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 30, 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 August 31, 1999, The Valspar Corporation had 43,235,413 shares of common
stock outstanding, excluding 10,085,899 shares held in treasury. The Company had
no other classes of stock outstanding.
<PAGE>
-1-
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended July 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 30, 1999,
July 31, 1998 and October 30, 1998............................................ 2 & 3
Condensed Consolidated Statements of Income - Three months and nine months ended
July 30, 1999 and July 31, 1998............................................... 4
Condensed Consolidated Statements of Cash Flows - Nine months ended July 30, 1999
and July 31, 1998............................................................. 5
Notes to Condensed Consolidated Financial Statements - July 30, 1999............ 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 9 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 13
PART II. OTHER INFORMATION
- -------------------------------
Item 1. Legal Proceedings............................................................... 14
Item 6. Exhibits and Reports on Form 8-K................................................. 14
SIGNATURES.................................................................................... 15
- ----------
</TABLE>
<PAGE>
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
July 30, July 31, October 30,
1999 1998 1998
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,288 $ 14,832 $ 14,990
Accounts receivable less allowance 7/30/99 -
$4,886; 07/31/98 - $1,872; 10/30/98 - $1,464) 291,583 218,529 212,287
Inventories:
Manufactured products 121,086 101,285 99,990
Raw materials, supplies, and work-in-process 35,906 41,581 42,821
----------- --------- ---------
156,992 142,866 142,811
Other current assets 64,822 56,434 55,981
----------- --------- ---------
TOTAL CURRENT ASSETS 539,685 432,661 426,069
GOODWILL, NET 208,780 90,078 92,872
OTHER ASSETS 71,215 59,222 49,257
PROPERTY, PLANT AND EQUIPMENT 509,324 411,084 424,927
Less allowance for depreciation (210,816) (185,761) (191,445)
----------- --------- ---------
298,508 225,323 233,482
----------- --------- ---------
$ 1,118,188 $ 807,284 $ 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>
July 30, July 31, October 30,
1999 1998 1998
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 55,500 $ 77,335 $ 24,340
Trade accounts payable 154,658 104,090 138,182
Income taxes 13,120 9,089 6,913
Accrued liabilities 136,255 90,920 98,549
---------- --------- ---------
TOTAL CURRENT LIABILITIES 359,533 281,434 267,984
LONG TERM DEBT 338,944 166,056 164,768
DEFERRED LIABILITIES 43,411 24,729 28,740
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 25,972 21,015 22,413
Retained earnings 408,513 350,689 367,040
Other comprehensive income 43 (272) (308)
---------- --------- ---------
461,188 398,092 415,805
Less cost of common stock in treasury
(7/30/99 - 10,086,599 shares; 07/31/98
- 9,484,127 shares; 10/30/98
- 9,902,827 shares) 84,888 63,027 75,617
---------- --------- ---------
376,300 335,065 340,188
---------- --------- ---------
$1,118,188 $ 807,284 $ 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)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
----------------------- -----------------------
July 30, July 31, July 30, July 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 398,076 $ 327,684 $ 1,020,588 $ 845,505
Costs and expenses:
Cost of sales 277,455 226,360 712,660 590,426
Research and development 12,009 10,303 32,868 29,538
Selling & administration 61,513 51,840 167,369 136,236
Restructuring Charge 0 0 8,346 0
----------- ----------- ----------- -----------
Income from Operations 47,099 39,181 99,345 89,305
Interest expense 5,326 3,458 13,992 7,703
Other income - net 788 1,353 10,110 3,551
----------- ----------- ----------- -----------
Income before income taxes 42,561 37,076 95,463 85,153
Income taxes 16,728 14,830 37,469 34,061
----------- ----------- ----------- -----------
Net income $ 25,833 $ 22,246 $ 57,994 $ 51,092
=========== =========== =========== ===========
Net income per common share -
basic $ 0.60 $ 0.51 $ 1.34 $ 1.17
=========== =========== =========== ===========
Net income per common share -
diluted $ 0.59 $ 0.50 $ 1.32 $ 1.15
=========== =========== =========== ===========
Average number of common shares
outstanding - basic 43,226,940 43,537,245 43,343,731 43,490,351
=========== =========== =========== ===========
- diluted 43,867,732 44,535,016 43,884,830 44,380,763
