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 May 31, 1996
Commission file number 0-6953
LILLY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0471010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
733 SOUTH WEST STREET
INDIANAPOLIS, INDIANA 46225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 687-6700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Number of shares outstanding at June 30, 1996:
Class A Common 22,254,000
Class B Common 382,000
Page 1 of 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Three Months Ended
May 31 May 31
1996 1995
-----------------------
Net sales $131,711 $85,407
Costs and expenses:
Cost of products sold 84,237 56,877
Selling, administrative and general 28,585 15,057
Research and development 4,618 3,330
Restructuring charges 9,607 0
--------- ---------
127,047 75,264
--------- ---------
OPERATING INCOME 4,664 10,143
Other income (expense):
Interest income and sundry 173 49
Interest expense (3,153) (514)
--------- ---------
(2,980) (465)
--------- ---------
INCOME BEFORE INCOME TAXES 1,684 9,678
Income Taxes 1,068 3,870
--------- ---------
NET INCOME $616 $5,808
========= =========
Cash dividends per share--Note B $0.08 $0.08
========= =========
Average number of shares and equivalent shares
of capital stock outstanding--Note B 23,000 23,300
========= =========
Net income per share--Note B $0.03 $0.25
========= =========
See notes to consolidated condensed financial statements.
Page 2 of 14
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Six Months Ended
May 31 May 31
1996 1995
-----------------------
Net sales $204,982 $165,854
Costs and expenses:
Cost of products sold 133,447 110,444
Selling, administrative and general 43,454 30,366
Research and development 7,790 6,671
Restructuring charges 9,607 0
--------- ---------
194,298 147,481
--------- ---------
OPERATING INCOME 10,684 18,373
Other income (expense):
Interest income and sundry 339 182
Interest expense (3,624) (1,130)
--------- ---------
(3,285) (948)
--------- ---------
INCOME BEFORE INCOME TAXES 7,399 17,425
Income Taxes 3,297 6,970
--------- ---------
NET INCOME $4,102 $10,455
========= =========
Cash dividends per share--Note B $0.16 $0.15
========= =========
Average number of shares and equivalent shares
of capital stock outstanding--Note B 23,000 23,300
========= =========
Net income per share--Note B $0.18 $0.45
========= =========
See notes to consolidated condensed financial statements.
Page 3 of 14
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
May 31 November 30
1996 1995
------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $7,985 $20,260
Accounts receivable, less allowances
for doubtful accounts (5/31/96, $2,933;
11/30/95, $2,051) 81,218 40,911
Inventories--Note C 45,623 15,411
Other 12,882 349
--------- ---------
TOTAL CURRENT ASSETS 147,708 76,931
OTHER ASSETS 31,601 13,781
INTANGIBLE ASSETS 253,108 47,401
PROPERTY AND EQUIPMENT
Land, buildings and equipment 117,607 86,273
Allowances for depreciation (deduction) (43,471) (40,804)
--------- ---------
74,136 45,469
--------- ---------
$506,553 $183,582
========= =========
See notes to consolidated condensed financial statements.
Page 4 of 14
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
May 31 November 30
1996 1995
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $49,204 $23,982
Other 27,429 10,415
Current portion of long-term debt 14,520 7,029
--------- ---------
TOTAL CURRENT LIABILITIES 91,153 41,426
LONG-TERM DEBT 260,680 21,200
OTHER LIABILITIES 44,473 11,582
SHAREHOLDERS' EQUITY Capital stock:
Class A (limited voting) 15,032 14,947
Class B (voting) 300 300
Additional capital 74,468 73,450
Retained earnings 51,942 51,446
Currency translation adjustments (114) 288
Cost of capital stock in treasury
(deduction) (31,381) (31,057)
--------- ---------
110,247 109,374
--------- ---------
$506,553 $183,582
========= =========
See notes to consolidated condensed financial statements.
