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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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______________ to _______________
Commission File Number: 1-11091
SYBRON INTERNATIONAL CORPORATION
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(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
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(Registrant's telephone number, including area code)
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(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 10, 1998 there were 100,998,656 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
Index Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, June 30,1998 (unaudited)
and September 30, 1997 2
Consolidated Statements of Income, for the three and nine months
ended June 30, 1998 (unaudited) and 1997 (unaudited) 3
Consolidated Statements of Shareholders' Equity for the year ended September 30,
1997 and the nine months ended June 30, 1998 (unaudited) 4
Consolidated Statements of Cash Flows, for the nine months ended
June 30, 1998 (unaudited) and 1997 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 5. OTHER INFORMATION 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
SIGNATURES 30
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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
June 30, September 30,
1998 1997
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents ................................................ $ 27,726 $ 18,582
Accounts receivable (less allowance for doubtful
receivables of $5,113 and $3,963) ...................................... 180,412 174,155
Inventories (note 2) ..................................................... 166,467 152,775
Deferred income taxes .................................................... 25,586 19,058
Prepaid expenses and other current assets ................................ 19,414 16,177
----------- -----------
Total current assets .................................................. 419,605 380,747
----------- -----------
Property, plant and equipment net of depreciation of $167,934
and $144,553 ............................................................. 206,402 199,825
Intangible assets ......................................................... 753,891 662,792
Deferred income taxes ..................................................... 13,919 16,468
Other assets .............................................................. 7,956 8,325
----------- -----------
Total assets ........................................................... $ 1,401,773 $ 1,268,157
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 41,436 $ 43,253
Current portion of long-term debt ........................................ 36,719 41,224
Income taxes payable ..................................................... 1,925 1,696
Accrued payroll and employee benefits .................................... 33,149 34,466
Restructuring reserve .................................................... 11,356 --
Deferred income taxes .................................................... 7,679 5,007
Other current liabilities ................................................ 26,413 27,415
----------- -----------
Total current liabilities ............................................. 158,677 153,061
----------- -----------
Long-term debt ............................................................ 741,880 676,072
Deferred income taxes ..................................................... 51,541 51,761
Other liabilities ......................................................... 10,338 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 100,814,728 and 99,562,038 shares, respectively ........... 1,008 995
Equity Rights, 50 and 250 rights at $1.09 per right respectively ......... -- --
Additional paid-in capital ............................................... 229,376 210,920
Retained earnings ........................................................ 236,408 187,536
Cumulative foreign currency translation adjustment ....................... (27,455) (24,968)
Treasury common stock, 220 and 1,090 shares at cost
respectively ............................................................ -- (1)
----------- -----------
Total shareholders' equity ............................................ 439,337 374,482
----------- -----------
Total liabilities and shareholders' equity ............................ $ 1,401,773 $ 1,268,157
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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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,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales ............................................. $ 235,502 $ 221,264 $ 695,638 $ 605,433
Cost of sales:
Cost of product sold ............................... 112,709 105,811 336,065 294,233
Restructuring charges .............................. 6,417 -- 6,417 --
Depreciation of purchase accounting adjustments .... 162 954 492 2,869
---------- ---------- ---------- ----------
Total cost of sales ................................... 119,288 106,765 342,974 297,102
---------- ---------- ---------- ----------
Gross profit .......................................... 116,214 114,499 352,664 308,331
Selling, general and administrative expenses .......... 57,944 57,875 177,074 158,083
Merger, transaction and integration expenses .......... 9,886 -- 9,886 --
Restructuring charges ................................. 16,924 -- 16,924 --
Depreciation and amortization of purchase
accounting adjustments ............................... 6,654 6,312 19,535 16,202
---------- ---------- ---------- ----------
Operating income ...................................... 24,806 50,312 129,245 134,046
---------- ---------- ---------- ----------
Other income (expense):
Interest expense ................................... (14,105) (12,929) (42,272) (33,313)
Amortization of deferred financing fees ............ (64) (58) (172) (200)
Other, net ......................................... 122 (49) 20 (351)
---------- ---------- ---------- ----------
Income before income taxes and extraordinary
item ................................................. 10,759 37,276 86,821 100,182
Income taxes .......................................... 6,944 14,737 37,468 39,821
---------- ---------- ---------- ----------
Income before extraordinary item ...................... 3,815 22,539 49,353 60,361
Extraordinary item - Write-off of unamortized
Deferred financing fees (net of income tax benefits
of $413) ............................................. -- (673) -- (673)
---------- ---------- ---------- ----------
Net income ............................................ $ 3,815 $ 21,866 $ 49,353 $ 59,688
========== ========== ========== ==========
Basic earnings per common share prior to
extraordinary item ................................... $ .04 $ .23 $ .49 $ .62
Extraordinary item .................................... -- (.01) -- (.01)
---------- ---------- ---------- ----------
Basic earnings per share .............................. $ .04 $ .22 $ .49 $ .61
========== ========== ========== ==========
Diluted earnings per common share prior to
extraordinary item ................................... $ .04 $ .22 $ .47 $ .59
Extraordinary item .................................... -- (.01) -- (.01)
---------- ---------- ---------- ----------
Diluted earnings per common share ..................... $ .04 $ .21 $ .47 $ .58
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND THE NINE MONTHS ENDED JUNE 30, 1998
(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 ............ $ 970 $ 1 $ 192,555 $ 104,109 $ (9,050) $ (3) $ 288,582
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)
Dividends paid by "A" Company
prior to the merger ..................... -- -- 520 (845) -- -- (325)
Net income ............................... -- -- -- 83,140 -- -- 83,140
Cumulative foreign currency
translation adjustment .................. -- -- -- -- (15,918) -- (15,918)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1997 ............ $ 995 $ -- $ 210,920 $ 187,536 $ (24,968) $ (1) $ 374,482
========== ========== ========== ========== ========== ========== ==========
Shares issued in connection
with the exercise of 1,270,650
stock options ........................... 13 -- 10,707 (1) -- -- 10,719
Conversion of 200 equity rights to 872
shares of common stock .................. -- -- -- (1) -- 1 --
Tax benefits related to stock options .... -- -- 6,605 -- -- -- 6,605
See accompanying notes to unaudited consolidated financial statements.
