Due to the seasonal nature of portions of our business, EBIT for the first quarter is not necessarily indicative of EBIT for subsequent quarters or for the full year.
Cash flow used in operations was $23,322 for the three months ended January 30, 2015, compared to cash provided by operations of $9,317 for the same period last year. Cash flow from operations decreased due to higher incentive compensation payments and increases in accounts receivable primarily due to the timing of sales in the current quarter. These items were partially offset by lower uses of operating cash in 2015 for lower inventory levels, primarily in our Paints segment, and increases in accounts payable due to the timing of raw material purchases.
During the first three months of 2015, we used our borrowing capacity and cash on hand to fund $83,582 in share repurchases, $17,839 in capital expenditures and our seasonal working capital needs. We used cash on hand to fund $24,574 in dividend payments.
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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
Debt and Capital Resources
Our debt classified as current was $356,204 at January 30, 2015 compared to $606,356 and $540,162 at October 31, 2014 and January 24, 2014, respectively. Total debt was $1,706,285 at January 30, 2015 compared to $1,556,391 and $1,552,516 at October 31, 2014 and January 24, 2014, respectively. The increase in total debt from October 31, 2014 was primarily due to share repurchases, capital expenditures and normal seasonality of operating cash flow. The ratio of total debt to capital was 63.9% at January 30, 2015, compared to 60.6% at October 31, 2014 and 58.8% at January 24, 2014.
On January 21, 2015, we issued $250,000 of unsecured Senior Notes that mature on February 1, 2025 with a coupon rate of 3.30%, and $250,000 of unsecured Senior Notes that mature on February 1, 2045 with a coupon rate of 4.40%. The net proceeds of both issuances were $491,955 in the aggregate. The public offering was made pursuant to a registration statement filed with the U.S. Securities and Exchange Commission. We used the net proceeds to repay short-term borrowings under our commercial paper program and credit facility in the first quarter of 2015.
We maintain an unsecured revolving credit facility with a syndicate of banks. On December 16, 2013, we entered into an amended and restated $750,000 credit facility with a syndicate of banks with a maturity date of December 14, 2018. Under certain circumstances we have the option to increase this credit facility to $1,000,000.
We maintain uncommitted bank lines of credit to meet short-term funding needs in certain of our international locations. These arrangements are reviewed periodically for renewal and modification.
Our credit facilities have covenants that require us to maintain certain financial ratios. We were in compliance with these covenants as of January 30, 2015. Our debt covenants do not limit, nor are they reasonably likely to limit, our ability to obtain additional debt or equity financing.
We had $191,766 in cash and cash equivalents and $596,018 in unused committed bank credit facilities, providing total committed liquidity of $787,784 at the end of our 2015 first quarter, compared to $389,327 at the end of fiscal year 2014. Our cash and cash equivalent balances consist of high quality, short-term money market instruments and cash held by our international subsidiaries. Cash and cash equivalents held by our international subsidiaries are used to fund their day-to-day operating needs and have also been used to finance acquisitions. Our investment policy on excess cash is to preserve principal. As of January 30, 2015, $189,255 of the $191,766 of cash (on the Condensed Consolidated Balance Sheets) was held by our international subsidiaries. If these funds were repatriated to the U.S. we would be required to accrue and pay income taxes. However, no deferred U.S. income taxes have been provided on these earnings as they are considered to be reinvested for an indefinite period of time or will be repatriated when it is tax effective to do so.
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 domestic and international liquidity needs. In the current market conditions, we have demonstrated continued access to capital markets.
We use derivative instruments with a number of counterparties principally to manage 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 January 30, 2015.
Share Repurchases
Weighted-average common shares outstanding – diluted for the first quarter of 2015 were 83,866,879, down 3,774,425 from the same period in the prior year. During the quarter, we repurchased 982,500 shares for $83,582. On November 21, 2014, the Board approved a new share repurchase program, with no expiration date, authorizing us to purchase up to $1,500,000 of outstanding shares of common stock. This new program was effective immediately and replaced the previous repurchase authorization. As of January 30, 2015, $1,432,603 remained available for purchases under the new authorization.
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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
NON-GAAP FINANCIAL MEASURES
This section includes financial information prepared in accordance with accounting principles generally accepted in the United States (GAAP), as well as certain non-GAAP financial measures such as adjusted gross profit, adjusted operating expense, adjusted earnings before interest and taxes (EBIT), adjusted net income and adjusted net income per common share – diluted. Generally, a non-GAAP financial measure is a numerical measure of financial performance that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. Non-GAAP measures as presented herein may not be comparable to similarly titled measures used by other companies.
