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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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 1-11091
SYBRON INTERNATIONAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 22-2849508
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(414) 274-6600
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At August 9, 1999 there were 103,763,566 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, June 30, 1999
and September 30, 1998 (unaudited) 2
Consolidated Statements of Income for the three and nine months
ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Shareholders' Equity for the year
ended September 30, 1998 and the nine months ended
June 30, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1999 and 1998 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 30
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 34
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
June 30, September 30,
1999 1998
---------- -------------
Current assets:
Cash and cash equivalents....................................... $ 14,270 $ 23,891
Accounts receivable (less allowance for doubtful
receivables of $4,427 and $5,693, respectively)............... 211,361 192,657
Inventories (note 2)............................................ 198,907 167,944
Deferred income taxes........................................... 18,608 30,305
Net assets held for sale (note 7)............................... - 51,562
Prepaid expenses and other current assets....................... 18,077 17,429
---------- ----------
Total current assets....................................... 461,223 483,788
---------- ----------
Property, plant and equipment net of accumulated depreciation
of $207,732 and $178,087, respectively........................ 227,706 222,759
Intangible assets................................................. 947,426 814,907
Deferred income taxes............................................. 12,951 15,242
Other assets...................................................... 7,598 8,848
---------- ----------
Total assets............................................... $1,656,904 $1,545,544
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 51,516 $ 49,713
Current portion of long-term debt............................... 8,560 39,396
Income taxes payable............................................ 15,325 19,997
Accrued payroll and employee benefits........................... 41,785 39,950
Restructuring reserve (note 5).................................. 3,209 7,609
Reserve for discontinued operations............................. 5,411 12,201
Deferred income taxes........................................... 18,330 9,072
Other current liabilities....................................... 29,124 37,785
---------- -----------
Total current liabilities................................... 173,260 215,723
---------- -----------
Long-term debt.................................................... 843,907 790,089
Deferred income taxes............................................. 47,215 50,564
Other liabilities................................................. 11,384 13,912
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 103,637,880 and 102,902,496 shares,
respectively.................................................. 1,036 1,029
Equity Rights, 50 rights at $1.09 per right..................... -- --
Additional paid-in capital...................................... 245,317 234,070
Retained earnings............................................... 368,098 260,845
Accumulated other comprehensive income.......................... (33,313) (20,688)
Treasury common stock, 220 shares at cost ...................... -- --
---------- ----------
Total shareholders' equity................................. 581,138 475,256
---------- ----------
Total liabilities and shareholders' equity................. $1,656,904 $1,545,544
========== ==========
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,
1999 1998 1999 1998
---- ---- ---- ----
Net sales............................................... $ 280,051 $ 226,993 $ 800,398 $ 667,815
Cost of sales:
Cost of product sold................................. 134,476 107,083 387,322 317,725
Restructuring charge................................. -- 6,140 -- 6,140
Depreciation of purchase accounting adjustments...... 160 162 496 492
--------- --------- --------- ---------
Total cost of sales..................................... 134,636 113,385 387,818 324,357
--------- --------- --------- ---------
Gross profit............................................ 145,415 113,608 412,580 343,458
Selling, general and administrative expenses............ 70,045 56,334 198,280 172,378
Merger, transaction and integration expenses (note 6)... (122) 9,886 2,569 9,886
Restructuring charge.................................... (932) 16,281 (932) 16,281
Depreciation and amortization of purchase
accounting adjustments................................. 7,793 6,423 22,653 18,815
--------- --------- --------- ---------
Operating income........................................ 68,631 24,684 190,010 126,098
--------- --------- --------- ---------
Other income (expense):
Interest expense..................................... (13,749) (13,374) (41,898) (40,082)
Amortization of deferred financing fees.............. (87) (64) (247) (172)
Other, net........................................... 40 118 (593) 43
--------- --------- --------- ---------
Income before income taxes, discontinued
operations and extraordinary item ..................... 54,835 11,364 147,272 85,887
Income taxes............................................ 21,491 6,617 58,098 35,559
--------- --------- --------- ---------
Income from continuing operations before
extraordinary item..................................... 33,344 4,747 89,174 50,328
Discontinued Operations: Income from discontinued
operations (net of income taxes of $327, $80
and $1,908, respectively) (note 7).................... -- 450 121 3,133
Extraordinary Item: Gain (loss) on sale of discontinued
operations (net of income taxes expense/(credit) of
($2,696) and $15,955, respectively (note 7)............ (838) -- 17,958 --
--------- --------- ---------- ---------
Net income.............................................. $ 32,506 $ 5,197 $ 107,253 $ 53,461
========= ========= ========== =========
Basic earnings per common share from continuing
operations before extraordinary item................... $ .32 $ .05 $ .86 $ .49
Discontinued operations................................. -- -- -- .03
Extraordinary item...................................... (.01) -- .18 --
--------- --------- ---------- ---------
Basic earnings per common share......................... $ .31 $ .05 $ 1.04 $ .52
========= ========= ========== =========
Diluted earnings per common share from continuing
operations before extraordinary item................... $ .31 $ .04 $ .84 $ .48
Discontinued operations................................. -- -- -- .02
Extraordinary item...................................... (.01) .01 .17 --
--------- --------- ---------- ---------
Diluted earnings per common share....................... $ .30 $ .05 $ 1.01 $ .50
========= ========= ========== =========
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, 1998
AND THE NINE MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL
COMMON EQUITY PAID-IN RETAINED
STOCK RIGHTS CAPITAL EARNINGS
-------- ------ ---------- --------
Balance at September 30, 1997................. $ 1,014 $ -- $ 212,665 $ 189,963
Shares issued in connection
with the exercise of 1,445,760
stock options................................. 15 -- 12,970 --
Conversion of 200 equity rights to 872
shares of common stock ....................... -- -- -- (1)
Tax benefits related to stock options -- -- 7,291 --
Dividends paid by LRS Acquisition Corp.
