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 February 29, 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 March 31, 2000:
Class A Common 22,720,000
Class B Common 497,000
Page 1 of 12
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
February 29, February 28,
2000 1999
-------- --------
Net sales $161,051 $146,139
Costs and expenses:
Cost of products sold 101,939 90,083
Selling, general and administrative 41,697 37,093
Research and development 5,272 5,159
-------- --------
148,908 132,335
-------- --------
Operating income 12,143 13,804
Other expenses:
Sundry expense 137 239
Interest expense, net 4,297 4,101
-------- --------
Income before income taxes 7,709 9,464
Income taxes 3,161 3,880
-------- --------
Net income $ 4,548 $ 5,584
======== ========
Net income per share:
Basic $ 0.20 $ 0.24
Diluted $ 0.20 $ 0.24
Cash dividends per share $ .08 $ .08
See notes to condensed consolidated financial statements.
Page 2 of 12
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
February 29, November 30,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 4,733 $ 5,714
Accounts receivable, less allowances
for doubtful accounts (2/29/00, $1,869;
11/30/99, $1,775) 92,395 91,369
Inventories 61,611 58,500
Other 7,877 6,274
--------- ---------
Total current assets 166,616 161,857
Other assets 23,992 22,755
Intangible assets 232,685 233,878
Property and equipment:
Land, buildings and equipment 207,907 199,714
Accumulated depreciation (70,442) (67,778)
--------- ---------
137,465 131,936
--------- ---------
$ 560,758 $ 550,426
========= =========
See notes to condensed consolidated financial statements.
Page 3 of 12
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
February 29, November 30,
2000 1999
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,129 $ 60,317
Other 37,972 52,820
--------- ---------
Total current liabilities 107,101 113,137
Long-term debt 221,387 206,803
Other liabilities 37,193 38,315
Shareholders' equity:
Capital stock:
Class A (limited voting) 15,554 15,539
Class B (voting) 300 300
Additional capital 84,237 83,833
Retained earnings 136,498 133,807
Accumulated other comprehensive loss (3,388) (3,509)
Cost of capital stock in treasury (38,124) (37,799)
--------- ---------
195,077 192,171
--------- ---------
$ 560,758 $ 550,426
========= =========
See notes to condensed consolidated financial statements.
Page 4 of 12
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended
February 29, February 28,
2000 1999
-------- --------
OPERATING ACTIVITIES
Net income $ 4,548 $ 5,584
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,005 2,632
Amortization 3,017 2,686
Changes in operating assets and liabilities
net of effects from acquired business:
Accounts receivable (1,026) (4,521)
Inventories (3,111) (3,201)
Accounts payable and accrued expenses (6,036) (9,284)
Sundry (4,148) (8,354)
-------- --------
Net cash used by operating activities (3,751) (14,458)
INVESTING ACTIVITIES
Purchases of property and equipment (8,834) (6,843)
Payments for acquired businesses (1,250) (2,721)
Sundry 33 468
-------- --------
Net cash used by investing activities (10,051) (9,096)
FINANCING ACTIVITIES
Dividends paid (1,857) (1,857)
Proceeds from borrowings 14,584 21,800
Sundry 94 339
-------- --------
Net cash provided by financing activities 12,821 20,282
-------- --------
Decrease in cash and cash equivalents (981) (3,272)
Cash and cash equivalents at beginning of period 5,714 13,326
-------- --------
Cash and cash equivalents at end of period $ 4,733 $ 10,054
======== ========
See notes to condensed consolidated financial statements.
Page 5 of 12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
FEBRUARY 29, 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 month period ended
February 29, 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):
February 29, November 30,
2000 1999
------- -------
Finished products $35,294 $33,628
Raw materials 31,993 30,048
------- -------
67,287 63,676
Less adjustment of certain inventories
to LIFO basis 5,676 5,176
------- -------
$61,611 $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):
Three Months Ended
February 29, February 28,
2000 1999
-------- --------
Wood Coatings $ 74,296 $ 65,113
Metal Coatings 67,584 63,662
Composites and Glass Coatings 19,171 17,364
-------- --------
$161,051 $146,139
======== ========
Page 6 of 12
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 February 29, 2000 and February 28, 1999 was approximately $4,669,000 and
$5,799,000, 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):
Three Months Ended
February 29, February 28,
2000 1999
------ ------
Basic
Weighted-average common shares outstanding 23,205 23,180
====== ======
Diluted
Weighted-average common shares outstanding 23,205 23,180
Dilutive effect of stock options 35 150
------ ------
Average common shares outstanding assuming dilution 23,240 23,330
====== ======
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.
Page 7 of 12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations - Three Months Ended February 29, 2000
The Company's net sales for the first quarter of 2000 increased by $14.9 million
or 10.2% to $161.1 million from the first quarter of 1999. Sales volume
continues to increase in most markets, with strong growth in sales of wood
coatings and powder coatings.
Gross profit for the first quarter of 2000 decreased by 1.7 percentage points
over the same period a year ago, representing 36.7% of net sales compared to
38.4% for last year's first quarter. This decline is directly related to the
rapid cost escalation in petroleum-based raw materials, weather related
manufacturing disruptions and transition start-up costs associated with
increased capacity.
Selling, general and administrative expenses during the first quarter of 2000
increased 12.4% over the same period in 1999 due to higher selling expenses
related to business building initiatives.
Operating income for the first quarter of 2000 decreased by 12.0% over the same
period a year ago, as raw material and selling, general and administrative cost
increases offset the increase in net sales.
Net interest expense during the first quarter of 2000 increased by 4.8% compared
to the first quarter of 1999, due to slightly higher average interest rates and
debt levels.
Net income and net income per share for the first quarter of 2000 decreased
18.6% and 16.7%, respectively, over the same period of 1999, due to higher raw
material and selling, general and administrative costs. The effective tax rate
remained at 41%.
Liquidity and Capital Resources
Cash used by operating activities for the first quarter of 2000 decreased $10.7
million over the first quarter of 1999, primarily due to changes in working
capital and non-current liabilities.
Cash used by investing activities for the first quarter of 2000 increased by
$1.0 million compared to the same period a year ago, which was primarily due to
increased capital expenditures of $2.0 million, offset by a decrease in payments
for acquired businesses of $1.5 million.
Cash provided by financing activities during the first quarter of 2000 decreased
by $7.5 million over the same period a year ago primarily due to lower
borrowings outstanding 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 8 of 12
Forward-Looking Statements
Statements in this report that are not strictly historical may be
"forward-looking" statements, 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.
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 9 of 12
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is included herein:
EXHIBIT 27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended February 29, 2000.
Note: All other item numbers under this section are not applicable.
Page 10 of 12
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)
April 14, 2000
/s/ Douglas W. Huemme
-----------------------------------
Douglas W. Huemme
Chairman and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
April 14, 2000
/s/ John C. Elbin
-----------------------------------
John C. Elbin
Vice President, Chief Financial
Officer and Secretary
Page 11 of 12