Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549



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FORM 10-Q

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x
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the quarterly period ended July 25, 2008



or



o
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934




For the transition period from _________ to ________



Commission File Number:  1-3011



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THE VALSPAR CORPORATION

(Exact name of registrant as specified in its charter)



Delaware
        36-2443580(State or other jurisdiction ofincorporation or organization)
        (I.R.S. EmployerIdentification No.)




1101 Third Street South

Minneapolis, MN  55415

(Address of principal executive offices, including zip code)



612/332-7371

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.xYesoNo



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filerx
        Accelerated fileroNon-accelerated filero
        Smaller reporting companyo




Indicate by check mark whether the registrant is a shell
 company (as defined in Rule 12b-2 of the Exchange Act).oYes
xNo



As of August 28, 2008, The Valspar Corporation had 99,788,510 shares of common stock outstanding, excluding 18,654,114 shares held in treasury. The Company had no other classes of stock outstanding.





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- 1 -






THE VALSPAR CORPORATION





Index to Form 10-Q

for the Quarter Ended July 25, 2008





PART I.
        FINANCIAL INFORMATION
        Page No.Item 1.
        Financial StatementsCondensed Consolidated Balance Sheets  July 25, 2008, July 27, 2007 and October 26, 2007
        2 - 3Condensed Consolidated Statements of Income  Three months and nine months ended July 25, 2008 and July 27, 2007
        4Condensed Consolidated Statements of Cash Flows  Nine months ended July 25, 2008 and July 27, 2007
        5Notes to Condensed Consolidated Financial Statements  July 25, 2008
        6 - 14Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        15 - 19Item 3.
        Quantitative and Qualitative Disclosures About Market Risk
        20Item 4.
        Controls and Procedures
        20PART II.
        OTHER INFORMATIONItem 1.
        Legal Proceedings
        20Item 6.
        Exhibits
        20SIGNATURES
        21






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PART I. FINANCIAL INFORMATION



ITEM 1.
        FINANCIAL STATEMENTS




THE VALSPAR CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)



ASSETS
        
        July 25,2008
        
        July 27,2007
        
        October 26,2007(Unaudited)
        
        (Unaudited)
        
        (Note)CURRENT ASSETS:Cash and cash equivalents
        
        $
        101,114
        
        $
        83,954
        
        $
        84,948Accounts and notes receivable less allowance (7/25/08-$12,760; 7/27/07-$10,633; 10/26/07-$10,598)
        
        
        651,925
        
        
        568,877
        
        
        537,890Inventories:Manufactured products
        
        
        193,965
        
        
        187,005
        
        
        172,431Raw materials, supplies and work-in-process
        
        
        113,676
        
        
        120,478
        
        
        119,257Total inventories
        
        
        307,641
        
        
        307,483
        
        
        291,688Deferred income taxes
        
        
        28,552
        
        
        31,508
        
        
        25,597Prepaid expenses and other
        
        
        92,539
        
        
        100,370
        
        
        89,519TOTAL CURRENT ASSETS
        
        
        1,181,771
        
        
        1,092,192
        
        
        1,029,642GOODWILL
        
        
        1,379,393
        
        
        1,298,077
        
        
        1,298,951INTANGIBLES, NET
        
        
        607,924
        
        
        536,317
        
        
        590,649OTHER ASSETS
        
        
        15,597
        
        
        73,659
        
        
        15,156LONG-TERM DEFERRED INCOME TAXES
        
        
        2,264
        
        
        2,195
        
        
        3,487PROPERTY, PLANT AND EQUIPMENT
        
        
        1,058,117
        
        
        971,313
        
        
        1,002,914Less accumulated depreciation
        
        
        (546,777
        )
        
        (478,111
        )
        
        (488,518
        )NET PROPERTY, PLANT AND EQUIPMENT
        
        
        511,340
        
        
        493,202
        
        
        514,396TOTAL ASSETS
        
        $
        3,698,289
        
        $
        3,495,642
        
        $
        3,452,281




NOTE:
        The Balance Sheet at October 26, 2007 has been derived from the audited consolidated financial statements at that date.




See Notes to Condensed Consolidated Financial Statements



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THE VALSPAR CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS - CONTINUED

(DOLLARS IN THOUSANDS)



LIABILITIES AND STOCKHOLDERS EQUITY
        
        July 25,2008
        
        July 27,2007
        
        October 26,2007(Unaudited)
        
        (Unaudited)
        
        (Note)CURRENT LIABILITIES:Notes payable and commercial paper
        
        $
        301,105
        
        $
        347,407
        
        $
        267,493Current portion of long-term debt
        
        
        19
        
        
        100,028
        
        
        100,028Trade accounts payable
        
        
        436,897
        
        
        398,930
        
        
        371,437Income taxes
        
        
        8,089
        
        
        35,399
        
        
        19,316Accrued liabilities
        
        
        264,228
        
        
        253,235
        
        
        270,873TOTAL CURRENT LIABILITIES
        
        
        1,010,338
        
        
        1,134,999
        
        
        1,029,147LONG-TERM DEBT,  NET OF CURRENT PORTION
        
        
        783,744
        
        
        603,351
        
        
        648,988DEFERRED INCOME TAXES
        
        
        223,752
        
        
        241,767
        
        
        239,321DEFERRED LIABILITIES
        
        
        160,576
        
        
        158,880
        
        
        116,686TOTAL LIABILITIES
        
        
        2,178,410
        
        
        2,138,997
        
        
        2,034,142HUARUN REDEEMABLE STOCK
        
        
        46,219
        
        
        33,924
        
        
        37,342STOCKHOLDERS 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
        
        
        59,220Additional paid-in capital
        
        
        322,486
        
        
        303,155
        
        
        312,343Retained earnings
        
        
        1,158,404
        
        
        1,075,762
        
        
        1,108,051Other
        
        
        145,593
        
        
        66,694
        
        
        81,8711,685,703
        
        
        1,504,831
        
        
        1,561,485Less cost of Common Stock in treasury (7/25/08-18,855,276 shares; 7/27/07-17,944,651 shares; 10/26/07-17,807,651 shares)
        
        
        212,043
        
        
        182,110
        
        
        180,688TOTAL STOCKHOLDERS EQUITY
        
        
        1,473,660
        
        
        1,322,721
        
        
        1,380,797TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
        
        $
        3,698,289
        
        $
        3,495,642
        
        $
        3,452,281




NOTE:  The Balance Sheet at October 26, 2007 has been derived from the audited consolidated financial statements at that date.



