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| VAL > SEC Filings for VAL > Form 10-K on 23-Dec-2008 | All Recent SEC Filings |
23-Dec-2008
Annual Report
OVERVIEW
The following discussion of financial condition and results of operations should
be read in the context of this overview.
General Economic and Industry-Wide Factors General economic conditions presented extraordinary challenges in 2008. Higher raw material costs and continued declines in the U.S. housing and construction markets throughout fiscal 2008 and an overall global economic decline in the fourth quarter of 2008 negatively affected our results.
In 2008, we experienced dramatic increases in the costs of raw materials in the U.S and abroad, continuing a trend that began in the second half of fiscal 2004. Although the price of crude oil trended downward in the fourth quarter of 2008, we did not experience relief in our raw material costs in the quarter. In response to increased raw material costs during the fiscal year, we were able to implement customer price increases to partially offset the cost increases.
Total net sales increased 7.2% from 2007, primarily driven by favorable foreign currency exchange rates, acquisitions and increased customer selling prices. Our acquisitions and international operations performed well in 2008. We continued to expand our global presence in 2008 by acquiring Aries Coil Coatings S.A. de C.V. (Aries), a privately owned manufacturer of high-performance coil and packaging coatings based in Monterrey, Mexico.
The U.S. housing market continued its decline, and our wood coatings and architectural paints continue to be the product lines most affected by the downturn. In the fourth quarter of 2008, we began to see weakness in the commercial construction market. Our architectural product line, however, performed well in comparison to our competitors. We believe this was due to increased brand awareness resulting from our continuing investment in the Valspar and Cabot brands.
At the end of 2008, a crisis in the worldwide credit and financial sectors emerged, as well as a slowdown in the global economy.
Business Performance
Net sales increased to $3,482,378,000 from $3,249,287,000 in 2007, primarily
driven by favorable foreign currency exchange rates, acquisitions and increased
customer selling prices. Our global presence expanded as international net sales
accounted for 40.6% of our total business in 2008, compared to 36.8% in 2007.
In December 2007, we acquired control of Aries Coil Coatings S.A. de C.V. (Aries), a privately owned manufacturer of high-performance coil and packaging coatings based in Monterrey, Mexico. We purchased the remaining shares of this business in the second quarter of 2008. Aries had annual sales in calendar year 2007 of approximately $40,000,000.
In January 2007, we acquired a majority of the voting shares of a coil coatings business in Brazil from Tekno S.A. Tekno's revenue for 2006 was $10,700,000. In the fourth quarter of 2008, we acquired the remaining shares of this business.
We continue to invest in the Valspar brand to support the long-term growth of our Paints segment by building a premium brand in the marketplace. As a result, we have seen an increase in consumer awareness of the Valspar brand. In China, our Huarun brand continues to experience growth.
During the third quarter of 2008, we initiated a comprehensive series of actions to lower our cost structure and further increase our operational efficiency. The total cost of these restructuring actions is expected to be $0.23 to $0.25 per share after tax. Approximately half of the total cost of our restructuring actions is related to streamlining our European operations. We have reduced manufacturing capacity and our overall global head-count to lower our costs in light of challenging global economic conditions. Restructuring activities during 2008 resulted in pre-tax charges of $23,454,000 or $0.16 per share after tax. See Note 15 in Notes to Consolidated Financial Statements for more information on restructuring.
During the year we generated $165,551,000 in free cash flow (net cash provided by operating activities less capital expenditures and dividends), an increase of $104,479,000 from 2007, and reduced our total debt, including notes payable, by $93,854,000. Our liquidity position is strong, with $90,073,000 in cash and $339,859,000 unused committed bank credit facilities providing total committed liquidity of $429,932,000 at year-end.
During the year we repurchased 1,850,000 shares of our stock for $39,675,000. Additionally, our board of directors raised the dividend in fiscal year 2008 by 7.7% to $0.56 per share.
Earnings Per Share
Net income per share available to common shareholders was $1.38 for 2008 and
$1.50 for 2007. We accrued $12,195,000 in 2008 for the Huarun Redeemable Stock
(See Note 2 in Notes to Consolidated Financial Statements for further details).
