1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2000
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: 1-11091
SYBRON INTERNATIONAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 22-2849508
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(414) 274-6600
--------------
(Registrant's telephone number, including area code)
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 [ ]
At August 11, 2000, there were 105,182,025 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
2
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
Index Page
- ---------------------------------------------------------------- ----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, June 30, 2000 (unaudited)
and September 30, 1999 2
Consolidated Statements of Income for the three and nine months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 3
Consolidated Statements of Shareholders' Equity for the year
ended September 30, 1999 and the nine months ended
June 30, 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
June 30, 2000 (unaudited) and 1999 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 40
SIGNATURES 41
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
June 30, September 30,
2000 1999
------------- -------------
Current assets:
Cash and cash equivalents...................................... $ 17,901 $ 18,491
Accounts receivable (less allowance for doubtful
receivables of $5,761 and $5,676, respectively).............. 236,397 231,506
Inventories (note 2)........................................... 231,419 203,202
Deferred income taxes.......................................... 24,999 23,339
Prepaid expenses and other current assets...................... 26,452 15,419
----------- ------------
Total current assets....................................... 537,168 491,957
Available for sale security....................................... 52,150 50,900
Property, plant and equipment, net of accumulated depreciation
of $240,385 and $212,995, respectively....................... 255,657 245,247
Intangible assets................................................. 1,155,009 1,028,081
Deferred income taxes............................................. 12,602 13,623
Other assets...................................................... 10,661 13,109
----------- ------------
Total assets............................................... $2,023,247 $1,842,917
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 52,349 $ 62,418
Current portion of long-term debt.............................. 4,118 8,962
Income taxes payable........................................... 10,720 23,490
Accrued payroll and employee benefits.......................... 44,261 49,006
Deferred income taxes.......................................... 3,819 3,251
Other current liabilities (note 4)............................. 31,984 44,822
----------- ------------
Total current liabilities.................................. 147,251 191,949
Long-term debt.................................................... 972,418 875,254
Securities lending agreement...................................... 52,150 50,461
Deferred income taxes............................................. 98,145 84,527
Other liabilities................................................. 20,491 15,382
Commitments and contingent liabilities
Shareholders' equity:
Preferred Stock, $.01 par value; authorized 20,000,000 shares - -
Common Stock, $.01 par value; authorized 250,000,000 shares,
issued 105,182,245 and 104,023,697 shares, respectively...... 1,052 1,040
Equity Rights, 50 rights at $1.09 per right.................... - -
Additional paid-in capital..................................... 271,596 251,251
Retained earnings.............................................. 507,997 403,380
Accumulated other comprehensive income......................... (47,853) (30,327)
Treasury common stock, 220 shares at cost ..................... - -
----------- ------------
Total shareholders' equity................................. 732,792 625,344
----------- ------------
Total liabilities and shareholders' equity................. $ 2,023,247 $ 1,842,917
=========== ============
See accompanying notes to unaudited consolidated financial statements.
2
4
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net sales ...................................................... $ 317,015 $ 280,051 $ 941,651 $ 800,398
Cost of sales:
Cost of product sold ........................................ 150,809 134,476 450,058 387,322
Depreciation of purchase accounting adjustments ............. 154 160 476 496
--------- --------- --------- ---------
Total cost of sales ............................................ 150,963 134,636 450,534 387,818
--------- --------- --------- ---------
Gross profit ................................................... 166,052 145,415 491,117 412,580
Selling, general and administrative expenses ................... 78,062 70,045 231,333 198,280
Merger, transaction and integration expense/(credit) ........... -- (122) -- 2,569
Restructuring charge reversal (note 4) ......................... -- (932) -- (932)
Depreciation and amortization of purchase
accounting adjustments ...................................... 11,503 7,794 32,838 22,654
--------- --------- --------- ---------
Total selling, general and administrative expenses ............. 89,565 76,785 264,171 222,571
--------- --------- --------- ---------
Operating income ............................................... 76,487 68,630 226,946 190,009
Other income (expense):
Interest expense ............................................ (18,769) (13,749) (54,951) (41,898)
Amortization of deferred financing fees ..................... (209) (87) (608) (247)
Other, net .................................................. 641 41 1,417 (592)
--------- --------- --------- ---------
Income before income taxes and discontinued
operations .................................................. 58,150 54,835 172,804 147,272
Income taxes ................................................... 22,932 21,491 68,187 58,098
--------- --------- --------- ---------
Income from continuing operations .............................. 35,218 33,344 104,617 89,174
Discontinued operations:
Income from discontinued operations (net of
income tax expense of $80) (note 5) ......................... -- -- -- 121
Extraordinary Item:
Gain on sale of discontinued operations (less income
tax expense/(benefit) of ($2,696) and $15,955,
respectively) (note 5) ...................................... -- (838) -- 17,958
--------- --------- --------- ---------
Net income ..................................................... $ 35,218 $ 32,506 $ 104,617 $ 107,253
========= ========= ========= =========
Basic earnings per common share from continuing
operations .................................................. $ .34 $ .32 $ 1.00 $ .86
Discontinued operations ........................................ -- -- -- --
Extraordinary item ............................................. -- (.01) -- .18
--------- --------- --------- ---------
Basic earnings per common share ................................ $ .34 $ .31 $ 1.00 $ 1.04
========= ========= ========= =========
Diluted earnings per common share from continuing
operations .................................................. $ .33 $ .31 $ .98 $ .84
Discontinued operations ........................................ -- -- -- --
Extraordinary item ............................................. -- (.01) -- .17
--------- --------- --------- ---------
Diluted earnings per common share .............................. $ .33 $ .30 $ .98 $ 1.01
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
3
5
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1999
AND THE NINE MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
-------- ------------ -------- ------ -------------
Balance at September 30, 1998 ..................... $1,029 $234,070 $260,833 $(20,688) $ 475,244
Comprehensive income:
Net income ..................................... -- -- 142,547 -- 142,547
Translation adjustment ......................... -- -- -- (9,905) (9,905)
Unrealized gain on security available
for sale ..................................... -- -- -- 266 266
------ -------- -------- -------- ---------
Total comprehensive income ........................ -- -- 142,547 (9,639) 132,908
Shares issued in connection with the
exercise of 1,121,421 stock options ............ 11 10,680 -- -- 10,691
Tax benefits related to stock options ............. -- 6,501 -- -- 6,501
------ -------- -------- -------- ---------
Balance at September 30, 1999 ..................... 1,040 251,251 403,380 (30,327) 625,344
Comprehensive income:
Net income ..................................... -- -- 104,617 -- 104,617
Translation adjustment ......................... -- -- -- (18,273) (18,273)
Unrealized gain on security available
for sale ..................................... -- -- -- 747 747
------ -------- -------- -------- ---------
Total comprehensive income ........................ -- -- 104,617 (17,526) 87,091
Shares issued in connection with the
exercise of 1,158,548 stock options ............ 12 12,484 -- -- 12,496
Tax benefits related to stock options ............. -- 7,861 -- -- 7,861
------ -------- -------- -------- ---------
Balance at June 30, 2000 .......................... $1,052 $271,596 $507,997 $(47,853) $ 732,792
====== ======== ======== ======== =========
See accompanying notes to unaudited consolidated financial statements.
4
6
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30,
2000 1999
---- ----
Cash flows from operating activities:
Net income ...................................................................... $ 104,617 $ 107,253
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of NPT ........................................................... -- (17,958)
Depreciation ................................................................... 28,792 26,893
Amortization ................................................................... 32,698 22,805
Loss (gain) on sale of property plant and equipment ............................ (246) --
Provision for losses on doubtful accounts ...................................... 802 108
Inventory provisions ........................................................... 1,338 255
Deferred income taxes .......................................................... 13,547 19,897
Changes in assets and liabilities, net of effects of businesses acquired:
Decrease (increase) in accounts receivable ..................................... 5,189 (3,457)
Increase in inventories ........................................................ (14,196) (15,341)
Decrease (increase) in prepaid expenses and other current assets ............... (10,674) 1,908
Decrease in accounts payable ................................................... (12,693) (3,395)
Decrease in income taxes payable ............................................... (12,666) (18,969)
Increase (decrease) in accrued payroll and employee benefits ................... (12,103) 537
Decrease in other current liabilities .......................................... (13,266) (15,793)
Net change in other assets and liabilities ..................................... (3,812) (7,201)
--------- ---------
Net cash provided by operating activities ................................... 107,327 97,542
Cash flows from investing activities:
Capital expenditures ........................................................... (33,482) (23,576)
Proceeds from sales of property, plant and equipment ........................... 967 918
Proceeds (refund) from the sale of NPT, net of sale expenses ................... (2,600) 85,877
Payments for businesses acquired ............................................... (143,796) (188,121)
--------- ---------
Net cash used in investing activities ....................................... (178,911) (124,902)
Cash flows from financing activities:
Proceeds - revolving credit facility ........................................... 417,600 422,900
Principal payments - revolving credit facility ................................. (347,400) (328,000)
Principal payments on long-term debt ........................................... (4,891) (87,878)
Receipt of collateral under securities lending agreement ....................... 1,869 --
Proceeds from the exercise of common stock options ............................. 12,496 7,207
Deferred financing fees ........................................................ (197) (146)
Other .......................................................................... (3,592) 4,133
--------- ---------
Net cash provided by financing activities ................................... 75,885 18,216
Effect of exchange rate changes on cash and cash equivalents ..................... (4,891) (477)
Net decrease in cash and cash equivalents ........................................ (590) (9,621)
Cash and cash equivalents at beginning of period ................................. 18,491 23,891
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 17,901 $ 14,270
========= =========
See accompanying notes to unaudited consolidated financial statements.
5
7
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30,
2000 1999
------ ------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................................. $ 53,412 $ 43,974
====== ======
Cash paid during the period for income taxes.............................. $ 58,333 $ 50,280
====== ======
Capital lease obligations incurred........................................ $ 56 $ 277
====== ======
See accompanying notes to unaudited consolidated financial statements.
6
8
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments which are necessary for a
fair statement of the results for the interim periods presented have been
included. Except as described in note 5 below, all such adjustments were of
a normal recurring nature. The results for the three and nine month periods
ended June 30, 2000 are not necessarily indicative of the results to be
expected for the full year.
On April 24, 2000, Sybron International Corporation (the "Company" or
"Sybron International") announced its intention to spin off its Dental
Business as a separate publicly traded company. The spin-off will be
effected by way of a pro rata dividend of the stock of SDS Holding Co. to
the Company's shareholders (the "Distribution"). SDS Holding Co. is a newly
organized Delaware subsidiary of the Company which will be renamed Sybron
Dental Specialties, Inc. ("SDS") in connection with the Distribution. SDS
will own and operate all of our dental group businesses, including those
operated by the subsidiary currently named Sybron Dental Specialties, Inc.
This subsidiary will be renamed Sybron Dental Management, Inc. ("SDM") in
connection with the Distribution, and will become a wholly owned subsidiary
of SDS. Following the Distribution, our shareholders will own shares in
both SDS, which will then be an independent public company operating the
Dental Business, and Sybron International, which will continue to operate
the Company's Laboratory Business.
The Distribution is subject to a number of conditions, including (i)
receipt by the Company of a favorable ruling from the Internal Revenue
Service concerning the tax-free nature of the Distribution, (ii)
appropriate stock market conditions for the Distribution, (iii) financing
for Sybron International and SDS as independent companies, (iv) completion
of certain internal restructuring steps, including the transfer of SDM and
its dental businesses to SDS, (v) receipt of approval to list SDS's common
stock on the NYSE, (vi) approval by Sybron International's board of
directors of the final terms of the Distribution, and (vii) effectiveness
of a registration statement on Form 10 registering the stock of SDS under
the Securities Exchange Act of 1934, including an information statement
that would be sent to the Company's shareholders in connection with the
Distribution. Upon satisfaction of the conditions, SDS will be shown as a
discontinued operation.
On August 8, 2000, SDS filed its Form 10 with the SEC via EDGAR, under its
current name, "SDS Holding Co." The information in the Form 10 is
preliminary, and is subject to amendment and completion.
