FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Stock, without par value
Common Share Purchase Right
(Title of class)
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Page 1 of Pages
Exhibit Index on Page
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 17, 1998 was $442,468,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 17, 1998.
22,702,280 shares of Class A Common Stock, without par value
422,687 shares of Class B Common Stock, without par value
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Items 5 Annual Report to Shareholders for Fiscal
through 8 Year Ended November 30, 1997
Part III: Items 10 Proxy Statement for Annual Meeting of
through 13 Shareholders to be held April 23, 1998
2
<PAGE>
PART I
Lilly Industries, Inc.
Item 1. BUSINESS
Business Description
Lilly Industries, Inc. (referred to herein as "Lilly" or the "Company") was
founded in 1865, and incorporated under the laws of the State of Indiana on
December 5, 1888. The Company believes it is a leader in the industrial coatings
industry, one of the five largest industrial coatings manufacturers in North
America, and one of the 15 largest in the world based on net sales of $601.3
million in fiscal 1997. Lilly formulates, produces and sells coatings primarily
to original equipment manufacturers, enhancing the appearance of and providing
durability to products such as home and office furniture, cabinets, appliances,
building products, transportation, agricultural and construction equipment,
mirrors and a variety of metal and fiberglass reinforced surfaces. A significant
amount of the Company's sales represent coatings developed in cooperation with
its customers to meet their specific product requirements, resulting in a number
of primary supplier relationships with those customers. Lilly also produces and
sells household products, such as fabric protectors, furniture care products and
cleaning aids.
No one class of similar products (other than protective and decorative
coatings) accounted for 10% or more of consolidated revenues of the Company in
any of the last three fiscal years. The Company has only one reportable industry
segment, and employs approximately 2,100 people. The Company has plants and
sales offices in the U.S., Australia, Canada, China, Germany, Ireland, Malaysia,
Singapore, Taiwan and the United Kingdom. (1)
On April 8, 1996, the Company acquired all the outstanding shares of
Guardsman Products, Inc. ("GPI") for $235 million in cash. Like the Company, GPI
was in the business of formulating, producing and selling industrial coatings.
GPI also marketed various household furniture care and automotive after-market
products. With the acquisition of GPI, Lilly increased its fiscal 1996 net sales
by approximately 55% over fiscal 1995 net sales. The GPI acquisition
strengthened Lilly's market position by broadening customer base and product
lines. The acquisition increased Lilly's presence in industrial wood and metal
coatings, and provided it with important environmentally-friendly water-borne
technologies. Lilly also gained a household products business focused on fabric
and stain protection products for household furniture. This business is
characterized by relatively high margins and the potential for new product
development, and adds a degree of diversification to the Company.
- --------------
(1) References in this Form 10-K are references to the Company's fiscal years
ended November 30, 1995, 1996 and 1997.
<PAGE>
Industrial Coatings Industry
Coatings protect a wide range of manufactured goods from the effects of
external elements over the life of the product. In addition, coatings make
products more aesthetically pleasing to end-use customers. Lilly competes in
three principal industrial coatings markets: (i) wood coatings, such as
furniture lacquer and protective color; (ii) metal coatings, such as coil and
powder coatings used to finish furniture, appliances and transportation
equipment; and (iii) composites and glass coatings, such as those used for
mirrors.
Sales for the global paints and coatings market equal approximately $50
billion annually, with annual sales for the domestic market equaling
approximately $17 billion. Annual sales for the industrial coatings segment in
which Lilly participates are approximately $25 billion globally and $8.5 billion
domestically. The balance of the market consists primarily of architectural
coatings (primarily house paints), a market in which Lilly does not compete, and
specialty coatings, including maintenance coatings and traffic paints.
Industrial coatings is a mature and highly fragmented industry in the
U.S., growing in-line with industrial production, and includes many small
competitors. Long term annual unit growth in the U.S. industrial coatings
business is projected between 1% and 2%, largely tied to fluctuations in general
economic cycles. Annual unit growth rate is projected between 1% and 2% in
Europe and between 4% and 6% in Asia. The North American industrial coatings
industry is divided among over 700 participants.
Due to its maturity and historically fragmented participant base, the
coatings industry is undergoing consolidation through mergers and acquisitions.
Consolidation of the coatings industry is being driven by several factors,
including (i) the need for growth in maturing markets; (ii) environmental costs
which, together with a more demanding global customer base, will make it
difficult for smaller manufacturers with limited financial resources to remain
independent; and (iii) the increasing technical and financial resources of the
larger players. To date, the effects of industry consolidation include a greater
concentration of market share with fewer companies, a reduction in the number of
competitors, and the creation of new synergies within the larger coatings
companies, such as raw material purchasing power and manufacturing economies of
scale.
Competition
The industrial coatings industry is competitive, with more than 700
North American manufacturers operating in numerous market segments.
Manufacturers include large international companies as well as small regional
firms, and no one manufacturer dominates. Competitive advantages include
developing coatings that meet specific customer requirements, pricing coatings
competitively and rapidly delivering quality products. Increasingly,
technological developments that reduce negative environmental effects are
becoming an important competitive factor.
Lilly is one of the top five industrial coatings manufacturers in North
America, one of the top 15 worldwide, and, with the acquisition of GPI, became
the largest supplier to the U.S. residential furniture market, serving virtually
all of the top 25 U.S. furniture manufacturers. The Company is also well
represented in other wood coatings, industrial metal finishes, coil and powder
coatings and mirror glass coatings markets. While Lilly is among the top five
North American producers of industrial coatings, some competitors are generally
more diversified and have greater financial resources than the Company. Major
competitors include Akzo Nobel; Ferro Corporation; Morton International, Inc.;
The Sherwin-Williams Company; PPG Industries, Inc.; and The Valspar Corporation.
End Use Markets
The Company focuses on four end use markets: metal coatings; wood
coatings; glass coatings and composites; and Guardsman products. These four
markets accounted for approximately 39%, 38%, 12% and 11% of the Company's
fiscal 1997 net sales, respectively. The following provides a summary of these
markets.
<PAGE>
Metal Coatings. The Company's metal coatings provide specialized
coatings for numerous applications such as appliances, building products and
fixtures (such as residential siding, aluminum gutters, and metal roofing),
agricultural and construction equipment, furniture, bicycles, digital satellite
systems, automotive trim and wheels, entry and garage doors, computers, window
trim, shelving, and playground equipment. These coatings include traditional
liquid coatings as well as polyester-based coil coatings and a full range of
decorative and functional powder coatings. The coil coatings process is
considered one of the most environmentally safe, energy-efficient methods of
applying coatings to metal substrates. Lilly's technical innovation has produced
conventional and waterborne coil coatings formulated with proprietary resins
that provide high exterior durability, flexibility, corrosion resistance and
chemical resistance. Powder coatings are experiencing growth because of their
environmental desirability, as powder coatings have no solvent content. Lilly
powder coatings are environmentally compliant and provide outstanding durability
and performance for both interior and exterior applications. Metal coatings are
manufactured at fourteen facilities in the U.S. and two in Canada.
Wood Coatings. Lilly's wood coatings provide a full range of
custom-formulated coatings designed to enhance the beauty of wood while
providing maximum durability for products such as residential and office
furniture, building products and kitchen cabinets. Wood coatings are
manufactured at six U.S. locations, as well as five foreign facilities located
in Canada, China, Ireland, Malaysia and Taiwan.
Glass Coatings and Composites. Lilly's glass coatings are well
recognized globally. The Company's glass coatings provide mirror manufacturers
with everything needed to convert glass into mirrors of premier quality. Glass
coatings include patented silver and copper plating solutions, as well as
low-lead and lead-free coatings for mirror-back protection, all of which meet
the environmental and quality performance standards of mirror manufacturers.
Glass coatings are manufactured at two facilities located in Connecticut, and
foreign facilities located in Canada and Germany. The Company's composites
include in-mold coatings ("gelcoats") that are used as the surface finish on
boats, recreational vehicles, cultured marble vanity tops, custom van and truck
components and personal watercraft.
Guardsman Products. The Company also manufactures and distributes a
wide variety of household products consisting of four distinct businesses:
Interior Care, Consumer Products, Specialty Chemicals and WoodPro(R). The
Interior Care business provides fabric protection and furniture care products to
consumers through furniture stores, and is the world's largest supplier of
retail-applied fabric protection, Fabri-Coate(R). The Consumer Products business
markets several well-known brand name household specialty items, such as
Guardsman(R) Furniture Polish, Goof Off(R) remover, One-Wipe(R) dust clothes and
Chip Clip(R) snack closures. These products are sold through hardware, home
center, paint, mass merchant and grocery retailers. The Specialty Chemicals
business manufactures private-label automotive chemicals such as brake part
cleaner, fuel injector cleaner, and engine oil supplements for national
automotive customers. This division also serves as a private-label contractor in
the chemical packaging market. The WoodPro(R) business is a franchise group that
offers on-site repair and maintenance of wood and upholstered furnishings for
the home or office. These businesses operate from two facilities located in
Michigan and one facility located in the United Kingdom.
Distribution and Customers
Lilly's technical sales force of approximately 600 people market and
sell its industrial coatings directly to over 6,000 industrial customers
throughout the world. Most of the Company's customers are located throughout the
United States and Canada, with the remaining customers concentrated in Asia and
Europe. The Company is not dependent upon any single customer or few customers.
The loss of any single customer would not have a material adverse impact on the
Company. No single customer of the Company represented more than 5% of net
sales. International sales, including U.S. exports of $17.2 million, were $126.5
million in fiscal year 1997, which represented 21% of consolidated sales.
Information concerning the Company's net sales, pre-tax profit and assets in
foreign countries and the United States for the three years ended November 30,
1997 is set forth in Note 9 in the Notes to Consolidated Financial Statements in
the Company's 1997 Annual Report to Shareholders. Note 9 is incorporated herein
by reference.
<PAGE>
The Company has no significant order backlog. No material part of the
business is subject to re-negotiation of profit or termination of contracts or
subcontracts at the election of any governments. Historically, first quarter
operating results are below operating results for the second, third and fourth
quarters due to the lower demand for industrial production which typically
occurs in December.
Raw Materials
Raw materials are the largest single cost in the industrial coatings
business, representing about half of the selling price of most coatings. The
typical coating consists of pigments dispersed in a liquid known as the
"vehicle," which is usually composed of one or more polymers, and a solvent. The
solvent helps the coating spread over the substrate; the polymers form a film to
hold the coating in place after the solvent has evaporated and provides the
unique performance characteristics of the coating. Solvents are typically
petrochemical-based products that evaporate quickly. However, the use of
petrochemical-based solvents is declining as environmentally friendly
technologies, such as water-borne and powder coatings, gain market share. The
pigment, usually an inorganic substance, provides the color. "Fillers" and
"extender pigments" provide gloss and sheen control, while specialty chemicals
known as additives, enhance the flow and application properties of the coating.
The Company manufactures its industrial coatings from a variety of
polymers, pigments, solvents and other chemicals, the bulk of which are obtained
from petrochemical feed stocks. In addition to petrochemicals, the Company uses
both silver and copper. Under normal conditions, all of these raw materials are
available on the open market, although prices and availability are subject to
fluctuation from time to time. Lilly, like most other companies in the coatings
industry, uses a variety of organic and inorganic materials in its products. No
single raw material cost currently accounts for over 4% of net sales and most
account for 1% of net sales or less.