See Notes to Condensed Consolidated Financial Statements



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THE VALSPAR CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



THREE MONTHS ENDED
        
        NINE MONTHS ENDEDJuly 25, 2008
        
        July 27, 2007
        
        July 25, 2008
        
        July 27, 2007Net sales
        
        $
        957,683
        
        $
        893,498
        
        $
        2,559,186
        
        $
        2,396,492Cost of goods sold
        
        
        682,981
        
        
        614,976
        
        
        1,829,758
        
        
        1,672,005Gross profit
        
        
        274,702
        
        
        278,522
        
        
        729,428
        
        
        724,487Research and development
        
        
        25,063
        
        
        24,096
        
        
        72,413
        
        
        69,991Selling and administrative
        
        
        163,297
        
        
        149,981
        
        
        438,588
        
        
        420,613Income from operations
        
        
        86,342
        
        
        104,445
        
        
        218,427
        
        
        233,883Interest expense
        
        
        13,862
        
        
        16,033
        
        
        43,459
        
        
        46,962Other (income)/expense  net
        
        
        1,928
        
        
        1,301
        
        
        5,871
        
        
        3,345Income before income taxes
        
        
        70,552
        
        
        87,111
        
        
        169,097
        
        
        183,576Income taxes
        
        
        23,563
        
        
        28,894
        
        
        57,246
        
        
        60,245Net income
        
        $
        46,989
        
        $
        58,217
        
        $
        111,851
        
        $
        123,331Huarun redeemable stock accrual (1)
        
        
        (3,049
        )
        
        (5,067
        )
        
        (8,877
        )
        
        (15,201
        )Net income available to common shareholders
        
        $
        43,940
        
        $
        53,150
        
        $
        102,974
        
        $
        108,130Net income per common share  basic
        
        $
        0.44
        
        $
        0.53
        
        $
        1.03
        
        $
        1.07Net income per common share  diluted
        
        $
        0.44
        
        $
        0.52
        
        $
        1.03
        
        $
        1.05Average number of common shares outstanding basic
        
        
        99,280,953
        
        
        100,008,949
        
        
        99,663,955
        
        
        101,147,717 diluted
        
        
        99,835,078
        
        
        101,836,291
        
        
        100,314,575
        
        
        102,938,740Dividends paid per common share
        
        $
        0.14
        
        $
        0.13
        
        $
        0.42
        
        $
        0.39




(1) Huarun redeemable stock accrual reduced basic and diluted net income per common share three cents in the third quarter of 2008, nine cents year to date in 2008, five cents in the third quarter of 2007 and fifteen cents year to date in 2007 as further described in Note 3.



See Notes to Condensed Consolidated Financial Statements



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THE VALSPAR CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(DOLLARS IN THOUSANDS)



NINE MONTHS ENDEDJuly 25,2008
        
        July 27,2007OPERATING ACTIVITIES:Net Income
        
        $
        111,851
        
        $
        123,331Adjustments to reconcile net income to net cash (used in)/provided by operating activities:Depreciation
        
        
        53,054
        
        
        47,362Amortization
        
        
        5,924
        
        
        4,150Stock-based compensation
        
        
        4,911
        
        
        6,881(Gain)/loss on asset divestiture
        
        
        814
        
        
        63Changes in certain assets and liabilities, net of effects of acquired businesses:(Increase)/decrease in accounts and notes receivable
        
        
        (83,307
        )
        
        (65,791
        )(Increase)/decrease in inventories and other current assets
        
        
        (7,606
        )
        
        (17,341
        )Increase/(decrease) in trade accounts payable and accrued liabilities
        
        
        18,718
        
        
        (44,547
        )Increase/(decrease) in income taxes payable
        
        
        8,322
        
        
        (3,816
        )Increase/(decrease) in other deferred liabilities
        
        
        (6,710
        )
        
        7,498Other
        
        
        2,402
        
        
        (1,457
        )Net Cash (Used In)/Provided By Operating Activities
        
        
        108,373
        
        
        56,333INVESTING ACTIVITIES:Purchases of property, plant and equipment
        
        
        (26,393
        )
        
        (47,677
        )Acquired businesses, net of cash
        
        
        (64,647
        )
        
        (114,375
        )Cash proceeds on disposal of assets
        
        
        19,113
        
        
        Net Cash (Used In)/Provided By Investing Activities
        
        
        (71,927
        )
        
        (162,052
        )FINANCING ACTIVITIES:Net proceeds from (payments on) borrowing
        
        
        51,660
        
        
        201,901Proceeds from sale of treasury stock
        
        
        13,708
        
        
        22,862Payments on deferred liability  excess cash  Huarun
        
        
        (11,390
        )
        
        (19,734
        )Excess tax benefit from stock-based compensation
        
        
        113
        
        
        1,811Treasury stock purchases
        
        
        (39,675
        )
        
        (15,821
        )Retirement of common stock
        
        
        0
        
        
        (55,228
        )Dividends paid
        
        
        (41,863
        )
        
        (39,592
        )Net Cash (Used In)/Provided By Financing Activities
        
        
        (27,447
        )
        
        96,199Increase/(Decrease) in Cash and Cash Equivalents
        
        
        8,999
        
        
        (9,520
        )Effect of exchange rate changes on Cash and Cash Equivalents
        
        
        7,167
        
        
        5,236Cash and Cash Equivalents at Beginning of Period
        
        
        84,948
        
        
        88,238Cash and Cash Equivalents at End of Period
        
        $
        101,114
        
        $
        83,954




See Notes to Condensed Consolidated Financial Statements

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- 6 -  THE VALSPAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 25, 2008




NOTE 1:  BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements of The Valspar Corporation (the Company) have been prepared in accordance with accounting principles generally accepted in the United States 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 generally accepted accounting principles 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 quarter ended July 25, 2008 are not necessarily indicative of the results that may be expected for the year ending October 31, 2008.



