UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission File Number: 1-7558
LAWTER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1370818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
990 Skokie Boulevard; Northbrook, Illinois 60062
(Address of principal executive offices)
(847) 498-4700
(Registrant's telephone number, including area code)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock $1.00 par value per share - 45,359,035 shares outstanding as
of April 30, 1997.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that disclosures are adequate to make
the information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of Lawter
International, Inc. and Subsidiaries as of March 31, 1997 and December 31, 1996
and the results of their operations for the three months ended March 31, 1997
and 1996, and the statements of cash flows for the three months ended March 31,
1997 and 1996, have been included. It should be noted that these interim
statements are based on certain annual estimates such as the final level of LIFO
inventories and the provision for income taxes. These and other similar items
may be subject to year end adjustments. The results of operations for such
interim periods are not necessarily indicative of the results for the full year.
Lawter International, Inc. and Subsidiaries
Condensed Statements of Earnings
(Shown in thousands)
Three Months Ended March 31
---------------------------
1997 1996
-------- --------
Net Sales $ 50,140 $ 49,366
Cost of Products Sold 34,524 35,810
-------- --------
Gross Margin $ 15,616 $ 13,556
Selling, Admin. Research and
Distribution Expenses 7,563 6,286
-------- --------
Income from Operations $ 8,053 $ 7,270
Investment Income 754 1,171
-------- --------
Earnings before Income Taxes $ 8,807 $ 8,441
Provision for Income Taxes 2,869 2,276
-------- --------
Net Earnings $ 5,938 $ 6,165
======== ========
Earnings per Share of Common Stock (Note 2) $ .13 $ .14
Dividends per Share of Common Stock $ .10 $ .10
Weighted Average Shares Outstanding 45,355 45,071
The accompanying notes to the condensed financial statements are an integral
part of these statements.
-2-
Lawter International, Inc. and Subsidiaries
Condensed Balance Sheets
(Shown in thousands)
March 31 December 31
-------- -----------
Assets 1997 1996
- -------- -------- --------
Current Assets
Cash $ 7,227 $ 8,221
Time Deposits 45,414 46,710
Marketable Securities 1,680 2,400
Accounts Receivable (net) 48,555 47,671
Inventories (Note 1)
Raw Materials 25,148 24,094
Finished Goods 24,248 25,517
Prepaid Expenses 2,000 1,974
-------- --------
Total Current Assets $154,272 $156,587
-------- --------
Property, Plant and Equipment $135,897 $141,346
Less Accumulated Depreciation (47,649) (49,229)
-------- --------
Net Property $ 88,248 $ 92,117
-------- --------
Investment in Affiliates $ 25,548 $ 24,833
-------- --------
Intangibles and Other Assets $ 18,872 $ 19,586
-------- --------
Total Assets $286,940 $293,123
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts Payable and Accrued Expenses $ 30,829 $ 41,844
Short-Term Borrowings 45,461 38,962
Income Taxes Payable 2,951 1,371
-------- --------
Total Current Liabilities $ 79,241 $ 82,177
-------- --------
Deferred Income Taxes $ 36,155 $ 36,281
-------- --------
Long-Term Obligations $ 29,050 $ 29,050
-------- --------
Total Liabilities $144,446 $147,508
-------- --------
Stockholders' Equity
Preferred Stock (None Issued) $ --- $ ---
Common Stock 45,359 45,349
Additional Paid-in Capital 14,822 14,711
Retained Earnings 91,319 89,917
Cumulative Translation Adjustments (8,524) (3,826)
Other (482) (536)
-------- --------
Net Stockholders' Equity $142,494 $145,615
-------- --------
Total Liabilities and Equity $286,940 $293,123
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these balance sheets.
