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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

THE VALSPAR CORPORATION

Principal Executive Offices:

1101 Third Street South
Minneapolis, MN 55415

Telephone Number: 612/332-7371

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.   x Yes    o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).   x Yes    o No

As of June 1, 2004, The Valspar Corporation had 51,313,392 shares of common stock outstanding, excluding 8,907,920 shares held in treasury. The Company had no other classes of stock outstanding.

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THE VALSPAR CORPORATION

Index to Form 10-Q
for the Quarter Ended April 30, 2004

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PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

THE VALSPAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)

NOTE:   The Balance Sheet at October 31, 2003 has been derived from the audited consolidated financial statements at that date.

See Notes to Condensed Consolidated Financial Statements

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THE VALSPAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS — CONTINUED
(DOLLARS IN THOUSANDS)

NOTE:   The Balance Sheet at October 31, 2003 has been derived from the audited consolidated financial statements at that date.

See Notes to Condensed Consolidated Financial Statements

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THE VALSPAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

See Notes to Condensed Consolidated Financial Statements.

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THE VALSPAR CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)

See Notes to Condensed Consolidated Financial Statements

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004

NOTE 1:   BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of The Valspar Corporation (“the Company”) have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 ended April 30, 2004 are not necessarily indicative of the results that may be expected for the year ending October 29, 2004.

The Condensed Consolidated Balance Sheet at October 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

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, 2003.

NOTE 2:   ACCOUNTS PAYABLE

Trade accounts payable include $35.2 million at April 30, 2004, $18.9 million at October 31, 2003 and $34.6 million at April 25, 2003 of issued checks that had not cleared the Company’s bank accounts.

NOTE 3:   ACQUISITIONS AND DIVESTITURES

In January 2004, the Company acquired De Beer Lakfabrieken B.V., a manufacturer and distributor of automotive refinish coatings based in The Netherlands. De Beer’s revenue for calendar year 2003 was approximately 39 million Euros (approximately $50 million at time of acquisition). This transaction was accounted for as a purchase. Accordingly, the net assets and operating results have been included in the Company’s balance sheet from the date of acquisition. The pro forma results of operations for this acquisition have not been presented as the impact on reported results was not material.

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004 – CONTINUED

NOTE 4:   COMPREHENSIVE INCOME

For the three and six months ended April 30, 2004 and April 25, 2003, Comprehensive income was as follows:

NOTE 5:   GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill for the quarter ended April 30, 2004 increased from the end of fiscal 2003 by $42.3 million to $1.0 billion. The majority of the increase is due to the De Beer acquisition ($35.6 million) and the remaining difference is attributable to foreign currency translation. The purchase price allocation is preliminary and is subject to change upon completion of the valuation.

Total intangible amortization expense for the six months ended April 30, 2004 was $2.3 million, which is comparable to the prior year. Estimated amortization expense for each of the five succeeding fiscal years based on the intangible assets as of April 30, 2004 is expected to be approximately $4.5 million annually.

NOTE 6:   SEGMENT INFORMATION

In accordance with Statement of Financial Accounting Standards No. 131 (SFAS 131), “Disclosures about Segments of an Enterprise and Related Information,” and based on the nature of the Company’s products, technology, manufacturing processes, customers, and regulatory environment, the Company has determined that it operates its business in two reportable segments: Paints and Coatings.

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004 – CONTINUED

SFAS 131 requires an enterprise to report segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources. The Company evaluates the performances of operating segments and allocates resources based on profit or loss from operations before interest expense and taxes.

The Paints segment includes the products from the Architectural, Automotive and Specialty (AAS) product line. AAS products include interior and exterior decorative paints, primers, varnishes and specialty decorative products, such as enamels, aerosols, and faux finishes for the do-it-yourself and professional markets in North America. Other AAS products include automotive refinish paints and high performance floor paints.

The Coatings segment includes the products from the Industrial and Packaging product lines. Industrial products include a broad range of decorative and protective coatings for metal, wood, plastic and glass. Packaging products include both interior and exterior coatings used in rigid packaging containers, principally food containers and beverage cans. The products of this segment are sold throughout the world.

The Company’s remaining activities are included in All Other. These activities include specialty polymers and colorants that are used internally and sold to other coatings manufacturers, as well as composites (gelcoats and related products) and furniture protection plans. Also, included within All Other are the administrative expenses of the Company’s corporate headquarters site. The Administrative expenses include interest and amortization expense, certain environmental-related expenses and other expenses not directly allocated to any other operating segment.

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004 – CONTINUED

In the following table, sales between segments are recorded at selling prices that are below market prices, generally intended to recover internal costs. Segment operating profit includes income realized on inter-segment sales. Comparative results for the three and six months ended April 30, 2004 and April 25, 2003 on this basis are as follows:

NOTE 7:   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 primarily to hedge the impact of currency fluctuations on certain inter-company transactions.