2. Inventories at June 30, 2000 and September 30, 1999 consist of the
following: (In thousands)
7
9
June 30, September 30,
2000 1999
---- ----
Raw materials $ 97,197 $ 67,541
Work-in-process 40,095 39,439
Finished goods 105,068 106,010
Excess and obsolescence reserves (7,981) (7,091)
LIFO reserve (2,960) (2,697)
-------- --------
$231,419 $203,202
======== ========
3. For the three and nine month periods ended June 30, 2000, the Company
completed one and eight acquisitions, respectively. These acquisitions were
all cash transactions, except the acquisition in the third quarter for
which part of the purchase price was paid in cash and part was paid with
the issuance of a note in the amount of approximately $30.7 million. The
aggregate purchase price of the acquisitions (including the $30.7 million
note) for the quarter and year to date periods (which are not significant,
individually or in the aggregate), net of cash acquired, was approximately
$35.8 million and $174.5 million, respectively. There are no future
purchase price adjustments with respect to earnout provisions for any of
these transactions. All of these acquisitions have been accounted for as
purchases. The results of these acquisitions were included as of the date
they were acquired. The total goodwill and intangibles for the three and
nine month periods ended June 30, 2000 for acquired companies (including
adjustments for asset valuations in previous fiscal 2000 quarters) was
approximately $36.7 million and $146.9 million, respectively, and will be
amortized over 15-20 years. A description of the company acquired in the
third quarter is as follows:
(a) On May 9, 2000, the Company acquired Genevac Limited ("Genevac"),
located in Ipswich, England. Genevac is a designer and manufacturer of
specialty evaporators used in chemical, agrochemical and biotechnology
laboratories for drug discovery and other chemistry related
applications. Sales revenues in 1999 were approximately $11.2 million.
Genevac will be included in the Labware and Life Sciences business
segment.
Subsequent to June 30, 2000, the company completed two acquisitions for
cash. The aggregate purchase price for these two acquisitions was not
significant, individually or aggregated with other fiscal 2000
acquisitions. Both of these transactions, which are described below, will
be accounted for as purchases.
(a) On August 3, 2000, the Company acquired Abbott Laboratories Murex
bacteriology latex agglutination product line ("Murex"). The latex
agglutination bacteriology products include antisera, agglutination
reagents, latex reagents and stained suspensions, all currently
manufactured by or for Abbott's Murex subsidiary based in Dartford,
England. Abbott will continue to provide manufacturing, distribution
and other customer related functions for the Company until it is ready
to transition the products into its manufacturing and distribution
system. Sales revenues in 1999 were approximately $24.0 million. Murex
will be included in the Diagnostics and Microbiology business segment.
8
10
(b) On August 9, 2000, the Company announced that it had acquired Lab
Vision Corporation ("Lab Vision"). Lab Vision is a world leading
manufacturer and distributor of automated staining instruments and
antibodies used by immunohistochemistry laboratories. Lab Vision's
sales revenues are approximately $9.0 million. Lab Vision will be
included in the Clinical and Industrial business segment.
4. The following table updates activity to the Company's 1998 restructuring
charges as described in note 11 to the consolidated financial statements in
the Company's 1999 annual report on Form 10-K and included in other current
liabilities in the Company's balance sheet.
LEASE SHUT- INVENTORY FIXED CONTRACTUAL
------ ---------- ---------- ------ -----------
SEVERANCE PAYMENTS DOWN WRITE-OFF ASSETS TAX (D) GOODWILL (E) OBLIGATIONS
--------- -------- --------- ---------- ------- ------- ------------ -----------
(A) (B) COSTS (B) (C) (C) (F) OTHER TOTAL
--- --- --------- --- --- --- ----- -----
(IN THOUSANDS)
1998
Restructuring
charge $ 8,500 $ 400 $ 500 $ 6,400 $ 2,300 $ 700 $ 2,100 $ 1,000 $ 2,100 $ 24,000
1998 cash
payments 3,300 100 100 -- -- -- -- 400 700 4,600
1998 non-cash
charges -- -- -- 6,400 2,300 -- 2,100 -- 600 11,400
------- ------- ------- ------ ------ ---- ------- ------- ------- -------
September 30,
1998 balance $ 5,200 $ 300 $ 400 $ -- $ -- $ 700 $ -- $ 600 $ 800 $ 8,000
1999 cash
payments 3,400 300 400 -- -- -- -- 300 400 4,800
Adjustments (a) 900 -- -- -- -- -- -- -- -- 900
------- ------- ------- ------ ------ ---- ------- ------- ------- -------
September 30,
1999 balance $ 900 $ -- $ -- $ -- $ -- $ 700 $ -- $ 300 $ 400 $ 2,300
2000 cash
payments 400 -- -- -- -- -- -- 200 200 800
------- ------- ------- ------ ------ ---- ------- ------- ------- -------
June 30, 2000
balance $ 500 $ -- $ -- $ -- $ -- $ 700 $ -- $ 100 $ 200 $ 1,500
======= ======= ======= ====== ====== ==== ======= ======= ======= =======
-----------------------------
(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel). As of June
30, 2000, 154 employees have been terminated as a result of the
restructuring plan. Payments will continue to certain employees previously
terminated under this restructuring plan. An adjustment of approximately
$900 was made in the second quarter of fiscal 1999 to adjust the accrual
primarily representing over accruals for anticipated costs associated with
outplacement services, accrued fringe benefits, and severance associated
with employees who were previously notified of termination and subsequently
filled other Company positions. No additional employees will be terminated
under this restructuring plan.
(b) Amount represents lease payments and shutdown costs on exited facilities.
(c) Amount represents write-offs of inventory and fixed assets associated with
discontinued product lines.
(d) Amount represents a statutory tax relating to assets transferred from an
exited sales facility in Switzerland.
(e) Amount represents goodwill associated with exited product lines at Sybron
Laboratory Products Corporation.
(f) Amount represents certain terminated contractual obligations primarily
associated with SDS.
The Company expects to make future cash payments of approximately $0.2
million in the remainder of fiscal 2000 and approximately $1.3 million in
fiscal 2001 and beyond.
5. On March 31, 1999, the Company completed the sale of Nalge Process
Technologies Group, Inc. ("NPT"). The results and gain on the sale of NPT
in the fiscal 1999 period are classified as
9
11
discontinued operations and an extraordinary item, respectively. In
addition, in the first quarter of fiscal 2000, the Company refunded
approximately $2.6 million of previously accrued purchase price adjustments
to the purchaser. The Company does not anticipate any additional
adjustments to the purchase price.
6. The Company's operating subsidiaries are engaged in the manufacture and
sale of laboratory and dental products in the United States and other
countries. Laboratory products are categorized in the business segments of
a) Labware and Life Sciences, b) Clinical and Industrial, c) Diagnostics
and Microbiology and d) Laboratory Equipment. Dental products are
categorized in the business segments of a) Professional Dental, b)
Orthodontics and c) Infection Control Products.
Information on these business segments is summarized on the following two
pages:
10
12
LABWARE CLINICAL DIAGNOSTICS TOTAL
AND LIFE AND AND LABORATORY ELIMIN- LABORATORY
SCIENCES INDUSTRIAL MICROBIOLOGY EQUIPMENT ATIONS BUSINESS
-------- ---------- ------------ --------- ------ --------
THREE MONTHS ENDED 6/30/ 99
Revenues:
External customer ........ 70,682 45,370 42,918 24,554 -- 183,524
Intersegment ............. 1,443 106 201 186 (1,788) 148
------ ------ ------ ------ ------- -------
Total revenues ......... 72,125 45,476 43,119 24,740 (1,788) 183,672
====== ====== ====== ====== ======= =======
Gross profit ............... 36,590 19,567 21,667 10,283 -- 88,107
Selling, general and admin.. 18,031 7,749 11,100 4,980 -- 41,860
Operating income ........... 18,559 11,818 10,567 5,303 -- 46,247
THREE MONTHS ENDED 6/30/00
Revenues:
External customer ........ 86,810 50,270 50,636 24,313 -- 212,029
Intersegment ............. 203 1,735 138 228 (2,130) 174
------ ------ ------ ------ ------- -------
Total revenues ......... 87,013 52,005 50,774 24,541 (2,130) 212,203
====== ====== ====== ====== ======= =======
Gross profit ............... 45,919 22,124 27,200 10,166 -- 105,409
Selling, general and admin.. 25,096 8,800 13,736 4,806 -- 52,438
Operating income ........... 20,823 13,324 13,464 5,360 -- 52,971
INFECTION TOTAL
PROFESSIONAL CONTROL ELIMIN- DENTAL
DENTAL ORTHODONTICS PRODUCTS ATIONS BUSINESS OTHER (A) TOTAL
------ ------------ -------- ------ -------- --------- -----
THREE MONTHS ENDED 6/30/ 99
Revenues:
External customer ........ 48,311 42,059 6,157 -- 96,527 -- 280,051
Intersegment ............. 279 1,140 -- (1,419) -- (148) --
------ ------ ------ ------- -------- ------- --------
Total revenues ......... 48,590 43,199 6,157 (1,419) 96,527 (148) 280,051
====== ====== ====== ======= ======== ======= ========
Gross profit ............... 27,036 26,934 3,338 -- 57,308 -- 145,415
Selling, general and admin.. 14,836 13,908 2,576 -- 31,320 3,605 76,785
Operating income .......... 12,200 13,026 762 -- 25,988 (3,605) 68,630
THREE MONTHS ENDED 6/30/00
Revenues:
External customer ........ 53,451 44,270 7,265 -- 104,986 -- 317,015
Intersegment ............. 248 1,719 24 (1,991) -- (174) --
------ ------ ------ ------- -------- ------- --------
Total revenues ......... 53,699 45,989 7,289 (1,991) 104,986 (174) 317,015
====== ====== ====== ======= ======== ======= ========
Gross profit ............... 30,335 26,636 3,672 -- 60,643 -- 166,052
Selling, general and admin.. 15,821 16,033 2,966 -- 34,820 2,307 89,565
Operating income ........... 14,514 10,603 706 -- 25,823 (2,307) 76,487
- -------------------------------------------------
(a) Includes the elimination of intergroup and corporate office activity.
11
13
LABWARE CLINICAL DIAGNOSTICS TOTAL
AND LIFE AND AND LABORATORY ELIMIN- LABORATORY
SCIENCES INDUSTRIAL MICROBIOLOGY EQUIPMENT ATIONS BUSINESS
-------- ---------- ------------ --------- ------ --------
NINE MONTHS ENDED 6/30/ 99
Revenues:
External customer ........ 192,599 129,784 119,841 73,118 -- 515,342
Intersegment ............. 735 4,496 286 560 (5,648) 429
------- ------- ------- ------- ----- ---------
Total revenues ......... 193,334 134,280 120,127 73,678 (5,648) 515,771
======= ======= ======= ======= ===== =========
Gross profit ............... 98,575 54,674 61,158 30,414 -- 244,821
Selling, general and admin.. 49,867 22,278 30,837 15,294 -- 118,276
Operating income ........... 48,708 32,396 30,321 15,120 -- 126,545
NINE MONTHS ENDED 6/30/00
Revenues:
External customer ........ 252,292 156,847 154,431 71,416 -- 634,986
Intersegment ............. 841 5,062 331 671 (6,445) 460
------- ------- ------- ------- ----- ---------
Total revenues ......... 253,133 161,909 154,762 72,087 (6,445) 635,446
======= ======= ======= ======= ===== =========
Gross profit ............... 131,942 67,034 83,633 30,056 -- 312,665
Selling, general and admin.. 72,074 26,995 42,598 15,168 -- 156,835
Operating income ........... 59,868 40,039 41,035 14,888 -- 155,830
Segment Assets ............. 583,343 286,031 462,863 127,221 -- 1,459,458
INFECTION TOTAL
PROFESSIONAL CONTROL ELIMIN- DENTAL
DENTAL ORTHODONTICS PRODUCTS ATIONS BUSINESS OTHER (A) TOTAL
------ ------------ -------- ------ -------- --------- -----
NINE MONTHS ENDED 6/30/ 99
Revenues:
External customer ........ 140,303 127,009 17,744 -- 285,056 -- 800,398
Intersegment ............. 475 3,214 -- (3,689) -- (429) --
------- ------- ------ ------ ------- -------- ---------
Total revenues ......... 140,778 130,223 17,744 (3,689) 285,056 (429) 800,398
======= ======= ====== ====== ======= ======== =========
Gross profit ............... 78,456 79,574 9,729 -- 167,759 -- 412,580
Selling, general and admin.. 46,438 42,538 7,308 -- 96,284 8,011 222,571
Operating income ........... 32,018 37,036 2,421 -- 71,475 (8,011) 190,009
NINE MONTHS ENDED 6/30/00
Revenues:
External customer ........ 156,273 131,030 19,362 -- 306,665 -- 941,651
Intersegment ............. 687 4,391 28 (5,106) -- (460) --
------- ------- ------ ------ ------- -------- ---------
Total revenues ......... 156,960 135,421 19,390 (5,106) 306,665 (460) 941,651
======= ======= ====== ====== ======= ======== =========
Gross profit ............... 88,921 80,236 9,295 -- 178,452 -- 491,117
Selling, general and admin.. 44,800 46,011 7,937 -- 98,748 8,588 264,171
Operating income ........... 44,121 34,225 1,358 -- 79,704 (8,588) 226,946
Segment Assets ............. 198,399 190,648 57,683 -- 446,730 117,059 2,023,247
- ----------------------------------------
(a) Includes the elimination of intergroup and corporate office activity.
