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 29, 1999 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 26, 1999, The Valspar Corporation had 43,443,265 shares of common
stock outstanding, excluding 9,878,047 shares held in treasury. The Company had
no other classes of stock outstanding.
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1
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended January 29, 1999
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - January 29, 1999,
January 30, 1998, and October 30, 1998....................... 2 & 3
Condensed Consolidated Statements of Income - Three months
ended January 29, 1999 and January 30, 1998.................. 4
Condensed Consolidated Statements of Cash Flows - Three months
ended January 29, 1999 and January 30, 1998.................. 5
Notes to Condensed Consolidated Financial Statements -
January 29, 1999............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7 - 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk .... 10
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings.............................................. 10
Item 6. Exhibits and Reports on Form 8-K............................... 10
SIGNATURES............................................................... 11
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2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 29, January 30, October 30,
1999 1998 1998
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 12,480 $ 11,448 $ 14,990
Accounts receivable less allowance
(1/29/99-$1,850; 1/30/98-$1,453;
10/30/98-$1,464) 216,509 170,961 212,287
Inventories:
Manufactured products 111,828 90,809 99,990
Raw materials, supplies and work-in-
process 30,411 39,887 42,821
----------- ----------- -----------
142,239 130,696 142,811
Other current assets 55,675 45,705 55,981
----------- ----------- -----------
TOTAL CURRENT ASSETS 426,903 358,810 426,069
OTHER ASSETS 148,633 89,797 142,129
PROPERTY, PLANT AND EQUIPMENT 443,526 362,367 424,927
Less allowance for depreciation (198,772) (172,350) (191,445)
----------- ----------- -----------
244,754 190,017 233,482
----------- ----------- -----------
$ 820,290 $ 638,624 $ 801,680
=========== =========== ===========
</TABLE>
Note: The Balance Sheet at October 30, 1998 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
3
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 29, January 30, October 30,
1999 1998 1998
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 73,570 $ 106,118 $ 24,055
Trade accounts payable 121,155 93,257 138,182
Income taxes 10,810 6,069 6,913
Accrued liabilities 87,248 73,204 98,549
Current portion of long-term debt 145 291 285
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 292,928 278,939 267,984
LONG-TERM DEBT 151,120 31,658 164,768
DEFERRED LIABILITIES 28,146 24,974 28,740
STOCKHOLDERS' EQUITY:
Common Stock (Par Value-$.50;
Authorized 120,000,000 shares;
Shares issued, including shares in
treasury--53,321,312) 26,660 26,660 26,660
Additional paid-in capital 27,662 23,158 24,881
Retained earnings 371,697 317,491 367,040
Other (2,058) (1,856) (2,776)
----------- ----------- -----------
423,961 365,453 415,805
Less cost of Common Stock in treasury
(1/29/99-9,823,797 shares; 1/30/98-
9,489,650 shares; 10/30/98-9,902,827
shares) 75,865 62,400 75,617
----------- ----------- -----------
348,096 303,053 340,188
----------- ----------- -----------
$ 820,290 $ 638,624 $ 801,680
=========== =========== ===========
</TABLE>
Note: The Balance Sheet at October 30, 1998 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
<PAGE>
4
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-------------------------------
January 29, January 30,
1999 1998
------------ ------------
Net sales $ 265,810 $ 225,359
Costs and expenses:
Cost of sales 190,471 161,645
Research and development 9,509 9,258
Selling and administration 47,132 38,406
Interest expense 3,154 1,885
Other (income)/expense - net (450) (660)
------------ ------------
Income before income taxes 15,994 14,825
Income taxes 6,278 5,930
------------ ------------
Net income $ 9,716 $ 8,895
============ ============
Net income per common share - basic $ 0.22 $ 0.20
============ ============
Net income per common share - diluted $ 0.22 $ 0.20
============ ============
Average number of common shares
outstanding - basic 43,443,304 43,403,943
- diluted 43,974,006 44,152,204
Dividends paid per common share
$ 0.115 $ 0.105
