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, 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 June 30, 1999:
Class A Common 22,786,000
Class B Common 441,000
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
1999 1998
-------- --------
Net sales $171,375 $159,198
Costs and expenses
Cost of products sold 104,257 97,404
Selling, general and administrative 41,278 37,836
Research and development 5,358 4,929
-------- --------
150,893 140,169
-------- --------
OPERATING INCOME 20,482 19,029
Sundry expense 254 61
Interest expense, net 3,911 4,258
-------- --------
INCOME BEFORE INCOME TAXES 16,317 14,710
Income taxes 6,690 5,995
-------- --------
NET INCOME $ 9,627 $ 8,715
======== ========
Cash dividends per share $ 0.08 $ 0.08
Net income per share
Basic $ 0.41 $ 0.38
Diluted $ 0.41 $ 0.37
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
1999 1998
-------- --------
Net sales $317,514 $302,532
Costs and expenses
Cost of products sold 194,340 187,307
Selling, general and administrative 78,371 72,122
Research and development 10,517 10,295
-------- --------
283,228 269,724
-------- --------
OPERATING INCOME 34,286 32,808
Sundry expense 493 128
Interest expense, net 8,012 8,792
-------- --------
INCOME BEFORE INCOME TAXES 25,781 23,888
Income taxes 10,570 10,033
-------- --------
NET INCOME $ 15,211 $ 13,855
======== ========
Cash dividends per share $ 0.16 $ 0.16
Net income per share
Basic $ 0.65 $ 0.60
Diluted $ 0.65 $ 0.59
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
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,484 $ 13,326
Accounts receivable, less allowances
for doubtful accounts (5/31/99, $1,960;
11/30/98, $1,981) 92,260 82,039
Inventories 55,827 50,796
Other 7,293 5,871
--------- ---------
TOTAL CURRENT ASSETS 162,864 152,032
OTHER ASSETS 26,019 21,257
INTANGIBLE ASSETS 237,785 241,028
PROPERTY AND EQUIPMENT
Land, buildings and equipment 177,250 162,357
Accumulated depreciation (64,607) (60,189)
--------- ---------
112,643 102,168
$ 539,311 $ 516,485
========= =========
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
1999 1998
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 68,894 $ 66,156
Other 31,931 35,805
--------- ---------
TOTAL CURRENT LIABILITIES 100,825 101,961
LONG-TERM DEBT 219,800 203,700
OTHER LIABILITIES 40,435 45,249
SHAREHOLDERS' EQUITY
Capital stock:
Class A (limited voting) 15,509 15,459
Class B (voting) 300 300
Additional capital 83,187 81,890
Retained earnings 119,411 107,914
Accumulated other comprehensive income (3,336) (4,096)
Cost of capital stock in treasury (36,820) (35,892)
--------- ---------
178,251 165,575
--------- ---------
$ 539,311 $ 516,485
========= =========
See notes to consolidated condensed financial statements.
Page 5 of 14
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands)
Six Months Ended
May 31 May 31
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 15,211 $ 13,855
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 5,265 4,855
Amortization 5,657 5,092
Changes in operating assets and liabilities net
of effects from acquired businesses:
Accounts receivable (10,053) (865)
Inventories (5,007) (244)
Accounts payable and accrued expenses (1,211) (4,555)
Sundry (10,898) 2,924
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,036) 21,062
INVESTING ACTIVITIES
Purchases of property and equipment (15,981) (5,288)
Payments for acquired businesses (2,721) (11,253)
Sundry 1,091 4,468
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (17,611) (12,073)
FINANCING ACTIVITIES
Dividends paid (3,713) (3,700)
Proceeds from borrowings 16,100 11,000
Principal payments on borrowings 0 (14,200)
Sundry 418 1,088
-------- --------
NET CASH PROVIDED(USED) BY FINANCING ACTIVITIES 12,805 (5,812)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,842) 3,177
Cash and cash equivalents at beginning of year 13,326 10,079
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,484 $ 13,256
======== ========
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, 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 Six Months Ended
May 31 May 31
1999 1998 1999 1998
------------------------ ------------------------------
Basic
Weighted-average common shares
outstanding 23,200 23,138 23,190 23,127
====== ====== ====== ======
Diluted
Weighted-average common shares
outstanding 23,200 23,138 23,190 23,127
Dilutive effect of stock options 130 265 140 261
------ ------ ------ ------
Average common shares outstanding
assuming dilution 23,330 23,403 23,330 23,388
====== ====== ====== ======
Page 7 of 14
NOTE C--INVENTORIES
The principal inventory classifications are summarized as follows (in
thousands):
May 31 November 30
1999 1998
------- -------
Finished products $32,119 $29,761
Raw materials 29,584 27,411
------- -------
61,703 57,172
Less adjustment of certain
inventories to last in,
first out (LIFO) basis 5,876 6,376
------- -------
$55,827 $50,796
======= =======
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 $10,172,000 and
$8,221,000 for the three months ended May 31,1999 and 1998, respectively. Total
comprehensive income was $15,971,000 and $12,852,000 for the six months ended
May 31, 1999 and 1998, respectively. Adoption of this disclosure standard had no
effect on the Company's operating results or financial position.
