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 31, 1998 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, 1998, The Valspar Corporation had 43,717,185 shares of common
stock outstanding, excluding 9,604,127 shares held in treasury. The Company had
no other classes of stock outstanding.
<PAGE>
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THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended July 31, 1998
PART I. FINANCIAL INFORMATION Page No.
- ----------------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 31, 1998,
July 25, 1997, and October 31, 1997.......................... 2 - 3
Condensed Consolidated Statements of Income - Three
months and nine months ended July 31, 1998 and July 25,
1997......................................................... 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended July 31, 1998 and July 25, 1997................ 5
Notes to Condensed Consolidated Financial Statements -
July 31, 1998............................................... 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7 - 10
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................. 10
Item 5. Other Information............................................. 10
Item 6. Exhibits and Reports on Form 8-K.............................. 10
SIGNATURES.............................................................. 11
- ----------
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
July 31, July 25, October 31,
1998 1997 1997
---------- ---------- ----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,832 $ 10,798 $ 11,113
Accounts receivable less allowance
(7/31/98 - $1,872; 7/25/97 - $1,899;
10/31/97 - $1,364) 218,529 196,201 183,593
Inventories:
Manufactured products 101,285 70,979 81,720
Raw materials, supplies, and work-in-process 41,581 26,807 37,933
---------- ---------- ----------
142,866 97,786 119,653
Other current assets 56,434 40,877 42,488
---------- ---------- ----------
TOTAL CURRENT ASSETS 432,661 345,662 356,847
INTANGIBLE ASSETS 108,005 47,965 51,530
OTHER ASSETS 41,295 23,219 21,345
PROPERTY, PLANT AND EQUIPMENT 411,084 343,088 351,847
Less allowance for depreciation (185,761) (164,633) (166,099)
---------- ---------- ----------
225,323 178,455 185,748
---------- ---------- ----------
$ 807,284 $ 595,301 $ 615,470
========== ========== ==========
</TABLE>
Note: The Balance Sheet at October 31, 1997 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in Thousands)
<TABLE>
<CAPTION>
July 31, July 25, October 31,
1998 1997 1997
---------- ---------- ----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 77,050 $ 73,735 $ 71,720
Trade accounts payable 104,090 91,324 96,676
Income taxes 9,089 6,988 1,083
Accrued liabilities 90,920 82,149 89,660
Current portion of long-term debt 285 281 281
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 281,434 254,477 259,420
LONG TERM DEBT 166,056 38,044 35,844
DEFERRED LIABILITIES 24,729 18,864 25,141
STOCKHOLDERS' EQUITY:
Common Stock (Par value - $.50;
Authorized - 120,000,000 shares;
Shares issued, including shares in
treasury - 53,321,312 shares) 26,660 26,660 26,660
Additional paid-in capital 23,309 17,816 17,758
Retained earnings 350,689 297,247 313,485
Other (2,566) 98 (1,850)
---------- ---------- ----------
398,092 341,821 356,053
Less cost of common stock in treasury
(7/31/98- 9,484,127 shares; 7/25/97-
9,532,637 shares; 10/31/97-9,642,341
shares) 63,027 57,905 60,988
---------- ---------- ----------
335,065 283,916 295,065
---------- ---------- ----------
$ 807,284 $ 595,301 $ 615,470
========== ========== ==========
</TABLE>
Note: The Balance Sheet at October 31, 1997 has been derived from the
audited financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
--------------------------- ---------------------------
July 31, July 25, July 31, July 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 327,684 $ 282,655 $ 845,505 $ 724,711
Costs and expenses:
Cost of sales 226,360 194,000 590,426 499,809
Research & development 10,303 9,943 29,538 28,215
Selling & administration 51,840 44,468 136,236 119,485
Interest expense 3,458 1,711 7,703 3,627
Other income - net 1,353 2,030 3,551 2,840
----------- ----------- ----------- -----------
Income before income taxes 37,076 34,563 85,153 76,415
Income taxes 14,830 13,895 34,061 30,716
----------- ----------- ----------- -----------
Net income $ 22,246 $ 20,668 $ 51,092 $ 45,699
