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. -14- 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. -15- 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