Document And Entity Information

3 Months Ended

Jan. 27, 2017

Mar. 1, 2017

Document And Entity Information [Abstract]

Document Type

10-Q

Amendment Flag

false

Document Period End Date

Jan. 27, 2017

Document Fiscal Year Focus

2017

Document Fiscal Period Focus

Q1

Entity Filer Category

Large Accelerated Filer

Entity Registrant Name

VALSPAR CORP

Entity Central Index Key

0000102741

Current Fiscal Year End Date

--10-27

Entity Common Stock, Shares Outstanding

79,454,938

Condensed Consolidated Balance Sheets (USD $)

In Thousands, unless otherwise specified

Jan. 27, 2017

Oct. 28, 2016

Jan. 29, 2016

CURRENT ASSETS:

Cash and cash equivalents

$ 153,680

$ 174,720 ¹

$ 151,676

Restricted cash

882

857 ¹

1,383

Accounts and notes receivable net of allowances (1/27/17 – $8,308; 10/28/16 – $7,502; 1/29/16 – $9,823)

691,731

815,432 ¹

672,296

Inventories

506,562

473,294 ¹

515,226

Deferred income taxes

30,703

32,033 ¹

31,899

Prepaid expenses and other

120,464

98,288 ¹

127,527

TOTAL CURRENT ASSETS

1,504,022

1,594,624 ¹

1,500,007

GOODWILL

1,262,481

1,284,706 ¹

1,281,756

INTANGIBLES, NET

608,095

625,399 ¹

633,521

OTHER ASSETS

105,449

106,178 ¹

104,574

LONG-TERM DEFERRED INCOME TAXES

20,192

21,174 ¹

10,911

Property, plant and equipment, gross

1,751,514

1,682,456 ¹

1,593,379

Less accumulated depreciation

(1,093,644)

(1,014,013)¹

(964,219)

PROPERTY, PLANT AND EQUIPMENT, NET

657,870

668,443 ¹

629,160

TOTAL ASSETS

4,158,109

4,300,524 ¹

4,159,929

CURRENT LIABILITIES:

Short-term debt

136,562

71,339 ¹

338,185

Current portion of long-term debt

150,107

150,107 ¹

116

Trade accounts payable

524,559

553,152 ¹

504,639

Income taxes payable

14,338

28,216 ¹

20,675

Other accrued liabilities

354,212

463,006 ¹

361,707

TOTAL CURRENT LIABILITIES

1,179,778

1,265,820 ¹

1,225,322

LONG-TERM DEBT, NET

1,543,302

1,542,926 ¹

1,693,119

LONG-TERM DEFERRED INCOME TAXES

186,463

191,821 ¹

234,969

OTHER LONG-TERM LIABILITIES

180,205

186,534 ¹

151,793

TOTAL LIABILITIES

3,089,748

3,187,101 ¹

3,305,203

STOCKHOLDERS' EQUITY:

Common stock (par value - $0.50; authorized - 250,000,000 shares; shares issued, including shares in treasury - 118,442,624)

59,220

59,220 ¹

59,220

Additional paid-in capital

502,197

495,920 ¹

477,979

Retained earnings

2,472,674

2,458,101 ¹

2,235,998

Accumulated other comprehensive income (loss)

(284,345)

(217,183)¹

(218,238)

Less cost of common stock in treasury (1/27/17 – 38,987,807 shares; 10/28/16 – 39,019,811 shares; 1/29/16 – 39,430,801 shares)

(1,681,385)

(1,682,635)¹

(1,700,233)

TOTAL STOCKHOLDERS' EQUITY

1,068,361

1,113,423 ¹

854,726

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$ 4,158,109

$ 4,300,524 ¹

$ 4,159,929

[1] The Balance Sheet at October 28, 2016 has been derived from the audited consolidated financial statements at that date.

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)

In Thousands, except Share data, unless otherwise specified

Jan. 27, 2017

Oct. 28, 2016

Jan. 29, 2016

Statement of Financial Position [Abstract]

Accounts and notes receivable, allowance

$ 8,308

$ 7,502

$ 9,823

Common stock, par value (in usd per share)

$ 0.50

Common stock, shares authorized (in shares)

250,000,000

Common stock, shares issued, including shares in treasury (in shares)

118,442,624

Shares Held in Treasury (in shares)

38,987,807

39,019,811

39,430,801

Condensed Consolidated Statements Of Operations (Unaudited) (USD $)

In Thousands, except Share data, unless otherwise specified

3 Months Ended

Jan. 27, 2017

Jan. 29, 2016

Income Statement [Abstract]

Net sales

$ 907,652

$ 885,756

Cost of sales

597,133

567,129

Gross profit

310,519

318,627

Research and development

33,221

32,528

Selling, general and administrative

202,707

192,391

Operating expenses

235,928

224,919

Income from operations

74,591

93,708

Interest expense

22,544

22,415

Other (income) expense - net

(676)

