FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended February 28, 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.)
733 SOUTH WEST STREET
INDIANAPOLIS, INDIANA 46225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(317) 687-6700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Number of shares outstanding at March 31, 1999:
Class A Common 22,771,000
Class B Common 436,000
Page 1 of 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Three Months Ended
February 28 February 28
1999 1998
--------------- ----------------
Net sales $ 146,139 $ 143,334
Costs and expenses
Cost of products sold 90,083 89,903
Selling, general and administrative 37,093 34,286
Research and development 5,159 5,366
--------------- ----------------
132,335 129,555
--------------- ----------------
OPERATING INCOME 13,804 13,779
Sundry expense 239 139
Interest expense, net 4,101 4,462
--------------- ----------------
INCOME BEFORE INCOME TAXES 9,464 9,178
Income taxes 3,880 4,038
--------------- ----------------
NET INCOME $ 5,584 $ 5,140
=============== ================
Cash dividends per share $ .08 $ .08
Net income per share
Basic $ 0.24 $ 0.22
Diluted $ 0.24 $ 0.22
See notes to consolidated condensed financial statements.
Page 2 of 13
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
February 28 November 30
1999 1998
------------------- ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,054 $ 13,326
Accounts receivable, less allowances
for doubtful accounts (2/28/99, $2,143;
11/30/98, $1,981) 86,728 82,039
Inventories 54,021 50,796
Other 6,353 5,871
------------------- ------------------
TOTAL CURRENT ASSETS 157,156 152,032
OTHER ASSETS 25,589 21,257
INTANGIBLE ASSETS 240,199 241,028
PROPERTY AND EQUIPMENT
Land, buildings and equipment 168,438 162,357
Accumulated depreciation (61,835) (60,189)
-------------------- ------------------
106,603 102,168
$ 529,547 $ 516,485
=================== ==================
See notes to consolidated condensed financial statements.
Page 3 of 13
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
February 28 November 30
1999 1998
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 64,812 $ 66,156
Other 27,940 35,805
--------- ---------
TOTAL CURRENT LIABILITIES 92,752 101,961
LONG-TERM DEBT 225,500 203,700
OTHER LIABILITIES 41,438 45,249
SHAREHOLDERS' EQUITY Capital stock:
Class A (limited voting) 15,501 15,459
Class B (voting) 300 300
Additional capital 82,999 81,890
Retained earnings 111,641 107,914
Accumulated other comprehensive income (3,881) (4,096)
Cost of capital stock in treasury (36,703) (35,892)
--------- ---------
169,857 165,575
--------- ---------
$ 529,547 $ 516,485
========= =========
See notes to consolidated condensed financial statements.
Page 4 of 13
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended
February 28 February 28
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 5,584 $ 5,140
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,632 2,460
Amortization of intangibles 2,686 2,546
Changes in operating assets and liabilities net
of effects from acquired business:
Accounts receivable (4,521) 755
Inventories (3,201) 1,065
Accounts payable and accrued expenses (9,284) (11,504)
Sundry (8,354) 4,852
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (14,458) 5,314
INVESTING ACTIVITIES
Purchases of property and equipment (6,843) (2,455)
Payments for acquired businesses (2,721) (11,253)
Sundry 468 2,164
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (9,096) (11,544)
FINANCING ACTIVITIES
Dividends paid (1,857) (1,850)
Proceeds from borrowings 21,800 11,000
Principal payments on borrowings 0 (1,171)
Sundry 339 789
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,282 8,768
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,272) 2,538
Cash and cash equivalents at beginning of year 13,326 10,079
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,054 $ 12,617
======== ========
See notes to consolidated condensed financial statements.
Page 5 of 13
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
FEBRUARY 28, 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):
Three Months Ended
February 28
1999 1998
------ ------
Basic
Weighted-average common shares
outstanding 23,180 23,116
====== ======
Diluted
Weighted-average common shares
outstanding 23,180 23,116
Dilutive effect of stock options 150 258
------ ------
Average common shares outstanding
assuming dilution
23,330 23,374
====== ======
Page 6 of 13
NOTE C--INVENTORIES
================================================================================
The principal inventory classifications are summarized as follows (in
thousands):
February 28 November 30
1999 1998
------- -------
Finished products $31,226 $29,761
Raw materials 28,671 27,411
------- -------
59,897 57,172
Less adjustment of certain
inventories to last in,
first out (LIFO) basis 5,876 6,376
------- -------
$54,021 $50,796
======= =======
The Company uses the LIFO method in 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. During the first quarter of 1999 and 1998,
total comprehensive income was $5,799,000 and $4,631,000, respectively. Adoption
of this disclosure standard had no effect on the Company's operating results or
financial position.
