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 September 30, 1998
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.)
8601 95th Street; Pleasant Prairie, Wisconsin 53158
(Address of principal executive offices)
(414) 947-7300
(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 - 32,781,570 shares outstanding as
of October 30, 1998.
<PAGE>
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 September 30, 1998 and December 31,
1997 and the results of their operations for the three months and nine months
ended September 30, 1998 and 1997, and the statements of cash flows for the nine
months ended September 30, 1998 and 1997, 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.
<TABLE>
<CAPTION>
Lawter International, Inc. and Subsidiaries
Condensed Statements of Earnings
(Shown in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
-------- -------- -------- --------
Net Sales $ 53,024 $ 50,411 $157,376 $151,208
Cost of Products Sold 36,876 34,397 109,478 103,544
-------- -------- -------- --------
Gross Margin $ 16,148 $ 16,014 $ 47,898 $ 47,664
Selling, Administrative, Research
and Distribution Expenses 6,999 6,818 21,230 20,172
Subsidiary Closure Costs (Note 3) --- 9,535 --- 9,535
-------- -------- -------- --------
Income from Operations $ 9,149 $ (339) $ 26,668 $ 17,957
Investment Income 496 1,255 2,106 4,477
Interest Expense (2,437) ( 709) (5,614) (2,607)
Sale of Affiliate (Note 4) --- 32,030 --- 32,030
-------- -------- -------- --------
Earnings before Income Taxes $ 7,208 $ 32,237 $ 23,160 $ 51,857
Provision for Income Taxes 2,162 15,138 6,948 21,254
-------- -------- -------- --------
Net Earnings $ 5,046 $ 17,099 $ 16,212 $ 30,603
======== ======== ======== ========
Earnings per Share of Common
Stock (Note 2) $ .15 $ .37 $ .43 $ .67
Dividends per Share of Common Stock $ .10 $ .10 $ .30 $ .30
Weighted Average Shares Outstanding 33,777 45,467 37,752 45,401
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
Lawter International, Inc. and Subsidiaries
Condensed Balance Sheets
(Shown in thousands)
<S> <C> <C>
Sept. 30 Dec. 31
-------- --------
Assets 1998 1997
- -------- -------- --------
Current Assets
Cash $ 15,947 $ 8,052
Time Deposits 33,670 74,819
Accounts Receivable (net) 43,397 44,170
Inventories (Note 1)
Raw Materials 29,917 21,132
Finished Goods 21,255 21,958
Prepaid Expenses 781 1,051
-------- --------
Total Current Assets $144,967 $171,182
-------- --------
Property, Plant and Equipment $133,999 $127,451
Less Accumulated Depreciation (41,992) (38,803)
-------- --------
Net Property $ 92,007 $ 88,648
-------- --------
Intangibles and Other Assets $ 19,442 $ 16,354
-------- --------
Total Assets $256,416 $276,184
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts Payable $ 12,964 $ 12,324
Short-Term Borrowings 28,594 22,993
Accrued Expenses 14,392 13,805
Income Taxes Payable 5,457 4,099
-------- --------
Total Current Liabilities $ 61,407 $ 53,221
-------- --------
Deferred Income Taxes $ 32,690 $ 32,556
-------- --------
Long-Term Obligations $129,050 $ 29,050
-------- --------
Total Liabilities $223,147 $114,827
-------- --------
Stockholders' Equity
Preferred Stock (None Issued) $ --- $ ---
Common Stock 45,533 45,533
Treasury Stock (136,520) ---
Additional Paid-in Capital 16,747 16,747
Retained Earnings 113,919 109,070
Cumulative Translation Adjustments (5,933) (9,535)
Other (477) (458)
-------- --------
Net Stockholders' Equity $ 33,269 $161,357
-------- --------
Total Liabilities and Equity $256,416 $276,184
======== ========
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these balance sheets.