(continued)
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND THE NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY TREASURY TOTAL
COMMON EQUITY PAID-IN RETAINED TRANSLATION COMMON SHAREHOLDERS'
STOCK RIGHTS CAPITAL EARNINGS ADJUSTMENT STOCK EQUITY
--------- --------- --------- --------- ---------- --------- ---------
Dividends paid by "A" Company
prior to the merger ................ -- -- 314 (479) -- -- (165)
Shares issued related to a deferred
compensation plan of "A" Company ... -- -- 830 -- -- -- 830
Net income (Unaudited) .............. -- -- -- 49,353 -- -- 49,353
Cumulative foreign currency
translation adjustment ............. -- -- -- -- (2,487) -- (2,487)
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1998
(Unaudited) ........................ $ 1,008 $ -- $ 229,376 $ 236,408 $ (27,455) $ -- $ 439,337
========= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income ............................................................. $ 49,353 $ 59,688
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ........................................................... 22,830 21,422
Amortization ........................................................... 19,994 16,168
Provision for losses on doubtful accounts .............................. 1,140 298
Inventory provisions ................................................... (870) 1,672
Deferred income taxes .................................................. 3,743 (8,996)
Extraordinary item ..................................................... -- 673
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ............................. 293 (20,168)
Increase in inventories ................................................ (5,329) (22,040)
Increase in prepaid expenses and other current assets .................. (10,692) (7,660)
Increase (decrease) in accounts payable ................................ (2,459) 3,947
Decrease in income taxes payable ....................................... (731) (3,060)
Decrease in accrued payroll and employee benefits ...................... (1,753) (31)
Increase in restructuring reserve ...................................... 11,356 --
Decrease in other current liabilities .................................. (4,003) (5,872)
Net change in other assets and liabilities ............................. 11,243 12,734
---------- ----------
Net cash provided by operating activities .............................. 94,115 48,775
Cash flows from investing activities:
Capital expenditures ................................................... (26,919) (23,777)
Proceeds from sales of property, plant, and equipment .................. 4,473 307
Net payments for businesses acquired ................................... (166,083) (207,149)
---------- ----------
Net cash used in investing activities .................................. (188,529) (230,619)
Cash flows from financing activities:
Increase in the revolving credit facility .............................. 121,300 154,900
Proceeds from long term debt ........................................... -- 53,087
Principal payments on long-term debt ................................... (26,564) (21,495)
Proceeds from the exercise of common stock options ..................... 10,720 4,741
Deferred financing fees ................................................ (276) (1,188)
Other .................................................................. 629 (1,894)
---------- ----------
Net cash provided by financing activities .............................. 105,809 188,151
Effect of exchange rate changes on cash ................................. (2,251) (2,028)
Net increase in cash and cash equivalents ............................... 9,144 4,279
Cash and cash equivalents at beginning of year .......................... 18,582 13,750
---------- ----------
Cash and cash equivalents at end of period .............................. $ 27,726 $ 18,029
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................... $ 40,255 $ 32,256
Cash paid during the period for income taxes ........................... 30,376 40,696
Capital lease obligations incurred ..................................... 249 1,104
See accompanying notes to unaudited consolidated financial statements.
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. In these financial statements, the terms "Company" or "Sybron" mean Sybron
International Corporation and its subsidiaries on a consolidated basis,
unless the context otherwise indicates. 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. All such adjustments were of
a normal recurring nature. The results for the nine month period ended June
30, 1998 are not necessarily indicative of the results to be expected for
the full year. Certain amounts from the three and nine month periods ended
June 30, 1997, as originally reported, have been reclassified to conform
with the three and nine month periods ended June 30, 1998 presentation.
All prior period data has been adjusted to reflect the results of National
Scientific Company ("National") and LRS Acquisition Corp. ("LRS"), the
parent of "A" Company Orthodontics ('"A" Company'), acquired May 23, 1997
and April 9, 1998, respectively. The results of National and LRS, each of
which joined Sybron as the result of a merger and were accounted for as a
pooling of interests, were combined with the Company's previously reported
results as if the mergers occurred as of the beginning of all reported
periods.
2. Inventories at June 30, 1998 consist of the following:
(In thousands)
Raw materials $ 53,058
Work-in-process 27,271
Finished goods 90,441
LIFO Reserve (4,303)
---------
$ 166,467
=========
3. Acquisitions completed in the third quarter of fiscal 1998 are as follows:
(a) On April 2, 1998, a subsidiary of Sybron Laboratory Products
Corporation ("SLPC") completed the acquisition of Criterion Sciences
("Criterion"), a manufacturer of hematology stains, reagents and other
solutions used for laboratory analysis and testing. Criterion's annual
sales are approximately $6.0 million.
(b) On April 3, 1998, a subsidiary of SLPC completed the acquisition of
Custom Laboratories ("Custom"), a manufacturer of a glucose tolerance
test beverage. Custom's annual sales are approximately $1.6 million.
(c) On April 9, 1998, Sybron completed the merger of LRS, the parent of "A"
Company, and a subsidiary of Sybron International Corporation formed
for that purpose, with the
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result that LRS became a wholly owned subsidiary of Sybron. "A" Company
is a manufacturer and developer of orthodontic products, supplying
orthodontic professionals with brackets, archwires, and related
products. For the year ended December 31, 1997, "A" Company generated
net sales of approximately $45.0 million.
Under the terms of the merger agreement LRS shareholders received
3,215,982 shares of the Company's common stock (valued at approximately
$88.2 million based on the Company's closing price on April 9, 1998)
for all of the outstanding shares of LRS. In addition, the Company paid
certain outstanding debt obligations of LRS in the amount of $32.3
million.
The merger was structured as a tax-free reorganization and has been
accounted for as a pooling of interests. Accordingly, the Company's
historical financial information has been restated to include the
financial results of LRS.
Results of the Company and LRS before and after giving effect to the
merger are as follows:
Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
------------ ------------
(In thousands)
(unaudited)
Total net sales:
The Company $ 225,505 $ 661,696
LRS 9,997 33,942
------------ ------------
The Company, giving effect to the merger $ 235,502 $ 695,638
============ ============
Net income:
The Company $ 6,347 $ 50,437
LRS (2,532) (1,084)
------------ ------------
The Company, giving effect to the merger $ 3,815 $ 49,353
============ ============
(d) On April 13, 1998, a subsidiary of SLPC acquired DiMed Corporation
("DiMed"). DiMed is a manufacturer and distributor of culture media
products. DiMed's annual sales are approximately $1.7 million.
(e) On April 24, 1998, a subsidiary of SLPC purchased the assets of SciCan
Scientific ("SciCan"), a Toronto based manufacturer of laboratory
glassware. SciCan's annual sales are approximately $5.5 million.
