<PAGE>
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 August 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 103/rd/ 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 September 30, 2000:
Class A Common Stock 22,844,053
Class B Common Stock 435,037
Page 1 of 13
<PAGE>
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
August 31, August 31,
2000 1999
---- ----
Net sales $171,209 $169,452
Costs and expenses:
Cost of products sold 104,710 105,223
Selling, general and
administrative 42,244 40,179
Research and development 5,387 5,535
-------- --------
152,341 150,937
-------- --------
Operating income 18,868 18,515
Other (income) and expenses:
Sundry income (108) (75)
Interest expense, net 4,238 3,889
-------- --------
Income before income taxes 14,738 14,701
Income taxes 5,664 6,024
-------- --------
Net income $ 9,074 $ 8,677
======== ========
Net income per share:
Basic $ 0.39 $ 0.37
Diluted $ 0.38 $ 0.37
Cash dividends per share $ .08 $ .08
See notes to condensed consolidated financial statements.
Page 2 of 13
________________________________________________________________________________
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Nine Months Ended
August 31, August 31,
2000 1999
---- ----
Net sales $508,633 $486,966
Costs and expenses:
Cost of products sold 315,324 299,563
Selling, general and administrative 126,885 118,550
Research and development 15,919 16,052
-------- --------
458,128 434,165
-------- --------
Operating income 50,505 52,801
Other expenses:
Sundry expense 6 418
Interest expense, net 12,652 11,901
-------- --------
Income before income taxes 37,847 40,482
Income taxes 15,139 16,594
-------- --------
Net income $ 22,708 $ 23,888
======== ========
Net income per share:
Basic $ 0.98 $ 1.03
Diluted $ 0.97 $ 1.02
Cash dividends per share $ .24 $ .24
See notes to condensed consolidated financial statements.
Page 3 of 13
________________________________________________________________________________
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
August 31, November 30,
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 3,769 $ 5,714
Accounts receivable, less allowances
for doubtful accounts (8/31/00, $1,629;
11/30/99, $1,775) 93,023 91,369
Inventories 63,225 58,500
Other 11,235 6,274
-------- --------
Total current assets 171,252 161,857
Other assets 25,164 22,755
Intangible assets 227,356 233,878
Property and equipment:
Land, buildings and equipment 215,614 199,714
Accumulated depreciation (76,284) (67,778)
-------- --------
139,330 131,936
-------- --------
$563,102 $550,426
======== ========
See notes to condensed consolidated financial statements.
Page 4 of 13
________________________________________________________________________________
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
August 31, November 30,
2000 1999
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61,733 $ 60,317
Other 45,582 52,820
-------- --------
Total current liabilities 107,315 113,137
Long-term debt 210,885 206,803
Other liabilities 35,243 38,315
Shareholders' equity:
Capital stock:
Class A (limited voting) 15,574 15,539
Class B (voting) 300 300
Additional capital 84,750 83,833
Retained earnings 150,944 133,807
Accumulated other comprehensive loss (3,632) (3,509)
Cost of capital stock in treasury (38,277) (37,799)
-------- --------
209,659 192,171
-------- --------
$563,102 $550,426
======== ========
See notes to condensed consolidated financial statements.
Page 5 of 13
________________________________________________________________________________
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
August 31, August 31,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 22,708 $ 23,888
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 9,236 7,762
Amortization 8,553 8,675
Changes in operating assets and liabilities net of effects from acquired business:
Accounts receivable (1,654) (10,842)
Inventories (4,725) (6,042)
Accounts payable and accrued expenses (5,822) 8,324
Sundry (11,505) (12,124)
-------- --------
Net cash provided by operating activities 16,791 19,641
INVESTING ACTIVITIES
Purchases of property and equipment (17,787) (26,875)
Payments for acquired businesses (1,250) (2,721)
Sundry 1,316 1,067
-------- --------
Net cash used by investing activities (17,721) (28,529)
FINANCING ACTIVITIES
Dividends paid (5,571) (5,572)
Proceeds from borrowings 4,082 7,400
Sundry 474 466
-------- --------
Net cash (used) provided by financing activities (1,015) 2,294
-------- --------
Decrease in cash and cash equivalents (1,945) (6,594)
Cash and cash equivalents at beginning of period 5,714 13,326
-------- --------
Cash and cash equivalents at end of period $ 3,769 $ 6,732
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
Page 6 of 13
________________________________________________________________________________
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
AUGUST 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 nine month periods
ended August 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 inventory classifications are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
August 31, November 30,
2000 1999
---- ----
<S> <C> <C>
Finished products $36,298 $33,628
Raw materials 32,903 30,048
------- -------
69,201 63,676
Less adjustment of certain inventories
to LIFO basis 5,976 5,176
------- -------
$63,225 $58,500
======= =======
</TABLE>
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 Nine Months Ended
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Wood Coatings $ 79,767 $ 77,239 $233,278 $218,760
Metal Coatings 75,080 74,469 220,696 213,089
Composites and Glass Coatings 16,362 17,744 54,659 55,117
-------- -------- -------- --------
$171,209 $169,452 $508,633 $486,966
======== ======== ======== ========
</TABLE>
Page 7 of 13
<PAGE>
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 August 31, 2000 and 1999 was approximately $8,797,000 and $8,599,000
respectively. Total comprehensive income for the nine month period ended August
31, 2000 and 1999 was approximately $22,585,000 and $24,570,000, 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 Nine Months Ended
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic
Weighted-average common shares outstanding 23,228 23,220 23,216 23,200
====== ====== ====== ======
Diluted
Weighted-average common shares outstanding 23,228 23,220 23,216 23,200
Dilutive effect of stock options 679 110 239 130
------ ------ ------ ------
Average common shares outstanding assuming dilution 23,907 23,330 23,455 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--MERGER AGREEMENT AND 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. On September 27, 2000, the Company's shareholders approved the
merger agreement with The Valspar Corporation. Approval by the Lilly
Stockholders is a condition to completion of the merger, which remains subject
to satisfaction of other customary closing conditions, including expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act. The companies expect to complete the proposed merger by year
end. However, no assurances can be made that the companies will receive the
necessary governmental clearances on acceptable terms to complete the merger by
then.