prior to the merger.......................... -- -- 314 (479)
Dividends paid by Pinnacle Products of
Wisconsin prior to the merger................ -- -- -- (4,682)
Shares issued related to a deferred
compensation plan of LRS..................... -- -- 830 --
Net income .................................... -- -- -- 76,044
Accumulated other comprehensive
income........................................ -- -- -- --
--------- ------ ---------- ---------
Balance at September 30, 1998.................. $ 1,029 $ -- $ 234,070 $ 260,845
========= ====== ========== =========
Shares issued in connection
with the exercise of 735,384
stock options................................. 7 -- 7,199 --
Tax benefits related to stock options -- -- 4,048 --
Net income .................................... -- -- -- 107,253
Accumulated other comprehensive
income........................................ -- -- -- --
--------- ------ ---------- ---------
Balance at June 30, 1999....................... $ 1,036 $ -- $ 245,317 $ 368,098
========= ====== ========== =========
ACCUMULATED
OTHER TREASURY TOTAL
COMPREHENSIVE COMMON SHAREHOLDERS'
INCOME STOCK EQUITY
------ -------- -------------
Balance at September 30, 1997................. $ (24,981) $ (1) $ 378,660
Shares issued in connection
with the exercise of 1,445,760
stock options................................. -- -- 12,985
Conversion of 200 equity rights to 872
shares of common stock ....................... -- 1 --
Tax benefits related to stock options -- -- 7,291
Dividends paid by LRS Acquisition Corp.
prior to the merger.......................... -- -- (165)
Dividends paid by Pinnacle Products of
Wisconsin prior to the merger................ -- -- (4,682)
Shares issued related to a deferred
compensation plan of LRS..................... -- -- 830
Net income .................................... -- -- 76,044
Accumulated other comprehensive
income........................................ 4,293 -- 4,293
--------- ------ ----------
Balance at September 30, 1998.................. $ (20,688) $ -- $ 475,256
========= ====== ==========
Shares issued in connection
with the exercise of 735,384
stock options................................. -- -- 7,206
Tax benefits related to stock options -- -- 4,048
Net income .................................... -- -- 107,253
Accumulated other comprehensive
income........................................ (12,625) -- (12,625)
--------- ------ ---------
Balance at June 30, 1999....................... $ (33,313) $ -- $ 581,138
========= ====== ==========
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,
1999 1998
---- ----
Cash flows from operating activities:
Net income................................................................ $107,253 $ 53,461
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of NPT...................................................... (17,958) --
Depreciation............................................................. 26,893 22,340
Amortization............................................................. 22,805 19,274
Provision for losses on doubtful accounts................................ 108 1,203
Inventory provisions..................................................... 255 (900)
Deferred income taxes.................................................... 19,897 3,743
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............................... (3,457) 470
Increase in inventories.................................................. (15,341) (3,721)
Decrease (increase) in prepaid expenses and other current assets......... 1,908 (10,673)
Decrease in accounts payable............................................. (3,395) (2,266)
Decrease in income taxes payable......................................... (18,969) (3,431)
Increase (decrease) in accrued payroll and employee benefits............. 537 (1,104)
Decrease in reserve for discontinued operations.......................... (6,790) --
Increase (decrease) in restructuring reserve............................. (4,400) 11,356
Decrease in other current liabilities................................... (4,603) (4,871)
Net change in other assets and liabilities............................... (7,201) 13,602
--------- --------
Net cash provided by operating activities................................ 97,542 98,483
Cash flows from investing activities:
Capital expenditures..................................................... (23,576) (26,299)
Proceeds from sales of property, plant, and equipment.................... 918 4,436
Proceeds from the sale of NPT net of sale expenses...................... 85,877 --
Payments for businesses acquired......................................... (188,121) (166,083)
-------- --------
Net cash used in investing activities................................... (124,902) (187,946)
Cash flows from financing activities:
Proceeds - revolving credit facility...................................... 422,900 333,100
Principal payments - revolving credit facility............................ (328,000) (211,800)
Principal payments on long-term debt...................................... (87,878) (26,533)
Proceeds from the exercise of common stock options........................ 7,207 10,720
Dividends paid by Pinnacle and LRS prior to the mergers................... - (3,911)
Deferred financing fees................................................... (146) (276)
Other..................................................................... 4,133 629
-------- --------
Net cash provided from financing activities............................... 18,216 101,929
Effect of exchange rate changes on cash.................................... (477) (2,251)
Net increase (decrease) in cash and cash equivalents....................... (9,621) 10,215
Cash and cash equivalents at beginning of year............................. 23,891 18,003
-------- --------
Cash and cash equivalents at end of period................................. $ 14,270 $ 28,218
======== ========
See accompanying notes to unaudited consolidated financial statements.
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
June 30,
1999 1998
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................................. $ 43,974 $ 40,252
Cash paid during the period for income taxes.............................. 50,280 30,376
Capital lease obligations incurred........................................ 277 249
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 the opinion of management, all adjustments which are necessary for a
fair statement of the results for the interim periods presented have been
included. Except as described below, all such adjustments were of a normal
recurring nature. The results for the three and nine month periods ended
June 30, 1999 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, 1998, as originally reported, have been reclassified to
conform with the three and nine month periods ended June 30, 1999
presentation.
All prior period data has been adjusted to reflect the results of Pinnacle
Products of Wisconsin, Inc. ("Pinnacle"), which merged with a subsidiary of
the Company on October 29, 1998 (the "Pinnacle Merger"). The results of
Pinnacle, whose merger was accounted for as a pooling of interests, were
combined with the Company's previously reported results as if the merger
occurred as of the beginning of all reported periods.