-3-
<PAGE>
<TABLE>
<CAPTION>
Lawter International, Inc. and Subsidiaries
Condensed Statements of Cash Flows
(Shown in thousands)
Nine Months Ended Sept. 30
---------------------------
<S> <C> <C>
1998 1997
-------- --------
Cash Flow from Operating Activities:
Net Earnings $ 16,212 $ 30,603
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities-
Depreciation and Amortization 4,694 4,340
Deferred Income Taxes 91 ---
Undistributed Equity Income --- (1,456)
Deferred Exchange Gain (Loss) 225 3,206
Proceeds from Sales of Marketable Securities --- 2,502
Net (Gain) Loss from Marketable Securities --- (2)
Gain on Sale of Business --- (738)
Gain on Sale of Hach (33,730)
(Increase) Decrease in Current Assets-
Accounts Receivable 1,539 3,902
Inventories (6,268) 2,593
Prepaid Expenses 292 610
Increase (Decrease) in Current Liabilities-
Accounts Payable 350 (3,570)
Accrued Expenses 300 (3,625)
Income Taxes Payable 1,145 1,114
-------- --------
Net Cash Provided by Operating Activities $ 18,580 $ 5,749
-------- --------
Cash Flow from Investing Activities:
Expenditures for Property, Plant
& Equipment - Net $ (4,768) $( 3,438)
Purchase of Business-Net of Cash (3,200) ( 9,219)
Sale of Business --- 4,856
Proceeds from sale of Hach 59,987
Loans to Officers (18) (18)
Repayment of Officers' Loans --- 43
-------- --------
Net Cash Used for Investing Activities $ (7,986) $ 52,211
-------- --------
Cash Flow from Financing Activities:
Exercise of Stock Options $ --- $ 2,209
Common Stock Repurchase (136,520) ---
Payment of Long-Term Borrowings --- (50)
Proceeds from Long-Term Borrowings 100,000 ---
Payment of Short-Term Borrowings --- (8,685)
Proceeds from Short-Term Borrowings 3,994 ---
Cash Dividends Paid (11,358) (13,619)
-------- --------
Net Cash (Used for) Provided by
Financing Activities $(43,884) $(20,145)
-------- --------
Effect of Exchange Rate Changes on Cash $ 36 $ (849)
-------- --------
Increase (Decrease) in Cash and Equivalents $(33,254) $ 36,966
Cash and Equivalents, Beginning of Period 82,871 54,931
-------- --------
Cash and Equivalents, End of Period $ 49,617 $ 91,897
======== ========
</TABLE>
The accompanying notes to the condensed financial statements are an integral
part of these statements.
-4-
<PAGE>
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 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 September 30, 1998, 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. Subsidiary Closure Costs
In 1997, the Subsidiary Closure Costs represent costs associated with closing
several facilities, mainly in Europe. The after tax effect of these costs was
$.20 per share.
Note 4. Sale of Affiliate
During the third quarter of 1997, the Company sold its 28% stake in Hach Company
common stock for $59,987,000. This resulted in an after tax gain of $19,570,000
or $.43 per share.
Note 5. New Accounting Pronouncements
Effective January 1, 1998, Lawter adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income". This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an enterprise classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and paid-in capital in the equity section of a statement of
financial position. Unrealized translation adjustments is currently the only
type of other comprehensive income that the Company has.
-5-
<PAGE>
Lawter's comprehensive earnings were as follows:
(In 000's) Three Months Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
Net Earnings $ 5,046 $17,099 $16,212 $30,603
Unrealized Translation Adj. 4,553 1,980 3,602 (4,384)
------- ------- ------- -------
Total Comprehensive Income $ 9,599 $19,079 $19,814 $26,219
======= ======= ======= =======
The Company will be adopting SFAS No. 131 "Segment Reporting" in 1998.
SFAS No. 131 does not impact the Company's financial statements.
The Company will be adopting SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" in 1998. Additional disclosure will be
required in annual financial statements. SFAS No. 132 does not impact the
Company's interim reporting in 1998.
The Company will be adopting SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities" in 1999. SFAS No. 133 will have no significant impact
since no derivatives are in use at this time.
In 1998, the American Institute of Certified Public Accountants issued Statement
of Position 98-5 "Start-up, Pre-Operating and Organization Costs." This
statement requires start-up costs to be expensed as incurred versus the current
practice of capitalizing these costs. This statement will not have a material
impact on the Company and will be adopted in 1999.
Note 6. Repurchase of Lawter Stock
On March 19, 1998, Lawter entered into an agreement with the Estate of Daniel J.
