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 Three Months Commission File
Ended January 24, 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 February 28, 1997, The Valspar Corporation had 21,928,724 shares of common
stock outstanding, excluding 4,731,932 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 January 24, 1997
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - January 24, 1997,
January 26, 1996, and October 25, 1996................... 2 & 3
Condensed Consolidated Statements of Income - Three
months ended January 24, 1997 and January 26, 1996....... 4
Condensed Consolidated Statements of Cash Flows - Three
months ended January 24, 1997 and January 26, 1996....... 5
Notes to Condensed Consolidated Financial Statements -
January 24, 1997......................................... 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
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)
January 24, January 26, October 25,
1997 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,243 $ 3,094 $ 7,112
Accounts receivable less allowance
(1/24/97-$1,367; 1/26/96-$1,062;
10/25/96-$1,260) 131,148 111,094 152,842
Inventories:
Manufactured products 66,467 53,830 58,591
Raw material, supplies and work in
process 28,380 26,684 25,595
--------- --------- ---------
94,847 80,514 84,186
Other current assets 33,771 28,069 31,060
--------- --------- ---------
TOTAL CURRENT ASSETS 270,009 222,771 275,200
OTHER ASSETS 58,747 29,719 57,421
PROPERTY, PLANT AND EQUIPMENT 308,811 252,473 302,565
Less allowance for depreciation (153,893) (121,026) (148,746)
--------- --------- ---------
154,918 131,447 153,819
--------- --------- ---------
$ 483,674 $ 383,937 $ 486,440
========= ========= =========
</TABLE>
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>
<CAPTION>
January 24, January 26, October 25,
1997 1996 1996
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 33,000 $ 17,649 $ 14,665
Trade accounts payable 74,973 55,135 80,125
Income taxes 7,599 8,482 8,123
Accrued liabilities 58,423 45,904 75,911
Current portion of long-term debt 274 239 246
--------- --------- ---------
TOTAL CURRENT LIABILITIES 174,269 127,409 179,070
LONG-TERM DEBT 30,727 21,538 31,948
DEFERRED LIABILITIES 21,414 18,191 21,719
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 16,384 12,183 13,957
Retained earnings 280,667 237,966 276,679
Other 541 (3,655) (593)
--------- --------- ---------
Less cost of Common Stock in treasury 310,922 259,824 303,373
(1/24/97-4,709,447 shares; 1/26/96-
4,609,835 shares; 10/25/96-4,688,393
shares) 53,658 43,025 49,670
--------- --------- ---------
257,264 216,799 253,703
--------- --------- ---------
$ 483,674 $ 383,937 $ 486,440
========= ========= =========
</TABLE>
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
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------------
January 24, January 26,
1997 1996
------------ ------------
Net sales $ 189,288 $ 165,304
Costs and expenses:
Cost of sales 135,850 120,451
Research and development 8,229 6,720
Selling and administration 31,839 27,536
Interest expense 607 463
Other income - net (499) (288)
------------ ------------
Income before income taxes 13,262 10,422
Income taxes 5,334 4,190
------------ ------------
Net income $ 7,928 $ 6,232
============ ============
Per common share (Note 2)
Net income $ 0.36 $ 0.28
============ ============
Average number of common shares
outstanding 22,114,309 22,161,200
Dividends paid per common share $ 0.180 $ 0.165
See Notes to Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
------------------------
January 24, January 26,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,928 $ 6,232
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,323 5,746
Increase (decrease) in cash due to changes in net
operating assets, net of effects of acquired businesses:
Accounts and notes receivable 21,694 18,860
Inventories and other assets (12,791) (6,503)
Trade accounts payable and accrued liabilities (19,727) (28,014)
Income taxes payable (524) (617)
Other deferred liabilities (65) (166)
Other (597) 206
-------- --------
Net Cash Provided By/(Used In) Operating Activities 2,241 (4,256)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,809) (6,320)
Acquired businesses/assets, net of cash (6,456) 0
Other investments/advances to joint ventures 5,068 0
-------- --------
Net Cash Used In Investing Activities (8,197) (6,320)
FINANCING ACTIVITIES:
Net proceeds from borrowings 17,142 12,247
Proceeds from sale of treasury stock 759 325
Purchase of shares of Common Stock for treasury (4,874) (150)
Dividends paid (3,940) (3,627)
-------- --------
Net Cash Provided By Financing Activities 9,087 8,795
Increase/(Decrease) In Cash and Cash Equivalents 3,131 (1,781)
Cash and Cash Equivalents at Beginning of Year 7,112 4,875
-------- --------
Cash and Cash Equivalents at End of Period $ 10,243 $ 3,094
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 24, 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 months ended
January 24, 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 $15.1 million at January 24, 1997 and
$10.3 million at January 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 second phase of 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 January 24, 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Acquisition: 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 second
phase of 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
January 24, 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.