-3-
Lawter International, Inc. and Subsidiaries
Condensed Statements of Cash Flows
(Shown in thousands)
Three Months Ended March 31
---------------------------
1997 1996
-------- --------
Cash Flow from Operating Activities:
Net Earnings $ 5,938 $ 6,165
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities-
Depreciation and Amortization 1,358 1,407
Deferred Income Taxes --- (152)
Undistributed Equity Income (715) (614)
Deferred Exchange Gain (Loss) (178) 271
Purchase of Marketable Securities --- (19,623)
Proceeds from Sales of Marketable Securities 739 2,959
Net (Gain) Loss from Marketable Securities (1) (53)
(Increase) Decrease in Current Assets-
Accounts Receivable (2,837) 442
Inventories (1,660) 2,091
Prepaid Expenses (133) (276)
Increase (Decrease) in Current Liabilities-
Accounts Payable and Accrued Expenses (9,516) (1,620)
Income Taxes Payable 1,598 (58)
-------- --------
Net Cash Used for Operating Activities $ (5,407) $ (9,061)
-------- --------
Cash Flow from Investing Activities:
Expenditures for Property, Plant
& Equipment - Net $ (1,682) $ (9,456)
Loans to Officers (6) ---
Repayment of Officers' Loans 43 ---
-------- --------
Net Cash Used for Investing Activities $ (1,645) $ (9,456)
-------- --------
Cash Flow from Financing Activities:
Exercise of Stock Options $ 121 $ 98
Proceeds from Long-Term Borrowings --- 25,000
Payment of Short-Term Borrowings --- (6,000)
Proceeds from Short-Term Borrowings 9,610 5,949
Cash Dividends Paid (4,535) (4,507)
-------- --------
Net Cash Provided by Financing Activities $ 5,196 $ 20,540
-------- --------
Effect of Exchange Rate Changes on Cash $ (434) $ (112)
-------- --------
Increase (Decrease) in Cash and Equivalents $ (2,290) $ 1,911
Cash and Equivalents, Beginning of Period 54,931 63,680
-------- --------
Cash and Equivalents, End of Period $ 52,641 $ 65,591
======== ========
The accompanying notes to the condensed financial statements are an integral
part of these statements.
-4-
Lawter International, Inc. and Subsidiaries
Notes to the Condensed Financial Statements
Note 1. Inventories
At year end, the Company takes a complete physical inventory to determine
inventory values. During interim periods, the Company uses a combination of
perpetual inventory records, physical inventories and the gross profit method to
determine inventory values.
The Company values the majority of its domestic inventories at last-in, first-
out (LIFO) cost which is not in excess of net realizable value. The Company's
other inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.
Because the inventory determination under the LIFO method can only be made at
the end of each fiscal year based on the inventory levels and costs at that
point, interim LIFO determinations, including that at March 31, 1997, must
necessarily be based on management's estimates of expected year end inventory
levels and costs. Such future estimates of inventory levels and prices are
subject to many forces beyond the control of management.
Note 2. Earnings per Share
Earnings per share of common stock are computed on the weighted average shares
outstanding during the respective periods. Net earnings per share would not be
materially different from reported earnings per share if all outstanding stock
options were exercised.
Note 3. Restructuring Charges
In the fourth quarter of 1995, a new management team was formed. The new
management, taking into account a change in market conditions, developed a new
corporate strategy. Part of the decision making process included an evaluation
of the feasibility of continuing to utilize older manufacturing facilities.
With the anticipated completion of construction of the new ink vehicle and resin
facility in Europe combined with the new ink vehicle and resin facility in the
U. S., the Company decided to implement a restructuring plan. This plan
included the decommissioning of older ink vehicle and resin plants. This
resulted in a 1995 fourth quarter pretax charge of $8,449,000, of which
$2,791,000 was charged to Selling, Administrative, Research and Distribution
expenses for personnel redundancy and $5,658,000 was charged to Cost of Products
Sold for site decommissioning. These restructuring activities commenced in the
fourth quarter of 1995 and will continue through the middle of 1997.
