ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Due to the seasonal nature of portions of our business, EBIT for the second quarter is not necessarily indicative of EBIT for subsequent quarters or for the full year.
During the first six months of 2012, we used our borrowing capacity and cash provided by operations to fund $145,322 in share repurchases, $30,085 in capital expenditures and our seasonal working capital needs. We used cash on hand and $26,180 in proceeds from the sale of treasury stock to fund $37,075 in dividend payments. We anticipate capital spending in 2012 to be approximately $90,000.
See Note 9 in Notes to the Condensed Consolidated Financial Statements for further discussion on our restricted cash associated with cash collateralization of certain letters of credit.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
In the first quarter of 2012, we issued $400,000 in unsecured Senior Notes that mature on January 15, 2022 with a coupon rate of 4.20%. The public offering was made pursuant to a registration statement filed with the U.S. Securities and Exchange Commission. We used the net proceeds for general corporate purposes, including paying down our commercial paper and, subsequent to the end of our second quarter, retiring our $200,000 of 5.625% Senior Notes that matured on May 1, 2012. The ratio of total debt to capital was 51.2% at April 27, 2012, compared to 46.6% at October 28, 2011 and 45.0% at April 29, 2011.
Our debt classified as current was $209,138 at April 27, 2012 compared to $377,319 and $354,467 at October 28, 2011 and April 29, 2011, respectively. The decline in current debt from October 28, 2011 was primarily due to repayment of commercial paper borrowings with proceeds from our issuance of Senior Notes. We ended our 2012 second quarter with $602,766 of reserve liquidity that includes $594,275 of available committed credit facilities and $208,491 of cash, and excludes $200,000 related to the retirement of Senior Notes on May 1, 2012.
Our credit facilities have covenants that require us to maintain certain financial ratios. We were in compliance with these covenants as of April 27, 2012. Our debt covenants do not limit, nor are they reasonably likely to limit, our ability to obtain additional debt or equity financing.
To ensure availability of funds, we maintain uncommitted bank lines of credit sufficient to cover outstanding short-term borrowings. These arrangements are reviewed periodically for renewal and modification.
We believe future cash flow from operations, existing lines of credit, access to credit facilities and access to debt and capital markets will be sufficient to meet our current and projected financing and liquidity needs. In the current market conditions, we have demonstrated continued access to capital markets. We have committed liquidity and cash reserves in excess of our anticipated funding requirements.
Our cash and cash equivalent balances consist of high quality, short-term money market instruments and cash held by our international subsidiaries that are used to fund those subsidiaries’ day-to-day operating needs. Those balances have also been used to finance acquisitions. Our investment policy on excess cash is to preserve principal.
We use derivative instruments with a number of counterparties principally to manage well-defined interest rate and foreign currency exchange risks. We evaluate the financial stability of each counterparty and spread the risk among several financial institutions to limit our exposure. We will continue to monitor counterparty risk on an ongoing basis. We do not have any credit-risk related contingent features in our derivative contracts as of April 27, 2012.
Off-Balance Sheet Financing: We do not have off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Forward Looking Statements: Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.
Forward-looking statements are based on management’s current expectations, estimates, assumptions and beliefs about future events, conditions and financial performance. Forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside our control and could cause actual results to differ materially from such statements. Any statement that is not historical in nature is a forward-looking statement. We may identify forward-looking statements with words and phrases such as “expects,” “projects,” “estimates,” “anticipates,” “believes,” “could,” “may,” “will,” “plans to,” “intend,” “should” and similar expressions.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
These risks, uncertainties and other factors include, but are not limited to, deterioration in general economic conditions, both domestic and international, that may adversely affect our business; fluctuations in availability and prices of raw materials, including raw material shortages and other supply chain disruptions, and the inability to pass along or delays in passing along raw material cost increases to our customers; dependence of internal sales and earnings growth on business cycles affecting our customers and growth in the domestic and international coatings industry; market share loss to, and pricing or margin pressure from, larger competitors with greater financial resources; significant indebtedness that restricts the use of cash flow from operations for acquisitions and other investments; dependence on acquisitions for growth, and risks related to future acquisitions, including adverse changes in the results of acquired businesses, the assumption of unforeseen liabilities and disruptions resulting from the integration of acquisitions; risks and uncertainties associated with operations and achievement of profitable growth in developing markets, including Asia and Central and South America; loss of business with key customers; damage to our reputation and business resulting from product claims or recalls, litigation, customer perception and other matters; our ability to respond to technology changes and to protect our technology; changes in governmental regulation, including more stringent environmental, health and safety regulations; our reliance on the efforts of vendors, government agencies, utilities and other third parties to achieve adequate compliance and avoid disruption of our business; unusual weather conditions adversely affecting sales; changes in accounting policies and standards and taxation requirements such as new tax laws or revised tax law interpretations; the nature, cost and outcome of pending and future litigation and other legal proceedings; and civil unrest and the outbreak of war and other significant national and international events.