=========== =========== =========== ===========
Net income per common share - basic $ 0.51 $ 0.48 $ 1.17 $ 1.05
=========== =========== =========== ===========
Net income per common share - diluted $ 0.50 $ 0.47 $ 1.15 $ 1.03
=========== =========== =========== ===========
Average number of common shares
outstanding - basic 43,537,245 43,488,484 43,490,351 43,521,370
=========== =========== =========== ===========
- diluted 44,535,016 44,225,060 44,380,763 44,232,548
=========== =========== =========== ===========
Dividends paid per common share $ 0.105 $ 0.09 $ 0.315 $ 0.27
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
July 31, July 25,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 51,092 $ 45,699
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 23,344 18,944
Increase (decrease) in cash due to changes in
net operating assets, net of effects of acquired
businesses:
Accounts and notes receivable (14,502) (40,327)
Inventories and other assets (22,250) (20,891)
Trade accounts payable and
accrued liabilities (5,092) 18,311
Income taxes payable 8,488 (3,188)
Other deferred liabilities (741) (338)
Other (5,531) (2,440)
---------- ----------
Net Cash Provided By Operating Activities 34,808 15,770
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (30,538) (34,240)
Acquired businesses/assets, net of cash (90,275) (31,762)
Other investments/advances to joint ventures (17,092) 8,088
---------- ----------
Net Cash Used In Investing Activities (137,905) (57,914)
FINANCING ACTIVITIES:
Net proceeds from borrowing 120,785 65,159
Proceeds from sale of treasury stock 1,065 1,911
Purchase of shares of Common Stock for treasury (1,146) (9,413)
Dividends paid (13,888) (11,827)
---------- ----------
Net Cash Provided by Financing Activities 106,816 45,830
Increase In Cash and Cash Equivalents 3,719 3,686
Cash and Cash Equivalents at Beginning of Period 11,113 7,112
---------- ----------
Cash and Cash Equivalents at End of Period $ 14,832 $ 10,798
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 1998
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 31, 1998 are not necessarily indicative of the results that
may be expected for the year ended October 30, 1998. 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
31, 1997.
NOTE 2: In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share". Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options
is excluded. Diluted earnings per share is based on the weighted average number
of Common Shares outstanding during each period plus other potentially dilutive
securities, principally from stock options. The potential dilution from the
exercise of stock options was not material for the third quarter or first nine
months of 1997 or 1998.
NOTE 3: Trade accounts payable include $19.2 million at July 31, 1998 and $15.4
million at July 25, 1997 of issued checks which had not cleared the Company's
bank accounts.
NOTE 4: Effective April 15, 1998, the Company completed its purchase of
Plasti-Kote Co., Inc., a manufacturer of consumer aerosol and specialty paint
products. 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 three or nine month periods ended
July 31, 1998.
Effective April 30, 1998, the Company completed its purchase of Anzol Pty. Ltd.,
an Australian-based manufacturer of packaging and industrial coatings and
resins. 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 three or nine month periods ended
July 31, 1998.
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NOTE 5: In August, 1998, the Company agreed to purchase from Dexter Corporation
its worldwide Packaging Coatings business which supplies beverage can coatings,
food can and specialty coatings to the packaging market. Completion of the
transaction is expected by year-end and is subject to regulatory approval and
other customary closing conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Acquisitions & Divestitures: Effective April 15, 1998, the Company
completed its purchase of Plasti-Kote Co., Inc., a manufacturer of
consumer aerosol and specialty paint products. 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 three or nine month periods ended
July 31, 1998.
Effective April 30, 1998, the Company completed its purchase of Anzol
Pty. Ltd., an Australian-based manufacturer of packaging and industrial
coatings and resins. 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 three or nine month periods ended July 31, 1998.