The Company's largest single raw material cost is for titanium dioxide
(TiO2), which is a white pigment, and accounts for approximately 30% of pigment
usage in the coatings industry. The Company's annual expenditures for TiO2 total
approximately 4% of the Company's annual net sales.
Research and Development
Lilly's Corporate Technology Center, as well as laboratories at its
major facilities, emphasize the development of product finishes to meet specific
requirements of customers and the maintenance of quality throughout the
manufacturing process. They are also engaged in research directed toward
development of new products and new manufacturing and application techniques.
Research and development expenses were $18.7 million (3.1% of net sales), $17.3
million (3.4% of net sales) and $13.2 million (4.0% of net sales) for the fiscal
years 1997, 1996 and 1995, respectively. Future research and development
expenses as a percent of net sales are anticipated to remain at current levels
with emphasis on new product development.
The Company holds several patents and trademarks, and considers patent
and trademark protection to be important, but no individual patent is currently
material to the Company's business as a whole. The Company has patents and
licenses for glass coatings which are material to that specific business; and
new patents are continually being developed to sustain the Company's competitive
advantage.
Properties
As of November 30, 1997, Lilly maintained 31 principal facilities, of
which 20 were located in the U.S. See Item 2 - Properties. The plants range in
size from approximately 260,000 square feet to approximately 9,000 square feet.
The facilities vary in age and are well maintained and adequate for their
present uses. Utilization rates vary from site to site depending on capacity,
customers served and range of production capabilities. The Company believes it
can take advantage of special situations (e.g., special orders, new customers,
new technology) that may arise during the course of an operating cycle by adding
capacity through incremental shifts. Each facility operates technical support
centers to assist customers in addressing both application and processing
issues.
<PAGE>
Although the Company has traditionally located its domestic plants near
its customer base, the Company has begun to rely on larger, more efficient,
centralized plants in the U.S. With respect to its foreign operations, the
Company continues to adhere to its strategy of following, and being in close
proximity to, its customers as they open plants around the world.
Employees and Collective Bargaining Units
As of November 30, 1997, Lilly employed approximately 2,100 people. The
coatings industry is not heavily unionized and to the extent that there is
unionization, it is highly fragmented. Unionized workers account for
approximately 14% of the Company's total work force and operate through six
separate unions at seven Lilly facilities. The Company believes that its
relations with its employees are good.
Environmental Regulation
The Company's operations are subject to numerous foreign, federal,
state and local environmental laws and regulations relating to protection of the
environment, employee health and safety, and the discharge, storage, treatment
and disposal of hazardous materials. In the United States, these laws include
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"), the Resource Conservation and Recovery Act, the Clean
Water Act, and the Clean Air Act. Certain operations of the Company use
pigments, resins and solvents that contain chemicals that are considered
hazardous under various environmental laws. Accordingly, management closely
monitors the Company's environmental performance at its facilities. Management
believes that the Company is in compliance in material respects with all
environmental laws and regulations.
CERCLA imposes joint and several liability, without regard to fault or
the legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release of hazardous substances into the
environment. These persons include the owner and operator of the site where the
release occurred and companies that disposed or arranged for disposal of the
hazardous substances found at the site. The Company has been named as a
potentially responsible party ("PRP") by the United States Environmental
Protection Agency ("EPA") or similar state agencies with respect to several
inactive waste processing and/or disposal sites where clean-up costs have been
incurred or may be incurred. In addition to these sites, the Company is
currently investigating and remediating on-site disposal areas at certain of its
current and former facilities.
The Company continually assesses its environmental matters and establishes
reserves to provide for these matters as they arise. The Company's experience to
date leads it to believe that it will have continuing expenditures for
compliance with provisions regulating protection of the environment and
remediation efforts at waste and manufacturing sites. However, management
believes that such expenditures will not have a material adverse effect on
operating results or the financial position of the Company as a whole.
Under the Clean Air Act Amendments of 1990 ("CAAA"), the EPA is
required to regulate volatile organic compound ("VOC") emissions from a variety
of consumer and commercial products, including coatings. Accordingly, in June
1996, the EPA issued proposed regulations that would limit VOCs from industrial
coatings. Final regulations are expected in 1998. Although the Company cannot
accurately assess the impact of these regulations prior to their promulgation or
implementation in final form, based on currently available information, the
Company believes that these regulations will not have a material adverse effect
on the operating results or the financial position of the Company as a whole.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements which constitute
forward looking statements within the meaning of Section 27A of the Securities
Act. Discussions containing such forward looking statements may be found under
the captions "Management's Discussion and Analysis of Results of Operations and
Financial Condition ("MD&A"), and "Business," as well as elsewhere within this
Report. Forward looking statements include statements regarding the intent,
belief or current expectations of the Company, primarily with respect to the
future operating performance of the Company or related industry developments.
When used in this Report, terms such as "anticipate," "believe," "estimate,"
"expect," "intend," "indicate," "may be," "objective," "plan," "predict," and
"will be" are intended to identify such statements. Forward looking statements
are not guarantees of future performance and involve risks and uncertainties.
Forward looking statements are based upon management's expectations at the time
they are made. Actual results could differ materially from those projected in
the forward looking statements as a result of the risk factors set forth below
and the matters set forth in this Report generally, many of which are beyond the
control of the Company. The Company cautions the reader, however, that the
following list of factors may not be exhaustive.
<PAGE>
Sensitivity to General Economic and Industry Conditions
The Company's business, and the industrial coatings industry as a
whole, is cyclical in nature and affected by the general trends of the economy.
In particular, consumer behavior and confidence, the level of personal
discretionary spending, housing activity, interest rates, credit availability,
and demographics influence the Company's end use markets, such as the housing,
building products, construction and agricultural equipment, appliance, furniture
and automotive industries. During economic downturns, these industries tend to
experience declines, which in turn diminish demand for the Company's products.
Effects of Leverage
The Company's level of indebtedness will have several important effects
on its operations including (i) a substantial portion of the Company's cash flow
from operations will be dedicated to debt service obligations, (ii) the
covenants contained in the Company's revolving credit facility and senior notes
may limit the Company's ability to borrow additional funds, and (iii) the
Company's leveraged financial position may make the Company more vulnerable to
economic downturns and may limit its ability to withstand competitive pressures,
and plan for, or react to, changes in market conditions.
Environmental Matters
The operations of the Company, like those of other companies in the
industrial coatings industry, are subject to numerous foreign, federal, state
and local environmental laws and regulations. While the Company believes that it
is currently in material compliance with environmental requirements, any failure
to comply with such present and future requirements could subject the Company to
future liabilities. The imposition of more stringent environmental requirements,
or a determination that the Company is potentially responsible for site
remediation where contamination is not presently known could result in
expenditures for which no accrual has been made.
Mature Industry
The industrial coatings industry is a mature business in the U.S.,
growing in line with industrial production. Long-term annual growth in the U.S.
industrial coatings industry is projected in the 1% to 2% range. To expand and
remain competitive, the Company will be required to continue (i) to develop
coatings that meet specific customer requirements, (ii) to price those coatings
competitively, and (iii) to deliver quality products on time. In addition, the
Company will also need to keep pace with technological developments to remain
competitive, particularly technological developments that relate to
environmental demands such as reductions of volatile organic compound emissions
imposed by the Clean Air Act Amendments of 1990.
Raw Materials
Over 50% of the Company's operating costs are typically attributable to
the cost of raw materials. The cost of these raw materials, most of which are
derived from petrochemical products, depends on numerous factors, including
changes in the economy, the level of foreign and domestic production, and the
crude oil supply and demand balance. A rise in the price of raw materials could
materially increase the Company's operating costs and thereby adversely affect
its profit margins.
International Operations
During fiscal 1997, the Company's international sales, including U.S.
exports of $17.2 million, accounted for approximately 21% of total sales, and
the Company may increase this percentage in the coming years. The Company's
international operations subject it to the risks of doing business abroad,
including currency fluctuations, various trade barriers, restrictions on the
transfer of funds, greater difficulty in accounts receivable collection, burdens
of complying with a wide variety of foreign laws, and, in certain parts of the
world, economic, social, and political instability, any of which could have an
adverse effect on the Company's financial position and results of operations.
<PAGE>
Executive Officers of the Company
The executive officers of the Company, the age of each, the positions and
offices held by each during the last five years, and the period during which
each has served in such positions and offices are as follows:
Name of
Executive Officer Age Positions and Offices Held
- ----------------- --- --------------------------
Larry H. Dalton 50 Vice President - Manufacturing
and Engineering since July,
1994; General Manager of the
Company's Indianapolis Division
from prior to 1992 to
July, 1994.
William C. Dorris 54 Director since 1989; Vice
President - Corporate
Development since July, 1994;
General Manager of the
Company's High Point Division
from prior to 1992 to July,
1994; of the Company's
Templeton Division from prior
to 1992 to July, 1994; and of
the Company's Dallas Division
from 1993 to July, 1994.
John C. Elbin 44 Vice President, Chief Financial
Officer and Secretary since
April, 1997; Senior Vice
President and Chief Financial
Officer, Pet Incorporated from
prior to 1992 to June, 1995.
Douglas W. Huemme 56 Director since 1990; Chairman,
President and Chief Executive
Officer of the Company since
prior to 1992.
A. Barry Melnkovic 40 Vice President - Human
Resources since April, 1996;
Director, Corporate Employee &
Labor Relations and Director
Corporate Compensation and
Benefits, Cummins Engine
Company, Inc., from August, 1993
to February, 1996; Division Human
Resource Manager, Ashland
Chemical, Inc. from prior to
1992 to August, 1993.
Kenneth L. Mills 49 Assistant Secretary since prior
to 1992; Treasurer from prior
to 1992 until October, 1993;
Corporate Accounting Director
since October, 1993.
Robert A. Taylor 43 Director since April, 1997;
Executive Vice President and
Chief Operating Officer since
February, 1997; Vice President
and General Manager, Wood
Coatings from April 1994 to
February, 1997; Vice President,
Specialty and Container Coatings,
AKZ0 Coatings, Inc. from 1992 to
April, 1994.
Each executive officer will serve as such until his successor is chosen and
qualified. No family relationships exist among the Company's executive officers.
6
<PAGE>
Item 2. Properties.
The Company has 31 principal facilities. The locations and approximate
square footage at those facilities are as follows:
Location Square Feet
High Point, North Carolina (2 locations) 320,000
Indianapolis, Indiana 260,000
Grand Rapids, Michigan 165,000
Eschweiler, Germany 121,000
Fremont, Michigan 120,000
North Kansas City, Missouri 106,000
London, Ontario, Canada 103,000
Bowling Green, Kentucky 94,000
Moline, Illinois 76,000
Cornwall, Ontario, Canada 71,000
Kaohsiung Hsien, Taiwan, R.O.C. 64,000
Montebello, California 58,000
Charlotte, North Carolina 57,000
Rocky Hill, Connecticut 57,000
Gardena, California 52,000
Paulsboro, New Jersey 47,000
Dothan, Alabama 42,000
Dallas, Texas 36,000
Little Rock, Arkansas 35,000
Seattle, Washington 30,000
Elkhart, Indiana 25,000
Guangdon, China 25,000
Selangor, Malaysia 20,000
Davie, Florida 14,000
Woodbridge, Connecticut 13,000
Ballinamore, Ireland 12,000
Oxfordshire, England 12,000
Wallenfels, West Germany 9,000
North Sydney, Australia 1,000
Singapore 1,000
All of these principal facilities noted above are owned directly or indirectly
by the Company, except for the facilities in Grand Rapids, Michigan, Gardena,
California, Guangdon, China, Selangor, Malaysia, Oxfordshire, England, Singapore
and Australia which are leased.