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(f) On May 14, 1998, a subsidiary of SLPC purchased the assets of Summit
Biotechnology, Inc., a business located in Fort Collins, Colorado,
which processes and sells fetal bovine serum for cell culture and
diagnostic purposes. Annual sales are approximately $2.0 million.
(g) On May 22, 1998, a subsidiary of SLPC purchased Marks Polarized
Corporation ("Marks"). Marks, with annual sales of approximately $1.0
million, is a manufacturer of laminated filters, polarizers, polarized
filters, and other optical products.
Acquisitions completed after the third quarter of fiscal 1998 are as
follows:
(a) On July 3, 1998, a subsidiary of SLPC purchased Electrothermal
Engineering Ltd. ("Electrothermal"), located in Southend-on-Sea,
England. Electrothermal is a manufacturer of laboratory equipment,
including heating mantles and controls. Electorthermal's annual sales
are approximately $5.4 million.
(b) On July 3, 1998, a subsidiary of Sybron Dental Specialties, Inc.
("SDS") purchased certain assets of Tycom Corporation and its
affiliate Tycom Dental Corporation ("Tycom"). Tycom, with annual sales
of approximately $8.0 million, manufactures a line of endodontic
instrumentation.
(c) On July 22, 1998, a subsidiary of SDS completed the acquisition of the
high level disinfectant/sterilant business of Cottrell Ltd.
("Cottrell"), based in Englewood, Colorado. Annual sales for the
acquired product lines are approximately $7.5 million.
(d) On July 31, 1998, a subsidiary of SLPC acquired Lab-Line Instruments,
Inc. ("Lab-Line"). Lab-Line offers a broad line of constant temperature
laboratory apparatus, including shakers, refrigerators/freezers, ovens,
water baths, environmental chambers, and furnaces. Lab-Line is located
in Melrose Park, Illinois and has annual sales of approximately $20
million.
(e) On August 3, 1998, a subsidiary of SLPC acquired Applied Biotech Inc.
("ABI"), a manufacturer of products for the rapid detection of
pregnancy, drugs of abuse, and infectious diseases. ABI is located in
San Diego, California and has annual sales of approximately $20
million.
(f) On August 3, 1998, a subsidiary of SLPC acquired the operating assets
of Scherf Prazision GmbH ("Scherf"), a manufacturer of volumetric
glassware, tubes, and vials. Scherf is located in Urspringen, Germany
and has annual sales of approximately DM 4.6 million ($2.6 million).
(g) On August 6, 1998, a subsidiary of SLPC acquired the diagnostic
products business of Seradyn, Inc., based in Indianapolis, Indiana. The
acquired products, which include
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infectious disease diagnostic reagents and test kits, as well as
uniform latex particles used in the production of diagnostic reagents,
have annual sales of approximately $12 million.
All of the acquisitions, except for the merger with LRS, were made for cash
and are being accounted for as purchases with the results of the acquired
entity being included in the Company's financial statements from the date
of the acquisition.
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 the Company 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), which was 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.
6. In June 1998, the Company recorded a restructuring charge of $24,024
($16,703 after tax or $.16 per share on a diluted basis) for the
rationalization of certain acquired companies, combination of certain
production facilities, movement of certain customer service and marketing
functions, and the exiting of several product lines. The restructuring
charge has been classified as components of cost of sales ($6,417),
selling, general and administrative expenses ($16,924) and income tax
expense ($683). Principal items included in the reserve were severance and
termination costs for approximately 165 notified employees (primarily
production, sales and marketing personnel) (approximately $8,477), the
non-cash write-off of certain fixed assets and inventory associated with
exited product lines (approximately $8,710), the non cash write-off of
goodwill associated with discontinued product lines (approximately $2,061),
remaining lease payments and shut down costs on exited facilities and other
contractual obligations (approximately $1,991), a statutory tax penalty
(approximately $683), and other related restructuring costs (approximately
$2,102). As of June 30, 1998, the Company has made cash payments of
approximately $2,878 and has written off approximately $10,771 of fixed
assets, inventory, goodwill and other miscellaneous items relating to the
restructuring reserve. The remaining amount of approximately $10,375
relates to obligations expected to be paid in the next twelve months.
7. In the quarter ended June 30, 1998, the Company incurred approximately
$9,886 ($6,129 after tax or $.06 per share on a diluted basis) of costs
associated with the merger, transition and integration of the "A" Company.
The majority of these expenses were adjustments to the merger
consideration. The Company expects to incur an estimated additional $1.5
million
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before taxes in the fourth quarter of fiscal 1998 and $1.0 million before
taxes in the first quarter of fiscal 1999 in connection with further
integration costs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The subsidiaries of the Company are leading manufacturers of
value-added products for the laboratory and professional dental and orthodontic
markets in the United States and abroad. In May 1998, the Company's
laboratory subsidiaries were realigned under Sybron Laboratory Products
Corporation ("SLPC"). The primary laboratory subsidiaries under SLPC are Nalge
Nunc International Corporation ("NNI"), Erie Scientific Company ("Erie") and
Barnstead Thermolyne Corporation ("Barnstead/Thermolyne"). NNI develops,
manufactures, and markets labware, life sciences and process technologies
products. Offerings include reusable and disposable plastic labware, cell and
tissue culture products, high quality bio-pharmaceutical packaging, filtration
products, and industrial products used in fluid processing such as plastic
tubing, sanitary tubing and fittings. Erie develops, manufactures, and markets
products for diagnostics and research, histology, microbiology, and clinical
and industrial applications. These products include liquid standards and
reagents, stains, diagnostic tests, microscope slides and other glass products.
Barnstead/Thermolyne develops, manufactures and markets precision laboratory
equipment consisting of heating, stirring, measuring, sterilizing, analytical
and temperature control apparatus, and water purification systems.
Sybron's primary dental and orthodontic subsidiaries are "A" Company,
as well as Kerr Corporation ("Kerr") and Ormco Corporation ("Ormco") which are
subsidiaries of Sybron Dental Specialties, Inc. ("Sybron Dental Specialties").
Kerr develops, manufactures and markets a broad range of consumable products for
use in restorative, prosthetic, and endodontic dentistry. Ormco and "A" Company
develop, manufacture and market a broad line of orthodontic appliances including
bands, brackets, wire, adhesives, and ancillary equipment used during the course
of orthodontic treatment.
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 and international growth.
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.
