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 December 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to -------------- ---------------- Commission File Number: 1-11091 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 February 9, 1998 there were 97,191,300 shares of the Registrant's Common Stock, par value $0.01 per share, outstanding. The number of outstanding shares has been adjusted to reflect a two-for-one stock split in the form of a 100 percent stock dividend (one share of Common Stock for each outstanding share of Common Stock), to be distributed on February 20, 1998 to shareholders of record at the close of business on February 12, 1998. 2 SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES Index Page - ------------------------------------------------------------------------------- ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets, December 31, 1997 (unaudited) and September 30, 1997 2 Consolidated Statements of Income, for the three months ended December 31, 1997 (unaudited) and 1996 (unaudited) 3 Consolidated Statements of Shareholders' Equity for the year ended September 30, 1997 and the three months ended December 31, 1997 (unaudited) 4 Consolidated Statements of Cash Flows, for the three months ended December 31, 1997 (unaudited) and 1996 (unaudited) 5 Notes to Unaudited Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19 SIGNATURES 20 1 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS December 31, September 30, 1997 1997 ------------- -------------- (Unaudited) Current assets: Cash and cash equivalents ............................................. $ 19,004 $ 17,155 Accounts receivable (less allowance for doubtful receivables of $3,724 and $3,312) ................................... 165,231 165,907 Inventories (note 2) .................................................. 156,626 144,217 Deferred income taxes ................................................. 16,727 16,629 Prepaid expenses and other current assets ............................. 18,074 15,880 ----------- ----------- Total current assets ............................................. 375,662 359,788 ----------- ----------- Property, plant and equipment net of depreciation of $157,252 and $139,792 ......................................................... 195,728 190,291 Intangible assets ....................................................... 686,917 647,567 Deferred income taxes ................................................... 16,638 16,468 Other assets ............................................................ 5,907 7,397 ----------- ----------- Total assets ..................................................... $ 1,280,852 $ 1,221,511 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ...................................................... $ 42,490 $ 41,184 Current portion of long-term debt ..................................... 36,749 37,252 Income taxes payable .................................................. 6,862 954 Accrued payroll and employee benefits ................................. 28,859 34,466 Deferred income taxes ................................................. 6,305 4,794 Other current liabilities ............................................. 28,290 25,630 ----------- ----------- Total current liabilities ......................................... 149,555 144,280 ----------- ----------- Long-term debt .......................................................... 676,637 645,733 Deferred income taxes ................................................... 51,214 51,761 Other liabilities ....................................................... 11,999 12,781 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 96,686,306 and 96,346,056 shares, respectively ....... 967 963 Equity Rights, 50 and 250 rights at $1.09 per right respectively ...... -- -- Additional paid-in capital ............................................ 202,506 197,799 Retained earnings ..................................................... 213,046 193,713 Cumulative foreign currency translation adjustment .................... (25,072) (25,518) Treasury common stock, 220 and 1,090 shares at cost respectively ........................................................ -- (1) ----------- ----------- Total shareholders' equity ....................................... 391,447 366,956 ----------- ----------- Total liabilities and shareholders' equity ....................... $ 1,280,852 $ 1,221,511 =========== =========== 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 December 31, 1997 1996 ---- ---- Net sales ........................................... $ 210,127 $ 173,658 Cost of sales: Cost of product sold ............................. 104,103 86,819 Depreciation of purchase accounting adjustments .. 165 960 --------- --------- Total cost of sales ................................. 104,268 87,779 --------- --------- Gross profit ........................................ 105,859 85,879 Selling, general and administrative expenses ........ 54,160 45,313 Depreciation and amortization of purchase accounting adjustments ............................. 6,028 4,763 --------- --------- Operating income .................................... 45,671 35,803 --------- --------- Other income (expense): Interest expense ................................. (12,992) (9,151) Amortization of deferred financing fees .......... (53) (72) Other, net ....................................... (62) (142) --------- --------- Income before income taxes .......................... 