Item 3. Legal Proceedings.
The Company is involved in various litigation and other asserted and
unasserted claims arising in the ordinary course of business, primarily relating
to product warranty and clean-up costs at independently operated waste
treatment/disposal sites previously used by the Company or the predecessors of
businesses purchased by the Company. While the results of lawsuits or other
proceedings against the Company cannot be predicted with certainty, management
believes that uninsured and unreserved losses, if any, arising from these
proceedings will not have a material adverse effect on the business or
consolidated financial position of the Company.
8
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of fiscal 1997 to a vote
of security holders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters.
The information required by this item is incorporated by reference herein
from the information included under caption "Stock Trading and Dividend
Information" in the Company's 1997 Annual Report to Shareholders and is included
in Exhibit 13. There is no established public trading market for the Company's
Class B Common Stock.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference herein
from the information included under the caption "Selected Financial Data" in the
Company's 1997 Annual Report to Shareholders and is included in Exhibit 13.
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
The information required by this item is incorporated by reference herein
from the information included under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" in the Company's 1997
Annual Report to Shareholders and is included in Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
No information is required to be disclosed under this item of this report
pursuant to General Instruction 1 to Item 305 of Regulation S-K.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company are incorporated by
reference from the Company's 1997 Annual Report to Shareholders and are included
in Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
No information is required to be disclosed under this item of this report
pursuant to Instruction 1 to Item 304 of Regulation S-K.
9
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
The information required by this item with respect to directors of the
Company is incorporated herein by reference from the section entitled "Proposal
Number One, Election of Directors" of the Company's definitive Proxy Statement
relating to its Annual Meeting of Shareholders to be held April 23, 1998. See
Part I, for a list of the Company's executive officers, and their ages,
positions and offices.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference
from the section entitled "Compensation of Executive Officers" of the Company's
definitive Proxy Statement relating to its Annual Meeting of Shareholders to be
held April 23, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is incorporated herein by reference
from the sections entitled "Share Ownership of Certain Beneficial Owners" and
"Proposal Number One, Election of Directors" of the Company's definitive Proxy
Statement relating to its Annual Meeting of Shareholders to be held April 23,
1998.
Item 13. Certain Relationships and Related Transactions.
The information required by this item, if any, is incorporated herein by
reference from the section entitled "Proposal Number One, Election of Directors"
of the Company's definitive Proxy statement relating to its Annual Meeting of
Shareholders to be held April 23, 1998.
10
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a)-1 The following items, included in the Company's 1997 Annual Report
to Shareholders, are incorporated herein by reference and are
included herein in Exhibit 13.
Report of Independent Auditors
Consolidated Balance Sheets --
November 30, 1997 and 1996
Consolidated Statements of Income and Retained Earnings -- Years ended
November 30, 1997, 1996 and 1995
Consolidated Statements of Cash
Flows -- Years ended November 30, 1997,
1996 and 1995
Notes to Consolidated Financial
Statements -- November 30, 1997
(a)-2 The following financial statement schedule is filed as a
part of this report.
Schedule
Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
11
<PAGE>
(a)-3 Exhibits.
Exhibits Incorporated by Reference
EXHIBIT INDEX
Exhibit No. Description Page
2 Merger Agreement, dated March 4, 1996, by and among Lilly
Industries, Inc., LP Acquisition Corporation and Guardsman
Products, Inc. This exhibit is incorporated by reference to
Exhibit 2 to Lilly Industries, Inc.'s Form 8-K Current
Report filed with the SEC on April 22, 1996.
3.1 Restated Articles of Incorporation of Lilly Industries, Inc.,
as amended. This exhibit is incorporated by reference to
Exhibit 3(a) to Lilly Industries, Inc.'s Form 10-K Annual
Report for the fiscal year ended November 30, 1996.
3.2 Restated By-Laws of Lilly Industries, Inc., as amended. This
exhibit is incorporated by reference to Exhibit 3(b) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the fiscal year
ended November 30, 1993.
4.1 Indenture, dated November 10, 1997, between Lilly Industries,
Inc. and Harris Trust and Savings Bank. This exhibit is
incorporated by reference to Exhibit 4.1 to Lilly Industries,
Inc.'s Registration Statement on Form S-4 filed with the
Commission on December 5, 1997 (Commission No. 333-41587).
4.2 Credit Agreement, dated October 24, 1997, between Lilly
Industries, Inc., the Lenders Signatory thereto, and NBD Bank,
N.A. as Agent. This exhibit is incorporated by reference to
Exhibit 4.2 to Lilly Industries, Inc.'s Registration Statement
on Form S-4 filed with the Commission on December 5, 1997
(Commission No. 333-41587).
4.3 Rights Agreement, dated January 12, 1996, between Lilly
Industries, Inc. and KeyCorp Shareholder Services, Inc. as
Rights Agent. This exhibit is incorporated by reference to
Exhibit 4 to Lilly Industries, Inc.'s Form 8-A filed with the
SEC on January 23, 1996.
10.1 Registration Agreement, dated November 5, 1997, between Lilly
Industries, Inc. and Salomon Brothers, Inc., Lehman Brothers,
Inc. and Schroder & Co., Inc. This exhibit is incorporated by
reference to Exhibit 10.1 to Lilly Industries, Inc.'s
Registration Statement on Form S-4 filed with the Commission on
December 5, 1997 (Commission No. 333-41587).
10.2 Form of Exchange Agent Agreement, dated December 22, 1997,
between Lilly Industries, Inc. and Harris Trust and Savings
Bank. This exhibit is incorporated by reference to Exhibit 10.2
to Lilly Industries, Inc.'s Registration Statement on Form S-4
filed with the Commission on December 5, 1997 (Commission No.
333-41587).
*10.3 Lilly Industries, Inc. Unfunded Supplemental Retirement Plan
(as in effect November 29, 1990). This exhibit is incorporated
by reference to Exhibit 10(b) to Lilly Industries, Inc.'s Form
10-K Annual Report for the fiscal year ended November 30, 1990.
*10.4 Lilly Industries, Inc. Unfunded Excess Benefit Plan. This
exhibit is incorporated by reference to Exhibit 10(c) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the fiscal year
ended November 30, 1989.
*10.5 Lilly Industries, Inc. Second Unfunded Supplemental Retirement
Plan (effective June 4, 1990). This exhibit is incorporated by
reference to Exhibit 10(f) to Lilly Industries, Inc.'s Form
10-K Annual Report for the fiscal year ended November 30, 1990.
*10.7 Lilly Industries, Inc. 1991 Director Stock Option Plan. This
exhibit is incorporated by reference to Exhibit 10(i) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the fiscal year
ended November 30, 1991.
<PAGE>
*10.8 Lilly Industries, Inc. 1992 Stock Option Plan. This exhibit is
incorporated by reference to Exhibit 10(j) to Lilly Industries,
Inc.'s Form 10-K Annual Report for the fiscal year ended
November 30, 1991. First Amendment to Lilly Industries, Inc.
1992 Stock Option Plan. This exhibit is incorporated by
reference to Exhibit 10.8 to Lilly Industries, Inc.'s
Registration Statement on Form S-4 filed with the Commission on
December 5, 1997 (Commission No. 333-41587).
10.9 First Amendment to Credit Agreement, dated April 2, 1997,
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. This exhibit is incorporated
by reference to Exhibit 10 to Lilly Industries, Inc.'s Form
10-Q Quarterly Report for the fiscal quarter ended May 31,
1997.
*10.10 Lilly Industries, Inc. Executive Retirement Plan (effective as
of January 1, 1996). This exhibit is incorporated by reference
to Exhibit 10(i) to Lilly Industries, Inc.'s Form 10-K Annual
Report for the fiscal year ended November 30, 1996.
*10.11 Lilly Industries, Inc. Retirement Plan (effective as of January
1, 1996) and Trust Agreement for Lilly Industries, Inc.
Replacement Plan between Lilly Industries, Inc. and Bankers
Trust Company of Des Moines, dated September 27, 1996. This
exhibit is incorporated by reference to Exhibit 10(j) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the fiscal year
ended November 30, 1996.
*10.12 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Hugh M. Cates. This exhibit is
incorporated by reference to Exhibit 10(1) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.13 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Larry H. Dalton. This exhibit is
incorporated by reference to Exhibit 10(2) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.14 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and William C. Dorris. This exhibit is
incorporated by reference to Exhibit 10(3) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.15 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and John C. Elbin. This exhibit is
incorporated by reference to Exhibit 10(4) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.16 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Ned L. Fox. This exhibit is incorporated
by reference to Exhibit 10(5) to Lilly Industries, Inc.'s Form
10-Q Quarterly Report for the fiscal quarter ended August 31,
1997.
*10.17 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Douglas W. Huemme. This exhibit is
incorporated by reference to Exhibit 10(6) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
<PAGE>
*10.18 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and A. Barry Melnkovic. This exhibit is
incorporated by reference to Exhibit 10(7) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.19 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and John D. Million. This exhibit is
incorporated by reference to Exhibit 10(8) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.20 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Kenneth L. Mills. This exhibit is
incorporated by reference to Exhibit 10(9) to Lilly Industries,
Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended
August 31, 1997.
*10.21 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Gary D. Missildine. This exhibit is
incorporated by reference to Exhibit 10(10) to Lilly
Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal
quarter ended August 31, 1997.
*10.22 Change in Control Agreement, dated September 5, 1997, by and
between Registrant and Robert A. Taylor. This exhibit is
incorporated by reference to Exhibit 10(11) to Lilly
Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal
quarter ended August 31, 1997.
*10.23 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Keith C. Vander Hyde, Jr.. This exhibit
is incorporated by reference to Exhibit 10(12) to Lilly
Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal
quarter ended August 31, 1997.
*10.24 Change in Control Agreement, dated September 26, 1997, by and
between Registrant and Jay M. Wiegner. This exhibit is
incorporated by reference to Exhibit 10(13) to Lilly
Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal
quarter ended August 31, 1997.
- ----------------
* Management contracts and compensatory plans required to be filed
pursuant to Item 14(c) of Form 10-K.
13
<PAGE>
Exhibits Filed Herewith:
11 Computation of Earnings Per Share.
13 Excerpts from the Lilly Industries, Inc. 1997
Annual Report.
21 List of Subsidiaries.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
(b) The Following Reports on Form 8-K were filed
by Lilly Industries, Inc. during the fourth
quarter of fiscal 1997:
Report on Form 8-K filed on October 17, 1997
filing a press release announcing the offer
of $100 million in ten year Senior Unsecured
Notes maturing in 2007 and the finalizing of
a five year $175 million unsecured bank
revolving credit facility to replace an
exisiting $300 million facility.
Report on Form 8-K filed on November 10, 1997
filing a press release announcing completion
of the offering of $100 million of Senior
Unsecured Notes and the closing of a new $175
million unsecured bank revolving credit
facility.
