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, 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 - 45,468,785 shares outstanding as
of July 31, 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 June 30, 1997 and December 31, 1996
and the results of their operations for the three months and six months ended
June 30, 1997 and 1996, and the statements of cash flows for the six months
ended June 30, 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 Six Months Ended
June 30 June 30
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
Net Sales $ 50,657 $ 46,247 $100,797 $ 95,613
Cost of Products Sold 34,623 32,054 69,147 67,864
-------- -------- -------- --------
Gross Margin $ 16,034 $ 14,193 $ 31,650 $ 27,749
Selling, Administrative, Research
and Distribution Expenses 5,791 5,720 13,354 12,006
-------- -------- -------- --------
Income from Operations $ 10,243 $ 8,473 $ 18,296 $ 15,743
Net Investment Income 570 1,773 1,324 2,944
-------- -------- -------- --------
Earnings before Income Taxes $ 10,813 $ 10,246 $ 19,620 $ 18,687
Provision for Income Taxes 3,247 2,886 6,116 5,162
-------- -------- -------- --------
Net Earnings $ 7,566 $ 7,360 $ 13,504 $ 13,525
======== ======== ======== ========
Earnings per Share of Common
Stock (Note 2) $ .17 $ .16 $ .30 $ .30
Dividends per Share of Common Stock $ .10 $ .10 $ .20 $ .20
Weighted Average Shares Outstanding 45,359 45,080 45,357 45,075
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 1997 1996
- -------- -------- --------
Current Assets
Cash $ 10,368 $ 8,221
Time Deposits 37,587 46,710
Marketable Securities 1,731 2,400
Accounts Receivable (net) 46,380 47,671
Inventories (Note 1)
Raw Materials 26,368 24,094
Finished Goods 20,910 25,517
Prepaid Expenses 1,450 1,974
-------- --------
Total Current Assets $144,794 $156,587
-------- --------
Property, Plant and Equipment $132,354 $141,346
Less Accumulated Depreciation (43,590) (49,229)
-------- --------
Net Property $ 88,764 $ 92,117
-------- --------
Investment in Affiliates $ 26,257 $ 24,833
-------- --------
Intangibles and Other Assets $ 20,339 $ 19,586
-------- --------
Total Assets $280,154 $293,123
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
Accounts Payable and Accrued Expenses $ 24,841 $ 41,844
Short-Term Borrowings 42,619 38,962
Income Taxes Payable 3,649 1,371
-------- --------
Total Current Liabilities $ 71,109 $ 82,177
-------- --------
Deferred Income Taxes $ 36,132 $ 36,281
-------- --------
Long-Term Obligations $ 29,050 $ 29,050
-------- --------
Total Liabilities $136,291 $147,508
-------- --------
Stockholders' Equity
Preferred Stock (None Issued) $ --- $ ---
Common Stock 45,359 45,349
Additional Paid-in Capital 14,822 14,711
Retained Earnings 94,350 89,917
Cumulative Translation Adjustments (10,190) (3,826)
Other (478) (536)
-------- --------
Net Stockholders' Equity $143,863 $145,615
-------- --------
Total Liabilities and Equity $280,154 $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)
Six Months Ended June 30
---------------------------
1997 1996
-------- --------
Cash Flow from Operating Activities:
Net Earnings $ 13,504 $ 13,525
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities-
Depreciation and Amortization 2,530 2,647
Deferred Income Taxes --- (152)
Undistributed Equity Income (1,456) (1,246)
Deferred Exchange Gain (Loss) (264) 445
Purchase of Marketable Securities --- (23,202)
Proceeds from Sales of Marketable Securities 739 19,075
Net (Gain) Loss from Marketable Securities (8) (721)
Gain on Sale of Business (738) ---
(Increase) Decrease in Current Assets-
Accounts Receivable (806) 2,209
Inventories (312) 1,806
Prepaid Expenses 418 (1,343)
Increase (Decrease) in Current Liabilities-
Accounts Payable and Accrued Expenses (11,950) (6,468)
Income Taxes Payable 2,183 311
-------- --------
Net Cash Provided by Operating Activities $ 3,840 $ 6,886
-------- --------
Cash Flow from Investing Activities:
Expenditures for Property, Plant
& Equipment - Net $ (4,779) $(17,117)
Purchase of Business-Net of Cash (9,219) ---
Sale of Business 4,856
Loans to Officers (12) (1)
Repayment of Officers' Loans 43 ---
-------- --------
Net Cash Used for Investing Activities $ (9,111) $(17,118)
-------- --------
Cash Flow from Financing Activities:
Exercise of Stock Options $ 121 $ 222
Proceeds from Long-Term Borrowings --- 25,000
Payment of Short-Term Borrowings --- (15,342)
Proceeds from Short-Term Borrowings 7,837 13,848
Cash Dividends Paid (9,071) (9,016)
-------- --------
Net Cash (Used for) Provided by
Financing Activities $ (1,113) $ 14,712
-------- --------
Effect of Exchange Rate Changes on Cash $ (592) $ (289)
-------- --------
Increase (Decrease) in Cash and Equivalents $ (6,976) $ 4,191
Cash and Equivalents, Beginning of Period 54,931 63,680
-------- --------
Cash and Equivalents, End of Period $ 47,955 $ 67,871
======== ========
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, 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 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 reduction in labor force as a result of the restructuring plan was
originally estimated at approximately 100 positions. To date, 94 positions
have been eliminated. As of June 30, 1997, employee head count was at 524 versus
a high of 604 employees in 1995. Redundancy payments charged against the
reserve through June 30, 1997 were $2,480,000 including $108,000 utilized in the
second quarter of 1997. Redundancy payments are expected to be completed by the
end 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 June 30, 1997,
five manufacturing facilities in North America and three manufacturing
-5-
facilities in Europe were shut down and/or sold. The costs charged against the
reserve related to these facilities were $4,731,000, comprised of $3,880,000 for
the write down of the net book value of the assets, $296,000 for cleanup costs,
$727,000 for costs incurred during the wind down period of the European
facilities, $67,000 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
$10,700,000 from $16,000,000 at December 31, 1996 to $5,300,000 at June 30,
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 completion of a new
corporate headquarters facility 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.