Page 5 of 14
ONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
Six Months Ended
May 31 May 31
1996 1995
---------------------
OPERATING ACTIVITIES
Net income $4,102 $10,455
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,008 2,293
Amortization of intangibles 3,142 1,944
Restructuring charges 9,607 0
Deferred income taxes (4,000) (61)
Changes in operating assets and liabilities,
net of effects from acquired business:
Accounts receivable (2,475) 3,018
Inventories (4,707) (319)
Other current assets 1,454 (460)
Accounts payable and other current liabilities 1,409 (9,309)
Sundry 2,974 (244)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,514 7,317
INVESTING ACTIVITIES
Purchases of property and equipment (6,505) (3,893)
Payment for acquired business (235,000) 0
Sundry (879) (2,046)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (242,384) (5,939)
FINANCING ACTIVITIES
Cash dividends paid (3,606) (3,415)
Proceeds from short-term and long-term borrowings 278,000 0
Principal payments on short-term and
long-term borrowings (59,578) (7,060)
Sundry 779 (293)
--------- ---------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 215,595 (10,768)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (12,275) (9,390)
Cash and cash equivalents at beginning of year 20,260 26,581
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,985 $17,191
========= =========
See notes to consolidated condensed financial statements.
Page 6 of 14
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
MAY 31, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended November 30, 1995.
NOTE B--SHARE AND PER SHARE AMOUNTS
Equivalent shares of capital stock represent additional shares assumed issued
upon exercise of stock options.
NOTE C--INVENTORIES
The principal inventory classifications are summarized as follows (in
thousands):
May 31 November 30
1996 1995
---------- -----------
Finished products $ 25,200 $ 11,065
Raw materials 28,661 12,584
-------- --------
53,861 23,649
Less adjustment of certain
inventories to last in,
first out (LIFO) basis 8,238 8,238
-------- --------
$ 45,623 $ 15,411
======== ========
The Company uses the LIFO method in inventory valuation for approximately 70% of
inventories where an actual valuation can be made only at the end of each year
based on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Since these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation. The Company estimates the annual adjustment for LIFO
and allocates it to quarters based on actual inflation experienced in a quarter
as it relates to anticipated inflation for the year.
Page 7 of 14
NOTE D--RESTRUCTURING
The Company has adopted and commenced implementation of plans for the
consolidation of manufacturing facilities related to the April 8, 1996
acquisition of Guardsman Products, Inc. These plans will result in the closure
of some plants and workforce reductions totaling approximately 250 employees.
Closure costs consist of facility and equipment valuation adjustments, inventory
disposal costs, dismantling and maintenance costs, and termination benefits. The
primary employee groups affected include manufacturing, selling, administrative
and research and development personnel. It is anticipated these plans will be
completed by the end of fiscal 1997.
Costs associated with the planned closure of former Lilly facilities and related
reductions in workforce are reflected as restructuring charges included in
second quarter operations. These charges totaled $9,607,000, which reduced
second quarter net income by $5,284,000 or $.23 per share. The components of the
restructuring charges and amounts paid or charged against these reserves are as
follows (in thousands):
Costs Paid Ending
Provision or Charged Balance
--------- ---------- -------
Facilities, equipment,
inventories, and other $7,827 $365 $7,462
Termination benefits 1,780 0 1,780
------ ------ ------
$9,607 $365 $9,242
====== ====== ======
Costs associated with the planned closure of former Guardsman facilities and
related reductions in workforce are recorded as liabilities in the opening
balance sheet of the combined entity as of the acquisition date. The components
of these liabilities and amounts paid or charged against these reserves are as
follows (in thousands):
Costs Paid Ending
Liabilities or Charged Balance
----------- ---------- -------
Facilities, equipment,
inventories, and other $6,532 $0 $6,532
Termination benefits 2,476 100 2,376
------ ------ ------
$9,008 $100 $8,908
====== ====== ======
NOTE E--ACQUISITION
Lilly acquired 9,322,583 shares or about 96.5% of the outstanding stock of
Guardsman Products, Inc. ("Guardsman") pursuant to a cash tender offer of $23
per share for all the outstanding stock of Guardsman. The tender offer expired
on April 4, 1996 and the shares tendered were accepted for purchase on April 8,
1996. Pursuant to a follow-up merger, all non-tendered shares of Guardsman were
converted into the right to receive $23 net per share in cash (subject to
perfected dissenters' rights, if any). To finance the purchase of shares, Lilly
obtained commitments for $300 million of senior secured credit facilities and
used $275 million of these facilities to pay-off existing debt and fund the
initial purchase of shares, and to pay related expenses. The acquisition
transactions were recorded using the purchase method and consolidated financial
statements include the results of operations of Guardsman since the date of
acquisition. The excess of the purchase price
Page 8 of 14
over the fair value of assets acquired is being amortized by the straight-line
method over 40 years.