(c) The response to this portion of this item is
submitted as a separate section of this
report.
(d) The response to this portion of this item is
submitted as a separate section of this
report.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: February 23, 1998
LILLY INDUSTRIES, INC.
/s/ Douglas W. Huemme
--------------------------
Douglas W. Huemme,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- ------------------- ------------------
(1) Principal Executive
Officer and Director
/s/ Douglas W. Huemme Chairman, President February 23, 1998
- ----------------------- and Chief Executive
Douglas W. Huemme Officer
(2) Principal
Financial Officer
/s/ John C. Elbin Vice President, February 23, 1998
- ------------------------ Chief Financial Officer
John C. Elbin and Secretary
(3) Principal
Accounting Officer
/s/ Kenneth L. Mills Corporate Accounting February 23, 1998
- ----------------------- Director and
Kenneth L. Mills Assistant Secretary
<PAGE>
(4) A majority of the
Board of Directors
/s/ James M. Cornelius Director February 23, 1998
- ----------------------
James M. Cornelius
/s/ William C. Dorris Director February 23, 1998
- ----------------------
William C. Dorris
/s/ Paul K. Gaston Director February 23, 1998
- ----------------------
Paul K. Gaston
/s/ Harry MoRrison Director February 23, 1998
- ----------------------
Harry Morrison, Ph.D.
/s/ Norma J. Oman Director February 23, 1998
- ----------------------
Norma J. Oman
/s/ John D. Peterson Director February 23, 1998
- ----------------------
John D. Peterson
/s/ Thomas E. Reilly, Jr. Director February 23, 1998
- ----------------------
Thomas E. Reilly, Jr.
/s/ Van P. Smith Director February 23, 1998
- ----------------------
Van P. Smith
/s/ Robert A. Taylor Director February 23, 1998
- ----------------------
Robert A. Taylor
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ------ ---------------------------------------------- ------ ------
Additions
Description Balance at (1) (2) (3) Deductions- Balance
Beginning Charged to Charged to Acquired in Describe at End of
of Period Costs and Other Accounts Business Period
Expenditures -Describe Combination
<S> <C> <C> <C> <C> <C> <C>
Year ended November 30, 1997:
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable $2,705,759 $ 538,000 $ -- $ -- $1,104,759 (A) $2,139,000
========== ========== ====== ======== ========= ==========
Year ended November 30, 1996:
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable $2,050,922 $ 510,826 $ -- $729,307 $585,296 (A) $2,705,759
========== ========== ====== ======== ======== ==========
Year ended November 30, 1995:
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable $1,758,769 $ 600,717 $ -- $ -- $308,564 (A) $2,050,922
========== ========== ====== ======== ======== ==========
</TABLE>
Note A - Uncollectible accounts receivable charged off, net of recoveries.
17
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Year Ended November 30
1997 1996 1995
Primary:
Average shares outstanding 22,940 22,600 22,677
Net Income $28,095 $18,776 $20,264
Net Income per common share $1.22 $0.83 $0.89
======= ======= =======
Average shares outstanding 22,940 22,600 22,677
Dilutive stock options based
on treasury stock method
using average market
price 460 500 409
------- ------- -------
23,400 23,100 23,086
======= ======= =======
Net Income $28,095 $18,776 $20,264
Net Income per common
and common equivalent
share $1.20 $0.81 $0.88
======== ======= =======
Fully diluted:
Average shares outstanding 22,940 22,600 22,677
Dilutive stock options based
on treasury stock method
using the higher of year-end,
quarter-end or average market
price 460 600 423
-------- ------- -------
23,400 23,200 23,100
======== ======= =======
Net Income $28,095 $18,776 $20,264
Net Income per common
and common equivalent
share $1.20 $0.81 $0.88
======== ======= =======
Selected Financial Data (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended November 30 1997 1996 (2) 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Operations
<S> <C> <C> <C> <C> <C> <C>
Net sales $601,296 $508,976 $328,345 $331,306 $284,325 $236,476
Cost of products sold 373,015 321,748 219,899 214,809 189,111 152,480
Gross margin percentage 38.0% 36.8% 33.0% 35.2% 33.5% 35.5%
Selling, general and
administrative expenses 139,467 112,361 59,874 61,498 53,319 50,128
Research and development expenses 18,680 17,294 13,184 12,982 12,325 11,030
Operating income 70,134 57,573 35,388 42,017 29,570 22,838
Operating income percentage 11.7% 11.3% 10.8% 12.7% 10.4% 9.7%
Interest expense 19,317 14,466 2,158 2,919 1,925 1,662
Income taxes 23,068 11,039 13,510 16,350 11,784 9,201
Net income 28,095 24,060 20,264 23,302 16,155 12,706
EBITDA (3) 92,470 73,761 44,106 51,536 36,751 30,361
EBITDA interest coverage (4) 4.8 5.1 20.4 17.7 19.1 18.3
Per Share Data (5)
Net income 1.20 1.04 .88 1.00 .70 .55
Cash dividends .32 .32 .31 .27 .24 .22
Book value 6.16 5.36 4.86 4.38 3.60 3.16
Price range of common stock 24 1/8-16 3/4 19 3/4-12 1/4 15-11 18-11 3/4 15 7/8-9 3/8 9 3/4-5 5/8
Other Data
Total assets 501,795 521,860 183,582 190,252 167,044 117,049
Working capital 52,126 50,579 35,505 41,604 33,270 27,131
Capital expenditures(6) 12,673 19,233 15,599 6,693 7,598 3,262
Depreciation 8,850 6,453 4,251 4,637 3,746 3,965
Amortization of intangibles 13,140 9,097 3,923 4,328 3,141 2,827
Total debt 224,171 261,561 28,229 35,110 44,101 14,642
Book value 142,439 121,889 109,374 99,424 81,128 70,125
Return on equity 21.3% 20.8% 19.4% 25.8% 21.4% 17.6%
Debt to total capitalization 61% 68% 21% 26% 35% 17%
Sales per employee 283 274 282 281 253 214
Operating income per employee 33 31 30 36 26 21
Average shares outstanding (7) 23,400 23,200 23,100 23,250 23,123 23,189
</TABLE>
<TABLE>
<CAPTION>
Year Ended November 30 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------
Operations
<S> <C> <C> <C> <C> <C>
Net sales $220,508 $240,146 $219,713 $203,499 $189,213
Cost of products sold 150,669 161,626 145,592 134,114 122,135
Gross margin percentage 31.7% 32.7% 33.7% 34.1% 35.5%
Selling, general and
administrative expenses 46,921 50,404 44,113 42,516 39,779
Research and development expenses 10,606 10,814 9,708 8,980 8,872
Operating income 12,312 17,302 20,300 17,889 18,427
Operating income percentage 5.6% 7.2% 9.2% 8.8% 9.7%
Interest expense 2,437 2,635 1,399 806 708
Income taxes 4,417 6,850 8,399 7,550 8,599
Net income 6,357 10,022 12,574 11,284 10,272
EBITDA (3) 20,177 26,179 26,958 23,540 23,050
EBITDA interest coverage (4) 8.3 9.9 19.3 29.2 32.6
Per Share Data (5)
Net income .27 .41 .51 .45 .40
Cash dividends .21 .20 .17 .15 .14
Book value 3.16 3.10 3.00 2.65 2.34
Price range of common stock 6 1/8-4 1/8 7 5/8-4 7 1/8-5 3/8 7 1/8-4 7/8 7 5/8-4 5/8
Other Data
Total assets 127,342 125,371 129,025 101,357 96,814
Working capital 30,405 34,513 40,389 36,368 26,006
Capital expenditures(6) 1,928 3,968 2,486 2,930 5,397
Depreciation 4,038 4,021 3,387 3,133 2,785
Amortization of intangibles 2,928 2,651 1,199 767 686
Total debt 21,501 28,345 25,560 10,007 8,419
Book value 74,187 73,185 74,482 65,987 58,755
Return on equity 8.6% 13.6% 17.9% 18.1% 18.3%
Debt to total capitalization 22% 28% 26% 13% 13%
Sales per employee 186 186 174 170 160
Operating income per employee 10 13 16 15 16
Average shares outstanding (7) 23,499 24,659 24,863 24,921 25,511
</TABLE>
<PAGE>
1 This table of Selected Financial Data should be read in conjunction with
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the Company's consolidated financial statements included
herein.
2 1996 operations include the effect of the acquisition of Guardsman
Products, Inc. on April 8, 1996 and exclude the effect of a restructuring
charge of $9,607 which reduced net income by $5,284 or $.23 per share.
3 EBITDA represents earnings before interest, taxes, depreciation and
amortization.
4 EBITDA interest coverage is determined by dividing EBITDA by interest
expense.
5 Adjusted for all stock splits and stock dividends through November 30, 1997
inclusive. Prices are rounded to nearest 1/8.
6 Excludes effect of acquisitions.
7 Used to calculate net income per share.
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Operating Results 1997 vs. 1996
================================================================================
Consolidated net sales increased 18.1% to a record $601.3 million for 1997.
Sales benefited from the full-year inclusion of Guardsman Products Inc. ("GPI"),
acquired in April, 1996. During 1997, the Company experienced volume growth in
each of its end use markets. Sales to the Company's four primary end use markets
(metal, wood, glass and composites, and Guardsman products) represented 39%,
38%, 12% and 11% of 1997 consolidated sales, respectively. International sales,
including U.S. exports of $17.2 million, grew 29.7% to $126.5 million during
1997. This represented an increase of 1.8 percentage points to 21.0% of sales.
For the first time in the Company's history, international sales exceeded 20% of
total sales, despite the negative impact of foreign exchange rate volatility in
several of the Company's overseas markets. Selling prices for most of the
Company's products remained stable during the year.
Gross profit margin continued to improve in 1997, rising 1.2 percentage
points over 1996 to 38.0%. Continued improvements in supply chain management,
including leveraging larger raw material order quantities and reducing the
number of raw materials, contributed to a 1.6 percentage point reduction in raw
material costs as a percentage of sales. The Company will continue to pursue
improvement in gross margin by reducing the number of raw material items,
process engineering, company-wide purchasing initiatives, and product
reformulations. Direct labor and overhead costs increased slightly as a
percentage of sales during 1997.
Operating expenses totaled $158.1 million for 1997, an increase of
$28.5 million, or 22.0%, over 1996 (excluding the restructuring charge reported
during 1996). Increases in 1997 operating expenses were due primarily to the
full-year inclusion of GPI operations. As a percentage of sales, operating
expenses increased 0.8 percentage points to 26.3%. The increase primarily
reflects higher amortization expense associated with intangibles acquired in the
GPI transaction, as well as higher selling and marketing costs associated with
certain Guardsman product lines, which target retail accounts rather than
original equipment manufacturers.
Interest expense increased 33.5% during 1997 to $19.3 million,
primarily due to the full-year inclusion of debt associated with the GPI
acquisition. The increase was partially mitigated by a reduction in
interest-bearing borrowings during 1997. Management anticipates that the
restructuring of the Company's debt capitalization during the fourth quarter of
1997 should contribute to a slightly lower average interest rate on borrowings
going forward. (See "Liquidity and Capital Resources").
The Company's effective tax rate remained virtually unchanged for 1997
at 45.1%. The effective tax rate remained above U.S. statutory rates, primarily
due to the impact of non-deductible intangibles acquired as part of the GPI
acquisition, and generally higher foreign tax rates.