615

Income before income taxes

52,723

70,678

Income taxes

11,976

18,247

Net income

$ 40,747

$ 52,431

Net income per common share - basic (in dollars per share)

$ 0.51

$ 0.67

Net income per common share - diluted (in dollars per share)

$ 0.50

$ 0.65

Average number of common shares outstanding

- basic (in shares)

79,269,937

78,760,765

- diluted (in shares)

81,341,377

80,612,302

Dividends paid per common share (in dollars per share)

$ 0.37

$ 0.33

Condensed Consolidated Statements Of Comprehensive Income (Unaudited) (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Jan. 27, 2017

Jan. 29, 2016

Statement of Comprehensive Income [Abstract]

Net income

$ 40,747

$ 52,431

Other comprehensive income (loss)

(67,162)

(22,740)

Comprehensive income (loss)

$ (26,415)

$ 29,691

Condensed Consolidated Statements Of Cash Flows (Unaudited) (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Jan. 27, 2017

Jan. 29, 2016

OPERATING ACTIVITIES:

Net income

$ 40,747

$ 52,431

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation

21,057

20,228

Amortization

2,906

2,793

Stock-based compensation

10,574

4,435

Changes in certain assets and liabilities:

(Increase)/decrease in accounts and notes receivable

97,224

176,042

(Increase)/decrease in inventories and other assets

(65,296)

(89,991)

Increase/(decrease) in trade accounts payable and other accrued liabilities

(106,170)

(131,574)

Increase/(decrease) in income taxes, net

(20,848)

(23,865)

Increase/(decrease) in other non-current liabilities

2,518

12,638

Other

139

(2,648)

Net cash provided by (used in) operating activities

(17,149)

20,489

INVESTING ACTIVITIES:

Purchases of property, plant and equipment

(28,697)

(24,117)

Acquisition of businesses, net of cash acquired

0

(5,698)

Purchase of noncontrolling interest

(5,820)

0

Cash proceeds on disposal of assets

980

6,753

Decrease in restricted cash

(25)

(76)

Net cash used in investing activities

(33,562)

(23,138)

FINANCING ACTIVITIES:

Payments of debt

(45)

Net change in other borrowings

3

5,850

Net proceeds (repayments) of commercial paper

65,702

(450)

Proceeds from stock options exercised

892

6,454

Treasury stock purchases

0

(18,134)

Excess tax benefit from stock-based compensation

1,043

4,429

Dividends paid

(30,151)

(26,063)

Net cash provided by (used in) financing activities

37,444

(27,959)

Decrease in cash and cash equivalents

(13,267)

(30,608)

Effect of exchange rate changes on cash and cash equivalents

(7,773)

(3,677)

Cash and cash equivalents at beginning of period

174,720 ¹

185,961

Cash and cash equivalents at end of period

$ 153,680

$ 151,676

[1] The Balance Sheet at October 28, 2016 has been derived from the audited consolidated financial statements at that date.

Basis Of Presentation

Basis of Presentation

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of The Valspar Corporation (Valspar, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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 GAAP 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 three months ended January 27, 2017 are not necessarily indicative of the results that may be expected for the year ending October 27, 2017.

The Condensed Consolidated Balance Sheet at October 28, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The Company made certain reclassifications to prior period amounts to conform to the current year presentation. These reclassifications did not have a material effect on the Condensed Consolidated Statements of Operations, Balance Sheets or Cash Flows.

For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended October 28, 2016.

Proposed Merger with The Sherwin-Williams Company

On March 19, 2016, Valspar entered into an Agreement and Plan of Merger (the Merger Agreement) with The Sherwin-Williams Company (Sherwin-Williams) and Viking Merger Sub, Inc., a wholly-owned subsidiary of Sherwin-Williams (Merger Sub).

The Merger Agreement provides that, among other things and subject to the terms and conditions of the Merger Agreement, (1) Merger Sub will be merged with and into Valspar (the Merger), with Valspar surviving the Merger as a wholly-owned subsidiary of Sherwin-Williams, and (2) at the effective time of the Merger, each outstanding share of common stock of Valspar, par value $0.50 per share (Valspar common stock) (other than Valspar common stock held in treasury by Valspar, owned by a subsidiary of Valspar or owned by Sherwin-Williams or any of its wholly-owned subsidiaries, or shares with respect to which appraisal rights have been validly exercised and not lost in accordance with Delaware law) will be converted into the right to receive the Merger Consideration.

The Merger Consideration means $113.00 per share in cash, except that if Sherwin-Williams is required, in order to obtain the necessary antitrust approvals, to commit to any divestiture, license, hold separate, sale or other disposition of or with respect to assets, businesses or product lines of Valspar, Sherwin-Williams or their subsidiaries representing, in the aggregate, in excess of $650 million of Net Sales (as defined in the Merger Agreement), then the Merger Consideration will be $105.00 per share in cash.