The Condensed Consolidated Balance Sheet at October 26, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.



For further information refer to the consolidated financial statements and footnotes thereto included in The Valspar Corporations annual report on Form 10-K for the year ended October 26, 2007.



NOTE 2:  ACCOUNTS PAYABLE



Trade accounts payable includes $26.4 million at July 25, 2008, $39.2 million at October 26, 2007 and $35.1 million at July 27, 2007 of issued checks that had not cleared the Companys bank accounts.



NOTE 3:  ACQUISITIONS AND DIVESTITURES



In January 2008, the Company completed the sale of its commercial/industrial polymer floor coatings product line to Sika AG, a global supplier to specialty chemicals markets. Sika is based in Baar, Switzerland, with North American headquarters in Lyndhurst, NJ. The product line had annual sales of approximately $17 million in fiscal year 2007. The pro forma results of operations for this divestiture have not been presented, as the impact on the reported results is not material. No manufacturing equipment or plants were included in the transaction. Valspar will produce selected products for Sika for a period of time.



In December 2007, the Company 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. Aries had annual sales in calendar year 2007 of approximately $40 million. This transaction was accounted for as a purchase. Accordingly, the net assets and operating results have been included in the Companys financial statements from the date of acquisition. The purchase price allocation is preliminary. The pro forma results of operations for this acquisition have not been presented, as the impact on reported results is not material.



In August 2007, the Company acquired Teknos Nova Coil TNC Oy (TNC), a privately owned manufacturer of high-performance coil coatings based in Helsinki, Finland. TNCs revenues for calendar 2006 were approximately 31 million. This transaction was accounted for as a purchase. The net assets and operating results have been included in the Companys fiscal year 2007 financial statements from the date of acquisition. The purchase price allocation is preliminary.



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In December 2006, the Company acquired the powder coatings business of H.B. Fuller Company. H.B. Fullers powder coatings business, which had net sales of approximately $75 million in 2005, serves customers in 26 countries from manufacturing facilities in the United States and the United Kingdom. This transaction was accounted for as a purchase. Accordingly, the net assets and operating results have been included in the Companys financial statements from the date of acquisition.



Pro forma results of operations for the fiscal year 2007 acquisitions (TNC and H.B. Fullers powder coatings business) noted above have not been presented, as they were immaterial to the reported results on an individual and combined basis.



In July 2006, the Company acquired approximately 80% of the share capital of Huarun Paints Holdings Company Limited (Huarun Paints), one of Chinas largest independent coatings companies, from Champion Regal Limited, a Hong Kong based investment company, and certain other shareholders. Huarun Paints is one of Chinas leading domestic suppliers of wood and furniture coatings, and a supplier of architectural coatings. Huarun Paints sells its products primarily through an extensive network of distributors and retail paint stores throughout China. Huarun Paints revenue for fiscal year 2005 was approximately $180 million. The cash purchase price was approximately $290.4 million. Certain of the shares not purchased by the Company at the closing are subject to various put and call rights. The put and call rights are classified outside of shareholders equity in Huarun Redeemable Stock. The
balance in Huarun Redeemable Stock was $46.2 million at July 25, 2008, $37.3 million at October 26, 2007 and $33.9 million at July 27, 2007.



The Huarun Redeemable Stock will be accrued to redemption value and the amount
of accretion is shown as an adjustment below net income to arrive at the net income available to common shareholders. The Company accrued $3.0 million and $8.9
million for the three and nine-month periods ended July 25, 2008 and $5.1 million and $15.2 million for the three and nine-month periods ended July 27, 2007,
respectively. This accrual reduced basic and diluted income available to common shareholders by three and nine cents per share for the three and nine-month
periods ended July 25, 2008 and five and fifteen cents per share for the three and nine-month periods ended July 27, 2007, respectively. Acquisition accounting
will be applied upon exercise of the outstanding put or call option and acquisition of the underlying shares.



Subsequent to the end of the third quarter, certain minority shareholders exercised their option to sell shares to the Company. Acquisition accounting was applied upon the exercise of the put options and the acquisition of the shares. After the redemption, the Company now owns approximately 85.8% of the outstanding shares of Huarun Paints.



Certain other shares were awarded as part of a Long Term Incentive Plan (LTIP) by Huarun prior to the acquisition closing. The shares covered by the LTIP award were initially treated as liability awards under SFAS 123R. The pre-acquisition share awards were re-classified as equity awards in 2007 after the Company determined it had no obligation to purchase the shares, and if it were to purchase the shares, the Company would purchase the shares at fair market value.



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The terms of the acquisition also require the Company to pay to Champion Regal and certain other shareholders an amount equal to the excess cash, as defined in the purchase agreement, held by Huarun as of the closing date. The liability shall be paid as soon as practical before the third anniversary of the closing date, including interest at 6%. The excess cash of $34.4 million was recorded as a deferred liability under purchase accounting. To reduce this liability, for the three and nine-month periods ended July 25, 2008, the Company paid $11.4 million plus interest. In 2007, the Company paid $4.2 million plus interest in the third quarter and $19.7 million plus interest for the full year to reduce this liability.



NOTE 4:  COMPREHENSIVE INCOME



For the three and nine months ended July 25, 2008 and July 27, 2007, Comprehensive Income, a component of Stockholders Equity, was as follows:



(Dollars in thousands)
        
        Three Months Ended
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Net Income
        
        $
        46,989
        
        $
        58,217
        
        $
        111,851
        
        $
        123,331Other Comprehensive Income, net of tax:Foreign currency translation gain (loss)
        
        
        14,500
        
        
        24,378
        
        
        62,793
        
        
        42,572Deferred gain (loss) on hedging activities
        
        
        473
        
        
        (401
        )
        
        929
        
        
        (32
        )Minimum pension liability adjustment, net of tax
        
        
        0
        
        
        30
        
        
        0
        
        
        70Total Comprehensive Income
        
        $
        61,962
        
        $
        82,224
        
        $
        175,573
        
        $
        165,941




NOTE 5:  GOODWILL AND OTHER INTANGIBLE ASSETS



The carrying amount of goodwill for the quarter ended July 25, 2008 increased from the end of fiscal 2007 by $80.4 million to $1,379.4 million. The increase is primarily due to the acquisition of Aries and foreign currency translation.