We undertake no obligation to subsequently revise any forward-looking statement to reflect new information, events or circumstances after the date of such statement, except as required by law.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our foreign sales and results of operations are subject to the impact of foreign currency fluctuations. As most of our underlying costs are denominated in the same currency as our sales, the effect has not been material. We have not hedged our exposure to translation gains and losses; however, we have reduced our exposure by borrowing funds in local currencies. A 10% adverse change in foreign currency rates is not expected to have a material effect on our results of operations or financial position.
We are also subject to interest rate risk. At April 27, 2012, approximately 5.6% of our total debt consisted of floating rate debt. From time to time, we may enter into interest rate swaps to hedge a portion of either our variable or fixed rate debt. Assuming the current level of borrowings, a 10% increase in interest rates from those in effect at the end of the second quarter would not have a material impact on our results of operations or financial position.
ITEM 4: CONTROLS AND PROCEDURES
Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of April 27, 2012. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting during the quarter ended April 27, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 our Form 10-K for the year ended October 28, 2011.
ITEM 1A: RISK FACTORS
There were no material changes to the risk factors disclosed in our Form 10-K for the year ended October 28, 2011.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| |
| (a) Not applicable |
| (b) Not applicable |
| (c) We made the following repurchases of equity securities during the quarter ended April 27, 2012: |
| | | | | | | | | | | | | |
Period | | Total Number
of Shares
Purchased1 | | Average
Price Paid
per Share | | Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs1 | | Maximum Number
of Shares that May
Yet be Purchased Under
the Plans or Programs1 | |
1/28/12 – 2/24/12 | | | | | | | | | | | | | |
Repurchase program | | | 100,000 | | $ | 46.08 | | | 100,000 | | | 6,900,000 | |
Other transactions2 | | | 3,423 | | | 43.81 | | | — | | | — | |
2/25/12 – 3/23/12 | | | | | | | | | | | | | |
Repurchase program | | | 860,000 | | | 47.15 | | | 860,000 | | | 6,040,000 | |
Other transactions2 | | | — | | | — | | | — | | | — | |
3/24/12 – 4/27/12 | | | | | | | | | | | | | |
Repurchase program | | | 1,040,000 | | | 49.13 | | | 1,040,000 | | | 5,000,000 | |
Other transactions2 | | | 4,964 | | | 48.59 | | | — | | | — | |
| |
1 | On October 13, 2010 we received board authorization to repurchase 15,000,000 shares, with no predetermined end date. As of April 27, 2012, we repurchased 10,000,000 shares under this authorization. |
| |
2 | Our other transactions include our acquisition of common stock in satisfaction of tax-payment obligations upon vesting of restricted stock and our receipt of surrendered shares in connection with the exercise of stock options. |
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ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 6: EXHIBITS
| | | |
| Exhibits | | |
| 10.1 | | The Valspar Corporation 2009 Omnibus Equity Plan (as amended through February 15, 2012) |
| 31.1 | | Section 302 Certification of the Chief Executive Officer |
| 31.2 | | Section 302 Certification of the Chief Financial Officer |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Schema Document |
| 101.CAL | | XBRL Calculation Linkbase Document |
| 101.DEF | | XBRL Definition Linkbase Document |
| 101.LAB | | XBRL Label Linkbase Document |
| 101.PRE | | XBRL Presentation Linkbase Document |
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: June 6, 2012 | By | /s/Rolf Engh | |
| Rolf Engh | |
| Secretary | |
| | | |
Date: June 6, 2012 | By | /s/Lori A. Walker | |
| Lori A. Walker | |
| Senior Vice President and Chief Financial Officer | |