=========== =========== =========== ===========
Dividends paid per common share $ 0.115 $ 0.105 $ 0.345 $ 0.315
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-5-
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
July 30, July 31,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 57,994 $ 51,092
Adjustments to reconcile net income to net cash provided by operating
activities:
Restructuring charges 8,346 0
Depreciation and amortization 28,371 23,344
Gains on sales of assets (10,520) (2,191)
Increase (decrease) in cash due to changes in
net operating assets, net of effects of acquired
businesses:
Accounts and notes receivable (46,981) (14,502)
Inventories and other assets (5,597) (24,500)
Trade accounts payable and
accrued liabilities 10,113 (5,092)
Income taxes payable 6,044 8,488
Other deferred liabilities 1,589 (741)
Other (8,654) (5,531)
--------- ---------
Net Cash Provided By Operating Activities 40,705 30,367
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (16,901) (30,103)
Acquired businesses/assets, net of cash (229,475) (90,275)
Divested businesses/assets 35,750 4,006
Other investments/advances to joint ventures (286) (17,092)
--------- ---------
Net Cash Used in Investing Activities (210,912) (133,464)
FINANCING ACTIVITIES:
Net proceeds from borrowing 204,656 120,785
Proceeds from sale of treasury stock 805 1,065
Purchase of shares of Common Stock for treasury (9,008) (1,146)
Dividends paid (14,948) (13,888)
--------- ---------
Net Cash Provided by Financing Activities 181,505 106,816
Increase In Cash and Cash Equivalents 11,298 3,719
Cash and Cash Equivalents at Beginning of Period 14,990 11,113
--------- ---------
Cash and Cash Equivalents at End of Period $ 26,288 $ 14,832
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
-6-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 30, 1999
NOTE 1: BASIS OF PRESENTATION
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 quarter and nine months ended July 30,
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: ACCOUNTS PAYABLE
Trade accounts payable include $14.1 million at July 30, 1999, $12.1 million at
October 30, 1998 and $19.2 million at July 31, 1998 of issued checks which had
not cleared the Company's bank accounts.
NOTE 3: ACQUISITIONS AND 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. The pro forma results of operations for this
acquisition has not been presented as the impact on reported results is not
material.
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. The pro forma results of operations for
this acquisition has not been presented as the impact on reported results is not
material.
Effective December 17, 1998, the Company acquired a majority interest in Dyflex
Polymers. Dyflex is a 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. The pro forma results of operations for this
acquisition has not been presented as the impact on reported results is not
material.
<PAGE>
-7-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 30, 1999 - CONTINUED
NOTE 3: ACQUISITIONS AND DIVESTITURES - CONTINUED
Effective February 26, 1999, the Company acquired the Dexter Corporation's
worldwide packaging coatings product lines 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. 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 actual allocation of the purchase price is
preliminary and is subject to change based upon final valuations. The following
unaudited pro forma combined capsule statement of income information for the
nine months ended July 30, 1999 and July 31, 1998 was prepared in accordance
with Accounting Principles Board Opinion No. 16 and assumes the acquisition had
occurred at the beginning of the periods presented. The following pro forma data
reflects adjustments for interest expense, amortization of goodwill and
depreciation of fixed assets. The unaudited pro forma financial information is
provided for informational purposes only and does not purport to be indicative
of the future results of Valspar.
UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
-------------------------------------------
<TABLE>
<CAPTION>
(Thousands of dollars, Nine months ended Nine months ended
except per share data) July 30, 1999 July 31, 1998
----------------- -----------------
<S> <C> <C>
Net sales $1,090,131 $1,006,832
Net income 57,213 48,693
Net income per share-basic 1.32 1.12
Net income per share-diluted 1.30 1.10
</TABLE>
During the second quarter, the Company completed the sale of its marine and
flexible packaging coatings businesses. These businesses had revenues of $25
million and $12 million, respectively, for the year ended October 30, 1998.