Total intangible asset amortization expense for the nine-months ended July 25, 2008 was $5.9 million, compared to $4.2 million for the same period last year. Estimated amortization expense for each of the five succeeding fiscal years based on the intangible assets as of July 25, 2008 is expected to be approximately $8.0 million annually.





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NOTE 6:  SEGMENT INFORMATION



In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information(SFAS 131), and based on the nature of the Companys products, technology, manufacturing processes, customers and regulatory environment, the Company aggregates its operating segments into two reportable segments: Coatings and Paints.



SFAS 131 requires an enterprise to report segment information in the same way that management internally organizes its business for assessing performance and making decisions regarding allocation of resources. The Company evaluates the performance of operating segments and allocates resources based on profit or loss from operations before interest expense and taxes (EBIT).



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



The Paints segment aggregates the Companys architectural and automotive product lines. Architectural products include interior and exterior decorative paints, primers, varnishes, floor paints and specialty decorative products, such as enamels, aerosols and faux varnishes for the do-it-yourself and professional markets in North America and Asia. Other Paints products include automotive refinish paints.



The Companys remaining activities are included in All Other. These activities include specialty polymers and colorants that are used internally and sold to other coatings manufacturers, as well as gelcoats and related products and furniture protection plans. Also included within All Other are the administrative expenses of the Companys corporate headquarters site. The administrative expenses include interest and amortization expense, certain environmental-related expenses and other expenses not directly allocated to any other operating 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 third quarter results on this basis are as follows:



(Dollars in thousands)
        
        Three Months Ended
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Net Sales:Coatings
        
        $
        543,277
        
        $
        484,298
        
        $
        1,508,610
        
        $
        1,349,922Paints
        
        
        335,692
        
        
        325,749
        
        
        826,254
        
        
        819,213All Other
        
        
        107,569
        
        
        120,989
        
        
        301,947
        
        
        312,273Less Intersegment Sales
        
        
        (28,855
        )
        
        (37,538
        )
        
        (77,625
        )
        
        (84,916
        )Total Net Sales
        
        $
        957,683
        
        $
        893,498
        
        $
        2,559,186
        
        $
        2,396,492




EBITCoatings
        
        $
        52,061
        
        $
        58,477
        
        $
        140,843
        
        $
        138,642Paints
        
        
        29,432
        
        
        36,126
        
        
        71,250
        
        
        86,111All Other
        
        
        2,921
        
        
        8,541
        
        
        463
        
        
        5,785Total EBIT
        
        $
        84,414
        
        $
        103,144
        
        $
        212,556
        
        $
        230,538Interest
        
        $
        13,862
        
        $
        16,033
        
        $
        43,459
        
        $
        46,962Income before Income Taxes
        
        $
        70,552
        
        $
        87,111
        
        $
        169,097
        
        $
        183,576




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- 10 -



THE VALSPAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JULY 25, 2008





NOTE 7:  FINANCIAL INSTRUMENTS



The Companys involvement with derivative financial instruments is limited principally to managing well-defined interest rate and foreign currency exchange risks. The Company enters into derivative financial instruments with high-credit quality counterparties and diversifies its positions among such counterparties to reduce its exposure to credit losses.



At July 25, 2008, the Company had an aggregate $100 million of notional amount interest rate swap contracts which have been designated as cash flow hedges under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(SFAS 133),to pay fixed rates of interest and receive a floating interest rate based on LIBOR. All contracts mature during fiscal 2011. The interest rate swap contracts are reflected at fair value in the condensed consolidated balance sheet. Amounts to be received or paid under the contracts are recognized in interest expense over the life of the contracts. Unrealized gains and losses are recorded in accumulated other comprehensive income and will be recognized in interest expense over the life of the swaps. There was an immaterial amount of ineffectiveness for these
swaps recognized in interest expense for the quarter ended July 25, 2008. At July 27, 2007, the Company had a $100 million notional amount interest rate swap contract designated as a fair value hedge under SFAS 133 to pay floating rates of interest based on LIBOR and to receive a fixed interest rate. The interest rate swap contract was reflected at fair value in the condensed consolidated balance sheet. Amounts to be received or paid under the contract were recognized in interest expense over the life of the contract. As the critical terms of the interest rate swap and hedged debt matched, there was an assumption of no ineffectiveness for this hedge. This contract matured on December 1, 2007.



At July 25, 2008, the Company had $10.1 million notional amount of forward
foreign currency exchange contracts maturing during fiscal years 2008 and 2009. These forward foreign exchange contracts have been designated as hedges under
SFAS 133 with unrealized gains or losses recorded in accumulated other comprehensive income. Unrealized gains and losses will be recognized in other expense
(income) when they occur. There was no ineffectiveness for these hedges.



At July 25, 2008, the Company had no treasury locks in place. During 2007, the
Company entered into $200 million notional amount of treasury locks to hedge, or lock-in, interest rates on anticipated long-term debt the company planned to
issue during fiscal year 2007. This was in addition to the $100 million notional amount of treasury locks to hedge, or lock-in, interest rates the Company had
outstanding as of October 27, 2006. The Company had designated the treasury locks entered into as cash flow hedges under SFAS 133 and recorded unrealized gains
and losses in accumulated other comprehensive income. During April 2007, the Company issued $350 million of senior notes. At that time the $300 million treasury
locks were terminated, yielding a deferred pre-tax gain of approximately $4.6 million. This gain is reflected in accumulated other comprehensive income in our
consolidated balance sheets and is being reclassified ratably to our statements of income as a decrease to interest expense over the five and ten-year term of
the related debt, respectively.



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THE VALSPAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JULY 25, 2008





NOTE 8:  GUARANTEES AND CONTRACTUAL OBLIGATIONS



The Company accounts for and discloses guarantees and contractual obligations in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45,Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45). The interpretation requires disclosure in periodic financial statements of certain guarantee arrangements. The interpretation also clarifies situations where a guarantor is required to recognize the fair value of certain guarantees in the financial statements. The Company does not have any guarantees that require recognition at fair value under the interpretation.