The Merger Agreement contains certain termination rights, and we may be required to pay Sherwin-Williams a termination fee of $300 million.

For further information on the Merger Agreement, refer to the Merger Agreement, a copy of which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 21, 2016, and which is incorporated by reference herein.

On June 29, 2016, Valspar stockholders voted to adopt the Merger Agreement at a special meeting of stockholders held for that purpose. Completion of the Merger remains subject to certain closing conditions, including the expiration or termination of the applicable waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act and the receipt of regulatory approvals in certain other jurisdictions.

In connection with the proposed Merger, we recognized costs of $8,683 and $0 for the three months ended January 27, 2017 and January 29, 2016, respectively, in Selling, general and administrative in the Condensed Consolidated Statements of Operations, for employee-related expenses and professional services.

Acquisitions and Divestitures

ACQUISITIONS AND DIVESTITURES

On February 4, 2016, we purchased ISVA Vernici (ISVA), a European coil coatings manufacturer headquartered in Turin, Italy, for total consideration of approximately $23,000. The ISVA acquisition extends our manufacturing footprint in Europe and brings customers an expanded product offering and increased customer service capabilities. The acquisition was recorded at fair value in our Coatings segment and an allocation of the purchase price has been substantially completed, with the exception of certain tax items. These adjustments are not expected to have a material impact on our condensed consolidated financial statements. We expect to finalize the purchase price allocation within one year of the date of acquisition. The assets, liabilities and operating results have been included in our financial statements from the date of acquisition. Pro forma results of operations for ISVA are not presented as they are immaterial to the reported results.

Inventories

INVENTORIES

Our major classes of inventories consist of the following:



	January 27, 2017		October 28, 2016		January 29, 2016
Manufactured products	$	312,504	$	279,461	$	317,021
Raw materials, supplies and work-in-progress	194,058		193,833		198,205
Total Inventories	$	506,562	$	473,294	$	515,226

Our international inventories are recorded using the first-in, first-out method. Domestic inventories, except for Quest, are recorded using the last-in, first-out (LIFO) method. An actual valuation of inventory under the LIFO method can be made only at the end of the year based on inventory levels and costs at that time. Interim LIFO calculations are based on management reviews of price changes, as well as estimates of expected year-end inventory levels and costs, and are subject to the final year-end LIFO inventory valuation.

Goodwill And Other Intangible Assets

GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill as of January 27, 2017 is $1,262,481, a decrease of $22,225 from the end of fiscal year 2016. The decrease is due to foreign currency translation.

Intangibles, net, as of January 27, 2017 are $608,095, a decrease of $17,304 from the end of fiscal year 2016. The decrease is due to foreign currency translation and amortization.

Total intangible asset amortization expense for the three months ended January 27, 2017 was $2,906 compared to $2,793 for the same period last year. Estimated annual amortization expense for fiscal 2017 and for each of the five succeeding fiscal years based on the intangible assets as of January 27, 2017 is expected to be approximately $12,000.

Guarantees

GUARANTEES

Furniture Protection Plans: We sell extended furniture protection plans and offer warranties for certain products. In the U.S., revenue related to furniture protection plans is deferred and recognized over the contract life. The range of contractual lives for our extended furniture protection plans is three years to lifetime warranty (estimated as 20 years). We have not sold lifetime warranty plans since 2005. Our furniture protection plans outstanding as of January 27, 2017 have a weighted average contractual life of approximately 11 years; however, we expect to pay substantially all of the claims for such plans within five years. We periodically assess the adequacy of these recorded amounts and adjust as necessary. Provisions for estimated losses on uncompleted furniture protection plan contracts are made in the period in which such losses can be estimated. The extended furniture protection plans that we enter into have fixed prices. To the extent the actual costs to complete contracts differ from the amounts estimated as of the date of the financial statements, gross margin would be affected in future periods when we revise our estimates.

Warranties: We offer warranties for certain products. For product warranties, we estimate the costs that may be incurred under these warranties based on historical claims data and record a liability in the amount of such costs at the time revenue is recognized. Anticipated losses are charged to earnings when identified.

Changes in the recorded amounts included in Other accrued liabilities and Other long-term liabilities during the period are as follows:



	Three Months Ended
	January 27, 2017			January 29, 2016
Beginning balance	$	90,038		$	82,871
Additional net deferred revenue/accrual made during the period	2,749			11,003
Payments made during the period	(1,750		)	(2,367		)
Ending balance	$	91,037		$	91,507

Fair Value Measurement

FAIR VALUE MEASUREMENT

We measure certain assets and liabilities at fair value or disclose the fair value of certain assets and liabilities recorded at cost in the Condensed Consolidated Financial Statements on both a recurring and nonrecurring basis. Fair value is defined as an exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value accounting rules establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes use of unobservable inputs. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the inputs used in the valuation. We classify assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. Transfers of instruments between levels are recorded based on end of period values. There were no transfers between levels for all periods presented. The three levels are defined as follows:


•	Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.