Our results for the third quarter and first nine months of fiscal 1998
ended June 30, 1998, contain charges with respect to the restructuring of our
laboratory businesses, the restructuring of certain operations of Sybron Dental
Specialties relating primarily to the consolidation of Ormco and "A" Company,
and merger, transaction and integration charges associated with the merger with
LRS Acquisition Company ("LRS")(the "Merger"), the parent of "A" Company. These
charges are collectively referred to herein as the "Special Charges". In
addition, because the Merger is accounted for as a pooling-of-interests, all
prior period data have been adjusted to reflect the historical results of LRS
and "A" Company as if the Merger took place on the first day of the reporting
period.
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The Special Charges, which total $33.9 million ($22.8 million after
tax), consist of the following items (see also Notes 6 and 7 of the Notes to the
Unaudited Consolidated Financial Statements):
(a) $9.4 million ($5.9 million after tax) relates to the realignment of our
laboratory subsidiaries under SLPC. This restructuring charge consists
primarily of severance expenditures associated with the consolidation
of certain functions, the restructuring of sales and marketing
activities, and costs associated with exiting certain product lines.
Approximately $4.6 million of these charges are cash expenditures.
The savings from these actions are expected to be approximately $6.1
million per year.
(b) $14.6 million ($10.7 million after tax) relates to the consolidation of
Ormco and "A" Company activities after the Merger, and the exiting of
certain product lines on the dental side of the business. The charge
primarily includes severance costs, costs associated with the closure
of Ormco's sales office in Zurich, Switzerland, and costs associated
with the exiting of redundant products lines. Approximately $8.0
million of these charges are cash expenditures.
The savings from these actions are expected to be approximately $11.0
million per year.
(c) $9.9 million ($6.2 million after tax) consists of transaction and
merger and integration costs associated with the Merger. We anticipate
additional merger and integration costs of $1.5 million before taxes in
the 1998 fourth fiscal quarter and $1.0 million before taxes in the
first fiscal quarter of 1999.
ALL OF THE FINANCIAL DATA IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE PRIOR TO THE SPECIAL
CHARGES AND PRIOR TO THE RESTATEMENT OF PRIOR PERIOD DATA DUE TO THE MERGER,
UNLESS OTHERWISE SPECIFIED.
Both our sales and operating income for the quarter and the nine months
ended June 30, 1998 grew over the corresponding prior year periods. Net sales
for the quarter and nine months ended June 30, 1998 increased by 12.3% and
17.5%, respectively, over the corresponding fiscal 1997 periods. After
restatement of the prior period data for the Merger, net sales for the quarter
and nine months ended June 30, 1998 increased by 6.4% and 14.9%, respectively,
over the corresponding fiscal 1997 periods. Operating income for the quarter and
nine months increased by 20.4% and 22.8%, respectively, over the corresponding
fiscal 1997 periods. After restatement of the prior years financials for the
Merger, operating income for the quarter and nine months ended June 30, 1998
increased by 15.3% and 21.2%, respectively, over the corresponding 1997 period.
Sales growth in the quarter and nine months ended June 30, 1998 was
strong both domestically and internationally. Domestic and international sales
increased by 14.6% and 7.4%,
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respectively, for the quarter, and by 21.5% and 9.5%, respectively, for the nine
months, over the corresponding fiscal 1997 periods. International sales were
negatively impacted by the strengthening of the U.S. dollar and economic
weakness in the Asian region. If currency effects were removed from sales, the
international increase over 1997 would have been 11.2% for the quarter and 14.1%
for the nine month period ended June 30, 1998. Sales to the Asian region
decreased by approximately $2.9 million for both the quarter and nine month
periods ended June 30, 1998, respectively, when compared to the corresponding
fiscal 1997 periods.
Acquisitions aided sales growth significantly during both the quarter
and nine month periods, accounting for $22.4 million and $8.7 million of the
domestic and international sales increases in the quarter, and $77.4 million
and $21.3 million for the nine month period, respectively. This quarter showed
no internal sales growth and instead showed a shrinkage of 2.0%. For the nine
months to date, internal sales growth amounted to 0.7%. For the quarter internal
growth was negatively impacted by the strengthened U.S. dollar, weak sales in
the Asian region, distributor inventory re-balancing impacting
Barnstead/Thermolyne in April and May of this quarter, reduced sales at Nalge
Process Technologies Corporation, and a disruption in Ormco and "A" Company
sales caused by the redistribution of sales territories in connection with the
Merger. Kerr's sales, which were negatively impacted by dealer inventory
consolidation in the second quarter, showed growth in the third quarter.
Inventory consolidation is, however, expected to continue to impact sales, as
the dealer network continues to consolidate. Without currency effects, internal
growth was approximately negative 0.9% for the quarter and positive 2.2% for
the nine month period ended June 30, 1998. Barnstead/Thermolyne was negatively
impacted in the first two months of this quarter by inventory re-balancing at
its major distributor, Fisher Scientific, however end user purchases of
Barnstead/Thermolyne products exceeded levels purchased by Fisher Scientific.
We continue to maintain an active program of developing and marketing
both new products and product line extensions, as well as pursuing growth
through acquisitions. We completed seven acquisitions in the third quarter of
fiscal 1998, four in July 1998 and three through August 12, 1998. (See Note 3 to
the Unaudited Consolidated Financial Statements).
Our results of operations include goodwill amortization, other
amortization, and depreciation. These non-cash charges totaled $14.6 million and
$13.1 million for the quarters ended June 30, 1998 and 1997, respectively and
$41.7 million and $36.4 million for the nine month periods ended June 30, 1998
and 1997, 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 $72.7 million and $61.2 million for
the quarters ended June 30, 1998 and 1997, respectively, and $199.5 million and
$164.5 million for the nine months ended June 30, 1998 and 1997, respectively.
EBITDA represents, for any relevant period, net income plus (i) interest
expense, (ii) provision for income taxes, (iii) Special Charges, (iv)
extraordinary items and (v) depreciation and amortization, all determined on a
consolidated basis and in accordance with generally accepted accounting
principles.
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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 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. Two of these options were sold in the third quarter
of fiscal 1998 at a gain of $0.2 million. The remaining options will expire in
the fourth quarter of fiscal 1998 and are designed to protect Sybron from
potential detrimental effects of currency movements associated with the U.S.
dollar versus the German mark and the French franc as compared to the fourth
quarter 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 costs to remediate certain environmental
contamination at the Rochester Site. CE claims its costs to date have amounted
to approximately $7.0 million. 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"). In connection with the VCA, CE and NYSDEC have reached
an agreement on the cleanup goals and remedial methods for soil and groundwater
contamination at the Site. CE has estimated that the costs to achieve the
agreed-upon cleanup goals using the agreed-upon remedial methods would be
approximately $7.9 million. Potential offsite issues have not yet been
addressed, and CE is presently preparing a work plan for an offsite monitoring
program. The Company believes the cost estimates developed by CE for the soil
and groundwater remediation are not reliable or meaningful cost estimates as
they are based on insufficient data and information. 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.