12
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The subsidiaries of Sybron International Corporation (the "Company" or
"Sybron International") are leading manufacturers of value-added products for
the Labware and Life Sciences, Clinical and Industrial, Diagnostics and
Microbiology, Laboratory Equipment, Professional Dental, Orthodontics and
Infection Control Products markets in the United States and abroad. Our Labware
and Life Sciences, Clinical and Industrial, Diagnostics and Microbiology and
Laboratory Equipment business segments (collectively, the "Laboratory Business")
are grouped under our subsidiary Sybron Laboratory Products Corporation, and our
Professional Dental, Orthodontics and Infection Control Products business
segments (collectively the "Dental Business") are grouped under a subsidiary
that is currently named Sybron Dental Specialties, Inc. The primary subsidiaries
in each of our business segments are as follows:
LABORATORY BUSINESS SUBSIDIARIES
Labware and Life Sciences Clinical and Industrial
Matrix Technologies Corporation Erie Scientific Company
Nalge Nunc International Corporation Chase Scientific Glass, Inc.
National Scientific Company The Naugatuck Glass Company
Nunc A/S Richard-Allan Scientific Company
Molecular BioProducts, Inc. Samco Scientific Corporation
Robbins Scientific Corporation Microm Laborgerate GmbH
Gerhard Menzel Glasbearbeitungswerk
GmbH & Co. K.G.
Diagnostics and Microbiology Laboratory Equipment
Applied Biotech, Inc. Barnstead Thermolyne Corporation
Microgenics Corporation Lab-Line Instruments, Inc.
Alexon-Trend, Inc.
Remel Inc.
DENTAL BUSINESS SUBSIDIARIES
Professional Dental Orthodontics
Kerr Corporation including its Demetron Division Ormco Corporation, including its
Sybron Canada Limited's Beavers Dental Division Analytic Endodontics Division
Kerr Italia S.p.A. Ormodent Group
Pinnacle Products, Inc. Ormco B.V.
Allesee Orthodontic Appliances, Inc.
Infection Control Products
Metrex Research Corporation, including its Alden Scientific
Division
13
15
When we use the terms "we" or "our" in this report, we are referring to
Sybron International Corporation and its subsidiaries. Our fiscal year ends on
September 30 and, accordingly, all references to quarters refer to the Company's
fiscal quarters. The quarters ended June 30, 1999 and 2000, refer to the
Company's third fiscal quarters of 1999 and 2000, respectively.
PROPOSED SPIN-OFF OF THE DENTAL BUSINESS
On April 24, 2000, Sybron International announced its intention to spin
off its Dental Business as a separate publicly traded company. The spin-off will
be effected by way of a pro rata dividend of the stock of SDS Holding Co. to the
Company's shareholders (the "Distribution"). SDS Holding Co. is a newly
organized Delaware subsidiary of the Company which will be renamed Sybron Dental
Specialties, Inc. ("SDS") in connection with the Distribution. SDS will own and
operate all of our dental group businesses, including those operated by the
subsidiary currently named Sybron Dental Specialties, Inc. This subsidiary will
be renamed Sybron Dental Management, Inc. ("SDM") in connection with the
Distribution, and will become a wholly owned subsidiary of SDS. Following the
Distribution, our shareholders will own shares in both SDS, which will then be
an independent public company operating the Dental Business, and Sybron
International, which will continue to operate the Company's Laboratory Business.
As an independent public company, SDS's stock is expected to trade on the New
York Stock Exchange ("NYSE") under the symbol "SYD". As previously announced,
the Company intends to change its name to Apogent Technologies Inc. following
the Distribution. The name change requires shareholder approval, which the
Company will seek at its 2001 annual meeting. Once shareholders approve the
name change, the Company expects its stock to trade on the NYSE under the
symbol "AOT."
The Distribution is subject to a number of conditions, including (i)
receipt by the Company of a favorable ruling from the Internal Revenue Service
concerning the tax-free nature of the Distribution, (ii) appropriate stock
market conditions for the Distribution, (iii) financing for Sybron International
and SDS as independent companies, (iv) completion of certain internal
restructuring steps, including the transfer of SDM and its dental businesses to
SDS, (v) receipt of approval to list SDS's common stock on the NYSE, (vi)
approval by Sybron International's board of directors of the final terms of the
Distribution, and (vii) effectiveness of a registration statement on Form 10
registering the stock of SDS under the Securities Exchange Act of 1934,
including an information statement that would be sent to the Company's
shareholders in connection with the Distribution.
On August 8, 2000, SDS filed its Form 10 with the SEC via EDGAR, under
its current name, "SDS Holding Co." The information in the Form 10 is
preliminary, and is subject to amendment and completion.
OVERVIEW
Over the past several years the Company has been pursuing a growth
strategy designed to increase sales and enhance operating margins. Elements of
that strategy include emphasis on acquisitions, product line extensions, new
product introductions, international growth and rationalization of existing
businesses and product lines. We rely heavily on debt to finance our growth
strategy, and our growth strategy has resulted over the years in substantial
portions of our sales, income and cash flows coming from international markets.
The environment for execution of our strategy has become significantly more
challenging over the past year as interest rates continue to increase and as the
U.S. dollar has strengthened against currencies in key markets for us. Increased
interest expense and the increased strength of the U.S. dollar reduced our
earnings by approximately $ 4.7 million (net of tax) for the quarter ended June
30, 2000, as compared with the same period last year. We expect a similar effect
in the fourth quarter, provided interest rates and the strength of the U.S.
dollar do not change. For further information about
14
16
our interest rate risk, see "Liquidity and Capital Resources," below, and "Item
3. Quantitative and Qualitative Disclosures about Market Risk -Interest Rates."
For further information about our foreign exchange risk, see "International
Operations," below, and "Item 3. Quantitative and Qualitative
Disclosures about Market Risk - Foreign Exchange."
Our results for the three and nine months ended June 30, 1999 include a
credit of approximately $1.1 million and a charge of approximately $1.6 million
relating to adjustments to our 1998 restructuring reserve and integration costs
associated with two mergers (the "1999 Special Charges").
Both our sales and operating income for the quarter and year to date
period ended June 30, 2000 grew over the corresponding prior year periods. Net
sales for the third quarter and the first nine months of fiscal 2000 increased
by 13.2% and 17.6%, respectively, over the corresponding fiscal 1999 periods.
Operating income for the third quarter and first nine months of fiscal 2000
increased by 11.4% and 19.4%, respectively, over the corresponding fiscal 1999
periods. Excluding the 1999 Special Charges, operating income for the third
quarter and the first nine months of fiscal 2000 increased by 13.2% and 18.4%,
respectively, over the corresponding fiscal 1999 periods.
Sales growth in the quarter was balanced both domestically and
internationally. In the third quarter of fiscal 2000, domestic and international
sales increased by 13.4% and by 12.7%, respectively, over the corresponding
fiscal 1999 quarter. For the first nine months of fiscal 2000, domestic and
international sales increased by 18.8% and 15.4%, respectively, over the
corresponding fiscal 1999 period. In both the third quarter and first nine
months of fiscal 2000, international sales growth was negatively impacted by the
strengthening of the U.S. dollar. Without the negative currency effects,
international sales growth for the quarter and first nine months of fiscal 2000
would have been 16.1% and 19.2%, respectively, over the corresponding fiscal
1999 periods.
Although healthy, our growth in sales and earnings were negatively
impacted in the quarter by lower than anticipated internal sales growth in our
Laboratory Business. The greatest part of the softness was caused by lower than
expected sales to a large OEM customer and by the streamlining of inventory at a
research/life science distributor. Ordering patterns of OEM customers and
distributors are unpredictable. The current conditions are expected to persist
through the fourth quarter and begin to resolve in the first quarter of next
year. This expectation is a forward looking statement, and is subject to a
number of uncertainties, including the ordering patterns of our OEM customers
and our distributors, which are beyond our control.
While Dental Business sales and earnings have enjoyed healthy growth
this year overall, this business has been soft in Europe for the third quarter
and the nine months ended June 30, 2000. This softness can be attributed to a
number of factors, including the strong U.S. dollar, competition, and
uncertainty regarding governmental reimbursement in Germany, which primarily
affects the Orthodontics business segment. These conditions are expected to
continue through the fourth quarter and possibly into the next fiscal year.
We continue to maintain an active program of developing and marketing
new products and product line extensions, as well as pursuing growth through
acquisitions. We completed eight acquisitions in the first nine months of fiscal
2000. (See Note 3 to the Unaudited Consolidated Financial
15
17
Statements.) Our ability to continue to grow at historical rates through
acquisitions is subject to a number of uncertainties, including but not limited
to the availability of suitable acquisition candidates at reasonable prices, our
ability to raise funds, and the cost of capital for acquisitions.
NON-CASH CHARGES
Our results of operations include goodwill amortization, other
amortization, and depreciation. These non-cash charges totaled $20.8 million and
$17.1 million for the quarters ended June 30, 2000 and 1999, respectively, and
$61.5 million and $49.7 million for the first nine months ended June 30, 2000
and 1999, respectively. Because our operating results reflect significant
depreciation and amortization expense largely associated with stepped-up assets,
goodwill and other intangibles from our acquisition program and the leveraged
buyout in 1987 of a company known at that time as Sybron Corporation (the
"Acquisition"), we believe our "Adjusted EBITDA" is a useful measure of our
ability to internally fund our liquidity requirements. "Adjusted EBITDA" (while
not a measure under generally accepted accounting principles ("GAAP"), and not a
substitute for GAAP-measured earnings or cash flows or an indication of
operating performance or a measure of liquidity) represents, for any relevant
period, net income from continuing operations plus (i) interest expense, (ii)
provision for income taxes, (iii) the 1999 Special Charges, and (iv)
depreciation and amortization, all determined on a consolidated basis and in
accordance with GAAP. Our "Adjusted EBITDA" amounted to $97.7 million and $84.6
million for the quarters ended June 30, 2000 and 1999, respectively, and $289.2
million and $240.5 million for the first nine months ended June 30, 2000 and
1999, respectively.
INTERNATIONAL OPERATIONS
Substantial portions of our sales, income and cash flows are derived
internationally. The financial position and the results of operations from
substantially all of our international operations, other than most U.S. export
sales, are measured using the local currency of the countries in which such
operations are conducted and are then translated into U.S. dollars. While the
reported income of foreign subsidiaries will be impacted by a weakening or
strengthening of the U.S. dollar in relation to a particular local currency, the
effects of foreign currency fluctuations are partially mitigated by the fact
that manufacturing costs and other expenses of foreign subsidiaries are
generally incurred in the same currencies in which sales are generated. Such
effects of foreign currency fluctuations are also mitigated by the fact that
such subsidiaries' operations are conducted in numerous foreign countries and,
therefore, in numerous foreign currencies. In addition, our U.S. export sales
may be impacted by foreign currency fluctuations relative to the value of the
U.S. dollar as foreign customers may adjust their level of purchases upward or
downward according to the weakness or strength of their respective currencies
versus the U.S. dollar.
