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 28, 1997
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 March 31, 1997:
Class A Common 22,507,000
Class B Common 353,000
Page 1 of 13
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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
February 28 February 29
1997 1996
--------------------------
Net sales $ 142,160 $ 73,271
Costs and expenses:
Cost of products sold 90,112 49,210
Selling, administrative and general 34,001 14,869
Research and development 4,595 3,172
--------- ---------
128,708 67,251
--------- ---------
OPERATING INCOME 13,452 6,020
Other income (expense):
Interest income and sundry 150 166
Interest expense (5,040) (471)
--------- ---------
(4,890) (305)
--------- ---------
INCOME BEFORE INCOME TAXES 8,562 5,715
Income Taxes 3,852 2,229
--------- ---------
NET INCOME $ 4,710 $ 3,486
========= =========
Cash dividends per share--Note B $ 0.08 $ 0.08
========= =========
Average number of shares and equivalent shares
of capital stock outstanding--Note B 23,300 22,900
========= =========
Net income per share--Note B $ 0.20 $ 0.15
========= =========
See notes to consolidated condensed financial statements.
Page 2 of 13
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
February 28 November 30
1997 1996
------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,372 $ 6,790
Accounts receivable, less allowances
for doubtful accounts (2/28/97, $2,844;
11/30/96, $2,706) 86,751 84,592
Inventories--Note C 48,382 47,546
Other 11,820 19,790
-------- --------
TOTAL CURRENT ASSETS 151,325 158,718
OTHER ASSETS 26,083 23,749
INTANGIBLE ASSETS 255,973 258,811
PROPERTY AND EQUIPMENT
Land, buildings and equipment 129,201 127,538
Allowances for depreciation (deduction) (48,857) (46,956)
-------- --------
80,344 80,582
-------- --------
$513,725 $521,860
======== ========
See notes to consolidated condensed financial statements.
Page 3 of 13
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CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
February 28 November 30
1997 1996
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 56,718 $ 56,593
Other 28,734 35,022
Current portion of long-term debt 16,675 16,524
--------- ---------
TOTAL CURRENT LIABILITIES 102,127 108,139
LONG-TERM DEBT 239,886 245,037
OTHER LIABILITIES 46,077 46,795
SHAREHOLDERS' EQUITY Capital stock:
Class A (limited voting) 15,150 15,103
Class B (voting) 300 300
Additional capital 76,200 75,433
Retained earnings 65,881 62,990
Currency translation adjustments 284 88
Cost of capital stock in treasury
(deduction) (32,180) (32,025)
--------- ---------
125,635 121,889
--------- ---------
$ 513,725 $ 521,860
========= =========
See notes to consolidated condensed financial statements.
Page 4 of 13
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended
February 28 February 29
1997 1996
------------------------
OPERATING ACTIVITIES:
Net income $ 4,710 $ 3,486
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,211 1,195
Amortization of intangibles 2,906 900
Changes in operating assets and liabilities:
Accounts receivable (2,159) (291)
Inventories (836) (5,098)
Accounts payable and accrued expenses (6,163) (1,310)
Sundry 3,077 (1,031)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 3,746 (2,149)
INVESTING ACTIVITIES:
Purchases of property and equipment (3,556) (3,315)
Sundry 3,551 32
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (5) (3,283)
FINANCING ACTIVITIES:
Cash dividends paid (1,819) (1,800)
Principal payments on long-term debt (3,625) (7,000)
Net payments on revolving note (1,375) 0
Sundry 660 479
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (6,159) (8,321)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (2,418) (13,753)
Cash and cash equivalents at beginning of year 6,790 20,260
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,372 $ 6,507
======== ========
See notes to consolidated condensed financial statements.
Page 5 of 13
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
FEBRUARY 28, 1997
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, 1996.
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):
February 28 November 30
1997 1996
---------- ------------
Finished products $ 26,235 $ 25,847
Raw materials 29,823 29,375
-------- --------
56,058 55,222
Less adjustment of certain
inventories to last in,
first out (LIFO) basis 7,676 7,676
-------- --------
$ 48,382 $ 47,546
======== ========
The Company uses the LIFO method in inventory valuation for approximately 82% 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 6 of 13
<PAGE>
NOTE D--RESTRUCTURING
In 1996 the Company implemented plans for the consolidation of manufacturing
facilities related to the Guardsman acquisition. These plans include the closure
of some Lilly and Guardsman plants and workforce reductions. It is anticipated
these plans will be completed by the end of fiscal 1997.
Costs associated with the planned closure of Lilly facilities and workforce
reductions were recorded in the 1996 second quarter as a restructuring charge
totaling $9,607,000, which reduced net income by $5,284,000 or $.23 per share.