Operating Results 1996 vs. 1995
================================================================================
Consolidated net sales increased to a record $509.0 million for 1996, up from
$328.3 million, or 55.0%, over 1995. Sales increased due to higher volumes
associated with the acquisition of GPI, overall volume increases in Lilly's
pre-acquisition business, and selected price increases instituted during the
second half of 1995.
Gross profit margin improved to 36.8% in 1996 from 33.0% in 1995.
Improved 1996 margins were due to lower raw material costs, efficiencies in raw
material procurement, and selected selling price increases instituted during the
second half of 1995.
Operating expenses increased to $139.3 million in 1996 from $73.1
million in 1995. Increases in 1996 were due to the inclusion of GPI's
operations, increased amortization expense associated with intangibles acquired
as part of the GPI acquisition, and the one-time restructuring charge of $9.6
million discussed below.
Interest expense in 1996 was $14.5 million, compared to $2.2 million in
1995. The increase was directly attributable to significantly higher levels of
interest-bearing debt necessary to fund the GPI acquisition.
<PAGE>
The Company's effective tax rate rose to 45.0% in 1996 from 40.0% in
1995, due primarily to higher levels of non-deductible intangible amortization
associated with the GPI acquisition.
Environmental
================================================================================
The Company's operations, like those of most companies in the coatings 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.
Computer Systems - Year 2000 Compliance
================================================================================
The Company has reviewed its computer and other operating systems to identify
those that could be affected by the "Year 2000 Issue." During 1997, an
implementation plan was developed to ensure that all significant aspects of Year
2000 compliance will be addressed. The Company will achieve Year 2000 compliance
in connection with an upgrade to its computer processing software. This upgrade
is scheduled to be completed in early 1999. Management believes that
accomplishing Year 2000 compliance will not have a material adverse impact on
its operations or financial position.
Guardsman Acquisition and Restructuring
================================================================================
Effective April 8, 1996, the Company acquired the outstanding shares of GPI for
$235 million. The purchase was financed through senior secured credit
facilities. GPI's technology and related products were complementary to Lilly's,
with little customer overlap. The combination of both companies has strengthened
Lilly's ability to penetrate key markets.
In 1997, the Company successfully completed its initiatives to reduce
costs of the combined companies by approximately $25 million. These efforts
included improving efficiencies in raw material procurement, facility
rationalization, and workforce reductions. Costs associated with the closure of
Lilly facilities and workforce reductions were recorded in the 1996 second
quarter as a restructuring charge totaling $9.6 million, which reduced net
income by $5.3 million or $0.23 per share. Costs associated with the closure of
GPI facilities and workforce reductions totaled $9.0 million and were recorded
in the opening balance sheet of the combined entity at the acquisition date.
Liquidity and Capital Resources
================================================================================
During 1997, the Company restructured its debt capitalization on more favorable
terms. The $300 million secured credit agreement ("Agreement"), which was
executed to complete the GPI acquisition, was restructured into a five-year,
$175 million revolving credit facility ("Facility"). In addition, the Company
successfully accessed the public debt market for the first time by issuing $100
million in ten-year senior notes ("Notes"). Both the Facility and the Notes are
unsecured and require no principal amortization prior to maturity. Management
expects to fund required debt service from operating cash flows.
<PAGE>
Liquidity and Capital Resources, continued
================================================================================
As part of the debt restructuring, the Company used net proceeds of
$99.2 million from the Notes offering to retire a portion of the debt
outstanding under the prior Agreement. The Company reduced total debt by $37.4
million during 1997. Additional amounts available for borrowing under the
Facility for acquisitions or general operating purposes totaled $51 million as
of November 30, 1997. Management believes that funds available from internal and
external sources are sufficient to meet the liquidity needs of the Company
during the next twelve months.
The Company manages exposure to interest rate movements primarily
through the issuance of fixed-rate debt securities and the use of interest rate
swap agreements. As of November 30, 1997, the Company was party to one interest
rate swap agreement with a notional principal amount of $95 million. The
agreement effectively converts a portion of the Company's debt from a floating
to a fixed interest rate, which was 7.03% as of November 30, 1997.
Cash provided by operating activities increased to $59.3 million during
1997, driven by higher levels of net income and non-cash charges for
depreciation and amortization associated with the full-year inclusion of GPI. In
addition, ongoing efforts to better manage working capital assets provided $5.1
million in operating cash.
Cash used for investing activities returned to more historical levels
during 1997, totaling a net $7.0 million. Included in this amount were $12.7
million of capital expenditures. Key capital project expenditures during 1997
included $4.8 million in additional capacity for the Company's powder and wood
operations, and $2.0 million for a new manufacturing facility in Ireland. Net
cash used for investing activities was partially offset by sundry inflows
totaling $5.7 million, representing disposal of non-operating assets, primarily
company-owned life insurance policies. Future investing activities are expected
to be financed from internal sources and existing credit facilities.
Cash used by financing activities totaled $49.1 million for 1997, due
principally to the $37.4 million reduction in debt. The Company maintained cash
dividend payments of $0.32 per share during 1997.
The Company focuses on three key measures of liquidity and access to
capital markets: EBITDA (earnings before interest, taxes, depreciation and
amortization); Interest Coverage (EBITDA divided by interest expense); and Debt
Capitalization (debt divided by the sum of debt plus equity). For 1997, the
company generated EBITDA of $92.5 million, an improvement of $19.0 million over
1996. Interest Coverage declined slightly to 4.8 times, due primarily to the
full-year inclusion of GPI and associated higher average debt outstanding during
the year. Debt Capitalization improved 7.0 percentage points to 61% due to
higher levels of net income retained in the business and lower levels of debt
outstanding at year-end 1997.
Subsequent Event - Acquisition of Merckens Lackchemie GmbH & Company
================================================================================
In December, 1997, the Company acquired Merckens Lackchemie GmbH and Company
("Merckens"). Located in Eschweiler, Germany, Merckens supplies industrial
coatings to customers throughout Europe. The Merckens product lines are
complementary to Lilly's existing products. Management anticipates that the
acquisition will add more than US $15 million of annual revenues to Lilly's
operations.
<PAGE>
Consolidated Statements of Income and Retained Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended November 30 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 601,296 $ 508,976 $ 328,345
Costs and expenses:
Cost of products sold 373,015 321,748 219,899
Selling, general and administrative 139,467 112,361 59,874
Research and development 18,680 17,294 13,184
Restructuring charge (Note 3) -- 9,607 --
--------------------------------------
531,162 461,010 292,957
--------------------------------------
Operating income 70,134 47,966 35,388
Other income (expense):
Interest income and sundry 346 638 544
Interest expense (19,317 (14,466) (2,158)
--------------------------------------
(18,971) (13,828) (1,614)
--------------------------------------
Income before income taxes 51,163 34,138 33,774
Income taxes (Note 7) 23,068 15,362 13,510
--------------------------------------
Net income 28,095 18,776 20,264
Retained earnings at beginning of year 62,990 51,446 38,223
--------------------------------------
91,085 70,222 58,487
Deduct dividends paid (1997, $.32 per share;
1996, $.32 per share; 1995, $.31 per share) 7,340 7,232 7,041
--------------------------------------
Retained earnings at end of year $ 83,745 $ 62,990 $ 51,446
======================================
Average number of shares and equivalent shares
of capital stock outstanding 23,400 23,200 23,100
Net income per share $ 1.20 $ .81 $ .88
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
November 30 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,079 $ 6,790
Accounts receivable, less allowance for doubtful accounts
(1997, $2,139; 1996, $2,706) 80,011 84,592
Inventories (Note 4) 45,704 47,546
Deferred income taxes 4,300 5,717
Other 6,580 14,073
------------------------
Total current assets 146,674 158,718
Other assets:
Goodwill, less amortization (1997, $15,368; 1996, $9,028) 220,897 228,536
Other intangibles, less amortization (1997, $17,963; 1996, $17,271) 30,059 30,275
Deferred income taxes 7,722 12,091
Sundry 13,604 11,658
------------------------
272,282 282,560
Property and equipment:
Land 8,035 8,396
Buildings 50,621 48,087
Equipment 78,432 71,056
Allowances for depreciation (deduction) (54,249) (46,957)
------------------------
82,839 80,582
------------------------
$ 501,795 $ 521,860
========================
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable $ 60,510 $ 56,593
Salaries and payroll related items 20,814 22,681
Other 10,936 11,281
State and local taxes 1,212 269
Federal income taxes 1,076 791
Current portion of long-term debt (Note 6) -- 16,524
------------------------
Total current liabilities 94,548 108,139
Long-term debt (Note 6) 224,171 245,037
Other liabilities 40,637 46,795
Shareholders' equity (Note 8):
Capital stock, $.55 stated value per share:
Class A (limited voting) - 27,674 shares issued
(1996, 27,184 shares) 15,375 15,103
Class B (voting) - 540 shares issued 300 300
Additional capital 79,417 75,433
Retained earnings 83,745 62,990
Currency translation adjustments (2,254) 88
Cost of capital stock in treasury (deduction) (34,144) (32,025)
------------------------
142,439 121,889
------------------------
$ 501,795 $ 521,860
========================
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year ended November 30 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 28,095 $ 18,776 $ 20,264
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring charge -- 9,607 --
Depreciation 8,850 6,453 4,251
Amortization of intangibles 13,140 9,097 3,923
Deferred income taxes 4,085 2,094 (70)
Changes in operating assets and liabilities
net of effects from acquired business:
Accounts receivable 4,581 (5,849) 1,320
Inventories 1,842 (7,086) 8,474
Accounts payable and accrued expenses 2,933 7,825 (9,972)
Sundry (4,226) (3,466) (987)
----------------------------------------
Net cash provided by operating activities 59,300 37,451 27,203
Investing Activities
Purchases of property and equipment (12,673) (19,233) (15,599)
Payment for acquired business -- (235,000 --
Sundry 5,716 4,590 (620)
----------------------------------------
Net cash used by investing activities (6,957) (249,643) (16,219)
Financing Activities
Dividends paid (7,340) (7,232) (7,041)
Proceeds from senior notes 99,200 -- --
Proceeds from short-term and long-term borrowings -- 310,600 --
Principal payments on short-term and
long-term borrowings (136,590) (105,817) (6,888)
Purchases of capital stock for treasury -- -- (4,380)
Sundry (4,324) 1,171 1,004
----------------------------------------
Net cash (used) provided by financing activities (49,054) 198,722 (17,305)
----------------------------------------
Increase (decrease) in cash and cash equivalents 3,289 (13,470) (6,321)
Cash and cash equivalents at beginning of year 6,790 20,260 26,581
----------------------------------------
Cash and cash equivalents at end of year $ 10,079 $ 6,790 $ 20,260
========================================
</TABLE>
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
November 30, 1997
1. Summary of Significant Accounting Policies
================================================================================
Business. Lilly Industries, Inc. and its subsidiaries ("the Company") are
principally in the business of formulating, producing and selling industrial
coatings and specialty chemicals to manufacturing companies. The Company's
products include wood coatings for furniture, building products and cabinets;
coil coatings for building products, appliances and transportation equipment;
specialty coatings for a variety of metal products and fiberglass reinforced
products; powder coatings for a variety of metal products; and glass coatings
for mirrors. The Company also sells various household products, including fabric
protectors, furniture care products and cleaning aids.
