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 June 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 Avenue; 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 - 34,028,205 shares outstanding as
of July 31, 1998.
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 June 30, 1998 and December 31, 1997
and the results of their operations for the three months and six months ended
June 30, 1998 and 1997, and the statements of cash flows for the six months
ended June 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.
Lawter International, Inc. and Subsidiaries
Condensed Statements of Earnings
(Shown in thousands)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net Sales $ 51,597 $ 50,657 $104,352 $100,797
Cost of Products Sold 35,667 34,623 72,602 69,147
-------- -------- -------- --------
Gross Margin $ 15,930 $ 16,034 $ 31,750 $ 31,650
Selling, Administrative, Research
and Distribution Expenses 7,214 5,791 14,231 13,354
-------- -------- -------- --------
Income from Operations $ 8,716 $ 10,243 $ 17,519 $ 18,296
Investment Income 538 1,627 1,610 3,222
Interest Expense (2,432) (1,057) (3,177) (1,898)
-------- -------- -------- --------
Earnings before Income Taxes $ 6,822 $ 10,813 $ 15,952 $ 19,620
Provision for Income Taxes 2,047 3,247 4,786 6,116
-------- -------- -------- --------
Net Earnings $ 4,775 $ 7,566 $ 11,166 $ 13,504
======== ======== ======== ========
Earnings per Share of Common
Stock (Note 2) $ .14 $ .17 $ .28 $ .30
Dividends per Share of Common Stock $ .10 $ .10 $ .20 $ .20
Weighted Average Shares Outstanding 34,030 45,359 39,782 45,357
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)
June 30 December 31
-------- -----------
Assets 1998 1997
- -------- -------- --------
Current Assets
Cash $ 13,095 $ 8,052
Time Deposits 31,170 74,819
Accounts Receivable (net) 41,208 44,170
Inventories (Note 1)
Raw Materials 28,972 21,132
Finished Goods 22,133 21,958
Prepaid Expenses 924 1,051
-------- --------
Total Current Assets $137,502 $171,182
-------- --------
Property, Plant and Equipment $127,219 $127,451
Less Accumulated Depreciation (40,283) (38,803)
-------- --------
Net Property $ 86,936 $ 88,648
-------- --------
Intangibles and Other Assets $ 18,737 $ 16,354
-------- --------
Total Assets $243,175 $276,184
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts Payable $ 10,333 $ 12,324
Short-Term Borrowings 22,831 22,993
Accrued Expenses 12,976 13,805
Income Taxes Payable 3,458 4,099
-------- --------
Total Current Liabilities $ 49,598 $ 53,221
-------- --------
Deferred Income Taxes $ 32,529 $ 32,556
-------- --------
Long-Term Obligations $129,050 $ 29,050
-------- --------
Total Liabilities $211,177 $114,827
-------- --------
Stockholders' Equity
Preferred Stock (None Issued) $ --- $ ---
Common Stock 45,533 45,533
Treasury Stock (131,601) ---
Additional Paid-in Capital 16,747 16,747
Retained Earnings 112,275 109,070
Cumulative Translation Adjustments (10,486) (9,535)
Other (470) (458)
-------- --------
Net Stockholders' Equity $ 31,998 $161,357
-------- --------
Total Liabilities and Equity $243,175 $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)
Six Months Ended June 30
---------------------------
1998 1997
-------- --------
Cash Flow from Operating Activities:
Net Earnings $ 11,166 $ 13,504
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities-
Depreciation and Amortization 3,087 2,530
Undistributed Equity Income --- (1,456)
Deferred Exchange Gain (Loss) 440 (264)
Proceeds from Sales of Marketable Securities --- 739
Net (Gain) Loss from Marketable Securities --- (8)
Gain on Sale of Business --- (738)
(Increase) Decrease in Current Assets-
Accounts Receivable 2,544 (806)
Inventories (7,927) (312)
Prepaid Expenses 118 418
Increase (Decrease) in Current Liabilities-
Accounts Payable (3,025) (7,485)
Accrued Expenses ( 742) (4,465)
Income Taxes Payable ( 624) 2,183
-------- --------
Net Cash Provided by Operating Activities $ 5,037 $ 3,840
-------- --------
Cash Flow from Investing Activities:
Expenditures for Property, Plant
& Equipment - Net $ (1,760) $( 4,779)
Purchase of Business-Net of Cash (3,200) ( 9,219)
Sale of Business --- 4,856
Loans to Officers (12) (12)
Repayment of Officers' Loans --- 43
