Valspar (NYSE: VAL):

Summary Financials

     
Fiscal Third Quarter 2016 (Ended July 29, 2016)
Reported     %     Adjusted*     %
Results     Change     Results     Change
      2016     2015           2016     2015      
Net Sales     $1,141.9     $1,149.1     (1%)     $1,141.9     $1,149.1     (1%)
Gross Profit     $421.9     $411.3     3%     $429.8     $415.6     3%
EBIT     $170.2     $165.7     3%     $186.0     $174.1     7%
Net Income     $117.0     $102.9     14%     $127.3     $108.8     17%
EPS (diluted)     $1.44     $1.25     15%     $1.57     $1.33     18%
       

$ millions except EPS

Notes on Net Sales and Volume: Acquisitions added 2% to net sales and 1% to volume for fiscal Q3 2016 (2% and 2% respectively for fiscal Q3 2015). Foreign currency translation negatively impacted net sales by 2% for fiscal Q3 2016 (5% for fiscal Q3 2015).

* Adjusted Results exclude certain items which are detailed in the “Reconciliation of Non-GAAP Financial Measures” included in this release. In addition to restructuring and other charges, the excluded items in fiscal Q3 2016 include $5 million of pre-tax costs incurred in connection with the proposed merger with The Sherwin-Williams Company.

CEO Comment
“In the third quarter, adjusted EBIT increased 7 percent and adjusted EPS grew 18 percent. These results were highlighted by volume growth, new business wins across the portfolio and effective cost management. Coatings segment performance was led by strong volume growth in the Coil and Wood product lines. In the Paints segment, volumes grew 3 percent led by each of our International regions, and EBIT increased 28 percent,” said Gary E. Hendrickson, chairman and chief executive officer.

Coatings Segment Results
Fiscal third quarter 2016 net sales in the Coatings segment decreased 1 percent to $631 million. This includes the effects of foreign currency translation that negatively impacted net sales by 3 percent. Acquisitions added 1 percent to net sales in the quarter. Volumes increased 1 percent in the fiscal third quarter of 2016. Acquisitions added 1 percent to volume in the quarter. Coatings segment EBIT of $126 million increased 8 percent. Adjusted EBIT of $127 million increased 6 percent, primarily driven by benefits from productivity initiatives. Adjusted EBIT as a percent of net sales increased to 20.1% from 18.7% in the prior year.

Paints Segment Results
Fiscal third quarter 2016 net sales of $445 million in the Paints segment increased slightly compared to the prior year. This includes the effects of foreign currency translation that negatively impacted net sales by 2 percent. Acquisitions added 4 percent to net sales in the quarter. Volume increased 3 percent in the fiscal third quarter of 2016. Acquisitions added 2 percent to volume in the quarter. Paints segment EBIT of $59 million increased 28 percent. Paints segment adjusted EBIT of $68 million increased 30 percent, driven by the benefits from productivity initiatives and the impact of the Quest acquisition. Adjusted EBIT as a percent of net sales increased to 15.2% from 11.7% in the prior year.

Dividends
During the quarter, the company paid a quarterly dividend of $0.33 per common share outstanding, or $26 million. Valspar is a member of the S&P High Yield Dividend Aristocrats®, which is comprised of companies increasing dividends every year for at least 20 consecutive years.

Valspar: If it matters, we’re on it.®
Valspar is a global leader in the coatings industry providing customers with innovative, high-quality products and value-added services. Our 11,100 employees worldwide deliver advanced coatings solutions with best-in-class appearance, performance, protection and sustainability to customers in more than 100 countries. Valspar offers a broad range of superior coatings products for the consumer market, and highly-engineered solutions for the construction, industrial, packaging and transportation markets. Founded in 1806, Valspar is headquartered in Minneapolis. Valspar’s reported net sales in fiscal 2015 were $4.4 billion and its shares are traded on the New York Stock Exchange (symbol: VAL). For more information, visit www.valspar.com and follow @valspar on Twitter.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA provides a safe harbor for forward-looking statements.

