CURRENT-ASSETS> 326,934
<PP&E> 326,398
<DEPRECIATION> (159,655)
<TOTAL-ASSETS> 563,710
<CURRENT-LIABILITIES> 239,374
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> 1,014
<TOTAL-LIABILITY-AND-EQUITY> 563,710
<SALES> 442,056
<TOTAL-REVENUES> 442,056
<CGS> 305,809
<TOTAL-COSTS> 93,289
<OTHER-EXPENSES> (810)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,916
<INCOME-PRETAX> 41,852
<INCOME-TAX> 16,821
<INCOME-CONTINUING> 25,031
<DISCONTINUED> 0
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<NET-INCOME> 25,031
<EPS-PRIMARY> .57
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</TABLE>