In addition, all prior period data has been adjusted to reflect the March
31, 1999 sale of Nalge Process Technologies Group, Inc. ("NPT"). NPT has
been classified as a discontinued operation and the results have been
reported accordingly. The gain on the sale of NPT has been reported as an
extraordinary item. (See note 7)
The following table reconciles sales and net income for the three and nine
months ended June 30, 1998 as previously reported to sales and net income
for the three and nine months ended June 30, 1998 after restatement for the
Pinnacle Merger and the reclassification of NPT to discontinued operations.
Three months ended Nine months ended
June 30, 1998 June 30, 1998
(In thousands) (In thousands)
(Unaudited) (Unaudited)
------------------ -----------------
Net sales:
The Company $ 235,502 $ 695,638
Pinnacle 2,970 8,752
NPT (11,479) (36,575)
--------- ---------
Total $ 226,993 $ 667,815
========= =========
Net income (loss):
The Company $ 3,815 $ 49,353
Pinnacle 1,382 4,108
Pinnacle pro forma income tax expense (a) (553) (1,643)
--------- ---------
Pro forma net income $ 4,644 $ 51,818
Pinnacle pro forma income tax expense (a) 553 1,643
--------- ---------
Net income reported $ 5,197 $ 53,461
========= =========
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Three months ended Nine months ended
June 30, 1998 June 30, 1998
(In thousands) (In thousands)
(Unaudited) (Unaudited)
------------------ ------------------
Basic shares outstanding:
The Company 100,742 100,242
Shares issued in Pinnacle Merger 1,897 1,897
---------- --------
Basic shares reported 102,639 102,139
Diluted shares outstanding:
The Company 104,350 104,035
Shares issued in Pinnacle Merger 1,897 1,897
---------- --------
Diluted shares reported 106,247 105,932
Basic earnings per share:
Reported $ .05 $ .52
Pro forma $ .05 $ .51
Diluted earnings per share
Reported $ .05 $ .50
Pro forma $ .04 $ .49
- ----------------
(a) Prior to the merger, Pinnacle was an S corporation and, therefore,
income tax expense was not reflected in its historical net income.
2. Inventories at June 30, 1999 and September 30, 1998 consist of the following:
June 30, September 30,
1999 1998
---- ----
Raw materials $ 70,601 $ 54,465
Work-in-process 38,293 32,502
Finished goods 94,311 84,759
LIFO Reserve (4,298) (3,782)
-------- --------
$198,907 $167,944
======== ========
3. Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130").
SFAS 130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
income.
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Comprehensive income and the components of comprehensive income (loss) for
the three and nine month periods ended June 30, 1999 and 1998 are as follows:
(In thousands)
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 32,506 $ 5,197 $107,253 $ 53,461
Other comprehensive income (loss)
Foreign currency translation (4,793) 1,470 (12,625) (2,493)
-------- -------- -------- --------
Comprehensive income $ 27,713 $ 6,667 $ 94,628 $ 50,968
======== ======== ======== ========
4. Acquisitions completed in the third quarter of fiscal 1999 are as follows:
(a) On June 3, 1999, the Company acquired Microgenics Corporation
("Microgenics") located in Pleasanton, California. Microgenics
manufacturers and sells diagnostic reagents for use in drugs of abuse
screening, therapeutic drug monitoring, thyroid function testing and
anemia testing. Microgenics' annual sales are approximately $35 million.
Acquisitions completed after the third quarter of fiscal 1999 are a follows:
(a) On July 1, 1999, a subsidiary of Sybron Laboratory Products Corporation
("SLPC") acquired the assets of Micro Test, Inc. ("Micro Test") located
in Lilburn, Georgia. Micro Test, with annual revenues of approximately
$1.6 million, is a manufacturer of transport media for various infectious
organisms.
(b) On July 1, 1999, a subsidiary of SLPC acquired the bioreagent and ELISA
immunochemistry product lines of Genzyme Diagnostics, a business unit of
Genzyme General (Nasdaq:GENZ). These product lines generate approximately
$3.1 million in annual sales.
(c) On July 12, 1999, a subsidiary of Sybron Dental Specialties, Inc.
("SDS"), completed the acquisition of Alden Scientific, Inc. ("Alden")
and its sister corporation Gulfstream Medical, Inc. The companies,
located in Winthrop, Massachusetts with manufacturing facilities in
Springfield, Massachusetts, manufacture reagents and related infection
control products used to disinfect kidney dialysis machines. Alden also
manufactures chemical detecting and hematology reagents, calibrating
solutions and osmomerty standards. Combined annual sales are
approximately $3.5 million.
(d) On July 30, 1999, a subsidiary of SDS completed the acquisition of Endo
Direct Ltd., located close to London, England. Endo Direct has been the
exclusive importer and reseller of Tycom Dental endodontic products,
product lines acquired by SDS in 1998. Endo Direct's annual sales are
approximately $0.5 million.
(e) On August 9, 1999, a subsidiary of SLPC completed the acquisition of STEM
Corporation LTD., located in Tollesbury Essex, England. STEM designs,
manufactures and markets
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heating, cooling, stirring and shaking equipment for laboratory
applications. STEM's annual sales are approximately $1.6 million.
All of the acquisitions were made for cash at an aggregate purchase price of
approximately $94.2 million and are being accounted for as purchase
business combinations with the results of the acquired entity being
included in the Company's financial statements from the date of the
acquisition.