From time to time we may employ currency hedges to mitigate the impact
of foreign currency fluctuations. If currency hedges are not employed, we may be
exposed to earnings volatility as a result of foreign currency fluctuations. In
October 1998, we decided to employ a series of foreign currency options with a
U.S. dollar notional amount of approximately $45.7 million at a cost of
approximately $0.3 million. These options were designed to protect the Company
from potential detrimental effects of currency movements associated with the
U.S. dollar versus the German mark, French franc, Swiss franc, and Japanese yen
in the second, third and fourth quarters of fiscal 1999. These options were sold
or expired worthless in their respective quarters of fiscal 1999 at a net gain
of $1.1 million. In November
16
18
1999, we again decided to employ a series of foreign currency options with a
U.S. dollar notional amount of approximately $47.6 million at a cost of
approximately $1.2 million. These options are designed to protect the Company
from potential detrimental effects of currency movements associated with the
U.S. dollar versus the Euro, Danish krone and Japanese yen in the second, third
and fourth quarters of fiscal 2000 as compared to the second, third and fourth
quarters of fiscal 1999. The options designed to mitigate the detrimental
effects on the Company from a strengthening of the U.S. dollar in the second
quarter of fiscal 2000 were sold or expired worthless during the second quarter
of fiscal 2000, at a net gain of $0.7 million. The options designed to mitigate
the detrimental effects on the Company from a strengthening of the U.S. dollar
in the third quarter of fiscal 2000 were sold or expired worthless during the
third quarter of fiscal 2000, at a net gain of $0.9 million. The remaining
contracts with a notional value of $15.9 million remained in place at June 30,
2000.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2000
COMPARED TO THE QUARTER ENDED JUNE 30, 1999
NET SALES.
FISCAL FISCAL DOLLAR PERCENT
NET SALES: (IN THOUSANDS) 1999 2000 CHANGE CHANGE
- ------------------------- ---- ---- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 70,682 $ 86,810 $ 16,128 22.8%
Clinical and Industrial 45,370 50,270 4,900 10.8%
Diagnostics and Microbiology 42,918 50,636 7,718 18.0%
Laboratory Equipment 24,554 24,313 (241) (1.0)%
-------- -------- ---------- -----
Subtotal Laboratory Business 183,524 212,029 28,505 15.5%
DENTAL BUSINESS:
Professional Dental 48,311 53,451 5,140 10.6%
Orthodontics 42,059 44,270 2,211 5.3%
Infection Control Products 6,157 7,265 1,108 18.0%
--------- --------- -------- ----
Subtotal Dental Business 96,527 104,986 8,459 8.8%
-------- ------- -------- -----
Total Net Sales $280,051 $317,015 $ 36,964 13.2%
======= ======= ======= ====
Overall Company. Net sales for the third quarter of fiscal 2000, the period
ended June 30, 2000, increased by $37.0 million or 13.2% from the corresponding
fiscal 1999 quarter. Net sales for the Laboratory Business increased by $28.5
million in the third quarter of fiscal 2000, an increase of 15.5% from the
Laboratory Business's net sales in the corresponding fiscal 1999 quarter. Net
sales for the Dental Business increased by $8.5 million in the third quarter of
fiscal 2000, an increase of 8.8% from the Dental Business's net sales in the
corresponding fiscal 1999 quarter.
Labware and Life Sciences. Increased net sales in the Labware and Life
Sciences segment resulted primarily from: (a) net sales of products of acquired
companies (approximately $15.5 million), (b) increased net sales of new products
(approximately $0.7 million) and (c) increased net sales of existing products
(approximately $0.5 million). Increased net sales were partially offset by: (a)
unfavorable foreign currency fluctuations (approximately $0.4 million) and (b)
price decreases (approximately $0.2 million). Net sales were also negatively
impacted by the previously discussed OEM and distributor softness.
17
19
Clinical and Industrial. Increased net sales in the Clinical and Industrial
segment resulted primarily from: (a) net sales of products of acquired companies
(approximately $7.3 million) and (b) price increases (approximately $0.7
million). Increased net sales were partially offset by: (a) decreased net sales
of existing products (approximately $2.5 million) and (b) unfavorable foreign
currency fluctuations (approximately $0.6 million).
Diagnostics and Microbiology. Increased net sales in the Diagnostics and
Microbiology segment resulted primarily from: (a) net sales of products of
acquired companies net of discontinued products (approximately $6.2 million),
(b) increased net sales of new products (approximately $1.9 million) and (c)
price increases (approximately $0.9 million). Increased net sales were partially
offset by: (a) decreased net sales of existing products (approximately $1.2
million) and (b) unfavorable foreign currency fluctuations (approximately $0.1
million). Net sales were also negatively impacted by the previously discussed
OEM and distributor softness.
Laboratory Equipment. Decreased net sales in the Laboratory Equipment
segment resulted primarily from: (a) decreased net sales of discontinued product
lines (approximately $0.6 million) and (b) decreased net sales of existing
products (approximately $0.5 million). Decreased net sales were partially offset
by: (a) increased net sales of new products (approximately $0.5 million) and (b)
price increases (approximately $0.4 million).
Professional Dental. Increased net sales in the Professional Dental segment
resulted primarily from: (a) increased net sales of new products (approximately
$9.4 million) and (b) net sales of products from an acquired company
(approximately ($0.9 million). Increased net sales were partially offset by: (a)
a decrease in existing product net sales (approximately $4.2 million) and (b)
unfavorable foreign currency fluctuations (approximately $1.0 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of new products (approximately $3.1
million) and (b) net sales of products from an acquired company (approximately
$1.4 million). Increased net sales were partially offset by: (a) unfavorable
foreign currency fluctuations (approximately $1.2 million) and (b) decreased net
sales of existing products (approximately $1.1 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from: (a) net sales of products of an
acquired company (approximately $1.0 million) and (b) increased net sales of
existing products (approximately $ 0.1 million).
GROSS PROFIT.
FISCAL PERCENT OF FISCAL PERCENT OF DOLLAR PERCENT
GROSS PROFIT: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ---------------------------- ---- ----- ---- ----- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 36,590 51.8% $ 45,919 52.9% $ 9,329 25.5%
Clinical and Industrial 19,567 43.1% 22,124 44.0% 2,557 13.1%
Diagnostics and Microbiology 21,667 50.5% 27,200 53.7% 5,533 25.5%
Laboratory Equipment 10,283 41.9% 10,166 41.8% (117) (1.1)%
-------- ---- -------- ---- -------- -----
Subtotal Laboratory Business 88,107 48.0% 105,409 49.7% 17,302 19.6%
DENTAL BUSINESS:
Professional Dental 27,036 56.0% 30,335 56.8% 3,299 12.2%
18
20
Orthodontics 26,934 64.0% 26,636 60.2% (298) (1.1)%
Infection Control Products 3,338 54.2% 3,672 50.5% 334 10.0%
------- ---- ------- ---- ------- -----
Subtotal Dental Business 57,308 59.4% 60,643 57.8% 3,335 5.8%
------- ---- ------- ---- ------- -----
Total Gross Profit $145,415 51.9% $166,052 52.4% $ 20,637 14.2%
======= ==== ======= ==== ======= =====
Overall Company. Gross profit for the quarter ended June 30, 2000 increased
by $20.6 million or 14.2% from the corresponding fiscal 1999 period. Gross
profit for the Laboratory Business increased by $17.3 million in the third
quarter of fiscal 2000, an increase of 19.6% from the Laboratory Business's
gross profit in the corresponding fiscal 1999 quarter. Gross profit for the
Dental Business increased by $3.3 million in the third quarter of fiscal 2000,
an increase of 5.8% from the Dental Business's gross profit in the corresponding
fiscal 1999 quarter.
Labware and Life Sciences. Increased gross profit in the Labware and Life
Sciences segment resulted primarily from: (a) the effects of acquired companies
(approximately $8.4 million), (b) a favorable product mix (approximately $2.1
million) and (c) increased volume (approximately $1.5 million). Increased gross
profit was partially offset by: (a) increased manufacturing overhead
(approximately $1.4 million), (b) inventory valuation adjustments (approximately
$0.7 million), (c) unfavorable foreign currency fluctuations (approximately $
0.4 million) and (d) price decreases (approximately $0.2 million). Gross profit
was also negatively impacted by the previously discussed OEM and distributor
softness.
Clinical and Industrial. Increased gross profit in the Clinical and
Industrial segment resulted primarily from: (a) the effects of acquired
companies (approximately $2.6 million), (b) price increases (approximately $0.7
million), (c) an improved product mix (approximately $ 0.3 million) and (d)
inventory valuation adjustments (approximately $0.3 million). Increased gross
profit was partially offset by: (a) decreased volume (approximately $ 0.7
million), (b) increased manufacturing overhead (approximately $ 0.5 million) and
(c) unfavorable foreign currency fluctuations (approximately $0.1 million).
Diagnostics and Microbiology. Increased gross profit in the Diagnostics and
Microbiology segment resulted primarily from: (a) the effects of acquired
companies net of discontinued product lines (approximately $3.4 million), (b) a
favorable product mix (approximately $1.0 million), (c) price increases
(approximately $0.9 million), (d) increased volume (approximately $0.8 million)
and (e) decreased manufacturing overhead (approximately $0.6 million). Increased
gross profit was partially offset by: (a) inventory adjustments (approximately
$1.0 million) and (b) unfavorable currency fluctuations (approximately $0.2
million). Gross profit was also negatively impacted by the previously discussed
OEM and distributor softness.
Laboratory Equipment. Decreased gross profit resulted primarily from: (a)
inventory valuation adjustments (approximately $0.6 million) and (b) decreased
volume (approximately $0.4 million). Decreased gross profit was partially offset
by: (a) price increases (approximately $0.4 million), (b) decreased
manufacturing overhead (approximately $0.4 million), and (c) product mix
(approximately $0.1 million).
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $3.0
million), (b) a favorable product mix (approximately $0.9 million), (c) the
effects of an acquired company (approximately $0.8 million) and (d) inventory
valuation adjustments (approximately $0.1 million). Increased gross profit was
partially offset by: (a)
19
21
increased manufacturing costs (approximately $1.0 million) and (b) unfavorable
foreign currency fluctuations (approximately $0.5 million).
Orthodontics. Decreased gross profit in the Orthodontics segment resulted
primarily from: (a) increased manufacturing costs (approximately $3.0 million)
and (b) unfavorable foreign currency fluctuations (approximately $1.2 million).
Decreased gross profit was partially offset by: (a) a favorable product mix
(approximately $2.0 million), (b) increased volume (approximately $1.3 million),
(c) the effects of an acquired company (approximately $0.4 million) and (d)
inventory valuation adjustments (approximately $0.2 million).
Infection Control Products. Increased gross profit in the Infection Control
Products segment resulted primarily from: (a) effects of an acquired company
(approximately $0.7 million) and (b) increased volume (approximately $0.1
million). Increased gross profit was partially offset by: (a) decreased
manufacturing costs (approximately $0.2 million), (b) an unfavorable product mix
(approximately $0.2 million) and (c) inventory valuation adjustments
(approximately $0.1 million). Gross margins in the Infection Control Products
segment were negatively impacted by costs associated with issues relating to the
FDA inspection of Metrex Research, Inc.'s Parker, Colorado facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
SELLING GENERAL AND ADMINISTRATIVE
- ---------------------------------- PERCENT OF PERCENT OF DOLLAR PERCENT
EXPENSES: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ----------------------------- ---- ----- ---- ----- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 18,031 25.5% $ 25,096 28.9% $ 7,065 39.2%
Clinical and Industrial 7,749 17.1% 8,800 17.5% 1,051 13.6%
Diagnostics and Microbiology 11,100 25.9% 13,736 27.1% 2,636 23.7%
Laboratory Equipment 4,980 20.3% 4,806 19.8% (174) (3.5)%
-------- ---- -------- ---- -------- ------
Subtotal Laboratory Business 41,860 22.8% 52,438 24.7% 10,578 25.3%
DENTAL BUSINESS:
Professional Dental 14,836 30.7% 15,821 29.6% 985 6.6%
Orthodontics 13,908 33.1% 16,033 36.2% 2,125 15.3%
Infection Control Products 2,576 41.8% 2,966 40.8% 390 15.1%
-------- ---- -------- ---- --------- -----
Subtotal Dental Business 31,320 32.4% 34,820 33.2% 3,500 11.2%
Corporate Office 3,605 N/A 2,307 N/A (1,298) (36.0)%
-------- ---- -------- ---- ------- -----
Total Selling General and
Administrative Expenses $ 76,785 27.4% $ 89,565 28.3% $ 12,780 16.6%
======= ==== ======= ==== ======= ====
Overall Company. Selling, general and administrative expenses for the
quarter ended June 30, 2000 increased by $12.8 million or 16.6% from the
corresponding fiscal 1999 quarter. Selling, general and administrative expenses
for the Laboratory Business increased by $10.6 million in the third quarter of
20
22
fiscal 2000, an increase of 25.3% from the Laboratory Business's corresponding
fiscal 1999 quarter. Selling, general and administrative expenses for the Dental
Business increased by $3.5 million in the third quarter of fiscal 2000, an
increase of 11.2% from the Dental Business's corresponding fiscal 1999 quarter.