•	Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.

Recurring Fair Value Measurements

The following tables provide information by level for assets and liabilities that are recorded at fair value on a recurring basis:



	Fair Value at January 27, 2017		Fair Value Measurements Using Inputs Considered as
	Fair Value at January 27, 2017		Level 1		Level 2		Level 3
Assets
Cash equivalents	$	28,610	$	28,610	$	—	$	—
Restricted cash¹	882		882		—		—
Foreign currency contracts²	191		—		191		—
Deferred compensation plan assets³	19,515		19,515		—		—
Total Assets	$	49,198	$	49,007	$	191	$	—



	Fair Value at October 28, 2016		Fair Value Measurements Using Inputs Considered as
	Fair Value at October 28, 2016		Level 1		Level 2		Level 3
Assets
Cash equivalents	$	39,842	$	39,842	$	—	$	—
Restricted cash¹	857		857		—		—
Foreign currency contracts²	267		—		267		—
Deferred compensation plan assets³	12,864		12,864		—		—
Total Assets	$	53,830	$	53,563	$	267	$	—



	Fair Value at January 29, 2016		Fair Value Measurements Using Inputs Considered as
	Fair Value at January 29, 2016		Level 1		Level 2		Level 3
Assets
Cash equivalents	$	39,103	$	39,103	$	—	$	—
Restricted cash¹	1,383		1,383		—		—
Foreign currency contracts²	403		—		403		—
Deferred compensation plan assets³	10,796		10,796		—		—
Total Assets	$	51,685	$	51,282	$	403	$	—

¹Restricted cash represents cash that is restricted from withdrawal for contractual or legal reasons.

² In the Condensed Consolidated Balance Sheets, foreign currency contracts are included in Prepaid expenses and other when in an asset position and Other accrued liabilities when in a liability position. The fair market value was estimated using observable market data for similar financial instruments.

³The Deferred Compensation Plan Assets consist of the investment funds maintained for the future payments under the Company's deferred compensation plan, which is structured as a rabbi trust. Investments held in the rabbi trust are publicly traded mutual funds. Rabbi trust assets are considered irrevocable, and may only be used to pay participant benefits under the plan. The only exception is the event of bankruptcy, in which case the assets in the rabbi trust would be subject to the claims of creditors of the Company. In the Condensed Consolidated Balance Sheets, rabbi trust assets are included in Other assets.

The following tables provide information regarding the estimated fair value of our outstanding debt, which is recorded at carrying value in the Condensed Consolidated Balance Sheets:



	Fair Value at January 27, 2017		Fair Value Measurements Using Inputs Considered as
	Fair Value at January 27, 2017		Level 1		Level 2		Level 3
Debt¹
Publicly traded debt	$	1,723,409	$	1,723,409	$	—	$	—
Non-publicly traded debt	143,568		—		143,568		—
Total Debt	$	1,866,977	$	1,723,409	$	143,568	$	—



	Fair Value at October 28, 2016		Fair Value Measurements Using Inputs Considered as
	Fair Value at October 28, 2016		Level 1		Level 2		Level 3
Debt¹
Publicly traded debt	$	1,777,957	$	1,777,957	$	—	$	—
Non-publicly traded debt	78,398		—		78,398		—
Total Debt	$	1,856,355	$	1,777,957	$	78,398	$	—



	Fair Value at January 29, 2016		Fair Value Measurements Using Inputs Considered as
	Fair Value at January 29, 2016		Level 1		Level 2		Level 3
Debt¹
Publicly traded debt	$	1,749,610	$	1,749,610	$	—	$	—
Non-publicly traded debt	346,732		—		346,732		—
Total Debt	$	2,096,342	$	1,749,610	$	346,732	$	—

¹Debt, excluding debt issuance costs, is recorded at carrying value of $1,843,568, $1,778,398 and $2,046,732 on the Condensed Consolidated Balance Sheets as of January 27, 2017, October 28, 2016 and January 29, 2016, respectively. The fair value of our publicly traded debt is based on quoted prices (unadjusted) in active markets. The fair value of our non-publicly traded debt was estimated using a discounted cash flow analysis based on our current borrowing costs for debt with similar maturities. In addition, the carrying values of our commercial paper included in non-publicly traded debt approximate the financial instrument’s fair value as the maturities are less than three months. See Note 7 for additional information on debt.

Nonrecurring Fair Value Measurements

We measure certain assets at fair value on a nonrecurring basis. These assets primarily include assets acquired and liabilities assumed as part of an acquisition, as well as property, plant and equipment when the planned use of the asset changes. See Note 2 for additional information on our acquisitions and Note 15 for additional information on restructuring.

