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 30, 1998 Number: 1-3011
THE VALSPAR CORPORATION
State of Incorporation: IRS Employer ID No.:
Delaware 36-2443580
Principal Executive Offices:
1101 Third Street South
Minneapolis, MN 55415
Telephone Number: 612/332-7371
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities and Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
As of February 27, 1998, The Valspar Corporation had 43,814,618 shares of common
stock outstanding, excluding 9,506,694 shares held in treasury. The Company had
no other classes of stock outstanding.
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended January 30, 1998
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - January 30, 1998,
January 24, 1997, and October 31, 1997.................... 2 & 3
Condensed Consolidated Statements of Income - Three
months ended January 30, 1998 and January 24, 1997........ 4
Condensed Consolidated Statements of Cash Flows - Three
months ended January 30, 1998 and January 24, 1997........ 5
Notes to Condensed Consolidated Financial Statements -
January 30, 1998.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 7 - 9
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.......................................... 9
Item 6. Exhibits and Reports on Form 8-K........................... 9
SIGNATURES............................................................ 10
- ----------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
January 30, January 24, October 31,
1998 1997 1997
(Unaudited) (Unaudited) (Note)
--------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,448 $ 10,243 $ 11,113
Accounts receivable less allowance
(1/30/98-$1,453; 1/24/97-$1,367;
10/31/97-$1,364) 170,961 131,148 183,593
Inventories:
Manufactured products 90,809 66,467 81,720
Raw materials, supplies and work-in-
process 39,887 28,380 37,933
--------- --------- ---------
130,696 94,847 119,653
Other current assets 45,705 33,771 42,488
--------- --------- ---------
TOTAL CURRENT ASSETS 358,810 270,009 356,847
OTHER ASSETS 89,797 58,747 72,875
PROPERTY, PLANT AND EQUIPMENT 362,367 308,811 351,847
Less allowance for depreciation (172,350) (153,893) (166,099)
--------- --------- ---------
190,017 154,918 185,748
--------- --------- ---------
$ 638,624 $ 483,674 $ 615,470
========= ========= =========
Note: The Balance Sheet at October 31, 1997 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
January 30, January 24, October 31,
1998 1997 1997
(Unaudited) (Unaudited) (Note)
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 106,118 $ 33,000 $ 71,720
Trade accounts payable 93,257 74,973 96,676
Income taxes 6,069 7,599 1,083
Accrued liabilities 73,204 58,423 89,660
Current portion of long-term debt 291 274 281
--------- --------- ---------
TOTAL CURRENT LIABILITIES 278,939 174,269 259,420
LONG-TERM DEBT 31,658 30,727 35,844
DEFERRED LIABILITIES 24,974 21,414 25,141
STOCKHOLDERS' EQUITY:
Common Stock (Par Value-$.50;
Authorized 120,000,000 shares;
Shares issued, including shares in
treasury--53,321,312) 26,660 13,371 26,660
Additional paid-in capital 23,158 16,384 17,758
Retained earnings 317,491 280,667 313,485
Other (1,856) 541 (1,850)
--------- --------- ---------
365,453 310,963 356,053
Less cost of Common Stock in treasury
(1/30/98-9,489,650 shares; 1/24/97-
9,418,894 shares; 10/31/97-9,642,341
shares) 62,400 53,699 60,988
--------- --------- ---------
303,053 257,264 295,065
--------- --------- ---------
$ 638,624 $ 483,674 $ 615,470
========= ========= =========
Note: The Balance Sheet at October 31, 1997 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------------
January 30, January 24,
1998 1997
------------ ------------
Net sales $ 225,359 $ 189,288
Costs and expenses:
Cost of sales 161,645 135,850
Research and development 9,258 8,229
Selling and administration 38,406 31,839
Interest expense 1,885 607
Other income/(expense) - net 660 (499)
------------ ------------
Income before income taxes 14,825 13,262
Income taxes 5,930 5,334
------------ ------------
Net income $ 8,895 $ 7,928
============ ============
Net income per common share - basic and
diluted $ 0.20 $ 0.18
============ ============
Average number of common shares
outstanding - basic 43,403,943 43,528,200
- diluted 44,152,204 44,228,618
Dividends paid per common share $ 0.105 $ 0.090
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
-------------------------
January 30, January 24,
1998 1997
---------- ----------
OPERATING ACTIVITIES:
Net income $ 8,895 $ 7,928
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization 7,295 6,323
Increase (decrease) in cash due to changes in net
operating assets, net of effects of acquired businesses:
Accounts and notes receivable 12,934 21,694
Inventories and other assets (18,728) (12,791)
Trade accounts payable and accrued liabilities (13,371) (19,727)
Income taxes payable 4,986 (524)
Other deferred liabilities 35 (65)
Other (2,852) (597)
--------- ---------
Net Cash Provided By/(Used In) Operating Activities (806) 2,241
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (10,510) (6,809)
Acquired businesses/assets, net of cash (2,686) (6,456)
Other investments/advances to joint ventures (11,025) 5,068
--------- ---------
Net Cash Used In Investing Activities (24,221) (8,197)
FINANCING ACTIVITIES:
Net proceeds from borrowings 30,193 17,142
Proceeds from sale of treasury stock 439 759
Purchase of shares of Common Stock for treasury (373) (4,874)
Dividends paid (4,897) (3,940)
--------- ---------
Net Cash Provided By Financing Activities 25,362 9,087
Increase In Cash and Cash Equivalents 335 3,131
Cash and Cash Equivalents at Beginning of Period 11,113 7,112
--------- ---------
Cash and Cash Equivalents at End of Period $ 11,448 $ 10,243
========= =========
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 30, 1998
NOTE 1: The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
January 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended October 30, 1998. For further information refer to
the consolidated financial statements and footnotes thereto included in The
Valspar Corporation's annual report on Form 10-K for the year ended October 31,
1997.