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
5
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
January 29, January 30,
1999 1998
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,716 $ 8,895
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 8,541 7,295
Increase (decrease) in cash due to changes in net
operating assets, net of effects of acquired businesses:
Accounts and notes receivable (4,222) 12,934
Inventories and other assets (373) (18,728)
Trade accounts payable and accrued liabilities (25,964) (13,371)
Income taxes payable 3,897 4,986
Other deferred liabilities (863) 35
Other (1,865) (2,852)
---------- ----------
Net Cash Used In Operating Activities (11,133) (806)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Acquired businesses/assets, net of cash (7,408) (10,510)
Other investments/advances to joint ventures (15,200) (2,686)
150 (11,025)
---------- ----------
Net Cash Used In Investing Activities (22,458) (24,221)
FINANCING ACTIVITIES:
Net proceeds from borrowings 35,697 30,193
Proceeds from sale of treasury stock 377 439
Purchase of shares of Common Stock for treasury 0 (373)
Dividends paid (4,993) (4,897)
---------- ----------
Net Cash Provided By Financing Activities 31,081 25,362
Increase (Decrease) In Cash and Cash Equivalents (2,510) 335
Cash and Cash Equivalents at Beginning of Period 14,990 11,113
---------- ----------
Cash and Cash Equivalents at End of Period $ 12,480 $ 11,448
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
6
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 29, 1999
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 29, 1999 are not necessarily indicative of the results that may be
expected for the year ended October 29, 1999. 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 30,
1998.
NOTE 2: Trade accounts payable include $18.9 million at January 29, 1999 and
$13.2 million at January 30, 1998 of issued checks which had not cleared the
Company's bank accounts.
NOTE 3: 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 month period ended January 29,
1999.
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 month period ended January 29,
1999.
Effective December 17, 1998, the Company acquired a majority interest in Dyflex
Polymers. Dyflex is a rapidly growing Netherlands producer of specialty
water-based polymers. 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 month
period ended January 29, 1999.
NOTE 4: On February 26, 1999 the Company acquired the Dexter Corporation's
worldwide Packaging Coatings business and its French Industrial coatings
subsidiary, Dexter SAS. Dexter Packaging Coatings is a worldwide supplier of
beverage can coatings, food can and specialty coatings to the packaging market.
Dexter SAS supplies a variety of industrial coatings to the European market. At
the date of acquisition the transaction will be accounted for as a purchase.
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7
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 acquisition of Plasti-Kote Co., Inc., Anzol Pty. Ltd.,
Dyflex Polymers, and other acquisitions and divestitures which occurred
during fiscal 1998 and the first three months of fiscal 1999.
Operations: Net sales for the quarter increased 17.9% to $265,810,000
from $225,359,000 in the first quarter of 1998. Excluding the results of
acquisitions and divestitures, net sales increased 8.6%. The increase
was primarily driven by volume increases in all of our business groups.
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 was flat at 28.3% in the first quarter of 1999
and the first quarter of 1998. This was primarily the result of stable
raw material costs over the prior year. The Company expects raw material
costs to be relatively stable the next several months, however it is
experiencing cost increases in selected high-volume materials.
Operating expense (research and development, selling, and
administrative) increased 18.8% to $56,641,000 (21.3% of net sales) in
the first quarter of 1999 compared with $47,664,000 (21.2% of net sales)
in the first quarter of 1998. Excluding the results of acquisitions and
divestitures, operating expenses increased 8.3%. This increase was
primarily the result of additional advertising and promotional costs
supporting the sales growth for Consumer Group customers, and additional
selling expenses in all business groups.
Net income in the first quarter of 1999 increased 9.2% to $9,716,000 or
$.22 per share, primarily driven by higher sales levels.
