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 25, 2003 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
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 |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No
As of August 29, 2003, The Valspar Corporation had 50,630,149 shares of common
stock outstanding, excluding 9,591,163 shares held in treasury. The Company had
no other classes of stock outstanding.
-1-
THE VALSPAR CORPORATION
Index to Form 10-Q
for the Quarter Ended July 25, 2003
PART I. FINANCIAL INFORMATION Page No.
----------------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 25, 2003,
July 26, 2002 and October 25, 2002....................... 2 - 3
Condensed Consolidated Statements of Income - Three months
and nine months ended July 25, 2003 and July 26, 2002.... 4
Condensed Consolidated Statements of Cash Flows - Nine
months ended July 25, 2003 and July 26, 2002............. 5
Notes to Condensed Consolidated Financial Statements -
July 25, 2003............................................ 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10 - 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 12
Item 4. Controls and Procedures.................................... 12
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.......................................... 12
Item 6. Exhibits and Reports on Form 8-K........................... 13
SIGNATURES............................................................. 14
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-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE VALSPAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
July 25, July 26, October 25,
2003 2002 2002
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 20,625 $ 19,226 $ 22,715
Accounts receivable less allowance
(7/25/03 - $14,611; 7/26/02 - $14,944;
10/25/02 - $17,013) 411,088 401,460 368,134
Inventories:
Manufactured products 134,047 132,686 123,274
Raw materials, supplies and work-
in-process 74,651 79,435 77,371
----------- ----------- -----------
208,698 212,121 200,645
Deferred income taxes 27,958 40,345 30,498
Prepaid expenses and other 75,382 79,892 79,796
----------- ----------- -----------
TOTAL CURRENT ASSETS 743,751 753,044 701,788
GOODWILL 957,615 941,465 938,759
INTANGIBLES, NET 290,353 299,316 293,208
OTHER ASSETS, NET 83,016 55,860 68,333
DEFERRED INCOME TAX 15,831 -- 14,989
PROPERTY, PLANT AND EQUIPMENT 707,727 633,047 652,164
Less allowance for depreciation (296,793) (243,747) (249,689)
----------- ----------- -----------
410,934 389,300 402,475
----------- ----------- -----------
$ 2,501,500 $ 2,438,985 $ 2,419,552
=========== =========== ===========
NOTE: The Balance Sheet at October 25, 2002 has been derived from the audited
consolidated 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 25, July 26, October 25,
2003 2002 2002
----------- ----------- -----------
(Unaudited) (Unaudited) (Note)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 47,689 $ 30,311 $ 40,579
Trade accounts payable 201,885 208,865 197,047
Income taxes payable 54,032 45,360 20,998
Accrued liabilities 232,615 242,131 245,271
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 536,221 526,667 503,895
LONG-TERM DEBT 818,104 956,666 885,819
DEFERRED INCOME TAXES 181,700 167,971 180,592
DEFERRED LIABILITIES 120,961 61,351 111,993
STOCKHOLDERS' EQUITY:
Common Stock (Par Value - $.50;
Authorized - 120,000,000 shares;
Shares issued, including shares
in treasury - 60,221,312) 30,110 30,110 30,110
Additional paid-in capital 242,764 229,928 230,163
Retained earnings 680,204 587,055 614,964
Other (3,868) (12,524) (29,919)
----------- ----------- -----------
949,210 834,569 845,318
Less cost of Common Stock in treasury
(7/25/03 - 9,673,503 shares; 7/26/02 -
10,128,506 shares; 10/25/02 -
10,117,299 shares) 104,696 108,239 108,065
----------- ----------- -----------
844,514 726,330 737,253
----------- ----------- -----------
$ 2,501,500 $ 2,438,985 $ 2,419,552
=========== =========== ===========
NOTE: The Balance Sheet at October 25, 2002 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 25, July 26, July 25, July 26,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 598,179 $ 575,043 $ 1,628,920 $ 1,560,085
Costs and expenses:
Cost of sales 403,908 385,165 1,113,084 1,053,301
Research and development 17,580 15,462 52,307 47,831
Selling and administration 99,674 97,152 285,714 280,223
----------- ----------- ----------- -----------
Income from operations 77,017 77,273 177,815 178,730
Interest expense 11,077 13,016 34,403 36,293
