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 26, 2002 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 28, 2002, The Valspar Corporation had 50,095,809 shares of common
stock outstanding, excluding 10,125,503 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 July 26, 2002
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 26, 2002,
July 27, 2001 and October 26, 2001.......................... 2 - 3
Condensed Consolidated Statements of Income - Three months
and nine months ended July 26, 2002 and July 27, 2001....... 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended July 26, 2002 and July 27, 2001................ 5
Notes to Condensed Consolidated Financial Statements -
July 26, 2002 .............................................. 6 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11 - 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk .... 13
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
SIGNATURES/CERTIFICATIONS............................................... 15 - 16
- -------------------------
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
July 26, 2002 July 27, 2001 October 26, 2001
------------- ------------- ----------------
(Unaudited) (Unaudited) (Note)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 19,226 $ 23,746 $ 20,139
Accounts receivable less allowance
(7/26/02 - $14,944; 7/27/01 - $7,490;
10/26/01 - $10,212) 401,460 384,143 341,383
Inventories:
Manufactured products 132,686 135,070 114,967
Raw materials, supplies and work-in-
process 79,435 58,407 70,598
------------ ------------ ------------
212,121 193,477 185,565
Deferred income taxes 40,345 21,121 40,547
Prepaid expenses and other accounts 79,892 75,493 73,860
------------ ------------ ------------
TOTAL CURRENT ASSETS 753,044 697,980 661,494
GOODWILL, NET 941,465 1,028,590 1,056,628
INTANGIBLES, NET 299,316 31,185 30,212
OTHER ASSETS, NET 55,860 78,560 66,557
PROPERTY, PLANT AND EQUIPMENT 633,047 707,762 700,998
Less allowance for depreciation (243,747) (284,862) (289,819)
------------ ------------ ------------
389,300 422,900 411,179
------------ ------------ ------------
$ 2,438,985 $ 2,259,215 $ 2,226,070
============ ============ ============
Note: The Balance Sheet at October 26, 2001 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
-3-
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS)
July 26, 2002 July 27, 2001 October 26, 2001
------------- ------------- ----------------
(Unaudited) (Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 30,311 $ 17,456 $ 41,600
Trade accounts payable 208,865 205,884 174,844
Income taxes 45,360 44,380 23,328
Accrued liabilities 242,131 183,155 235,295
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 526,667 450,875 475,067
LONG TERM DEBT 956,666 1,098,113 1,006,217
DEFERRED INCOME TAXES 167,971 22,378 60,012
DEFERRED LIABILITIES 61,351 32,220 30,209
STOCKHOLDERS' EQUITY:
Common Stock (Par value - $.50; Authorized -
120,000,000 shares; Shares issued, including
shares in treasury - 60,221,312 shares) 30,110 30,110 30,110
Additional paid-in capital 229,928 216,460 216,756
Retained earnings 583,520 526,989 522,805
Other (8,989) (4,244) (1,551)
------------ ------------ ------------
834,569 769,315 768,120
Less cost of common stock in treasury
(7/26/02-10,128,506 shares; 7/27/01 -
10,759,797 shares; 10/26/01-10,739,685
shares) 108,239 113,686 113,555
------------ ------------ ------------
726,330 655,629 654,565
------------ ------------ ------------
$ 2,438,985 $ 2,259,215 $ 2,226,070
============ ============ ============
Note: The Balance Sheet at October 26, 2001 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
-4-
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
July 26, July 27, July 26, July 27,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 575,043 $ 544,888 $ 1,560,085 $ 1,395,613
Costs and expenses:
Cost of sales 385,156 374,496 1,053,301 969,787
Research and development 15,462 15,797 47,831 43,561
Selling and administration 97,152 91,333 280,223 238,611
------------ ------------ ------------ ------------
Income from Operations 77,273 63,262 178,730 143,654
Interest expense 13,016 19,368 36,293 57,289
Other (income)/expense - net 1,358 (93) 1,616 (1,129)
