FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended August 31, 1999
Commission file number 0-6953
LILLY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0471010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 WEST 103RD STREET
INDIANAPOLIS, INDIANA 46290
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 814-8700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Number of shares outstanding at September 30, 1999:
Class A Common 22,803,000
Class B Common 430,000
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
August 31 August 31
1999 1998
--------- ---------
<S> <C> <C>
Net sales $ 169,452 $ 159,345
Costs and expenses
Cost of products sold 105,223 97,593
Selling, general and administrative 40,179 37,371
Research and development 5,535 5,235
--------- ---------
150,937 140,199
--------- ---------
OPERATING INCOME 18,515 19,146
Sundry income (expense) 75 (51)
Interest expense, net (3,889) (4,140)
--------- ---------
INCOME BEFORE INCOME TAXES 14,701 14,955
Income taxes 6,024 6,281
--------- ---------
NET INCOME $ 8,677 $ 8,674
========= =========
Cash dividends per share $ 0.08 $ 0.08
Net income per share
Basic $ 0.37 $ 0.37
Diluted $ 0.37 $ 0.37
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
August 31 August 31
1999 1998
------------------ ---------------------
<S> <C> <C>
Net sales $ 486,966 $ 461,877
Costs and expenses
Cost of products sold 299,563 284,900
Selling, general and administrative 118,550 109,493
Research and development 16,052 15,530
------------------ ---------------------
434,165 409,923
------------------ ---------------------
OPERATING INCOME 52,801 51,954
Sundry expense (418) (179)
Interest expense, net (11,901) (12,932)
------------------ ---------------------
INCOME BEFORE INCOME TAXES 40,482 38,843
Income taxes 16,594 16,314
------------------ ---------------------
NET INCOME $ 23,888 $ 22,529
================== =====================
Cash dividends per share $ 0.24 $ 0.24
Net income per share
Basic $ 1.03 $ 0.97
Diluted $ 1.02 $ 0.96
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
August 31 November 30
1999 1998
------------------- -------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,732 $ 13,326
Accounts receivable, less allowances
for doubtful accounts (8/31/99, $1,900;
11/30/98, $1,981) 93,049 82,039
Inventories 56,862 50,796
Other 6,000 5,871
------------------- -------------------
TOTAL CURRENT ASSETS 162,643 152,032
OTHER ASSETS 25,888 21,257
INTANGIBLE ASSETS 235,514 241,028
PROPERTY AND EQUIPMENT
Land, buildings and equipment 187,906 162,357
Accumulated depreciation (66,965) (60,189)
------------------- -------------------
120,941 102,168
$ 544,986 $ 516,485
=================== ===================
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
August 31 November 30
1999 1998
----------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 65,187 $ 59,156
Other 45,174 42,805
----------------- --------------
TOTAL CURRENT LIABILITIES 110,361 101,961
LONG-TERM DEBT 211,100 203,700
OTHER LIABILITIES 38,487 45,249
SHAREHOLDERS' EQUITY Capital stock:
Class A (limited voting) 15,532 15,459
Class B (voting) 300 300
Additional capital 83,693 81,890
Retained earnings 126,230 107,914
Accumulated other comprehensive income (3,414) (4,096)
Cost of capital stock in treasury (37,303) (35,892)
----------------- --------------
185,038 165,575
----------------- --------------
$ 544,986 $ 516,485
================= ==============
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
August 31 August 31
1999 1998
-------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,888 $ 22,529
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,762 7,292
Amortization 8,675 8,182
Changes in operating assets and liabilities net of effects from acquired
businesses:
Accounts receivable (10,842) (243)
Inventories (6,042) (1,892)
Accounts payable and accrued expenses 8,324 (5,644)
Sundry (12,124) 5,262
-------------------- -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,641 35,486
INVESTING ACTIVITIES
Purchases of property and equipment (26,875) (11,584)
Payments for acquired businesses (2,721) (11,253)
Sundry 1,067 2,786
-------------------- -------------------
NET CASH USED BY INVESTING ACTIVITIES (28,529) (20,051)
FINANCING ACTIVITIES
Dividends paid (5,572) (5,553)
Proceeds from borrowings 7,400 11,000
Principal payments on borrowings - (15,600)
Sundry 466 1,489
-------------------- -------------------
NET CASH PROVIDED(USED) BY FINANCING ACTIVITIES 2,294 (8,664)
-------------------- -------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,594) 6,771
Cash and cash equivalents at beginning of year 13,326 10,079
-------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,732 $ 16,850
==================== ===================
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
AUGUST 31, 1999
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended November 30, 1998.