The personnel redundancy costs relate to cash outlays for benefits to be paid to
the manufacturing and office employees at older plants in Europe and North
America. The labor force will be reduced by approximately 100 positions when
the restructuring plan is completed, of which 84 positions have already been
eliminated. As of March 31, 1997, employee head count was down to 509 from a
high of 604 employees in 1995. Redundancy payments charged against the reserve
through March 31, 1997 were $2,372,000 including $94,000 utilized in the first
quarter of 1997.
The site decommissioning costs represent demolition, cleanup and asset write
down costs for older facilities in Europe and North America. Included in the
$5,658,000, is $4,461,000 for non-cash items which relate to the write down of
the net book value of the assets at these locations. As of March 31, 1997,
-5-
four manufacturing facilities in North America and one manufacturing facility in
Europe were shut down and/or sold, and one manufacturing facility in Europe was
in the final stages of being shut down. The costs charged against the reserve
related to these facilities were $4,324,000 comprised of $3,738,000 for the
write down of the net book value of the assets, $161,000 for cleanup costs,
$650,000 for costs incurred during the wind down period of the two European
facilities, $14,000 for equipment dismantling and $191,000 for relocation costs,
partially offset by the proceeds of $430,000 from the sale of one of the North
American facilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Liquidity and Capital Resources
Lawter's cash and equivalents, net of short-term borrowings, decreased
$8,800,000 from $16,000,000 at December 31, 1996 to $7,200,000 at March 31,
1997. The decrease in net cash and equivalents was due primarily to payments of
liabilities related to the purchase of a division of Wolstenholme International
Limited, the initial cash outflows to operate the businesses acquired from
Wolstenholme International Limited and Hercules Inc. and the build up of certain
raw materials due to favorable pricing. The Company generally relies on
internally generated funds from operations to satisfy working capital
requirements and to fund capital expenditures. However, in certain
circumstances, the Company finds it is more advantageous to borrow funds to
satisfy these requirements.
The capital expenditures planned for the near future include construction of a
new corporate headquarters in Pleasant Prairie, Wisconsin as well as additions
to existing facilities elsewhere. The Company currently anticipates using
internally generated funds for the majority of these capital expenditures.
Results of Operations
SALES. The Company's consolidated net sales increased 2% in the first quarter
of 1997 when compared to the first quarter of 1996. Included in the first
quarter of 1997 are $6,200,000 in sales of products, mostly in Europe, related
to the Wolstenholme and Hercules acquisitions. Excluding the Wolstenholme and
Hercules products, sales were down 11% due primarily to 1) lower volume both
domestically and in Europe due to competitive factors and 2) the impact of a
stronger U. S. dollar versus European currencies.
GROSS MARGINS. Gross margins as a percent of net sales were 31.1% and 27.5% for
the quarters ended March 31, 1997 and 1996, respectively. Included in the gross
margin in 1997 was a $1,675,000 benefit for business interruption insurance
accrued for losses resulting from a shutdown of the Irish facility in 1996.
Excluding this benefit, the first quarter 1997 gross margin was 27.8%. The
higher percentage in 1997 was due to lower raw material costs domestically and
the lower costs as a result of the restructuring plan (See "Restructuring Plan"
below), partially offset by higher costs relating to tolling agreements for
producing Hercules and Wolstenholme products. In the second quarter of 1997,
the effects of these costs will dissipate as the major portion of the tolling
agreements ended at March 31,1997 and production was taken internal.
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses increased from $6,286,000 in
the quarter ended March 31, 1996 to $7,563,000 in the quarter ended March 31,
-6-
1997 due to costs associated with the Wolstenholme acquisition, foreign exchange
transaction losses, and higher research, administrative and distribution costs
in the U. S.
NET INVESTMENT INCOME. Net investment income in the quarter ended March 31,
1997 decreased from the quarter ended March 31, 1996 due primarily to decreased
funds available for investments as funds were used to finance acquisitions and
capital expenditures.