Forward-looking statements are based on management’s current expectations, estimates, assumptions and beliefs about future events, conditions and financial performance. Forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside our control and could cause actual results to differ materially from such statements. Any statement that is not historical in nature is a forward-looking statement. We may identify forward-looking statements with words and phrases such as “expect,” “project,” "forecast," "outlook," “estimate,” “anticipate,” “believe,” “could,” “may,” “will,” “plan to,” “intend,” “should” and similar words or expressions.

These risks, uncertainties and other factors include, but are not limited to, deterioration in general economic conditions, both domestic and international, that may adversely affect our business; fluctuations in availability and prices of raw materials, including raw material shortages and other supply chain disruptions, and the inability to pass along or delays in passing along raw material cost increases to our customers; dependence of internal sales and earnings growth on business cycles affecting our customers and growth in the domestic and international coatings industry; market share loss to, and pricing or margin pressure from, larger competitors with greater financial resources; significant indebtedness that restricts the use of cash flow from operations for acquisitions and other investments; our access to capital is subject to global economic and capital market conditions; dependence on acquisitions for growth, and risks related to future acquisitions, including adverse changes in the results of acquired businesses, the assumption of unforeseen liabilities and disruptions resulting from the integration of acquisitions; risks and uncertainties associated with operating in foreign markets, including achievement of profitable growth in developing markets; impact of fluctuations in foreign currency exchange rates on our financial results; loss of business with key customers; our ability to innovate in order to meet customers' product demands, which may change based on customers' preferences and competitive factors; damage to our reputation and business resulting from product claims or recalls, litigation, customer perception and other matters; our ability to respond to technology changes and to protect our technology; possible interruption, failure or compromise of the information systems we use to operate our business; 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 governmental regulation, including more stringent environmental, health and safety regulations; changes in accounting policies and standards and taxation requirements such as new tax laws or revised tax law interpretations; the nature, cost and outcome of pending and future litigation and other legal proceedings; unusual weather conditions adversely affecting sales; civil unrest and the outbreak of war and other significant national and international events; risks relating to our merger with Sherwin-Williams including, the possibility that the closing conditions to the contemplated transaction may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant a necessary regulatory approval; delay in closing the transaction or the possibility of non-consummation of the transaction; the potential for regulatory authorities to require divestitures in connection with the proposed transaction and the possibility that Valspar stockholders consequently receive $105 per share instead of $113 per share; the occurrence of any event that could give rise to termination of the merger agreement; the risk that stockholder litigation in connection with the contemplated transaction may affect the timing or occurrence of the contemplated transaction or result in significant costs of defense, indemnification and liability; risks inherent in the achievement of cost synergies and the timing thereof; risks related to the disruption of the transaction to Valspar and its management; the effect of announcement of the transaction on Valspar’s ability to retain and hire key personnel and maintain relationships with customers, suppliers and other third parties; and other factors set forth in the risk factors section of our Annual Report on Form 10-K for the fiscal year ended October 30, 2015, as well as Valspar’s Quarterly Reports on Form 10-Q and other documents filed by Valspar with the Securities and Exchange Commission.

We caution investors not to place undue reliance on any such forward-looking statements, which speak only as of the date on which such statements were made. We undertake no obligation to subsequently revise any forward-looking statement to reflect new information, events or circumstances after the date of such statement, except as required by law.