We believe that the non-GAAP financial measures provide meaningful information to assist investors in understanding our financial results and assessing prospects for future performance without regard to restructuring charges. We believe adjusted gross profit, adjusted operating expense, adjusted EBIT, adjusted net income and adjusted net income per common share – diluted are important indicators of our operations because they exclude items that may not be indicative of or are unrelated to our core operating results and provide a baseline for analyzing trends in our underlying business. To measure adjusted gross profit, adjusted operating expense and adjusted EBIT, we remove the impact of before-tax restructuring charges and gain on sale of certain assets. Adjusted net income and adjusted net income per common share – diluted are calculated by removing the after-tax impact of restructuring charges and gain on sale of certain assets from our calculated net income and net income per common share – diluted. Since non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures. These non-GAAP financial measures are an additional way to view aspects of our operations that, when viewed with our GAAP results and the reconciliations to corresponding GAAP financial measures below, provide a more complete understanding of our business. We strongly encourage investors and shareholders to review our financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.
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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
The following table reconciles gross profit, operating expense, EBIT, net income and net income per common share – diluted (GAAP financial measures) to adjusted gross profit, adjusted operating expense, adjusted EBIT, adjusted net income and adjusted net income per common share – diluted (non-GAAP financial measures) for the periods presented:
| | | | | | | | | | |
| | | Three Months Ended | |
| | | January 30, 2015 | | | January 24, 2014 | | |
| Coatings Segment | | | | | | | | | |
| Earnings before interest and taxes (EBIT) | | $ | 135,609 | | | $ | 69,975 | | |
| Restructuring charges – cost of sales | | | 2,390 | | | | 4,265 | | |
| Restructuring charges – operating expense | | | 963 | | | | 4,355 | | |
| Gain on sale of certain assets | | | (48,001 | ) | | | — | | |
| Adjusted EBIT | | $ | 90,961 | | | $ | 78,595 | | |
| | | | | | | | | | |
| Paints Segment | | | | | | | | | |
| EBIT | | $ | 25,329 | | | $ | 30,997 | | |
| Restructuring charges – cost of sales | | | 2,459 | | | | 1,775 | | |
| Restructuring charges – operating expense | | | 731 | | | | 1,044 | | |
| Adjusted EBIT | | $ | 28,519 | | | $ | 33,816 | | |
| | | | | | | | | | |
| Other and Administrative | | | | | | | | | |
| EBIT | | $ | (2,617 | ) | | $ | (5,783 | ) | |
| Restructuring charges – cost of sales | | | — | | | | 66 | | |
| Restructuring charges – operating expense | | | — | | | | 301 | | |
| Adjusted EBIT | | $ | (2,617 | ) | | $ | (5,416 | ) | |
| | | | | | | | | | |
| Consolidated | | | | | | | | | |
| Gross profit | | $ | 333,292 | | | $ | 319,053 | | |
| Restructuring charges – cost of sales | | | 4,849 | | | | 6,106 | | |
| Adjusted gross profit | | $ | 338,141 | | | $ | 325,159 | | |
| | | | | | | | | | |
| Operating expense | | $ | 223,937 | | | $ | 223,493 | | |
| Restructuring charges – operating expense | | | (1,694 | ) | | | (5,700 | ) | |
| Adjusted operating expense | | $ | 222,243 | | | $ | 217,793 | | |
| | | | | | | | | | |
| EBIT | | $ | 158,321 | | | $ | 95,189 | | |
| Restructuring charges – total | | | 6,543 | | | | 11,806 | | |
| Gain on sale of certain assets | | | (48,001 | ) | | | — | | |
| Adjusted EBIT | | $ | 116,863 | | | $ | 106,995 | | |
| | | | | | | | | | |
| Net income | | $ | 103,974 | | | $ | 53,553 | | |
| After tax restructuring charges – total1 | | | 4,118 | | | | 7,581 | | |
| After tax gain on sale of certain assets1 | | | (37,216 | ) | | | — | | |
| Adjusted net income | | $ | 70,876 | | | $ | 61,134 | | |
| | | | | | | | | | |
| Net income per common share – diluted | | $ | 1.24 | | | $ | 0.61 | | |
| Restructuring charges – total | | | 0.05 | | | | 0.09 | | |
| Gain on sale of certain assets | | | (0.44 | ) | | | — | | |
| Adjusted net income per common share – diluted | | $ | 0.85 | | | $ | 0.70 | | |
| | | | | | | | | | |
1 The tax effect of the gain on sale of assets and restructuring charges is calculated using the effective tax rate of the jurisdiction in which the charges were incurred.