Consolidation and Use of Estimates. The consolidated financial statements
include the accounts of all subsidiaries after elimination of intercompany
accounts and transactions. Preparation of these statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents. Cash equivalents include time deposits and certificates of
deposit with original maturities of three months or less.
Inventories. Coatings inventories in the United States are stated at the lower
of cost, determined by the last-in, first-out (LIFO) method, or market. All
other inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
Intangible Assets. Goodwill, which represents the excess of cost over fair value
of net assets of purchased businesses, is amortized by the straight-line method
over periods ranging from 20 to 40 years. Other intangible assets consist of
noncompete agreements, customer lists and technology and are amortized by the
straight-line method over periods ranging from 5 to 20 years. The Company
periodically evaluates the value of intangible assets to determine if an
impairment has occurred. This evaluation is based on various analyses including
reviewing anticipated cash flows.
Property and Equipment. Property and equipment is recorded on the basis of cost
and includes expenditures for new facilities and items which substantially
increase the useful life of existing buildings and equipment. Depreciation is
based on estimated useful lives (ranging from 3 to 40 years) and computed
primarily by the straight-line method.
Interest-Rate Swap Agreements. The Company periodically enters into
interest-rate swap agreements to modify the interest characteristics of its
outstanding debt. Swap agreements involve the exchange of interest payments
based on a variable interest rate for interest payments based on a fixed
interest rate calculated by reference to a notional amount over the life of the
agreement. The notional amount of each swap agreement represents all or a
portion of the principal balance of a specific debt obligation. The differential
to be paid or received is accrued and recognized as an adjustment of interest
expense.
Net Income Per Share. Net income per share is computed on the basis of the
weighted average number of shares outstanding during each year, adjusted for
stock splits and the dilutive effect, if any, of common stock equivalents. In
February, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which
requires certain modifications to the currently applicable net income per share
calculations defined in Accounting Principles Board Opinion No. 15 and
restatement of net income per share for all prior periods reported. The Company
is required to adopt this standard in its first quarter of fiscal 1998. Adoption
of SFAS No. 128 is not expected to materially impact the Company's net income
per share.
2. Acquisition
================================================================================
On April 8, 1996 the Company acquired for $235,000,000 in cash all the
outstanding shares of Guardsman Products, Inc. ("Guardsman"). To finance the
acquisition, the Company used $275,000,000 of senior secured credit facilities
<PAGE>
(see Note 6) to fund the initial purchase of shares, pay-off existing debt and
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
included $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.
If the acquisition had occurred on December 1, 1995, pro forma net
sales and net income for the year ended November 30, 1996 would be $598,722,000
and $20,767,000, respectively, and net income per share would be $.90. The pro
forma results include a restructuring charge of $9,607,000 which reduced net
income by $5,284,000 or $.23 per share (see Note 3). The pro forma consolidated
results of operations are not necessarily indicative of future results of
operations or actual results of operations that would have occurred had the
purchase been made at December 1, 1995.
3. Restructuring
================================================================================
In 1996 the Company adopted and commenced implementation of plans for the
consolidation of manufacturing facilities related to the acquisition of
Guardsman. These plans included the closure of both Lilly and Guardsman
facilities and workforce reductions totaling approximately 250 employees.
Closure costs included facility and equipment valuation adjustments, inventory
disposal costs, dismantling and maintenance costs, and termination benefits. The
primary employee groups affected included manufacturing, selling, administrative
and research and development personnel. As of November 30, 1997 the plans are
complete.
Costs associated with the closure of former Lilly facilities and
workforce reductions were recorded in the 1996 second quarter and reflected as a
restructuring charge totaling $9,607,000, which reduced net income by $5,284,000
or $.23 per share. The amounts paid or charged against these reserves and
amounts remaining as liabilities are as follows (in thousands):
Facilities,
Equipment,
Inventories Termination
and Other Benefits Total
--------- -------- -----
Balance December 1, 1995 $ -- $ -- $ --
Provision 7,827 1,780 9,607
Amounts paid or charged 365 447 812
----------------------------------
Balance November 30, 1996 7,462 1,333 8,795
Amounts paid or charged 7,462 1,333 8,795
----------------------------------
Balance November 30, 1997 $ -- $ -- $ --
==================================
Costs associated with the closure of former Guardsman facilities and
workforce reductions were recorded in the opening balance sheet of the combined
entity at the acquisition date. The amounts paid or charged against these
reserves and amounts remaining as liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
Facilities,
Equipment,
Inventories Termination
and Other Benefits Total
--------- -------- -----
<S> <C> <C> <C>
Balance April 8, 1996 $6,532 $2,476 $9,008
Amounts paid or charged 1,642 469 2,111
----------------------------------
Balance November 30, 1996 4,890 2,007 6,897
Amounts paid or charged 3,590 589 4,179
Adjustment of estimated liabilities to goodwill 1,300 1,418 2,718
----------------------------------
Balance November 30, 1997 $ -- $ -- $ --
==================================
</TABLE>
<PAGE>
4. Inventories
================================================================================
The principal inventory classifications at November 30 are summarized as follows
(in thousands):
1997 1996
- --------------------------------------------------------------
Finished products $26,361 $25,847
Raw materials 27,019 29,375
-------------------
53,380 55,222
Less adjustment of certain inventories
to last-in, first-out (LIFO) basis 7,676 7,676
-------------------
$45,704 $47,546
===================
Inventory cost is determined by the LIFO method of inventory valuation
for approximately 68% and 69% of inventories at November 30, 1997 and 1996,
respectively.
5. Benefit Plans
================================================================================
The Company maintains defined benefit and defined contribution plans that cover
substantially all employees. Retirement benefits under the defined benefit plans
are based on final monthly compensation and years of service. Retirement
benefits under the defined contribution plans are based on employer and employee
contributions plus earnings to retirement. The plans' assets consist primarily
of common stock, fixed income securities and guaranteed insurance contracts. In
addition, unfunded supplemental executive retirement plans cover certain
employees in which benefits, determined by the Board of Directors, are payable
after retirement over periods ranging from 15 years to life of the participant.
The provision for defined benefit pension cost is determined using the
projected unit credit actuarial method. The Company's policy is to fund amounts
as are necessary on an actuarial basis to provide assets sufficient to meet the
benefits to be paid to plan members in accordance with the Employee Retirement
Income Security Act of 1974. Amounts contributed to union-sponsored pension
plans are based upon requirements of collective bargaining agreements. Company
contributions to the defined contribution plans are based on a percentage of
employee contributions.
The Guardsman defined benefit pension plans covering substantially all U.S.
employees were amended to freeze years of service at December 31, 1996 and
merged into the defined benefit plan maintained by the Company. Concurrently
with this amendment, these employees became participants in the Company's
defined contribution plans. The impact of the plan merger was recorded in
connection with the Guardsman acquisition. All 1996 amounts disclosed below
reflect the effect of freezing years of service for the Guardsman plans and
their merger into the Lilly plan.
A summary of the components of net pension cost for the defined benefit
plans and amounts charged to expense for the defined contribution plans for the
years ended November 30 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Defined benefit plans
Service cost - benefits earned
during the period $2,099 $1,733 $ 708
Interest cost on projected benefit obligation 5,484 4,594 2,742
Actual net gain on plan assets (8,482) (9,056) (8,849)
Net amortization and deferral 1,012 3,104 5,267
----------------------------
Net pension cost (benefit) 113 375 (132)
Defined contribution plans 3,740 2,219 2,130
----------------------------
Pension expense $3,853 $2,594 $1,998
============================
</TABLE>
<PAGE>
The expected long-term rate of return on assets used to compute the
defined benefit plans' pension expense was 9.25% for 1997, 1996 and 1995.
The following table sets forth the funded status and amounts recognized
in the consolidated balance sheets at November 30 for the Company's defined
benefit pension plans (in thousands):
1997 1996
- ---------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ 60,141 $ 58,699
Nonvested 4,767 6,774
----------------------
Total accumulated benefit obligations $ 64,908 $ 65,473
======================
Actuarial present value of projected benefit
obligations for services rendered to date $(82,542) $(79,647)
Plan assets at fair value 88,594 83,186
----------------------
Excess of plan assets over projected
benefit obligations 6,052 3,539
Unrecognized net gains (4,277) (768)
Unrecognized prior service cost 5,274 2,794
Unrecognized transition obligation at
December 1, 1985, net of amortization (1,135) (1,337)
----------------------
Net pension asset $ 5,914 $ 4,228
======================
The discount rate and rate of increase in compensation levels used to
measure benefit obligations were 7% and 5%, respectively, for both 1997 and
1996.
Accumulated benefits for supplemental executive retirement plans
totaled approximately $7,953,000 and $5,144,000 at November 30, 1997 and 1996,
respectively.
6. Long-Term Debt
================================================================================
Long-term debt consists of the following as of November 30 (in thousands):
1997 1996
- ------------------------------------------------------
Revolving Credit Facility $124,000 $ --
7.75% Senior Unsecured Notes 100,000 --
Facility A Term Note -- 171,500
Facility B Term Note -- 49,875
Facility C Revolving Note -- 40,000
Other 171 186
---------------------
224,171 261,561
Less current portion -- 16,524
---------------------
$224,171 $245,037
=====================
In November 1997, the Company restructured its long-term debt into a
$175,000,000 revolving credit facility ("Facility") with a group of financial
institutions and $100,000,000 of senior notes ("Notes"). The Notes were issued
as a 144A private placement offering with registration rights. The Facility is
unsecured and provides for borrowings under a revolving note. Interest is
payable upon maturity of each revolving advance, but in no case less frequently
than quarterly. The principal of the Facility is due October, 2002. The Notes
are unsecured. Interest is payable on June 1 and December 1 of each year the
Notes are outstanding. The principal of the Notes is due December, 2007.
<PAGE>
6. Long-Term Debt, continued
================================================================================
The Facility bears interest, at the Company's option, at (i) the higher
of the agent bank's prime rate (8.25% at November 30, 1997) or the Federal Funds
rate plus 0.50%, or (ii) the London Interbank Offered Rate for U.S. Dollars plus
0.40% to 1.00%, depending upon the Company's leverage. A commitment fee ranging
from 0.15% to 0.25%, depending upon the Company's leverage, is payable on the
unused portion of the Facility.
In April 1996, the Company entered into a forty-four month amortizing
interest rate swap agreement ("Swap") with a notional amount of $175,000,000.
This agreement effectively converts a portion of the revolving note from
variable rate debt to fixed rate debt with a rate of 7.03% at November 30, 1997.
The notional amount of the Swap was $95,000,000 at November 30, 1997, and
reduces ratably on an annual basis to $50,000,000 in 1999.
Interest of $20,628,000, $12,746,000 and $2,306,000 was paid in fiscal
1997, 1996 and 1995, respectively.
The Company is subject to various debt covenants under the Facility and
Notes, including affirmative and negative covenants which require the
maintenance of certain ratios for maximum leverage, fixed charge coverage and
interest coverage. Additionally, such covenants place certain restrictions on
the Company's ability to engage in mergers and acquisitions and incur additional
indebtedness.