The Company sells extended furniture protection plans and offers warranties for certain of its products. Revenue related to furniture protection plans is deferred and recognized over the contract life. Historical claims data is used to forecast claims payments over the contract period and revenue is recognized based on the forecasted claims payments. Actual claims costs are reflected in earnings in the period incurred. Anticipated losses on programs in progress are charged to earnings when identified. For product warranties, the Company estimates the costs that may be incurred under these warranties based on historical claims data and records a liability in the amount of such costs at the time revenue is recognized.



The Company periodically assesses the adequacy of these recorded amounts and adjusts as necessary. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are estimable. Extended furniture protection plans entered into by the Company have fixed prices. To the extent the actual costs to complete contracts are higher than the amounts estimated as of the date of the financial statements, gross margin would be negatively affected in future quarters when the Company revises its estimates. The Companys practice is to revise estimates as soon as such changes in estimates become known.



Changes in the recorded amounts during the period are as follows:



(Dollars in thousands)
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007Beginning balance, October
        
        $
        85,142
        
        $
        87,287Change in accrual from previous fiscal year
        
        
        
        
        
        (990
        )Additional net deferred revenue/accrual made during the period
        
        
        6,516
        
        
        13,922Payments made during the period
        
        
        (9,561
        )
        
        (12,467
        )Ending balance
        
        $
        82,097
        
        $
        87,752




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- 12 -



THE VALSPAR CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JULY 25, 2008





NOTE 9:  STOCK BASED COMPENSATION



Compensation expense associated with our stock-based compensation plans was $1.4 million  ($0.9 million after tax) and $4.9 million ($3.2 million after tax) for the three and nine-months ended July 25, 2008, respectively, compared to $2.4 million ($1.5 million after tax) and $6.9 million ($4.4 million after tax) for the three and nine-months ended July 27, 2007, respectively.



NOTE 10:PENSION AND OTHER POSTRETIREMENT BENEFITS



The Company sponsors a number of defined benefit pension plans for certain hourly, salaried and non-U.S. employees. The benefits for most of these plans are generally based on stated amounts for each year of service. The Company funds the plans in amounts consistent with the limits of allowable tax deductions.



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



(Dollars in thousands)
        
        Three Months Ended
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Service cost
        
        $
        955
        
        $
        874
        
        $
        2,844
        
        $
        2,586Interest cost
        
        
        3,374
        
        
        3,152
        
        
        10,113
        
        
        9,412Expected return on plan assets
        
        
        (3,923
        )
        
        (3,748
        )
        
        (11,785
        )
        
        (11,207
        )Amortization of transition asset
        
        
        (8
        )
        
        (31
        )
        
        (25
        )
        
        (93
        )Amortization of prior service cost
        
        
        184
        
        
        168
        
        
        551
        
        
        504Recognized actuarial (gain)/loss
        
        
        759
        
        
        878
        
        
        2,281
        
        
        2,624Net periodic benefit cost
        
        $
        1,341
        
        $
        1,293
        
        $
        3,979
        
        $
        3,826




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



(Dollars in thousands)
        
        Three Months Ended
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Service cost
        
        $
        292
        
        $
        205
        
        $
        876
        
        $
        615Interest cost
        
        
        232
        
        
        179
        
        
        696
        
        
        537Amortization of prior service cost
        
        
        (20
        )
        
        (32
        )
        
        (61
        )
        
        (96
        )Recognized actuarial (gain)/loss
        
        
        97
        
        
        63
        
        
        291
        
        
        189Net periodic benefit cost
        
        $
        601
        
        $
        415
        
        $
        1,802
        
        $
        1,245






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- 13 -  THE VALSPAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 25, 2008




NOTE 11:  RECLASSIFICATION



Certain amounts in the 2007 financial statements have been reclassified to conform with the 2008 presentation.



NOTE 12:  INCOME TAXES



The Financial Accounting Standards Board (FASB) issued interpretation No. 48,Accounting for Uncertainty in Income Taxes(FIN 48), in June 2006. This statement clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109,Accounting for Income Taxes(SFAS 109). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was adopted by the Company on October 27, 2007, the first day of fiscal year 2008.



As a result of the implementation of FIN 48, the Company recorded a cumulative effect adjustment of $10.8 million, increasing its liability for unrecognized tax benefits, interest and penalties and reducing the October 27, 2007 balance of retained earnings.



At October 27, 2007, the Company had a $57.4 million liability recorded for gross unrecognized tax benefits. Of this total, $30.3 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate.



The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The Company had approximately $9.9 million accrued at October 27, 2007.



The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and numerous state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service (IRS) concluded its examination of the Companys U.S. federal tax returns for the fiscal years ended 2004 and 2005 in April 2008. There were no material adjustments to the Companys income tax expense or balance of unrecognized tax benefits reported at October 27, 2007 as a result of the IRS examination. The Company is currently under audit in several state and foreign jurisdictions. The Company also expects various statutes of limitation to expire during the year. Due to the uncertain response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.



NOTE 13:  RECENTLY ISSUED ACCOUNTING STANDARDS



The Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), in March 2008. SFAS 161 applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, results of operations, and cash flows. To meet those objectives, SFAS 161 requires (1) qualitative disclosures about
objectives for using derivatives by primary underlying risk exposure (e.g., interest rate, credit or foreign exchange rate) and by purpose or strategy (fair value hedge, cash flow hedge, net investment hedge, and non-hedges), (2) information about the volume of derivative activity in a flexible format that the preparer believes is the most relevant and practicable, (3) tabular disclosures about balance sheet location and gross fair value amounts of derivative instruments, income statement and other comprehensive income (OCI) location and amounts of gains and losses on derivative instruments by type of contract (e.g., interest rate contracts, credit contracts or foreign exchange contracts), and (4) disclosures about credit-risk related contingent features in derivative agreements. Comparative disclosures for earlier periods are not required. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which is the second
quarter of fiscal year 2009 for the Company.



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- 14 -  THE VALSPAR CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 25, 2008




FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157), in September 2006. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. This statement does not require any new fair value measurements by the Company.