The following unaudited pro forma consolidated results of operations for the six
months ended May 31, 1996 and 1995 are stated as though the acquisition occurred
on December 1, 1994 (in thousands, except per share data):
Six Months Ended
---------------------------------
May 31, May 31,
1996 1995
----------- --------
Net sales $294,728 $293,511
Net income 6,093* 13,515
Net income per share .26* .58
- ----------
* Pro forma results for the six months ended May 31, 1996 include
restructuring changes of $9,607 which reduced net income by $5,284 or
$.23 per share.
The pro forma consolidated results of operations are not necessarily indicative
of the actual results of operations that would have occurred had the purchase
been made at December 1, 1994, or of future results of operations.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Record Revenues; Guardsman Acquired and Assimilated. On April 8 Lilly acquired
Guardsman Products, Inc. ("Guardsman") for $235 million cash, all of it
borrowed. Lilly's 2nd quarter operations ended May 31 included two months of
Guardsman's revenues and as a result, record sales were achieved. Although
inclusion of Guardsman's revenues accounted for the major portion of that sales
increase, a portion was due to a general resurgence in business that began in
early April.
Second Quarter Results
Our second quarter income statement illustrates the effect of the Guardsman
acquisition. Sales increased to $131.7 million, up 54% over those of last year's
second quarter.
Earnings were also affected by the Guardsman acquisition. Earnings for this
year's second quarter were three cents a share compared with twenty-five cents a
share last year. Except for the one-time restructuring charge of $9.6 million,
earnings would have been a second quarter record of 26 cents per share. This
one-time charge of $9.6 million pre-tax relates to certain facility closings and
employment reductions that will enable Lilly to reduce future operating
expenses. Thus, our combined operations were able to generate sufficient income
to write off the entire $9.6 million restructuring charge in a single quarter -
and still show a profit.
Acquisition Summary
We completed the entire Guardsman acquisition in less than 90 days - from
initial offer, to payment for the Guardsman shares, to identifying major
cost-savings, as well as accounting for those costs and absorbing them in the
same quarter. Further, the two companies are now operating as one. Finally, the
Guardsman acquisition also brought us a sixth Strategic Business Unit, which we
renamed "Guardsman Products" to more closely reflect the nature of its business.
This business unit sells a variety of consumer and OEM related
Page 9 of 14
products, including the well-known Guardsman furniture polish and Fabri-coat
fabric protection.
Our initial goal was to carve out a minimum of $20 million in annual operating
expenses over the first twelve to twenty-four months. Based on the redundant
costs we have identified after two months of ownership, we will surpass that
goal.
The first $20 million of savings will cover the interest expense on the $235
million we borrowed to acquire Guardsman. Thus, we do not expect to utilize
Guardsman's pre-tax earnings ($15 million last year) to pay that interest
expense - once the identified cost savings have been fully implemented.
Near-term Outlook
We expect sales to increase further during the next two quarters because: o
Business has been running ahead of last year since April; o Each subsequent
quarter will include a full three months of Guardsman
revenues compared to only two months in the second quarter; and
o Synergy is already at work - customers are now being exposed to the
wider range of services and technology provided by THE NEW LILLY.
We also look for increased earnings because:
o No additional restructuring costs will be incurred;
o Selling, general and administrative expenses, as a percent of sales,
should begin to trend lower as plans for cost reductions are fully
implemented; and
o The combination of higher sales and reduced operating costs should act
as an accelerant to earnings.
Accordingly, we believe profits for our fiscal year ended November 30, 1996 will
exceed those of last year, before the one-time restructuring charge of $9.6
million is considered.
Other
In other action, the Board of Directors increased its membership to eleven
members and elected Paul K. Gaston, Guardsman's former Chairman, to the vacant
post. Mr. Gaston's familiarity with Guardsman operations and his legal
experience with Warner Norcross & Judd LLP, where he served as managing partner,
should make him a valuable contributor to Lilly.
The Board of Directors declared its regular quarterly dividend of 8 cents per
share, payable October 1 to shareholders of record at the close of business on
September 10. This is the 230th consecutive dividend paid by the Company.