------------ ------------ ------------ ------------
Income before income taxes 62,899 43,987 140,821 87,494
Income taxes 24,845 18,485 55,625 38,498
------------ ------------ ------------ ------------
Net income $ 38,054 $ 25,502 $ 85,196 $ 48,996
============ ============ ============ ============
Net income per common share - basic $ 0.76 $ 0.52 $ 1.71 $ 1.09
============ ============ ============ ============
Net income per common share - diluted $ 0.74 $ 0.51 $ 1.66 $ 1.08
============ ============ ============ ============
Average number of common shares
outstanding - basic 49,946,161 49,453,561 49,785,690 44,935,038
============ ============ ============ ============
- diluted 51,526,402 50,201,842 51,186,179 45,348,308
============ ============ ============ ============
Dividends paid per common share $ 0.140 $ 0.135 $ 0.420 $ 0.405
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
-5-
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
July 26, 2002 July 27, 2001
------------- -------------
OPERATING ACTIVITIES:
Net income $ 85,196 $ 48,996
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 32,904 32,667
Amortization 3,759 21,021
Gains on sales of assets 0 (736)
Changes in certain assets and liabilities, net of effects of
acquired businesses:
(Increase) in accounts and notes receivable (51,369) (22,042)
Decrease (increase) in inventories and prepaid assets (30,250) 3,074
Increase (decrease) in trade accounts payable and
accrued liabilities 65,920 (8,100)
Increase in income taxes payable 22,032 29,345
Decrease in other deferred liabilities (1,541) (489)
Other 1,724 1,496
------------ ------------
Net Cash Provided By Operating Activities 128,375 105,232
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (25,739) (22,984)
Acquired businesses/assets, net of cash (22,870) (807,042)
Divested businesses/assets 0 7,268
------------ ------------
Net Cash Used In Investing Activities (48,609) (822,758)
FINANCING ACTIVITIES:
Net proceeds (payments) from borrowings (71,523) 736,494
Proceeds from sale of treasury stock 11,793 2,012
Dividends paid (20,949) (18,169)
------------ ------------
Net Cash (Used in)/Provided by Financing Activities (80,679) 720,337
Increase/(Decrease) In Cash and Cash Equivalents (913) 2,811
Cash and Cash Equivalents at Beginning of Period 20,139 20,935
------------ ------------
Cash and Cash Equivalents at End of Period $ 19,226 $ 23,746
============ ============
See Notes to Condensed Consolidated Financial Statements.
-6-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 26, 2002
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 26,
2002 are not necessarily indicative of the results that may be expected for the
year ending October 25, 2002. 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 26, 2001.
NOTE 2: ACCOUNTS PAYABLE
- ------
Trade accounts payable include $51.3 million at July 26, 2002, $24.5 million at
October 26, 2001 and $31.5 million at July 27, 2001 of issued checks which had
not cleared the Company's bank accounts.
NOTE 3: ACQUISITIONS AND DIVESTITURES
- ------
In March 2002, Valspar purchased from its joint venture partner the remaining
20% interest in Dyflex B.V., a resin manufacturer in the Netherlands. 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 have not been presented as the impact on reported results is not
material.
In December 2001, the Valspar Renner joint venture acquired a plant from Renner
Herrmann S.A. (a Brazilian company), and in January 2002, the Company acquired
the remaining 50% interest in the Valspar Renner joint venture. Valspar Renner
supplies packaging coatings and metal decorating inks to the South American
market. Revenues for the joint venture were $17 million in 2001. 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 have
not been presented as the impact on reported results is not material.
Effective November 30, 2001, Valspar acquired the coil, spray-applied door, and
rigid packaging coatings businesses of Technical Coatings Co., a subsidiary of
Benjamin Moore and Co. Revenues for these businesses were $25 million in 2001.
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 have not been presented as the impact on reported results is not
material.
