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 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 August 29, 1997, The Valspar Corporation had 43,790,109 shares of common
stock outstanding, excluding 9,531,203 shares held in treasury. The Company had
no other classes of stock outstanding.
<PAGE>
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended July 25, 1997
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 25, 1997,
July 26, 1996, and October 25, 1996......................... 2 & 3
Condensed Consolidated Statements of Income - Three
months and nine months ended July 25, 1997 and July 26,
1996........................................................ 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended July 25, 1997 and July 26, 1996................ 5
Notes to Condensed Consolidated Financial Statements -
July 25, 1997............................................... 6 & 7
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
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
July 25, July 26, October 25,
1997 1996 1996
--------- --------- ---------
(Unaudited) (Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,798 $ 3,734 $ 7,112
Accounts receivable less allowance
(7/25/97-$1,899; 7/26/96-$1,929;
10/25/96-$1,260) 196,201 162,200 152,842
Inventories:
Manufactured products 70,979 55,946 58,591
Raw material, supplies and work in
process 26,807 25,069 25,595
--------- --------- ---------
97,786 81,015 84,186
Other current assets 40,877 27,053 31,060
--------- --------- ---------
TOTAL CURRENT ASSETS 345,662 274,002 275,200
OTHER ASSETS 71,184 53,504 57,421
PROPERTY, PLANT AND EQUIPMENT 343,088 295,689 302,565
Less allowance for depreciation (164,633) (145,325) (148,746)
--------- --------- ---------
178,455 150,364 153,819
--------- --------- ---------
$ 595,301 $ 477,870 $ 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.
<PAGE>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
July 25, July 26, October 25,
1997 1996 1996
-------- --------- ---------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 73,735 $ 6,158 $ 14,665
Trade accounts payable 91,324 82,138 80,125
Income taxes 6,988 7,293 8,123
Accrued liabilities 82,149 66,025 75,911
Current portion of long-term debt 281 265 246
-------- --------- ---------
TOTAL CURRENT LIABILITIES 254,477 161,879 179,070
LONG-TERM DEBT 38,044 56,508 31,948
DEFERRED LIABILITIES 18,864 18,544 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 17,816 12,775 13,957
Retained earnings 297,247 263,003 276,679
Other 98 (3,435) (593)
-------- --------- ---------
341,821 285,673 303,373
Less cost of Common Stock in treasury
(7/25/97-9,532,637 shares; 7/26/96-9,175,678
shares; 10/25/96-9,376,786 shares) 57,905 44,734 49,670
-------- --------- ---------
283,916 240,939 253,703
-------- --------- ---------
$595,301 $ 477,870 $ 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
<PAGE>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
July 25, July 26, July 25, July 26,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 282,655 $ 247,481 $ 724,711 $ 621,244
Costs and expenses:
Cost of sales 194,000 171,516 499,809 435,839
Research and development 9,943 8,470 28,215 23,285
Selling and administration 44,468 36,683 119,485 96,945
Interest expense 1,711 1,050 3,627 2,216
Other income - net 2,030 663 2,840 1,527
----------- ----------- ----------- -----------
Income before income taxes 34,563 30,425 76,415 64,486
Income taxes 13,895 12,231 30,716 25,923
----------- ----------- ----------- -----------
Net income $ 20,668 $ 18,194 $ 45,699 $ 38,563
=========== =========== =========== ===========
Per common share (Note 2)
Net income $ 0.47 $ 0.41 $ 1.03 $ .87
=========== =========== =========== ===========
Average number of common
shares outstanding 44,225,060 44,453,968 44,232,548 44,425,368
Dividends paid per common
share $ 0.09 $ 0.0825 $ 0.27 $ 0.2475
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
July 25, July 26,
1997 1996
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 45,699 $ 38,563
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 18,944 16,801
Increase (decrease) in cash due to changes in net
operating assets, net of effects of acquired businesses:
Accounts and notes receivable (40,327) (12,506)
Inventories and other assets (20,891) 10,121
Trade accounts payable and accrued liabilities 18,311 3,812
Income taxes payable (3,188) (1,805)
Other deferred liabilities (338) (136)
Other (2,440) (140)
-------- --------
Net Cash Provided By Operating Activities 15,770 54,710
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (34,240) (16,243)
Acquired business/assets, net of cash (31,762) (51,369)
Other investments/advances to joint ventures 8,088 (764)
-------- --------
Net Cash Used In Investing Activities (57,914) (68,376)
FINANCING ACTIVITIES:
Net proceeds from borrowings 65,159 24,387
Proceeds from sale of treasury stock 1,911 1,648
Purchase of shares of Common Stock for treasury (9,413) (2,589)
Dividends paid (11,827) (10,921)
-------- --------
Net Cash Provided By Financing Activities 45,830 12,525
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 3,686 (1,141)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,112 4,875
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,798 $ 3,734
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 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 nine month
periods ended July 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 $15.4 million at July 25, 1997 and $11.8
million at July 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 July 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 third quarter the Company completed its
purchase of a resin manufacturing facility in Hagerstown, Maryland and completed
the formation of a joint venture in Brazil for the manufacture and sale of
packaging coatings in South America. The Company owns 50 percent of the joint
venture. These transactions were not material to the results of operations for
the quarter ended July 25, 1997.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 25, 1997 -- CONTINUED
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 basic 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: The following discussion of operations is
affected by the combined effect of the first and second phases of the
Coates acquisition (described in Note 4 attached hereto) and other
acquisitions and divestitures which occurred during fiscal 1996 and the
first nine months of fiscal 1997.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
Operations: Net sales increased 14.2% to $282,655,000 and 16.7% to
$724,711,000 in the three and nine month periods ended July 25, 1997,
respectively, over net sales for the comparable periods one year ago.