Debt

DEBT

Debt consists of the following:



	January 27, 2017			October 28, 2016			January 29, 2016
Short-term debt	$	136,562		$	71,339		$	338,185

Current portion of long-term debt	150,107			150,107			116

Long-term debt:
Publicly traded bonds	1,550,000			1,550,000			$	1,700,000
Other long-term debt	6,899			6,952			8,431
Less: Debt issuance costs	(13,597		)	(14,026		)	(15,312		)
Long-term debt, net of current portion and debt issuance costs	1,543,302			1,542,926			1,693,119
Total debt, net of debt issuance costs	$	1,829,971		$	1,764,372		$	2,031,420

During the three months ended July 29, 2016, $150,000 of Senior Notes that mature on May 1, 2017 were reclassified as Current portion of long-term debt.

We maintain a $750,000 unsecured committed revolving credit facility with a syndicate of banks with a maturity date of December 14, 2018. Under certain circumstances we have the option to increase this credit facility to $1,000,000. This facility has covenants that require us to maintain certain financial ratios. We were in compliance with these covenants as of January 27, 2017. Our debt covenants do not limit, nor are they reasonably likely to limit, our ability to obtain additional debt or equity financing.

We maintain uncommitted bank lines of credit to meet short-term funding needs in certain of our international locations. These arrangements are reviewed periodically for renewal and modification.

Stock-Based Compensation

STOCK-BASED COMPENSATION

Compensation expense associated with our stock-based compensation plans was $10,574 for the three months ended January 27, 2017 compared to $4,435 for the three months ended January 29, 2016.

Pensions And Other Post-Retirement Benefits

PENSIONS AND OTHER POST-RETIREMENT BENEFITS

We sponsor a number of defined benefit pension plans for certain hourly and salaried employees. The benefits for most of these plans are generally based on stated amounts for each year of service.

The net periodic benefit cost of our pension benefits is as follows:



	Three Months Ended
	January 27, 2017			January 29, 2016
Service cost	$	740		$	683
Interest cost	2,905			3,309
Expected return on plan assets	(4,916		)	(4,878		)
Amortization of prior service cost	110			112
Recognized actuarial loss	1,788			1,642
Net periodic benefit cost	627			868

The net periodic benefit cost of our post-retirement medical benefits is as follows:



	Three Months Ended
	January 27, 2017			January 29, 2016
Service cost	$	34		$	72
Interest cost	76			90
Expected return on plan assets	N/A			N/A
Amortization of prior service credit	(14		)	(32		)
Recognized actuarial loss	81			96
Net periodic benefit cost	$	177		$	226

Income Taxes

INCOME TAXES

Our effective income tax rates for the three months ended January 27, 2017 and January 29, 2016 are as follows:



	Three Months Ended
	January 27, 2017		January 29, 2016
Effective tax rate	22.7	%	25.8	%

The first quarter 2017 effective tax rate is lower than the prior year due to the impact of the cumulative effect of tax laws that were enacted during the period in the U.S., Germany and France. The first quarter 2016 effective tax rate was primarily driven by favorable foreign tax rate changes, recognition of U.S. foreign tax credits in fiscal year 2016, and the permanent extension of the U.S. research and development tax credit.

At October 28, 2016, we had a $19,067 liability recorded for gross unrecognized tax benefits (excluding interest and penalties) in other long-term liabilities. Of this total, $16,674 represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of October 28, 2016, we had accrued approximately $4,179 of interest and penalties relating to unrecognized tax benefits. There were no material adjustments to our recorded liability for unrecognized tax benefits or interest and penalties during the first quarter of fiscal years 2017 or 2016.

Net Income Per Common Share

NET INCOME PER COMMON SHARE

The following table presents the net income per common share calculations for the three months ended January 27, 2017 and January 29, 2016:



	Three Months Ended
	January 27, 2017		January 29, 2016
Basic
Net income	$	40,747	$	52,431
Weighted-average common shares outstanding - basic	79,269,937		78,760,765
Net income per common share - basic	$	0.51	$	0.67
Diluted
Net income	$	40,747	$	52,431
Weighted-average common shares outstanding - basic	79,269,937		78,760,765
Diluted effect of stock options and unvested restricted stock	2,071,440		1,851,537
Weighted-average common shares outstanding - diluted	81,341,377		80,612,302
Net income per common share - diluted	$	0.50	$	0.65

Basic earnings per share are based on the weighted-average number of common shares outstanding during each period. In computing diluted earnings per share, the number of common shares outstanding is increased by common stock options and unvested restricted stock with exercise prices lower than the average market prices of common shares during each period and reduced by the number of shares assumed to have been purchased with proceeds from the exercised options. Potential common shares of 0 and 703,022 related to our outstanding stock options and unvested restricted stock were excluded from the computation of diluted earnings per share for the three months ended January 27, 2017 and January 29, 2016, respectively, as inclusion of these shares would have been antidilutive.