5. In June 1998, the Company recorded a restructuring charge of approximately
$24.0 million (approximately $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 was originally classified as components of cost of
sales (approximately $6.4 million relating entirely to the write-off of
inventory), selling, general and administrative expenses (approximately $16.9
million) and income tax expense (approximately $0.7 million). Upon
reclassifying NPT to a discontinued operation in December, 1998,
approximately $0.3 million and $0.6 million were reclassified from cost of
sales and selling, general and administrative expenses to discontinued
operations. In addition in the September 30, 1998 balance sheet,
approximately $0.4 million of the remaining restructuring reserve at NPT was
reclassified from restructuring reserve to net assets held for sale. Activity
with respect to the restructuring charge since June 1998 is as follows:
Shut- Inventory
Lease down Write- Fixed Contractual
Severance(a) Pymts.(b) Costs(b) off(c) Assets(c) Tax(d) Goodwill(e) Obligations(f) Other Total
----------- --------- ------- --------- --------- ------ ----------- -------------- ----- -----
(In thousands)
1998 Initial
Accrual $ 8,500 $ 400 $ 500 $6,400 $2,300 $ 700 $2,100 $1,000 $2,100 $24,000
1998 cash
payments 3,300 100 100 -- -- -- -- 400 700 4,600
Non-cash 1998
charges -- -- -- 6,400 2,300 -- 2,100 -- 600 11,400
-------- ----- ----- ------ ------ ------ ------ ------ ------ -------
Balance 9/30/98 5,200 300 400 -- -- 700 -- 600 800 8,000
1999 cash
payments 2,900 100 200 -- -- -- -- 300 -- 3,500
Adjustments (g) 900 -- -- -- -- -- -- -- 400 1,300
-------- ----- ----- ------ ------ ------ ------ ------ ------ -------
Balance 6/30/99 $ 1,400 $ 200 $ 200 $ -- $ -- $ 700 $ -- $ 300 $ 400 $ 3,200
======== ===== ===== ====== ====== ====== ====== ====== ====== =======
(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel). As of
June 30, 1999, 152 employees have been terminated as a result of the
restructuring plan. An adjustment of approximately $0.9 million was made
in the third quarter of fiscal 1999 to adjust the accrual primarily
representing over accruals for anticipated costs associated with
outplacement services, accrued fringe benefits, and severance associated
with employees who were previously notified of termination and
subsequently filled other Company positions.
(b) Amount represents lease payments and shutdown costs on exited facilities.
(c) Amount represents write-offs of inventory and fixed assets associated
with discontinued product lines.
(d) Amount represents a statutory tax relating to assets
transferred from an exited sales facility in Switzerland.
(e) Amount represents goodwill associated with exited product lines at SLPC.
(f) Amount represents certain terminated contractual obligations primarily
associated with Sybron Dental Specialties Corporation.
(g) Amount represents reserves transferred from NPT (approximately $0.4
million relating to "other") which were reclassified to discontinued
operations and approximately $0.9 million relating to unused severance as
described in (a) above.
The Company expects to make further cash payments of approximately $0.8
million in the fourth quarter of fiscal 1999, approximately $0.4 million and
$0.2 million in the first and second quarters of
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fiscal 2000, respectively and approximately $1.8 million in the third quarter
of fiscal 2000 and beyond. The actions associated with the restructuring are
expected to eliminate annual costs of $16.0 million. In the third quarter of
fiscal 1999, the Company estimates it saved approximately $4.0 million (or
$16.0 million on an annualized basis). We do not anticipate any additional
adjustments to the savings estimates.
6. For the nine months ended June 30, 1999, the Company incurred approximately
$2.6 million ($1.6 million after tax or $.02 per share on a diluted basis) of
costs associated with the Pinnacle Merger and the integration of "A" Company
Orthodontics (`"A" Company'), a subsidiary of LRS Acquisition Corp. ("LRS"),
with SDS. LRS was merged with a subsidiary of the Company on April 9, 1998
(the "LRS" Merger) and accounted for as a pooling of interests. The actual
and anticipated costs associated with the Pinnacle Merger and the integration
of "A" Company were primarily from Pinnacle Merger non-shareholder
compensation (approximately $1.9 million). The remaining $0.7 million related
to miscellaneous expenses primarily related to completing the "A" Company
integration including customer announcements, professional fees, and
relocation expenses. The Company does not anticipate incurring any further
merger, transaction and integration expenses associated with the LRS and
Pinnacle Mergers.
7. On March 31, 1999, Sybron completed the sale of NPT to Norton Performance
Plastics Corporation, a subsidiary of Saint-Gobain - France. Net proceeds
from the sale, net of $3.7 million of selling expenses and estimated
adjustments, amounted to approximately $84.0 million. The sales price and
final gain calculation are subject to further adjustments based upon the
finalization of the audited book value of NPT at March 31, 1999 and the
related tax impact. In the quarter ended June 30, 1999, the Company reduced
the gain on the sale of NPT to reflect a reduction to the purchase price for
estimated audit adjustments to NPT's balance sheet (approximately $1.9
million), an adjustment in the tax basis of NPT (approximately $1.3 million)
and additional expenses incurred in the transaction (approximately $0.2
million), partially offset by a reduction to tax expense (approximately $2.6
million). The Company does not expect a significant change to the purchase
price or gain as a result of the finalization of the audit of NPT's March 31,
1999 balance sheet and tax calculation. The proceeds of the sale net of tax
and expenses were used to repay approximately $67.9 million previously owed
under the Company's credit facilities.
Sales from NPT were $11.5 million in the quarter ended June 30, 1998, and
because NPT was sold on March 31, 1999, there were no sales in the quarter
ended June 30, 1999. Sales from NPT were $21.0 million and $36.6 million for
the year to date period in fiscal 1999 through NPT's sale date of March 31,
1999 and the nine months ended June 30, 1998, respectively. Certain expenses
were allocated to discontinued operations in 1998 and the first two quarters
ended March 31, 1999, including interest expense which was allocated based
upon the historical purchase prices and cash flows of the companies
comprising NPT.