 
THE VALSPAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Nine Months Ended July 29, 2016 and July 31, 2015
(Dollars in thousands, except per share amounts)
               
 
 
Three Months Ended Nine Months Ended
July 29, July 31, July 29, July 31,
      2016     2015     2016     2015
Net Sales $ 1,141,942 $ 1,149,126 $ 3,084,495 $ 3,243,084
Cost of Sales 718,052 733,572 1,935,176 2,094,956
Restructuring Charges - Cost of Sales 1,943 1,319 7,304 7,398
Acquisition-related Charges - Cost of Sales       —       2,952       —       2,952
Gross Profit       421,947       411,283       1,142,015       1,137,778
Research and Development 36,211 34,951 104,330 99,590
Selling, General and Administrative 207,461 206,432 610,006 600,310
Restructuring Charges - Operating Expenses 3,302 3,280 8,708 5,994
Proposed Merger-related Charges - Operating Expenses 4,616 — 22,856 —
Acquisition-related Charges - Operating Expenses       16       892       1,141       892
Operating Expenses 251,606 245,555 747,041 706,786
Gain on Sale of Certain Assets       —       —       —       48,001
Income From Operations 170,341 165,728 394,974 478,993
Interest Expense 23,082 22,622 68,286 59,178
Other (Income) Expense, Net       103       70       1,469       799
Income Before Income Taxes 147,156 143,036 325,219 419,016
Income Taxes       30,168       40,174       75,773       121,866
Net Income     $ 116,988     $ 102,862     $ 249,446     $ 297,150
 
 
Average Number of Shares O/S - basic 79,124,763 80,020,089 78,947,072 80,857,078
Average Number of Shares O/S - diluted       81,185,695       81,999,701       80,904,905       82,910,996
 
 
Net Income per Common Share - basic $ 1.48 $ 1.29 $ 3.16 $ 3.68
Net Income per Common Share - diluted     $ 1.44     $ 1.25     $ 3.08     $ 3.58
 
 
THE VALSPAR CORPORATION
SEGMENT INFORMATION (UNAUDITED AND SUBJECT TO RECLASSIFICATION)
For the Three and Nine Months Ended July 29, 2016 and July 31, 2015
(Dollars in thousands)
               
 
 
 
Three Months Ended Nine Months Ended
July 29, July 31, July 29, July 31,
      2016     2015     2016     2015

Coatings Segment

Net Sales $ 631,034 $ 640,225 $ 1,762,033 $ 1,858,103
Earnings Before Interest and Taxes (EBIT) 126,333 117,311 335,252 360,942
 
Key Metrics (GAAP):
Sales Growth (1.4 %) (6.5 %) (5.2 %) (0.7 %)
EBIT, % of Net Sales 20.0 % 18.3 % 19.0 % 19.4 %
 
Key Metrics (non-GAAP)1:
Adjusted EBIT $ 127,139 $ 119,911 $ 337,334 $ 320,450
Adjusted EBIT, % of Net Sales 20.1 % 18.7 % 19.1 % 17.2 %
 

Paints Segment

Net Sales $ 445,421 $ 443,844 $ 1,143,578 $ 1,209,346
EBIT 58,933 45,897 105,494 117,797
 
Key Metrics (GAAP):
Sales Growth 0.4 % (7.5 %) (5.4 %) (8.5 %)
EBIT, % of Net Sales 13.2 % 10.3 % 9.2 % 9.7 %
 
Key Metrics (non-GAAP)1:
Adjusted EBIT $ 67,500 $ 51,740 $ 124,718 $ 127,533
Adjusted EBIT, % of Net Sales 15.2 % 11.7 % 10.9 % 10.5 %
 

Other and Administrative

Net Sales $ 65,487 $ 65,057 $ 178,884 $ 175,635
EBIT (15,028 ) 2,450 (47,241 ) (545 )
 
Key Metrics (GAAP):
Sales Growth 0.7 % (0.0 %) 1.8 % 2.6 %
EBIT, % of Net Sales (22.9 %) 3.8 % (26.4 %) (0.3 %)
 
Key Metrics (non-GAAP)1:
Adjusted EBIT $ (8,657 ) $ 2,450 $ (22,671 ) $ (554 )
Adjusted EBIT, % of Net Sales (13.2 %) 3.8 % (12.7 %) (0.3 %)
 

1

     The information on this page includes non-GAAP financial measures. Please refer to the "RECONCILIATION OF NON-GAAP FINANCIAL MEASURES" included in this release for detailed information.
 