In February 2008, FASB issued FASB Staff Position FAS 157-2,Effective Date of FASB Statement No. 157(FSP FAS 157-2) which delays the effective date for the implementation of SFAS 157 solely for non-financial assets and non-financial liabilities, except those non-financial items that are recognized or disclosed at fair value in the financial statements on a recurring basis (i.e., at least annually). The new effective date would be for fiscal years beginning after November 15, 2008 or fiscal year 2010 for the Company. FASB indicated that the partial deferral would not be available to entities that have previously early adopted SFAS 157 in its entirety. Therefore, for fiscal years beginning after November 15, 2007, all companies would be required to implement SFAS 157 for all financial assets and financial liabilities measured at fair value
(whether on a recurring or non-recurring basis), as well as for any other assets and liabilities that are carried at fair value on a recurring basis in the financial statements. The Company is currently evaluating the impact of SFAS 157 on its financial statements.



FASB issued SFAS No. 158,Employers Accounting for Defined Benefit Pension and Other Postretirement Plans(SFAS 158), in September 2006. SFAS 158 was adopted by the Company in 2007. SFAS 158 will further require the Company to measure the plans assets and obligations that determine its funded status as of the end of the employers fiscal year (with limited exceptions). This will be required to be adopted for fiscal years ending after December 15, 2008, which would be the fiscal year ending October 30, 2009 for the Company. The Company is currently evaluating the impact of this further requirement of SFAS 158 on its financial statements.



In December 2007, FASB issued SFAS No. 141(R),Business Combinations (SFAS 141(R)), and SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements  an Amendment of ARB No. 51 (SFAS 160), which changed the accounting for and reporting of business combinations and non-controlling interests in consolidated financial statements. SFAS 141(R) and SFAS 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008, which is fiscal year 2010 for the Company. Earlier adoption is prohibited. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the date of adoption. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year of
adoption, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented.



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ITEM 2:
        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




Overview: In the third quarter of fiscal year 2008, sales increased compared to the prior year due primarily to favorable foreign currency exchange rates, the impact of acquisitions and selling price increases. Demand for the Companys products in international markets remained strong, and the Coatings segment performed well. The Company continues to see weak demand for architectural paints and wood coatings product lines mainly due to the decline in the U.S. housing market. Gross margins were down compared to last year as a result of higher raw material costs. The Company has implemented price increases that have partially offset these raw material cost increases. The Companys ability to return to historical levels of gross margins depends on its ability to implement further price increases to offset continuing increases in raw material costs. Operating expenses for
the quarter, as a percentage of net sales, have increased compared to the prior year due to higher incentive compensation and restructuring charges offset by lower brand spending and expense controls. The increase in debt from the end of fiscal year 2007 was driven by the acquisition of Aries Coil Coatings S.A. de C.V. (Aries) in December 2007 and by share repurchases in the first two quarters of 2008.



During the third quarter the Company initiated a comprehensive series of actions to lower its cost structure and further increase its operational efficiency. The initial phase of the restructuring actions, which began in the third quarter of 2008, resulted in pre-tax charges of $3.9 million or $0.03 per share after tax. Restructuring activities will continue in the fourth quarter of 2008 and into fiscal year 2009.



Earnings Per Share: The Company accrued $3.0 million in the third quarter of 2008 and $8.9 million year to date for the Huarun Redeemable Stock related to the Huarun Paints acquisition (see Note 3 for further details). This compares to an accrual of $5.1 million for the third quarter of 2007 and $15.2 million year to date in 2007. The accrual reduced basic and diluted income available to common shareholders by three and nine cents per share in the three and nine-month periods ended July 25, 2008 and by five and fifteen cents per share in the three and nine-month periods ended July 27, 2007, respectively. The net income per share available to common shareholders was $0.44 and $1.03 for the three and nine-month periods ended July 25, 2008, and $0.52 and $1.05 for the three and nine-month periods ended July 27, 2007, respectively.



Three Months Ended
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Net income per common share  diluted
        
        $
        0.44
        
        $
        0.52
        
        $
        1.03
        
        $
        1.05Huarun redeemable stock accrual
        
        
        0.03
        
        
        0.05
        
        
        0.09
        
        
        0.15Adjusted net income per common share  diluted
        
        $
        0.47
        
        $
        0.57
        
        $
        1.12
        
        $
        1.20




The above table includes a non-GAAP financial measure  Adjusted net income per common share-diluted  which excludes a non-cash accrual relating to the Huarun Redeemable Stock in connection with the Huarun Paints acquisition. Management discloses this measure because it believes this measure may assist investors in comparing the Companys results of operations in the respective periods without regard to the effect on results in the 2007 and 2008 periods of the non-cash accrual relating to the Huarun Paints acquisition.



When the Huarun Redeemable Stock is redeemed, acquisition accounting will be applied.



Critical Accounting Policies:  Other than the adoption of FIN 48 in the first quarter of 2008, there were no material changes in the Companys critical accounting policies during the three and nine-month periods ended July 25, 2008.



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- 16 -  ITEM 2:
        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  CONTINUED




Operations:



Net Sales
        
        Three Months Ended
        
        Nine Months Ended(Dollars in millions)
        
        July 25,2008
        
        July 27,2007
        
        %Change
        
        July 25,2008
        
        July 27,2007
        
        %ChangeCoatings
        
        $
        543.3
        
        $
        484.3
        
        12.2%
        
        $
        1,508.6
        
        $
        1,349.9
        
        11.8%Paints
        
        
        335.7
        
        
        325.7
        
        3.1%
        
        
        826.3
        
        
        819.2
        
        0.9%All Other
        
        
        78.7
        
        
        83.5
        
        -5.7%
        
        
        224.3
        
        
        227.4
        
        -1.3%Consolidated Net Sales
        
        $
        957.7
        
        $
        893.5
        
        7.2%
        
        $
        2,559.2
        
        $
        2,396.5
        
        6.8%





        Consolidated Net Sales Sales growth for the third quarter of 2008 was 0.6% after excluding the positive effect of foreign currency of 3.9% and the positive effect of acquisitions of 2.7%. Sales growth year-to-date was 0.4% after excluding the positive effect of foreign currency of 3.9% and the positive effect of acquisitions of 2.5%. The core growth for the third quarter and year-to-date periods was due primarily to increased selling prices partially offset by lower demand resulting from the decline in the U.S. housing market.



