FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended May 31, 2000
Commission file number 0-6953
LILLY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0471010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 WEST 103rd STREET
INDIANAPOLIS, INDIANA 46290
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 814-8700
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Number of shares outstanding at June 30, 2000
Class A Common Stock 22,717,752
Class B Common Stock 499,891
Page 1 of 14
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Three Months Ended
May 31, May 31,
2000 1999
--------- ---------
Net sales $ 176,373 $ 171,375
Costs and expenses:
Cost of products sold 108,675 104,257
Selling, general and administrative 42,944 41,278
Research and development 5,260 5,358
--------- ---------
156,879 150,893
--------- ---------
Operating income 19,494 20,482
Other expenses:
Sundry (income) expense (23) 254
Interest expense, net 4,117 3,911
--------- ---------
Income before income taxes 15,400 16,317
Income taxes 6,314 6,690
--------- ---------
Net income $ 9,086 $ 9,627
========= =========
Net income per share:
Basic $ 0.39 $ 0.41
Diluted $ 0.39 $ 0.41
Cash dividends per share $ .08 $ .08
See notes to condensed consolidated financial statements.
Page 2 of 14
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Six Months Ended
May 31, May 31,
2000 1999
-------- --------
Net sales $337,424 $317,514
Costs and expenses:
Cost of products sold 210,614 194,340
Selling, general and administrative 84,641 78,371
Research and development 10,532 10,517
-------- --------
305,787 283,228
-------- --------
Operating income 31,637 34,286
Other expenses:
Sundry expense 114 493
Interest expense, net 8,414 8,012
-------- --------
Income before income taxes 23,109 25,781
Income taxes 9,475 10,570
-------- --------
Net income $ 13,634 $ 15,211
======== ========
Net income per share:
Basic $ 0.59 $ 0.65
Diluted $ 0.59 $ 0.65
Cash dividends per share $ .16 $ .16
See notes to condensed consolidated financial statements.
Page 3 of 14
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
May 31, November 30,
2000 1999
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,057 $ 5,714
Accounts receivable, less allowances
for doubtful accounts(5/31/00, $1,545;
11/30/99, $1,775) 94,568 91,369
Inventories 62,540 58,500
Other 8,785 6,274
--------- ---------
Total current assets 170,950 161,857
Other assets 24,630 22,755
Intangible assets 229,859 233,878
Property and equipment:
Land, buildings and equipment 212,632 199,714
Accumulated depreciation (73,204) (67,778)
--------- ---------
139,428 131,936
--------- ---------
$ 564,867 $ 550,426
========= =========
See notes to condensed consolidated financial statements.
Page 4 of 14
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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
May 31, November 30,
2000 1999
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,214 $ 60,317
Other 44,672 52,820
--------- ---------
Total current liabilities 113,886 113,137
Long-term debt 212,503 206,803
Other liabilities 36,091 38,315
Shareholders' equity:
Capital stock:
Class A (limited voting) 15,559 15,539
Class B (voting) 300 300
Additional capital 84,363 83,833
Retained earnings 143,727 133,807
Accumulated other comprehensive loss (3,355) (3,509)
Cost of capital stock in treasury (38,207) (37,799)
--------- ---------
202,387 192,171
--------- ---------
$ 564,867 $ 550,426
========= =========
See notes to condensed consolidated financial statements.
Page 5 of 14
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
May 31, May 31,
2000 1999
-------- --------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 13,634 $ 15,211
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 6,090 5,265
Amortization 5,638 5,657
Changes in operating assets and liabilities
net of effects from acquired business:
Accounts receivable (3,199) (10,053)
Inventories (4,040) (5,007)
Accounts payable and accrued expenses 749 (1,211)
Sundry (7,088) (10,898)
-------- --------
Net cash provided (used)
by operating activities 11,784 (1,036)
INVESTING ACTIVITIES
Purchases of property and equipment (14,656) (15,981)
Payments for acquired businesses (1,250) (2,721)
Sundry 1,337 1,091
-------- --------
Net cash used by investing activities (14,569) (17,611)
FINANCING ACTIVITIES
Dividends paid (3,714) (3,713)
Proceeds from borrowings 5,700 16,100
Sundry 142 418
-------- --------
Net cash provided by financing activities 2,128 12,805
-------- --------
Decrease in cash and cash equivalents (657) (5,842)
Cash and cash equivalents at beginning of period 5,714 13,326
-------- --------
Cash and cash equivalents at end of period $ 5,057 $ 7,484
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6 of 14
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
MAY 31, 2000
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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. The results of operations for the three and six month periods
ended May 31, 2000 are not necessarily indicative of the results for the full
year.
The balance sheet at November 30, 1999 has been derived from the audited
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 Company's annual report on Form 10-K for the
year ended November 30, 1999.