The Company also holds interest rate swaps used to manage the interest rate risk associated with its borrowings. The interest rate swap contracts are reflected at fair value in the condensed consolidated balance sheets. Amounts to be paid or received under the contracts are accrued as interest rates change and are recognized over the life of the contracts as an adjustment to interest expense.

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004 – CONTINUED

At April 30, 2004, the Company had a $100 million notional amount interest rate swap contract designated as a cash flow hedge to pay fixed rates of interest and receive variable rates of interest based on three-month LIBOR. This contract started in this fiscal year and matures during fiscal 2008. Additionally, the Company had a $100 million notional amount interest rate swap contract designated as a fair value hedge to pay floating rates of interest based on three-month LIBOR, maturing during fiscal 2008. As the critical terms of the interest rate swaps and hedged debt match, there is an assumption of no ineffectiveness for these hedges.

The Company currently does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

NOTE 8:   GUARANTEES AND CONTRACTUAL OBLIGATIONS

The Company sells extended furniture protection plans and offers warranties for certain of its products. For the furniture protection plans, revenue is deferred over the contract period, generally five years, and is recognized based on the ratio of costs incurred to estimated total costs at program completion. For product warranties, the Company estimates the costs that may be incurred under these warranties based on historical claim data and records a liability in the amount of such costs at the time revenue is recognized. The Company periodically assesses the adequacy of these recorded amounts and adjusts as necessary.

Changes in the recorded amounts during the period are as follows (dollars in thousands):

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004 – CONTINUED

NOTE 9:   STOCK PLANS

Under the Company’s Stock Option Plans, options for the purchase of up to 10,000,000 shares of common stock may be granted to officers, employees, and non-employee directors. Options are issued at market value at the date of grant and are exercisable in full or in part over a prescribed period of time. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation is reflected in income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 2004 – CONTINUED

NOTE 10:   PENSION AND OTHER POSTRETIREMENT BENEFITS

The company sponsors a number of defined benefit pension plans for certain hourly, salaried and foreign employees. The benefits for these plans are generally based on stated amounts for each year of service. The Company funds the plans in amounts consistent with the limits of allowable tax deductions.

The cost of the pension benefits is as follows:

NOTE 11:   RECLASSIFICATION

Certain amounts in the 2003 financial statements have been reclassified to conform with the 2004 presentation.

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ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies:

There were no material changes in the Company’s critical accounting policies during the quarter and six months ended April 30, 2004.

Operations:   Consolidated net sales increased 13.6 percent for the quarter to $638.4 million from $561.8 million in the prior year. Excluding the positive effect of foreign currency exchange and acquisitions, net sales increased 8.1 percent in the quarter. Consolidated net sales increased 10.6 percent for the six month period to $1,140.0 million from $1,030.7 million in the prior year. Excluding the positive effect of foreign currency exchange and acquisitions, net sales increased 5.9 percent in the six month period. Net sales of the Paints segment increased 19.1 percent to $223.8 million in the quarter compared to the prior year. Year to date net sales in the Paints segment increased 16.7 percent to $368.7 from the prior year. Net sales growth before acquisitions for the Paints segment is 12.8 percent and 13.0 percent, for the second quarter and year to date, respectively. Strong sales to large home improvement retailers contributed to the year over year increases, net of acquisitions, in both the quarter and the six month period. Foreign currency exchange fluctuation had an immaterial effect on the reported results of the Paints segment. Net sales of the Coatings segment increased 10.8 percent to $356.2 million in the quarter compared to the prior year. Year to date net sales in the Coatings segment increased 8.2 percent to $668.7 million. The increase in net sales in both the quarter and the six month period was largely attributable to an increase in demand for general industrial and coil coatings. Excluding the positive effect of foreign currency exchange, net sales for the Coatings segment increased approximately 6.5 percent in the quarter and 3.7 percent for the six month period. Due to the seasonal nature of the Company’s business, sales for the second quarter are not necessarily indicative of sales for the full year.

Consolidated gross profit increased $28.1 million to $206.0 million in the second quarter of 2004. As a percent of consolidated net sales, consolidated gross profit during the second quarter of 2004 increased to 32.3 percent from 31.7 percent. For the six-month period consolidated gross profit increased $40.8 million to $362.3 million. As a percent of consolidated net sales, consolidated gross profit during the six month period of 2004 increased to 31.8 percent from 31.2 percent. The increase in gross profit is largely due to manufacturing efficiencies resulting from order volume increases in the Industrial product line.

Consolidated operating expenses (research and development, selling and administrative) increased 15.6 percent to $132.1 million (20.7 percent of consolidated net sales) in the second quarter of 2004 compared to $114.3 million (20.3 percent of consolidated net sales) in 2003. For the six month period consolidated operating expenses increased 12.4 percent to $248.2 million (21.8 percent of consolidated net sales) compared to $220.8 million (21.4 percent of consolidated net sales). The increase in the first and the second quarter was primarily driven by additional merchandising expenses related to new product line introductions within the Paints segment. Variable incentive compensation and research and development expense related to developing new products for the Asian furniture market also contributed to the increase in the second quarter.

