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, 1996
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.)
733 SOUTH WEST STREET
INDIANAPOLIS, INDIANA 46225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 687-6700
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, 1996:
Class A Common 22,331,000
Class B Common 365,000
Page 1 of 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Three Months Ended
August 31 August 31
1996 1995
-----------------------
Net sales $ 150,859 $ 79,705
Costs and expenses:
Cost of products sold 94,671 54,586
Selling, administrative and general 33,322 14,179
Research and development 4,757 3,027
--------- ---------
132,750 71,792
--------- ---------
OPERATING INCOME 18,109 7,913
Other income (expense):
Interest income and sundry 132 167
Interest expense (5,449) (451)
--------- ---------
(5,317) (284)
--------- ---------
INCOME BEFORE INCOME TAXES 12,792 7,629
Income Taxes 5,780 3,052
--------- ---------
NET INCOME $ 7,012 $ 4,577
========= =========
Cash dividends per share--Note B $ 0.08 $ 0.08
========= =========
Average number of shares and equivalent shares
of capital stock outstanding--Note B 23,100 23,100
========= =========
Net income per share--Note B $ 0.30 $ 0.20
========= =========
See notes to consolidated condensed financial statements.
Page 2 of 13
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Nine Months Ended
August 31 August 31
1996 1995
-----------------------
Net sales $ 355,841 $ 245,559
Costs and expenses:
Cost of products sold 228,118 165,030
Selling, administrative and general 76,776 44,545
Research and development 12,547 9,698
Restructuring charges 9,607 0
--------- ---------
327,048 219,273
--------- ---------
OPERATING INCOME 28,793 26,286
Other income (expense):
Interest income and sundry 471 349
Interest expense (9,073) (1,581)
--------- ---------
(8,602) (1,232)
--------- ---------
INCOME BEFORE INCOME TAXES 20,191 25,054
Income Taxes 9,077 10,022
--------- ---------
NET INCOME $ 11,114 $ 15,032
========= =========
Cash dividends per share--Note B $ 0.24 $ 0.23
========= =========
Average number of shares and equivalent shares
of capital stock outstanding--Note B 23,050 23,200
========= =========
Net income per share--Note B $ 0.48 $ 0.65
========= =========
See notes to consolidated condensed financial statements.
Page 3 of 13
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
August 31 November 30
1996 1995
------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,749 $ 20,260
Accounts receivable, less allowances
for doubtful accounts (8/31/96, $3,078;
11/30/95, $2,051) 82,981 40,911
Inventories--Note C 46,156 15,411
Other 8,037 349
--------- ---------
TOTAL CURRENT ASSETS 146,923 76,931
OTHER ASSETS 26,771 13,781
INTANGIBLE ASSETS 254,419 47,401
PROPERTY AND EQUIPMENT
Land, buildings and equipment 121,066 86,273
Allowances for depreciation (deduction) (40,900) (40,804)
--------- ---------
80,166 45,469
--------- ---------
$ 508,279 $ 183,582
========= =========
See notes to consolidated condensed financial statements.
Page 4 of 13
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
August 31 November 30
1996 1995
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 46,107 $ 23,982
Other 19,596 10,415
Current portion of long-term debt 14,520 7,029
--------- ---------
TOTAL CURRENT LIABILITIES 80,223 41,426
LONG-TERM DEBT 262,680 21,200
OTHER LIABILITIES 49,489 11,582
SHAREHOLDERS' EQUITY Capital stock:
Class A (limited voting) 15,082 14,947
Class B (voting) 300 300
Additional capital 75,125 73,450
Retained earnings 57,139 51,446
Currency translation adjustments 94 288
Cost of capital stock in treasury
(deduction) (31,853) (31,057)
--------- ---------
115,887 109,374
--------- ---------
$ 508,279 $ 183,582
========= =========
See notes to consolidated condensed financial statements.