32,564 26,438 Income taxes ........................................ 13,229 10,760 --------- --------- Net income .......................................... $ 19,335 $ 15,678 ========= ========= Basic earnings per common share ..................... $ .20 $ .17 ========= ========= Diluted earnings per common share ................... $ .19 $ .16 ========= ========= 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, 1997 AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE DATA) CUMULATIVE FOREIGN ADDITIONAL CURRENCY TREASURY TOTAL COMMON EQUITY PAID-IN RETAINED TRANSLATION COMMON SHAREHOLDERS' STOCK RIGHTS CAPITAL EARNINGS ADJUSTMENT STOCK EQUITY --------- ------ ------------ -------- ---------- -------- ------------- Balance at September 30, 1996 .......... $ 938 $ 1 $ 179,954 $ 111,378 $ (9,189) $ (3) $ 283,079 Shares issued in connection with the exercise of 1,451,392 stock options.. 15 -- 11,465 (8) -- -- 11,472 Conversion of 448 equity rights to 1,960 shares of common stock .................. -- (1) -- (1) -- 2 -- Tax benefits related to stock options ..... -- -- 6,385 -- -- -- 6,385 1,047,236 shares of common stock issued in connection with National Scientific Company Merger .......................... 10 -- (5) 2,745 -- -- 2,750 Dividends paid by National Scientific Company prior to the merger ............. -- -- -- (1,604) -- -- (1,604) Net income ............................... -- -- -- 81,203 -- -- 81,203 Cumulative foreign currency translation ion adjustment .............. -- -- -- -- (16,329) -- (16,329) --------- --------- --------- --------- --------- ------- ----------- Balance at September 30, 1997 ............ $ 963 $ -- $ 197,799 $ 193,713 $ (25,518) $ (1) $ 366,956 ========= ========= ========= ========= ========= ======= =========== Shares issued in connection with the exercise of 340,250 stock options ........................... 4 -- 2,868 (1) -- -- 2,871 Conversion of 200 equity rights to 872 shares of common stock .................. -- -- -- (1) -- 1 -- Tax benefits related to stock options .... -- -- 1,839 -- -- -- 1,839 Net income (Unaudited) ................... -- -- -- 19,335 -- -- 19,335 Cumulative foreign currency translation adjustment .................. -- -- -- -- 446 -- 446 --------- --------- --------- --------- --------- ------- ----------- Balance at December 31, 1997 (Unaudited) ............................. $ 967 $ -- $ 202,506 $ 213,046 $ (25,072) $ -- $ 391,447 ========= ========= ========= ========= ========= ======= =========== See accompanying notes to unaudited consolidated financial statements. 4 6 SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) Three Months Ended December 31, 1997 1996 ------ ------ Cash flows from operating activities: Net income .......................................................... $ 19,335 $ 15,678 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ....................................................... 7,288 6,989 Amortization ....................................................... 6,073 4,756 Provision for losses on doubtful accounts .......................... 66 107 Inventory provisions ............................................... (863) 779 Deferred income taxes .............................................. (696) (2,101) Changes in assets and liabilities: Decrease in accounts receivable .................................... 4,110 4,740 Increase in inventories ............................................ (8,689) (3,202) Increase in prepaid expenses and other current assets .............. (5,773) (4,406) (Decrease) increase in accounts payable ............................ 708 (5,728) Increase in income taxes payable ................................... 4,549 3,767 Decrease in accrued payroll and employee benefits .................. (6,334) (5,891) Increase in other current liabilities .............................. 2,929 1,604 Net change in other assets and liabilities ......................... 8,721 3,287 -------- -------- Net cash provided by operating activities .......................... 31,424 20,379 Cash flows from investing activities: Capital expenditures ............................................... (9,391) (6,709) Proceeds from sales of property, plant, and equipment .............. 1,064 127 Net payments for businesses acquired ............................... (53,287) (5,678) -------- -------- Net cash used in investing activities ............................. (61,614) (12,260) Cash flows from financing activities: Increase in the revolving credit facility ........................... 40,400 8,900 Principal payments on long-term debt ................................ (9,092) (9,041) Proceeds from the exercise of common stock options .................. 2,870 2,390 Other ............................................................... (1,072) 677 -------- -------- Net cash provided by financing activities .......................... 33,106 2,926 Effect of exchange rate changes on cash .............................. (1,067) 1,051 Net increase in cash and cash equivalents ............................ 1,849 12,096 Cash and cash equivalents at beginning of year ....................... 17,155 10,874 -------- -------- Cash and cash equivalents at end of period ........................... $ 19,004 $ 22,970 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest ............................ $ 13,110 $ 8,690 Cash paid during the period for income taxes ........................ 6,924 4,282 Capital lease obligations incurred .................................. 165 132 See accompanying notes to unaudited consolidated financial statements. 5 7 SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. When we use the terms "Company", "Sybron", "We", or "Our", we are referring to Sybron International Corporation and its subsidiaries and their respective predecessors. In the opinion of management, all adjustments which are necessary for a fair statement of the results for the interim period have been included. All such adjustments were of a normal recurring nature. The results for the three month period ended December 31, 1997 are not necessarily indicative of the results to be expected for the full year. Certain amounts from the three month period ended December 31, 1996, as originally reported, have been reclassified to conform with the three month period ended December 31, 1997 presentation. The results for the first quarter ended December 31, 1996 have been adjusted to reflect the results of National Scientific Company. The results of National Scientific Company, which were accounted for as a pooling of interests, were combined with our previously reported results as if the merger occurred on October 1, 1996. 2. Inventories at December 31, 1997 consist of the following: (In thousands) Raw materials $ 51,163 Work-in-process 28,660 Finished goods 80,949 LIFO Reserve (4,146) --------- $156,626 ========= 3. Acquisitions completed in the first quarter of fiscal 1998 are as follows: (a) On October 1, 1997, Erie Scientific International Corporation ("Erie") completed the acquisition of Chase Instruments Corp. ("Chase"), a manufacturer of disposable laboratory glassware. Annual sales of Chase are approximately $24 million. (b) On October 29, 1997, Nalge Nunc International Corporation completed the acquisition of Lida Manufacturing Corporation ("Lida"), a producer of syringe filters for chromatography sample preparation, biological research, genetic research, and general laboratory filtration. Annual sales of Lida are approximately $7 million. (c) On November 26, 1997, Erie completed the acquisition of Clinical Standards Laboratories, Inc. ("CSL"). CSL's products are used to detect and identify bacteria involved in infections. Annual sales of CSL are approximately $2.6 million. 6 8 (d) On December 16, 1997, Ormco Corporation completed the acquisition of the Ormodent group of companies ("Ormodent"). Ormodent has been the distributor of Ormco's orthodontic line of products in France. Annual sales of Ormodent are approximately $20 million. Acquisitions completed after the first quarter of fiscal 1998 are as follows: (a) On January 2, 1998, Erie completed the acquisition of Diagnostic Reagents, Inc. ("DRI"). DRI manufactures and sells immunoassay reagents principally for drugs-of-abuse testing. Annual sales of DRI are approximately $10 million. (b) On January 27, 1998, Erie completed the acquisition of the assets of Cel-Line Associates, Inc. ("Cel-Line"), a manufacturer of printed microscope slides. Annual sales of Cel-Line are approximately $1.7 million. 4. In the quarter ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" ("EPS"). SFAS 128 replaces the requirement for a presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS, both of which are required to be presented on the face of the statement of income for all entities with complex capital structures. SFAS 128 was effective for financial statements issued for periods ending after December 15, 1997, and requires restatement of all prior period EPS data presented. The adoption of this statement is not expected to materially affect either future or prior period EPS. 5. On January 30, 1998 we announced a two-for-one stock split in the form of a 100 percent stock dividend (one share of stock for each outstanding share of stock), to be distributed on February 20, 1998, to shareholders of record at the close of business on February 12, 1998. The financial results for all periods presented have been restated to reflect this change. Earnings per share prior to the announced split were as follows: Three Months Ended December 31, ---------------- 1997 1996 ----- ----- Basic EPS prior to the two-for-one stock split $0.40 $0.33 ===== ===== Diluted EPS prior to the two-for-one stock split $0.39 $0.32 ===== ===== 7 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We, Sybron International Corporation, are a leading manufacturer of value-added products for the laboratory and professional dental and orthodontic markets in the United States and abroad. Our laboratory business provides plastic labware, microscope slides, disposable diagnostic products, consumables, temperature control apparatus and water purification systems to industrial, academic, clinical, governmental and biotechnology laboratories. Our dental and orthodontic businesses provide a diversified line of consumable products to dentists and orthodontic appliances and related products to orthodontists. We have 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 and international growth. When we use the terms "Company", "Sybron", "we" or "our", we are referring to Sybron International Corporation and its subsidiaries and their respective predecessors. Our fiscal year ends on September 30. Both our sales