This compares to an accrual of $18,619,000 in 2007. The accrual reduced basic
and diluted income available to common shareholders by $0.12 and $0.18 per share
in 2008 and 2007, respectively. The table below presents adjusted net income per
common share - diluted, which excludes a non-cash accrual relating to Huarun
Redeemable Stock. The table also presents restructuring charges included in net
income in the respective periods.
2008 2007
---------------------------------------------- - - ---- - - ---- -
Net income per common share - diluted $ 1.38 $ 1.50
Huarun redeemable stock accrual 0.12 0.18
Adjusted net income per common share - diluted $ 1.50 $ 1.68
---------------------------------------------- - - ---- - - ---- -
Restructuring charges $ 0.16 -
---------------------------------------------- - - ---- - - ---- -
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"Adjusted net income per common share-diluted" is a non-GAAP financial measure. Management discloses this measure because we believe the measure may assist investors in comparing our results of operations in the respective periods without regard to the effect on results in the 2008 and 2007 periods of the non-cash accrual related to the Huarun Redeemable Stock. As the Huarun Redeemable Stock is redeemed, acquisition accounting is applied.
OPERATIONS 2008 VS. 2007
Net Sales 2008 2007 % Change
---------------------- - - ------------- - - ------------- - -- ------- -
Coatings $ 2,053,747,000 $ 1,851,687,000 10.9 %
Paints 1,127,073,000 1,088,819,000 3.5 %
All Other 301,558,000 308,781,000 -2.3 %
---------------------- - - ------------- - - ------------- - -- ------- -
Consolidated Net Sales $ 3,482,378,000 $ 3,249,287,000 7.2 %
---------------------- - - ------------- - - ------------- - -- ------- -
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• Consolidated Net Sales - Sales growth for 2008 was 1.3%, excluding the favorable impact of foreign currency of 3.5% and acquisitions of 2.4%. Core growth was primarily due to increased selling prices partially offset by lower demand resulting from the decline in the U.S. housing and construction markets. Fiscal year 2008 included 53 weeks compared to 52 weeks in 2007.
• Coatings Segment Net Sales - Sales growth for 2008 was 2.3%, excluding the favorable impact of foreign currency of 4.5% and acquisitions of 4.1%. Coatings core sales growth was driven by our packaging, general industrial and coil product lines partially offset by weak sales in the wood coatings product line related to weakness in the furniture and new construction markets.
• Paints Segment Net Sales - Sales growth for 2008 was 1.0%, excluding the favorable impact of foreign currency of 2.3% and acquisitions of 0.2%. Sales in our architectural product line have been adversely affected by continued weakness in the U.S. housing market. Our architectural product line, however, performed well in comparison to our competitors. We believe this was due to increased brand awareness resulting from our continuing investment in the Valspar and Cabot brands. We continue to experience growth in the Huarun Paints architectural product line in the Chinese domestic market.
• All Other Net Sales - Sales for 2008 decreased 3.8%, excluding the positive effect of foreign currency of 1.5%. The sales decline reflects weak market conditions for these products.
Gross Profit 2008 2007
------------------------- - - ----------- - - ----------- -
Consolidated Gross Profit $ 977,431,000 $ 971,797,000
As a percent of Net Sales 28.1 % 29.9 %
------------------------- - - ----------- - - ----------- -
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• Consolidated Gross Profit - The decrease in gross profit as a percent of net sales was primarily due to the lag between higher raw material costs and the impact of selling price increases. The decrease is also due to 2008 restructuring charges, which were $15,694,000 or 0.5% of net sales.
Operating Expenses* 2008 2007
------------------------------- - ------------- - ------------- -
Consolidated Operating Expenses $ 684,056,000 $ 662,224,000
As a percent of Net Sales 19.6 % 20.4 %
------------------------------- - - ----------- - - ----------- -
|
* Includes research and development, selling and administrative costs and amortization expense. For breakout see Consolidated Statement of Income.
• Consolidated Operating Expenses (dollars) - Operating expenses increased 3.3% to $684,056,000 in 2008 compared to the prior year. Operating expenses for 2008 included restructuring charges of $7,489,000 and a pre-tax gain on the sale of a non-strategic specialty product line of $14,167,000. The increase in operating expense in dollars is due to acquisitions, restructuring costs and increased incentive compensation, partially offset by a gain on the sale of a specialty product line and expense controls.
