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 Six Months Commission File
Ended May 1, 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 May 29, 1998, The Valspar Corporation had 43,836,561 shares of common
stock outstanding, excluding 9,484,751 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 May 1, 1998
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - May 1, 1998,
April 25, 1997, and October 31, 1997 .......................... 2 & 3
Condensed Consolidated Statements of Income - Three
months and six months ended May 1, 1998 and April 25,
1997 .......................................................... 4
Condensed Consolidated Statements of Cash Flows - Six
months ended May 1, 1998 and April 25, 1997 ................... 5
Notes to Condensed Consolidated Financial Statements -
May 1, 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 4. Submission of Matters to a Vote of Security Holders............. 10
Item 6. Exhibits and Reports on Form 8-K................................ 10
SIGNATURES................................................................ 11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
May 1, April 25, October 31,
1998 1997 1997
---------- ---------- ----------
(Unaudited) (Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,519 $ 8,121 $ 11,113
Accounts receivable less allowance
(5/1/98 - $1,527; 4/25/97 -
$1,629; 10/31/97 - $1,364) 210,404 172,681 183,593
Inventories:
Manufactured products 46,387 78,214 81,720
Raw materials, supplies, and work-
in-process 97,857 31,724 37,933
---------- ---------- ----------
144,244 109,938 119,653
Other current assets 48,133 36,194 42,488
---------- ---------- ----------
TOTAL CURRENT ASSETS 420,300 326,934 356,847
INTANGIBLE ASSETS 99,293 41,154 51,530
OTHER ASSETS 41,423 28,879 21,345
PROPERTY, PLANT AND
EQUIPMENT 392,794 326,398 351,847
Less allowance for depreciation (185,712) (159,655) (166,099)
---------- ---------- ----------
207,082 166,743 185,748
---------- ---------- ----------
$ 768,098 $ 563,710 $ 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
(Dollars in Thousands, Except Per Share Amounts)
May 1, April 25, October 31,
1998 1997 1997
---------- ---------- ----------
(Unaudited) (Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ 93,370 $ 67,271 $ 71,720
Trade accounts payable 111,237 91,392 96,676
Income taxes 3,670 7,555 1,083
Accrued liabilities 93,773 72,883 89,660
Current portion of long-term debt 734 273 281
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 302,784 239,374 259,420
LONG TERM DEBT 123,895 37,084 35,844
DEFERRED LIABILITIES 23,004 19,909 25,141
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 23,546 16,595 17,758
Retained earnings 333,061 280,496 313,485
Other (1,859) 1,014 (1,850)
---------- ---------- ----------
381,408 324,765 356,053
Less cost of common stock in treasury
(5/1/98-9,485,529 shares; 4/25/97-
9,532,590 shares; 10/31/97-9,642,341
shares) 62,993 57,422 60,988
---------- ---------- ----------
318,415 267,343 295,065
---------- ---------- ----------
$ 768,098 $ 563,710 $ 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 SIX MONTHS
ENDED ENDED
--------------------------------------------------------
May 1, April 25, May 1, April 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales $ 292,462 $ 252,768 $ 517,821 $ 442,056
Costs and expenses:
Cost of sales 202,421 169,959 364,066 305,809
Research and development 9,977 10,043 19,235 18,272
Selling & administration 45,990 43,178 84,396 75,017
Interest expense 2,360 1,309 4,245 1,916
Other income - net 1,538 311 2,198 810
----------- ----------- ----------- -----------
Income before income taxes 33,252 28,590 48,077 41,852
Income taxes 13,301 11,487 19,231 16,821
----------- ----------- ----------- -----------
Net income $ 19,951 $ 17,103 $ 28,846 $ 25,031
=========== =========== =========== ===========
Net income per common share -
basic $ 0.46 $ 0.39 $ 0.66 $ 0.57
=========== =========== =========== ===========
Net income per common share -
diluted $ 0.45 $ 0.39 $ 0.65 $ 0.57
=========== =========== =========== ===========
Average number of common shares
outstanding - basic 43,529,865 43,547,428 43,466,904 43,537,814
=========== =========== =========== ===========
