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, 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 Avenue; Kenosha, Wisconsin 53142
(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 - 34,030,205 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, 1998 and December 31, 1997
and the results of their operations for the three months ended March 31, 1998
and 1997, and the statements of cash flows for the three months ended March 31,
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.
Lawter International, Inc. and Subsidiaries
Condensed Statements of Earnings
(Shown in thousands)
Three Months Ended March 31
---------------------------
1998 1997
-------- --------
Net Sales $ 52,755 $ 50,140
Cost of Products Sold 36,935 34,524
-------- --------
Gross Margin $ 15,820 $ 15,616
Selling, Admin. Research and
Distribution Expenses 7,017 7,563
-------- --------
Income from Operations $ 8,803 $ 8,053
Investment Income 327 754
-------- --------
Earnings before Income Taxes $ 9,130 $ 8,807
Provision for Income Taxes 2,739 2,869
-------- --------
Net Earnings $ 6,391 $ 5,938
======== ========
Earnings per Share of Common Stock (Note 2) $ .14 $ .13
Dividends per Share of Common Stock $ .10 $ .10
Weighted Average Shares Outstanding 45,533 45,355
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 1998 1997
- -------- -------- --------
Current Assets
Cash $ 11,371 $ 8,052
Time Deposits 65,657 74,819
Accounts Receivable (net) 42,645 44,170
Inventories (Note 1)
Raw Materials 26,358 21,132
Finished Goods 22,472 21,958
Prepaid Expenses 2,232 1,051
-------- --------
Total Current Assets $170,735 $171,182
-------- --------
Property, Plant and Equipment $125,145 $127,451
Less Accumulated Depreciation (39,063) (38,803)
-------- --------
Net Property $ 86,082 $ 88,648
-------- --------
Intangibles and Other Assets $ 18,639 $ 16,354
-------- --------
Total Assets $275,456 $276,184
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts Payable $ 11,358 $ 12,324
Short-Term Borrowings 23,518 22,993
Accrued Expenses 13,052 13,805
Income Taxes Payable 4,823 4,099
-------- --------
Total Current Liabilities $ 52,751 $ 53,221
-------- --------
Deferred Income Taxes $ 32,510 $ 32,556
-------- --------
Long-Term Obligations $ 29,050 $ 29,050
-------- --------
Total Liabilities $114,311 $114,827
-------- --------
Stockholders' Equity
Preferred Stock (None Issued) $ --- $ ---
Common Stock 45,533 45,533
Additional Paid-in Capital 16,747 16,747
Retained Earnings 110,907 109,070
Cumulative Translation Adjustments (11,578) (9,535)
Other (464) (458)
-------- --------
Net Stockholders' Equity $161,145 $161,357
-------- --------
Total Liabilities and Equity $275,456 $276,184
======== ========
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
---------------------------
1998 1997
-------- --------
Cash Flow from Operating Activities:
Net Earnings $ 6,391 $ 5,938
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities-
Depreciation and Amortization 1,482 1,358
Undistributed Equity Income --- (715)
Deferred Exchange Gain (Loss) 205 (178)
Proceeds from Sales of Marketable Securities --- 739
Net (Gain) Loss from Marketable Securities --- (1)
(Increase) Decrease in Current Assets-
Accounts Receivable 1,096 (2,837)
Inventories (6,029) (1,660)
Prepaid Expenses (1,210) (133)
Increase (Decrease) in Current Liabilities-
Accounts Payable (803) (4,068)
Accrued Expenses (603) (5,448)
Income Taxes Payable 770 1,598
-------- --------
Net Cash Provided by (Used for) Operating
Activities $ 1,299 $ (5,407)
-------- --------
Cash Flow from Investing Activities:
Expenditures for Property, Plant
& Equipment - Net $ (452) $ (1,682)
Purchase of Business - Net (3,200) ---
Loans to Officers (6) (6)
Repayment of Officers' Loans --- 43
-------- --------
Net Cash Used for Investing Activities $ (3,658) $ (1,645)
-------- --------
Cash Flow from Financing Activities:
Exercise of Stock Options $ --- $ 121
Proceeds from Short-Term Borrowings 1,197 9,610
Cash Dividends Paid (4,553) (4,535)
-------- --------
Net Cash Provided by (Used for) Financing
Activities $ (3,356) $ 5,196
-------- --------
Effect of Exchange Rate Changes on Cash $ (128) $ (434)
-------- --------
Increase (Decrease) in Cash and Equivalents $ (5,843) $ (2,290)
Cash and Equivalents, Beginning of Period 82,871 54,931
-------- --------
Cash and Equivalents, End of Period $ 77,028 $ 52,641
======== ========
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, 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. New Accounting Prouncements
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 translations adjustments is currently the only
type of other comprehensive income that the Company has.