• Consolidated Operating Expenses (percent of net sales) - As a percent of consolidated net sales, consolidated operating expenses decreased 0.8% compared to last year. The decrease was driven primarily by a gain on the sale of a specialty product line and expense controls, partially offset by restructuring charges and higher incentive compensation.
EBIT* 2008 2007
------------------------- - - ----------- - - ----------- -
Coatings $ 188,267,000 $ 198,073,000
As a percent of Net Sales 9.2 % 10.7 %
Paints 94,587,000 105,947,000
As a percent of Net Sales 8.4 % 9.7 %
All Other 3,588,000 17,413,000
As a percent of Net Sales 1.2 % 5.6 %
------------------------- - - ----------- - - ----------- -
Consolidated EBIT $ 286,442,000 $ 321,433,000
------------------------- - - ----------- - - ----------- -
As a percent of Net Sales 8.2 % 9.9 %
------------------------- - - ----------- - - ----------- -
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* We evaluate the performance of operating segments and allocate resources based on profit or loss from operations before interest expense and taxes (EBIT).
• Consolidated EBIT - EBIT for 2008 decreased $34,991,000 or 10.9% compared to the prior year. The decrease in EBIT as a percent of net sales was primarily driven by the lag between raw material cost increases and the impact of pricing actions and restructuring charges. Consolidated EBIT for 2008
included pre-tax restructuring charges of $23,454,000 or 0.7% of net sales. For Consolidated EBIT, as well as EBIT of the segments discussed below, foreign currency fluctuation had no material effect.
• Coatings Segment EBIT - The decrease in EBIT as a percent of net sales was primarily driven by the lag between raw material cost increases and the impact of pricing actions and restructuring charges. EBIT for 2008 included restructuring charges of $12,951,000 or 0.6% of net sales.
• Paints Segment EBIT - The decrease in EBIT as a percent of net sales was primarily driven by the lag between raw material cost increases and the impact of pricing actions and restructuring charges. EBIT for 2008 included restructuring charges of $7,153,000 or 0.6% of net sales.
• All Other EBIT - All other EBIT includes corporate expenses. The decrease in EBIT as a percent of net sales was primarily driven by the decrease in net sales and the lag between raw material cost increases and the impact of pricing actions and restructuring charges. EBIT for 2008 included restructuring charges of $3,350,000 or 1.1% of net sales. Both 2008 and 2007 include pre-tax gains on the sale of assets of $14,167,000 and $16,500,000, respectively.
Interest Expense 2008 2007
----------------------------- - - ---------- - - ---------- -
Consolidated Interest Expense $ 57,745,000 $ 61,662,000
----------------------------- - - ---------- - - ---------- -
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• Interest Expense - The 2008 decrease is due primarily to lower average interest rates, partially offset by higher average debt levels.
Effective Tax Rate 2008 2007
------------------ - ------ - ------ -
Effective Tax Rate 34.1 % 33.7 %
------------------ - - ---- - - ---- -
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• Effective Tax Rate - The 2008 effective income tax rate reflects certain discrete items resulting from the implementation of FIN 48.
Net Income 2008 2007 % Change
----------------------- - - ----------- - - ----------- - - -------- -
Consolidated Net Income $ 150,766,000 $ 172,115,000 -12.4 %
----------------------- - - ----------- - - ----------- - - -------- -
OPERATIONS 2007 VS. 2006
Net Sales 2007 2006 % Change
---------------------- - - ------------- - - ------------- - -- ------- -
Coatings $ 1,851,687,000 $ 1,683,482,000 10.0 %
Paints 1,088,819,000 985,698,000 10.5 %
All Other 308,781,000 308,882,000 0.0 %
---------------------- - - ------------- - - ------------- - -- ------- -
Consolidated Net Sales $ 3,249,287,000 $ 2,978,062,000 9.1 %
---------------------- - - ------------- - - ------------- - -- ------- -
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• Consolidated Net Sales - Sales growth for 2007 was negative 0.6% after excluding the favorable impact of acquisitions of 7.9% and foreign currency of 1.8%.
• Coatings Segment Net Sales - Excluding the favorable impact of the acquisitions of Huarun and H.B. Fuller's powder coatings business of 7.7% and the positive effect of foreign currency of 2.4%, net sales growth in the Coatings segment was negative 0.1%. Coatings core sales were affected by soft sales in the wood coatings product line related to weakness in the furniture and new construction markets.