- diluted 44,458,508 44,250,630 44,301,078 44,238,690
=========== =========== =========== ===========
Dividends paid per common share $ 0.105 $ 0.09 $ 0.21 $ 0.18
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
SIX MONTHS ENDED
-----------------------
May 1, April 25,
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net income $ 28,846 $ 25,031
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,755 11,919
Increase (decrease) in cash due to changes in
net operating assets, net of effects of acquired
businesses:
Accounts and notes receivable (13,626) (16,807)
Inventories and other assets (30,935) (27,587)
Trade accounts payable and
accrued liabilities 12,500 8,646
Income taxes payable 3,733 (568)
Other deferred liabilities (3,046) 173
Other (4,668) (3,862)
--------- ---------
Net Cash Provided By/(Used In) Operating Activities 7,559 (3,055)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,582) (18,531)
Acquired businesses/assets, net of cash (56,446) (24,299)
Other investments/advances to joint ventures (10,630) 4,808
--------- ---------
Net Cash Used In Investing Activities (89,658) (38,022)
FINANCING ACTIVITIES:
Net proceeds from borrowing 97,914 57,727
Proceeds from sale of treasury stock 1,007 1,071
Purchase of shares of Common Stock for treasury (1,146) (8,826)
Dividends paid (9,270) (7,886)
--------- ---------
Net Cash Provided by Financing Activities 88,505 42,086
Increase In Cash and Cash Equivalents 6,406 1,009
Cash and Cash Equivalents at Beginning of Period 11,113 7,112
--------- ---------
Cash and Cash Equivalents at End of Period $ 17,519 $ 8,121
========= =========
See Notes to Condensed Consolidated Financial Statements.
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 1, 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 and six month
periods ended May 1, 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,
principally from stock options. The potential dilution from the exercise of
stock options was not material for the second quarter or first six months of
1997 or 1998.
NOTE 3: Trade accounts payable include $18.4 million at May 1, 1998 and $15.3
million at April 25, 1997 of issued checks which had not cleared the Company's
bank accounts.
NOTE 4: 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 or six month periods ended May
1, 1998.
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 will be accounted for as a purchase. Accordingly, the
net assets and operating results will be included in the Company's financial
statements from the date of acquisition. Due to the timing and structure of the
transaction, there was no material impact on the earnings or financial position
of the Company for the current reporting periods.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Acquisitions & 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. This transaction was not material to the
results of operations reported for the three or six month periods ended
May 1, 1998.
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 will be accounted for as a
purchase. Accordingly, the net assets and operating results will be
included in the Company's financial statements from the date of
acquisition. Due to the timing and structure of the transaction, there
was no material impact in the earnings or financial position of the
Company for the current reporting periods.
The following discussion of operations is affected by the acquisition of
Plasti-Kote Co., Inc. and 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 occurred during fiscal 1997 and the first six
months of fiscal 1998.
Operations: Net sales increased 15.7% to $292,462,000 and 17.1% to
$517,821,000 for the three and six month periods ended May 1, 1998,
respectively, over net sales for the comparable periods one year ago.
Excluding the results of acquisitions and divestitures, net sales
increased 13.7% for the three month period and 13.2% for the six month
period. The second quarter and year to date increases were primarily
driven by volume increases in the Consumer Group, Industrial Group and
in certain business lines within the Special Products Group. Due to the
seasonal nature of the Company's business, sales for the quarter and six
month periods are not necessarily indicative of sales for the full year.