Selling, general and administrative expenses at the corporate office decreased
by $1.3 million in the third quarter of fiscal 2000, a decrease of 36.0% from
the corporate office's corresponding fiscal 1999 quarter.
Labware and Life Sciences. Increased selling, general and administrative
expenses in the Labware and Life Sciences segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $4.9 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $1.7 million),
(c) increased general and administrative expenses (approximately $0.4 million)
and (d) increased selling and marketing expenses (approximately $0.3 million).
The increased selling, general and administrative expenses were partially offset
by the non-recurring 1999 Special Charges (approximately $0.2 million).
Clinical and Industrial. Increased selling, general and administrative
expenses in the Clinical and Industrial segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $1.1 million), (b) increased selling and marketing
expenses (approximately $0.6 million) and (c) increased amortization of
intangibles primarily as a result of acquisitions (approximately $0.2 million).
Increased selling, general and administrative expenses were partially offset by:
(a) decreased general and administrative expenses (approximately $0.7 million)
and (b) favorable foreign currency fluctuations (approximately $0.1 million).
Diagnostics and Microbiology. Increased selling, general and administrative
expenses in the Diagnostics and Microbiology segment resulted primarily from:
(a) increased selling, general and administrative expenses as a result of
acquired businesses (approximately $1.7 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $1.4 million),
and (c) increased selling and marketing expense (approximately $0.4 million).
Increased selling, general and administrative expenses were partially offset by:
(a) decreased general and administrative expenses (approximately $0.7 million)
and (b) favorable foreign currency fluctuations (approximately $0.2 million).
Laboratory Equipment. Decreased selling, general and administrative expenses
in the Laboratory Equipment segment resulted primarily from: (a) decreased
general and administrative expenses (approximately $0.2 million), (b) decreased
selling and marketing expenses (approximately $0.1 million), and (c) the
non-recurring 1999 Special Charges (approximately $0.1 million). Decreased
selling, general and administrative expenses were partially offset by: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $0.1 million) and (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $0.1 million).
Professional Dental. Increased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) increased
general and administrative expenses (approximately $0.6 million), (b)
unfavorable foreign currency fluctuations (approximately $0.3 million), (c)
increased research and development expenses (approximately $0.1 million), and
(d) increased amortization of intangibles primarily as a result of acquisitions
(approximately $0.1 million). Increased selling, general
21
23
and administrative expenses were partially offset by decreased sales and
marketing expenses (approximately $0.1 million).
Orthodontics. Increased selling, general and administrative expenses in the
Orthodontics segment resulted primarily from: (a) a 1999 non-recurring reversal
of 1999 Special Charges (approximately $1.2 million), (b) increased sales and
marketing expenses (approximately $0.6 million), (c) increased general and
administrative expenses (approximately $0.4 million), and (d) general and
administrative expenses as a result of acquired companies (approximately $0.3
million). Increased selling, general and administrative expenses in the
Orthodontics segment were partially offset by decreased research and development
expenses (approximately $0.4 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of an
acquired company (approximately $0.2 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $0.1 million),
and (c) increased selling and marketing expenses (approximately $0.1 million).
Corporate Office. Decreased selling, general and administrative expenses at
the corporate office resulted primarily from a decrease in employee compensation
primarily related to fiscal 2000 bonus accruals (approximately $1.3 million).
OPERATING INCOME.
PERCENT OF PERCENT OF DOLLAR PERCENT
OPERATING INCOME: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- -------------------------------- ---- ----- ---- ----- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 18,559 26.3% $ 20,823 24.0% $ 2,264 12.2%
Clinical and Industrial 11,818 26.0% 13,324 26.5% 1,506 12.7%
Diagnostics and Microbiology 10,567 24.6% 13,464 26.6% 2,897 27.4%
Laboratory Equipment 5,303 21.6% 5,360 22.0% 57 1.1%
-------- ---- ------- ---- ------- -----
Subtotal Laboratory Business 46,247 25.2% 52,971 25.0% 6,724 14.5%
DENTAL BUSINESS:
Professional Dental 12,200 25.3% 14,514 27.2% 2,314 19.0%
Orthodontics 13,026 31.0% 10,603 24.0% (2,423) (18.6)%
Infection Control Products 762 12.4% 706 9.7% (56) (7.3)%
-------- ---- ------- ---- ------- -----
Subtotal Dental Business 25,988 26.9% 25,823 24.6% (165) (0.6)%
-----
Corporate Office (3,605) N/A (2,307) N/A 1,298 (36.0)%
-------- ---- ------- ---- ------- -----
Total Operating Income $ 68,630 24.5% $ 76,487 24.1% $ 7,857 11.4%
======== ==== ======= ==== ======= =====
As a result of the foregoing, operating income in the third quarter of
fiscal 2000 increased by 11.4% or $7.9 million over operating income in the
corresponding quarter of fiscal 1999.
INTEREST EXPENSE.
Interest expense was $18.8 million in the third quarter of fiscal 2000, an
increase of $5.0 million from the corresponding fiscal 1999 quarter. The
increase resulted from a higher average debt balance in 2000,
22
24
resulting primarily from funding acquisitions, an increase in average interest
rates primarily due to an increase in the average Eurodollar Rate and the
addition of a Term B Loan in July 1999 that increased availability under the
Revolving Credit Facility by $300 million. The Term B Loan bears interest at
1.25% higher than the Revolving Credit Facility.
INCOME TAXES.
Taxes on income before an extraordinary item in the third quarter of fiscal
2000 were $22.9 million, an increase of $1.4 million from the corresponding 1999
quarter. The increase resulted primarily from increased taxable earnings.
INCOME BEFORE EXTRAORDINARY ITEM.
As a result of the foregoing we had net income from continuing operations of
$35.2 million in the third quarter of fiscal 2000, as compared to $33.3 million
in the corresponding 1999 period.
EXTRAORDINARY ITEM.
On March 31, 1999, Sybron completed the sale of NPT to Norton Performance
Plastics Corporation. Net proceeds from the sale, net of estimated selling
expenses of $1.7 million, amounted to $86.0 million. The Company realized a gain
on this sale in the second quarter of fiscal 1999 (net of tax of $18.7 million)
of $18.8 million. Reductions to the gain were made in the Company's third and
fourth fiscal quarters of 1999 of $0.8 million each reducing the final gain on
the sale of NPT to $17.2 million.
NET INCOME.
As a result of the foregoing, we had net income of $35.2 million in the
third quarter of fiscal 2000, as compared to net income of $32.5 million in the
corresponding 1999 period.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization expense is allocated among cost of sales,
selling, general and administrative expenses and other expense. Depreciation and
amortization increased $3.7 million in the third quarter of fiscal 2000 due to
additional depreciation and amortization from the step-up of assets, goodwill
and intangibles recorded from the various acquisitions as well as routine
operating capital expenditures.
FIRST NINE MONTHS ENDED JUNE 30, 2000
COMPARED TO THE FIRST NINE MONTHS ENDED JUNE 30, 1999
NET SALES.
FISCAL FISCAL DOLLAR PERCENT
NET SALES: (IN THOUSANDS) 1999 2000 CHANGE CHANGE
- ------------------------- ---- ---- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 192,599 $ 252,292 $ 59,693 31.0%
23
25
Clinical and Industrial 129,784 156,847 27,063 20.9%
Diagnostics and Microbiology 119,841 154,431 34,590 28.9%
Laboratory Equipment 73,118 71,416 (1,702) (2.3)%
-------- -------- -------- -----
Subtotal Laboratory Business 515,342 634,986 119,644 23.2%
DENTAL BUSINESS:
Professional Dental 140,303 156,273 15,970 11.4%
Orthodontics 127,009 131,030 4,021 3.2%
Infection Control Products 17,744 19,362 1,618 9.1%
-------- -------- --------- -----
Subtotal Dental Business 285,056 306,665 21,609 7.6%
-------- -------- --------- -----
Total Net Sales $800,398 $941,651 $141,253 17.6%
======== ======== ========= =====
Overall Company. Net sales for the nine months ended June 30, 2000 increased
by $141.3 million or 17.6% from the corresponding fiscal 1999 period. Net sales
for the Laboratory Business increased by $119.6 million in the first nine months
of fiscal 2000, an increase of 23.2% from the Laboratory Business's net sales in
the corresponding fiscal 1999 period. Net sales for the Dental Business
increased by $21.6 million in the first nine months of fiscal 2000, an increase
of 7.6% from the Dental Business's net sales in the corresponding fiscal 1999
period.
Labware and Life Sciences. Increased net sales in the Labware and Life
Sciences segment resulted primarily from: (a) net sales of products of acquired
companies (approximately $48.9 million), (b) increased net sales of existing
products (approximately $11.0 million) and (c) increased net sales of new
products (approximately $1.5 million). Increased net sales were partially offset
by unfavorable foreign currency fluctuations (approximately $1.7 million). Net
sales were also negatively impacted by the previously discussed OEM and
distributor softness.
Clinical and Industrial. Increased net sales in the Clinical and Industrial
segment resulted primarily from: (a) net sales of products of acquired companies
(approximately $22.0 million), (b) price increases (approximately $3.6 million),
and (c) increased net sales of existing products (approximately $3.4 million).
Increased net sales were partially offset by unfavorable foreign currency
fluctuations (approximately $1.9 million).
Diagnostics and Microbiology. Increased net sales in the Diagnostics and
Microbiology segment resulted primarily from: (a) net sales of products of
acquired companies net of discontinued products (approximately $26.0 million),
(b) increased net sales of existing products (approximately $5.0 million), (c)
increased net sales of new products (approximately $2.9 million) and (d) price
increases (approximately $0.8 million). Increased net sales were partially
offset by unfavorable foreign currency fluctuations (approximately
$0.1 million). Net sales were also negatively impacted by the previously
discussed OEM and distributor softness.
Laboratory Equipment. Decreased net sales in the Laboratory Equipment
segment resulted primarily from decreased net sales of existing products
primarily related to the constant temperature business, ovens and incubators
(approximately $3.6 million) and (b) unfavorable foreign currency fluctuations
(approximately $0.1 million). The constant temperature business is expected to
continue to undergo pressure due to the large number of competing companies in
the marketplace. Decreased net sales were partially offset by: (a) increased net
sales of new products (approximately $1.1 million) and (b) price increases
(approximately $0.9 million).
Professional Dental. Increased net sales in the Professional Dental segment
resulted primarily from: (a) increased net sales of new products (approximately
$22.6 million), and (b) net sales of products of
24
26
acquired companies net of discontinued products (approximately $0.8 million).
Increased net sales were partially offset by: (a) decreased net sales of
existing products (approximately $5.2 million) and (b) unfavorable foreign
currency fluctuations (approximately $2.2 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of new products (approximately $6.2
million) and (b) increased net sales of products of an acquired company
(approximately $3.4 million). Increased net sales were partially offset by: (a)
unfavorable foreign currency fluctuations (approximately $3.5 million) and (b)
decreased net sales of existing products (approximately $2.1 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from net sales of products of an acquired
company (approximately $3.0 million) partially offset by decreased net sales of
existing products due to product life cycle maturities and from a voluntary
suspension of sales of certain products as the result of issues raised by an FDA
inspection of Metrex Research, Inc.'s Parker, Colorado facility. The impact of
the action was mitigated by Metrex's ability to supply substitute products to
its customers (approximately $1.4 million).
GROSS PROFIT.
FISCAL PERCENT OF FISCAL PERCENT OF DOLLAR PERCENT
GROSS PROFIT: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ---------------------------- ---- ----- ---- ----- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 98,575 51.2% $ 131,942 52.3% $ 33,367 33.8%
Clinical and Industrial 54,674 42.1% 67,034 42.7% 12,360 22.6%
Diagnostics and Microbiology 61,158 51.0% 83,633 54.2% 22,475 36.7%
Laboratory Equipment 30,414 41.6% 30,056 42.1% (358) (1.2)%
-------- ---- -------- ---- -------- ----
Subtotal Laboratory Business 244,821 47.5% 312,665 49.2% 67,844 27.7%
DENTAL BUSINESS:
Professional Dental 78,456 55.9% 88,921 56.9% 10,465 13.3%
Orthodontics 79,574 62.7% 80,236 61.2% 662 0.8%
Infection Control Products 9,729 54.8% 9,295 48.0% (434) (4.5)%
--------- ---- -------- ---- -------- ----
Subtotal Dental Business 167,759 58.9% 178,452 58.2% 10,693 6.4%
------- ---- -------- ---- -------- ----
Total Gross Profit $412,580 51.5% $ 491,117 52.2% $ 78,537 19.0%
======= ==== ======== ==== ======= ====
Overall Company. Gross profit for the nine months ended June 30, 2000
increased by $78.5 million or 19.0% from the corresponding fiscal 1999 period.