• Paints Segment Net Sales - Excluding the favorable impact of the Huarun acquisition of 10.8% and the positive effective of foreign currency of 1.0%, net sales growth in the Paints segment was negative 1.3%. The decrease was primarily driven by weakness in the U.S. residential construction and housing markets which affected sales in the architectural product line.
Gross Profit 2007 2006
------------------------- - - ----------- - - ----------- -
Consolidated Gross Profit $ 971,797,000 $ 905,905,000
As a percent of Net Sales 29.9 % 30.4 %
------------------------- - - ----------- - - ----------- -
|
• Consolidated Gross Profit - The decrease in gross profit as a percent of net sales was due to lower U.S. volume in our higher margin Paints segment, manufacturing inefficiencies resulting from inventory reductions and increased raw material costs.
Operating Expenses* 2007 2006
------------------------------- - - ----------- - - ----------- -
Consolidated Operating Expenses $ 662,224,000 $ 598,468,000
As a percent of Net Sales 20.4 % 20.1 %
------------------------------- - - ----------- - - ----------- -
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* Includes research and development, selling and administrative costs and amortization expense. For breakout see Consolidated Statement of Income.
• Consolidated Operating Expenses - Operating expenses increased 10.7% to $662,224,000 in 2007 compared to 2006. The dollar increase was driven by our investment in building the Valspar brand and incremental expenses of H.B. Fuller powder coatings and TNC, partially offset by lower incentive compensation.
EBIT* 2007 2006
------------------------- - - ----------- - - ----------- -
Coatings $ 198,073,000 $ 202,432,000
As a percent of Net Sales 10.7 % 12.0 %
Paints 105,947,000 107,129,000
As a percent of Net Sales 9.7 % 10.9 %
All Other 17,413,000 (5,923,000 )
As a percent of Net Sales 5.6 % -1.9 %
------------------------- - - ----------- - - ----------- -
Consolidated EBIT $ 321,433,000 $ 303,638,000
------------------------- - - ----------- - - ----------- -
As a percent of Net Sales 9.9 % 10.2 %
------------------------- - - ----------- - - ----------- -
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* We evaluate the performance of operating segments and allocate resources based on profit or loss from operations before interest expense and taxes (EBIT).
• Consolidated EBIT - EBIT for 2007 increased $17,795,000 or 5.9% compared to the prior year. The decrease in EBIT as a percent of net sales was primarily driven by lower operating profits related to
weakness in the furniture and new construction markets, an increase in expense related to our investment in building the Valspar brand, partially offset by lower incentive compensation and a gain on the sale of certain intellectual property assets. For Consolidated EBIT, as well as EBIT of the segments discussed below, foreign currency fluctuation had no material effect.
• Coatings Segment EBIT - The decrease in EBIT was primarily due to lower operating profits from our wood coatings product line related to weakness in the furniture and new construction markets, partially offset by lower incentive compensation.
• Paints Segment EBIT - The decrease in EBIT was largely attributable to an increase in expense related to our investment in building the Valspar brand, partially offset by lower incentive compensation and improvement in automotive refinish profitability.
• All Other EBIT - All other EBIT includes corporate expenses. Fiscal year 2007 includes a pre-tax gain on the sale of assets of $16,500,000.
Interest Expense 2007 2006
----------------------------- - - ---------- - - ---------- -
Consolidated Interest Expense $ 61,662,000 $ 46,206,000
----------------------------- - - ---------- - - ---------- -
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• Interest Expense - The increase in interest expense was primarily due to an increase in average debt outstanding.
Effective Tax Rate 2007 2006
------------------ - - ---- - - ---- -
Effective Tax Rate 33.7 % 31.9 %
------------------ - - ---- - - ---- -
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• Effective Tax Rate - The effective tax rate increase was due to favorable 2006 items: tax adjustments related to prior tax periods, the approval of favorable tax credits and statutory rate reductions in foreign jurisdictions.
FINANCIAL CONDITION
Cash provided by operating activities was $264,450,000 in 2008, compared with
$190,682,000 in 2007 and $284,672,000 in 2006. In 2008, the cash provided by
operating activities and proceeds from disposal of assets were used to fund
$81,896,000 in net repayments of debt, $64,647,000 in acquisitions, $55,854,000
in dividend payments, $43,045,000 in capital expenditures, $39,675,000 in share
repurchases, and $21,501,000 for the purchase of Huarun stock upon exercise of a
"put" option by certain minority shareholders.