The following discussion of operations is affected by the acquisition of
Plasti-Kote Co., Inc., Anzol Pty. Ltd., and the second phase of the
acquisition of TOTAL SA's Coates Coatings operations which was effective
on January 1, 1997 (described in Note 2 of the 1997 Annual Report), and
other less substantial acquisitions and divestitures which occurred
during fiscal 1997 and the first nine months of fiscal 1998.
Operations: Net sales increased 15.9% to $327,684,000 and 16.7% to
$845,505,000 for the three and nine month periods ended July 31, 1998,
respectively, over net sales for the comparable periods one year ago.
Excluding the results of acquisitions and divestitures, net sales
increased 7.4% for the three month period and 11.0% for the nine month
period. The third quarter and year to date increases were primarily
driven by volume increases in the Consumer Group, Industrial 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
nine month periods are not necessarily indicative of sales for the full
year.
<PAGE>
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
The gross profit margin declined from 31.4% to 30.9% during the third
quarter and from 31.0% to 30.2% for the first nine months from the
comparable periods last year. The decreases were primarily the result of
an increase in raw material costs from the comparable periods in the
prior year as well as a shift in product mix to lower margin products
within the Consumer, Packaging and Industrial business groups. The
Company does not expect a significant, general upward trend in raw
material costs over the next several months; however, it is experiencing
cost increases in selected high-volume materials.
Operating expenses (research and development, selling, and
administrative) increased 14.2% to $62,143,000 (19.0% of net sales) in
the third quarter of 1998 compared with $54,411,000 (19.2% of net sales)
in the third quarter of 1997. Year to date, operating expenses increased
12.2% to $165,774,000 (19.6% of net sales) compared with $147,700,000
(20.4% of net sales) for the same period last year. Excluding the
results of acquisitions and divestitures, operating expenses increased
0.4% for the quarter and 6.8% year to date. The year to date expense
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 upgrade its existing systems.
Interest expense increased 202.1% to $3,458,000 in the third quarter of
1998 compared with $1,711,000 in the third quarter of 1997. Year to
date, interest expense increased 212.4% to $7,703,000 compared with
$3,627,000 for the same period last year. The quarter and year to date
increases were the result of higher average debt levels during these
periods primarily related to the funding of acquisitions.
Net income in the third quarter of 1998 increased 7.6% to $22,246,000,
or $0.50 per diluted share from the third quarter of 1997. Year to date,
net income increased 11.8% to $51,092,000, or $1.15 per diluted share
from the prior year.
Financial Condition: The net cash provided by the Company's operations
was $34,808,000 for the first nine months of 1998, compared with
$15,770,000 for the first nine months of 1997. The additional cash
provided by operations was the result of higher net income and a
decrease in net working capital requirements. The cash provided by
operating activities combined with $120,785,000 in proceeds from bank
borrowings were used to fund $107,367,000 of acquisition and joint
venture investments, $30,538,000 of capital expenditures, $1,146,000 in
payments for share repurchases, and $13,888,000 in dividend payments.
Cash balances increased $3,719,000 during the first nine months of 1998.
<PAGE>
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
During the first nine months of 1998, accounts receivable increased
$14,502,000 as sales volume increased. Inventory and other assets
increased $22,250,000 primarily due to increased inventory levels
related to the increase in sales volume. Accounts payable and accrued
liabilities decreased $5,092,000, due to increases in various expense
accruals more than offset by the timing of payables disbursements.
Capital expenditures for property, plant, and equipment were $30,538,000
in the first nine months of 1998, compared with $34,240,000 in the first
nine months of 1997. The decrease in capital expenditures in 1998 was
primarily due to expenditures made in 1997 to construct a new laboratory
in Pittsburgh for the Packaging Group. Aside from this project, capital
spending was distributed among the four business groups with no other
major single expenditure.
In August, 1998, the Company agreed to purchase from Dexter Corporation
its worldwide Packaging Coatings business. Completion of the transaction
is expected by year-end and is subject to regulatory approval and other
customary closing conditions. The Company expects to fund the purchase
using new and existing lines of credit.