See Note 15 in Notes to Condensed Consolidated Financial Statements for further information on restructuring.
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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
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of the financial statements. We regularly review our estimates and assumptions, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A comprehensive discussion of our critical accounting estimates is included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended October 31, 2014. There were no material changes to our critical accounting estimates in the first quarter of fiscal year 2015.
OFF-BALANCE SHEET ARRANGEMENTS
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,” “intends,” “should” and similar expressions.
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 operating in foreign markets, including achievement of profitable growth in developing markets; impact of fluctuations in foreign currency exchange rates on our financial results; 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; possible interruption, failure or compromise of the information systems we use to operate our business; 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. Generally our underlying costs are denominated in the same currency as our sales. We have not used derivative financial instruments to hedge our exposure to translation gains and losses. A 10% adverse change applied equally to all foreign currency exchange rates is not expected to have a material effect on our net income or financial position. A change of greater than 10% in the exchange rates for individual currencies in geographies where we have a significant presence could have a material impact on our net income or financial position.
We are also subject to interest rate risk. At January 30, 2015, approximately 12.1% of our total debt consisted of floating rate debt. From time to time, we may enter into interest rate derivatives 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 first 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 January 30, 2015. 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 January 30, 2015 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 31, 2014.
ITEM 1A. RISK FACTORS
There were no material changes to the risk factors disclosed in our Form 10-K for the year ended October 31, 2014.
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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 January 30, 2015:
| | | | | | | | | | | | | | | | |
Period | | Total Number
of Shares
Purchased | | Average
Price Paid
per Share | | Total Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs | | Maximum
Number
of Shares that
May
Yet be Purchased
Under
the Plans or
Programs1 | | Maximum Amount
that May Yet be
Spent Under the
Plans or Programs2 | |
11/1/2014 - 11/21/2014 | | | | | | | | | | | | | | | | |
Repurchase Program | | | 192,500 | | $ | 84.05 | | | 192,500 | | | 4,826,974 | | | N/A | |
11/22/2014 - 11/28/2014 | | | | | | | | | | | | | | | | |
Repurchase Program | | | 12,500 | | $ | 84.88 | | | 12,500 | | | N/A | | $ | 1,498,938,594 | |
11/29/2014 - 12/26/2014 | | | | | | | | | | | | | | | | |
Repurchase Program | | | 217,500 | | $ | 83.09 | | | 217,500 | | | N/A | | $ | 1,480,860,692 | |
12/27/2014 - 1/30/2015 | | | | | | | | | | | | | | | | |
Repurchase Program | | | 560,000 | | $ | 86.15 | | | 560,000 | | | N/A | | $ | 1,432,602,691 | |
Other Transactions3 | | | 54,772 | | $ | 83.87 | | | — | | | — | | | — | |
| |
1 | On December 5, 2012, the board approved a share repurchase authorization of 15,000,000 shares, with no predetermined end date. There were 192,500 shares purchased in fiscal year 2015 and 4,826,974 shares remaining under that plan on November 21, 2014 when it was replaced by a new plan. |
| |
2 | On November 21, 2014 the board authorized the purchase of up to $1.5 billion of the corporation’s outstanding shares of common stock, with no expiration date. This new program was effective immediately and replaced the previous repurchase authorization. On January 30, 2015, there were 790,000 shares purchased under this program. |
| |
3 | Our other transactions include our acquisition of common stock in satisfaction of tax-payment obligations upon vesting of restricted stock. |
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ITEM 6. EXHIBITS
| | |
Exhibit | | |
Number | | Description |
| | |
4.1 | | Fifth Supplemental Indenture, among the Company, The Bank of New York Mellon Trust Company, N.A. (as successor to Bank One Trust Company, N.A.) and U.S. Bank National Association, as series trustee, dates as of January 21, 2015, to Indenture dated as of April 24, 2002, between the Company and the Bank of New York Mellon Trust Company, N.A. (as successor to Bank One Trust Company, N.A.) (incorporated by reference to Form 8-K filed on January 21, 2015) |
| | |
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 |
* Filed electronically herewith
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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: March 11, 2015 | By | /s/ Rolf Engh |
| Rolf Engh |
| Executive Vice President, General Counsel and Secretary |
| |
Date: March 11, 2015 | By | /s/ James L. Muehlbauer |
| James L. Muehlbauer |
| Executive Vice President, Chief Financial and Administrative Officer |