Financial Condition: The net cash used by the Company's operations was
$11,133,000 for the first three months of 1999, compared with $806,000
for the first three months of 1998. The additional cash used by
operations was the result of an increase in net working capital
requirements. During the first quarter of 1999, $35,697,000 in proceeds
from bank borrowings were used to fund $15,200,000 in net acquisition
investments, $7,408,000 in capital expenditures, $4,993,000 in dividend
payments, and the cash used by the Company's operations.
During the first quarter of 1999, accounts receivable increased
$4,222,000 as sales volume increased. Inventory and other assets
increased only modestly due to strong sales and tighter inventory
management practices. Accounts payable and accrued liabilities decreased
$25,964,000, due to payment of various year-end accruals and the timing
of payables disbursements.
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8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
Capital expenditures for property, plant, and equipment were $7,408,000
in the first three months of 1999, compared with $10,510,000 in the
first three months of 1998. The decrease in capital expenditures in 1999
was primarily due to 1998 expenditures to increase production capacity
for the Consumer and resin businesses.
The Company's total debt to capital ratio increased to 39.2% at the end
of the first quarter from 35.7% at the close of fiscal 1998. The total
debt to capital ratio as of January 30, 1998 was 31.3%. The Company
believes its existing lines of credit as amended and expanded as noted
below and access to credit facilities will be sufficient to meet its
current and projected needs for financing.
Subsequent Events: On February 26, 1999 the Company acquired the Dexter
Corporation's worldwide Packaging Coatings business and its French
Industrial coatings subsidiary, Dexter SAS. Dexter Packaging Coatings is
a worldwide supplier of beverage can coatings, food can and specialty
coatings to the packaging market. Dexter SAS supplies a variety of
industrial coatings to the European market. Combined 1998 sales for the
Packaging Coatings unit and Dexter SAS were $212 million. The purchase
was financed with credit available under a $450 million multi-currency
credit facility with a syndicate of banks, which amends the previous
facility dated March 16, 1998.
In January 1999, the Company agreed to sell its marine coatings business
to Jotun AS of Sandefjord, Norway. The Company's marine coatings
business had revenues of $25 million for the year ended October, 1998.
Completion of the transaction is expected in March 1999.
New Accounting Standards: The FASB recently issued SFAS No. 131,
Disclosures about Segments of and Enterprise and Related Information,
which establishes standards for defining operating segments and
reporting certain information about such segments; and SFAS No. 132,
Employers' Disclosure about Pension and Other Post-retirement Benefits,
which revised disclosure requirements relative to pension and other
post-retirement benefits. Since these statements only affect financial
information disclosures in interim and annual periods, the adoption of
these standards will not affect the Company's financial condition or
results of operations. The Company is continuing to evaluate the effect
of these standards on its disclosures. The Company adopted SFAS No. 130,
Reporting Comprehensive Income, providing for the reporting and
presentation of comprehensive income and its components, in the first
quarter of 1999, which had no material impact on the financial
statements.
<PAGE>
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
Year 2000 Readiness Disclosure: The Company is engaged in a company-wide
project to prepare its business for the change in date from the year
1999 to 2000, the "Year 2000" issue. The scope of this project addresses
(i) identifying and taking appropriate corrective action to remedy the
Company's significant information technology (IT) systems, (ii) an
assessment and remediation, as necessary, of non-IT equipment and
systems with embedded computer chips, (iii) an evaluation of the
Company's significant business partners to assess their "Year 2000"
readiness, and (iv) business continuity planning to limit the impact of
"Year 2000" disruptions should they occur.
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 implement a detailed project
plan which includes an inventory of the Company's systems and equipment
that may be affected; provides a risk assessment; establishes detailed
remediation plans; and provides for complete testing of each system
subject to "Year 2000" risk. Contingency plans are being developed for
critical applications. The inventory, risk assessment and remediation
plans have been completed for all of the affected systems. Remediation
and testing is complete for the core information systems in use for the
Company's domestic business. Remediation and testing of equipment in the
U.S. with embedded computer chips is expected to be complete by April
30,1999. For the Company's foreign operations, the stage of "Year 2000"
remediation and testing varies; however, the Company expects to complete
all its significant remediation and testing phases on or around June 30,
1999.