Page 5 of 13
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
August 31 August 31
1996 1995
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 11,114 $ 15,032
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,618 3,406
Amortization of intangibles 6,096 2,931
Restructuring charges 9,607 --
Deferred income taxes (3,000) (100)
Changes in operating assets and liabilities,
net of effects from acquired business:
Accounts receivable (4,238) 3,052
Inventories (5,240) 3,621
Other current assets 299 (52)
Accounts payable and other current liabilities (521) (12,066)
Sundry 3,571 (1,226)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,306 14,598
INVESTING ACTIVITIES
Purchases of property and equipment (15,433) (8,106)
Payment for acquired business (235,000) --
Sundry 1,598 (2,597)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (248,835) (10,703)
FINANCING ACTIVITIES
Cash dividends paid (5,417) (5,230)
Proceeds from short-term and long-term borrowings 292,000 --
Principal payments on short-term and
long-term borrowings (71,578) (7,060)
Purchases of capital stock for treasury -- (2,543)
Sundry 1,013 1,017
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 216,018 (13,816)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (10,511) (9,921)
Cash and cash equivalents at beginning of year 20,260 26,581
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,749 $ 16,660
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
Page 6 of 13
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
AUGUST 31, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed 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 Rule 10-01 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. 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, 1995.
NOTE B--SHARE AND PER SHARE AMOUNTS
Equivalent shares of capital stock represent additional shares assumed issued
upon exercise of stock options.
NOTE C--INVENTORIES
The principal inventory classifications are summarized as follows (in
thousands):
August 31 November 30
1996 1995
---------- -----------
Finished products $ 25,100 $ 11,065
Raw materials 28,594 12,584
-------- --------
53,694 23,649
Less adjustment of certain
inventories to last in,
first out (LIFO) basis 7,538 8,238
-------- --------
$ 46,156 $ 15,411
======== ========
The Company uses the LIFO method in inventory valuation for approximately 70% of
inventories where 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 necessarily 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.
Page 7 of 13
<PAGE>
NOTE D--RESTRUCTURING
The Company has adopted and commenced implementation of plans for the
consolidation of manufacturing facilities related to the April 8, 1996
acquisition of Guardsman Products, Inc. These plans will result in the closure
of some plants and workforce reductions totaling approximately 250 employees.
Closure costs consist of facility and equipment valuation adjustments, inventory
disposal costs, dismantling and maintenance costs, and termination benefits. The
primary employee groups affected include manufacturing, selling, administrative
and research and development personnel. It is anticipated these plans will be
completed by the end of fiscal 1997.
Costs associated with the planned closure of former Lilly facilities and related
reductions in workforce are reflected as restructuring charges included in
second quarter operations. These charges totaled $9,607,000, which reduced
second quarter net income by $5,284,000 or $.23 per share. The components of the
restructuring charges and amounts paid or charged against these reserves are as
follows (in thousands):
Costs Paid Ending
Provision or Charged Balance
Facilities, equipment,
inventories, and other $7,827 $ 365 $7,462
Termination benefits 1,780 25 1,755
------ ------ ------
$9,607 $ 390 $9,217
====== ====== ======
Costs associated with the planned closure of former Guardsman facilities and
related reductions in workforce are recorded as liabilities in the opening
balance sheet of the combined entity as of the acquisition date. The components
of these liabilities and amounts paid or charged against these reserves are as
follows (in thousands):
Costs Paid Ending
Liabilities or Charged Balance
Facilities, equipment,
inventories, and other $6,532 $1,100 $5,432
Termination benefits 2,476 700 1,776
------ ------ ------
$9,008 $1,800 $7,208
====== ====== ======
NOTE E--ACQUISITION
Lilly acquired 9,322,583 shares or about 96.5% of the outstanding stock of
Guardsman Products, Inc. ("Guardsman") pursuant to a cash tender offer of $23
per share for all the outstanding stock of Guardsman. The tender offer expired
on April 4, 1996 and the shares tendered were accepted for purchase on April 8,
1996. Pursuant to a follow-up merger, all non-tendered shares of Guardsman were
converted into the right to receive $23 net per share in cash (subject to
perfected dissenters' rights, if any). To finance the purchase of shares, Lilly
obtained commitments for $300 million of senior secured credit facilities and
used $275 million of these facilities to pay-off existing debt and fund the
initial purchase of shares, and to pay related expenses. The acquisition
transactions were recorded using the purchase method and consolidated financial
statements include the results of operations of Guardsman since the date of
acquisition. The excess of the purchase price
Page 8 of 13
<PAGE>
over the fair value of assets acquired is being amortized by the straight-line
method over 40 years.