Other (income)/expense - net 1,240 1,358 1,655 1,616
----------- ----------- ----------- -----------
Income before income taxes 64,700 62,899 141,757 140,821
Income taxes 24,586 24,845 53,868 55,625
----------- ----------- ----------- -----------
Net income $ 40,114 $ 38,054 $ 87,889 $ 85,196
=========== =========== =========== ===========
Net income per common share - basic $ 0.79 $ 0.76 $ 1.75 $ 1.71
=========== =========== =========== ===========
Net income per common share - diluted $ 0.77 $ 0.74 $ 1.70 $ 1.66
=========== =========== =========== ===========
Average number of common shares outstanding
- basic 50,500,156 49,946,161 50,365,736 49,785,690
=========== =========== =========== ===========
- diluted 51,889,457 51,526,402 51,783,890 51,186,179
=========== =========== =========== ===========
Dividends paid per common share $ 0.150 $ 0.140 $ 0.450 $ 0.420
=========== =========== =========== ===========
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 25, July 26,
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net income $ 87,889 $ 85,196
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 36,532 32,904
Amortization 3,344 3,759
Loss on asset divestiture 783 --
Changes in certain assets and liabilities, net of effects of
acquired businesses:
Increase in accounts and notes receivable (28,276) (51,369)
Decrease (increase) in inventories and other current assets 7,107 (30,250)
Increase (decrease) in trade accounts payable and accrued
liabilities (26,887) 65,920
Increase in income taxes payable 35,171 22,032
Increase (decrease) in other deferred liabilities 2,479 (1,541)
Other 110 1,724
--------- ---------
Net Cash Provided By Operating Activities 118,252 128,375
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (33,343) (25,739)
Acquired businesses/assets, net of cash -- (22,870)
--------- ---------
Net Cash Used In Investing Activities (33,343) (48,609)
FINANCING ACTIVITIES:
Net repayment of borrowings (75,327) (71,523)
Proceeds from sale of treasury stock 10,976 11,793
Dividends paid (22,648) (20,949)
--------- ---------
Net Cash Used In Financing Activities (86,999) (80,679)
Decrease in Cash and Cash Equivalents (2,090) (913)
Cash and Cash Equivalents at Beginning of Period 22,715 20,139
--------- ---------
Cash and Cash Equivalents at End of Period $ 20,625 $ 19,226
========= =========
See Notes to Condensed Consolidated Financial Statements.
-6-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 25, 2003
NOTE 1: BASIS OF PRESENTATION
------
The accompanying unaudited condensed consolidated financial statements 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 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 25, 2003 are not necessarily indicative of the results that
may be expected for the year ending October 31, 2003.
The Condensed Consolidated Balance Sheet at October 25, 2002 has been derived
from the audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial information.
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 25, 2002.
NOTE 2: ACCOUNTS PAYABLE
------
Trade accounts payable include $29,110,000 at July 25, 2003, $41,100,000 at
October 25, 2002 and $51,330,000 at July 26, 2002 of issued checks that had not
cleared the Company's bank accounts.
NOTE 3: ACQUISITIONS AND DIVESTITURES
------
In March 2002, the Company 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.
-7-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 25, 2003 - CONTINUED
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.
NOTE 4: OTHER COMPREHENSIVE INCOME
------
For the three and nine months ended July 25, 2003 and July 26, 2002, the
activity within the components of other comprehensive income, classified as a
component of Other within Stockholders' Equity, was as follows:
(Dollars in thousands) Three Months Ended Nine Months Ended
----------------------------- ------------------------------
July 25, 2003 July 26, 2002 July 25, 2003 July 26, 2002
-------- -------- -------- --------
Other Comprehensive Income:
Foreign currency translation $ 9,993 $ (116) $ 25,346 $(10,287)
Deferred gain/(loss) on hedging
activities, net of tax 2,359 (2,248) 2,650 (2,248)
Minimum pension liability,
net of tax -- -- (2,425) --
-------- -------- -------- --------
Total Other Comprehensive Income $ 12,352 $ (2,364) $ 25,571 $(12,535)
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
------
The carrying amount of goodwill for the quarter ended July 25, 2003 increased
from the end of fiscal 2002 by $18,856,000 to $957,615,000 due to foreign
currency translation.