7. Income Taxes
================================================================================
Income tax expense for the years ended November 30 is comprised of the following
components (in thousands):
1997 1996 1995
- ----------------------------------------------------------------------------
Current expense:
Federal $ 10,612 $ 7,204 $ 7,953
Foreign 7,674 4,736 3,267
State 697 1,328 2,360
-----------------------------------
18,983 13,268 13,580
Deferred expense (credit):
Federal 2,818 1,829 --
Foreign 210 (119) (70)
State 1,057 384 --
-----------------------------------
4,085 2,094 (70)
-----------------------------------
$ 23,068 $ 15,362 $ 13,510
===================================
A reconciliation of the statutory U.S. federal rate to the effective
income tax rate for the years ended November 30 is as follows:
1997 1996 1995
- -----------------------------------------------------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
Goodwill 3.9 4.1 2.4
State income taxes, net of federal
income tax benefit 2.3 3.3 3.4
Foreign 2.2 1.3 --
Other items 1.7 1.3 (.8)
-----------------------------
Effective income tax rate 45.1% 45.0% 40.0%
=============================
<PAGE>
Deferred income taxes are recorded based upon differences between the
financial statement and tax basis of assets and liabilities. The deferred tax
assets and liabilities recorded on the balance sheet at November 30 are as
follows (in thousands):
1997 1996
- --------------------------------------------------------------------------
Deferred tax assets:
Restructuring and closure reserves $ -- $ 6,127
Goodwill and intangibles 1,426 1,316
Employee benefits 6,467 4,398
Accounts receivable, inventory and other 13,937 15,281
-------------------
21,830 27,122
Deferred tax liabilities:
Property and equipment 7,709 8,003
Pension 2,099 1,311
-------------------
9,808 9,314
-------------------
Net deferred tax assets $12,022 $17,808
===================
No provision has been made for U.S. federal income taxes on certain
undistributed earnings of foreign subsidiaries that the Company intends to
permanently invest or that may be remitted tax-free. The total of undistributed
earnings that would be subject to federal income tax if remitted under existing
law is approximately $12,000,000 at November 30, 1997. Determination of the
unrecognized deferred tax liability related to these earnings is not practicable
because of the complexities with its hypothetical calculation. Upon distribution
of these earnings, the Company will be subject to U.S. taxes and withholding
taxes payable to various foreign governments. A credit for foreign taxes already
paid would be available to reduce the U.S. tax liability.
Income taxes of $20,500,000, $20,177,000 and $16,524,000 were paid in
1997, 1996 and 1995, respectively.
<PAGE>
8. Capital Stock
================================================================================
The Company has two classes of common stock, Class A stock and Class B stock.
Authorized shares of Class A and Class B stock are 97,000,000 and 3,000,000,
respectively. The limited voting rights of Class A shareholders are equal to
voting rights of Class B shareholders only with regard to voting for merger,
consolidation or dissolution of the Company and voting and electing four
directors of the Company if there are ten or more directors and two directors if
there are nine or fewer directors. With respect to all rights other than voting,
Class A shareholders are the same as Class B shareholders.
The terms of the Class B stock, which is held only by employees,
provide that these shares be exchanged for Class A stock on a share-for-share
basis when the shareholder ceases to be an employee or decides to dispose of the
shares. Accordingly, 3,000,000 shares of authorized Class A stock are reserved
for this purpose.
On January 12, 1996, the Company's Board of Directors ("Board")
declared a dividend of one purchase right for each outstanding share of Class A
and Class B stock. In addition, one right is distributed for each share issued
after January 26, 1996. Upon exercise, each right entitles holders to purchase
from the Company one share of stock at $55 per share, subject to certain
adjustments. The rights become exercisable when a person or group acquires
beneficial ownership of 15 percent or more of Class A stock or becomes the
beneficial owner of an amount of Class A stock (but not less than 10 percent)
which the Board determines to be substantial and not in the Company's best
long-term interests or following the announcement of a tender or exchange offer
for 30% or more of the Class A stock.
In the event a person acquires 15 percent or more of Class A stock, or
is determined by the Board to be a substantial owner whose ownership is not in
the Company's best long-term interests or an acquiring person engages in certain
self-dealing transactions, each holder will have the right to receive that
number of common shares having a market value of two times the exercise price of
the right. At any time after a person becomes an acquiring person, but before
such person acquires 50 percent or more of outstanding Class A stock, the Board
may exchange each right for one common share (subject to adjustment).
In the event the Company is involved in certain business combination
transactions, or 50 percent or more of the Company's consolidated assets or
earning power are sold, each holder will have the right to receive, upon
exercise at the then-current exercise price of the right, that number of shares
of common stock of the acquiring company having a market value of two times the
exercise price of the right.
The Company may redeem the rights at a price of $.01 per right at any
time prior to the time a person or group becomes an acquiring person as defined
by the rights agreement. The rights expire in January, 2006.
<PAGE>
A summary of shares issued and held in treasury follows (in thousands):
<TABLE>
<CAPTION>
Capital Stock Capital Stock
Issued Held in Treasury
Class A Class B Class A Class B
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 1, 1994 26,695 540 4,304 222
Class A exchanged for Class B -- -- 78 (78)
Class B exchanged for Class A -- -- (8) 8
Acquisition for treasury -- -- 370 --
Stock options exercised 208 -- 10 35
---------------------------------------
Balance at November 30, 1995 26,903 540 4,754 187
Class A exchanged for Class B -- -- 78 (78)
Class B exchanged for Class A -- -- (54) 54
Stock options exercised 281 -- 32 28
---------------------------------------
Balance at November 30, 1996 27,184 540 4,810 191
Class A exchanged for Class B -- -- 106 (106)
Class B exchanged for Class A -- -- (22) 22
Stock options exercised 490 -- 29 75
---------------------------------------
Balance at November 30, 1997 27,674 540 4,923 182
=======================================
</TABLE>
<PAGE>
Changes in capital stock are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Cost of
Capital Stock Capital
(Stated Amount) Additional Stock in
Class A Class B Capital Treasury
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 1, 1994 $14,831 $ 300 $71,972 $26,087
Acquisition for treasury -- -- -- 4,380
Stock options exercised 116 -- 1,376 590
Disqualifying disposition
of stock options -- -- 102 --
-------------------------------------------
Balance at November 30, 1995 14,947 300 73,450 31,057
Stock options exercised 156 -- 1,828 968
Disqualifying disposition
of stock options -- -- 155 --
-------------------------------------------
Balance at November 30, 1996 15,103 300 75,433 32,025
Stock options exercised 272 -- 3,834 2,119
Disqualifying disposition
of stock options -- -- 150 --
-------------------------------------------
Balance at November 30, 1997 $15,375 $ 300 $79,417 $34,144
===========================================
</TABLE>
Incentive stock option plans entitle certain directors, officers and
other key employees to buy shares of Class A stock at prices not less than fair
market value on the date of grant. The options vest and become exercisable
ratably over a three-year period commencing two years after the date of grant
and expire five years after the date of grant. The options are granted with
stock appreciation rights (SAR) and reload options. An SAR entitles the option
holder to receive a cash payment equal to the difference between the option
price and the current value of Class A stock. The reload option entitles the
option holder to the same number of options exercised with an option price equal
to the fair market value at the date of exercise. Shares reserved under these
plans were 3,008,125 and 2,008,125 at November 30, 1997 and 1996, respectively.
A summary of stock option activity for the years ended November 30 follows:
Weighted
Average
Number of Exercise
Shares Price
- ----------------------------------------------------------
Balance at December 1, 1994 1,319,418 $ 8.99
Grants 101,041 13.12
Exercised (208,229) 7.16
Terminated (13,350) 10.60
------------------------
Balance at November 30, 1995 1,198,880 9.64
Grants 311,304 12.88
Exercised (280,962) 7.06
Terminated (16,932 10.84
------------------------
Balance at November 30, 1996 1,212,290 11.05
Grants 77,072 18.43
Exercised (489,610) 8.39
Terminated (10,250) 13.39
------------------------
Balance at November 30, 1997 789,502 $ 13.39
========================
At November 30, 1997 the range of exercise prices and weighted-average
remaining contractual life of outstanding options were $10.59 - $21.63 and three
years, respectively. At November 30, 1997 and 1996, the number of options
exercisable was 279,000 and 570,000 respectively, and the weighted-average
exercise price of those options was $12.93 and $8.93, respectively.
<PAGE>
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," became effective for the Company in 1997. SFAS
123 permits companies to continue to apply APB Opinion 25, "Accounting for Stock
Issued to Employees," and related Interpretations in accounting for its plans.
The Company has elected to follow APB 25 and related Interpretations. Under APB
25, because the exercise price of the Company's employee stock options is not
less than fair market price of the share at the date of grant, no compensation
expense is recognized in the financial statements.
Pro forma information regarding net income and net income per share is
required by SFAS 123 and has been determined as if the Company accounted for its
employee stock options using the fair value method of that Statement. The fair
value of options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997 and 1996,
respectively: risk-free interest rate of 5.8% and 6.0%; dividend yields of 1.9%
for both years; volatility factors of the expected market price of the Company's
Class A stock of .30 and .32; and a weighted-average expected life of options of
4 years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information follows (in thousands, except per share data):
1997 1996
- ------------------------------------------------------------------
Net income:
As reported $ 28,095 $ 18,776
Pro forma 27,608 18,439
Net income per share:
As reported $ 1.20 $ .81
Pro forma 1.18 .79
Weighted-average fair value
of options granted during the year $ 4.93 $ 3.71
Due to the required phase-in provisions, the effects of applying SFAS
123 to arrive at the above pro forma amounts may not be representative of pro
forma net income or net income per share in future years.
<PAGE>
9. Geographic Information
================================================================================
The Company maintains operations in the United States as well as Canada, the
United Kingdom, Germany, Taiwan, Malaysia, China and Ireland. A summary of
geographic data for the years ended November 30 is as follows (in thousands):
1997 1996 1995
- ------------------------------------------------------------------------------
Net sales to unaffiliated customers:
United States $ 491,973 $ 423,753 $ 277,494
Foreign 109,323 85,223 50,851
---------------------------------------
Consolidated $ 601,296 $ 508,976 $ 328,345
=======================================
Income before income taxes:
United States $ 48,779 $ 41,501 $ 25,943
Foreign 21,701 16,710 9,989
Interest expense (19,317) (14,466) (2,158)
Restructuring charge -- (9,607) --
---------------------------------------
Consolidated $ 51,163 $ 34,138 $ 33,774
=======================================
Total assets:
United States $ 453,456 $ 473,957 $ 158,338
Foreign 49,007 48,325 25,784
Eliminations (deductions) (668) (422) (540)
---------------------------------------
Consolidated $ 501,795 $ 521,860 $ 183,582
=======================================
10. Quarterly Results of Operations (Unaudited)
Quarterly results of operations are summarized as follows (in thousands, except
per share data):
Quarter Ended
1997 Feb. 28 May 31 Aug. 31 Nov. 30
- ------------------------------------------------------------------------
Net sales $142,160 $154,238 $150,904 $153,994
Gross profit 52,048 59,193 57,072 59,968
Net income 4,710 7,401 7,679 8,305
Net income per share .20 .32 .33 .35
Quarter Ended
1996 Feb. 29 May 31 Aug. 31 Nov. 30
- --------------------------------------------------------------------------
Net sales $ 73,271 $131,711 $150,859 $153,135
Gross profit 24,061 47,474 56,188 59,505
Net income 3,486 616 7,012 7,662
Net income per share .15 .03 .30 .33
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Lilly Industries, Inc.