Gross profit for the Laboratory Business increased by $67.8 million in the first
nine months of fiscal 2000, an increase of 27.7% from the Laboratory Business's
gross profit in the corresponding fiscal 1999 period. Gross profit for the
Dental Business increased by $10.7 million in the first nine months of fiscal
2000, an increase of 6.4% from the Dental Business's gross profit in the
corresponding fiscal 1999 period.
Labware and Life Sciences. Increased gross profit in the Labware and Life
Sciences segment resulted primarily from: (a) the effects of acquired companies
(approximately $26.6 million), (b) increased volume (approximately $6.7
million), (c) a favorable product mix (approximately $4.3 million), (d)
inventory valuation adjustments (approximately $0.5 million) and (e) favorable
foreign currency fluctuations (approximately $0.6 million). Increased gross
profit was partially offset by increased
25
27
manufacturing overhead (approximately $5.3 million). Gross profit was also
negatively impacted by the previously discussed OEM and distributor softness.
Clinical and Industrial. Increased gross profit in the Clinical and
Industrial segment resulted primarily from: (a) the effects of acquired
companies (approximately $8.2 million), (b) price increases (approximately $3.6
million), (c) an improved product mix (approximately $3.0 million), (d)
increased volume (approximately $1.5 million) and (e) inventory valuation
adjustments (approximately $0.5 million). Increased gross profit was partially
offset by: (a) increased manufacturing overhead (approximately $4.1 million) and
(b) unfavorable effects of foreign currency fluctuations (approximately $0.3
million).
Diagnostics and Microbiology. Increased gross profit in the Diagnostics and
Microbiology segment resulted primarily from: (a) the effects of acquired
companies net of discontinued product lines (approximately $16.8 million), (b) a
favorable product mix (approximately $3.9 million), (c) increased volume
(approximately $3.4 million) and (d) price increases (approximately $0.8
million). Increased gross profit was partially offset by: (a) increased
manufacturing overhead (approximately $2.1 million), (b) unfavorable effects of
foreign currency fluctuations (approximately $0.2 million) and (c) inventory
valuation adjustments (approximately $0.1 million). Gross profit was also
negatively impacted by the previously discussed OEM and distributor softness.
Laboratory Equipment. Decreased gross profit in the Laboratory Equipment
segment resulted primarily from: (a) reduced volume (approximately $1.2 million)
and (b) inventory valuation adjustments (approximately $0.7 million). Decreased
gross profit was partially offset by: (a) price increases (approximately $0.8
million), (b) decreased manufacturing overhead (approximately $0.3 million), (c)
an improved product mix (approximately $0.3 million), and (d) the effects of
acquired companies (approximately $0.1 million).
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $10.3
million), (b) a favorable product mix (approximately $2.3 million) and (c) the
effects of an acquired company net of discontinued product lines (approximately
$0.7 million). Increased gross profit was partially offset by: (a) increased
manufacturing costs (approximately $1.7 million), (b) unfavorable foreign
currency fluctuations (approximately $0.8 million) and (c) inventory valuation
adjustments (approximately $0.3 million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) a favorable product mix (approximately $4.7 million), (b)
increased volume (approximately $2.7 million) and (c) the effects of an acquired
company (approximately $1.0 million). Increased gross profit was partially
offset by: (a) increased manufacturing costs (approximately $3.7 million), (b)
unfavorable foreign currency fluctuations (approximately $3.4 million) and (c)
inventory valuation adjustments (approximately $0.6 million).
Infection Control Products. Decreased gross profit in the Infection Control
Products segment resulted primarily from: (a) decreased volume (approximately
$0.8 million), (b) increased manufacturing costs (approximately $0.7 million),
(c) costs associated with the product recall referred to above, including the
write-off of inventory (approximately $0.6 million), (d) product mix
(approximately $0.2 million) and (e) inventory valuation adjustments
(approximately $0.1 million). Decreased gross profit was partially offset by:
the effects of an acquired company (approximately $2.0 million).
26
28
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
SELLING GENERAL AND ADMINISTRATIVE
- ---------------------------------- PERCENT OF PERCENT OF DOLLAR PERCENT
EXPENSES: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ----------------------------- ---- ----- ---- ----- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 49,867 25.9% $ 72,074 28.6% $ 22,207 44.5%
Clinical and Industrial 22,278 17.2% 26,995 17.2% 4,717 21.2%
Diagnostics and Microbiology 30,837 25.7% 42,598 27.6% 11,761 38.1%
Laboratory Equipment 15,294 20.9% 15,168 21.2% (126) (0.8)%
-------- ---- -------- ---- -------- ----
Subtotal Laboratory Business 118,276 23.0% 156,835 24.7% 38,559 32.6%
DENTAL BUSINESS:
Professional Dental 46,438 33.1% 44,800 28.7% (1,638) (3.5)%
Orthodontics 42,538 33.5% 46,011 35.1% 3,473 8.2%
Infection Control Products 7,308 41.2% 7,937 41.0% 629 8.6%
-------- ---- -------- ---- -------- ----
Subtotal Dental Business 96,284 33.8% 98,748 32.2% 2,464 2.6%
Corporate Office 8,011 N/A 8,588 N/A 577 7.2%
-------- ---- -------- ---- -------- ----
Total Selling General and
Administrative Expenses $ 222,571 27.8% $264,171 28.1% $ 41,600 18.7%
======== ==== ======== ==== ======== ====
Overall Company. Selling, general and administrative expenses for the nine
months ended June 30, 2000 increased by $41.6 million or 18.7% from the
corresponding fiscal 1999 period. Selling, general and administrative expenses
for the Laboratory Business increased by $38.6 million in the first nine months
of fiscal 2000, an increase of 32.6% from the Laboratory Business's
corresponding fiscal 1999 period. Selling, general and administrative expenses
for the Dental Business increased by $2.5 million in the first nine months of
fiscal 2000, an increase of 2.6% from the Dental Business's corresponding fiscal
1999 period. Selling, general and administrative expenses at the corporate
office increased by $0.6 million in the first nine months of fiscal 2000, an
increase of 7.2% from the corporate office's corresponding fiscal 1999 period.
Labware and Life Sciences. Increased selling, general and administrative
expenses in the Labware and Life Sciences segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $15.0 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $4.4 million),
(c) increased selling and marketing expenses (approximately $1.6 million) and
(d) increased general and administrative expenses (approximately $1.5 million).
Increased selling, general and administrative expenses were partially offset by:
(a) favorable foreign currency fluctuations (approximately $0.2 million) and (b)
the non-recurring 1999 special charges (approximately $0.1 million).
Clinical and Industrial. Increased selling, general and administrative
expenses in the Clinical and Industrial segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $3.8 million), (b) increased selling and marketing
expenses (approximately $1.2 million) and (c) increased amortization of
intangibles primarily as a result of acquisitions (approximately $0.7 million).
Increased selling, general and administrative expenses were partially offset by:
(a) decreased general and administrative expenses (approximately $0.7 million)
and (b) favorable foreign currency fluctuations (approximately $0.3 million).
Diagnostics and Microbiology. Increased selling, general and administrative
expenses in the Diagnostics and Microbiology segment resulted primarily from:
(a) increased selling, general and administrative expenses as a result of
acquired businesses (approximately $7.2 million), (b) increased
27
29
amortization of intangibles primarily as a result of acquisitions (approximately
$3.9 million) and (c) increased selling and marketing expenses (approximately
$1.6 million). Increased selling, general and administrative expenses were
partially offset by : (a) decreased general and administrative expenses
(approximately $0.6 million), (b) favorable foreign currency fluctuations
(approximately $0.2 million), and (c) decreased research and development
expenses (approximately $0.1 million).
Laboratory Equipment. Decreased selling, general and administrative expenses
in the Laboratory Equipment segment resulted primarily from: (a) decreased
selling and marketing expenses (approximately $0.6 million) and (b) decreased
general and administrative expenses (approximately $0.2 million). Decreased
selling, general and administrative expenses were partially offset by: (a)
increased research and development expenses (approximately $0.4 million), (b)
increased selling, general and administrative expense as a result of
acquisitions (approximately $0.2 million), and (c) increased amortization of
intangibles primarily as a result of acquired businesses (approximately $0.1
million).
Professional Dental. Decreased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) the
non-recurring 1999 Special Charges (approximately $2.0 million) and (b)
decreased selling and marketing expenses (approximately $0.6 million). Decreased
selling, general and administrative expenses in the Professional Dental segment
were partially offset by: (a) unfavorable foreign currency fluctuations
(approximately $0.5 million), (b) increased general and administrative expenses
(approximately $0.3 million), and (c) increased amortization of intangibles
primarily as a result of an acquisition (approximately $0.2 million).
Orthodontics. Increased selling, general and administrative expenses in the
Orthodontics segment resulted primarily from: (a) increased general and
administrative expenses (approximately $1.9 million), (b) a non-recurring 1999
reversal of special charges (approximately $1.2 million), (c) increased selling,
general and administrative expenses as a result of acquired companies
(approximately $0.9 million), (d) increased amortization of intangibles
primarily as a result of acquisitions (approximately $0.4 million), (e)
increased selling and marketing expenses (approximately $0.2 million) and (f)
unfavorable foreign currency fluctuations (approximately $0.1 million).
Increased selling, general and administrative expenses in the Orthodontics
segment were partially offset by (a) decreased research and development expenses
(approximately $0.7 million) and (b) the non-recurring 1999 Special Charges
(approximately $0.5 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
companies (approximately $0.4 million) and (b) amortization of intangibles
primarily from acquired businesses (approximately $0.3 million). Increased
selling, general and administrative expenses were partially offset by decreased
selling and marketing expenses (approximately $0.1 million).
Corporate Office. Increased selling, general and administrative expenses at
the corporate office resulted primarily from: (a) an increase in legal expense
and professional fees (approximately $1.9 million) partially offset by a
reduction in employee compensation and benefits (approximately $1.3 million).
28
30
OPERATING INCOME.
PERCENT OF PERCENT OF DOLLAR PERCENT
OPERATING INCOME: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- -------------------------------- ---- ----- ---- ----- ------ ------
LABORATORY BUSINESS:
Labware and Life Sciences $ 48,708 25.3% $ 59,868 23.7% $ 11,160 22.9%
Clinical and Industrial 32,396 25.0% 40,039 25.5% 7,643 23.6%
Diagnostics and Microbiology 30,321 25.3% 41,035 26.6% 10,714 35.3%
Laboratory Equipment 15,120 20.7% 14,888 20.8% (232) (1.5)%
-------- ---- ---------- ---- ------- -----
Subtotal Laboratory Business 126,545 24.6% 155,830 24.5% 29,285 23.1%
DENTAL BUSINESS:
Professional Dental 32,018 22.8% 44,121 28.2% 12,103 37.8%
Orthodontics 37,036 29.2% 34,225 26.1% (2,811) (7.6)%
Infection Control Products 2,421 13.6% 1,358 7.0% (1,063) (43.9)%
-------- ---- ---------- ---- ------- -----
Subtotal Dental Business 71,475 25.1% 79,704 26.0% 8,229 11.5%
Corporate Office (8,011) N/A (8,588) 0.0% (577) 7.2%
-------- ---- ---------- ---- ------- -----
Total Operating Income $190,009 23.7% $ 226,946 24.1% $ 36,937 19.4%
======== ==== ========== ==== ======= =====
As a result of the foregoing, operating income in the first nine months of
fiscal 2000 increased by 19.4% or $36.9 million over operating income in the
corresponding fiscal 1999 period.
INTEREST EXPENSE.
Interest expense was $55.0 million in the first nine months of fiscal 2000,
an increase of $13.1 million from the corresponding fiscal 1999 period. The
increase resulted from a higher average debt balance in 2000, resulting
primarily from funding acquisitions (partially offset by the application of
proceeds from the sale of Nalge Process Technologies Group, Inc. ("NPT") in
March 1999), an increase in average interest rates primarily due to an increase
in the Eurodollar Rate and the addition of a Term B Loan in July 1999.
INCOME TAXES.
Taxes on income from continuing operations in the first nine months of
fiscal 2000 were $68.2 million, an increase of $10.1 million from the
corresponding 1999 period. The increase resulted primarily from increased
taxable earnings.