and operating income for the quarter ended December 31, 1997 (the first quarter of fiscal 1998) grew over the corresponding prior year period. Net sales for the quarter ended December 31, 1997 increased by 21.0% over the corresponding fiscal 1997 period. Sales growth in the first quarter of fiscal 1998 was strong both domestically and internationally with increases of 26.4% and 10.8%, respectively, over the 1997 period. International sales were negatively impacted by the strengthening of the U.S. dollar. If currency effects were removed from sales, the international increase would have been 18.4%. Acquisitions aided sales growth in the quarter, accounting for $26.4 million and $5.4 million of the domestic and international sales increases, respectively. Our internal growth was 2.7%, negatively impacted by the strengthened U.S. dollar. Without currency effects, internal growth was approximately 5.3%. We continue to maintain an active program of developing and marketing both new products and product line extensions, as well as growth through acquisitions. We completed four acquisitions in the first quarter of fiscal 1998 and two more in January 1998. (See Note 3 of the Notes to the Unaudited Consolidated Financial Statements). The results of operations of Sybron reflect goodwill amortization, other amortization, and depreciation. These non-cash charges totaled $13.4 million and $11.7 million for the quarters ended December 31, 1997 and 1996, respectively. Our earnings before interest, taxes, depreciation and amortization ("EBITDA") which, as discussed below in "Liquidity and Capital Resources", we believe is the appropriate measure of our ability to internally fund our liquidity requirements, amounted to $58.9 million and $47.3 million for the quarters ended December 31, 1997 and 1996, respectively. EBITDA represents, for any relevant period, net income plus (i) interest expense, (ii) provision for income taxes, and (iii) depreciation and amortization, all determined on a consolidated basis and in accordance with generally accepted accounting principles. 8 10 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 verses 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 1997, we decided to employ a series of foreign currency options with a U.S. dollar notional amount of approximately $13.6 million at a cost of approximately $0.4 million. These options expire in the third and fourth quarters of fiscal 1998 and are designed to protect Sybron from potential detrimental effects of currency movements associated with the U.S. dollar verses the German mark and the French franc as compared to the third and fourth quarters of fiscal 1997. As previously reported, on May 2, 1996, Combustion Engineering, Inc. ("CE") commenced legal proceedings in the New York Supreme Court, County of Monroe (the "CE Litigation"), against the Company with respect to the former Taylor Instruments facility in Rochester, New York (the "Rochester Site" or "Site"), a discontinued operation. CE's complaint seeks indemnification from the Company with respect to the cost to remediate certain environmental contamination at the Rochester Site. The CE Litigation has not yet advanced beyond the filing of the complaint. CE entered into a voluntary cleanup agreement ("VCA") concerning the Site with the New York State Department of Environmental Conservation ("NYSDEC") and is in the process of negotiation with NYSDEC to establish cleanup goals and remedial methods for the Site. Because cleanup goals and remedial methods have not yet been established, and because the extent of the Company's liability, if any, is uncertain, the Company cannot estimate with any reasonable certainty the cost to it of CE's claims. The Company has provided notice to its third party liability insurance carriers. To date, the carriers have denied coverage. RESULTS OF OPERATIONS QUARTER ENDED DECEMBER 31, 1997 COMPARED TO THE QUARTER ENDED DECEMBER 31, 1996 9 11 NET SALES. Net sales for the three months ended December 31, 1997 were $210.1 million, an increase of $36.5 million (21.0%) from net sales of $173.7 million for the corresponding three months ended December 31, 1996. Sales in the laboratory segment were $137.1 million for the three months ended December 31, 1997, an increase of 33.1% from the corresponding 1997 fiscal period. Increased sales in the laboratory segment resulted primarily from (i) sales of products of acquired companies (approximately $30.6 million), (ii) increased volume from sales of existing products (approximately $3.8 million), (iii) price increases (approximately $0.8 million) and (iv) increased volume from sales of new products (approximately $0.7 million). Increased sales in the laboratory segment were partially offset by unfavorable foreign currency impacts (approximately $1.8 million). In the dental segment, net sales were $73.0 million for the three months ended December 31, 1997, an increase of 3.3% from the corresponding fiscal 1997 period. Increased sales in the dental segment resulted primarily from (i) increased volume from sales of existing products (approximately $3.7 million), (ii) sales of products of acquired companies (approximately $1.2 million) and (iii) increased volume from sales of new products (approximately $0.3 million). Increased sales in the dental segment were partially offset by unfavorable foreign currency impacts (approximately $2.8 million). GROSS