Terra for the repurchase by Lawter of the Estate's entire holdings of Lawter
Common Stock. The 11,503,130 shares, representing approximately 25.4% of
Lawter's outstanding Common Stock, were purchased for $11.375 per share, for a
total purchase price of $130,848,000 plus related costs on April 1, 1998. These
shares were placed in Treasury Stock at cost.
This repurchase was financed through a $100,000,000 note issued to Prudential
Insurance Company of America at an interest rate of 6.91%, with the principal to
be repaid in five annual installments of $20,000,000 each beginning April 1,
2006 with a final maturity date of April 1, 2010. The remaining amount was
funded with cash on hand.
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
$38,900,000 from $59,900,000 at December 31, 1997 to $21,000,000 at September
30, 1998. The decrease in net cash and equivalents was due primarily to the
repurchase of Lawter stock and the build-up of certain strategic raw materials
due to favorable pricing.
On April 1, 1998, Lawter repurchased approximately 25.4% of the Company's
outstanding stock for a purchase price of approximately $132 million by
utilizing $32 million in cash on hand and incurring a $100 million note payable
to the Prudential Insurance Company of America. The note payable is due in five
-6-
<PAGE>
annual principal installments of $20 million each beginning April 1, 2006 with a
final maturity date of April 1, 2010. This changes the complexion of the
Company to one that is more leveraged. Management believes that the Company's
cash reserves will be adequate for its currently foreseeable working capital
needs and future capital expenditures.
Capital expenditures in the near future will include additions and improvements
to existing facilities. 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 5% in the third quarter
of 1998 when compared to the third quarter of 1997. Sales volume increased by
6%. Regionally, sales volume increased 13% in North America and 5% in the
Pacrim, while European sales volume was down by 3%. European sales were
affected by competitive pressures and management's decision to discontinue some
low margin business.
Consolidated net sales for the nine months ended September 30, 1998 increased 4%
over sales for the nine months ended September 30, 1997. Sales gains as a
result of a 7% volume increase were adversely affected by a stronger dollar.
GROSS MARGINS. Gross margins as a percent of net sales were 30.5% and 31.8% for
the quarters ended September 30, 1998 and 1997, respectively and 30.4% and 31.5%
for the nine months ended September 30, 1998 and 1997, respectively. Included
in the 1997 gross margins were business interruption proceeds and a gain on the
sale of a previously decommissioned manufacturing facility. Excluding these
items the gross margins in 1997 were 29.2% for both the three and nine months
ended September 30, 1997. The higher gross margin percentages in 1998 excluding
these items were due to lower raw material costs in both Europe and the U.S.
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses increased to $6,999,000 in
the quarter ended September 30, 1998 versus $6,818,000 in the quarter ended
September 30, 1997. Selling, administrative, research and distribution expenses
increased from $20,172,000 in the first nine months of 1997 to $21,230,000 in
the first nine months of 1998. The increase in 1998 selling, administrative,
research and distribution expenses was due to higher freight costs associated
with the higher sales volume.
SUBSIDIARY CLOSURE COSTS. In 1997, the Subsidiary Closure Costs represent costs
associated with closing several facilities, mainly in Europe. The after tax
effect of these costs was $.20 per share.
INVESTMENT INCOME. Investment income in both the quarter and nine months ended
September 30, 1998 decreased from the same periods in 1997 due primarily to
decreased funds available for investments in 1998 as funds were used for the
repurchase of Lawter stock.
INTEREST EXPENSE. Interest expense in both the quarter and nine months ended
September 30, 1998 increased from the same periods in 1997 due to interest
expense incurred as a result of the long-term borrowing used to finance the
stock repurchase in 1998.
SALE OF AFFILIATE. During the third quarter of 1997, the Company sold its 28%
stake in Hach Company common stock for $59,987,000. This resulted in an after
tax gain of $19,570,000 or $.43 per share.
INCOME TAXES. The effective tax rate was 30.0% for the three months and nine
months ended September 30, 1998, respectively versus 47.0% and 41.0% for the
-7-
<PAGE>
three months and nine months ended September 30, 1997. The higher rates in 1997
were due to the higher tax rate on the sale of Hach Company common stock along
with the lack of tax benefit on the subsidiary closure costs.
