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Valspar Reports Fiscal 2015 Second Quarter Results

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The Valspar Corporation (NYSE:VAL) today reported fiscal second quarter 2015 net sales of $1.08 billion, a decrease of 7 percent over the prior year. Net sales in local currency decreased 2 percent. Total volumes decreased 3 percent, driven by the expected decline in the Paints segment. Reported net income and earnings per diluted share for the current fiscal year include nonrecurring items, which are detailed in the “Reconciliation of Non-GAAP Financial Measures” included in this release. Second quarter 2015 adjusted net income and earnings per diluted share, excluding these nonrecurring items, were $92 million and $1.11, respectively. Second quarter 2014 adjusted net income and earnings per diluted share were $93 million and $1.07, respectively. The effects of foreign currency translation negatively impacted net sales by approximately $55 million and EPS (as adjusted) by $0.04 in the second quarter of 2015.

“Our results for second quarter were in line with our expectations. EPS (as adjusted) grew four percent, despite the negative impact of currency translation and the expected volume decline in our Paints segment in North America,” said Gary E. Hendrickson, chairman and chief executive officer. “We saw continued volume and profit growth from our Coatings segment, driven by new business wins and benefits from productivity and cost savings. In the Paints segment, volume and sales were up in local currency in all of our international regions.”

“Based on our solid first half results and our outlook for the rest of the year, we are reiterating our fiscal 2015 EPS (as adjusted) guidance,” Hendrickson added.

Fiscal Second Quarter 2015 Segment Results

Net sales in the Coatings segment decreased 1 percent to $615 million in the fiscal second quarter of 2015. Net sales in local currency increased 5 percent, and volumes were up 3 percent. Volume increased significantly in the General Industrial and the Coil product lines and declined slightly in the Packaging and Wood product lines. Coatings segment adjusted earnings before interest and taxes (EBIT) of $110 million (or 17.8% of net sales) increased 9 percent as a result of benefits from productivity initiatives, cost/price and increased volume.

Net sales in the Paints segment decreased 15 percent to $403 million in the fiscal second quarter of 2015. Net sales in local currency and volumes both decreased 12 percent. Volume growth in Europe, Asia and Australia regions was more than offset by a decline in North America. The volume decline in North America was driven by the previously disclosed product line adjustment at a significant customer and from difficult prior year comparisons when the company launched several significant new products in the home improvement and hardware channels. Paints segment adjusted EBIT of $47 million (or 11.7% of net sales) was down 17 percent from the prior year driven by the volume decline in North America.

Fiscal 2015 Guidance

The company is reaffirming its fiscal 2015 annual diluted EPS (as adjusted) guidance of $4.45 to $4.65. Based on the company’s updated estimate of foreign currency translation for the year, the company is updating its fiscal 2015 annual sales guidance to reflect a sales decline in the “low single-digits” from fiscal 2014, compared to the previous guidance of “approximately flat sales”. Excluding the expected impact of currency translation, fiscal 2015 annual sales are expected to increase “low single-digits”. The company’s fiscal 2015 guidance does not include the impact of the pending acquisition of the businesses from Quest Specialty Chemicals, as described below.

Dividends and Share Repurchases

During the quarter, the company paid a quarterly dividend of $0.30 per common share outstanding, or $24.4 million. Valspar is a member of the S&P High Yield Dividend Aristocrats(R), which is comprised of companies increasing dividends every year for at least 20 consecutive years. Also during the quarter, the company repurchased 1.1 million shares of its stock, for $92.5 million.

Acquisition of the Performance Coating Businesses from Quest Specialty Chemicals

The company announced today that it has reached a definitive agreement to acquire the performance coatings businesses of Quest Specialty Chemicals, which includes products serving the automotive refinish and industrial end markets. The transaction, which is expected to close in the company’s third fiscal quarter, is subject to customary closing conditions. Financial terms were not disclosed. Please refer to the separate press release issued today for more details.

An earnings conference call is scheduled for 11:00 a.m. Eastern Time (10:00 a.m. Central Time) today and will be webcast and accessible from the Investor Relations section of Valspar’s website at http://investors.valspar.com.

Valspar: If it matters, we’re on it.(R)
Valspar is a global leader in the coatings industry providing customers with innovative, high-quality products and value-added services. Our 10,500 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 2014 were $4.5 billion and its shares are traded on the New York Stock Exchange (symbol:VAL). For more information, visit www.valspar.com and follow @valsparCo on Twitter.