Effective December 1, 1998, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". The statement requires capitalization of certain costs incurred
in the development of internal-use software, including external direct material
and service costs, employee payroll and payroll-related costs, and capitalized
interest. Prior to adoption of SOP 98-1, the Company expensed these costs as
incurred. The effect of the adoption of this statement on consolidated earnings
during the current period is immaterial.
Page 7 of 13
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations - Three Months Ended February 28, 1999
Net sales for the first quarter of 1999 increased 2% over the same period in
1998. The increase was due to strong growth in powder coatings, wood coatings
and composites. Sales of powder coatings increased by a double digit rate
reflecting continued market share growth. Wood coatings sales increased due
primarily to a strong North American housing market and continued penetration
into the Asia/Pacific region. Composite sales increased from 1998 levels
reflecting improved demand from transportation and housing markets. Sales of
glass coatings were down from prior year levels due to increased competitive
activity in North America and Europe. Liquid metal sales also declined with the
largest component of the decrease relating to the softness in the agricultural
and construction equipment markets.
Gross profit for the first quarter of 1999 increased 4.9% over the same period a
year ago, representing 38.4% and 37.3% of sales, respectively. Gross profit
growth reflects the impact of Lilly's continuing efforts to lower raw material
costs through supply chain management.
Selling, general and administrative expenses during the first quarter of 1999
increased 8.2% over the same period in 1998, due to investments in selling,
marketing and infrastructure enhancements directed toward global expansion.
Operating income for the first quarter of 1999 increased slightly over the same
period a year ago, as SG&A increases offset sales and gross profit gains.
Interest expense during the first quarter of 1999 decreased 8.1% compared to the
first quarter of 1998, due to lower average interest rates and lower debt
levels.
Net income and net income per share for the first quarter of 1999 increased 8.6%
and 9%, respectively, over the same period of 1998, due to increased pre-tax
earnings and a lower effective tax rate. The effective tax rate decreased to 41%
in 1999 from 44% during the first quarter of 1998, primarily due to the
implementation of international tax planning strategies.
Liquidity and Capital Resources
Cash used by operating activities for the first quarter of 1999 increased $19.7
million over the first quarter of 1998, primarily due to increased working
capital, decreased non-current liabilities and increased non-current assets.
Cash used by investing activities for the first quarter of 1999 declined $2.5
million compared to the same period a year ago, primarily due to decreased
payments for acquired businesses offset by increased capital expenditures.
Cash provided by financing activities during the first quarter of 1999 increased
$11.5 million over the same period a year ago as the Company utilized credit
facilities to fund a portion of first quarter 1999 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 July 1, 1999, to shareholders of record on June 10, 1999.
Page 8 of 13
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 is actively engaged in 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:
o Inventory - identification of items to be assessed for Y2K readiness.
o Assessment - prioritizing the inventoried items, assessing their Y2K
readiness and defining corrective actions and developing contingency
plans.
o 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 is expected to be completed during the third quarter of
1999.
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 has been completed and deployment of these Non-IT systems
is expected to be completed during the third quarter of 1999.
The Company is in the process of contacting significant raw material and service
suppliers regarding their Y2K readiness. The Company's supplier readiness
program focuses on those suppliers considered essential for the prevention of a
material disruption to the Company's business operation. The Company will make
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 program is
expected to be completed during the third quarter of 1999.
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 $1.5
million will be spent during the remainder of fiscal year 1999. Approximately
70% of total Y2K cost is comprised of equipment and software replacement costs
with the balance being comprised of assessment and remediation costs. The
Company expects all costs to be funded with operating cash flow. Y2K costs are
expensed as incurred except for new systems and equipment, which are capitalized
and charged to expense over the estimated useful life of the related asset.
Page 9 of 13
While the Company believes that its efforts to address Y2K issues will be
successfully completed in a timely manner, the Company recognizes that failing
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. 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.
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 10 of 13
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 February 28, 1999.
Note: All other item numbers under this section are not applicable.
Page 11 of 13
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LILLY INDUSTRIES, INC. (Registrant)
April 13, 1999
/s/ Douglas W. Huemme
-----------------------------------
Douglas W. Huemme
Chairman and Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
April 13, 1999
/s/ John C. Elbin
-------------------------------
John C. Elbin
Vice President, Chief Financial
Officer and Secretary
Page 12 of 13