Operations: Net sales for the quarter increased 14.5% to $189,288,000
from $165,304,000 in the first quarter of 1996. Excluding the results
of the first and second phases of the acquired Coates operations, net
sales increased 5.8%. The increase was 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 first quarter are not necessarily indicative of
sales for the full year.
The gross profit margin increased to 28.2% in the first quarter of 1997
from 27.1% in the first quarter of 1996. The increase was primarily the
result of a modest decline in raw material costs over the prior year.
Raw material costs continued to be stable in the first quarter 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 17.0% to $40,068,000 (21.2% of net sales) in
the first quarter of 1997 compared with $34,256,000 (20.7% of net
sales) in the first quarter of 1996. Excluding the results of the first
and second phases of the acquired Coates operations, operating expenses
increased 6.9%. This increase was primarily the result of costs related
to the Gordon Bartels and House of Kolor acquisitions, increased
management and selling resources committed to the Industrial Group and
higher information systems expenditures as the Company continues to
replace its existing systems.
Net income in the first quarter of 1997 increased 27.2% to $7,928,000,
or $0.36 per share, primarily driven by higher sales levels and gross
profit margin rates.
Financial Condition: The net cash provided by the Company's operations
was $2,241,000 for the first three months of 1997 compared with a use
of cash of $4,256,000 for the first three months of 1996. The
additional cash was provided by increases in net income and a reduction
in net working capital requirements. The cash provided by operating
activities combined with $22,210,000 in proceeds from bank borrowings
and other investing activities were used to support $6,809,000 in
capital expenditures, $6,456,000 in cash payments related to
acquisitions, $4,874,000 in payments for share repurchases, and
$3,940,000 in dividend payments. Cash balances increased $3,131,000
during the first quarter of 1997.
During the first quarter of 1997, accounts receivable decreased
$21,694,000 as higher year-end balances were collected, inventory
increased $10,661,000 as production increased for seasonal sales in the
Consumer Group and accounts payable and accrued liabilities decreased
$19,727,000 as a result of the payment of various year-end accruals and
the timing of accounts payable disbursements.
Capital expenditures for property, plant, and equipment were $6,809,000
in the first quarter of 1997 compared with $6,320,000 in the first
quarter of 1996. 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 Company's total debt to capital ratio increased to 19.9% at the end
of the first quarter from 15.6% at the close of fiscal 1996. The total
debt to capital ratio as of January 26, 1996 was 15.4%. 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 of the legal proceedings that were previously
reported on the Company's Form 10-K for the year ended October 25,
1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 3.1 - Amended Certificate of Incorporation
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 January 24, 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: March 10, 1997 By /s/ R. Engh
-----------------------------------
R. Engh
Secretary
Date: March 10, 1997 By /s/ P. C. Reyelts
-----------------------------------
P. C. Reyelts
Vice President, Finance
(Chief Financial Officer)
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE VALSPAR CORPORATION
The Valspar Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that, in accordance with Section 242 of the Delaware General
Corporation Law, the amendment to the Corporation's Certificate of Incorporation
set forth in the following resolution was approved by the Corporation's board of
directors at a duly held meeting, was recommended to the shareholders, and was
approved by the shareholders at the annual meeting of the shareholders duly
called and held pursuant to Section 222 of the Delaware General Corporation Law:
RESOLVED, that the first sentence of Article Fourth of the
Certificate of Incorporation of The Valspar Corporation be and it
hereby is amended to read as follows:
"Fourth. The total number of shares of stock which
the corporation shall have the authority to issue is one
hundred twenty million (120,000,000) shares of Common Stock of
the par value of Fifty Cents ($.50) per share."
IN WITNESS WHEREOF, The Valspar Corporation has caused this Certificate
of Amendment to be signed by its duly authorized officer this 26th day of
February, 1997.
THE VALSPAR CORPORATION
By: /s/ Rolf Engh
----------------------------------------
Rolf Engh, Secretary and General Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JAN-24-1997
<CASH> 10,243
<SECURITIES> 0
<RECEIVABLES> 132,515
<ALLOWANCES> (1,367)
<INVENTORY> 94,847
<CURRENT-ASSETS> 270,009
<PP&E> 308,811
<DEPRECIATION> (153,893)
<TOTAL-ASSETS> 483,674
<CURRENT-LIABILITIES> 174,269
<BONDS> 0
0
0
<COMMON> 13,330
<OTHER-SE> 541
<TOTAL-LIABILITY-AND-EQUITY> 483,674
<SALES> 189,288
<TOTAL-REVENUES> 189,288
<CGS> 135,850
<TOTAL-COSTS> 40,068
<OTHER-EXPENSES> (499)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 607
<INCOME-PRETAX> 13,262
<INCOME-TAX> 5,334
<INCOME-CONTINUING> 7,928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,928
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