FORWARD-LOOKING STATEMENTS

Certain statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Private Securities Litigation Reform Act of 1995 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 “expects,” “projects,” “estimates,” “anticipates,” “believes,” “could,” “may,” “will,” “plans to,” “intends,” “should” and similar 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; 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; 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; changes in governmental regulation, including more stringent environmental, health and safety regulations; our reliance on the efforts of vendors, government agencies, utilities and other third parties to achieve adequate compliance and avoid disruption of our business; unusual weather conditions adversely affecting sales; 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; and civil unrest and the outbreak of war and other significant national and international events. 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 Six Months Ended May 1, 2015 and April 25, 2014
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
May 1, April 25, May 1, April 25,
2015 2014 2015 2014
Net Sales1 $ 1,079,289 $ 1,155,826 $ 2,093,958 $ 2,134,943
Cost of Sales1 684,856 766,799 1,361,384 1,420,757
Restructuring Charges – Cost of Sales 1,230 8,269 6,079 14,375
Gross Profit 393,203 380,758 726,495 699,811
Research and Development 32,037 35,585 64,639 66,143
Selling, General and Administrative 204,237 201,512 393,878 388,747
Restructuring Charges 1,020 587 2,714 6,287
Operating Expenses 237,294 237,684 461,231 461,177
Gain on Sale of Certain Assets 48,001
Income From Operations 155,909 143,074 313,265 238,634
Interest Expense 20,241 15,756 36,556 31,688
Other (Income) Expense, Net 1,694 318 729 689
Income Before Income Taxes 133,974 127,000 275,980 206,257
Income Taxes 43,660 41,041 81,692 66,745
Net Income $ 90,314 $ 85,959 $ 194,288 $ 139,512
Average Number of Shares O/S – basic 80,826,518 84,161,922 81,275,572 84,654,825
Average Number of Shares O/S – diluted 82,871,129 86,523,938 83,366,627 87,081,533
Net Income per Common Share – basic $ 1.12 $ 1.02 $ 2.39 $ 1.65
Net Income per Common Share – diluted $ 1.09 $ 0.99 $ 2.33 $ 1.60

1 Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation. In the first quarter of 2015, we changed our policy and now classify freight costs on shipments to customers as cost of sales. Previously these costs were recorded as a deduction from net sales. Reclassifications had no effect on net income (loss), cash flows or stockholders’ equity as previously reported.

THE VALSPAR CORPORATION
SEGMENT INFORMATION (UNAUDITED AND SUBJECT TO RECLASSIFICATION)
For the Three and Six Months Ended May 1, 2015 and April 25, 2014
(Dollars in thousands)
Three Months Ended Six Months Ended
May 1, April 25, May 1, April 25,
2015 2014 2015 2014

Coatings Segment

Net Sales1 $ 614,821 $ 621,092 $ 1,217,878 $ 1,186,478
Earnings Before Interest and Taxes (EBIT) 108,022 98,047 243,631 168,022
Key Metrics (GAAP):
Sales Growth1

(1.0%

)

12.6%

2.6%

11.6%

EBIT, % of Net Sales1

17.6%

15.8%

20.0%

14.2%

Key Metrics (non-GAAP)2:
Adjusted EBIT $ 109,578 $ 100,686 $ 200,539 $ 179,281
Adjusted EBIT, % of Net Sales1

17.8%

16.2%

16.5%

15.1%

Paints Segment

Net Sales1 $ 402,979 $ 476,594 $ 765,502 $ 842,381
Earnings Before Interest and Taxes (EBIT) 46,571 50,423 71,900 81,420
Key Metrics (GAAP):
Sales Growth1

(15.4%

)

7.7%

(9.1%

)

8.5%

EBIT, % of Net Sales1

11.6%

10.6%

9.4%

9.7%

Key Metrics (non-GAAP)2:
Adjusted EBIT $ 47,274 $ 56,759 $ 75,793 $ 90,575
Adjusted EBIT, % of Net Sales1

11.7%

11.9%

9.9%

10.8%

Other and Administrative

Net Sales1 $ 61,489 $ 58,140 $ 110,578 $ 106,084
Earnings Before Interest and Taxes (EBIT) (378 ) (5,714 ) (2,995 ) (11,497 )
Key Metrics (GAAP):
Sales Growth1

5.8%

(2.6%

)

4.2%

(3.5%

)

EBIT, % of Net Sales1

(0.6%

)

(9.8%

)

(2.7%

)

(10.8%

)

Key Metrics (non-GAAP)2:
Adjusted EBIT $ (387 ) $ (5,833 ) $ (3,004 ) $ (11,249 )
Adjusted EBIT, % of Net Sales1

(0.6%

)

(10.0%

)

(2.7%

)

(10.6%

)

1 Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation. In the first quarter of 2015, we changed our policy and now classify freight costs on shipments to customers as cost of sales. Previously these costs were recorded as a deduction from net sales. Reclassifications had no effect on net income (loss), cash flows or stockholders’ equity as previously reported.