 
THE VALSPAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
As of July 29, 2016 and July 31, 2015
(Dollars in thousands)
       
 
 
July 29, July 31,
      2016     2015

Assets

Current Assets:
Cash and Cash Equivalents $ 170,223 $ 342,647
Restricted Cash 836 1,628
Accounts and Notes Receivable, Net 828,689 876,800
Inventories 523,637 512,609
Deferred Income Taxes 32,898 28,120
Prepaid Expenses and Other       137,228       103,241
Total Current Assets       1,693,511       1,865,045
Goodwill 1,286,591 1,304,831
Intangibles, Net 627,939 653,020
Other Assets 125,462 117,415
Long-Term Deferred Income Taxes 10,056 6,893
Property, Plant & Equipment, Net       646,522       630,814
Total Assets     $ 4,390,081     $ 4,578,018
 

Liabilities and Stockholders' Equity

Current Liabilities:
Short-term Debt $ 242,208 $ 474,169
Current Portion of Long-Term Debt 150,101 158,091
Trade Accounts Payable 563,078 554,493
Income Taxes Payable 19,485 43,530
Other Accrued Liabilities       421,717       390,590
Total Current Liabilities       1,396,589       1,620,873
Long-Term Debt, Net of Current Portion 1,557,001 1,706,950
Long-term Deferred Income Taxes 242,977 226,798
Other Long-Term Liabilities       152,112       139,188
Total Liabilities       3,348,679       3,693,809
Stockholders' Equity       1,041,402       884,209
Total Liabilities and Stockholders' Equity     $ 4,390,081     $ 4,578,018
 
 
THE VALSPAR CORPORATION
SELECTED INFORMATION (UNAUDITED AND SUBJECT TO RECLASSIFICATION)
For the Three and Nine Months Ended July 29, 2016 and July 31, 2015
(Dollars in thousands)
               
 
 
Three Months Ended Nine Months Ended
July 29, July 31, July 29, July 31,
      2016     2015     2016     2015
Depreciation and Amortization $ 23,480 $ 22,566 $ 71,163 $ 68,058
 
Capital Expenditures 28,605 19,647 89,159 60,846
 
Dividends Paid 26,152 24,105 78,307 73,056
 
 
THE VALSPAR CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)
For the Three Months Ended July 29, 2016 and July 31, 2015
(Dollars in thousands, except per share amounts)
 
The following information provides reconciliations of non-GAAP financial measures from operations, which are presented in the accompanying news release, to the most comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The company has provided non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as information supplemental and in addition to the financial measures presented in the accompanying news release that are calculated and presented in accordance with GAAP. Such non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in the news release. The non-GAAP financial measures in the accompanying news release may differ from similar measures used by other companies. The following tables reconcile gross profit, operating expenses, net income (GAAP financial measures) and earnings before interest and taxes (EBIT) for the periods presented to adjusted gross profit, adjusted operating expenses, adjusted net income and adjusted EBIT (non-GAAP financial measures) for the periods presented.
       
Three Months Ended Three Months Ended
July 29, 2016 July 31, 2015
      Dollars     % of Net Sales     Dollars     % of Net Sales

Coatings Segment

        
EBIT $ 126,333 20.0 % $ 117,311 18.3 %
Restructuring Charges - Cost of Sales 22 0.0 % 825 0.1 %
Restructuring Charges - Operating Expense 768 0.1 % 1,775 0.3 %
Acquisition-related Charges - Operating Expense 16 0.0 % - 0.0 %
Gain on Sale of Certain Assets   -   0.0 %   -   0.0 %
Adjusted EBIT1 $ 127,139 20.1 % $ 119,911 18.7 %
 

Paints Segment

EBIT $ 58,933 13.2 % $ 45,897 10.3 %
Restructuring Charges - Cost of Sales 1,921 0.4 % 494 0.1 %
Acquisition-related Charges - Cost of Sales - 0.0 % 2,952 0.7 %
Impairment of Certain Long-lived Assets - Cost of Sales 5,867 1.3 % - 0.0 %
Restructuring Charges - Operating Expense 779 0.2 % 1,505 0.3 %
Acquisition-related Charges - Operating Expense   -   0.0 %   892   0.2 %
Adjusted EBIT1 $ 67,500 15.2 % $ 51,740 11.7 %
 