Total intangible amortization expense for the nine months ended July 25, 2003
was $3,344,000. Estimated amortization expense for each of the five succeeding
fiscal years based on the intangible assets as of July 25, 2003 is expected to
be approximately $4,500,000 annually.
NOTE 6: 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 Industrial product line includes
decorative and protective coatings for wood, metal and plastic substrates. 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 Other category primarily includes
resins, colorants and composites. The resins and colorants are used internally
and sold to other coatings manufacturers.
-8-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 25, 2003 - CONTINUED
Net sales by product line are as follows:
(Dollars in
thousands) Three Months Ended Nine Months Ended
------------------------------- -------------------------------
July 25, 2003 July 26, 2002 July 25, 2003 July 26, 2002
---------- ---------- ---------- ----------
Industrial $ 224,272 $ 225,943 $ 638,725 $ 629,699
Packaging 138,214 126,642 384,733 356,372
AAS 196,136 184,570 497,365 473,622
Other 39,557 37,888 108,097 100,403
---------- ---------- ---------- ----------
$ 598,179 $ 575,043 $1,628,920 $1,560,085
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 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 and to manage the Company's mix of fixed and
variable rate debt. 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.
At July 25, 2003, the Company had $100,000,000 notional amount interest rate
swap contracts designated as cash flow hedges to pay fixed rates of interest and
receive variable rates of interest based on three-month LIBOR; these contracts
will mature during fiscal 2004. The Company also has a $100,000,000 notional
amount forward interest rate swap contract, which will begin during fiscal 2004
and mature during fiscal 2008 to pay fixed rates of interest and receive
variable rates of interest based on three-month LIBOR. At July 25, 2003, the
Company also had a $100,000,000 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.
NOTE 8: GUARANTEES AND CONTRACTUAL OBLIGATIONS
------
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." The
interpretation requires disclosure in periodic financial statements of certain
guarantee arrangements. The interpretation also clarifies situations where a
guarantor is required to recognize the fair value of certain guarantees in the
financial statements. The Company does not have any guarantees that require
recognition at fair value under the interpretation.
-9-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 25, 2003 - CONTINUED
The Company sells extended furniture protection plans and offers warranties for
certain of its products. These items are required to be disclosed in periodic
financial statements under the interpretation. 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 (in thousands):
Balance, October 25, 2002 $ 53,026
Additional accrual made during the period 25,540
Payments made during the period (24,184)
--------
Balance, July 25, 2003 $ 54,382
NOTE 9: STOCK PLANS
------
Under the Company's Stock Option Plans, options for the purchase of up to
8,250,000 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.
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
July 25, 2003 July 26, 2002 July 25, 2003 July 26, 2002
------------- ------------- ------------- -------------
Net income, as reported 40,114 38,054 87,889 85,196
Deduct: Total stock-based employee 1,608 1,909 5,510 6,243
compensation expense determined under
fair value based method for all awards,
net of related tax effects
-10-
THE VALSPAR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 25, 2003 - CONTINUED
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
July 25, 2003 July 26, 2002 July 25, 2003 July 26, 2002
------------- ------------- ------------- -------------
Pro forma net income 38,506 36,145 82,379 78,953
Earnings per share:
Basic - as reported $ 0.79 $ 0.76 $ 1.75 $ 1.71
Basic - pro forma $ 0.76 $ 0.72 $ 1.64 $ 1.59
Diluted - as reported $ 0.77 $ 0.74 $ 1.70 $ 1.66
Diluted - pro forma $ 0.74 $ 0.70 $ 1.59 $ 1.54
NOTE 10: RECLASSIFICATION
-------
Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation.
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 nine months ended July 25, 2003.