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The components of net assets held for sale of discontinued operations
included in the Consolidated Balance Sheet at September 30, 1998 are as
follows: (In thousands)
September 30,
1998
----
(Unaudited)
Cash $ 317
Net account receivables 8,977
Net inventories 10,152
Other current assets 158
Intangible assets 33,607
Property plant and equipment - net 2,930
Current portion of long term debt (25)
Accounts payable (2,339)
Accrued liabilities (1,012)
Deferred income taxes- net (1,195)
Long term debt (8)
--------
$ 51,562
========
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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. The laboratory businesses are grouped under Sybron
Laboratory Products Corporation ("SLPC"), and the dental and orthodontic
businesses are grouped under Sybron Dental Specialties, Inc. ("SDS"). Their
major product categories and their primary subsidiaries in each category are as
follows:
SLPC
Labware and Life Sciences Diagnostics and Microbiology
Nalge Nunc International Corporation Applied Biotech, Inc.
National Scientific Company CASCO-NERL Diagnostics Corporation
Nunc A/S Diagnostic Reagents, Inc.
Nalge (Europe), Ltd. Alexon-Trend, Inc.
Molecular BioProducts, Inc. Remel Inc.
Clinical and Industrial Laboratory Equipment
Erie Scientific Company Barnstead Thermolyne Corporation
Chase Scientific Glass, Inc. Lab-Line Instruments, Inc.
The Naugatuck Glass Company
Richard-Allan Scientific Company
Samco Scientific Corporation
Gerhard Menzel Glasbearbeitungswerk
GmbH & Co. K.G.
SDS
Professional Dental Orthodontics
Kerr Corporation Ormco Corporation
Beavers Dental Company Allesee Orthodontic Appliances, Inc
Metrex Research Corporation
Pinnacle Products, Inc
Over the past several years the Company has been pursuing a growth strategy
designed to increase sales and enhance operating margins. Elements of that
strategy include emphasis on acquisitions, product line extensions, new product
introductions, international growth and rationalization of existing businesses
and product lines.
When we use the terms "we" or "our" in this report, we are referring to
Sybron International Corporation and its subsidiaries. Our fiscal year ends on
September 30 and, accordingly, all references to quarters refer to the Company's
fiscal quarters.
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Our results for the nine months ended June 30, 1999 include charges relating
to integration costs associated with the merger with LRS Acquisition Corp.
("LRS") (the "LRS Merger"), the parent of "A" Company, and transaction costs
associated with the merger with Pinnacle Products of Wisconsin, Inc.
("Pinnacle") (the "Pinnacle Merger") (See Note 6 to the Unaudited Consolidated
Financial Statements). In addition, because the LRS and Pinnacle Mergers are
each accounted for as a pooling of interests, all prior period data have been
adjusted to reflect the historical results of LRS and Pinnacle as if the Mergers
took place on the first day of the reporting period. In addition, historical
financial data relating to Nalge Process Technologies Group, Inc. ("NPT") have
been reclassified to discontinued operations. (See Note 7 to the Unaudited
Consolidated Financial Statements)
All results referred to below include the adjustments to the historical
results for the pooling of interest transactions and the discontinued operation.
Both our sales and operating income for the quarter and nine months ended
June 30, 1999 grew over the corresponding prior year period. Net sales for the
quarter and nine months ended June 30, 1999 increased by 23.4% and 19.9%,
respectively, over the corresponding fiscal 1998 periods. Operating income for
the quarter and nine months increased by 178.0% and 50.7%, respectively, over
the corresponding fiscal 1998 periods. Excluding the restructuring charges and
acquisition related expenses in both 1998 and 1999, operating income for the
quarter and nine months increased by 18.6% and 21.0%, respectively, over the
corresponding fiscal 1998 periods.
Sales growth in the quarter and the nine months ended June 30, 1999 was
strong both domestically and internationally. Domestic and international sales
increased by 26.9% and by 15.6%, respectively, over the corresponding fiscal
1998 quarter and by 21.2% and by 17.0%, respectively, over the corresponding
fiscal 1998 nine month period.
Acquisitions aided sales growth significantly during the quarter and nine
month periods, accounting for $30.7 million and $7.3 million of the domestic and
international sales increase, respectively, for the quarter and $83.9 million
and $22.9 million of the domestic and international sales increase,
respectively, for the nine month period. Internal growth for the quarter and
nine months ended June 30, 1999 was 6.8% and 5.1%, respectively.
We continue to maintain an active program of developing and marketing new
products and product line extensions, as well as pursuing growth through
acquisitions. We completed one acquisition in the third quarter of fiscal 1999
and five in the fourth quarter through August 9, 1999. (See Note 4 to the
Unaudited Consolidated Financial Statements.)
Our results of operations include goodwill amortization, other amortization,
and depreciation. These non-cash charges totaled $17.1 million and $14.2 million
for the quarters ended June 30, 1999 and 1998, respectively, and $49.7 million
and $41.6 million for the nine months ended June 30, 1999 and 1998,
respectively. Because our operating results reflect significant depreciation and
amortization expense largely associated with stepped-up assets and goodwill from
our acquisition program and the leveraged buyout in 1987 of a company known at
that time as Sybron Corporation (the "Acquisition"), we believe our "Adjusted
EBITDA" is a useful measure of our ability to internally fund our liquidity
requirements.
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"Adjusted EBITDA" (while not a measure under generally accepted accounting
principles ("GAAP"), and not a substitute for GAAP measured earnings or cash
flows or an indication of operating performance or a measure of liquidity)
represents, for any relevant period, net income from continuing operations plus
(i) interest expense, (ii) provision for income taxes, (iii) acquisition related
expenses, (iv) restructuring charges and (v) depreciation and amortization, all
determined on a consolidated basis and in accordance with GAAP. Our "Adjusted
EBITDA" amounted to $84.6 million and $71.3 million for the quarters ended June
30, 1999 and 1998, respectively, and $240.5 million and $199.9 million for the
nine months ended June 30, 1999 and 1998, respectively.