Other and Administrative

EBIT $ (15,028 ) (22.9 %) $ 2,450 3.8 %
Restructuring Charges - Operating Expense 1,755 2.7 % - 0.0 %
Proposed Merger-related Charges - Operating Expenses   4,616   7.0 %   -   0.0 %
Adjusted EBIT1 $ (8,657 ) (13.2 %) $ 2,450 3.8 %
 

Total

Gross Profit $ 421,947 36.9 % $ 411,283 35.8 %
Restructuring Charges - Cost of Sales 1,943 0.2 % 1,319 0.1 %
Acquisition-related Charges - Cost of Sales - 0.0 % 2,952 0.3 %
Impairment of Certain Long-lived Assets - Cost of Sales   5,867   0.5 %   -   0.0 %
Adjusted Gross Profit1 $ 429,757 37.6 % $ 415,554 36.2 %
Operating Expenses $ 251,606 22.0 % $ 245,555 21.4 %
Restructuring Charges - Operating Expense (3,302 ) (0.3 %) (3,280 ) (0.3 %)
Proposed Merger-related Charges - Operating Expenses (4,616 ) (0.4 %) - 0.0 %
Acquisition-related Charges - Operating Expense   (16 ) (0.0 %)   (892 ) (0.1 %)
Adjusted Operating Expenses1 $ 243,672 21.3 % $ 241,383 21.0 %
EBIT $ 170,238 14.9 % $ 165,658 14.4 %
Restructuring Charges - Total 5,245 0.5 % 4,599 0.4 %
Proposed Merger-related Charges - Total 4,616 0.4 % - 0.0 %
Acquisition-related Charges - Total 16 0.0 % 3,844 0.3 %
Impairment of Certain Long-lived Assets - Total 5,867 0.5 % - 0.0 %
Gain on Sale of Certain Assets - Total   -   0.0 %   -   0.0 %
Adjusted EBIT1 $ 185,982 16.3 % $ 174,101 15.2 %
 
1 The data in this schedule has been individually rounded and therefore may not sum.
 
 
THE VALSPAR CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)
For the Nine Months Ended July 29, 2016 and July 31, 2015
(Dollars in thousands, except per share amounts)
               
 
 
 
 
Nine Months Ended Nine Months Ended
July 29, 2016 July 31, 2015
      Dollars     % of Net Sales     Dollars     % of Net Sales

Coatings Segment

EBIT $ 335,252 19.0 % $ 360,942 19.4 %
Restructuring Charges - Cost of Sales 94 0.0 % 3,776 0.2 %
Restructuring Charges - Operating Expense 1,062 0.1 % 3,733 0.2 %
Acquisition-related Charges - Operating Expense 926 0.1 % - 0.0 %
Gain on Sale of Certain Assets   -   0.0 %   (48,001 ) (2.6 %)
Adjusted EBIT1 $ 337,334 19.1 % $ 320,450 17.2 %
 

Paints Segment

EBIT $ 105,494 9.2 % $ 117,797 9.7 %
Restructuring Charges - Cost of Sales 7,210 0.6 % 3,622 0.3 %
Acquisition-related Charges - Cost of Sales - 0.0 % 2,952 0.2 %
Impairment of Certain Long-lived Assets - Cost of Sales 5,867 0.5 % - 0.0 %
Restructuring Charges - Operating Expense 5,932 0.5 % 2,270 0.2 %
Acquisition-related Charges - Operating Expense   215   0.0 %   892   0.1 %
Adjusted EBIT1 $ 124,718 10.9 % $ 127,533 10.5 %
 