2 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 May 1, 2015 and April 25, 2014
(Dollars in thousands)
May 1, April 25,
2015 2014

Assets

Current Assets:
Cash and Cash Equivalents $ 146,279 $ 116,503
Restricted Cash 1,532 2,966
Accounts and Notes Receivable, Net 823,014 852,678
Inventories 494,355 497,579
Deferred Income Taxes 28,621 40,754
Prepaid Expenses and Other 105,333 112,018
Total Current Assets 1,599,134 1,622,498
Goodwill 1,081,255 1,144,042
Intangibles, Net 575,939 603,978
Other Assets 108,881 76,527
Long-Term Deferred Income Taxes 6,570 7,021
Property, Plant & Equipment, Net 607,081 638,096
Total Assets $ 3,978,860 $ 4,092,162

Liabilities and Stockholders’ Equity

Current Liabilities:
Short-term Debt $ 273,840 $ 556,672
Current Portion of Long-Term Debt 162,502
Trade Accounts Payable 550,361 606,614
Income Taxes 47,829 33,810
Other Accrued Liabilities 367,475 382,000
Total Current Liabilities 1,402,007 1,579,096
Long Term Debt, Net of Current Portion 1,350,005 1,092,419
Deferred Income Taxes 215,789 238,664
Other Long-Term Liabilities 139,693 134,117
Total Liabilities 3,107,494 3,044,296
Stockholders’ Equity 871,366 1,047,866
Total Liabilities and Stockholders’ Equity $ 3,978,860 $ 4,092,162
THE VALSPAR CORPORATION
SELECTED INFORMATION (UNAUDITED AND SUBJECT TO RECLASSIFICATION)
For the Three and Six Months Ended May 1, 2015 and April 25, 2014
(Dollars in thousands)
Three Months Ended Six Months Ended
May 1, April 25, May 1, April 25,
2015 2014 2015 2014
Depreciation and Amortization $ 21,591 $ 24,492 $ 45,492 $ 52,634
Capital Expenditures 23,360 29,630 41,199 50,621
Dividends Paid 24,377 21,954 48,951 44,180
THE VALSPAR CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)
For the Three Months Ended May 1, 2015 and April 25, 2014
(Dollars in thousands, except per share amounts)
The following information provides reconciliations of non-GAAP financial measures from operations 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 expense, earnings before interest and taxes (EBIT), net income, net income per common share – diluted, and diluted earnings per share (EPS) guidance for the periods presented (GAAP financial measures) to adjusted gross profit, adjusted operating expense, adjusted earnings before interest and taxes (EBIT), adjusted net income, adjusted net income per common share – diluted, and adjusted diluted earnings per share (EPS) guidance (non-GAAP financial measures) for the periods presented.
Three Months Ended Three Months Ended
May 1, 2015 April 25, 20141
Dollars % of Net Sales Dollars % of Net Sales

Coatings Segment

Earnings Before Interest and Taxes (EBIT) $ 108,022 17.6 % $ 98,047 15.8 %
Restructuring Charges – Cost of Sales 561 0.1 % 2,468 0.4 %
Restructuring Charges – Operating Expense 995 0.2 % 171 0.0 %
Adjusted EBIT $ 109,578 17.8 % $ 100,686 16.2 %

Paints Segment

EBIT $ 46,571 11.6 % $ 50,423 10.6 %
Restructuring Charges – Cost of Sales 669 0.2 % 5,828 1.2 %
Restructuring Charges – Operating Expense 34 0.0 % 508 0.1 %
Adjusted EBIT $ 47,274 11.7 % $ 56,759 11.9 %

Other and Administrative

EBIT $ (378 ) (0.6 %) $ (5,714 ) (9.8 %)
Restructuring Charges – Cost of Sales 0.0 % (27 ) (0.0 %)
Restructuring Charges – Operating Expense (9 ) (0.0 %) (92 ) (0.2 %)
Adjusted EBIT $ (387 ) (0.6 %) $ (5,833 ) (10.0 %)