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 for $0.4 million. The remaining options expired worthless in the
fourth quarter of 1998. These options were designed to protect the Company from
potential detrimental effects of currency movements associated with the U.S.
dollar versus the German mark and the French franc as compared to the third and
fourth quarters of 1997. In October 1998, we again decided to employ a series of
foreign currency options with a U.S. dollar notional amount of approximately
$45.7 million at a cost of approximately $0.3 million. These options are
designed to protect the Company from potential detrimental effects of currency
movements associated with the U.S. dollar versus the German mark, French franc,
Swiss franc, and Japanese yen in the second, third and fourth quarters of fiscal
1999. The options, designed to protect the Company from detrimental effects of
foreign currency fluctuations in the second and third quarters, were sold or
expired worthless in their respective quarters of fiscal 1999 at a net gain of
$0.1 million and $0.5 million, respectively. The remaining contracts with a
notional value of $15.2 million remained in place at June 30, 1999.
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RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1999 COMPARED TO THE QUARTER ENDED JUNE 30, 1998
NET SALES. Net sales for the three months ended June 30, 1999 were $280.1
million, an increase of $53.1 million (23.4%) from net sales of $227.0 million
for the corresponding three months ended June 30, 1998. Sales in the laboratory
segment were $183.8 million for the three months ended June 30, 1999, an
increase of 32.6% from the corresponding 1998 fiscal period. Increased sales in
the laboratory segment resulted primarily from (i) sales of products of acquired
companies, net of discontinued product lines (approximately $34.7 million), (ii)
increased volume from sales of existing products (approximately $5.6 million),
(iii) price increases (approximately $2.9 million), (iv) increased volume from
sales of new products (approximately $1.1 million) and (v) an improved product
mix (approximately $0.9 million). In the dental segment, net sales were $96.3
million for the three months ended June 30, 1999, an increase of 8.9% from the
corresponding fiscal 1998 period. Increased sales in the dental segment resulted
primarily from (i) sales of products of acquired companies, net of discontinued
product lines (approximately $3.3 million), (ii) increased volume from sales of
existing products (approximately $2.5 million) and (iii) increased volume from
sales of new products (approximately $2.2 million).
GROSS PROFIT. Gross profit for the three months ended June 30, 1999 was
$145.4 million, an increase of 28.0% from gross profit of $113.6 million for the
corresponding fiscal 1998 period. Excluding the restructuring charges in the
prior year period, gross profit for the three months ended June 30, 1999
increased 21.4% from gross profit of $119.7 million for the corresponding fiscal
1998 period. Gross profit in the laboratory segment was $88.4 million (48.1% of
net segment sales), an increase of 31.8% from gross profit of $67.1 million
(48.4% of net segment sales) during the corresponding fiscal 1998 period.
Excluding the restructuring charges in the prior year period, gross profit in
the laboratory segment increased 28.8% from gross profit of $68.6 million (49.5%
of net segment sales) during the corresponding fiscal 1998 period. The decrease
in gross margin percentage resulted primarily from purchased businesses in the
laboratory segment with lower gross margins than our existing laboratory
businesses. Gross profit in the laboratory segment increased primarily as a
result of (i) the effects of acquired companies (approximately $15.8 million),
(ii) increased volume (approximately $2.9 million), (iii) price increases
(approximately $2.9 million), (iv) the effect of prior period restructuring
charges (approximately $1.5 million), (v) favorable manufacturing overhead
application (approximately $0.7 million) and (vi) favorable foreign currency
impacts (approximately $0.4 million). Increased gross profit in the laboratory
segment was partially offset by an unfavorable product mix (approximately $3.2
million). In the dental segment, gross profit was $57.0 million (59.2% of net
segment sales) for the three months ended June 30, 1999, an increase of 22.6%
from gross profit of $46.5 million (52.6% of net segment sales) during the
corresponding fiscal 1998 period. Excluding the restructuring charges in the
prior year period, gross profit increased 11.5% from gross profit of $51.1
million (57.9% of net segment sales) during the corresponding fiscal 1998
period. Increased gross profit in the dental segment resulted primarily from (i)
the effect of prior period restructuring charges (approximately $4.6 million),
(ii) favorable manufacturing overhead application (approximately $2.4 million),
(iii) increased volume (approximately $2.0 million), (iv) the effects of
acquired companies (approximately $1.8 million) and (v) an improved product mix
(approximately $0.5 million) partially offset by inventory adjustments
(approximately $0.7 million).
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 30, 1999 were $76.8
million (27.4% of net sales) as compared to $88.9 million (39.2% of net sales)
in the corresponding fiscal 1998 period. Excluding the restructuring charges and
acquisition related expenses from both periods, selling, general and
administrative expenses for the three months ended June 30, 1999 were $77.8
million (27.8% of net sales) as compared to $62.8 million (27.6% of net sales)
in the corresponding fiscal 1998 period. General and administrative expenses at
the corporate level, including amortization of purchase accounting adjustments
and goodwill associated with acquisitions, were $6.7 million, representing an
increase of 17.7% from $5.7 million in the corresponding fiscal 1998 period. The
increase at the corporate level was primarily due to increased professional
service and legal expenses. Selling, general and administrative expenses at the
subsidiary level, including amortization of intangibles, were $70.1 million
(25.0% of net sales), representing a decrease of 15.8% from $83.2 million (36.7%
of net sales) in the corresponding fiscal 1998 period. The decrease at the
subsidiary level was primarily due to (i) prior period restructuring and
acquisition expenses related expenses (approximately $27.3 million) and (ii)
favorable foreign currency impacts (approximately $0.2 million) offset by (i)
expenses related to newly acquired businesses (approximately $6.6 million), (ii)
increased general and administrative expenses (approximately $3.0 million),
(iii) increased marketing expenses (approximately $2.0 million), (iv) increased
amortization of intangible assets related to acquired businesses (approximately
$1.4 million) and (iv) increased research and development expenditures
(approximately $1.3 million).