-------- --------
Net Cash Used for Investing Activities $ (4,972) $( 9,111)
-------- --------
Cash Flow from Financing Activities:
Exercise of Stock Options $ --- $ 121
Common Stock Repurchase (131,601) ---
Proceeds from Long-Term Borrowings 100,000 ---
Proceeds from Short-Term Borrowings 1,113 7,837
Cash Dividends Paid (7,956) (9,071)
-------- --------
Net Cash (Used for) Provided by
Financing Activities $(38,444) $ (1,113)
-------- --------
Effect of Exchange Rate Changes on Cash $ (227) $ (592)
-------- --------
Increase (Decrease) in Cash and Equivalents $(38,606) $ (6,976)
Cash and Equivalents, Beginning of Period 82,871 54,931
-------- --------
Cash and Equivalents, End of Period $ 44,265 $ 47,955
======== ========
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 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 June 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. 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.
Lawter's comprehensive earnings were as follows:
(In 000's) Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
Net Earnings $ 4,775 $7,566 $11,166 $13,504
Unrealized Translation Adj. 1,092 (1,666) ( 951) (6,364)
------- ------- ------- -------
Total Comprehensive Income $ 5,867 $5,900 $10,215 $ 7,140
======= ======= ======= =======
The Company will 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.
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.
-5-
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 4. 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
$38,500,000 from $59,900,000 at December 31, 1997 to $21,400,000 at June 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 issued
to the Prudential Insurance Company of America. The note payable is due in five
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 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 2% in the second quarter
of 1998 when compared to the second quarter of 1997. Despite a worldwide
slowdown experienced by the industry in April and May, sales volume improved 4%.
A strengthening of the U.S. dollar against European and Asian currencies
partially offset this increase.
Consolidated net sales for the six months ended June 30, 1998 increased 4% over
sales for the six months ended June 30, 1997. Sales gains as a result of an 8%
volume increase were also affected by a stronger dollar.
-6-
GROSS MARGINS. Gross margins as a percent of net sales were 30.9% and 31.7% for
the quarters ended June 30, 1998 and 1997, respectively and 30.4% and 31.4% for
the six months ended June 30, 1998 and 1997, respectively. The lower
percentage in 1998 was due to prior year cost of goods sold including the effect
of Business Interruption proceeds of $500,000 in the second quarter and
$2,175,000 in the six months ended June 30, 1997.
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses increased to $7,214,000 in
the quarter ended June 30, 1998 versus $5,791,000 in the quarter ended June 30,
1997. Selling, administrative, research and distribution expenses increased
from $13,354,000 in the first six months of 1997 to $14,231,000 in the first six
months of 1998. The increase in both periods was due to the impact of a
stronger U.S. dollar versus foreign currencies along with a gain in 1997 from
the sale of the Fluorescent business.
INVESTMENT INCOME. Investment income in both the quarter and six months ended
June 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 six months ended
June 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.
INCOME TAXES. The effective tax rates were 30.0% and 30.0% for the three months
and six months ended June 30, 1998, respectively versus 30.0% and 31.2% for the
three months and six months ended June 30, 1997.
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. 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.
-7-
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)
August 13, 1998 /s/ John P. O'Mahoney
- --------------- --------------------------
John P. O'Mahoney
Chairman and Chief
Executive Officer
August 13, 1998 /s/ Mark W. Joslin
- --------------- --------------------------
Mark W. Joslin
Chief Financial Officer
and Treasurer
-8-
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