The gross profit margin declined from 32.8% to 30.8% during the second
quarter and from 30.8% to 29.7% for the first six months from the
comparable periods last year. The decreases were primarily the result of
an increase in raw material costs from the comparable periods in the
prior year. 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.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Operating expenses (research and development, selling, and
administrative) increased 5.2% to $55,967,000 (19.1% of net sales) in
the second quarter of 1998 compared with $53,221,000 (21.1% of net
sales) in the second quarter of 1997. Year to date, operating expenses
increased 11.1% to $103,631,000 (20.0% of net sales) compared with
$93,289,000 (21.1% of net sales) for the same period last year.
Excluding the results of acquisitions and divestitures, operating
expenses increased 5.7% for the quarter and 10.2% year to date. The
expense increase was primarily the result of additional advertising and
promotional costs for large Consumer Group customers, additional selling
expenses in all business groups, and higher information systems
expenditures as the Company continues to replace its existing systems.
Net income in the second quarter of 1998 increased 16.7% to $19,951,000,
or $0.45 per diluted share from the second quarter of 1997. Year to
date, net income increased 15.2% to $28,846,000, or $0.65 per diluted
share from the prior year. Both increases were primarily driven by
higher sales levels and improved operating expense control.
Financial Condition: The net cash provided by the Company's operations
was $7,559,000 for the first six months of 1998, compared with cash used
in operations of $3,055,000 for the first six months of 1997. The
additional cash provided by operations was the result of higher net
income and a decrease in net working capital requirements. The cash
provided by operating activities combined with $97,914,000 in proceeds
from bank borrowings were used to fund $67,076,000 of acquisition and
joint venture investments, $22,582,000 of capital expenditures,
$1,146,000 in payments for share repurchases, and $9,270,000 in dividend
payments. Cash balances increased $6,406,000 during the first six months
of 1998.
During the first six months of 1998, accounts receivable increased
$13,626,000 as sales volume increased. Inventory and other assets
increased $30,935,000 as the businesses, primarily the Consumer Group,
increased production for seasonal sales. Accounts payable and accrued
liabilities increased $12,500,000, primarily as a result of the increase
in inventories.
Capital expenditures for property, plant, and equipment were $22,582,000
in the first six months of 1998, compared with $18,531,000 in the first
six months of 1997. The increase in capital expenditures in 1998 was
primarily due to production capacity expansion projects for the Consumer
and resin businesses. Aside from these projects, capital spending was
distributed among the four business groups with no other major single
expenditure.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
The Company's total debt to capital ratio increased to 40.6% at the end
of the second quarter from 26.7% at the close of fiscal 1997. The total
debt to capital ratio as of April 25, 1997 was 28.1%. 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; their 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 its
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 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 pending legal proceedings that were previously
reported on the Company's Form 10-K for the year ended October 31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders was held at the Research Center of
the Corporation at 312 South 11th Avenue, Minneapolis, Minnesota, on
February 25, 1998. The stockholders took the following actions: (i) The
stockholders elected three directors to serve for three-year terms. The
stockholders present in person or by proxy cast the following numbers of
votes in connection with the election of directors, resulting in the
election of all nominees:
Votes For Votes Withheld
--------- --------------
Kendrick B. Melrose 38,752,439 1,787,913
Gregory R. Palen 40,436,006 104,346
Lawrence Perlman 40,411,777 128,575
(ii) The stockholders approved the Corporation's Stock Option Plan for
Non-Employee Directors. 39,213,140 votes were cast for the resolution;
1,119,392 votes were cast against the resolution; 207,820 votes
abstained; and there were no broker non-votes.
(iii) The stockholders ratified the appointment of Ernst & Young LLP as
the Company's independent auditors for fiscal 1998. 40,314,603 votes
were cast for the resolution; 173,461 votes were cast against the
resolution; shares representing 52,288 votes abstained; and there were
no broker non-votes.
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 May 1, 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: June 15, 1998 By /s/ R. Engh
-------------------------
R. Engh
Secretary
Date: June 15, 1998 By /s/ P. C. Reyelts
-------------------------
P. C. Reyelts
Vice President, Finance
(Chief Financial Officer)