The Company is also communicating and working with its significant
business partners to minimize "Year 2000" risks and protect the Company
and its customers from potential service interruptions. The Company has
surveyed its key suppliers to determine their "Year 2000" readiness and
is currently in the process of identifying potential critical "Year
2000" issues involving key third parties and either resolving those
issues or developing contingency plans to the extent practicable. The
inability of external parties to complete their "Year 2000" readiness in
a timely fashion could materially impact the Company, including the risk
of disruptions in raw materials supply, or in communications or
electrical service.
The company has expensed its "Year 2000" readiness costs as incurred and
estimates the total cost for "Year 2000" readiness will be approximately
$4 to $5 million, with roughly $2.3 million of the costs incurred
through the end of the first quarter of 1999.
<PAGE>
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- CONTINUED
Forward-looking Statements: This discussion contains certain
"forward-looking" statements, particularly those pertaining to Year 2000
readiness. These forward-looking statements are based on management's
expectations and beliefs concerning future events. Forward-looking
statements are necessarily subject to risks, uncertainties and other
factors, many of which are outside the control of the Company, that
could cause actual results to differ materially from such statements.
These uncertainties and other factors include such things as : the
Company's reliance on the efforts of vendors, government agencies,
utilities and other third parties to achieve adequate compliance and
avoid disruption of its business in early 2000; dependence of internal
earnings growth on economic conditions and growth in the domestic and
international coatings industry; changes in the Company's relationships
with customers and suppliers; unusual weather conditions that might
adversely affect paint and coatings sales; exposure to foreign currency
fluctuations; and other risks and uncertainties. The foregoing list is
not exhaustive, and the Company disclaims any obligation to subsequently
revise any forward-looking statements to reflect events or circumstances
after the date of such statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Not Applicable
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 30, 1998.
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 January 29, 1999.
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11
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 15, 1999 By /s/ R. Engh
----------------------------------
R. Engh
Secretary
Date: March 15, 1999 By /s/ P. C. Reyelts
----------------------------------
P. C. Reyelts
Sr. Vice President, Finance
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-29-1999
<PERIOD-END> JAN-29-1999
<CASH> 12,480
<SECURITIES> 0
<RECEIVABLES> 218,359
<ALLOWANCES> (1,850)
<INVENTORY> 142,239
<CURRENT-ASSETS> 426,903
<PP&E> 443,526
<DEPRECIATION> (198,772)
<TOTAL-ASSETS> 820,290
<CURRENT-LIABILITIES> 292,928
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> (2,058)
<TOTAL-LIABILITY-AND-EQUITY> 820,290
<SALES> 265,810
<TOTAL-REVENUES> 265,810
<CGS> 190,471
<TOTAL-COSTS> 56,641
<OTHER-EXPENSES> (450)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,154
<INCOME-PRETAX> 15,994
<INCOME-TAX> 6,278
<INCOME-CONTINUING> 9,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,716
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-30-1998
<PERIOD-END> JAN-30-1998
<CASH> 11,448
<SECURITIES> 0
<RECEIVABLES> 172,414
<ALLOWANCES> (1,453)
<INVENTORY> 130,696
<CURRENT-ASSETS> 358,810
<PP&E> 362,367
<DEPRECIATION> (172,350)
<TOTAL-ASSETS> 638,624
<CURRENT-LIABILITIES> 278,939
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> (1,856)
<TOTAL-LIABILITY-AND-EQUITY> 638,624
<SALES> 225,359
<TOTAL-REVENUES> 225,359
<CGS> 161,645
<TOTAL-COSTS> 47,664
<OTHER-EXPENSES> (660)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,885
<INCOME-PRETAX> 14,825
<INCOME-TAX> 5,930
<INCOME-CONTINUING> 8,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,895
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