NOTE B--NET INCOME PER SHARE
Basic and diluted net income per share are computed by dividing net income as
reported by the average number of shares outstanding as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
August 31 August 31
1999 1998 1999 1998
---------------------------- ------------------------------
<S> <C> <C> <C> <C>
Basic
Weighted-average common shares
outstanding 23,220 23,182 23,200 23,146
====== ====== ====== ======
Diluted
Weighted-average common shares
outstanding 23,220 23,182 23,200 23,146
Dilutive effect of stock options 110 295 130 272
------ ------ ------ ------
Average common shares outstanding
assuming dilution 23,330 23,477 23,330 23,418
====== ====== ====== ======
</TABLE>
NOTE C--INVENTORIES
================================================================================
The principal inventory classifications are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
August 31 November 30
1999 1998
------------------- ---------------------
<S> <C> <C>
Finished products $ 32,624 $ 29,761
Raw materials 30,114 27,411
------------------- --------------------
62,738 57,172
Less adjustment of certain
inventories to last in,
first out (LIFO) basis 5,876 6,376
------------------- -------------------
$ 56,862 $ 50,796
=================== ===================
</TABLE>
The Company uses the LIFO method of inventory valuation for approximately 64% of
inventories where an actual valuation can be made only at the end of each year
based on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Since these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation. The Company estimates the annual adjustment for LIFO
and allocates it to quarters based on actual inflation experienced in a quarter
as it relates to anticipated inflation for the year.
NOTE D---ACCOUNTING CHANGES
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" during the first quarter of fiscal year 1999.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS 130 requires the Company to report, in addition
to net income, other components of comprehensive income, including foreign
currency translation adjustments. Total comprehensive income was $8,599,000 and
$7,205,000 for the three months ended August 31,1999 and 1998, respectively.
Total comprehensive income was $24,570,000 and $20,057,000 for the nine months
ended August 31, 1999 and 1998, respectively. Adoption of this disclosure
standard had no effect on the Company's operating results or financial position.
NOTE E---RECLASSIFICATION
Certain amounts in the November 30, 1998 balance sheet have been reclassified to
conform with 1999 presentation.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations
Sales for the third quarter ended August 31, 1999 increased 6.3% to $169.5
million compared to $159.3 in the prior year. Sales for the nine month period
ended August 31, 1999 were up 5.4% at $487.0 million compared to $461.9 million
for the same period of 1998. Sales growth for both the third quarter and nine
month period was driven by strong volume increases in wood coatings and powder
coatings for metal substrates.
Sales of wood coatings increased due to continued expansion in Asia and domestic
growth in the furniture, kitchen cabinets, and building product markets. Powder
coatings continue to gain market share in most metal coatings markets. Sales
growth in these markets was partially offset by reduced demand for liquid metal
coatings in the agricultural and construction equipment markets.
Gross profit margin for the third quarter ended August 31, 1999 fell slightly to
37.9% of sales compared to 38.8% in the prior year. The decrease was primarily
driven by the effect of changes in product sales mix and a slight increase in
manufacturing labor and overhead. For the nine month period ended August 31,
1999, gross profit margin held approximately even with the same period of the
prior year at 38.5% and 38.3%, respectively.
Selling, general and administrative expenses for the third quarter ended August
31, 1999 increased 7.5% to $40.2 million compared to $37.4 million in the prior
year. Selling, general and administrative expenses for the nine month period
ended August 31, 1999 increased 8.3% to $118.6 million compared to $109.5
million for the same period of 1998. Investment in selling, marketing and
infrastructure enhancements contributed to the increase for both periods as the
Company continues to focus on global expansion and capturing additional market
share in certain markets.
Interest expense for the third quarter and nine month period ended August 31,
1999 decreased 6.1% and 8.0%, respectively, over the same periods of 1998 due to
lower average interest rates and lower average debt outstanding. The Company's
effective tax rate for the third quarter and nine month period ended August 31,
1999 was 41.0% compared to 42.0% for the same periods of 1998. The lower
effective rate for 1999 is a result of the favorable impact of international tax
planning strategies.
Net income and net income per diluted share for the third quarter were even with
prior year results at $8.7 million and $.37 per diluted share, respectively. Net
income and net income per diluted share for the nine month period ending August
31, 1999 increased 6.0% and 6.3%, respectively, over the same period of 1998
primarily due to higher operating income, reduced interest expense and a more
favorable effective tax rate.
Liquidity and Capital Resources
Cash provided by operating activities during the nine months ended August 31,
1999 decreased to $19.6 million compared to $35.5 million for the same period of
1998 as higher net income was offset by the cash effect of changes in certain
operating assets and liabilities.
<PAGE>
Cash used by investing activities during the nine months ended August 31, 1999
increased to $28.5 million compared to $20.1 million for the same period of
1998. The increase was primarily due to increased capital expenditures offset by
decreased payments for acquired businesses. Capital expenditures increased by
$15.3 million to $26.9 million for the nine months ended August 31, 1999. The
increase was driven by investments in international and domestic infrastructure.
Cash provided by financing activities during the nine months ended August 31,
1999 increased $11.0 million over the same period of 1998 as the Company
utilized credit facilities to fund a portion of operating and investing cash
flows.
The Company believes that funds available from internal and external sources
will be sufficient to meet the liquidity needs of the Company.
The Board of Directors declared a regular quarterly dividend of eight cents per
common share, payable January 3, 2000, to shareholders of record on December 10,
1999.