Operating results from these businesses were not material to the results of
operations reported for the three or nine-month periods ended July 30, 1999.
<PAGE>
-8-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 30, 1999 - CONTINUED
NOTE 4: RESTRUCTURING
During the second quarter of fiscal 1999 the Company's board approved and the
Company initiated plans to eliminate redundant facilities and functions
resulting from the acquired Dexter packaging coatings operations. The
formulation of such plans had begun as of the date of acquisition of Dexter.
Costs associated with the planned closure of former Dexter locations and
workforce reductions totaling $6.4 million were recorded as liabilities in the
purchase price allocation. Of the $6.4 million total estimated restructuring
liability recorded, $5.3 million relates to employee termination benefits and
$0.6 million relates to contract cancellation costs. As of July 30, 1999, costs
totaling $1.7 million were charged against accrued expenses pertaining to the
closure of former Dexter locations and workforce reductions.
Additionally, costs associated with workforce reductions and the planned closure
of existing Valspar locations are reflected as a pre-tax restructuring charge
totaling $8.3 million. Of the $8.3 million total estimated restructuring
liability recognized, $3.5 million relates to employee termination benefits,
$3.1 million relates to contract and other program cancellation costs, and $1.0
million relates to recording assets to be disposed of at fair value. As of July
30, 1999, costs totaling $2.3 million were charged against accrued expenses
pertaining to the closure of existing Valspar locations and workforce
reductions. These plans contemplate a workforce reduction of worldwide headcount
by 200.
Cash requirements of this restructuring plan are estimated to be $13.7 million
and will primarily be expended over the next twelve months. In addition, the
Company anticipates capital expenditures of approximately $4 million will be
required over the next several months to upgrade certain production capabilities
as a result of the restructuring.
NOTE 5: COMPREHENSIVE INCOME
As of October 31, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income or shareholders' equity. Comprehensive
income is comprised of net income and the components of other comprehensive
income, which include foreign currency translation, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. The Company's components of Shareholders' Equity relating to
cumulative other comprehensive income/(loss) consists entirely of foreign
currency translation adjustments of $43,000, ($272,000) and ($308,000) as of
July 30, 1999, July 31, 1998, and October 30, 1998, respectively.
<PAGE>
-9-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 30, 1999 - CONTINUED
NOTE 6: NEW ACCOUNTING STANDARDS
The FASB issued SFAS No. 131, "Disclosures about Segments of an 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 statement
information disclosures in interim and annual reports, 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.
NOTE 7: RECLASSIFICATION
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operations: Net sales for the quarter increased 21.5% to $398,076,000
and 20.7% to $1,020,588,000 for the three and nine month periods
ended July 30, 1999, respectively, over net sales for the comparable
periods one year ago.
Excluding the results of acquisitions and divestitures, net sales
increased approximately 5 to 6% for the three-month period and
nine-month period. The third quarter and year to date increases were
driven by volume increases across all of the product lines. Due to
the seasonal nature of the Company's business, sales for the quarter
and nine-month period are not necessarily indicative of sales for the
full year.
Net income in the third quarter of 1999 increased 16.1% to
$25,833,000 or diluted earnings per share of $.59. Year to date, net
income increased by 13.5% to $57,994,000 or diluted earnings per
share of $1.32. The increase for both periods was driven by the sales
growth. The earnings in 1999 were affected by a $8,346,000
restructuring charge offset by gains from the sale of North American
flexible packaging coatings business and the marine coatings
business.
<PAGE>
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The gross margin decreased from 30.9% to 30.3% during the third
quarter and remained constant at 30.2% for the first nine months from
the comparable periods last year. The gross margin decline resulted
primarily from the Dexter acquisition, which currently generates
margins lower than the Company's current and prior year margins from
its other product lines.