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RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1998 COMPARED TO THE QUARTER ENDED JUNE 30, 1997
NET SALES. Net sales for the third quarter of 1998 were $235.5 million,
an increase of $25.7 million (12.3%) over the corresponding 1997 quarter. After
restating the prior year's quarter for the Merger, net sales for the three
months ended June 30, 1998 increased by $14.2 million (6.4%) from net sales in
the three months ended June 30, 1997. Sales in the laboratory segment were
$150.1 million for the three months ended June 30, 1998, an increase of 13.1%
from the corresponding 1997 fiscal period. Increased sales in the laboratory
segment resulted primarily from (i) sales of products of acquired companies, net
of a divested product line (approximately $19.3 million), (ii) price increases
(approximately $2.5 million) and (iii) increased volume from sales of new
products (approximately $1.6 million). Increased sales in the laboratory segment
were partially offset by (i) reduced volume from sales of existing products
(approximately $3.1 million) and (ii) unfavorable foreign currency impacts
(approximately $2.9 million). In the dental segment, net sales were $85.4
million for the three months ended June 30, 1998, an increase of 10.8% from the
corresponding fiscal 1997 period. Increased sales in the dental segment resulted
primarily from (i) sales of products of acquired companies, net of
discontinued product lines (approximately $11.8 million) and (ii) increased
volume from sales of new products (approximately $3.0 million). Increased
sales in the dental segment were partially offset by (i) a reduction in volume
of sales of existing products (approximately $4.9 million) and (ii) unfavorable
foreign currency impacts (approximately $1.6 million).
GROSS PROFIT. Gross profit for the third quarter of fiscal 1998 was
$122.6 million, an increase of 14.0% from gross profit of $107.6 million for the
corresponding fiscal 1997 period. After restating the third quarter of 1997 for
the Merger, gross profit increased over the corresponding 1997 quarter by $8.1
million (7.1%). Gross profit in the laboratory segment was $73.3 million (48.8%
of net segment sales) in the third quarter of fiscal 1998, an increase of 16.4%
from gross profit of $63.0 million (47.4% 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 $10.0 million), (ii) price increases (approximately $2.5
million), (iii) inventory adjustments (approximately $1.1 million), (iv) a
reduction in depreciation expense of certain assets that became fully
depreciated in the prior fiscal year (approximately $0.5 million) and (v)
increased volume (approximately $0.4 million). Increased gross profit in the
laboratory segment was partially offset by (i) an unfavorable product mix
(approximately $2.1 million), (ii) an unfavorable foreign currency impact
(approximately $1.3 million) and (iii) unfavorable overhead application
(approximately $1.0 million). In the dental segment, gross profit was $49.3
million (57.8% of net segment sales) in the third quarter of fiscal 1998, an
increase of 10.5% from gross profit of $44.6 million (57.9% of net segment
sales) during the corresponding fiscal 1997 period. Increased gross profit in
the dental segment resulted primarily from (i) the effects of acquired companies
(approximately $8.5 million) and (ii) a reduction in depreciation expense of
certain assets that became fully depreciated in the prior fiscal year
(approximately $0.3 million). Increased gross profit in the dental segment was
partially offset by (i) unfavorable foreign currency impacts (approximately $1.6
million), (ii) reduced volume
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(approximately $1.1 million), (iii) unfavorable overhead application
(approximately $0.9 million) and (iv) inventory factors (approximately $0.5
million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the third quarter of fiscal 1998 were $64.6 million
(27.4% of net sales) as compared to $59.4 million (28.3% of net sales) in the
corresponding fiscal 1997 period. After restating the third quarter of 1997 for
the Merger, selling, general and administrative expenses increased over the
corresponding 1997 quarter by $0.4 million (0.6%). General and administrative
expenses at the corporate level, including amortization of purchase accounting
adjustments and goodwill associated with acquisitions, were $5.6 million in the
third quarter of fiscal 1998, representing a decrease of 14.4% from $6.5 million
in the corresponding fiscal 1997 period. The decrease at the corporate level was
primarily due to (i) a reduction in employee benefits expense (approximately
$0.5 million) and (ii) reduced depreciation and amortization expense of certain
tangible and intangible assets that became fully amortized and depreciated in
the prior fiscal year (approximately $0.4 million). Selling, general and
administrative expenses at the subsidiary level, including amortization of
intangibles, were $59.0 million (25.1% of net sales), representing an increase
of 11.5% from $52.9 million (25.2% 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 $6.8 million), (ii)
increased amortization of intangible assets related to acquired businesses
(approximately $0.9 million) and (iii) increased marketing expense
(approximately $0.3 million), partially offset by (i) favorable foreign currency
impacts (approximately $1.3 million) and (ii) a reduction in research and
development expenditures (approximately $0.3 million).
SPECIAL CHARGES. The third quarter results include the Special Charges
which total $33.9 million ($22.8 million after tax), as follows:
(a) In June 1998, the Company recorded a restructuring charge of $24.0
million ($16.7 million after tax or $.16 per share on a diluted
basis) for the rationalization of certain acquired companies,
combination of certain production facilities, movement of certain
customer service and marketing functions, and the exiting of several
product lines. The restructuring charge has been classified as
components of cost of sales ($6.4 million), selling, general and
administrative expenses ($16.9 million) and income tax expense ($0.7
million). Principal items included in the reserve were severance and
termination costs for approximately 165 notified employees (primarily
production, sales and marketing personnel) (approximately $8.4
million), the non-cash write-off of certain fixed assets and inventory
associated with exited product lines (approximately $8.7 million), the
non cash write-off of goodwill associated with discontinued product
lines (approximately $2.1 million), remaining lease payments and shut
down costs on exited facilities and other contractual obligations
(approximately $2.0 million), a statutory tax penalty (approximately
$0.7 million), and other related restructuring costs (approximately
$2.1 million). As of June 30, 1998, the Company has made cash payments
of approximately $2.9 million and has written off approximately $10.8
million of fixed assets, inventory, goodwill and other miscellaneous
items relating to the restructuring reserve. The remaining amount of
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approximately $10.3 million relates to obligations expected to be paid
in the next twelve months.