Year 2000
The Year 2000 issue ("Y2K" or "Y2K issue") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any computer programs or any hardware that have date sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a temporary inability to process transactions or
engage in normal manufacturing or other business activities.
The Company has substantially completed a company-wide effort to achieve Y2K
readiness for both information technology ("IT") and non-information technology
("Non-IT") systems, and to determine the Y2K readiness of significant suppliers.
The Company is focusing its efforts on IT systems, Non-IT systems and suppliers
that, without Y2K readiness, could have a material adverse effect on the
Company's operations.
The Company's approach to addressing Y2K preparedness consists of the following:
Inventory - identification of items to be assessed for Y2K readiness.
Assessment - prioritizing the inventoried items, assessing their Y2K readiness
and defining corrective actions and developing contingency plans.
Deployment - implementing corrective actions, verifying implementation and
finalizing contingency plans.
The Company's IT systems are comprised of business computer systems and
technical infrastructure. In 1996, the Company determined that the IT systems
supporting its business units could be inadequate to meet business requirements
after 1999 and thus implemented a project to replace all critical IT systems.
All critical IT systems have been inventoried and assessed, and replacement of
non-conforming IT systems began during the fourth quarter of 1998. Deployment of
all critical IT systems was completed during the third quarter of 1999. Initial
testing has been completed but on-going evaluation and testing of critical IT
systems will be performed throughout the remainder of the year.
<PAGE>
The Company's Non-IT systems are comprised of manufacturing and warehousing
systems and facility support systems. A preliminary inventory and assessment of
these Non-IT systems was completed in early 1999 and deployment of these Non-IT
systems was completed during the third quarter of 1999.
The Company has substantially completed the process of contacting significant
raw material and service suppliers regarding their Y2K readiness. The Company's
supplier readiness program focused on those suppliers considered essential for
the prevention of a material disruption to the Company's business operation. The
Company made efforts to address third-party Y2K compliance issues noted from the
inquiries. However, there can be no assurance that such third-parties will be
Y2K compliant. Non-compliance by third parties could have a material adverse
impact on the Company's financial position and business operations.
The Company is developing contingency plans to minimize the impact to the
Company of any potential non-compliance by third parties or other unanticipated
Y2K business interruptions. These plans, for example, will address the
availability of raw materials, alternative service providers, and other
resources critical to the Company's operations. However, it is unlikely these
plans will address all potential business interruptions. Accordingly, there can
be no assurance the implementation of these plans will be successful.
The Company utilizes both internal and external resources in all phases of its
Y2K readiness program. The Company estimates the total cost of resolving the Y2K
issue to be approximately $5 million. Of this amount, the Company estimates that
over $0.5 million was spent during the third quarter of 1999. Approximately 70%
of total Y2K cost will be comprised of equipment and software replacement costs
with the balance being comprised of assessment and remediation costs. The
Company expects all costs related to the Y2K readiness program to be funded with
operating cash flow. Y2K costs were expensed as incurred except for new systems
and equipment, which were capitalized and will be charged to expense over the
estimated useful life of the related asset.
While the Company believes that its efforts to address Y2K issues have been
successfully completed, the Company recognizes that failure to resolve Y2K
issues could, in a reasonably likely worst case scenario, increase costs and
limit the Company's ability to conduct business operations. The financial impact
of such scenario can not be reasonably estimated.
Forward-Looking Statements
Statements in this report that are not strictly historical may be
"forward-looking" statements, which involve risks and uncertainties. Such
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Risk factors include general economic
and industry conditions, effects of leverage, environmental matters,
technological developments, product pricing, raw material cost changes, and
international operations, among others, which are set forth in the Company's
annual report on Form 10-K for the year ended November 30, 1998. Actual results
of the Company could differ materially from those expressed or implied by any
such forward-looking statements. The Company makes no commitment to update any
forward-looking statement or disclose any facts, events, or circumstances after
the date hereof that may affect the accuracy of any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. Both interest rate risk and foreign currency risk are
considered immaterial to the Company.
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibit is included herein:
EXHIBIT 27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the three months
ended August 31, 1999.
Note: All other item numbers under this section are not applicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LILLY INDUSTRIES, INC. (Registrant)
October 15, 1999
/s/ Douglas W. Huemme
--------------------------------
Douglas W. Huemme
Chairman and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
October 15, 1999
/s/ John C. Elbin
--------------------------------
John C. Elbin
Vice President,
Chief Financial Officer
and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000059479
<NAME> Lilly Industries, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> AUG-31-1999
<PERIOD-END> DEC-1-1999
<EXCHANGE-RATE> 1.000
<CASH> 6,732
<SECURITIES> 0
<RECEIVABLES> 94,949
<ALLOWANCES> 1,900
<INVENTORY> 56,862
<CURRENT-ASSETS> 162,643
<PP&E> 187,906
<DEPRECIATION> 66,965
<TOTAL-ASSETS> 544,986
<CURRENT-LIABILITIES> 110,361
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<COMMON> 99,525
0
0
<OTHER-SE> 85,513
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<TOTAL-COSTS> 434,165
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</TABLE>