NOTE 2: In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standard No. 128, "Earnings per Share". Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options
is excluded. Diluted earnings per share is based on the weighted average number
of Common Shares outstanding during each period plus common stock equivalents on
stock options. The potential dilution from the exercise of stock options was not
material for the first quarter of 1997 or 1998.
NOTE 3: Trade accounts payable include $13.2 million at January 30, 1998 and
$15.1 million at January 24, 1997 of issued checks which had not cleared the
Company's bank accounts.
NOTE 4: Effective December 1, 1997, the Company completed it's purchase of a 49%
interest in Valspar Coates (South Africa) (Proprietary) Limited, a joint venture
company formed with Coates Brothers (South Africa) Limited to operate the can
coatings and metal decorating inks business in South Africa. The transaction is
being accounted for as an equity investment. The transaction was not material to
the results of operations reported for the period ended January 30, 1998.
The Acquisition Agreement between the Company and Coates Brothers plc calls for
the purchase of certain other Coates operations in subsequent phases over a
period of up to five years. The additional phases of the transaction are subject
to various conditions and regulatory approvals.
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 second phase of the acquisition of TOTAL SA's Coates
Coatings operations which was effective on January 1, 1997 (described
in Note 2 of the 1997 Annual Report), and other acquisitions and
divestitures which occured during fiscal 1997 and the first three
months of fiscal 1998.
Operations: Net sales for the quarter increased 19.1% to $225,359,000
from $189,288,000 in the first quarter of 1997. Excluding the results
of acquisitions and divestitures, net sales increased 12.6%. 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 1998
compared to 28.2% in the first quarter of 1997. This was primarily the
result of a modest increase in raw material costs over the prior year
offset by improved handling efficiencies within our production
facilities. The Company does not expect a significant, general upward
trend in raw material costs over the next several months, however, it
is experiencing cost increases in selected high-volume materials.
Operating expenses (research and development, selling, and
administrative) increased 19.0% to $47,664,000 (21.2% of net sales) in
the first quarter of 1998 compared with $40,068,000 (21.2% of net
sales) in the same period in 1997. Excluding the results of
acquisitions and divestitures, operating expenses increased 16.0%. This
increase was primarily the result of additional advertising and
promotional costs in the Consumer Group, additional selling expenses in
all business groups and higher information systems expenditures as the
Company continues to upgrade its existing systems.
Net income in the first quarter of 1998 increased 12.2% to $8,895,000,
or $0.20 per share, primarily driven by higher sales levels.
Financial Condition: The net cash used by the Company's operations was
$806,000 for the first three months of 1998 compared with $2,241,000 of
cash provided by operations for the first three months of 1997. The
additional cash used by operations was the result of an increase in net
working capital requirements. During the first quarter of 1998,
$30,193,000 in proceeds from bank borrowings were used to fund
$10,510,000 in capital expenditures, $13,711,000 in acquisition and
joint venture investments, $4,897,000 in dividend payments, and the
cash used by the Company's operations.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
During the first quarter of 1998, accounts receivable decreased
$12,934,000 as higher year-end balances resulting from seasonally
strong fourth quarter sales were collected. Inventory and other assets
increased $18,728,000 due to an increase in sales volume. Accounts
payable and accrued liabilities decreased $13,371,000 as increases in
accounts payable were more than offset by the payment of various
year-end accruals.
Capital expenditures for property, plant, and equipment were
$10,510,000 in the first quarter of 1998 compared with $6,809,000 in
the first quarter of 1997. The increase in capital expenditures in 1998
was primarily due to production capacity expansion projects for the
Consumer and resin businesses. Other capital spending was distributed
among the four business groups with no other single major expenditure.
The Company's total debt to capital ratio increased to 31.3% at the end
of the first quarter from 26.8% at the close of fiscal 1997. The total
debt to capital ratio as of January 24, 1997 was 19.9%. The Company
believes its existing lines of credit will be sufficient to meet its
current and projected needs for financing.
NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about
Segments of an Enterprise and Related Information". SFAS 130
establishes standards for the reporting and presentation of
comprehensive income and its components. SFAS 131 establishes standards
for defining operating segments and the reporting of certain
information regarding operating segments. These statements only impact
the disclosure of financial information in interim and annual reports;
the adoption will have no impact to the Company's financial condition
or results of operations. The Company is presently analyzing the impact
of these statements on it's disclosures. Both statements are effective
beginning with the Company's 1999 Annual Report to Shareholders.
YEAR 2000. The Company continues to review its computer and other
operating systems to identify those which could be affected by the
"Year 2000" issue and continues to revise and update its conversion
plan to resolve any issues. The Company has also initiated formal
communications with its significant business partners to work with them
to eliminate Year 2000 risks and protect Valspar and its customers from
potential service interruptions. The Company continues to believe that,
with modifications to existing software and converting to new software
in certain instances, the Year 2000 problem will not
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
pose significant operational problems for the Company. The Company will
utilize both internal and external resources to develop and test the
Year 2000 modifications, the costs of which are not expected to
materially impact the Company's financial condition or results of
operations. The above conclusions are based on assumptions of future
events. As a result, there can be no guarantee that these conclusions
will not change as new facts become known.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
During the period covered by this report, there were no legal
proceedings instituted that are reportable, and there were no material
developments in any of the legal proceedings that were previously
reported on the Company's Form 10-K for the year ended October 31,
1997.
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 30, 1998.
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 16, 1998 By /s/ R. Engh
----------------------------
R. Engh
Secretary
Date: March 16, 1998 By /s/ P. C. Reyelts
----------------------------
P. C. Reyelts
Vice President, Finance
(Chief Financial Officer)