Other and Administrative

EBIT $ (47,241 ) (26.4 %) $ (545 ) (0.3 %)
Restructuring Charges - Operating Expense 1,714 1.0 % (9 ) (0.0 %)
Proposed Merger-related Charges - Operating Expenses   22,856   12.8 %   -   0.0 %
Adjusted EBIT1 $ (22,671 ) (12.7 %) $ (554 ) (0.3 %)
 

Total

Gross Profit $ 1,142,015 37.0 % $ 1,137,778 35.1 %
Restructuring Charges - Cost of Sales 7,304 0.2 % 7,398 0.2 %
Acquisition-related Charges - Cost of Sales - 0.0 % 2,952 0.1 %
Impairment of Certain Long-lived Assets - Cost of Sales   5,867   0.2 %   -   0.0 %
Adjusted Gross Profit1 $ 1,155,186 37.5 % $ 1,148,128 35.4 %
Operating Expenses $ 747,041 24.2 % $ 706,786 21.8 %
Restructuring Charges - Operating Expense (8,708 ) (0.3 %) (5,994 ) (0.2 %)
Proposed Merger-related Charges - Operating Expenses (22,856 ) (0.7 %) - 0.0 %
Acquisition-related Charges - Operating Expense   (1,141 ) (0.0 %)   (892 ) (0.0 %)
Adjusted Operating Expenses1 $ 714,336 23.2 % $ 699,900 21.6 %
EBIT $ 393,505 12.8 % $ 478,194 14.7 %
Restructuring Charges - Total 16,012 0.5 % 13,392 0.4 %
Proposed Merger-related Charges - Total 22,856 0.7 % - 0.0 %
Acquisition-related Charges - Total 1,141 0.0 % 3,844 0.1 %
Impairment of Certain Long-lived Assets - Total 5,867 0.2 % - 0.0 %
Gain on Sale of Certain Assets - Total   -   0.0 %   (48,001 ) (1.5 %)
Adjusted EBIT1 $ 439,381 14.2 % $ 447,429 13.8 %
 
1 The data in this schedule has been individually rounded and therefore may not sum.
 
 
THE VALSPAR CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)
For the Three and Nine Months Ended July 29, 2016 and July 31, 2015
(Dollars in thousands, except per share amounts)
               
 
Three Months Ended Nine Months Ended
      July 29, 2016     July 31, 2015     July 29, 2016     July 31, 2015
Net Income $ 116,988 $ 102,862 $ 249,446 $ 297,150
Restructuring Charges - Total1 5,245 4,599 16,012 13,392
Proposed Merger-related Charges - Total2 4,616 - 22,856 -
Acquisition-related Charges - Total3 16 3,844 1,141 3,844
Impairment of Certain Long-lived Assets - Total4 5,867 - 5,867 -
Gain on Sale of Certain Assets - Total5   -     -     -     (48,001 )
Total Pre-tax Adjustments $ 15,744 $ 8,443 $ 45,876 $ (30,765 )
Income Taxes Impact - Total6   (5,414 )   (2,529 )   (16,500 )   5,430  
Adjusted Net Income $ 127,318 $ 108,776 $ 278,822 $ 271,815
Average Number of Shares O/S - diluted 81,185,695 81,999,701 80,904,905 82,910,996
Adjusted Net Income per Common Share - diluted $ 1.57 $ 1.33 $ 3.45 $ 3.28
 
 
1 Represents severance and employee benefits, asset-related charges and exit costs related to restructuring activities.
2 Represents costs incurred related to the pending merger with The Sherwin-Williams Company including employee-related expenses, professional services and regulatory fees.
3 Represents professional fees and acquisition-related charges associated with other acquisition-related activity.
4 Represents impairment of a certain asset group in our Consumer Paints product line.
5 Represents gain on sale of a non-strategic specialty product offering in our Coatings segment.

6 Represents the tax effect of restructuring charges, proposed merger-related charges, acquisition-related charges, impairment of certain long-lived assets and gain on sale of certain assets calculated using the effective tax rate of the jurisdiction in which the charges were incurred.