The Company's total debt to capital ratio increased to 42.1% at the end
of the third quarter from 26.8% at the close of fiscal 1997. The total
debt to capital ratio as of July 25, 1997 was 28.3%. The Company
believes its existing lines of credit and access to new credit
facilities will be sufficient to meet its current and projected needs
for financing.
New Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information". SFAS 130 establishes
standards for the reporting and presentation of comprehensive income and
its components. SFAS 131 establishes standards for defining operating
segments and the reporting of certain information regarding operating
segments. These statements only impact the disclosure of financial
information in interim and annual reports; their adoption will have no
impact to the Company's financial condition or results of operations.
The Company is presently analyzing the impact of these statements on its
disclosures. Both statements are effective beginning with the Company's
1999 Annual Report to Shareholders.
Year 2000. The Company continues to evaluate and respond to the
potential impact of the Year 2000 issue on its computer and other
operating systems. A Year 2000 steering committee continues to formulate
and carry out a detailed project plan to inventory the Company's systems
and equipment that may be affected; provide a risk assessment related to
the Year 2000 issue; and establish detailed remediation and testing
plans regarding Year 2000 readiness for its high risk applications. The
Company is also communicating and working with its significant business
partners to minimize Year 2000 risks and protect Valspar and its
customers from potential service interruptions. The Company has surveyed
its key suppliers to determine their Year 2000 readiness and their
ability to provide raw materials, supplies and services without
interruption.
<PAGE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
The Company continues to believe that, with modifications to existing
software and converting to new software in certain instances, the Year
2000 problem will not pose significant operational problems for the
Company. The Company will utilize both internal and external resources
to develop and test the Year 2000 modifications, the costs of which are
not expected to materially impact the Company's financial condition or
results of operations. The above conclusions are based on assumptions of
future events. As a result, there can be no guarantee that these
conclusions will not change as new facts become known.
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 31, 1997.
ITEM 5. OTHER INFORMATION:
The deadline for submission of stockholder proposals pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended, for
inclusion in the Company's proxy statement for its 1999 Annual Meeting
of Stockholders is September 30, 1998. Additionally, if the Company
receives notice of a stockholder proposal after December 8, 1998, such
proposal will be considered untimely pursuant to Rules 14a-4 and
14a-5(e), and the persons named in proxies solicited by the Board of
Directors of the Company for its 1999 Annual Meeting of Stockholders may
exercise discretionary voting power with respect to such proposal.
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 31, 1998.
<PAGE>
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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 14, 1998 By /s/ R. Engh
------------------------------
R. Engh
Secretary
Date: September 14, 1998 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-30-1998
<PERIOD-END> JUL-31-1998
<CASH> 14,832
<SECURITIES> 0
<RECEIVABLES> 220,401
<ALLOWANCES> (1,872)
<INVENTORY> 142,866
<CURRENT-ASSETS> 432,661
<PP&E> 411,084
<DEPRECIATION> (185,761)
<TOTAL-ASSETS> 807,284
<CURRENT-LIABILITIES> 281,434
<BONDS> 0
26,660
0
<COMMON> 0
<OTHER-SE> (2,566)
<TOTAL-LIABILITY-AND-EQUITY> 807,284
<SALES> 327,684
<TOTAL-REVENUES> 327,684
<CGS> 226,360
<TOTAL-COSTS> 62,143
<OTHER-EXPENSES> (1,353)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,458
<INCOME-PRETAX> 37,076
<INCOME-TAX> 14,830
<INCOME-CONTINUING> 22,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,246
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-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
26,660
0
<COMMON> 0
<OTHER-SE> 98
<TOTAL-LIABILITY-AND-EQUITY> 595,301
<SALES> 282,655
<TOTAL-REVENUES> 282,655
<CGS> 194,000
<TOTAL-COSTS> 54,411
<OTHER-EXPENSES> (2,030)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,711
<INCOME-PRETAX> 34,563
<INCOME-TAX> 13,895
<INCOME-CONTINUING> 20,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,668
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
</TABLE>