-7-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 26, 2002 - CONTINUED
Effective July 31, 2001, Valspar acquired the packaging coatings business of
Coates Brothers in Singapore, Malaysia, Indonesia and Thailand. Revenues for
these businesses were $7 million in 2000. 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 have not been presented as the
impact on reported results is not material.
Effective December 20, 2000, the Company acquired all outstanding Class A and
Class B stock of Lilly Industries, Inc. for $31.75 per share in cash. Total
consideration paid was approximately $1,036 million, including the assumption of
debt of approximately $218 million. Lilly Industries was one of the five largest
industrial coatings and specialty chemicals manufacturers in North America with
reported sales of $656.2 million for the year ended November 30, 1999, and
$669.7 million for the year ended November 30, 2000. Lilly Industries
formulates, manufactures and markets industrial coatings and specialty chemicals
to original equipment manufacturers for products such as home and office
furniture, cabinets, appliances, building products, transportation and
agricultural and construction equipment. 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
following unaudited pro forma combined summary statement of income information
for the nine month period ended July 27, 2001 was prepared in accordance with
Statement of Financial Accounting Standards No. 141 (SFAS 141) "Business
Combinations" and assumes the acquisition had occurred at the beginning of the
period presented. The following pro forma data reflects adjustments for interest
expense and amortization of goodwill. The unaudited pro forma financial
information is provided for informational purposes only and does not purport to
be indicative of the future results of the Company.
UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
(Thousands of dollars, Nine months ended
except per share data) July 27, 2001
-------------
Net sales $1,493,111
Net income 59,052
Net income per share-basic 1.31
Net income per share-diluted 1.30
During the first quarter of fiscal 2001, the Company completed the sale of its
existing mirror coatings businesses as a condition of Federal Trade Commission
approval for the Lilly Industries acquisition. This product line had revenues of
approximately $12 million for the year ended October 27, 2000. The pro forma
results of operations for this divestiture have not been presented as the impact
on reported results is not material.
-8-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 26, 2002 - CONTINUED
In November 2000, the Company acquired the 49% interest in The Valspar (Mexico)
Corporation, S.A. de C.V. held by its joint venture partner. The business, now
known as Valspar Mexicana, has operations in Mexico City and Monterrey and
produces Industrial and Packaging coatings. 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 have not been presented as the
impact on reported results is not material.
NOTE 4: OTHER COMPREHENSIVE INCOME
- ------
The Company's components of Shareholders' Equity relating to cumulative other
comprehensive income/(loss) consist of foreign currency translation adjustments
of ($5,284,000), $1,468,000 and ($1,157,000) as of July 26, 2002, October 26,
2001, and July 27, 2001, respectively. Additionally there is a $2,248,000 pretax
adjustment to Shareholders' Equity to reflect the decline in fair value relating
to interest rate swaps as of July 26, 2002 (see additional information in Note
8, Financial Instruments).
NOTE 5: SEGMENT INFORMATION
- -------
The Company operates its business in one reportable segment: Coatings. The
Company manufactures and distributes a broad portfolio of coatings products
principally in three product lines. The Architectural, Automotive and Specialty
(AAS) product line includes interior and exterior decorative paints and
aerosols, automotive and fleet refinish and high performance floor coatings. The
Packaging product line includes coatings and inks for rigid packaging
containers. The Industrial product line includes decorative and protective
coatings for wood, metal and plastic substrates. The Other category includes
primarily resins, colorants and composites. The resins and colorants are used
internally and sold to other coatings manufacturers.