OPERATING INCOME. Operating income was $68.6 million (24.5% of net sales)
for the three months ended June 30, 1999 compared to $24.7 million (10.9% of net
sales) in the corresponding fiscal 1998 period. Excluding the restructuring
charges and acquisition related expenses from both periods, operating income was
$67.6 million (24.1% of net sales) for the three months ended June 30, 1999
compared to $57.0 million (25.1% of net sales) in the corresponding fiscal 1998
period. Operating income in the laboratory segment was $44.5 million (24.2% of
net segment sales) compared to $25.5 million (18.4% of net segment sales) in the
corresponding fiscal 1998 period. Excluding the restructuring charges from both
periods, operating income was $44.7 million (24.3% of net sales) for the three
months ended June 30, 1999 compared to $36.4 million (26.2% of net sales) in the
corresponding fiscal 1998 period. Operating income in the dental segment was
$24.1 million (25.1% of net segment sales) compared to an operating loss of $0.8
million in the corresponding fiscal 1998 period. Excluding the restructuring
charges and acquisition related expenses from both periods, operating income was
$22.9 million (23.8% of net sales) for the three months ended June 30, 1999
compared to $20.6 million (23.4% of net sales) in the corresponding fiscal 1998
period.
INTEREST EXPENSE. Interest expense was $13.7 million for the three months
ended June 30, 1999 compared to $13.4 million in the corresponding fiscal 1998
period. This increase resulted from a higher debt balance primarily from our
acquisition activity, partially offset by the proceeds from the sale of NPT.
Interest expense for the three months ended June 30, 1999 and 1998 included
additional non-cash interest expense of $0.3 million resulting from the adoption
of SFAS No. 106.
INCOME TAXES. Taxes on income increased $14.9 million when compared to the
fiscal 1998 period primarily as a result of increased earnings.
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INCOME FROM CONTINUING OPERATIONS. As a result of the foregoing, we had net
income from continuing operations of $33.3 million for the three months ended
June 30, 1999 compared to $4.7 million in the corresponding fiscal 1998 period.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations for
the three months ended June 30, 1998 was $0.5 million. The fiscal 1999 period
contains no comparative results since the business was sold on March 31,1999.
EXTRAORDINARY ITEM. On March 31, 1999, Sybron completed the sale of NPT to
Norton Performance Plastics Corporation, a subsidiary of Saint-Gobain - France.
Net proceeds from the sale, net of $3.7 million of selling expenses and
estimated adjustments, amounted to $84.0 million. The Company realized a gain on
this sale of $18.0 million (net of tax $16.0 million). For the quarter ended
June 30, 1999, the Company reduced the gain on the sale of NPT to reflect a
reduction to the purchase price for estimated audit adjustments to NPT's March
31,1999 balance sheet (approximately $1.9 million), an adjustment to the tax
basis of NPT (approximately $1.3 million) and additional expenses incurred in
the transaction (approximately $0.2 million), partially offset by a reduction to
tax expense (approximately $2.6 million). The sales price and final gain
calculation are subject to further adjustments based upon finalization of the
audited book value of NPT at March 31, 1999 and the related tax impact. The
Company does not expect a significant change to the purchase price or gain as a
result of the finalization of the audit of NPT's March 31, 1999 balance sheet
and tax calculation. The proceeds of the sale, net of tax and expenses, were
used to repay approximately $67.9 million previously owed under the Company's
credit facilities.
NET INCOME. We had net income of $32.5 million for the three months ended
June 30, 1999 compared to $5.2 million in the corresponding fiscal 1998 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 $2.9 million when
compared to the prior year three month period. This increase was primarily due
to the amortization of intangible assets and depreciation of property, plant and
equipment related to acquired companies.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales for the nine months ended June 30, 1999 were $800.4
million, an increase of $132.6 million (19.9%) from net sales of $667.8 million
for the corresponding nine months ended June 30, 1998. Sales in the laboratory
segment were $515.7 million for the nine months ended June 30, 1999, an increase
of 29.8% from the corresponding 1998 fiscal period. Increased sales in the
laboratory segment resulted primarily from (i) sales of products of acquired
companies, net of discontinued product lines (approximately $97.2 million), (ii)
increased volume from sales of existing products (approximately $5.8 million),
(iii) price increases (approximately $5.9 million), (iv) increased volume from
sales of new products (approximately $5.4 million), (v) a favorable product mix
(approximately $2.2 million) and (vi) favorable foreign currency impacts
(approximately $1.9 million). In the dental segment, net sales were $284.7
million for the nine months ended June 30, 1999, an increase of 5.3% from the
corresponding
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fiscal 1998 period. Increased sales in the dental segment resulted primarily
from (i) sales of products of acquired companies, net of discontinued product
lines (approximately $9.6 million), (ii) increased volume from sales of new
products (approximately $5.9 million) and (iii) favorable foreign currency
movements (approximately $0.5 million). Increased sales in the dental segment
were partially offset by reduced volume from sales of existing products
(approximately $1.7 million).
GROSS PROFIT. Gross profit for the nine months ended June 30, 1999 was
$412.6 million, an increase of 20.1% from gross profit of $343.5 million for the
corresponding fiscal 1998 period. Excluding the restructuring charges in the
prior year period, gross profit for the nine months ended June 30, 1999
increased 18.0% from gross profit of $349.6 million for the corresponding fiscal
1998 period. Gross profit in the laboratory segment was $245.2 million (47.6% of
net segment sales), an increase of 28.1% from gross profit of $191.4 million
(48.2% of net segment sales) during the corresponding fiscal 1998 period.