Trade accounts payable and accrued liabilities increased by $33,528,000 primarily as a result of higher incentive compensation, restructuring accruals, higher raw material costs and timing of disbursements. Income taxes payable increased by $25,988,000 primarily as a result of timing of income tax disbursements. Inventories and other current assets decreased $15,684,000, primarily due to a worldwide emphasis on reducing inventory levels. Accounts and notes receivable increased by $21,993,000, primarily due to an increase in sales and the timing of customer payments.
Capital expenditures for property, plant and equipment were $43,045,000 in 2008, compared with $76,940,000 in 2007. We anticipate capital spending in fiscal 2009 to be approximately $60,000,000.
The ratio of total debt to capital decreased to 38.8% at the end of 2008 compared to 42.4% in 2007. Average debt outstanding during 2008 was $1,087,279,000 at a weighted average interest rate of 5.31% versus $1,037,677,000 at 5.94% last year. Interest expense for 2008 was $57,745,000 compared to $61,662,000 in 2007.
Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under the multi-currency credit facilities, commercial paper program, senior notes, industrial development bonds, employee benefit plans, capital leases, non-cancelable operating leases with initial or remaining terms in excess of one year, commodity purchase commitments and Huarun Paints minority interest shares that are subject to puts and are classified outside of shareholders' equity as Huarun Redeemable Stock. Interest charges are variable and assumed at current rates.
The following table summarizes our fixed cash obligations as of October 31, 2008 for the fiscal years ending in October:
CONTRACTUAL CASH OBLIGATIONS
2014 and
(Dollars in thousands) 2009 2010 2011 2012 2013 thereafter Total
-------------------------- -- --------- -- --------- -- -------- -- --------- -- -------- -- ------------ -- ----------- -
Notes & Interest to Banks $ 28,658 $ 256,450 $ - $ - $ - $ - $ 285,108
Commercial Paper 148,325 - - - - - 148,325
Senior Notes & Interest 27,975 27,975 27,975 227,975 16,725 351,600 680,225
Industrial Development
Bonds & Interest 306 306 306 306 306 13,420 14,950
Medical
Retiree/SERP/Pension 12,313 1,877 2,265 2,224 2,314 17,540 38,533
Capital Leases & Interest 13 - - - - - 13
Operating Lease 15,536 12,997 9,451 7,128 5,076 16,021 66,209
Commodity Purchase
Commitments 6,206 - - - - - 6,206
Huarun Redeemable Stock 43,529 - - - - - 43,529
-------------------------- -- - ------- -- - ------- -- - ------ -- - ------- -- - ------ -- -- --------- -- - --------- -
Total Contractual Cash
Obligations $ 282,861 $ 299,605 $ 39,997 $ 237,633 $ 24,421 $ 398,581 $ 1,283,098
-------------------------- -- - ------- -- - ------- -- - ------ -- - ------- -- - ------ -- -- --------- -- - --------- -
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We expect to make cash outlays in the future related to uncertain tax positions. However, due to the uncertainty of the timing of future cash flows, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, gross unrecognized tax benefits of $44,797,000 as of October 31, 2008, have been excluded from the contractual obligations table above. For further information related to unrecognized tax benefits see Note 10 in Notes to Consolidated Financial Statements.
On November 25, 2007, we entered into a 364-day $150,000,000 unsecured committed revolving credit facility with a syndicate of banks maturing on November 25, 2008. This credit facility was subject to an option to extend for an additional year. We exercised this option and borrowed $150,000,000 under this facility, which is now due November 25, 2009. We also have a $600,000,000 unsecured committed credit facility that expires in October 2010. Under the terms of these credit facilities, we can borrow at optional interest rates of prime or LIBOR-based rates. At October 31, 2008, we had unused lines of committed and uncommitted credit available from banks of $528,396,000.
We believe cash flow from operations, existing lines of credit, access to credit facilities and access to debt and capital markets will be sufficient to meet our current and projected needs for financing. In the current market conditions, despite the prevailing "credit crisis", we have demonstrated continued access to these markets. We have committed liquidity and cash reserves in excess of our anticipated funding requirements.
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