(b) In the quarter ended June 30, 1998, the Company incurred approximately
$9.9 million ($6.1 million after tax or $.06 per share on a diluted
basis) of costs associated with the merger, transition and integration
of the "A" Company. The majority of these expenses were adjustments to
the Merger consideration. The Company expects to incur an additional
$1.5 million before taxes in the fourth quarter of fiscal 1998, and
$1.0 million before taxes in the first quarter of fiscal 1999 in
connection with further integration costs.
See the description of the Special Charges under "General", above,
and Notes 6 and 7 to the Unaudited Consolidated Financial Statements.
OPERATING INCOME. As a result of the foregoing, operating income was
$58.0 million (24.6% of net sales) in the third quarter of fiscal 1998 compared
to $48.2 million (23.0% of net sales) in the corresponding fiscal 1997 period.
After restating the third quarter of 1997 for the Merger, operating income
increased over the corresponding 1997 quarter by $7.7 million (15.3%). Operating
income in the laboratory segment was $38.6 million (25.7% of net segment sales)
in the third quarter of fiscal 1998 compared to $30.9 million (23.3% of net
segment sales) in the corresponding fiscal 1997 period. Operating income in the
dental segment was $19.4 million (22.7% of net segment sales) in the third
quarter of fiscal 1998 compared to $17.3 million (22.4% of net segment sales)
in the corresponding fiscal 1997 period.
INTEREST EXPENSE. Interest expense was $14.1 million in the third
quarter of fiscal 1998 compared to $12.0 million in the corresponding fiscal
1997 period. After restating the third quarter of 1997 for the Merger, interest
expense increased over the corresponding 1997 quarter by $1.2 million. The
increase resulted from a higher debt balance primarily from our acquisition
activity. Interest expense during the quarters ended June 30, 1998 and 1997
included additional non-cash interest expense of $0.3 million resulting from the
adoption of SFAS No. 106.
INCOME TAXES. Taxes on income (after restating for the Merger)
decreased $7.8 million in the third quarter of fiscal 1998 when compared to the
1997 period primarily as a result of a tax benefit of $10.4 million from the
Special Charges, partially offset by an increase in income excluding the Special
Charges.
NET INCOME. As a result of the foregoing, we had net income of $3.8
million in the third quarter of fiscal 1998 (inclusive of the Special Charges
and restatement for the Merger) compared to $21.9 million in the corresponding
1997 period (after restatement for the Merger and inclusion of an extraordinary
item of $0.7 million related to the write off of deferred financing fees).
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 $1.1 million, after
restating for the Merger, 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.
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\NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales for the nine months ended June 30, 1998 were
$671.7 million, an increase of $100.0 million (17.5%) from net sales of $571.7
million for the corresponding nine months ended June 30, 1997. After restating
for the Merger, net sales for the nine months ended June 30, 1998 were $695.6
million, an increase of $90.2 million (14.9%) from net sales of $605.4 million
for the corresponding nine months ended June 30, 1997. Sales in the laboratory
segment were $434.0 million for the nine months ended June 30, 1998, an increase
of 24.9% from the corresponding 1997 fiscal period. Increased sales in the
laboratory segment resulted primarily from (i) sales of products of acquired
companies, net of a divested product line (approximately $82.7 million), (ii)
price increases (approximately $3.5 million), (iii) increased volume from sales
of new products (approximately $3.3 million) and (iv) increased volume from
sales of existing products (approximately $1.6 million). Increased sales in the
laboratory segment were partially offset by unfavorable foreign currency impacts
(approximately $4.6 million). In the dental segment, net sales were $237.7
million for the nine months ended June 30, 1998, an increase of 6.0% from the
corresponding fiscal 1997 period. Increased sales in the dental segment resulted
primarily from (i) sales of products of acquired companies, net of discontinued
product lines (approximately $16.0 million) and (ii) increased volume from sales
of new products (approximately $3.8 million). Increased sales in the dental
segment were partially offset by (i) unfavorable foreign currency impacts
(approximately $6.0 million) and (ii) reduced volume from sales of existing
products (approximately $0.5 million).
GROSS PROFIT. Gross profit for the nine months ended June 30, 1998 was
$344.7 million, an increase of 19.6% from gross profit of $288.2 million for the
corresponding fiscal 1997 period. After restating for the Merger, gross profit,
before the Special Charges, for the nine months ended June 30, 1998 was $359.1
million, an increase of 16.5% from gross profit of $308.3 million for the
corresponding fiscal 1997 period. Gross profit in the laboratory segment was
$208.0 million (47.9% of net segment sales), an increase of 28.7% from gross
profit of $161.6 million (46.5% 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 $42.4
million), (ii) increased volume (approximately $5.7 million), (iii) price
increases (approximately $3.5 million), (iv) a reduction in depreciation expense
of certain assets that became fully depreciated in the prior fiscal year
(approximately $1.6 million) and (v) favorable overhead application
(approximately $0.4 million). Increased gross profit in the laboratory segment
was partially offset by (i) an unfavorable product mix (approximately $3.0
million), (ii) unfavorable foreign currency impacts (approximately $2.8 million)
and (iii) inventory adjustments (approximately $0.9 million). In the dental
segment, gross profit was $136.8 million (57.5% of net segment sales) for the
nine months ended June 30, 1998, an increase of 8.0% from gross profit of $126.7
million (56.5% of net segment sales) during the corresponding fiscal 1997
period. Increased gross profit in the dental segment resulted primarily from (i)
the effects of acquired companies (approximately $9.9 million), (ii) increased
volume (approximately $2.1 million), (iii) inventory adjustments (approximately
$1.2 million), (iv) an improved product mix (approximately $1.2 million) and (v)
a reduction in depreciation expense of certain assets that became fully
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depreciated in the prior fiscal year (approximately $0.7 million), partially
offset by (i) unfavorable foreign currency impacts (approximately $4.3 million)
and (ii) unfavorable overhead application (approximately $0.2 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended June 30, 1998 were $186.8
million (27.8% of net sales) as compared to $159.6 million (27.9% of net sales)
in the corresponding fiscal 1997 period. After restating for the Merger,
selling, general and administrative expenses increased over the corresponding
1997 period by $22.3 million (12.8%). General and administrative expenses at the
corporate level, including amortization of purchase accounting adjustments and
goodwill associated with acquisitions, were $16.0 million, representing a
decrease of 10.0% from $17.7 million in the corresponding fiscal 1997 period.