Operating expense (research and development, selling, and
administrative) increased 18.3% to $73,522,000 (18.5% of net sales)
in the third quarter of 1999 compared with $62,143,000 (19.0% of net
sales) in the third quarter of 1998. Year to date operating expenses
increased 20.8% to $200,237,000 (19.6% of net sales) compared with
$165,774,000 (19.6% of net sales) for the same period last year.
Excluding the results of acquisitions and divestitures, operating
expenses increased approximately 7% for the three and nine-month
periods ended July 30, 1999. The expense increase, excluding the
results of acquisitions and divestitures, was primarily the result of
additional advertising and promotional costs for large architectural
coatings customers and additional selling expenses across all product
lines.
During the second quarter of fiscal 1999, the Company's board
approved and the Company initiated plans to eliminate redundant
facilities and functions resulting from the acquired Dexter packaging
coatings operations. The formulation of such plans had begun as of
the date of acquisition of Dexter. Costs associated with the planned
closure of former Dexter locations and workforce reductions totaling
$6.4 million were recorded as liabilities in the purchase price
allocation. Of the $6.4 million total estimated restructuring
liability recorded, $5.3 million relates to employee termination
benefits and $0.6 million relates to contract cancellation costs. As
of July 30, 1999, costs totaling $1.7 million were charged against
accrued expenses pertaining to the closure of former Dexter locations
and workforce reductions.
Additionally, costs associated with workforce reductions and the
planned closure of existing Valspar locations are reflected as a
pre-tax restructuring charge totaling $8.3 million. Of the $8.3
million total estimated restructuring liability recognized, $3.5
million relates to employee termination benefits, $3.1 million
relates to contract and other program cancellation costs, and $1.0
million relates to recording assets to be disposed of at fair value.
As of July 30, 1999, costs totaling $2.3 million were charged against
accrued expenses pertaining to the closure of existing Valspar
locations and workforce reductions. These plans contemplate a
workforce reduction worldwide by 200.
<PAGE>
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Cash requirements of this restructuring plan are estimated to be
$13.7 million and will primarily be expended over the next twelve
months. In addition, the Company anticipates capital expenditures of
approximately $4 million will be required over the next several
months to upgrade certain production capabilities as a result of the
restructuring.
Financial Condition: The net cash provided by the Company's
operations was $40,705,000 for the first nine months of 1999,
compared with $30,367,000 for the first nine months of 1998. The
additional cash provided by operating activities was primarily the
result of higher net income and non-cash changes. The cash provided
by operating activities combined with $204,656,000 in proceeds from
bank borrowings and proceeds from divested businesses of $35,750,000
were used to fund $229,761,000 of acquisitions and joint venture
investments, $16,901,000 of capital expenditures, $9,008,000 in
payments for share repurchases and $14,948,000 in dividend payments.
Cash balances increased $11,298,000 during the first nine months with
approximately $6,800,000 of the cash increase attributable to cash
obtained with the Dexter acquisition.
During the first nine months of 1999, accounts receivable increased
$46,981,000 as sales volume increased. Inventory and other assets
increased only $5,597,000 due to improved inventory management
practices. Accounts payable and accrued liabilities increased
$10,113,000 as a result of an increase in inventory levels and timing
of payments. These comparisons exclude the impact of acquired or
divested assets and liabilities.
Capital expenditures for property, plant, and equipment were
$16,901,000 in the first nine months of 1999, compared with
$30,103,000 in the first nine months of 1998. The decrease in capital
expenditures in 1999 was related to higher 1998 spending levels due
to the construction of production capacity for the architectural
coatings and resin product lines. Excluding the capital spending
required to integrate the Dexter business, estimated at approximately
$4,000,000 over several months, the Company anticipates spending
levels for the remainder of 1999 to be somewhat higher than 1998 for
the same period.
