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Valspar Corp. will close two plants and further increase prices in the wake of a second-quarter report that saw a drop in net income, despite double-digit increases in sales.
The plant closures, in California and Washington State, are part of restructuring plans that the Minneapolis-based paint and coatings company announced after issuing its report for the quarter ending April 29.
Valspar recorded a 23.5% year-over-year sales increase for the second quarter, thanks to the acquisitions of Wattyl and Isocoat, selling price increases, and improved volume in the coatings segment. But it was not enough to compensate soaring material costs and a still-struggling new-home construction market, the company said.
New Income Declines
Net income for the second quarter of 2011 fell to $56.3 million, or 58 cents per share, from $61.7 million, or 61 cents a share, for the same quarter of 2010.
Second-quarter gross margin, excluding restructuring and acquisition-related charges, was 32.3%—down from 34% in 2010. Adjusted profit was 64 cents, in line with Wall Street estimates.
Like every manufacturer, Valspar relied heavily on sales price increases to blunt the impact of rising raw material costs. Increased productivity also benefited the bottom line, the company said.
As a rate to revenue, operating expenses, excluding restructuring and acquisition-related charges, were 21.5%, up 50 basis points from 21% in the second quarter of 2010.
Executive Reaction
Outgoing Valspar CEO William L. Mansfield sounded an upbeat note about the Q2 picture, calling it a “solid accomplishment” in light of the strong second quarter of 2010.
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Valspar Corp. |
| Sales in Valspar’s coatings segment increased 15% over the second quarter of FY 2010. |
"Double-digit top-line growth resulting from acquisitions, pricing and the continued success of our new business efforts helped to mitigate the impact of substantially higher raw material costs,” he said.
“We are continuing to raise our selling prices and taking steps to further reduce our cost structure while maintaining investments in our brands and technology. We continue to expect fiscal year 2011 adjusted net income per share in the range of $2.45 to $2.65."
But president and COO Gary E. Hendrickson, who becomes CEO on June 1, said the company was facing housing-market reality in shutting down the two wood coatings plants.
"These markets have been struggling for several years, and we don't see any significant changes in the near or medium term," said Hendrickson.
Seeking TiO2 Options
Valspar officials said they were taking several steps to reduce the company’s dependence on Titanium Dioxide: using extenders, Chinese sulfate and new polymers.
“We have a lot of experience with the China sulfate material in our industrial and our consumer business in China,” said Hendrickson. “So, we are using some of that in North America and in Europe, and we are doing all of the things that the other companies have talked about in terms of trying to manage through the situation of tightness in the TiO2 market.”
Although the supply of TiO2 is currently adequate, the cost has become exorbitant, the company said. Titanium Dioxide is the most widely used pigment in paints and coatings.
Segment Results
Valspar’s coatings segment second-quarter sales totaled $509.1 million—a 15% increase from the same quarter of 2010. For the first half of fiscal 2011, coatings sales were $965.5 million, compared with $833.4 million for the first half of FY 2010.
The paint segment notched $418.3 million in sales, up from $303.9 million for the second quarter of 2010. Year-to-date paint sales totaled $754.3 million, up from $537.4 million in the first half of FY 2010.
However, coatings Earnings Before Interest and Taxes (EBIT) totaled $59.9 million for the second quarter, down from $62.4 million from the year-ago period. And Paint EBIT plummeted to $38.9 million for Q2 of FY 2011, from $52.1 million of Q2 for 2010.
Adjusted for restructuring and acquisition-related charges, Coatings EBIT climbed slightly (from $62.4 million in the second quarter of 2010 to $63.2 million in 2011). Paintings EBIT still took a hit when adjusted, however, declining to $43.8 million from $52.3 million, the company said.
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