The components of the restructuring charge 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 1,780 574 1,206
---------- ----------- -------
$ 9,607 $ 939 $ 8,668
========== =========== =======
Costs associated with the planned closure of Guardsman facilities and workforce
reductions were 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 $ 1,889 $ 4,643
Termination benefits 2,476 878 1,598
---------- ------- -------
$ 9,008 $ 2,767 $ 6,241
========== ======= =======
NOTE E--ACQUISITION
On April 8, 1996 the Company acquired all the outstanding shares of Guardsman
Products, Inc. ("Guardsman") for $235,000,000 in cash. The Company used
$275,000,000 of senior secured credit facilities to finance the acquisition,
pay-off existing debt and to pay related expenses. The acquisition was recorded
using the purchase method and the consolidated financial statements include the
results of operations of Guardsman since the date of acquisition. The fair value
of net assets acquired include $40,031,000 net working capital, $50,246,000
noncurrent assets, $213,642,000 intangible assets, $28,549,000 long-term debt,
and $40,370,000 noncurrent liabilities. Goodwill is being amortized by the
straight-line method over 40 years.
Page 7 of 13
<PAGE>
The following unaudited pro forma consolidated results of operations for the
three months ended February 28, 1997 and February 29, 1996 are stated as though
the acquisition occurred on December 1, 1995 (in thousands, except per share
data):
Three Months Ended
February 28, February 29,
1997 1996
--------------------
Net sales $142,160 $141,398
Net income 4,710 3,569
Net income per share .20 .16
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, 1995, or of future results of operations.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Record Sales and Earnings
Our sales and earnings set new records for performance for any first quarter in
our history. Sales for the first quarter ended February 28 rose 94% to a record
$142.2 million compared with $73.3 million for the same quarter a year earlier.
Earnings increased to a first quarter record of $4.7 million, 35% above the $3.5
million recorded for the 1996 first quarter. Earnings per share were 20 cents
for 1997 compared with 15 cents for 1996. The improvement in sales and earnings
reflected the contribution realized from Guardsman Products, Inc. (Guardsman),
which Lilly acquired last April, and improved operations from Lilly's core
businesses.
Our first quarter results were on target with our projections. Traditionally,
our first quarter revenues are lower than other quarters due to the seasonality
of our customers' volume requirements. Thus, we were pleased with our increase
in sales, which included contributions from the business acquired from Guardsman
and improved sales of wood and metal coatings.
Earnings held up reasonably well, particularly in the face of the onetime costs
we are incurring at new manufacturing facilities. These costs include start-up
expenses associated with three new facilities located at Bowling Green,
Kentucky; Charlotte, North Carolina; and Ballinamore, Ireland. Investments in
new facilities are needed to satisfy customer requirements in 1998 and beyond.
On balance, this year's first quarter is a continuation of the progress we made
during the last three quarters of fiscal 1996. We've moved through the
acquisition of Guardsman in an accretive manner, and we are continuing with our
plan to consolidate certain plants to improve manufacturing efficiencies. One
such consolidation is the recently announced movement of all manufacturing from
our South Gate, California facility to our Montebello, California site.
Page 8 of 13
<PAGE>
The consolidation of these two plants will improve raw material procurement,
inventory management, manufacturing and customer service on the west coast.
New Chief Operating Officer
On February 24, 1997, Robert A. Taylor was appointed Executive Vice President
and Chief Operating Officer of the Company. For the past 25 years, Bob Taylor
has held various domestic and international technical and management positions
within the industrial coatings industry. Most recently, he was the Vice
President and General Manager of our global wood coatings business unit.
Technology Exchange Agreement
On February 20, 1997, Lilly reached an agreement with the Sigma Coatings Group
("Sigma"), a subsidiary of PetroFina, to enter into a technology exchange
agreement between our respective coil coatings business units. Sigma is one of
Europe's leading suppliers of chemical coatings.
This agreement will provide both companies with access to additional
technologies to better serve market and customer requirements. Our combined coil
research and development programs will be synergized by the support of the
largest team of highly qualified scientists cooperating together on coil
coatings projects.
233rd Consecutive Cash Dividend
The Board of Directors declared the 233rd consecutive quarterly cash dividend on
March 21, 1997. The eight cent per share dividend will be paid on July 1, 1997
to shareholders of record on June 10, 1997.
Page 9 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 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 10 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)
April 14, 1997
/s/ Douglas W. Huemme
------------------------------------
Douglas W. Huemme
Chairman, President and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
April 14, 1997
/s/ Kenneth L. Mills
------------------------------------
Kenneth L. Mills
Corporate Accounting Director
Page 11 of 13
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
LILLY INDUSTRIES, INC.
(In thousands, except per share data)
Three Months Ended
February 28 February 29
1997 1996
Primary:
Average shares outstanding 22,750 22,530
Net income $ 4,710 $ 3,486
Net income per common share $ 0.21 $ 0.15
======= =======
Average shares outstanding 22,750 22,530
Dilutive stock options based
on treasury stock method
using average market
price 550 370
------- -------
23,300 22,900
Net income $ 4,710 $ 3,486
Net income per common
and common equivalent
share $ 0.20 $ 0.15
======= =======
Fully diluted:
Average shares outstanding 22,750 22,530
Dilutive stock options based
on the treasury stock
method using the higher
of quarter end or average
market price 550 370
------- -------
23,300 22,900
Net income $ 4,710 $ 3,486
Net income per common
and common equivalent
share $ 0.20 $ 0.15
======= =======
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