The following unaudited pro forma consolidated results of operations for the
nine months ended August 31, 1996 and 1995 are stated as though the acquisition
occurred on December 1, 1994 (in thousands, except per share data):
Nine Months Ended
August 31, August 31,
1996 1995
----------- -----------
Net sales $445,587 $434,697
Net income 13,105* 18,990
Net income per share .57* .82
*Pro forma results for the nine months ended August 31, 1996 include
restructuring charges of $9,607 which reduced net income by $5,284 or $.23 per
share.
The pro forma consolidated results of operations are not necessarily indicative
of the actual results of operations that would have occurred had the purchase
been made at December 1, 1994, or of future results of operations.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Sales and Earnings Set Records
Both sales and earnings reached record levels for our third quarter ended August
31. Sales rose 89 percent to $150.9 million compared with $79.7 million for last
year's third quarter. Third quarter earnings were also a record -- $7.0 million
- -- 53 percent ahead of the $4.6 million earned in last year's third quarter.
Earnings per share for the comparable third quarters were 30 cents for 1996 and
20 cents for 1995.
The sales gain is largely the result of our obtaining a full three months of
revenue contribution from Guardsman Products, Inc. (Guardsman), which we
acquired last April, as well as generally improved sales across our entire
product line. The improved earnings reflect both better profits from our core
businesses as well as an enhanced profit contribution from Guardsman.
Cost Savings Increase
Our goal to reduce the redundant expenses that accompanied our acquisition of
Guardsman appears well in hand. To date we've eliminated $15 million on an
annualized basis -- after owning Guardsman for only five months. Initially, we
expected to eliminate at least $20 million from annual operating costs after
twelve to twenty-four months of combined operations. That $20 million goal now
seems rather conservative, and $25 million is more probable.
As part of our cost savings program, we sold a resin plant in Grand Rapids,
Michigan in August. We also announced plans to close an aging coatings
manufacturing plant in Jamestown, New York. Both closings are expected to
further reduce costs.
Page 9 of 13
<PAGE>
These and other cost savings are expected to more than cover the interest
expense on the $235 million we borrowed to acquire Guardsman. Consequently, once
the identified cost savings have been fully realized, we expect all of
Guardsman's pre-tax earnings ($15 million in calendar year 1995) to contribute
to our net income.
Powder Coatings Plant Purchased
We recently purchased an ultra-modern powder coatings manufacturing plant
located at University Research Park in Charlotte, North Carolina. This gives us
the capacity to roughly double our sales of powder coatings, which is our
fastest growing product line. Our powder coatings plant in Kansas City is
presently operating efficiently, but at capacity, and therefore we needed a
second plant to sustain our momentum.
The facility itself is as modern and up-to-date as any in the U.S. In addition,
its superb location gives us access to many new customers in the East and
Southeast as well as the ability to service the entire U.S. from two strategic
locations.
231st Consecutive Dividend
The Board of Directors declared its regular quarterly dividend of 8 cents per
share, payable January 2, 1997 to shareholders of record at the close of
business on December 11, 1996. This is the 231st consecutive dividend paid by
Lilly Industries, Inc.