Net sales by product line are as follows:
(Dollars in
thousands) Three Months Ended Nine Months Ended
------------------------------ ------------------------------
July 26, 2002 July 27, 2001 July 26, 2002 July 27, 2001
------------- ------------- ------------- -------------
Industrial $ 225,943 $ 216,478 $ 629,688 $ 538,313
Packaging 126,642 112,650 356,372 341,909
AAS 184,570 180,199 473,622 421,378
Other 37,888 35,561 100,403 94,013
---------- ---------- ---------- ----------
$ 575,043 $ 544,888 $1,560,085 $1,395,613
-9-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 26, 2002 - CONTINUED
NOTE 6: RESTRUCTURING
- ------
In September 2001, the Company's Board of Directors approved and the Company
initiated actions to eliminate redundant facilities and functions resulting from
the Lilly Industries acquisition in order to accelerate performance improvement.
These actions resulted in the Company recording aggregate pre-tax charges of
$39.3 million during the fourth quarter of fiscal 2001. The charges include
$21.9 million classified as restructuring and $17.4 million of inventory and
other asset write-downs classified as cost of sales. Through July 26, 2002, the
Company has paid or incurred $34.1 million of the $39.3 million charge. The
Company anticipates that substantially all of the remaining restructuring costs
will be paid by October 25, 2002.
(In thousands) Incurred through Balance
Total Charge July 26, 2002 July 26, 2002
------------ ------------- -------------
Severance costs $ 8,384 $ 7,228 $ 1,156
Exit and termination costs 2,049 2,017 32
Property, plant and equipment 11,497 10,253 1,244
Inventory and other assets 17,370 14,554 2,816
---------- ---------- ----------
$ 39,300 $ 34,052 $ 5,248
These plans contemplated a worldwide workforce reduction of 350 people or five
percent of the total workforce. As of July 26, 2002, 339 employees have been
terminated and six of the seven full plant closures/consolidations have
occurred.
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
- -------
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Statement 141 requires that the purchase
method of accounting be used for all business combinations after June 30, 2001.
Statement 142 prohibits the amortization of goodwill and intangible assets with
indefinite useful lives. Statement 142 requires these assets be reviewed for
impairment at least annually. Intangible assets with finite lives will continue
to be amortized over their estimated useful lives.
Effective October 27, 2001, the Company adopted SFAS 142, which requires
goodwill and indefinite lived intangible assets be tested for impairment at the
reporting unit level at adoption and at least annually thereafter. An impairment
charge is recognized only when the calculated fair value of a reporting unit,
including goodwill, is less than its carrying amount. In accordance with SFAS
142, the Company completed the required transitional impairment tests of
goodwill and indefinite lived intangible assets and determined the fair value to
be in excess of the carrying value of these assets.
-10-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 26, 2002 - CONTINUED
As required by SFAS 142, the Company continues to amortize intangibles with
finite lives. Included in intangibles assets are patents, trademarks,
tradenames, customer lists and technology.
A reconciliation of reported net income adjusted to reflect the adoption of SFAS
142 is provided below:
(In thousands) Three Months Ended Nine Months Ended
------------------ -----------------
July 26, July 27, July 26, July 27,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Reported net income $ 38,054 $ 25,502 $ 85,196 $ 48,996
Add-back goodwill and indefinite
lived intangible asset amortization,
net of tax -- 5,930 -- 14,510
---------- ---------- ---------- ----------
Adjusted net income $ 38,054 $ 31,432 $ 85,196 $ 63,506
Reported basic earnings per share $ 0.76 $ 0.52 $ 1.71 $ 1.09
Add-back goodwill and indefinite
lived intangible asset amortization, -- 0.12 -- 0.32
---------- ---------- ---------- ----------
Adjusted basic earnings per share $ 0.76 $ 0.64 $ 1.71 $ 1.41
Reported diluted earnings per share $ 0.74 $ 0.51 $ 1.66 $ 1.08
Add-back goodwill and indefinite
lived intangible asset amortization -- 0.12 -- 0.32
---------- ---------- ---------- ----------
Adjusted diluted earnings per share $ 0.74 $ 0.63 $ 1.66 $ 1.40
NOTE 8: FINANCIAL INSTRUMENTS
- -------
The Company's involvement with derivative financial instruments is limited to
managing well-defined interest rate and foreign currency exchange risks. Forward
foreign currency exchange contracts are used to hedge the impact of currency
fluctuations on certain intercompany transactions. The Company also holds
interest rate swaps used to manage the interest rate risk associated with its
borrowings and to manage the Company's mix of fixed and variable rate debt. The
Company has "fixed to floating" fair value interest rate swaps and "floating to
fixed" cash flow interest rate swaps. These swaps were entered into and are
designated and qualified as hedges of certain of the Company's debt. As the
critical terms of the interest rate swap and hedged debt match, there is an
assumption of no ineffectiveness for these hedges.