        Coatings Segment Net Sales Sales growth for the third quarter of 2008 was 2.2% after excluding the positive effect of foreign currency of 5.2% and the positive effect of acquisitions of 4.8%. Sales growth year-to-date was 2.3% after excluding the positive effect of foreign currency of 5.2% and the positive effect of acquisitions of 4.3%. Core sales growth for the quarter and year-to-date periods was driven by the Companys packaging, general industrial and coil product lines partially offset by soft sales in the wood coatings product line resulting from continued weakness in the U.S. housing market.



        Paints Segment Net Sales Sales growth for the third quarter of 2008 was 0.2% after excluding the positive effect of foreign currency of 2.7% and the positive effect of acquisitions of 0.2%. Core growth in the quarter was due primarily to increased selling prices. Sales growth year-to-date was negative 1.6% after excluding the positive effect of foreign currency of 2.3% and the positive effect of acquisitions of 0.2%. Sales in the Companys architectural product line have been adversely affected by continued weakness in the U.S. housing market. This decline was partially offset by growth in the Huarun Paints architectural product line.



        All Other Net Sales The Other category includes resins, colorants, gelcoats and the Companys furniture repair business. Sales growth for the third quarter of 2008 was negative 7.1% after excluding the positive effect of foreign currency of 1.4%. Sales growth year-to-date was negative 3.4% after excluding the positive effect of foreign currency of 2.1%. The impact of the weak U.S. housing market drove the third quarter and year-to-date period declines.




Due to the seasonal nature of portions of the Companys business, sales for the third quarter are not necessarily indicative of sales for subsequent quarters or for the full year.

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- 17 -  ITEM 2:
        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  CONTINUED






Gross Profit
        
        Three Months Ended
        
        Nine Months Ended(Dollars in millions)
        
        July 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Consolidated Gross Profit
        
        $
        274.7
        
        $
        278.5
        
        $
        729.4
        
        $
        724.5As a percent of Net Sales
        
        
        28.7
        %
        
        31.2
        %
        
        28.5
        %
        
        30.2
        %





        Gross Profit The decrease in gross margins was driven primarily by the lag between higher raw material costs and the impact of selling price increases. Gross margins for the third quarter of 2008 included restructuring charges of $2.8 million or 0.2% of net sales.




Operating Expenses*
        
        Three Months Ended
        
        Nine Months Ended(Dollars in millions)
        
        July 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Consolidated Operating Expenses
        
        $
        188.4
        
        $
        174.1
        
        $
        511.0
        
        $
        490.6As a percent of Net Sales
        
        
        19.7
        %
        
        19.5
        %
        
        20.0
        %
        
        20.5
        %* Includes research and development, selling and administrative costs. For breakout see Consolidated Statement of Income.





        Consolidated Operating Expenses (dollars) Consolidated operating expenses increased 8.2% to $188.4 million in the third quarter of 2008 compared to the prior year. Consolidated operating expenses increased 4.2% to $511.0 million year-to-date compared to prior year. The third quarter of 2008 included restructuring charges of $1.1 million.



        Consolidated Operating Expenses (percent of net sales) As a percent of consolidated net sales, consolidated operating expenses increased 0.2 percentage points for the third quarter compared to last year. In addition to the restructuring charges, the increase is due to higher incentive compensation partially offset by lower brand spending and expense controls. As a percentage of consolidated net sales, consolidated operating expenses decreased 0.5 percentage points for the year-to-date period compared to last year. This year- to-date decrease was driven primarily by expense controls, lower brand spending and increased sales partially offset by higher incentive compensation.




EBIT
        
        Three Months Ended
        
        Nine Months Ended(Dollars in millions)
        
        July 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Coatings
        
        $
        52.1
        
        $
        58.5
        
        $
        140.8
        
        $
        138.6As a percent of Net Sales
        
        
        9.6
        %
        
        12.1
        %
        
        9.3
        %
        
        10.3
        %Paints
        
        $
        29.4
        
        $
        36.1
        
        $
        71.3
        
        $
        86.1As a percent of Net Sales
        
        
        8.8
        %
        
        11.1
        %
        
        8.6
        %
        
        10.5
        %All Other
        
        $
        2.9
        
        $
        8.5
        
        $
        0.5
        
        $
        5.8As a percent of Net Sales
        
        
        3.7
        %
        
        10.2
        %
        
        0.2
        %
        
        2.5
        %Consolidated EBIT
        
        $
        84.4
        
        $
        103.1
        
        $
        212.6
        
        $
        230.5As a percent of Net Sales
        
        
        8.8
        %
        
        11.5
        %
        
        8.3
        %
        
        9.6
        %






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- 18 -  ITEM 2:
        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  CONTINUED







        Consolidated EBIT EBIT for the third quarter of 2008 decreased $18.7 million or 18.2% compared to the prior year. EBIT for the nine-month period of 2008 decreased $18.0 million or 7.8% compared to prior year. The third quarter of 2008 included restructuring charges of $3.9 million. Foreign currency exchange fluctuation had an immaterial effect on EBIT.



        Coatings Segment EBIT The EBIT decrease as a percentage of net sales for the third quarter and year-to-date periods was driven primarily by the lag between higher raw material costs and the impact of increased selling prices. The third quarter of 2008 included restructuring charges of $1.0 million.



        Paints Segment EBIT The EBIT decrease as a percentage of net sales for the third quarter and year-to-date periods was driven primarily by the lag between higher raw material costs and the impact of increased selling prices. The third quarter of 2008 included restructuring charges of $2.3 million.



        All Other EBITThe Other category includes resins, colorants, gelcoats, the Companys furniture repair business and corporate expenses. The decrease for the third quarter and year-to-date periods was due primarily to the decrease in net sales and the lag between higher raw material costs and the impact of increased selling prices. The third quarter of 2008 included restructuring charges of $0.6 million.




Due to the seasonal nature of portions of the Companys business, EBIT for the third quarter is not necessarily indicative of EBIT for subsequent quarters or for the full year.