Page 8 of 13
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations - Three and nine month periods ended August 31, 2000
The Company's net sales for the third quarter of 2000 increased by $1.8 million
or 1.0% to $171.2 million compared to the third quarter of 1999. Sales momentum
softened during the third quarter. Most major product lines were relatively even
with the same quarter a year ago. Net sales for the nine month period ended
August 31, 2000 increased by $21.7 million or 4.4% to $508.6 million compared to
the same period in 1999.
Gross profit for the third quarter of 2000 was 38.8% of net sales, representing
an increase of 0.9 percentage points over the same period a year ago. For the
nine month period ended August 31, 2000, gross profit was 38.0%, a decline of
0.5 percentage points compared to last year. The decline in the nine month gross
profit percentage is 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 as a percentage of net sales, for
the three and nine month periods ended August 31, 2000, increased by 1.0 and 0.6
percentage points to 24.7% and 24.9% respectively, over the same periods in
1999. These increases are due to higher selling expenses related to growth in
international markets, increased freight expenses and marketing initiatives.
Operating income as a percentage of net sales, for the third quarter of 2000
increased by 0.1 percentage points to 11.0% over the same period a year ago.
Operating income as a percentage of net sales, for the nine month period ended
August 31, 2000 decreased by 0.9 percentage points to 9.9% over the same period
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 nine month periods ended August 31, 2000
increased by 9.0% and 6.3% respectively, over the same periods a year ago, due
to slightly higher average interest rates and debt levels.
Net income for the third quarter of 2000 increased by 4.6% to $9.1 million
compared to the same period a year ago. Net income for the nine month period
ended August 31, 2000 decreased by $1.2 million or 4.9% to $22.7 million over
the same period in 1999, due to higher raw material costs and selling, general
and administrative expenses.
During the third quarter of 2000, the Company's effective tax rate declined 1.0
percentage point to 40%, due to lower statutory rates in Canada and continued
tax planning initiatives.
Liquidity and Capital Resources
Cash provided by operating activities for the nine month period ended August 31,
2000 decreased by $2.9 million compared to the same period a year ago. The
decrease 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 nine month period ended August 31,
2000 decreased by $10.8 million compared to the same period a year ago, which
was primarily due to lower capital expenditures.
Cash provided by financing activities for the nine month period ended August 31,
2000 decreased by $3.3 million over the same period a year ago due to lower
proceeds from 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 13
________________________________________________________________________________
<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
intention 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 13
________________________________________________________________________________
<PAGE>
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Shareholders on September 27, 2000. The
following is a summary of the matter voted on at the meeting:
Shareholders approved the proposal to approve the Agreement and Plan of
Merger, dated as of June 23, 2000, among Lilly Industries, Inc. (the
"Corporation"), The Valspar Corporation, and Val Acquisition Corporation, a
wholly owned subsidiary of Valspar ("Merger Sub"), pursuant to which the
Merger Sub will be merged into the Corporation as set forth in the Proxy
Statement of the Corporation dated August 21, 2000.
Approval of the Merger required the affirmative vote of the holders of a
majority of the outstanding shares of Lilly Industries, Inc. Class A and
Class B Common Stock, having equal voting rights, share for share, voting
together as one class. The proposal was adopted with 16,717,775 shares of
Class A Stock and 481,306 shares of Class B Stock voting in favor of the
proposal. This represents 74.0% of the combined outstanding shares of Class
A Stock and Class B Stock.
Shareholders of record on August 18, 2000 were entitled to notice of, and
to vote at, the Special Meeting of Shareholders. On that date 22,756,053
shares of the Company's Class A Stock and 483,037 shares of the Company's
Class B Stock were outstanding.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included herein:
EXHIBIT 2.1 Agreement and Plan of Merger, dated as of June 23,2000, among
Lilly Industries, Inc., The Valspar Corporation and Val
Acquisition Corporation is incorporated by reference to
exhibition to Form 8-K of Lilly Industries, Inc. filed on
June 26, 2000.
EXHIBIT 27 Financial Data Schedule
(b) Reports on Form 8-K
On June 26, 2000, the Company filed a Form 8-K to announce it 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 11 of 13
________________________________________________________________________________
<PAGE>
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)
October 13, 2000
/s/ Douglas W. Huemme
---------------------
Douglas W. Huemme
Chairman and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
October 13, 2000
/s/ John C. Elbin
-----------------
John C. Elbin
Vice President, Chief Financial
Officer and Secretary
Page 12 of 13
________________________________________________________________________________