As of July 26, 2002, the Company's total lines of credit were $1,247 million,
with $725 million available under the lines of credit.
-11-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 26, 2002 - CONTINUED
NOTE 9: NEW ACCOUNTING STANDARDS
- ------
Effective October 27, 2001, the Company adopted Statement of Financial
Accounting Standard No. 144 (SFAS 144), "Accounting for the Impairment and
Disposal of Long-Lived Assets." The adoption of this standard did not have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.
Effective October 27, 2001, the Company adopted Statement of Financial
Accounting Standard No. 141 (SFAS 141), "Business Combinations" and Statement of
Financial Accounting Standard No. 142 (SFAS 142) "Goodwill and Other Intangible
Assets." See Note 7. Application of the non-amortization provisions of Statement
142 is expected to result in an annual increase to earnings of approximately
$.36 per share, assuming outstanding shares of 50,200,000.
NOTE 10: RECLASSIFICATION
- -------
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operations: Net sales for the quarter increased 5.5% to $575,043,000 from
$544,888,000 in 2001. For the nine month period net sales increased 11.8% to
$1,560,085,000 from $1,395,613,000. Core business growth was up 4.0% for the
quarter and 4.3% for the nine month period. The quarter sales increase was
attributable to growth in all of our major product lines. Due to the seasonal
nature of the Company's business, sales for the third quarter and nine month
period are not necessarily indicative of sales for the full year.
The gross profit margin increased to 33.0% from 31.3% in the third quarter of
2002 and to 32.5% from 30.5% for the first nine months from the comparable
periods last year. The increase in gross margin reflects lower raw material
costs and continued benefits from manufacturing integration.
Operating expenses (research and development, selling and administrative)
increased 5.1% to $112,614,000 (19.6% of net sales) in the third quarter of 2002
compared to $107,130,000 (19.7% of net sales) in 2001. Year to date operating
expenses increased 16.3% to $328,054,000 (21.0% of net sales) compared with
$282,172,000 (20.2% of net sales) for the same period last year. Operating
expenses in the third quarter of 2002 increased 1.4 percentage points over third
quarter 2001 after adjusting third quarter 2001 for the benefit of early
adoption of SFAS 142. This increase was primarily attributable to variable
incentive compensation and increased bad debt accruals.
-12-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Interest expense during the third quarter of 2002 decreased to $13,016,000 from
$19,368,000 in 2001. Year to date interest expense decreased to $36,293,000 from
$57,289,000 in the prior year. The decreases in both periods are due to lower
debt levels and reduced interest rates as compared to the previous year. In
April 2002, the Company completed the issuance of $350 million five-year bonds
at a 6% interest rate. Net proceeds were used to reduce floating rate bank
borrowings, and as a result the notes payable to banks and long-term debt under
the revolving credit line decreased $83.2 million and $263.0 million,
respectively. As a result, third quarter interest expense increased by
approximately $2 million compared to the second quarter of 2002.
The effective tax rate decreased to 39.5% resulting from the reduction of
non-deductible goodwill amortization following the adoption of SFAS 142.