Accumulated Other Comprehensive Income (Loss)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss), net of tax, consisted of the following for the three months ended January 27, 2017 and January 29, 2016:



Three Months Ended January 27, 2017	Foreign Currency Translation¹			Benefit Obligations²			Financial Instruments³			Accumulated Other Comprehensive Income (Loss)
Balance, October 28, 2016	$	(119,656	)	$	(90,829	)	$	(6,698	)	$	(217,183	)
Other comprehensive income (loss) before reclassifications	(69,234		)	—			(49		)	(69,283		)
Amounts reclassified from accumulated other comprehensive income (loss) to earnings	—			1,965			156			2,121
Balance, January 27, 2017	$	(188,890	)	$	(88,864	)	$	(6,591	)	$	(284,345	)



Three Months Ended January 29, 2016	Foreign Currency Translation¹			Benefit Obligations²			Financial Instruments³			Accumulated Other Comprehensive Income (Loss)
Balance, October 30, 2015	$	(107,489	)	$	(80,541	)	$	(7,468	)	$	(195,498	)
Other comprehensive income (loss) before reclassifications	(24,927		)	—			595			(24,332		)
Amounts reclassified from accumulated other comprehensive income (loss) to earnings	—			1,808			(216		)	1,592
Balance, January 29, 2016	$	(132,416	)	$	(78,733	)	$	(7,089	)	$	(218,238	)

¹We deem our foreign investments to be permanent in nature and therefore do not provide for taxes on foreign currency translation adjustments.

²Taxes on benefit obligations are recorded in the fourth quarter of each fiscal year.

³Amounts reclassified from accumulated other comprehensive income (loss) for financial instruments were net of tax expense of $115 for the three months ended January 27, 2017 and $116 for the three months ended January 29, 2016.

Amounts related to financial instruments are reclassified from accumulated other comprehensive income (loss) to net income based on the nature of the instrument. Gains and losses on foreign currency contracts are reclassified to other expense (income) when the underlying hedged item is realized. Unamortized gains and losses on treasury lock contracts are reclassified ratably to interest expense over the term of the related debt.

Amounts related to pension and post-retirement medical adjustments are reclassified from accumulated other comprehensive income (loss) to pension cost, which is allocated to cost of sales and operating expenses based on salaries and wages, approximately as follows:



	Three Months Ended
	January 27, 2017		January 29, 2016
Cost of sales	$	778	$	702
Research and development	243		230
Selling, general and administrative	944		876
Total before income taxes	$	1,965	$	1,808

Segment Information

SEGMENT INFORMATION

Based on the nature of our products, technology, manufacturing processes, customers and regulatory environment, we aggregate our operating segments into two reportable segments: Coatings and Paints. We are required to report segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources. We evaluate the performance of operating segments and allocate resources based on earnings before interest and taxes (EBIT).

The Coatings segment aggregates our industrial product lines and packaging product line. Industrial products include a broad range of decorative and protective coatings for metal, wood and plastic. Packaging products include both interior and exterior coatings used in packaging containers, principally metal food containers and beverage cans. The products of this segment are sold throughout the world.

The Paints segment aggregates our consumer paint and automotive refinish product lines. Consumer paint products include interior and exterior decorative paints, stains, primers, varnishes, high performance floor paints and specialty decorative products, such as enamels, aerosols and faux finishes primarily distributed for the do-it-yourself and professional markets in Australia, China, Europe and North America. Automotive refinish products include refinish paints and aerosol spray paints sold through automotive refinish distributors, body shops and automotive supply distributors and retailers in many countries around the world.

Our remaining activities are included in Other and Administrative. These activities include specialty polymers and colorants that are used internally and sold to other coatings manufacturers, as well as related products, furniture protection plans and furniture care and repair products. Also included within Other and Administrative are our corporate administrative expenses. The administrative expenses include expenses not directly allocated to any other reportable segment.

In the following table, sales between segments are recorded at selling prices that are below market prices, generally intended to recover internal costs. Segment EBIT includes income realized on inter-segment sales. Comparative segment data for the three months ended January 27, 2017 and January 29, 2016 are as follows:



	Three Months Ended
	January 27, 2017			January 29, 2016
Net sales
Coatings	$	565,212		$	543,563
Paints	291,275			291,097
Other and Administrative	93,065			90,525
Less Inter-segment Sales	(41,900		)	(39,429		)
Total Net sales	$	907,652		$	885,756

EBIT
Coatings	$	86,728		$	96,547
Paints	3,887			3,819
Other and Administrative	(15,348		)	(7,273		)
Total EBIT	75,267			93,093
Interest expense	22,544			22,415
Income before income taxes	$	52,723		$	70,678

It is not practicable to obtain the information needed to disclose revenues attributable to each of our identified product lines within our reportable segments.