PROFIT. Gross profit for the first quarter of fiscal 1998 was $105.9 million, an increase of 23.3% from gross profit of $85.9 million for the corresponding fiscal 1997 period. Gross profit in the laboratory segment was $64.1 million (46.8% of net segment sales) in the first quarter of fiscal 1998, an increase of 37.9% from gross profit of $46.5 million (45.1% of net segment sales) during the corresponding fiscal 1997 period. Gross profit in the laboratory segment increased primarily as a result of (i) the effects of acquired companies (approximately $14.9 million), (ii) increased volume (approximately $3.4 million), (iii) a favorable overhead application (approximately $0.9 million) and (iv) a reduction in depreciation expense of certain assets that became fully depreciated in the prior fiscal year (approximately $0.4 million). Increased gross profit in the laboratory segment was partially offset by (i) an unfavorable foreign currency impact (approximately $1.2 million), (ii) an unfavorable product mix (approximately $0.5 million), (iii) price reductions (approximately $0.2 million) and (iv) inventory factors (approximately $0.2 million). In the dental segment, gross profit was $41.8 million (57.2% of net segment sales) in the first quarter of fiscal 1998, an increase of 6.0% from gross profit of $39.4 million (55.7% of net segment sales) during the corresponding fiscal 1997 period. Increased gross profit in the dental segment resulted primarily from (i) increased volume (approximately $1.9 million), (ii) inventory factors (approximately $1.3 million), (iii) the effects of acquired companies (approximately $0.5 million) and (iv) a reduction in depreciation expense of certain assets that became fully depreciated in the prior fiscal year (approximately $0.4 million), partially offset by unfavorable foreign currency impacts (approximately $1.7 million). SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the first quarter of fiscal 1998 were $60.2 million (28.6% of net sales) as compared to $50.1 million (28.8% of net sales) in the corresponding fiscal 1997 period. General and administrative expenses at the corporate level, including amortization of purchase accounting adjustments and goodwill associated with acquisitions, were $5.2 million in the first quarter of fiscal 1998, representing a decrease of 7.3% from $5.6 million in the corresponding fiscal 1997 10 12 period. The decrease at the corporate level was primarily due to a reduction in depreciation and amortization expense of certain tangible and intangible assets that became fully amortized and depreciated in the prior fiscal year. Selling, general and administrative expenses at the subsidiary level, including amortization of intangibles, were $55.0 million (26.2% of net sales), representing an increase of 23.7% from $44.4 million (25.6% of net sales) in the corresponding fiscal 1997 period. Increases at the subsidiary level were primarily due to (i) expenses related to newly acquired businesses (approximately $6.2 million), (ii) increased marketing expense (approximately $2.5 million), (iii) increased amortization of intangible assets related to acquired businesses (approximately $1.8 million) and (iv) increased general and administrative expense (approximately $1.3 million) partially offset by (i) favorable foreign currency impacts (approximately $0.9 million) and (ii) a reduction in research and development expenditures (approximately $0.3 million). OPERATING INCOME. As a result of the foregoing, operating income was $45.7 million (21.7% of net sales) in the first quarter of fiscal 1998 compared to $35.8 million (20.6% of net sales) in the corresponding fiscal 1997 period. Operating income in the laboratory segment was $30.0 million (21.9% of net segment sales) in the first quarter of fiscal 1998 compared to $21.5 million (20.8% of net segment sales) in the corresponding fiscal 1997 period. Operating income in the dental segment was $15.7 million (21.5% of net segment sales) in the first quarter of fiscal 1998 compared to $14.3 million (20.3% of net segment sales) in the corresponding fiscal 1997 period. INTEREST EXPENSE. Interest expense was $13.0 million in the first quarter of fiscal 1998 compared to $9.2 million in the corresponding fiscal 1997 period. The increase resulted from a higher debt balance primarily from our acquisition activity. Interest expense during the quarters ended December 31, 1997 and 1996 included additional non-cash interest expense of $0.3 million resulting from the adoption of SFAS No. 106. INCOME TAXES. Taxes on income increased $2.5 million in the first quarter of fiscal 1998, primarily as a result of increased earnings. NET INCOME. As a result of the foregoing, Sybron had net income of $19.3 million in the first quarter of fiscal 1998 compared to $15.7 million in the corresponding fiscal 1997 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 $1.6 million when compared to the prior year quarter. This increase was primarily due to the amortization of intangible assets and depreciation of property, plant and equipment related to acquired companies partially offset by reduction in depreciation and amortization expense of certain tangible and intangible assets that became fully amortized and depreciated in the prior fiscal year. LIQUIDITY AND CAPITAL RESOURCES 11 13 As a result of our 1987 leveraged buyout transaction ("the Acquisition") 