NOTE B--INVENTORIES
The principal components of inventory are summarized as follows (in thousands):
May 31, November 30,
2000 1999
------- -------
Finished products $35,887 $33,628
Raw materials 32,529 30,048
------- -------
68,416 63,676
Less adjustment of certain inventories
to LIFO basis 5,876 5,176
------- -------
$62,540 $58,500
======= =======
The Company uses the LIFO method of inventory valuation for approximately 61% of
inventories. For these inventories, an actual valuation can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must be based on management's estimates
of expected year-end inventory levels and costs. Since these are subject to many
forces beyond management's control, interim results are subject to the final
year-end LIFO inventory valuation. The Company estimates the annual adjustment
for LIFO and allocates it to quarters based on actual inflation experienced in a
quarter as it relates to anticipated inflation for the year.
NOTE C--SEGMENT INFORMATION
The Company operates within three business segments which serve three end-use
markets: wood coatings; metal coatings; and composites and glass coatings.
Products sold to these markets have similar economic characteristics, production
processes, distribution methods, and regulatory environments. Based on these
similarities, the Company's products are aggregated into one reportable segment,
Industrial Coatings and Specialty Chemicals.
Net sales of Industrial Coatings and Specialty Chemical products by end-use
markets are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wood Coatings $ 79,215 $ 76,408 $153,511 $141,521
Metal Coatings 78,032 74,958 145,616 138,620
Composites and Glass Coatings 19,126 20,009 38,297 37,373
-------- -------- -------- --------
$176,373 $171,375 $337,424 $317,514
======== ======== ======== ========
</TABLE>
Page 7 of 14
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NOTE D--COMPREHENSIVE INCOME
Total comprehensive income is comprised of net income and net foreign currency
translation adjustments. Total comprehensive income for the three month period
ended May 31, 2000 and 1999 was approximately $9,119,000 and $10,172,000,
respectively. Total comprehensive income for the six month period ended May 31,
2000 and 1999 was approximately $13,788,000 and $15,971,000, respectively.
NOTE E--NET INCOME PER SHARE
Basic and diluted net income per share are computed by dividing net income as
reported by the average number of shares outstanding as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
------ ------ ------ ------
Basic
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding 23,217 23,200 23,211 23,190
====== ====== ====== ======
Diluted
Weighted-average common shares outstanding 23,217 23,200 23,211 23,190
Dilutive effect of stock options -- 130 18 140
------ ------ ------ ------
Average common shares outstanding assuming dilution 23,217 23,330 23,229 23,330
====== ====== ====== ======
</TABLE>
NOTE F--NEW ACCOUNTING STANDARD
Effective December 1, 1999, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-5,
"Reporting for the Costs of Start-Up Activities." The SOP requires start-up
costs capitalized prior to December 1, 1999 to be written off and any future
start-up costs to be expensed as incurred. The unamortized balance of start-up
costs was written off as of December 1, 1999. The effect of this change in
accounting principle on consolidated earnings was immaterial.
NOTE G--SUBSEQUENT EVENT
On June 26, 2000, the Company announced it had entered into a definitive merger
agreement with The Valspar Corporation ("Valspar") whereby Valspar will acquire
all outstanding shares of the Company's Class A and Class B common stock for
$31.75 per share in cash, and the Company will become a wholly-owned subsidiary
of Valspar.
The merger is subject to the approval of the Company's stockholders as well as
regulatory and other customary closing conditions. The merger is not subject to
a financing condition.
Page 8 of 14
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations - Three and six month periods ended May 31, 2000
The Company's net sales for the second quarter of 2000 increased by $5.0 million
or 2.9% to $176.4 million compared to second quarter of 1999. Net sales for the
six month period ended May 31, 2000 increased by $19.9 million or 6.3% to $337.4
million compared to the same period in 1999. Sales for the three and six month
periods ended May 31, 2000 showed continued growth in most markets.
Gross profit for the second quarter of 2000 was 38.4% of net sales, representing
a decrease of 0.8 percentage points over the same period a year ago. For the six
month period ended May 31, 2000, gross profit was 37.6%, a decline of 1.2
percentage points compared to last year. The declines in gross profit
percentages are directly related to the rapid cost escalation in petroleum-based
raw materials, and transition start-up costs associated with increased capacity.
Selling, general and administrative expenses for the three and six month periods
ended May 31, 2000 increased by 4.0% and 8.0% respectively, over the same
periods in 1999. These increases are due to higher selling expenses related to
growth in international markets, increased freight and marketing initiatives.
Operating income for the three and six month periods ended May 31, 2000
decreased by 4.8% and 7.7% respectively, over the same periods a year ago, as
increased raw material costs and selling, general and administrative expenses
offset increases in net sales.
Net interest expense for the three and six month periods ended May 31, 2000
increased by 5.3% and 5.0% respectively, over the same periods a year ago, due
to slightly higher average interest rates and debt levels.
Net income for the three and six month periods ended May 31, 2000 decreased by
5.6% and 10.4% respectively, over the same periods in 1999, due to higher raw
material costs and selling, general and administrative expenses. The effective
tax rate remained at 41%.
Liquidity and Capital Resources
Cash provided by operating activities for the six month period ended May 31,
2000 increased by $12.8 million compared to the same period a year ago. The
increase in cash provided by operating activities is primarily due to changes in
working capital and non-current liabilities.