Near-term Outlook
We expect sales and earnings to increase for the fourth quarter of fiscal 1996
compared with the fourth quarter of fiscal 1995 because:
o The fiscal 1996 fourth quarter will include all of Guardsman's sales
compared with none in 1995.
o Sales have generally improved compared to levels a year ago.
o Operating expenses, as a percent of sales, are moving lower as cost
savings plans continue to be implemented.
Consequently, we believe profits for our fiscal year ended November 30, 1996
will exceed those of last year, except for the onetime restructuring charge of
$9.6 million incurred in the second quarter related to the acquisition of
Guardsman last April.
Page 10 of 13
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included or incorporated by reference herein:
EXHIBIT 2Merger Agreement, dated March 4, 1996, by and among
Lilly Industries, Inc., LP Acquisition Corporation,
and Guardsman Products, Inc. (incorporated by
reference to Exhibit 2 to Form 8-K of Lilly
Industries, Inc. dated April 22, 1996 and filed with
the SEC on April 23, 1996)
EXHIBIT 4Credit Agreement, dated as of April 8, 1996, between
Lilly Industries, Inc., the Lenders Signatory
Thereto, NBD Bank, N.A., as Agent, and Harris Trust
and Savings Bank, Comerica Bank, Mercantile Bank of
St. Louis, and Bank One, Indianapolis, N.A., as
Co-Agents (incorporated by reference to Exhibit 4 to
Form 8-K of Lilly Industries, Inc.. dated April 22,
1996 and filed with the SEC on April 23, 1996)
EXHIBIT 11 Computation of Earnings Per Share
EXHIBIT 27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three
months ended August 31, 1996.
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 15, 1996
/s/ Douglas W. Huemme
------------------------------
Douglas W. Huemme
Chairman, President and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
October 15, 1996
/s/ Kenneth L. Mills
------------------------------
Kenneth L. Mills
Director of Corporate Accounting
Page 12 of 13
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
LILLY INDUSTRIES, INC.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31 August 31 August 31
1996 1995 1996 1995
---------- ----------- -------- ------
Primary:
<S> <C> <C> <C> <C>
Average shares outstanding 22,650 22,600 22,600 22,700
Net income $ 7,012 $ 4,577 $11,114 $15,032
Net income per common share $ 0.31 $ 0.20 $ 0.49 $ 0.66
======= ======= ======= =======
Average shares outstanding 22,650 22,600 22,600 22,700
Dilutive stock options based
on treasury stock method
using average market
price 400 500 400 500
------- ------- ------- -------
23,050 23,100 23,000 23,200
Net income $ 7,012 $ 4,577 $11,114 $15,032
Net income per common
and common equivalent
share $ 0.30 $ 0.20 $ 0.48 $ 0.65
======= ======= ======= =======
Fully diluted:
Average shares outstanding 22,650 22,600 22,600 22,700
Dilutive stock options based
on the treasury stock
method using the higher
of quarter end or average
market price 450 500 450 500
------- ------- ------- -------
23,100 23,100 23,050 23,200
Net income $ 7,012 $ 4,577 $11,114 $15,032
Net income per common
and common equivalent
share $ 0.30 $ 0.20 $ 0.48 $ 0.65
======= ======= ======= =======
</TABLE>
Page 13 of 13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> NOV-30-1996
<CASH> 9,749
<SECURITIES> 0
<RECEIVABLES> 86,060
<ALLOWANCES> (3,078)
<INVENTORY> 46,156
<CURRENT-ASSETS> 146,923
<PP&E> 121,066
<DEPRECIATION> (40,900)
<TOTAL-ASSETS> 508,279
<CURRENT-LIABILITIES> 80,223
<BONDS> 0
<COMMON> 90,506
0
0
<OTHER-SE> 25,381
<TOTAL-LIABILITY-AND-EQUITY> 508,279
<SALES> 150,859
<TOTAL-REVENUES> 150,859
<CGS> 94,671
<TOTAL-COSTS> 132,750
<OTHER-EXPENSES> (132)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,449
<INCOME-PRETAX> 12,792
<INCOME-TAX> 5,780
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,012
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