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 intangible assets increased by approximately $37.3 million in the first quarter of fiscal 1998 primarily as a result of the acquisition of Chase. We believe, therefore, that EBITDA represents the more appropriate measure of our ability to internally fund our capital requirements. Our capital requirements arise principally from indebtedness incurred in connection with the permanent financing for the Acquisition and our subsequent refinancings, our working capital needs, primarily related to inventory and accounts receivable, our capital expenditures, primarily related to purchases of machinery and molds, the purchase of various businesses and product lines in execution of our acquisition strategy and the periodic expansion of physical facilities. In addition, in the event we should be held liable for CE's claims in the CE Litigation (described above), liability for which we deny, we could require capital to satisfy such liabilities, depending upon their magnitude. It is currently our intent to continue to pursue our acquisition strategy. If acquisitions continue at our historical pace, of which there can be no assurance, we may require financing beyond the capacity of our Credit Facilities (as defined below). In addition, certain acquisitions previously completed contain "earnout provisions" requiring further payments in the future if certain financial results are achieved by the acquired companies. The statement contained in the immediately preceding paragraph concerning our intent to continue to pursue our acquisition strategy is a forward-looking statement. Our ability to continue our acquisition strategy is subject to a number of uncertainties, including, but not limited to, our ability to raise capital beyond the capacity of our Credit Facilities and the availability of suitable acquisition candidates at reasonable prices. See "Cautionary Factors" below. On July 31, 1995, we entered into a new credit agreement (the "Credit Agreement") with Chemical Bank (now known as The Chase Manhattan Bank ("Chase")) and certain other lenders providing for a term loan facility of $300 million (the "Term Loan Facility"), and a revolving credit facility of $250 million (the "Revolving Credit Facility") (collectively the "Credit Facilities"). On the same day, we borrowed $300 million under the Term Loan Facility and approximately $122.5 million under the Revolving Credit Facility. Approximately $158.5 million of the borrowed funds were used to finance the acquisition of the Nunc group of companies (approximately $9.1 million of the acquisition price for Nunc was borrowed under our previous credit facilities). The remaining borrowed funds of approximately $264.0 million were used to repay outstanding amounts, including accrued interest, under our previous credit facilities and to pay certain fees in connection with such refinancing. On July 9, 1996, under the First Amendment to the Credit Agreement (the "First Amendment"), the capacity of the Revolving Credit Facility was increased to $300 million, and a competitive bid process was established as an additional option for us in setting interest rates. On April 25, 1997, we entered into a second amendment to the Credit Agreement (the "Second Amendment"). The Second Amendment is an expansion of the Credit Facilities. The Term Loan Facility was restored to $300 million by increasing it by 12 14 $52.5 million (equal to the amount previously repaid through April 24, 1997) and the Revolving Credit Facility was expanded from $300 million to $600 million. On April 25, 1997, we borrowed a total of $622.9 million under the Credit Facilities. The proceeds were used to repay $466.3 million of previously existing LIBOR (as defined below) and ABR loans (as defined below) (including accrued interest and certain fees and expenses) under the Credit Facilities and to pay $156.6 million with respect to the purchase of Remel which includes both the purchase price and payment of assumed debt. The $72 million of CAF (as defined below) borrowings remained in place. Payment of principal and interest with respect to the Credit Facilities and the Sale/Leaseback (as defined later herein) are anticipated to be our largest use of operating funds in the future. The Credit Facilities 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 "ABR") or (b) the London interbank offered rate ("LIBOR") plus 1/2% to 7/8% (the "LIBOR Margin") depending upon the ratio of our total debt to EBITDA , or (c) with respect to the Revolving Credit Facility, the rate set by the competitive bid process among the parties to the Revolving Credit Facility established in the First Amendment ("CAF"). In the first quarter of fiscal 1998, the average interest rate on the Term Loan Facility (inclusive of the swap agreements described below) was 6.2% and the average interest rate on the Revolving Credit Facility was 6.6%. As a result of the terms of the Credit Agreement and our agreement governing the previous credit facilities, we are sensitive to a rise in interest rates. In order to reduce our sensitivity to interest rate increases, from time to time, we enter into interest rate swap agreements. At December 31, 1997, swap agreements aggregating a notional amount of $375 million were in place to hedge against a rise in interest rates. On December 15, 1997, a swap agreement with a notional amount of $50 million expired. The net interest rate paid by us is approximately equal to the sum of the swap agreement rate plus the applicable LIBOR Margin. During the first quarter of fiscal 1998, the LIBOR Margin was .75%. The swap agreement rates and durations are as follows: SWAP AGREEMENT SWAP AGREEMENT EXPIRATION DATE NOTIONAL AMOUNT DATE RATE - --------------- --------------- ---- ---- July 7, 1998................ $50 million July 7, 1993 5.17% August 9, 1999.............. $50 million August 7, 1997 6.077% August 13, 1999............. $50 million August 13, 1993 5.54% September 8, 2000........... $50 million December 8, 1995 5.56% February 7, 2001............ $50 million August 7, 1997 5.91% May 7, 2001................. $75 million May 7, 1997 6.5875% September 10, 2001.......... $50 million December 8, 1995 5.623% 13 15 Also as part of the permanent financing for the Acquisition, on December 22, 1988, we entered into the sale and leaseback of our principal domestic facilities (the "Sale/Leaseback"). In January 1994, the annual obligation under the Sale/Leaseback increased from $2.9 million to $3.3 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 not occur until January 1, 1999. We intend to fund our acquisitions, working capital requirements, capital expenditure requirements, principal and interest payments, obligations under the Sale/Leaseback, restructuring expenditures, other liabilities and periodic expansion of facilities, to the extent available, with funds provided by operations and short-term borrowings under the Revolving Credit Facility. To the extent that funds are not available, particularly with respect to our acquisition strategy, we will have to raise additional capital. As set forth above, after the Second Amendment, the Revolving Credit Facility provides up to $600 million in available credit. At December 31, 1997, there was $194.6 million of available credit under the Revolving Credit Facility. Under the Term Loan Facility, on July 31, 1997 we began to repay principal in 21 consecutive quarterly installments by paying the $8.75 million due in 1997 and $8.75 million due in the first quarter of fiscal 1998. Annual payments, in the remainder of fiscal 1998 and succeeding fiscal years, are due as follows: $26.25 million, $36.25 million, $42.5 million, $53.75 million and $123.75 million. The Credit Agreement contains numerous financial and operating covenants, including, among other things, restrictions on investments; requirements that we maintain certain financial ratios; restrictions on our ability to incur indebtedness or to create or permit liens or to pay cash dividends in excess of $50.0 million plus 50% of our consolidated net income for each fiscal quarter ending after June 30, 1995, less any dividends paid after June 22, 1994; and limitations on incurrence of additional indebtedness. The Credit Agreement permits us to make acquisitions provided we continue to satisfy all financial covenants upon any such acquisition. Our ability to meet our debt service requirements and to comply with such covenants is dependent upon our future performance, which is subject to financial, economic, competitive and other factors affecting us, many of which are beyond our control. 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", "estimate", "expect", "objective" 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 14 16 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; and 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. - Factors affecting our ability to continue pursuing our current acquisition 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, 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. - Factors affecting our ability to profitably distribute and sell our products, including any changes in our business relationships with our principal distributors, primarily in the laboratory segment, 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. - 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 15 17 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 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. - 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 that result in competitive disadvantages and create the potential for impairment of existing assets. - Factors affecting information systems associated with year 2000 compliance both internally and by our customers and suppliers. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Quorum The Company, a Wisconsin corporation, held its Annual Meeting of Shareholders on January 30, 1998. A quorum was present at the Annual Meeting, with 44,804,288 shares out of a 16 18 total of 48,175,503 shares entitled to cast votes represented in person or by proxy at the meeting. The share amounts set forth in this Item 4 are not adjusted to reflect the two-for-one stock split effective February 20, 1998. Proposal Number 1: To Elect Three Directors to Serve as Class III Directors Until the 2001 Annual Meeting of Shareholders and Until Their Respective Successors are Duly Elected and Qualified. The shareholders voted to elect Kenneth F. Yontz, Joe L. Roby and William U. Parfet to serve as Class III directors until the 2001 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified. The results of the vote are as follows: MR. YONTZ MR. ROBY MR. PARFET --------- -------- ---------- For 44,556,213 44,556,366 44,549,766 Withheld From 248,075 247,922 254,522 Under Wisconsin law, directors