The decrease at the corporate level was primarily due to (i) reduced
depreciation and amortization expense of certain tangible and intangible assets
that became fully amortized and depreciated in the prior fiscal year
(approximately $1.4 million) and (ii) a reduction in employee benefits expense
(approximately $0.4 million). Selling, general and administrative expenses at
the subsidiary level, including amortization of intangibles, were $170.9 million
(25.4% of net sales), representing an increase of 20.4% from $141.9 million
(24.8% 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 $21.4 million), (ii) increased amortization of
intangible assets related to acquired businesses (approximately $4.7 million),
(iii) increased marketing expense (approximately $3.3 million) and (iv)
increased general and administrative expense (approximately $1.8 million),
partially offset by (i) favorable foreign currency impacts (approximately $2.3
million) and (ii) a reduction in research and development expenditures
(approximately $0.2 million).
SPECIAL CHARGES. The nine month results include the Special Charges,
which total $33.9 million ($22.8 million after tax). See the description of the
Special Charges above under "General" and the "Results of Operations - Quarter
ended June 30, 1998 Compared to the Quarter ended June 30, 1997" above, and
Notes 6 and 7 to the Unaudited Consolidated Financial Statements.
OPERATING INCOME. Operating income was $157.9 million (23.5% of net
sales) for the nine months ended June 30, 1998 compared to $128.6 million (22.5%
of net sales) in the corresponding fiscal 1997 period. After restating for the
Merger, operating income increased over the corresponding 1997 period by $28.4
million (21.2%). Operating income in the laboratory segment was $104.4 million
(24.1% of net segment sales) compared to $79.4 million (22.8% of net segment
sales) in the corresponding fiscal 1997 period. Operating income in the dental
segment was $53.5 million (22.5% of net segment sales) compared to $49.2 million
(21.9% of net segment sales) in the corresponding fiscal 1997 period.
INTEREST EXPENSE. Interest expense was $40.3 million for the nine
months ended June 30, 1998 compared to $30.3 million in the corresponding fiscal
1997 period. After restating for the Merger, interest expense increased over the
corresponding 1997 period by $9.0 million. The increase resulted from a higher
debt balance primarily from our acquisition activity. Interest
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expense for the nine months ended June 30, 1998 and 1997 included additional
non-cash interest expense of $0.9 million resulting from the adoption of SFAS
No. 106.
INCOME TAXES. Taxes on income (after restating for the Merger)
decreased $2.4 million when compared to the 1997 period primarily as a result of
a tax benefit of $10.4 million from the Special Charges, partially offset by an
increase in income excluding the Special Charges.
NET INCOME. As a result of the foregoing, we had net income of $49.4
million for the nine months ended June 30, 1998 (inclusive of the Special
Charges and restatement for the Merger) compared to $59.7 million in the
corresponding fiscal 1997 period (after restatement for the Merger and inclusion
of an extraordinary item of $0.7 million related to the write off of deferred
financing fees).
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 $5.2 million, after
restating for the Merger, when compared to the prior year nine month period.
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
As a result of the 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 $42.6 million and
$110.9 million in the third quarter and year to date, respectively, primarily as
a result of continued acquisition activity. 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, payments to be made in
connection with our restructuring 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
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"earnout provisions" requiring further payments in the future if certain
financial results are achieved by the acquired companies. With respect to
restructuring charge of approximately $24.0 million, as of June 30, 1998 (See
Note 6 to the Unaudited Consolidated Financial Statements), the Company has made
cash payments of approximately $2.9 million. $10.3 million remains to be paid
over the next twelve months.
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 credit agreement (as amended, 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 the Second
Amended and Restated Credit Agreement (the "Second Amendment"). The Second
Amendment was an expansion of the Credit Facilities. The Term Loan Facility was
restored to $300 million by increasing it by $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 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 Limited Partnership which includes both the purchase price and payment of
assumed debt. The $72 million of CAF borrowings (as defined below) remained in
place. On July 1, 1998, we completed the First Amendment to the Second Amended
Credit Agreement (the "Additional Amendment"). The Additional Amendment provided
for an increase in the Term Loan Facility of $100 million. On July 1, 1998, we
used the $100 million of proceeds from the Additional Amendment to pay $100
million of existing debt balances under the Revolving Credit Facility. The
Additional Amendment also provides us with the ability to use proceeds from the
issuance of additional unsecured indebtedness of up to $300 million to pay
amounts outstanding under the Revolving Credit Facility without reducing our
ability to borrow under the Revolving Credit Facility in the future.
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Payment of principal and interest with respect to the Credit Facilities
and the Sale/Leaseback (as defined later herein) is 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"). The
average interest rate on the Term Loan Facility (inclusive of the swap
agreements described below) for both the quarter and nine months ended June 30,
1998 was 6.7% and the average interest rate on the Revolving Credit Facility for
the quarter and nine months ended June 30, 1998 was 6.6%.
As a result of the terms of the Credit Agreement, 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
June 30, 1998, swap agreements aggregating a notional amount of $375 million
were in place to hedge against a rise in interest rates. 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 third quarter and year to date 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%
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 occur on 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
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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 intend 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 June 30, 1998,
there was approximately $113.7 million of available credit under the Revolving
Credit Facility. On July 6, 1998, the available amount under the Revolving
Credit Facility increased by $100 million as a result of the funding of the
Additional Amendment. 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 each of the first, second and third
quarters of fiscal 1998. Annual payments, in the remainder of fiscal 1998 and
succeeding fiscal years 1999-2002, are due as follows: $8.75 million, $36.25
million, $42.5 million, $53.75 million and, as a result of the Additional
Amendment, $223.75 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.
YEAR 2000
Computer software that uses two digits rather than four to identify the
applicable year may be unable to interpret appropriately the calendar Year 2000,
and thus could cause disruption of normal businesses activities. We use software
in various aspects of our businesses, including manufacturing, accounting,
product development and many administrative functions. Some of this software
will be unable to interpret the calendar Year 2000 appropriately unless it is
modified or replaced. Many of our suppliers, vendors and customers face this
issue as well.