Page 8 of 14
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Results of Operations
Sales, operating income, net income, and diluted earnings per share were at
all-time record quarterly levels. For the second quarter ended May 31, 1999,
sales increased 7.7% to $171.4 million, operating income was also up 7.6% at
$20.5 million, and net income rose 10.5% to $9.6 million. Diluted earnings per
share for the second quarter increased 10.8% to $.41 compared to $.37 last year.
Sales for the six month period ended May 31, 1999 were up 5.0% at $317.5 million
compared to $302.5 million the same period last year. Net income for the first
half of fiscal year 1999 increased by 9.8% to $15.2 million, or $.65 per diluted
share.
The improved rate of sales growth in the second quarter and first half of the
year was attributable to strong volume increases in wood coatings, metal
coatings, and composites. Sales growth in these markets was a result of strong
powder coating sales, increases in market share, strong domestic construction
and transportation markets, and improved demand in the Asia/Pacific region.
Sales of agriculture and construction equipment liquid metal coatings declined
significantly from a year ago due to soft demand in these markets.
Gross profit margin for the second quarter of 1999 improved to 39.2% of sales
compared with 38.8% last year. For the six months ended May 31, 1999 gross
profit margin rose to 38.8%, compared to 38.1% in the prior year. The
improvement results from supply chain management initiatives which have lowered
raw material costs. Improved gross profit margin was offset by increased selling
expenses associated with business building initiatives, international expansion,
and growth of the fabric protection business.
Liquidity and Capital Resources
Cash used by operating activities for the six months ended May 31, 1999
increased $22.1 million over the first half of 1998, primarily due to increased
working capital, decreased non-current liabilities and increased non-current
assets.
Cash used by investing activities for the six months ended May 31, 1999
increased $5.5 million compared to the same period a year ago, primarily due to
increased capital expenditures offset by decreased payments for acquired
businesses.
Cash provided by financing activities during the six months ended May 31, 1999
increased $18.6 million over the same period a year ago as the Company utilized
credit facilities to fund a portion of operating and investing cash flows for
the first half of the year.
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 October 1, 1999, to shareholders of record on September
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 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.
Page 9 of 14
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 $1.0
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.
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 release 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.
Page 10 of 14
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 11 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 22,
1999, the following directors were elected by the votes indicated:
Stock Votes
Director Class Votes For Withheld
-------- ----- --------- --------
Thomas E. Reilly, Jr. A 18,258,748 151,869
John D. Peterson A 18,258,644 151,973
James M. Cornelius A 18,258,713 151,904
Paul K. Gaston A 18,253,552 157,065
William C. Dorris B 437,037 0
John C. Elbin B 437,037 0
Douglas W. Huemme B 437,037 0
Harry Morrison, Ph.D. B 437,037 0
Norma J. Oman B 437,037 0
Robert A. Taylor B 437,037 0
Shareholders of record on February 16, 1999 were entitled to notice of, and to
vote at, the Annual Meeting of Shareholders. On that date 22,772,474 shares of
the Company's Class A Stock and 437,037 shares of the Company's Class B Stock
were outstanding.
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 May 31, 1999.
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 12, 1999
/s/ Douglas W. Huemme
--------------------------------
Douglas W. Huemme
Chairman and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
July 12, 1999
/s/ John C. Elbin
--------------------------------
John C. Elbin
Vice President,
Chief Financial Officer
and Secretary
Page 13 of 14