Lawter's comprehensive earnings were as follows:
(In $000's) Three Months Ended March 31
---------------------------
1998 1997
-------- --------
Net Earnings $ 6,391 $ 5,938
Unrealized Translation Adjustments (2,043) (4,698)
-------- --------
Total Comprehensive Income $ 4,348 $ 1,240
======== ========
The Company will also be adopting SFAS No. 131 "Segment Reporting" in 1998.
Additional disclosure regarding segments will be required in annual financial
statements. SFAS No. 131 does not impact the Company's interim reporting in
1998.
-5-
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 4. Subsequent Event
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 on April 1, 1998. These shares were placed
in Treasury Stock at cost.
This repurchase was financed through a $100,000,000 Shelf Agreement with
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 and a final maturity date of April 1, 2010. The remaining amount
of $30,848,000 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
$6,400,000 from $59,900,000 at December 31, 1997 to $53,500,000 at March 31,
1998. The decrease in cash was the result of the purchase of substantial
amounts of a strategic raw material at favorable prices.
On April 1, 1998, Lawter repurchased approximately $25.4% of the Company's
outstanding stock for a purchase price of approximately $131 million by
utilizing $30 million in cash on hand and incurring a $100 million note payable
to the Prudential Insurance Company of America. The note payble is due in five
annual principal installments of $20 million beginning April 1, 2006. 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 working capital
needs and future capital expenditures.
Capital expenditures in the near future will include equipment for a joint
venture in China along with 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 first quarter
of 1998 when compared to the first quarter of 1997 due to an 11% increase in
sales volume, partially offset by the impact of a stronger U.S. dollar versus
European and Asian currencies while a change in mix caused average selling
prices to be marginally lower.
GROSS MARGINS. Gross margins as a percent of net sales were 30.0% and 31.1% for
the quarters ended March 31, 1998 and 1997, respectively. Included in the gross
margin in 1997 was a $1,675,000 benefit for business interruption insurance
proceeds for losses resulting from a shutdown of the Company's Irish facility in
1996. Excluding this benefit, the gross margin in 1998 increased compared to
1997 due to lower raw material costs and a change in the sales mix in Europe to
more profitable products along with increased production volume in both the US
and Europe which reduced the cost per pound produced.
-6-
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses decreased from $7,563,000 in
the quarter ended March 31, 1997 to $7,017,000 in the quarter ended March 31,
1998. This decrease was the result of lower foreign exchange transaction losses
in 1998 and the consolidation of various facilities in Europe.
NET INVESTMENT INCOME. Net investment income in the quarter ended March 31,
1998 decreased from the quarter ended March 31, 1997 due primarily to the sale
of the Company's equity investment in Hach Company common stock in July of 1997
resulting in the loss of the equity income in Hach.
INCOME TAXES. The effective tax rates were 30.0% and 32.6% for the three months
ended March 31, 1998 and 1997, respectively. The tax provision was unusually
high in the first quarter of 1997 due to losses at the Company's facility in
England on which no tax benefit was provided.
Other Matters
SUBSEQUENT EVENT. 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 on April 1, 1998.
These shares were placed in Treasury Stock at cost.
This repurchase was financed through a $100,000,000 Shelf Agreement with
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 and a final maturity date of April 1, 2010. The remaining amount
of $30,848,000 was funded with cash on hand.
YEAR 2000. Modifications to significant portions of the Company's computer
software will be required in order for it to function properly in the year 2000
and beyond. An initial assessment of the situation has been completed. Systems
affected have been identified and alternatives have been considered. Conversion
and testing of system applications is under way and is expected to be
substantially completed by the end of 1998. The costs associated with the year
2000 compliance are expected to be approximately $200,000 and will be expensed
as incurred. The Company is continuing to address the year 2000 impact with
customers, suppliers and other constituents.
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)(10.1) Purchase Agreement and Mutual Release dated as of March 19, 1998 by
and among the Company, the Estate of Daniel J. Terra, the Terra
Foundation For The Arts and James D. Terra (incorporated by reference
to the Company's 8-K dated March 19, 1998)(File No. 1-7558).
(10.2) First Modification of Private Shelf Agreement dated as December 6,
1995, by and between Lawter International, Inc. and The Prudential
Insurance Company of America (incorporated by reference to the
Company's 8-K dated April 1, 1998)(File No. 1-7558).
(27) Financial Data Schedule.
-7-
(b) On March 19, 1998, the Company filed a Form 8-K to report a news
release which announced that 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. Also included as an
exhibit to the Form 8-K was the Purchase Agreement and Mutual Release
for the stock buyback.
On April 1, 1998, the Company filed a Form 8-K to report the
completion of the stock buyback.
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 7, 1998 /s/ John P. O'Mahoney
- ------------ --------------------------
John P. O'Mahoney
Vice Chairman and
Chief Executive Officer
May 7, 1998 /s/ Mark W. Joslin
- ------------ --------------------------
Mark W. Joslin
Chief Financial Officer
and Treasurer
-8-
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