INCOME FROM CONTINUING OPERATIONS.
As a result of the foregoing we had net income from continuing operations of
$104.6 million in the first nine months of fiscal 2000, as compared to $89.2
million in the corresponding 1999 period.
DISCONTINUED OPERATIONS.
Income from discontinued operations was $0.1 million in the first nine
months of fiscal 1999. The 1999 discontinued operations resulted from the
operating results of NPT.
EXTRAORDINARY ITEM.
On March 31, 1999, Sybron completed the sale of NPT to Norton Performance
Plastics Corporation.
29
31
Net proceeds from the sale, net of estimated selling expenses of $1.7 million,
amounted to $86.0 million. The Company realized a gain on this sale in the
second quarter of fiscal 1999 (net of tax of $18.7 million) of $18.8 million.
Reductions to the gain were made in the Company's third and fourth fiscal
quarters of 1999 of $0.8 million each reducing the final gain on the sale of NPT
to $17.2 million.
NET INCOME.
As a result of the foregoing, we had net income of $104.6 million in the
first nine months of fiscal 2000, as compared to net income of $107.3 million in
the corresponding 1999 period.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization expense is allocated among cost of sales,
selling, general and administrative expenses and other expense. Depreciation and
amortization increased $11.8 million in the first nine months of fiscal 2000 due
to additional depreciation and amortization from the step-up of assets, goodwill
and intangibles recorded from the various acquisitions as well as routine
operating capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
General
As a result of the acquisition of Sybron's predecessor in 1987 and the
acquisitions we completed since 1987, we have increased the carrying value of
certain tangible and intangible assets consistent with generally accepted
accounting principles. Accordingly, our results of operations include a
significant level of non-cash expenses related to the depreciation of fixed
assets and the amortization of intangible assets, including goodwill. Goodwill
and other intangible assets increased by approximately $46.5 million and $159.6
million in the third quarter and first nine months of fiscal 2000, respectively,
primarily as a result of continued acquisition activity. We believe, therefore,
that Adjusted EBITDA represents the more appropriate measure of our ability to
internally fund our capital requirements.
Approximately $107.3 million of cash was generated from operating activities
in the first nine months of fiscal 2000, an increase of $9.8 million or 10.0%,
from the corresponding 1999 period. Increased cash flow from operating
activities resulted primarily from an increase in Adjusted EBITDA (approximately
$48.7 million) partially offset by increases in other net assets (approximately
$21.5 million), an increase in interest paid (approximately $9.4 million), and
an increase in taxes paid (approximately $8.0 million). Approximately $178.9
million of cash was used in investing activities in the first nine months of
fiscal 2000, an increase of $54.0 million, or 43.2%, from the corresponding 1999
period. Increased investing activities resulted primarily from the proceeds of
the sale of NPT on March 31, 1999 net of a refund of $2.6 million in the first
nine months of fiscal 2000 (approximately $88.4 million) and an increase in
capital expenditures (approximately $9.9 million), partially offset by a
decrease in acquisitions (approximately $44.3 million). Approximately $75.9
million of cash was provided from financing activities, primarily from the
Company's existing Credit Facilities (approximately $70.2
30
32
million), payments received from the exercise of employee stock options
(approximately $12.5 million) and a refund of collateral under a securities loan
agreement (approximately $1.9 million), partially offset by repayments of other
financing sources (approximately $8.7 million). With respect to the 1998
restructuring charge of approximately $24.0 million, of which approximately
$11.7 million represents cash expenditures, as of June 30, 2000, we have made
cash payments of approximately $10.2 million. The Company expects to make future
cash payments of approximately $0.2 million in fiscal 2000 and approximately
$1.3 million in fiscal 2001 and beyond.
Current Credit Facilities
Our current credit agreement with The Chase Manhattan Bank ("Chase") and
certain other lenders, as amended (the "Credit Agreement"), provides for three
separate credit facilities. These are comprised of a tranche A term loan
facility (the "Tranche A Term Loan Facility"), a tranche B term loan facility
(the "Tranche B Term Loan Facility"), and a revolving credit facility (the
"Revolving Credit Facility", together with the Tranche A Term Loan Facility and
the Tranche B Term Loan Facility, the "Credit Facilities"). The Credit
Facilities at June 30, 2000 can be summarized as follows: (dollars in millions)
Average Repayments Repayment
Facility Expiration Date Interest Rate Balance Due In Fiscal Amount
- -------- --------------- ------------- ------- ------------- ------
Tranche A Term Loan Facility(a) July 2002 6.3% $270.84 2001 $ 52.46
2002 218.38
--------
$ 270.84
========
Tranche B Term Loan Facility July 2004 7.9% $299.50 2000 $ 0.25
2001 1.00
2002 1.00
2003 120.25
2004 177.00
--------
$299.50
=======
Revolving Credit Facility July 2002 6.7% $352.00 2002 $352.00
=======
- ----------
(a) Includes interest income from swaps discussed below.
The Tranche A Term Loan Facility and Revolving Credit Facility provide for
an annual interest rate, at our option, equal to (a) the higher of (i) the rate
from time to time publicly announced by Chase in New York City as its prime
rate, (ii) the federal funds rate plus 1/2 of 1%, and (iii) the base CD rate
plus 1% (collectively referred to as "Tranche A ABR") or (b) the adjusted
interbank offered rate for eurodollar deposits ("Eurodollar Rate") plus 1/2% to
7/8% (the "Tranche A Eurodollar Rate Margin") depending upon the ratio of our
total debt to Consolidated Adjusted Operating Profit (as defined in the Credit
Agreement), or (c) with respect to certain advances under the Revolving Credit
Facility, the rate set by the competitive bid process among the parties to the
Revolving Credit Facility ("CAF"). The Tranche B Term Loan Facility provides for
an annual interest rate, at our option, equal to (a) the higher of (i) the rate
31
33
from time to time publicly announced by Chase in New York City as its prime rate
plus 1% to 1 1/4%, (ii) the federal funds rate plus of 1 1/2% to 1 3/4%, and
(iii) the base CD rate plus 2% to 2 1/4%, depending upon the ratio of our total
debt to Consolidated Adjusted Operating Profit, or (b) the Eurodollar Rate plus
2% to 2 1/4% depending upon the ratio of our total debt to Consolidated Adjusted
Operating Profit (the "Tranche B Eurodollar Rate Margin").
Spin-off Refinancing
We intend to refinance the Credit Facilities in connection with the proposed
Distribution. Depending on our credit rating and market conditions, we will
either refinance through the bank markets or through the use of a combination of
debt securities. If we receive a non-investment grade rating or public debt
market conditions are not favorable, we intend to refinance through the bank
markets ("Bank Refinancing"). We would expect a Bank Refinancing to be in the
form of a new revolving credit facility allowing the Company to borrow up to
$800 million at an estimated drawn cost of the Eurodollar Rate plus 1.0 percent.
In the event that we receive an investment grade rating and debt market
conditions are favorable, we may refinance through the issuance of debt
securities. The current intention is to complete the refinancing simultaneously
with the Distribution. The contemplated refinancing, using June 30, 2000
balances, can be summarized as follows: (In millions)
Sources: Uses:
-------- -----
Bank Refinancing or Repay existing Credit Facilities $941.6
Debt Securities $576.6
Fees and expenses $10.0
-----
Contribution from Dental
Business $375.0
------
Total sources $951.6 Total uses $951.6
====== ======
The anticipated refinancing as described above is forward-looking. Our
ability to complete this refinancing is subject to a number of uncertainties and
contingencies, including completion of the Distribution, our ability to receive
a satisfactory credit rating from each of the rating agencies, market
conditions, our financial performance, and other factors. There can be no
assurance that we will be able to obtain the contemplated credit facilities. In
the event the Distribution is not completed, we will continue under our existing
Credit Facilities.
Interest Rate Sensitivity
As a result of the terms of our Credit Facilities, we are sensitive to a
rise in interest rates. A rise in interest rates would result in increased
interest expense on our outstanding debt. In order to reduce our sensitivity to
interest rate increases, from time to time we enter into interest rate swap
agreements. As of June 30, 2000, the Company has eight interest rate swaps
outstanding aggregating a notional amount of $383.5 million. Under the terms of
the swap agreements, the Company is required to pay a fixed rate amount equal to
the swap agreement rate listed below. In exchange for the payment of the fixed
rate
32
34
amount, the Company receives a floating rate amount equal to the three-month
LIBOR rate in effect on the date of the swap agreements and the subsequent reset
dates. For each of the swap agreements the rate resets on each quarterly
anniversary of the swap agreement date until the swap expiration date. The net
interest rate paid by the Company is approximately equal to the sum of the swap
agreement rate plus the applicable Eurodollar Rate Margin. In fiscal 2000, the
Tranche A and Revolver Eurodollar Rate Margins were .75%. The Tranche B
Eurodollar Rate Margin, which became applicable on July 29, 1999, was 2.0%. In
connection with the potential refinancing, the Company will assess the level and
need to continue using interest rate swaps. In the event the Company issues
fixed rate debt securities, it is likely that the swaps would be sold. The swap
agreement rates and durations as of June 30, 2000 are as follows:
EXPIRATION DATE NOTIONAL AMOUNT SWAP AGREEMENT DATE SWAP AGREEMENT RATE
--------------- --------------- ------------------- -------------------
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.900%
September 10, 2001 $50 million December 8, 1995 5.623%
December 31, 2001 $8.5 million March 24, 1999 5.500%
June 8, 2002 $50 million December 8, 1995 5.500%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23, 1998 4.733%
October 1, 2002 $50 million October 1, 1999 6.260%
Sale/Leaseback
Also as part of the permanent financing for the acquisition of Sybron's
predecessor in 1987, on December 22, 1988, we entered into the sale and
leaseback of what were our principal domestic facilities at that time (the
"Sale/Leaseback"). In January 1999, the annual obligation under the
Sale/Leaseback increased from $3.3 million to $3.6 million, payable monthly. On
the fifth anniversary of the leases and every five years thereafter (including
renewal terms), the rent will be increased by the percentage equal to 75% of the
percentage increase in the Consumer Price Index over the preceding five years.
The percentage increase to the rent in any five-year period is capped at 15%.
The next adjustment will occur on January 1, 2004.
EUROPEAN ECONOMIC MONETARY UNIT
On January 1, 1999, eleven of the European Union countries (including
four countries in which we have operations) adopted the Euro as their single
currency. At that time, a fixed exchange rate was established between the Euro
and the individual countries' existing currencies (the "legacy currencies"). The
Euro trades on currency exchanges and is available for non-cash transactions.
Following the introduction of the Euro, the legacy currencies will remain legal
tender in the participating countries during a transition period from January 1,
1999 through January 1, 2002. Beginning on January 1, 2002, the European Central
Bank will issue Euro-denominated bills and coins for use in cash transactions.
On or before July 1, 2002, the participating countries will withdraw all legacy
bills and coins and use the Euro as their legal currency.
33
35
Our operating units located in European countries affected by the Euro
conversion intend to keep their books in their respective legacy currencies
through a portion of the transition period. At this time, we do not expect
reasonably foreseeable consequences of the Euro conversion to have a material
adverse effect on our business operations or financial condition.
CAUTIONARY FACTORS
This report contains various forward-looking statements concerning our
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by us from time to time in other
reports and documents as well as oral presentations. When used in written
documents or oral statements, the words "anticipate", "believe", "continue",
"estimate", "expect", "goals", "objective", "outlook" and similar expressions
are intended to identify forward-looking statements. The statements contained
herein and such future statements involve or may involve certain assumptions,
risks and uncertainties, many of which are beyond our control, that could cause
our actual results and performance to differ materially from what is expected.
In addition to the assumptions and other factors referenced specifically in
connection with such statements, the following factors could impact our business
and financial prospects:
- - Factors affecting our international operations, including relevant
foreign currency exchange rates, which can affect the cost to produce
our products or the ability to sell our products in foreign markets, and
the value in U.S. dollars of sales made in foreign currencies. Other
factors include our ability to obtain effective hedges against
fluctuations in currency exchange rates; foreign trade, monetary and
fiscal policies; laws, regulations and other activities of foreign
governments, agencies and similar organizations; risks associated with
having major manufacturing facilities located in countries, such as
Mexico, Hungary and Italy, which have historically been less stable than
the United States in several respects, including fiscal and political
stability; and risks associated with the economic downturns in other
countries.