Other Matters
STOCK REPURCHASE. On March 19, 1998, Lawter entered into an agreement with the
Estate of Daniel J. Terra for the repurchase by Lawter of the Estate's entire
holdings of Lawter Common Stock. The 11,503,130 shares, representing
approximately 25.4% of Lawter's outstanding Common Stock, were purchased for
$11.375 per share, for a total purchase price of $130,848,000 plus related
costs on April 1, 1998. These shares were placed in Treasury Stock at cost.
This repurchase was financed through a $100,000,000 note issued to Prudential
Insurance Company of America at an interest rate of 6.91%, with the principal to
be repaid in five annual installments of $20,000,000 each beginning April 1,
2006 with a final maturity date of April 1, 2010. The remaining amount was
funded with cash on hand.
YEAR 2000. The Company is taking the actions described below to evaluate and
address its exposure to year 2000 ("Y2K") issues, which may result from the
inability of some computer programs to identify the Year 2000 properly,
potentially leading to errors or system failure.
The Company is conducting Y2K reviews of each of the following areas: (i)
internal information systems, (ii) embedded systems, (iii) research and
development equipment, and (iv) suppliers providing products and services to the
Company.
The Company's internal information systems have been inventoried and assessed.
The Company believes its financial and manufacturing software in North America
is fully Y2K compliant. Its North American hardware and operating system
software are scheduled to be upgraded by the first quarter of 1999. In Europe,
all of the Company's internal information systems software and hardware is
scheduled to be fully compliant by the end of 1998. In the Pacrim, where the
Company has smaller operations, Y2K issues are being evaluated and addressed,
but a target completion date for such evaluation has not yet been established.
Embedded systems, specifically the Foxboro production system, which is used in
the Company's resin facilities in Wisconsin and Kallo, Belgium, is currently in
the process of being evaluated in Belgium, and is scheduled for assessment
starting November 16, 1998 in Wisconsin. The Company expects to complete these
assessments and upgrades by March 31, 1999.
The Company is in the process of testing its research and development equipment.
The Company expects to complete this testing by March 31, 1999 and to complete
any necessary upgrades by June 30, 1999.
Key suppliers were surveyed as to their Y2K compliance. Sixty-four percent of
these suppliers in North America and seventy percent in Europe have responded
that they are addressing the issue, and plan to be compliant. Meaningful
responses from suppliers in the Pacrim have not yet been received. The Company
will continue to seek responses from suppliers. While the Company does not yet
have contingency plans, it expects to develop such plans for each of the areas
identified above and will continue to develop and update those plans throughout
1999.
In a worst case scenario, any failure by the Company or any key supplier or
customer to become Y2K compliant could result in disruption of the Company's
normal operations and the inability or unwillingness of its customers to
purchase the Company's products. Any such failure or disruption could have a
material adverse affect on the Company's business, financial condition or
results of operations.
-8-
<PAGE>
The Company expects costs associated with Y2K remediation to be approximately
$200,000, which will be expensed as incurred and will not have a material impact
on the financial position, results of operations or cash flow of the Company.
To date, approximately $100,000 of such costs have been incurred.
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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(27) Financial Data Schedule.
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)
November 13, 1998 /s/ John P. O'Mahoney
- ----------------- --------------------------
John P. O'Mahoney
Chairman and Chief
Executive Officer
November 13, 1998 /s/ Mark W. Joslin
- ----------------- --------------------------
Mark W. Joslin
Chief Financial Officer
and Treasurer
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 49,617
<SECURITIES> 0
<RECEIVABLES> 43,397
<ALLOWANCES> 0
<INVENTORY> 51,172
<CURRENT-ASSETS> 144,967
<PP&E> 133,999
<DEPRECIATION> 41,992
<TOTAL-ASSETS> 256,416
<CURRENT-LIABILITIES> 61,407
<BONDS> 129,050
0
0
<COMMON> 45,533
<OTHER-SE> (12,264)
<TOTAL-LIABILITY-AND-EQUITY> 256,416
<SALES> 157,376
<TOTAL-REVENUES> 157,376
<CGS> 112,225
<TOTAL-COSTS> 112,225
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,614
<INCOME-PRETAX> 23,160
<INCOME-TAX> 6,948
<INCOME-CONTINUING> 16,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,212
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