The Company's total debt to capital ratio increased to 51.2% at the
end of the third quarter from 35.7% at the close of fiscal 1998, with
the increased debt ratio driven by the Dexter acquisition. The total
debt to capital ratio as of July 31, 1998 was 42.1%. In May 1999, the
Company filed a shelf registration statement covering up to $300
million in debt securities. The registration statement was declared
effective in June 1999. The Company may sell debt securities of
different series from time to time. The net proceeds from the sale of
the debt securities, if any are sold, would be added to our general
funds and could be used to:
<PAGE>
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
repay bank debt; finance acquisitions of companies and other assets;
and provide working capital. The Company believes its existing lines
of credit as amended and expanded and access to credit facilities
will be sufficient to meet its current and projected needs for
financing.
Year 2000 Readiness Disclosure: The Company is nearing completion of
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 has substantially completed the Year 2000 readiness
program in North America. Throughout the remainder of the year, the
Company will continue to update our understanding of the readiness of
our suppliers and execute the precautionary action plans developed as
part of business continuity planning efforts. Year 2000 readiness
programs outside of North America are proceeding as planned and the
Company expects global readiness efforts to be complete on or about
September 30, 1999.
As part of the "Year 2000" readiness project, the Company has been
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 and customers to determine their "Year 2000" readiness
and has identified potential critical "Year 2000" issues. The Company
has either resolved those issues or developed 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 $3.5 million, with $3.1 million of the costs incurred
through July 30, 1999.
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
<PAGE>
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
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
The company is exposed to market risk from changes in interest rates
and foreign currency exchange rates since it funds its operations
through long and short-term borrowings and denominates its business
transactions in a variety of foreign currencies.
Interest Rate Risk:
The Company's primary interest rate risk exposure results from
floating rate debt including various revolving credit and other lines
of credit. The impact of an increase in interest rates by 100 basis
points (1%) from July 30, 1999 rates would not be material to the
Company's net income. The Company currently does not hedge its
exposure for this floating rate debt.
Foreign Currency Risk:
The Company's foreign sales and results of operations are subject to
the impact of foreign currency fluctuations. As most of the Company's
foreign operations are in countries with fairly stable currencies,
such as the United Kingdom, France, Switzerland and Canada, this
effect has not been material. A 10% adverse change in foreign
currency exchange rates would not have resulted in a material impact
on the Company's net income. The Company does not currently hedge
against the risk of exchange rate fluctuations.
<PAGE>
-14-
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 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) On May 12, 1999, the registrant filed a report on Form 8-K/A
providing required financial information that was not available
on March 15, 1999, when the registrant filed its report on Form
8-K regarding the Company's acquisition of certain operations of
Dexter Corporation.
<PAGE>
-15-
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 13, 1999 By /s/R. Engh
-----------------------------------
R. Engh
Secretary
Date: September 13, 1999 By /s/P. C. Reyelts
----------------------------------
P. C. Reyelts
Senior Vice President, Finance
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-29-1999
<PERIOD-END> JUL-30-1999
<CASH> 26,288
<SECURITIES> 0
<RECEIVABLES> 296,469
<ALLOWANCES> (4,866)
<INVENTORY> 156,992
<CURRENT-ASSETS> 539,685
<PP&E> 509,324
<DEPRECIATION> (210,816)
<TOTAL-ASSETS> 1,118,188
<CURRENT-LIABILITIES> 359,533
<BONDS> 0
0
0
<COMMON> 26,660
<OTHER-SE> 43
<TOTAL-LIABILITY-AND-EQUITY> 1,118,188
<SALES> 1,020,588
<TOTAL-REVENUES> 1,020,588
<CGS> 712,660
<TOTAL-COSTS> 208,583
<OTHER-EXPENSES> (10,110)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,992
<INCOME-PRETAX> 95,463
<INCOME-TAX> 37,469
<INCOME-CONTINUING> 57,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,994
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.32
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-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
0
0
<COMMON> 26,660
<OTHER-SE> (272)
<TOTAL-LIABILITY-AND-EQUITY> 807,284
<SALES> 845,505
<TOTAL-REVENUES> 845,505
<CGS> 590,426
<TOTAL-COSTS> 165,774
<OTHER-EXPENSES> (3,551)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,703
<INCOME-PRETAX> 85,153
<INCOME-TAX> 34,061
<INCOME-CONTINUING> 51,092
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,092
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.15
</TABLE>