- - Factors affecting our ability to continue pursuing our current
acquisition strategy and to be successful with that strategy, including
our ability to raise capital beyond the capacity of our existing credit
facilities or to use our stock for acquisitions, the cost of the capital
required to effect our acquisition strategy, the availability of
suitable acquisition candidates at reasonable prices, competition for
appropriate acquisition candidates, our ability to realize the synergies
expected to result from acquisitions, and the ability of our existing
personnel to efficiently handle increased transitional responsibilities
resulting from acquisitions.
- - Our reliance on major independent distributors for a substantial portion
of our sales subjects our sales performance to volatility in demand from
distributors. We can experience volatility when distributors merge or
consolidate, when inventories are not managed to end-user demand, or
when distributors experience a softness in their sales. This volatility
in demand can also arise with large OEM customers to whom we sell
direct. Sales to our distributors and OEM customers are sometimes
unpredictable and wide variances sometimes occur quarter to quarter.
34
36
- - Factors affecting certain high growth industries we serve, such as
consolidation in the drug discovery and diagnostics industries.
- - Factors affecting our ability to profitably distribute and sell our
products, including any changes in our business relationships with our
principal distributors or OEM customers, competitive factors such as
the entrance of additional competitors into our markets, pricing and
technological competition, and risks associated with the development and
marketing of new products in order to remain competitive by keeping pace
with advancing dental, orthodontic and laboratory technologies.
- - Quarterly variations in operating results caused by a number of factors,
including business and industry conditions, timing of acquisitions,
distribution and OEM customer issues, and other factors listed here. All
these factors make it difficult to predict operating results for any
particular period.
- - With respect to Erie, factors affecting its Erie Electroverre S.A.
subsidiary's ability to manufacture the glass used by Erie's worldwide
manufacturing operations, including delays encountered in connection
with the periodic rebuild of the sheet glass furnace and furnace
malfunctions at a time when inventory levels are not sufficient to
sustain Erie's flat glass operations.
- - Factors affecting our ability to hire and retain competent employees,
including unionization of our non-union employees and changes in
relationships with our unionized employees.
- - The risk of strikes or other labor disputes at those locations which are
unionized which could affect our operations.
- - Factors affecting our ability to continue manufacturing and selling
those of our products that are subject to regulation by the United
States Food and Drug Administration or other domestic or foreign
governments or agencies, including the promulgation of stricter laws or
regulations, reclassification of our products into categories subject to
more stringent requirements, or the withdrawal of the approval needed to
sell one or more of our products.
- - Factors affecting the economy generally, including a rise in interest
rates, the financial and business conditions of our customers and the
demand for customers' products and services that utilize Company
products.
- - Factors relating to the impact of changing public and private health
care budgets, including reimbursement by private or governmental
insurance programs, which could affect demand for or pricing of our
products.
- - Factors affecting our financial performance or condition, including tax
legislation, unanticipated restrictions on our ability to transfer funds
from our subsidiaries and changes in applicable accounting principles or
environmental laws and regulations.
35
37
- - The cost and other effects of claims involving our products and other
legal and administrative proceedings, including the expense of
investigating, litigating and settling any claims.
- - Factors affecting our ability to produce products on a competitive
basis, including the availability of raw materials at reasonable prices.
- - Unanticipated technological developments, and/or intellectual property
challenges to our products that result in competitive disadvantages and
create the potential for impairment of our existing assets.
- - Factors affecting our operations in European countries related to the
conversion from local legacy currencies to the Euro.
- - Factors affecting our ability to complete the proposed spin-off of the
Dental Business, including but not limited to a favorable ruling by
the Internal Revenue Service regarding the tax-free nature of the
transaction and market conditions favorable to completing the spin-off.
- - Other business and investment considerations that may be disclosed from
time to time in our Securities and Exchange Commission filings or in
other publicly available written documents.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
36
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
RISK MANAGEMENT
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates. To reduce our risk from these foreign currency rate
and interest rate fluctuations, we occasionally enter into various hedging
transactions. We do not anticipate material changes to our primary market risks
other than fluctuations in magnitude from increased or decreased foreign
currency denominated business activity or floating rate debt levels. We do not
use financial instruments for trading purposes and are not a party to any
leveraged derivatives.
FOREIGN EXCHANGE
We have, from time to time, used foreign currency options to hedge our
exposure from adverse changes in foreign currency rates. Our foreign currency
exposure exists primarily in the Euro, Danish Krone and the Japanese Yen values
versus the U.S. dollar. Hedging is accomplished by the use of foreign currency
options, and the gain or loss on these options is used to offset gains or losses
in the foreign currencies to which they pertain. Hedges of anticipated
transactions are accomplished with options that expire on or near the maturity
date of the anticipated transactions. In November 1999 we entered into nine
foreign currency options to hedge our exposure to each of the aforementioned
currencies.
In 2000, we expect our exposure from our primary foreign currencies to
approximate the following:
ESTIMATED
EXPOSURE DENOMINATED ESTIMATED
IN THE RESPECTIVE EXPOSURE
CURRENCY FOREIGN CURRENCY IN U.S. DOLLARS
-------- ---------------- ---------------
(IN THOUSANDS)
Euro (EUR) 42,000 EUR $ 44,520
Danish Krone (DKK) 87,400 DKK 12,485
Japanese Yen (JPY) 800,000 JPY 7,619
As a result of these anticipated exposures, in November 1999 we entered into
a series of options expiring at the end of the second, third and fourth quarters
of 2000 to protect ourselves from possible detrimental effects of foreign
currency fluctuations. We accomplished this by taking approximately one-fourth
of the exposure in each of the foreign currencies listed above and purchasing a
put option on that currency (giving us the right but not the obligation to sell
the foreign currency at a predetermined rate). We purchased put options on the
foreign currencies at amounts approximately equal to our quarterly exposure. The
EUR and DKK options expire on a quarterly basis, at an exchange rate
approximately equal to the spot exchange rate at the date of purchase for each
of the respective currencies. The JPY options expire on a quarterly basis at an
exchange rate approximately equal to the prior year's respective quarters actual
exchange rate. In the second quarter, two of the options were sold and the third
expired worthless, in aggregate netting a gain of $0.7 million. In the third
quarter, two of the options were sold and the third expired worthless, in
aggregate netting a gain of $0.9 million. In November 1999, we acquired the
following put options:
37
39
NOTIONAL OPTION STRIKE
CURRENCY AMOUNT(A) EXPIRATION DATE PRICE PRICE(B)
-------- --------- --------------- ----- --------
(In thousands, except strike prices)
EUR 10,500 March 29, 2000 $ 250 .9524
EUR 10,500 June 28, 2000 297 .9524
EUR 10,500 September 26, 2000 329 .9524
DKK 21,850 March 29, 2000 88 7.00
DKK 21,850 June 28, 2000 103 7.00
DKK 21,850 September 26, 2000 114 7.00
JPY 200,000 March 29, 2000 9 116.00
JPY 200,000 June 28, 2000 10 120.00
JPY 200,000 September 26, 2000 24 115.00
- ---------------------
(a) Amounts expressed in units of foreign currency.
(b) Amounts expressed in foreign currency per U.S. dollar.
Our exposure in terms of these options is limited to the purchase price. To
illustrate this, the following example uses the Euro contract due to expire at
September 26, 2000.
EUR EXCHANGE GAIN/(LOSS) GAIN/(LOSS)
RATE ON OPTION (A) FROM PRIOR YEAR RATE (B) NET GAIN/(LOSS)
------------ ------------- ------------------------ ---------------
(IN THOUSANDS, EXCEPT EXCHANGE RATE)
.90 $ (329) $ 659 $ 330
.95 (329) 45 (284)
1.0 196 (507) (311)
- --------------------
(a) Calculated as (notional amount/strike price) - (notional amount/exchange
rate) - premium paid, with losses limited to the premium paid on the
contract.
(b) Calculated as (notional amount/exchange rate) - (notional amount/prior year
exchange rate of .9539).
INTEREST RATES
We use interest rate swaps to reduce our exposure to interest rate
movements. Our net exposure to interest rate risk consists of floating rate
instruments whose interest rates are determined by the Eurodollar Rate. Interest
rate risk management is accomplished by the use of swaps to create fixed
interest rate debt by resetting Eurodollar Rate loans concurrently with the
rates applying to the swap agreements. At June 30, 2000 we had floating rate
debt of approximately $922.3 million of which a total of $383.5 million was
swapped to fixed rates. The net interest rate paid by the Company is
approximately equal to the sum of the swap agreement rate plus the applicable
Eurodollar Rate Margin. In the first nine months of fiscal 2000, the Tranche A
and Revolver Eurodollar Rate Margins were .75%. The Tranche B Eurodollar Margin,
which became applicable on July 29, 1999, was 2.0%. The swap agreement rates and
durations as of June 30, 2000 are as follows:
38
40
EXPIRATION DATE NOTIONAL AMOUNT SWAP AGREEMENT DATE SWAP AGREEMENT RATE
--------------- --------------- ------------------- -------------------
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.900%
September 10, 2001 $50 million December 8, 1995 5.623%
December 31, 2001 $8.5 million March 24, 1999 5.500%
June 8, 2002 $50 million December 8, 1995 5.500%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23, 1998 4.733%
October 1, 2002 $50 million October 1, 1999 6.260%
In addition to the aforementioned swaps, on September 29, 1999, the Company
entered into a repurchase agreement in which we purchased a United States
Treasury Bond ("Treasury") with a par value of $50 million, an interest rate of
6.15% and a maturity date of August 15, 2029. Concurrent with the purchase of
the Treasury, the Company lent the security to an unrelated third party for a
period of 23 years. In exchange for the loaned Treasury, the Company has
received collateral equal to the market value of the Treasury on the date of the
loan, and adjusted on a weekly basis. For a period of five years the Company is
obligated to pay a rebate on the loaned collateral at an annual fixed rate of
6.478% and is entitled to receive a fee for the loan of the security at a
floating rate equal to LIBOR minus .75%. Thereafter, the Company is required to
pay the unrelated third party a collateral fee equal to the one-week general
collateral rate of interest (as determined weekly in good faith by the unrelated
third party, provided that such rate shall not exceed the federal funds rate in
effect as of the day of determination plus .25%).
The model below quantifies the Company's sensitivity to interest rate
movements as determined by the Eurodollar Rate and the effect of the interest
rate swaps which reduce that risk. The model assumes a) a base Eurodollar Rate
of 6.75% (the "Eurodollar Base Rate") which approximates the June 30, 2000 three
month Eurodollar Rate, b) the Company's floating rate debt is equal to it's June
30, 2000 floating rate debt balance of $922.3 million, c) the Company pays
interest on floating rate debt equal to the Eurodollar Rate + 75 basis points,
d) the Company has interest rate swaps (including the repurchase agreement) with
a notional amount of $433.5 million (equal to the notional amount of the
Company's interest rate swaps at June 30, 2000), and e) the Eurodollar Rate
varies by 10% of the Base Rate.
INTEREST EXPENSE INCREASE FROM A 10% INTEREST EXPENSE DECREASE FROM A 10%
ANNUAL INTEREST RATE EXPOSURE INCREASE IN THE EURODOLLAR BASE RATE DECREASE IN THE EURODOLLAR BASE RATE
- ----------------------------- ------------------------------------ ------------------------------------
Without interest rate swaps: $6.2 million ($6.2 million)
With interest rate swaps: $3.3 million ($3.3 million)
PART II - OTHER INFORMATION
39
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
See the Exhibit Index following the Signature page in this report,
which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
A Form 8-K dated as of April 24, 2000, was filed on April 25, 2000, to
report, under Item 5, the planned spin-off of the Company's dental group. A
copy of the Company's Press Release dated April 24, 2000, was filed as an
exhibit.
A Form 8-K dated as of June 26, 2000 was filed on June 26, 2000, to
report, under Item 5, the expected earnings shortfall for the Company's third
and fourth quarters of fiscal 2000. A copy of the Company's Press Release dated
June 26, 2000, was filed as an exhibit.
40
42
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.
SYBRON INTERNATIONAL CORPORATION
(Registrant)
Date: August 14, 2000 /s/ Dennis Brown
- ---------------------- -------------------------------
Dennis Brown
Vice President - Finance, Chief
Financial Officer & Treasurer*
* executing as both the principal financial
officer and the duly authorized officer
of the Company.
41
43
SYBRON INTERNATIONAL CORPORATION
(THE "REGISTRANT")
(COMMISSION FILE NO. 1-11091)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
27 Financial Data Schedule X
EI-1