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ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED

Operating profit increased $10.2 million or 16.0 percent from the prior year for the second quarter of 2004, and $13.3 or 13.2 percent for the six month period. Operating profit in the Paints segment increased 11.9 percent to $36.3 million in the quarter compared to the prior year. As a percent of net sales for the Paints segment, the Paints segment operating profit decreased to 16.2 percent from 17.3 percent. For the six month period, operating profit in the Paints segment increased $6.6 million or 15.3 percent compared to the prior period. As a percent of sales for the six month period, operating profit decreased to 13.6 percent from 13.7 percent compared to the prior year. The decrease in the quarter was largely attributable to additional merchandising expenses related to new product line introductions. Foreign currency exchange fluctuation had an immaterial effect on the Paint segments operating profit. Operating profit of the Coatings segment increased 19.7 percent to $43.9 million in the quarter compared to last year. As a percent of net sales for the Coatings segment, the Coatings segment operating profit increased to 12.3 percent from 11.4 percent. For the six month period operating profit in the Coatings segment increased $13.0 million or 19.3 percent compared to the prior period. As a percent of net sales for the Coatings segment, the Coatings segment operating profit increased to 12.0 percent from 10.9 in the six month period compared to the prior year. The increase resulted from manufacturing efficiencies within the Industrial product line due to larger order size and overall focused operating expense control. Excluding the positive effect of foreign currency exchange, operating profit for the Coatings segment increased approximately 15 percent in the quarter, and for the six month period. Due to the seasonal nature of the Company’s business, operating profit for the second quarter is not necessarily indicative of operating profit for subsequent quarters or for the full year.

Interest expense decreased to $10.6 million in the second quarter of 2004 from $11.5 million in the second quarter of 2003 due to lower interest rates combined with lower debt balances. Year to date interest expense decreased to $21.0 million in 2004 from $23.3 million in the prior year.

Net income in the second quarter of 2004 increased 21.6 percent to $39.1 million or $.74 per diluted share. For the six month period, net income increased 20.3 percent to $57.5 million or $1.09 per diluted share.

Liquidity and Sources of Capital:   The net cash provided by the Company’s operations was $42.0 million for the first six months of 2004, compared with net cash provided by operations of $39.2 million for the first six months of 2003. The cash provided by operations and the proceeds from borrowings were used to fund $25.1 million in capital expenditures, $19.0 million in dividend payments, and $43.7 million in acquired businesses.

Accounts receivable increased $44.8 million as a result of increased sales, primarily in the Architectural and Industrial product lines. Inventories and other current assets increased $14.9 due to seasonality in the Architectural product line.

Capital expenditures for property, plant and equipment were $25.1 million in the first six months of 2004, compared with $21.0 million in the first six months of 2003. The Company expects capital spending in 2004 to be in the range of $55 to $60 million.

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ITEM 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – CONTINUED

The ratio of total debt to capital decreased to 46.6 percent at the end of second quarter of 2004 compared to 47.2 percent at the close of fiscal 2003. The total debt to capital ratio as of April 25, 2003 was 53.7 percent. Included in short term debt is $70.0 million of long term debt that has been reclassified to take advantage of lower interest rates. The Company believes its cash flow from operations, 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.

There were no material changes in the Company’s fixed cash obligations during the six months ended April 30, 2004.

Off-Balance Sheet Financing:   The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

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 dependence of internal earnings growth on economic conditions and growth in the domestic and international coatings industry; risks related to any future significant acquisitions, including risks of adverse changes in the results of acquired businesses, risks of disruptions in business resulting from 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

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 percent 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 April 30, 2004, approximately 45 percent of the Company’s total debt consisted of floating rate debt. From time to time, the Company may enter into interest rate swaps to hedge a portion of either its variable or fixed rate debt. Assuming the current level of borrowings, a 10 percent increase in interest rates from those in effect at the end of the second quarter would increase the Company’s interest expense for the third quarter of 2004 by approximately $0.2 million.

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ITEM 4:   CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above.

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, 2003.

ITEM 4:   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders was held at the Research Center of the Corporation at 312 South 11^th Avenue, Minneapolis, Minnesota, on February 25, 2004. The stockholders took the following actions:

(i)    The stockholders elected four 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:

(ii)    The stockholders approved the Amended and Restated Key Employee Annual Bonus Plan. 43,357,594 votes were cast for the resolution; 2,685,685 votes were cast against the resolution; 320,940 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 2004. 44,881,347 votes were cast for the resolution; 1,351,877 votes were cast against the resolution, shares representing 130,995 votes abstained; and there were no broker non-votes.

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ITEM 6:   EXHIBITS AND REPORTS ON FORM 8-K

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.