We are addressing this Year 2000 issue with a corporate-wide initiative
sponsored by Sybron's Vice President-Finance and Chief Financial Officer and its
Vice President-General Counsel and Secretary, and led at the subsidiary level by
the Vice President and Chief Financial officer at SLPC and the Vice President
and Chief Information Officer at Sybron Dental Specialties. The objective of
the initiative is to mitigate the risk to the Company of Year 2000 issues by
minimizing the number and seriousness of any technical failures and by quickly
indentifying and repairing any such failures if they do occur. The various
phases of the initiative (which are being conducted simultaneously) include the
identification of affected mission critical software utilized by both
information and non-information technology systems, the assessment of risk
associated with such affected software, the development of a plan for modifying
the software, the implementation of
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solutions under the plan, and the testing of the solutions. The initiative also
includes communications with our significant suppliers, vendors and customers
to determine the extent to which we are vulnerable to any failures by
them to address the Year 2000 issue. The program contemplates the development
of contingency plans where needed to deal with Company systems and third party
issues.
We have completed most of the identification, risk-assessment and
plan development phases of our initiative with respect to our internal systems,
although we recognize that, because of the nature of the Year 2000 problem, work
in these areas will continue until the Year 2000. Our work in those phases has
included both information technology and non-information technology systems. We
have also commenced the implementation phase. In most cases, we are
upgrading existing software to versions which are Year 2000 compliant. In other
cases entire software platforms are being replaced with more current, compliant
systems, internally developed software is being reprogrammed, and hardware is
being replaced. Testing has been conducted, we are in the early stages of our
testing phase with respect to both information and non-information technology
systems.
We are in the process of communicating with our suppliers, vendors and
customers concerning the state of their readiness for Year 2000. Although the
information we have gathered to date does not permit us to complete our
assessment of risk related to the Year 2000 issues these third parties may
present, we have been informed by our major distributors in both the laboratory
and dental segments that they have Year 2000 programs in place. Because of the
reliance by SLPC and Sybron Dental Specialties on distributors in the United
States and abroad, a significant Year 2000 failure by these distributors could
seriously disrupt the Company's flow of products to end users.
Our Year 2000 initiative contemplates the development of contingency
plans as we test our software solutions and complete our risk assessments with
respect to third parties. Our contingency planning is therefore in the early
stages of development. The Company's current goal is to substantially complete
all phases of its initiative, including the development of plans for identified
contingencies, by March 31, 1999. This statement is a forward looking
statement. Our ability to meet our Year 2000 initiative objectives is subject
to a number of uncertainties, including the actions and status of third
parties, many of which are beyond our control. The Year 2000 problem has many
elements and potential consequences, some of which can not be reasonably
foreseeable, and there can be no assurance that unforeseen consequences will
not arise.
The historical and estimated future costs to the Company of Year 2000
are contained in the following table. The reported costs exclude internal
costs, and exclude costs related to manufacturing equipment for Sybron Dental
Specialties because the Company has not completed its analysis with respect to
such items. Our Year 2000 remediation efforts are funded from the Company's
cash flow and from borrowings under the Revolving Credit Facility. The
Company has not deferred any significant information technology projects due to
its Year 2000 efforts.
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1998
YEAR 2000 1997 1st Nine Months 4th Quarter(est.) 1999(est.)
(In thousands)
====================================================================================================================
Capital Costs 12 1,324 642 880
- --------------------------------------------------------------------------------------------------------------------
Expenses 179 391 81 179
- --------------------------------------------------------------------------------------------------------------------
Total 191 1,715 723 1,059
- --------------------------------------------------------------------------------------------------------------------
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 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:
o 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.
o 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.
o 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
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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.
o 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.
o 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.
o The risk of strikes or other labor disputes at those locations which
are unionized which could affect our operations.
o 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.
o 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.
o Factors relating to the impact of changing public and private health
care budgets which could affect demand for or pricing of our products.
o 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.
o 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.
o Factors affecting our ability to produce products on a competitive
basis, including the availability of raw materials at reasonable
prices.
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o Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing
assets.
o Unanticipated developments while implementing the modifications
necessary to mitigate Year 2000 compliance problems, including the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the indirect impacts of
third parties with whom we do business and who do not mitigate their
Year 2000 compliance problems, and similar uncertainties, and
unforeseen consequences of the Year 2000 problem.
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 1. LEGAL PROCEEDINGS
See the last paragraph under Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations-General" in Part I of
this Report for information regarding developments with respect to the CE
Litigation previously reported in Item 7 of the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997 and in Item 2 in Part I of the
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1998.
ITEM 5. OTHER INFORMATION
DEADLINE FOR SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-5(e) under the Securities Exchange Act of 1934, as
amended effective June 29, 1998:
(1) The deadline for submitting shareholder proposals to be considered for
inclusion in the Company's proxy statement and form of proxy for the
Company's 1999 annual meeting of shareholders pursuant to Rule 14a-8
is August 25, 1998.
(2) The date after which notice of a shareholder proposal submitted
outside the processes of Rule 14a-8 is considered untimely is November
30, 1998. Under the Company's Bylaws, written notice of such a
proposal, containing the information specified in the Bylaws, must be
received by the Company no earlier than November 1, 1998 and no later
than November 30, 1998.
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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. However, subsequent to the end of the quarter the
following reports were filed:
A Form 8-K, dated and filed with the Securities and Exchange
Commission on July 13, 1998, containing in Item 5 thereof the updated
description of the Company's capital stock.
A Form 8-K dated July 20, 1998 and filed with the Securities and
Exchange Commission on July 21, 1998, incorporating in Item 5 the
Company's Press Release dated July 20, 1998 filed as an exhibit.
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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, 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.
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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, 1998
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
4.1 First Amendment, dated as of July 1, X
1998, to the Second Amended and
Restated Credit Agreement, dated as
of April 25, 1997 (as amended,
supplemented or otherwise modified
from time to time, the "Credit
Agreement"), among the Registrant
and certain of its subsidiaries, the
several Lenders from time to time
parties thereto, Chase Securities Inc.,
as Arranger, and The Chase Manhattan
Bank, as Administrative Agent for the
Lenders
4.2 Form of Third Amended and Restated X
Parent Pledge Agreement, dated as of
July 1, 1998, executed pursuant to the
Credit Agreement
4.3 Form of Third Amended and Restated X
Subsidiaries Guarantee, dated as of
July 1, 1998, executed pursuant to the
Credit Agreement
4.4 Form of Third Amended and Restated X
Subsidiaries Pledge Agreement, dated
as of July 1, 1998, executed pursuant
to the Credit Agreement
4.5 Second Amendment, dated as of X
August 13, 1998, to the Credit Agreement
27.1 Financial Data Schedule X
27.2 Restated Financial Data Schedule (nine X
month period ended June 30, 1997)
E1-1