Interest Expense
        
        Three Months Ended
        
        Nine Months Ended(Dollars in millions)
        
        July 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Consolidated Interest Expense
        
        $
        13.9
        
        $
        16.0
        
        $
        43.5
        
        $
        47.0





        Interest Expense The third quarter and year to date decrease is due primarily to lower average interest rates partially offset by higher average debt levels.




Effective Tax Rate
        
        Three Months Ended
        
        Nine Months EndedJuly 25,2008
        
        July 27,2007
        
        July 25,2008
        
        July 27,2007Effective Tax Rate
        
        33.4%
        
        33.2%
        
        33.9%
        
        32.8%





        Effective Tax Rate The 2008 effective income tax rate reflects certain discrete items resulting from the implementation of FIN 48. The Company expects the annual income tax rate to be 34% to 34.5% going forward.




Net Income
        
        Three Months Ended
        
        Nine Months Ended(Dollars in millions, except per share amounts)
        
        July 25,2008
        
        July 27,2007
        
        %Change
        
        July 25,2008
        
        July 27,2007
        
        %ChangeConsolidated Net Income
        
        $
        47.0
        
        $
        58.2
        
        -19.3%
        
        $
        111.9
        
        $
        123.3
        
        -9.3%Earning Per Share
        
        $
        0.44
        
        $
        0.52
        
        
        
        $
        1.03
        
        $
        1.05





        Net Income As described under Earnings Per Share on page 15, adjusted net income per common share was $0.47 and $1.12 for the three and nine-month periods ended July 25, 2008, compared to $0.57 and $1.20 for the same periods in 2007, respectively. Net income for the third quarter of 2008 included an after tax restructuring charge of $0.03 per share.




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        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  CONTINUED




Financial Condition: Net cash generated by operations was $108.4 million for the first nine months of 2008, compared with $56.3 million
 for the first nine months of 2007. The cash was generated by net income and a net increase in accounts payable and accrued liabilities, partially offset by increases in accounts and notes
 receivable and inventories and other current assets. The net balance of accounts payable and accrued liabilities increased $18.7 million due primarily to the timing of disbursements. Accounts receivable
 increased $83.3 million due to the timing of customer payments, increase in net sales and change in customer mix. Inventories and other current assets increased $7.6 million due to seasonal working capital needs.



During the 2008 period, cash provided by operations, $65.4 million in proceeds from bank borrowings and sale of treasury stock and $19.1 million in proceeds from the divestiture of a product line (see Note 3) and sale of assets, were used to fund $64.6 million in acquisitions, $41.9 million in dividend payments, $39.7 million in treasury stock repurchases, $26.4 million in capital expenditures and $11.4 million to reduce the deferred liability for excess cash related to the Huarun Paints acquisition (see Note 3 for further details).



Capital expenditures for property, plant and equipment were $26.4 million in the first nine months of 2008, compared with $47.7 million in the first nine months of 2007. The Company anticipates capital spending in 2008 to be approximately $45 million.



The ratio of total debt to capital was 42.4% at July 25, 2008, compared to 42.4% at October 26, 2007 and 44.3% at July 27, 2007. Short-term debt (notes payable plus current portion of long-term debt) was $301.1 million at July 25, 2008. This debt included U.S. Commercial Paper as well as short-term borrowings. The Company believes its cash flow from operations, existing lines of credit, access to credit facilities and access to debt and capital markets will be sufficient to meet its current and projected needs for financing.



Off-Balance Sheet Financing:The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



Forward Looking Statements:  This discussion contains certain forward-looking statements. These forward-looking statements are based on managements expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Company that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, dependence of internal earnings growth on economic conditions and growth in the domestic and international coatings industry; risks related to any future acquisitions, including risks of adverse changes in the results of acquired businesses and the assumption of unforeseen liabilities; risks of disruptions in business resulting from the integration process and higher interest
costs resulting from further borrowing for any such acquisitions; our reliance on the efforts of vendors, government agencies, utilities and other third parties to achieve adequate compliance and avoid disruption of our business; risks of disruptions in business resulting from the Companys relationships with customers and suppliers; unusual weather conditions adversely affecting sales; changes in raw materials pricing and availability; delays in passing along cost increases to customers; changes in governmental regulation, including more stringent environmental, health and safety regulations; the nature, cost and outcome of pending and future litigation and other legal proceedings; the outbreak of war and other significant national and international events; and other risks and uncertainties. The foregoing list is not exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such
statements.





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ITEM 3:
        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




The Companys foreign sales and results of operations are subject to the impact of foreign currency fluctuations. The Company has not hedged its exposure to translation gains and losses; however, it has reduced its exposure by borrowing funds in local currencies. A 10% adverse change in foreign currency rates would not have a material effect on the Companys results of operations or financial position.



The Company is also subject to interest rate risk. At July 25, 2008, approximately 45% of the Companys total debt consisted of floating rate debt. From time to time, the Company may enter into interest rate swaps to hedge a portion of either its variable or fixed rate debt. Assuming the current level of borrowings, a 10% increase in interest rates from those in effect at the end of the third quarter would increase the Companys interest expense for the fourth quarter of 2008 by approximately $0.4 million.



ITEM 4:
        CONTROLS AND PROCEDURES




Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.



We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 25, 2008. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.



There were no changes in our internal control over financial reporting during the quarter ended July 25, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





PART II. OTHER INFORMATION



ITEM 1:
        LEGAL PROCEEDINGS




During the period covered by this report, there were no legal proceedings instituted that are reportable, and there were no material developments in any of the legal proceedings that were previously reported on the Companys Form 10-K for the year ended October 26, 2007.



ITEM 6:
        EXHIBITS




Exhibits31.1
        Section 302 Certification of the Chief Executive Officer31.2
        Section 302 Certification of the Chief Financial Officer32.1
        Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








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SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





THE VALSPAR CORPORATIONDate:  September 3, 2008
        
        By
        /s/ Rolf EnghRolf EnghSecretary




Date:  September 3, 2008
        
        By
        /s/ Lori A. WalkerLori A. WalkerSenior Vice President andChief Financial Officer








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