Cash used by investing activities for the six month period ended May 31, 2000
decreased by $3.0 million compared to the same period a year ago, which was
primarily due to lower capital expenditures of $1.3 million, and a decrease in
payments for acquired businesses of $1.5 million.
Cash provided by financing activities for the six month period ended May 31,
2000 decreased by $10.7 million over the same period a year ago primarily due to
lower increases in borrowings as compared to the same period in 1999.
The Company believes funds available from internal and external sources will be
sufficient to meet the liquidity needs of the Company.
Environmental
The Company's operations, like those of most companies in the industrial
coatings and specialty chemicals industry, are subject to regulations related to
maintaining or improving the quality of the environment. Such regulations, along
with the Company's own internal compliance efforts, have required, and will
continue to require, ongoing expenditures. Spending for environmental compliance
is not anticipated to be material to the Company's financial position. The
Company has been notified that it is a potentially responsible party for
clean-up costs with respect to several government investigations at
independently-operated waste disposal sites previously used by the Company.
Management has accrued, as appropriate, for these environmental liabilities.
Management believes the liabilities associated with these sites will not have a
material adverse effect on its operating results or financial position.
Page 9 of 14
<PAGE>
Forward-Looking Statements
Statements in this report that are not strictly historical constitute
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which
involve risks and uncertainties. Risk factors include general economic and
industry conditions, effects of leverage, environmental matters, technological
developments, product pricing, raw material cost changes, and international
operations, among others, which are set forth in the Company's annual report on
Form 10-K for the year ended November 30, 1999. The Company disclaims any
intentions or obligation to update or revise any forward looking statements,
whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. Both interest rate risk and foreign currency risk are
considered immaterial to the Company.
Page 10 of 14
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PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on March 31, 2000. The
following is a summary of matters voted on at the meeting:
(a) The following directors were elected by the votes indicated:
Stock Votes
Director Class Votes For Withheld
-------- ----- --------- --------
James M. Cornelius A 17,856,269 1,333,167
Paul K. Gaston A 17,848,748 1,340,688
John D. Peterson A 17,854,817 1,334,619
Thomas E. Reilly, Jr. A 17,856,839 1,332,597
William C. Dorris B 486,306 --
John C. Elbin B 486,306 --
Douglas W. Huemme B 486,306 --
Harry Morrision, Ph.D. B 486,306 --
Norma J. Oman B 486,306 --
Robert A. Taylor B 486,306 --
Shareholders of record on February 14, 2000 were entitled to notice of,
and to vote at, the Annual Meeting of Shareholders. On that date
22,733,318 shares of the Company's Class A Stock and 486,306 shares of
the Company's Class B Stock were outstanding.
(b) Shareholders also approved adoption of a proposal to amend the
Company's 1992 Stock Option Plan to increase the shares reserved by one
million. Approval of this proposal required the affirmative vote of a
majority of the shares of the Class A Stock and Class B Stock voting as
separate voting groups. The proposal was adopted with 13,673,679
shares, or 60%, of Class A Stock and 486,306 shares, or 100%, of Class
B Stock voting for the proposal. Shares of Class A Stock voting against
were 4,299,348. Shares of Class A stock either abstained or the subject
of broker nonvotes were 1,216,407.
Page 11 of 14
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Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herein:
4.6 Third Amendment to Credit Agreement among Lilly Industries,
Inc., the Lenders Signatory thereto and Bank One, Indiana,
N.A., as agent, dated as of May 31, 2000
10.28 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Robert A. Taylor.
10.29 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and John C. Elbin.
10.30 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and William C. Dorris.
10.31 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Jay M. Wiegner.
10.32 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Keith C. Vander Hyde, Jr.
10.33 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Virgil E. Underwood.
10.34 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Hugh M. Cates.
10.35 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Kenneth L. Millls.
10.36 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and John D. Million.
10.37 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and A. Berry Melnkovic.
10.38 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Ned L. Fox.
10.39 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Alain DeBlandre.
10.40 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Larry H. Dalton.
10.41 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Olin R. Crocker.
10.42 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Gary D. Missildine.
10.43 Change of Control Agreement, dated May 11, 2000, by and
between Registrant and Douglas W. Huemme.
10.44 Amendment to the Lilly Industries, Inc. Executive Retirement
Plan, as of May 11, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three month period ended May 31, 2000. On June 26, 2000, the
Company filed a Form 8-K to announce they had entered into a
definitive merger agreement with The Valspar Corporation
("Valspar"), whereby Valspar will acquire all outstanding
shares of the Company's common stock.
Note: All other item numbers under this section are not applicable.
Page 12 of 14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LILLY INDUSTRIES, INC. (Registrant)
July 14, 2000
/s/ Douglas W. Huemme
-----------------------------------
Douglas W. Huemme
Chairman and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
July 14, 2000
/s/ John C. Elbin
-----------------------------------
John C. Elbin
Vice President, Chief Financial
Officer and Secretary
Page 13 of 14