Total

Gross Profit $ 393,203 36.4 % $ 380,758 32.9 %
Restructuring Charges – Cost of Sales 1,230 0.1 % 8,269 0.7 %
Adjusted Gross Profit $ 394,433 36.5 % $ 389,027 33.7 %
Operating Expenses $ 237,294 22.0 % $ 237,684 20.6 %
Restructuring Charges – Operating Expense (1,020 ) (0.1 %) (587 ) (0.1 %)
Adjusted Operating Expenses $ 236,274 21.9 % $ 237,097 20.5 %
EBIT $ 154,215 14.3 % $ 142,756 12.4 %
Restructuring Charges – Total 2,250 0.2 % 8,856 0.8 %
Adjusted EBIT $ 156,465 14.5 % $ 151,612 13.1 %
Net Income $ 90,314 $ 85,959
After Tax Restructuring Charges – Total 1,849 6,661
Adjusted Net Income $ 92,163 $ 92,620
Net Income per Common Share – diluted $ 1.09 $ 0.99
After Tax Restructuring Charges – Total 0.02 0.08
Adjusted Net Income per Common Share – diluted $ 1.11 $ 1.07

1 Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation. In the first quarter of 2015, we changed our policy and now classify freight costs on shipments to customers as cost of sales. Previously these costs were recorded as a deduction from net sales. Reclassifications had no effect on net income (loss), cash flows or stockholders’ equity as previously reported.

THE VALSPAR CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)
For the Six Months Ended May 1, 2015 and April 25, 2014
(Dollars in thousands, except per share amounts)
Six Months Ended Six Months Ended
May 1, 2015 April 25, 20141
Dollars % of Net Sales Dollars % of Net Sales

Coatings Segment

Earnings Before Interest and Taxes (EBIT) $ 243,631 20.0 % $ 168,022 14.2 %
Restructuring Charges – Cost of Sales 2,951 0.2 % 6,733 0.6 %
Restructuring Charges – Operating Expense 1,958 0.2 % 4,526 0.4 %
Gain on Sale of Certain Assets (48,001 ) (3.9 %) 0.0 %
Adjusted EBIT $ 200,539 16.5 % $ 179,281 15.1 %

Paints Segment

EBIT $ 71,900 9.4 % $ 81,420 9.7 %
Restructuring Charges – Cost of Sales 3,128 0.4 % 7,603 0.9 %
Restructuring Charges – Operating Expense 765 0.1 % 1,552 0.2 %
Adjusted EBIT $ 75,793 9.9 % $ 90,575 10.8 %

Other and Administrative

EBIT $ (2,995 ) (2.7 %) $ (11,497 ) (10.8 %)
Restructuring Charges – Cost of Sales 0.0 % 39 0.0 %
Restructuring Charges – Operating Expense (9 ) (0.0 %) 209 0.2 %
Adjusted EBIT $ (3,004 ) (2.7 %) $ (11,249 ) (10.6 %)

Total

Gross Profit $ 726,495 34.7 % $ 699,811 32.8 %
Restructuring Charges – Cost of Sales 6,079 0.3 % 14,375 0.7 %
Adjusted Gross Profit $ 732,574 35.0 % $ 714,186 33.5 %
Operating Expenses $ 461,231 22.0 % $ 461,177 21.6 %
Restructuring Charges – Operating Expense (2,714 ) (0.1 %) (6,287 ) (0.3 %)
Adjusted Operating Expenses $ 458,517 21.9 % $ 454,890 21.3 %
EBIT $ 312,536 14.9 % $ 237,945 11.1 %
Restructuring Charges – Total 8,793 0.4 % 20,662 1.0 %
Gain on Sale of Certain Assets (48,001 ) (2.3 %) 0.0 %
Adjusted EBIT $ 273,328 13.1 % $ 258,607 12.1 %
Net Income $ 194,288 $ 139,512
After Tax Restructuring Charges – Total 5,967 14,242
After Tax Gain on Sale of Certain Assets (37,216 )
Adjusted Net Income $ 163,039 $ 153,754
Net Income per Common Share – diluted $ 2.33 $ 1.60
Restructuring Charges – Total 0.07 0.17
After Tax Gain on Sale of Certain Assets (0.44 )
Adjusted Net Income per Common Share – diluted $ 1.96 $ 1.77

Reconciliation of Fiscal 2015 Annual Adjusted Diluted EPS Guidance

Diluted EPS Guidance $4.79 – $4.94
After Tax Restructuring Charges 0.10 – 0.15
After Tax Gain on Sale of Certain Assets (0.44)
Adjusted Diluted EPS Guidance $4.45 – $4.65

1 Certain amounts in the 2014 financial statements have been reclassified to conform to the 2015 presentation. In the first quarter of 2015, we changed our policy and now classify freight costs on shipments to customers as cost of sales. Previously these costs were recorded as a deduction from net sales. Reclassifications had no effect on net income (loss), cash flows or stockholders’ equity as previously reported.

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