Legal Matter

LEGAL MATTER

The Sherwin-Williams Company/The Valspar Corporation Merger Litigation

On May 24, 2016, a putative class action lawsuit challenging the Merger was filed that named Valspar and its board of directors as defendants. The complaint, captioned Mitsopoulos v. Valspar (Case No. 12373), was filed on May 24, 2016 in the Court of Chancery of the State of Delaware by a purported stockholder of Valspar. The lawsuit sought to enjoin the transaction and alleged, among other things, that the members of the Valspar board of directors breached their fiduciary duties by failing to disclose material information relating to the transaction, including with respect to the financial analyses of Valspar’s financial advisors and financial projections prepared by Valspar management.

On June 17, 2016, Valspar filed a Current Report on Form 8-K disclosing certain additional information relating to the proposed Merger in response to allegations made in the above lawsuit. In filing the Form 8-K, Valspar denied the allegations of the lawsuit and the need for any supplemental disclosure, and stated it believed the definitive proxy statement filed in connection with the Merger disclosed all material information. However, Valspar disclosed the additional information solely for the purpose of avoiding the expense and burden of litigation.

On June 22, 2016, the Court of Chancery entered an order dismissing the Delaware Action with prejudice as to plaintiff Tom Mitsopoulos and without prejudice as to all other members of the putative class. Pursuant to the order, the Court of Chancery retained jurisdiction solely for the purpose of determining plaintiff Tom Mitsopoulos’ application for an award of attorneys’ fees and reimbursement of expenses.

Plaintiff’s counsel in the Action filed a Petition for an Award of Attorneys’ Fees and Expenses in view of the supplemental disclosures contained in the June 17, 2016 Form 8-K. After negotiations, to eliminate any risk associated with plaintiff Tom Mitsopoulos’ fee petition, Valspar has agreed to pay, and will pay, fees and expenses of $140 (i.e., $140,000) pertaining to the Action. This fee has not been approved or ruled upon by the Court of Chancery of the State of Delaware.

Restructuring

RESTRUCTURING

Restructuring charges in the three months ended January 27, 2017 primarily relate to a continuation of fiscal year 2016 initiatives to improve the global cost structure in our Paints segment. These initiatives included consolidating three sites in our automotive refinish product lines as a result of the Quest acquisition and initiatives to improve our global cost structure by consolidating our operations in the Paints segment. These restructuring activities resulted in pre-tax charges of $1,894 in the three months ended January 27, 2017. Included in restructuring charges are non-cash asset-related charges of $969. Asset-related charges include asset impairment charges as well as accelerated depreciation for assets with useful lives that have been shortened, accounted for in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment.

Restructuring charges in the first quarter of fiscal year 2016 primarily related to a continuation of fiscal year 2015 initiatives in the Paints segment to improve our North American cost structure through activities to rationalize our manufacturing operations and staffing reductions, which resulted from moving certain manufacturing to a third party. These restructuring activities resulted in pre-tax charges of $869 in the three months ended January 29, 2016, including non-cash asset-related charges of $571.

We currently expect additional expenses of approximately $1,100 in fiscal year 2017 for these restructuring plans, primarily related to site clean-up and lease exit costs.

The following restructuring charges by segment were recorded in the 2017 and 2016 periods:



Three Months Ended January 27, 2017	Liability Balance October 28, 2016		Expense			Payments and Other Activity			Liability Balance January 27, 2017
Coatings
Severance and employee benefits	$	1,456	$	(136	)	$	(47	)	$	1,273
Exit costs (consulting/site clean-up)	425		149			(162		)	412
Total Coatings	1,881		13			(209		)	1,685
Paints
Severance and employee benefits	3,721		340			(1,167		)	2,894
Asset-related charges	—		969			(969		)	—
Exit costs (consulting/site clean-up)	856		576			(193		)	1,239
Total Paints	4,577		1,885			(2,329		)	4,133
Other and Administrative
Severance and employee benefits	1,269		(4		)	(182		)	1,083
Total Other and Administrative	1,269		(4		)	(182		)	1,083
Total	$	7,727	$	1,894		$	(2,720	)	$	6,901



Three Months Ended January 29, 2016	Liability Balance October 30, 2015		Expense		Payments and Other Activity			Liability Balance January 29, 2016
Coatings
Severance and employee benefits	$	6,679	$	107	$	(3,098	)	$	3,688
Exit costs (consulting/site clean-up)	—		84		(84		)	—
Total Coatings	6,679		191		(3,182		)	3,688
Paints
Severance and employee benefits	6,004		54		(329		)	5,729
Asset-related charges	—		571		(571		)	—
Exit costs (consulting/site clean-up)	1,069		53		(154		)	968
Total Paints	7,073		678		(1,054		)	6,697
Other and Administrative
Severance and employee benefits	38		—		(1		)	37
Total Other and Administrative	38		—		(1		)	37
Total	$	13,790	$	869	$	(4,237	)	$	10,422

The ending liability balance at January 27, 2017 and January 29, 2016 is included in other accrued liabilities and other long-term liabilities on our Condensed Consolidated Balance Sheets. The restructuring reserve balances presented are considered adequate to cover committed restructuring actions.