On July 8, 1997, the Company sold its investment in Hach Company for
approximately $60 million. The after tax cash proceeds will be approximately
$40 million, which will be used to further the Company's long term plans. In the
short term, a portion of the funds will be used to pay off short term debt while
the remainder will be invested in time deposits.
Results of Operations
SALES. The Company's consolidated net sales increased 10% in the second quarter
of 1997 when compared to the second quarter of 1996. Included in the second
quarter of 1997 are $4,700,000 in sales of products, mostly in Europe, related
to the Wolstenholme and Hercules acquisitions. Excluding the Wolstenholme and
Hercules products, sales were down 1% due primarily to lower average selling
prices as a result of a change in sales mix and the impact of a stronger U. S.
dollar versus European currencies, partially offset by increased sales volume
both domestically and in Europe.
Consolidated net sales for the six months ended June 30, 1997 increased 5% over
sales for the six months ended June 30, 1996. Included in 1997 are $10,900,000
in sales of products, mostly in Europe, related to the Wolstenholme and Hercules
acquisitions. Excluding the Wolstenholme and Hercules products, sales were down
6% principally as a result of lower average selling prices due to a change in
sales mix and the impact of a stronger U. S. dollar versus European currencies,
partially offset by increased sales volume domestically.
GROSS MARGINS. Gross margins as a percent of net sales were 31.7% and 30.7% for
the quarters ended June 30, 1997 and 1996, respectively and 31.4% and 29.0% for
the six months ended June 30, 1997 and 1996, respectively. The higher
-6-
percentage in 1997 was due to lower raw material costs domestically and the
lower costs as a result of the restructuring plan (See "Restructuring Charges"
below).
SELLING, ADMINISTRATIVE, RESEARCH AND DISTRIBUTION EXPENSES. Selling,
administrative, research and distribution expenses were comparable at $5,791,000
in the quarter ended June 30, 1997 versus $5,720,000 in the quarter ended June
30, 1997. Selling, administrative, research and distribution expenses increased
from $12,006,000 in the first six months of 1996 to $13,354,000 in the first six
months of 1997 due to costs earlier in the year associated with the Wolstenholme
acquisition, and higher research, administrative and distribution costs in the
U. S.
NET INVESTMENT INCOME. Net investment income in both the quarter and six months
ended June 30, 1997 decreased from the same periods in 1996 due primarily to
gains on marketable securities in 1996 along with decreased funds available for
investments in 1997 as funds were used to finance acquisitions and capital
expenditures.
INCOME TAXES. The effective tax rates were 30.0% and 31.2% for the three months
and six months ended June 30, 1997, respectively versus 28.2% and 27.6% for the
three months and six months ended June 30, 1996. The higher rate in 1997 was
the result of a change in earnings mix in 1997, with more earnings attributable
to operating entities subject to higher tax rates.
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 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 reduction in labor force as a result of the restructuring plan was
originally estimated at approximately 100 positions. To date, 94 positions have
been eliminated. As of June 30, 1997, employee head count was at 524 versus a
high of 604 employees in 1995. Redundancy payments charged against the reserve
through June 30, 1997 were $2,480,000 including $108,000 utilized in the second
quarter of 1997. Redundancy payments are expected to be completed by the end 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 June 30, 1997, five
manufacturing facilities in North America and three manufacturing facilities in
Europe were shut down and/or sold. The costs charged against the reserve
related to these facilities were $4,731,000, comprised of $3,880,000 for the
write down of the net book value of the assets, $296,000 for cleanup costs,
-7-
$727,000 for costs incurred during the wind down period of the European
facilities, $67,000 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.
NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board has
issued Statement 128, "Earnings per Share" in 1997. The new statement changes
the method of calculating earnings per share. The statement is effective for
interim and annual periods ending after December 15, 1997. Earlier adoption is
prohibited. The Company will apply the new standard in the fourth quarter of
this year. The new standard should have no significant effect on the earnings
per share of the Company.
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
(b) On June 27, 1997, the Company filed a Form 8-K to report a news release on
June 26, 1997, which announced the intended sale of the Company's
investment in Hach Company Common Stock. Also included as an exhibit to
the Form 8-K was the Purchase and Standstill Agreement and Mutual Release
for the Hach Company Common Stock Sale.
On July 9, 1997, the Company filed a Form 8-K to report the completion of
the sale of the Company's investment in Hach Company Common Stock.
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 12, 1997 /s/ John P. O'Mahoney
- --------------- --------------------------
John P. O'Mahoney
Chairman and Chief
Executive Officer
August 12, 1997 /s/ Mark W. Joslin
- --------------- --------------------------
Mark W. Joslin
Chief Financial Officer
and Treasurer
-8-