We have audited the accompanying consolidated balance sheets of Lilly
Industries, Inc. and subsidiaries as of November 30, 1997 and 1996, and the
related consolidated statements of income and retained earnings and cash flows
for each of the three years in the period ended November 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lilly
Industries, Inc. and subsidiaries at November 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 23, 1998
Responsibility for Financial Statements
================================================================================
The management of Lilly Industries, Inc. is responsible for the preparation of
the financial statements in the Annual Report and for the integrity and
objectivity of the information presented. The financial statements have been
prepared in conformity with generally accepted accounting principles and
necessarily include amounts which are estimates and judgments. The fairness of
the presentation in these statements of the Company's financial position,
results of operations and cash flows is reported on by the independent auditors.
To assist in carrying out the above responsibility, the Company has
internal systems which provide for selection of personnel, segregation of duties
and the maintenance of accounting policies, systems, procedures and related
controls.
Although no cost-effective system can insure the elimination of errors,
the Company's systems have been designed to provide reasonable but not absolute
assurances that assets are safeguarded, that policies and procedures are
followed, and that the financial records are adequate to permit the production
of reliable financial statements. The Audit Committee of the Board of Directors,
which is composed of directors who are not employees of the Company or its
subsidiaries, meets regularly with Company officers and independent auditors in
connection with the adequacy and integrity of the Company's financial reporting
and internal controls.
/s/ John C. Elbin
John C. Elbin
Vice President, Chief Financial Officer
and Secretary
<PAGE>
Investor Information
================================================================================
Form 10-K
A copy of the Form 10-K, which is filed with the Securities and Exchange
Commission, will be sent free to any shareholder upon written request. Write to:
Mr. Kenneth L. Mills,
Assistant Secretary
Lilly Industries, Inc.
733 S. West Street
Indianapolis, IN 46225
Registrar and Transfer Agent
================================================================================
Harris Trust and Savings Bank
Attn: Shareholder Services
311 W. Monroe Street, 11th Floor
P. O. Box A3504
Chicago, Illinois 60690-3504
(800) 942-5909
(312) 461-6001
Communications concerning shareholder records, including address
changes, stock transfers, cash dividends or other service needs should be
directed to Harris Trust and Savings Bank.
Analyst Contacts
================================================================================
Security analyst inquiries are welcomed. Please call:
John C. Elbin
Chief Financial Officer
(317) 687-6703
Annual Meeting
================================================================================
Thursday, April 23, 1998
10:00 A.M., EST
Rooms 101 and 102
Indiana Convention Center & RCA Dome
Indianapolis, Indiana
The meeting notice and proxy materials were mailed to shareholders with
their copies of this annual report. Lilly urges all shareholders to vote their
proxies and thus participate in the decisions that will be made at the annual
meeting.
<PAGE>
[RIGHT COLUMN OF PRIOR PAGE]
Dividend Reinvestment Plan
================================================================================
A dividend reinvestment and voluntary stock purchase plan for Lilly Industries,
Inc. shareholders permits purchase of the Company's Class A stock without
payment of brokerage commission or service charge. Participants in this plan may
have cash dividends on their shares automatically reinvested and, if they
choose, invest by making optional cash payments. Additional information on the
plan is available by writing:
Harris Trust and Savings Bank
Attn: Shareholder Services
311 W. Monroe Street, 11th Floor
P. O. Box A3504
Chicago, Illinois 60690-3504
Stock Trading and Dividend Information
================================================================================
The Company's Class A stock is traded on the New York Stock Exchange under the
symbol LI.
Dividends are traditionally paid on the 1st business day of January,
April, July and October to shareholders of record approximately three weeks
prior.
The following table sets forth the dividends paid per share of stock
and the high and low prices in each of the quarters in the past two years ended
November 30.
Dividends Price Range
Fiscal 1997 Per Share High Low
- ---------------------------------------------------------------
1st quarter ended Feb. 28 $ .08 $20 $17
2nd quarter ended May 31 .08 21 16 3/4
3rd quarter ended Aug. 31 .08 24 1/8 19 3/4
4th quarter ended Nov. 30 .08 22 1/2 17 7/8
-----
$ .32
=====
Dividends Price Range
Fiscal 1996 Per Share High Low
- ---------------------------------------------------------------
1st quarter ended Feb. 29 $.08 $14 1/8 $12 1/4
2nd quarter ended May 31 .08 15 3/4 12 1/2
3rd quarter ended Aug. 31 .08 19 15
4th quarter ended Nov. 30 .08 19 3/4 16 1/4
-----
$.32
=====
At November 30, 1997 there were approximately 2,080 registered
shareholders of Class A stock and 54 registered shareholders of Class B stock,
which is reserved for employees of the Company.
<PAGE>
Locations
[LEFT COLUMN]
International
================================================================================
Australia
Level 22, 201 Miller Street
North Sydney, NSW 2080
Australia
Canada
1915 Second Street West
Cornwall, Ontario K6H 5T1
Canada
65 Duke Street
London, Ontario N6J 2X3
Canada
China
Lot 3 Xintang
District Administration
Dalinshan, Dongguan
Guangdon, China 511774
England
152 Milton Park
Abingdon
Oxfordshire OX14 4SD
England
Germany
D-8649 Wallenfels/Ofr.
Postfach 1126
Germany
Friedensstrasse 40
D-52249 Eschweiler
Germany
Ireland
Willowfield Road
Ballinamore
Co. Leitrim
Ireland
Malaysia
Lot No. 4963, Jalan Teratai
51/2 Miles
Meru Industrial Zone
41050 Klang
Selangor Darul Ehsan
Malaysia
Singapore
Level 36, Hong Leong Building
16 Raffles Quay 048581
Singapore
Taiwan, R.O.C.
No. 1 Kung Yeh First Road
Zenwu Village
Kaohsiung Hsien
Taiwan, R.O.C.
<PAGE>
[MIDDLE COLUMN OF PRIOR PAGE]
United States
================================================================================
Alabama
1771 Industrial Road
Dothan, AL 36303
Arkansas
1900 E. 145th Street
Little Rock, AR 72206
California
210 East Alondra Blvd.
Gardena, CA 90248
901 West Union Street
Montebello, CA 90640
Connecticut
145 Dividend Road
Rocky Hill, CT 06067
15 Lunar Drive
Woodbridge, CT 06525
Florida
2355 S.W. 66th Terrace
Davie, FL 33317
Illinois
5400 23rd Avenue
Moline, IL 61265
Indiana
28335 Clay Street
Elkhart, IN 46517
546 W. Abbott Street
Indianapolis, IN 46225
Kentucky
347 Central Avenue
Bowling Green, KY 42101
Michigan
411 Darling Street, N.
Fremont, MI 49412
4999 36th Street, SE
Grand Rapids, MI 49512
Missouri
1136 Fayette
N. Kansas City, MO 64116
New Jersey
1991 Nolte Drive
Paulsboro, NJ 08066
<PAGE>
[RIGHT COLUMN OF PRIOR PAGES
North Carolina
10300 Claude Freeman Drive
Charlotte, NC 28262
2147 Brevard Road
High Point, NC 27263
1717 English Road
High Point, NC 27262
Texas
2518 Chalk Hill Road
Dallas, TX 75212
Washington
13535 Monster Road
Seattle, WA 98178
Corporate Offices
================================================================================
733 S. West Street
Indianapolis, Indiana 46225
Corporate Technology Center
521 W. McCarty Street
Indianapolis, Indiana 46225
Exhibit 21
SUBSIDIARIES OF LILLY INDUSTRIES, INC. AS OF FEBRUARY 21, 1997
Name of Subsidiary State of Incorporation
1. Lilly Industries (USA), Inc. Indiana
2. Lilly Industries (Asia), Limited Hong Kong
3. Lilly Industries (Australia) Pty Ltd. Australia
(Subsidiary of Lilly Industries (USA), Inc.)
4. Lilly Industries (Cornwall) Limited Ontario, Canada
(Subsidiary of Lilly Industries (USA), Inc.)
5. Lilly Industries (Ireland) Limited Ireland
6. Lilly Industries (Malaysia) Sdn.Bhd. Malaysia
7. Lilly Industries (Mexico), S.A. de C.V. Mexico
8. Lilly Industries, Inc.(Canada) Ontario, Canada
9. Lilly Industries (Far East), Ltd. Taiwan
10. Lilly Industries (Thailand), Limited Thailand
11. London Laboratories GmbH Germany
(Subsidiary of Lilly Industries (USA), Inc.)
12. London Laboratories Limited Ontario, Canada
(Subsidiary of Lilly Industries (USA), Inc.)
13. Merckens Lackchemie GmbH and Company KG Germany
(Subsidiary of London Laboratories, GmbH)
14. Dongguan Lilly Paint Industries, Ltd. Peoples Republic
(Subsidiary of Lilly Industries (Asia), Limited) of China
15. G.C.I. Insurance Company, Limited Bermuda
(Subsidiary of Lilly Industries (USA), Inc.)
16. Guardsman UK Limited United Kingdom
(Subsidiary of Lilly Industries (USA), Inc.)
17. Guardsman Chemical International Virgin Islands
(Subsidiary of Lilly Industries (USA), Inc.
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Lilly Industries, Inc. of our report dated January 23, 1998, included in the
1997 Annual Report to Shareholders of Lilly Industries, Inc.
Our audits also included the financial statement schedule of Lilly Industries,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We further consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-59159, 2-76317, 33-52959, 33-52956 pertaining to the Lilly
Employees' Stock Purchase Plan, the Lilly Industries, Inc. Stock Option Plan,
the Lilly Industries, Inc. 1991 Director Stock Option Plan, and the Lilly
Industries, Inc. Employee 401(k) Savings Plan, respectively, and 33-52958 and
333-32205 pertaining to the Lilly Industries, Inc. 1992 Stock Option plan and
Form S-4 No. 333-41587 pertaining to the 7-3/4% Senior Notes due 2007, Series B)
of our report dated January 23, 1998, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Lilly Industries, Inc.
/s/ Ernst & Young LLP
Indianapolis, Indiana
February 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
CONDENSED BALANCE SHEET OF LILLY INDUSTRIES, INC. AT NOVEMBER 30, 1997 AND THE
CONSOLIDATED CONDENSED STATEMENT OF INCOME OF LILLY INDUSTRIES, INC. FOR THE
YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 10,079
<SECURITIES> 0
<RECEIVABLES> 82,150
<ALLOWANCES> 2,139
<INVENTORY> 45,704
<CURRENT-ASSETS> 146,674
<PP&E> 137,088
<DEPRECIATION> 54,249
<TOTAL-ASSETS> 501,795
<CURRENT-LIABILITIES> 94,548
<BONDS> 0
<COMMON> 95,092
0
0
<OTHER-SE> 47,347
<TOTAL-LIABILITY-AND-EQUITY> 501,795
<SALES> 601,296
<TOTAL-REVENUES> 601,296
<CGS> 373,015
<TOTAL-COSTS> 531,162
<OTHER-EXPENSES> 346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,317
<INCOME-PRETAX> 51,163
<INCOME-TAX> 23,068
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,095
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