Restructuring charges were recorded in the Condensed Consolidated Statements of Operations for the three months ended January 27, 2017 and January 29, 2016 approximately as follows:



	Three Months Ended
	January 27, 2017		January 29, 2016
Cost of sales	$	1,192	$	435
Selling, general and administrative	702		434
Total restructuring charges	$	1,894	$	869

Recently Issued Accounting Standards

RECENTLY ISSUED ACCOUNTING STANDARDS

Recently Adopted Standards

In the first quarter of fiscal 2017, we retrospectively adopted Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs. This guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the presentation of a debt discount. Accordingly, we reclassified $1,661 and $12,365 of unamortized debt issuance costs previously reported within Prepaid expenses and other and Other assets as a deduction to the carrying amount of our long-term debt in the October 28, 2016 consolidated balance sheet and reclassified $1,715 and $13,597 of unamortized debt issuance costs previously reported within Prepaid expenses and other and Other assets as a deduction to the carrying amount of our long-term debt in the January 29, 2016 consolidated balance sheet.

In the first quarter of fiscal 2017, we adopted ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This guidance clarifies that an entity may defer and present debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortize those costs ratably over the term of the arrangement, regardless of whether there are any outstanding borrowings on it. Accordingly, the deferred financing fees related to our revolving credit facility will remain reported as an asset.

In the first quarter of fiscal 2017, we prospectively adopted ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the software license consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. Adoption of this guidance had no impact on our consolidated financial statements.

Standards Not Yet Adopted

In January 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, to eliminate Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019, which means the first quarter of our fiscal year 2021. Early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (disposals) of assets or of businesses. The guidance is effective for fiscal years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted for interim and annual periods in which the financial statements have not been issued or made. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Amendment to Restricted Cash, on the classification and presentation of changes in restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. Adoption of this guidance will not have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Asset Transfers (Other Than Inventory), which will require immediate recognition of current and deferred income tax consequences for intercompany asset transfers (other than inventory) at the time of the asset transfer. Under the existing standard, current and deferred income tax consequences are recognized when the assets are sold to an outside party. This new guidance is intended to align with International Accounting Standards 12, Income Taxes. The guidance is effective for fiscal years beginning on or after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, in the statement of cash flows and is intended to simplify guidance that is currently absent for debt prepayments and extinguishment costs, contingent consideration payments made after business combinations, and separately identifiable cash flows, among other clarifications. The guidance is effective for fiscal years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The new guidance is intended to provide simplification of share-based payment transaction accounting, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as presentation in the statement of cash flows. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. Early adoption is permitted. We are currently reviewing the revised guidance and assessing the impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under existing GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, which means the first quarter of our fiscal year 2020, and modified retrospective adoption is required. Early adoption is permitted. We are currently reviewing the revised guidance and assessing the impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The guidance requires that deferred tax assets and deferred tax liabilities be presented as non-current in the consolidated balance sheets. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, by requiring certain inventory to be measured at the lower of cost or net realizable value. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. Early adoption is permitted. Adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contacts with Customers, which revised guidance on revenue recognition. The standard provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and to enhance disclosures. The guidance, following a one-year deferral issued by the FASB in August 2015, is effective for fiscal years and interim periods within those years beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. Early adoption is permitted. Either full retrospective or modified retrospective adoption is permitted. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements. In addition to the expanded disclosures regarding revenue, this guidance may impact timing of revenue recognition in some arrangements with variable consideration or contracts for the sale of goods or services.

We have determined that all other recently issued accounting standards will not have a material impact on our consolidated financial statements or do not apply to our operations.

Basis Of Presentation (Policies)

Basis of Presentation

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of The Valspar Corporation (Valspar, the Company, we, us or our) have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) 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 GAAP 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 three months ended January 27, 2017 are not necessarily indicative of the results that may be expected for the year ending October 27, 2017.

The Condensed Consolidated Balance Sheet at October 28, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

Reclassifications

The Condensed Consolidated Balance Sheet at October 28, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

Fair Value Measurement

FAIR VALUE MEASUREMENT

We measure certain assets and liabilities at fair value or disclose the fair value of certain assets and liabilities recorded at cost in the Condensed Consolidated Financial Statements on both a recurring and nonrecurring basis. Fair value is defined as an exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value accounting rules establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes use of unobservable inputs. Observable inputs must be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available. Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the inputs used in the valuation. We classify assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. Transfers of instruments between levels are recorded based on end of period values. There were no transfers between levels for all periods presented. The three levels are defined as follows:


•	Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.


•	Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.


•	Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.