INCOME TAXES. The effective tax rates were 32.6% and 27.0% for the three months
ended March 31, 1997 and 1996, respectively. The higher rate in 1997 was the
result of increased earnings at higher taxed locations in Europe. In subsequent
periods the effective tax rate is expected to be lower than the first quarter.
Other Matters
RESTRUCTURING CHARGES. In the fourth quarter of 1995, a new management team was
formed. The new management, taking into account a change in market conditions,
developed a new corporate strategy. Part of the decision making process
included an evaluation of the feasibility of continuing to utilize older
manufacturing facilities. With the anticipated completion of construction of
the new ink vehicle and resin facility in Europe combined with the new ink
vehicle and resin facility in the U. S., the Company decided to implement a
restructuring plan. This plan included the decommissioning of older ink vehicle
and resin plants. This resulted in a 1995 fourth quarter pretax charge of
$8,449,000, of which $2,791,000 was charged to Selling, Administrative, Research
and Distribution expenses for personnel redundancy and $5,658,000 was charged to
Cost of Products Sold for site decommissioning. These restructuring activities
commenced in the fourth quarter of 1995 and will continue through the middle of
1997.
The personnel redundancy costs relate to cash outlays for benefits to be paid to
the manufacturing and office employees at older plants in Europe and North
America. The labor force will be reduced by approximately 100 positions when
the restructuring plan is completed, of which 84 positions have already been
eliminated. As of March 31, 1997, employee head count was down to 509 from a
high of 604 employees in 1995. Redundancy payments charged against the reserve
through March 31, 1997 were $2,372,000 including $94,000 utilized in the first
quarter of 1997.
The site decommissioning costs represent demolition, cleanup and asset write
down costs for older facilities in Europe and North America. Included in the
$5,658,000, is $4,461,000 for non-cash items which relate to the write down of
the net book value of the assets at these locations. As of March 31, 1997,
four manufacturing facilities in North America and one manufacturing facility in
Europe were shut down and/or sold, and one manufacturing facility in Europe was
in the final stages of being shut down. The costs charged against the reserve
related to these facilities were $4,324,000 comprised of $3,738,000 for the
write down of the net book value of the assets, $161,000 for cleanup costs,
$650,000 for costs incurred during the wind down period of the two European
facilities, $14,000 for equipment dismantling and $191,000 for relocation costs,
partially offset by the proceeds of $430,000 from the sale of one of the North
American facilities.
LOOKING FORWARD. This Form 10-Q contains forward-looking statements which are
not historical facts. These statements involve risks and uncertainties that
could cause actual results to differ materially, including, but not limited to,
foreign currency rate fluctuations, competitive factors, raw material costs and
certain global and regional economic conditions and factors which are beyond the
Company's control.
-7-
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held on April 24, 1997, shareholders voted
to approve an amendment to the 1992 Non-Qualified Stock Option Plan and to
approve an amendment to the 1995 Non-Qualified Stock Option Plan for Non-
Employee Directors as proposed in the Company's 1997 Proxy Statement to
Stockholders.
The results of the vote on the proposal to approve the amendment to the 1992
Non-Qualified Stock Option Plan were 37,467,755 affirmative votes; 913,894
negative votes; and 1,395,826 abstentions.
The results of the vote on the proposal to approve the amendment to the 1995
Non-Qualified Stock Option Plan for Non-Employee Directors were 37,194,101
affirmative votes; 1,184,621 negative votes; and 1,398,753 abstentions.
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.
LAWTER INTERNATIONAL, INC.
--------------------------
(Registrant)
May 14, 1997 /s/ John P. O'Mahoney
- ------------ --------------------------
John P. O'Mahoney
Vice Chairman and
Chief Executive Officer
May 14, 1997 /s/ Mark W. Joslin
- ------------ --------------------------
Mark W. Joslin
Chief Financial Officer
and Treasurer
-8-
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