Operations: Net sales for the quarter increased 4.0% to $598,179,000 from
$575,043,000 in 2002. For the nine month period net sales increased 4.4% to
$1,628,920,000 from $1,560,085,000. Adjusting for the impact of foreign currency
translation of $31,654,000 sales increased by 2.4% for the nine months ended
July 25, 2003. 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 declined to 32.5% from 33.0% in the third quarter of
2003 and decreased to 31.7% from 32.5% for the first nine months from the
comparable period last year. The decrease in gross margin is largely due to
continuing raw material cost pressures which were not completely offset by
pricing actions.
Operating expenses (research and development, selling and administrative)
increased 4.1% to $117,254,000 (19.6% of net sales) in the third quarter of 2003
compared to $112,614,000 (19.6% of net sales) in 2002. Year to date operating
expenses increased 3.0% to $338,021,000 (20.8% of net sales) compared with
$328,054,000 (21.0% of net sales) for the same period last year. The increases
in both the third quarter and year-to-date are driven by seasonal increases in
Architectural Coatings expenses. Additionally, the year-to-date increase is
attributable to higher employment cost, including higher medical expenses.
Interest expense decreased to $11,077,000 in the third quarter of 2003 from
$13,016,000 in the third quarter of 2002. Year to date interest expense of
$34,403,000 compared to $36,293,000 for the comparable period in 2002. Lower
interest rates combined with lower debt balances resulted in the decreases for
the third quarter and the nine month period.
-11-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The effective tax rate decreased to 38.0% from 39.5% due to a larger percentage
of the company's taxable income being generated in lower taxing jurisdictions.
Net income in the third quarter of 2003 increased 5.4% to $40,114,000 or $.77
per diluted share. Year to date net income increased 3.2% to $87,889,000 or
$1.70 per diluted share.
Financial Condition: The net cash provided by the Company's operations was
$118,252,000 for the first nine months of 2003, compared with $128,375,000 for
the first nine months of 2002. During the first nine months of 2003, the cash
provided by operating activities and current cash balances were used to fund
$75,327,000 in repayment of bank borrowings, $33,343,000 in capital expenditures
and $22,648,000 in dividend payments.
Accounts receivable increased $28,276,000 as a result of increased sales
primarily in the Architectural and Packaging product lines. Inventories and
other current assets decreased $7,107,000 due to seasonality in the AAS and
Industrial product lines. Accounts payable and accrued liabilities decreased
$26,887,000 primarily as a result of timing of payables and accrued liability
disbursements.
Capital expenditures for property, plant and equipment were $33,343,000 in the
first nine months of 2003, compared with $25,739,000 in the first nine months of
2002. The Company expects capital spending in 2003 to be in the range of
$45,000,000 to $50,000,000.
The ratio of total debt to capital decreased to 50.6% at the end of third
quarter of 2003 compared to 55.7% at the close of fiscal 2002. The total debt to
capital ratio as of July 26, 2002 was 57.6%. 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 nine months ended July 25, 2003.
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
integration process and higher interest costs resulting from further borrowing
for any such acquisitions; our reliance on the efforts of vendors, government
agencies, utilities and other third parties to achieve adequate compliance and
avoid disruption of our business; changes in the
-12-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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% 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 25, 2003,
approximately 50% 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% increase in interest rates from those in effect at the end of
the third quarter would increase the Company's interest expense for the fourth
quarter of 2003 by approximately $200,000.
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-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of 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 25, 2002.
-13-
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Section 302 Certification of the Chief Executive Officer
31.2 Section 302 Certification of the Chief Financial Officer
32.1 Certification of Chief Executive Officer and 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) During the three months ended July 25, 2003, a report on Form 8-K,
dated May 12, 2003 was filed on May 12, 2003 under Item 9 - Regulation
FD Disclosure (information furnished in this Item 9 was also furnished
under Item 12).
-14-
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 8, 2003 By /s/Rolf Engh
------------------------------
Rolf Engh
Secretary
Date: September 8, 2003 By /s/Paul C. Reyelts
------------------------------
Paul C. Reyelts
Senior Vice President, Finance
(Chief Financial Officer)