Net income in the third quarter of 2002 increased 49.2% to $38,054,000 or $.74
per diluted share. On a comparable year over year basis (adjusted for adoption
of SFAS 142), diluted earnings per share increased 17.5%. Year to date net
income increased 73.9% to $85,196,000 or diluted earnings per share of $1.66. On
a comparable year over year basis (adjusted for adoption of SFAS 142 and higher
shares outstanding due to the April 2001 equity offering), diluted earnings per
share increased 31.2%.
Financial Condition: The net cash provided by the Company's operations was
$128,375,000 for the first nine months of 2002, compared with $105,232,000 for
the first nine months of 2001. During the first nine months of 2002, the cash
provided by operating activities and current cash balances were used to fund
$71,523,000 in repayment of bank borrowings, $22,870,000 in acquisition
investments, $25,739,000 in capital expenditures and $20,949,000 in dividend
payments.
Accounts receivable increased $51,369,000 as a result of increased sales in all
of our major product lines, primarily Architectural coatings. Inventories and
other assets increased $30,250,000 as a result of seasonality in Architectural
coatings sales. Accounts payable and accrued liabilities increased $65,920,000,
primarily as a result of increased inventory levels and the timing of payables
and accrued liability disbursements.
Capital expenditures for property, plant and equipment were $25,739,000 in the
first nine months of 2002, compared with $22,984,000 in the first nine months of
2001.
The ratio of total debt to capital decreased to 57.6% at the end of the third
quarter of 2002 from 61.6% at the close of fiscal 2001. The total debt to
capital ratio as of July 27, 2001 was 63.0%. The Company believes its existing
lines of credit, access to credit facilities, and access to debt and capital
markets will be sufficient to meet its current and projected needs for
financing.
-13-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Forward Looking Statements: This discussion contains certain "forward-looking"
statements. These forward-looking statements are based on management's
expectations and beliefs concerning future events. Forward-looking statements
are 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
risks related to the Company's acquisitions, including risks of adverse changes
in the results of acquired businesses; risks of disruptions in business
resulting from the integration process; and significantly higher levels of debt
for the Company resulting in higher interest costs. The Company also faces
general risks and uncertainties, such 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; 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
sales; changes in raw materials pricing and availability; changes in
governmental regulation, including more stringent environmental, health, and
safety regulations; the nature, cost and outcome of pending and future
litigation and other legal proceedings; the outbreak of war and other
significant national and international events; 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:
Market Risk. The Company's foreign sales and results of operations are subject
to the impact of foreign currency fluctuations. The Company has not hedged its
exposure to translation gains and losses; however, it has reduced its exposure
by borrowing funds in local currencies. A 10% adverse change in foreign currency
rates would not have a material effect on the Company's results of operations or
financial position.
The Company is also subject to interest rate risk. At July 26, 2002,
approximately 50% of the Company's total debt consisted of floating rate debt
after taking into account interest rate swaps entered into during the second
quarter as well as the 6% notes due May 1, 2007 which were priced on April 25,
2002 and settled on April 30, 2002. If interest rates were to increase 10% from
the rates in effect on July 26, 2002, assuming no change in debt balances, the
additional interest expense would be approximately $500,000 higher on a pre-tax
basis during the fourth quarter of the fiscal year.
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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 26, 2001.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C.ss.1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C.ss.1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) The registrant did not file any reports on Form 8-K during the
three months ended July 26, 2002.
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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: September 9, 2002 By /s/ R. Engh
-------------------------------
R. Engh
Secretary
Date: September 9, 2002 By /s/ P. C. Reyelts
-------------------------------
P. C. Reyelts
Senior Vice President, Finance
(Chief Financial Officer)
CERTIFICATIONS
I, Richard M. Rompala, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Valspar
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 9, 2002
/s/ Richard M. Rompala
------------------------------------
Richard M. Rompala
Chief Executive Officer
I, Paul C. Reyelts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Valspar
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
-16-
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 9, 2002
/s/ Paul C. Reyelts
------------------------------------
Paul C. Reyelts
Chief Financial Officer