are elected by a plurality of the votes cast by shares entitled to vote in the election of directors. "Plurality" means that the individuals who receive the largest number of votes are elected as directors up to the maximum number of directors to be chosen in the election. Any shares not voted, whether by withheld authority, broker non-vote or otherwise, have no effect in the election of directors except to the extent that the failure to vote for an individual results in another individual receiving a larger number of votes. Accordingly, the above referenced results indicate that each of Messrs. Yontz, Roby and Parfet received a plurality of the votes cast by shares present in person or by proxy at the meeting and entitled to vote on the election of directors. The terms of office as directors of Don H. Davis Jr., Richard W. Vieser, Christopher L. Doerr, Thomas O. Hicks and Robert B. Haas continued after the meeting. Proposal Number 2: To Consider and Vote Upon a Proposal to Amend the Sybron International Corporation Amended and Restated 1993 Long- Term Incentive Plan. The shareholders voted to approve a proposal to amend the Sybron International Corporation Amended and Restated 1993 Long-Term Incentive Plan (the "Plan") to (1) increase the number of shares of Common Stock authorized for issuance pursuant to the Plan by 2,400,000 (4,800,000 as adjusted for the two-for-one stock split effective February 20, 1998); (2) provide it is intended that the members of the Committee charged with administering the Plan qualify as "non-employee directors" as defined in Rule 16b-3 under the Securities Exchange Act of 1934 as well as "outside directors" for purposes of Section 162(m) of the Internal Revenue Code; (3) revise the share withholding provisions relating to tax withholding requirements to delete restrictions no longer required by Rule 16b-3; (4) require Non-Qualified Stock Options to be 17 19 granted with an exercise price not less than 100% of Fair Market Value at the time of grant; and (5) delete all provisions of the Plan relating to restricted stock. The results of the vote are as follows: For 43,134,859 Against 1,641,974 Abstentions 27,455 Broker Non-Votes 0 Under Wisconsin law, the affirmative vote of a majority of the votes cast thereon is required for the approval of Proposal Number 2. Because abstentions and broker non-votes are not considered votes cast, neither has an effect on the voting for the proposal. Accordingly, the above referenced results indicate the proposal to amend the Company's Plan received the affirmative vote of 43,134,859 shares, constituting 96.3% of the 44,776,833 votes cast thereon at the meeting. Proposal Number 3: To Consider and Vote Upon a Proposal to Amend the Company's Articles of Incorporation to Increase the Number of Authorized Shares of Common Stock. The shareholders voted to approve a proposal to amend the Company's Articles of Incorporation to increase the number of authorized shares of Common Stock from 110,000,000 to 250,000,000. The results of the vote are as follows: For 42,653,410 Against 2,115,444 Abstentions 35,434 Broker Non-Votes 0 Under Wisconsin law, the affirmative vote of a majority of the votes cast thereon is required for the approval of Proposal Number 3. Because abstentions and broker non-votes are not considered votes cast, neither has an effect on the voting for the proposal. Accordingly, the above referenced results indicate the proposal to amend the Company's Articles of Incorporation received the affirmative vote of 42,653,410 shares, constituting 95.3% of the 44,768,854 votes cast thereon at the meeting. ITEM 5. OTHER INFORMATION On February 5, 1998, Sybron announced that it had signed a definitive agreement with LRS Acquisition Corp. ("LRS") pursuant to which LRS will be merged with a subsidiary of Sybron. LRS is the parent company of "A" Company Orthodontics, a manufacturer and developer of orthodontic products headquartered in San Diego, California. "A" Company generated net sales of approximately $45 million for the year ended December 31, 1997. "A" Company will be managed by Sybron's subsidiary, Sybron Dental Specialties, Inc., which is the parent of Ormco 18 20 Corporation, a manufacturer and developer of orthodontic products, and Kerr Corporation, a manufacturer and developer of a broad range of consumable products for use in restorative, prosthetic, and endodontic dentistry. The transaction, which is expected to be completed within the next few months, is subject to approval by the shareholders of LRS and to other customary conditions of closing. The transaction has received early termination of the Hart-Scott-Rodino waiting period. Sybron will issue shares of its Common Stock in connection with the merger and will account for the transaction using the pooling of interests method of accounting. 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: No reports on Form 8-K were filed during the quarter for which this report is filed. 19 21 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 February 17, 1998 /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. 20 22 SYBRON INTERNATIONAL CORPORATION (THE "REGISTRANT") (COMMISSION FILE NO. 1-11091) EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997 INCORPORATED EXHIBIT HEREIN BY FILED NUMBER DESCRIPTION REFERENCE TO HEREWITH 11 Statement re Computation of Per Share X Earnings 27 Financial Data Schedule X EI-1