Excluding the results of acquisitions and divestitures, net sales
increased 11.3% for the three month period and 10.0% for the nine month
period. The third quarter and year to date increases were primarily
driven by volume increases in all of the Company's business groups. Due
to the seasonal nature of the Company's business, sales for the quarter
and nine month periods are not necessarily indicative of sales for the
full year.
The gross margin improved from 30.7% to 31.4% during the third quarter
and from 29.8% to 31.0% for the first nine 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 nine
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 20.5% to $54,411,000 (19.2% of net sales) in
the third quarter of 1997 compared with $45,153,000 (18.2% of net
sales) in the third quarter of 1996. Year to date, operating expenses
increased 22.8% to $147,700,000 (20.4% of net sales) compared with
$120,230,000 (19.4% of net sales) for the same period last year.
Excluding the results of acquisitions and divestitures, operating
expenses increased 20.1% for the quarter and 15.3% 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 of $0.47 per share or $20,668,000 in the third quarter of
1997 is an increase of 13.6% over the third quarter of 1996. Year to
date, net income increased 18.5% over the prior year to $45,699,000, or
$1.03 per share. Both increases were primarily driven by higher sales
levels and gross profit margin rates.
Financial Condition: The net cash provided by the Company's operations
was $15,770,000 for the first nine months of 1997, compared with
$54,710,000 for the first nine months of 1996. The decline in net cash
provided by the Company's operations was the result of an increase in
net working capital requirements. The cash provided by operating
activities and other investing activities combined with $65,159,000 in
proceeds from bank borrowings were used to fund $31,762,000 of
acquisition expenditures, $34,240,000 of capital expenditures,
$9,413,000 in payments for share repurchases, and $11,827,000 in
dividend payments. Cash balances increased $3,686,000 during the first
nine months of 1997.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
During the first nine months of 1997, accounts receivable increased
$40,327,000 due to an increase in sales volume and difficulties
encountered in the implementation of a new management information
system in the Company's Consumer Group which delayed the production of
customer statements. Inventory increased $20,891,000 during the first
nine months due to an increase in sales volume and, to a lesser extent,
a build up in anticipation of the management information systems
implementation. Accounts payable and accrued liabilities increased
$18,311,000 as a result of the increase in inventories and the timing
of accounts payable disbursements.
Capital expenditures for property, plant, and equipment were
$34,240,000 in the first nine months of 1997, compared with $16,243,000
in the first nine 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 28.3% at the end
of the third quarter from 15.6% at the close of fiscal 1996. The total
debt to capital ratio as of July 26, 1996 was 20.7%. 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 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 July 25, 1997.
<PAGE>
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 8, 1997 By /s/ R. Engh
--------------------------------
R. Engh
Secretary
Date: September 8, 1997 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> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JUL-25-1997
<CASH> 10,798
<SECURITIES> 0
<RECEIVABLES> 198,100
<ALLOWANCES> (1,899)
<INVENTORY> 97,786
<CURRENT-ASSETS> 345,662
<PP&E> 343,088
<DEPRECIATION> (164,633)
<TOTAL-ASSETS> 595,301
<CURRENT-LIABILITIES> 254,477
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> 98
<TOTAL-LIABILITY-AND-EQUITY> 595,301
<SALES> 724,711
<TOTAL-REVENUES> 724,711
<CGS> 499,809
<TOTAL-COSTS> 147,700
<OTHER-EXPENSES> (2,840)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,627
<INCOME-PRETAX> 76,415
<INCOME-TAX> 30,716
<INCOME-CONTINUING> 45,699
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,699
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