Page 10 of 14
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of shareholders of Lilly Industries, Inc. on April 18,
1996, the following directors were elected by the votes indicated:
Abstentions
Stock Votes and Broker
Director Name Class Votes For Withheld Nonvotes
- ------------------ ---- ---------- -------- -----------
H. J. (Jack) Baker A 18,386,887 0 249,418
John D. Peterson A 18,386,887 0 249,418
Thomas E. Reilly, Jr A 18,388,341 0 247,964
Van P. Smith A 18,385,864 0 250,441
James M. Cornelius B 383,628 0 0
William C. Dorris B 383,628 0 0
Douglas W. Huemme B 383,628 0 0
Roman J. Klusas B 383,628 0 0
Harry Morrison, Ph.D B 383,628 0 0
Richard A. Steele B 383,628 0 0
Shareholders also approved adoption of a proposal to amend Articles 5 and 6 of
the Company's Articles of Incorporation to increase the authorized shares of
Class A Stock from 48,500,000 shares to 97,000,000 shares and to increase the
authorized shares of Class B Stock form 1,500,000 shares to 3,000,000 shares.
The proposed amendment of the Articles of Incorporation required the affirmative
vote of holders of two-thirds of the outstanding shares of Class A Stock and
four-fifths of the outstanding shares of Class B Stock, voting as separate
voting groups. The proposal was adopted with 16,712,962 shares, or 75%, of Class
A Common Stock and 383,628 shares, or 98%, of Class B Common Stock voting for
the proposal. Shares of Class A Common Stock voted against were 1,706,461 and
216,884 shares of Class A Common Stock either abstained or were the subject of
broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included or incorporated by reference herein:
EXHIBIT 2 Merger Agreement, dated March 4, 1996, by and among Lilly
Industries, Inc., LP Acquisition Corporation, and Guardsman
Products, Inc. (incorporated by reference to Exhibit 2 to
Form 8-K of Lilly Industries, Inc. dated April 22, 1993 and
filed with the SEC on April 23, 1996)
EXHIBIT 4 Credit Agreement, dated as of April 8, 1996, between Lilly
Industries, Inc., the Lenders Signatory Thereto, NBD Bank,
N.A., as Agent, and Harris Trust and Savings Bank, Comerica
Bank, Mercantile Bank of St. Louis, and Bank One,
Indianapolis, N.A., as Co-Agents (incorporated by reference
to Exhibit 4 to Form 8-K of Lilly Industries, Inc.. dated
April 22, 1996 and filed with the SEC on April 23, 1996)
EXHIBIT 11 Computation of Earnings Per Share
EXHIBIT 27 Financial Data Schedule
Page 11 of 14
(b) The Company filed a report on Form 8-K on April 23, 1996. The report
was dated April 22, 1996 and reported the acquisition of Guardsman
Products, Inc.
Note: All other item numbers under this section are not applicable.
Page 12 of 14
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)
July 15, 1996
/s/ Douglas W. Huemme
---------------------------------------
Douglas W. Huemme
Chairman, President and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
July 15, 1996
/s/ Roman J. Klusas
---------------------------------------
Roman J. Klusas
Vice President and
Chief Financial Officer
Page 13 of 14
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
LILLY INDUSTRIES, INC.
(In thousands, except per share data)
Three Months Ended Six Months Ended
------------------------- ----------------
May 31 May 31 May 31 May 31
1996 1995 1996 1995
------- ------- ------ ------
Primary:
Average shares outstanding 22,600 22,800 22,600 22,800
Net income $ 616 $ 5,808 $ 4,102 $10,455
Net income per common share $ 0.03 $ 0.25 $ 0.18 $ 0.46
======= ======= ======= =======
Average shares outstanding 22,600 22,800 22,600 22,800
Dilutive stock options based
on treasury stock method
using average market
price 400 500 400 500
------- ------- ------- -------
23,000 23,300 23,000 23,300
Net income $ 616 $ 5,808 $ 4,102 $10,455
Net income per common
and common equivalent
share $ 0.03 $ 0.25 $ 0.18 $ 0.45
======= ======= ======= =======
Fully diluted:
Average shares outstanding 22,600 22,800 22,600 22,800
Dilutive stock options based
on the treasury stock
method using the higher
of quarter end or average
market price 400 500 400 500
------- ------- ------- -------
23,000 23,300 23,000 23,300
Net income $ 616 $ 5,808 $ 4,102 $10,455
Net income per common
and common equivalent
share $ 0.03 $ 0.25 $ 0.18 $ 0.45
======= ======= ======= =======
Page 14 of 14