Excluding the restructuring charges in the prior year period, gross profit in
the laboratory segment increased 27.1% from gross profit of $192.9 million
(48.5% of net segment sales) during the corresponding fiscal 1998 period. Gross
profit in the laboratory segment increased primarily as a result of (i) the
effects of acquired companies (approximately $44.0 million), (ii) price
increases (approximately $5.9 million), (iii) increased volume (approximately
$5.3 million), (iv) the effect of prior period restructuring charges
(approximately $1.5 million), (v) favorable foreign currency movements
(approximately $0.7 million) and (vi) inventory adjustments (approximately $0.2
million). Increased gross profit was partially offset by (i) increased
manufacturing overhead (approximately $3.0 million) and (ii) an unfavorable
product mix (approximately $0.9 million). In the dental segment, gross profit
was $167.4 million (58.8% of net segment sales) for the nine months ended June
30, 1999, an increase of 10.1% from gross profit of $152.1 million (56.2% of net
segment sales) during the corresponding fiscal 1998 period. . Excluding the
restructuring charges in the prior year period, gross profit increased 6.8% from
gross profit of $156.7 million (57.9% of net segment sales) during the
corresponding fiscal 1998 period. Increased gross profit in the dental segment
resulted primarily from (i) the effect of prior period restructuring charges
(approximately $4.6 million), (ii) decreased manufacturing overhead
(approximately $4.2 million), (iii) the effects of acquired companies
(approximately $3.7 million), (iv) increased volume (approximately $2.9
million), (v) an improved product mix (approximately $1.2 million) and (vi)
favorable foreign currency impacts (approximately $0.4 million). Increased gross
profit was partially offset by inventory adjustments (approximately $1.8
million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended June 30, 1999 were $222.6
million (27.8% of net sales) as compared to $217.4 million (32.5% of net sales)
in the corresponding fiscal 1998 period. Excluding the restructuring charges and
acquisition related expenses from both periods, selling, general and
administrative expenses for the nine months ended June 30, 1999 were $220.9
million (27.6% of net sales) as compared to $191.2 million (28.6% of net sales)
in the corresponding fiscal 1998 period. General and administrative expenses at
the corporate level, including amortization of purchase accounting adjustments
and goodwill associated with acquisitions, were $17.8 million, representing an
increase of 10.2% from $16.2 million in the corresponding fiscal 1998 period.
The increase at the corporate level was primarily due to increased professional
service and legal expenses. Selling, general and administrative expenses at the
subsidiary level, including amortization of intangibles, were $204.8 million
(25.6% of net sales), representing an increase of 1.8% from $201.2 million
(30.1% of net
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sales) in the corresponding fiscal 1998 period. Increases at the subsidiary
level were primarily due to (i) expenses related to newly acquired businesses
(approximately $18.3 million), (ii) increased amortization of intangible assets
related to acquired businesses (approximately $3.8 million), (iii) increased
marketing expense (approximately $2.4 million, (iv) increased general and
administrative expenses (approximately $2.2 million) and (v) increased research
and development expenditures (approximately $1.8 million). Increases in selling,
general and administrative expenses were partially offset by (i) prior period
restructuring and acquisition expenses related expenses (approximately $24.4
million) and (ii) favorable foreign currency impacts (approximately $0.7
million).
OPERATING INCOME. Operating income was $190.0 million (23.7% of net sales)
for the nine months ended June 30, 1999 compared to $126.1 million (18.9% of net
sales) in the corresponding fiscal 1998 period. Excluding the restructuring
charges and acquisition related expenses from both periods, operating income was
$191.6 million (23.9% of net sales) for the nine months ended June 30, 1999
compared to $158.4 million (23.7% of net sales) in the corresponding fiscal 1998
period. Operating income in the laboratory segment was $122.5 million (23.8% of
net segment sales) compared to $87.2 million (21.9% of net segment sales) in the
corresponding fiscal 1998 period. Excluding the restructuring charges from both
periods, operating income was $122.8 million (23.8% of net sales) for the nine
months ended June 30, 1999 compared to $97.0 million (24.4% of net sales) in the
corresponding fiscal 1998 period. Operating income in the dental segment was
$67.5 million (23.7% of net segment sales) compared to $38.9 million (14.4% of
net segment sales) in the corresponding fiscal 1998 period. Excluding the
restructuring charges and acquisition related expenses from both periods,
operating income was $68.8 million (24.2% of net sales) for the nine months
ended June 30, 1999 compared to $61.4 million (22.7% of net sales) in the
corresponding fiscal 1998 period.
INTEREST EXPENSE. Interest expense was $41.9 million for the nine months
ended June 30, 1999 compared to $40.1 million in the corresponding fiscal 1998
period. This increase resulted from a higher debt balance primarily from our
acquisition activity, partially offset by the proceeds from the sale of NPT.
Interest expense for the nine months ended June 30, 1999 and 1998 included
additional non-cash interest expense of $0.9 million resulting from the adoption
of SFAS No. 106.
INCOME TAXES. Taxes on income increased $22.5 million when compared to the
fiscal 1998 period primarily as a result of increased earnings.
INCOME FROM CONTINUING OPERATIONS. As a result of the foregoing, we had net
income from continuing operations of $89.2 million for the nine months ended
June 30, 1999 compared to $50.3 million in the corresponding fiscal 1998 period.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations for
the nine months ended June 30, 1999 was $0.1 million compared to $3.1 million in
the corresponding fiscal 1998 period. The fiscal 1999 period includes operating
results of NPT for the period October 1, 1999 through the sale date of March 31,
1999, while the 1998 period includes a full nine months of operating results. As
a result, comparative analysis would not be meaningful.
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EXTRAORDINARY ITEM. On March 31, 1999, Sybron completed the sale of NPT to
Norton Performance Plastics Corporation, a subsidiary of Saint-Gobain - France.
Net proceeds from the sale, net of $3.7 million of selling expenses and
estimated adjustments, amounted to $84.0 million. The Company realized a gain on
this sale of $18.0 million (net of tax $16.0 million). The sales price and final
gain calculation are subject to further adjustments based upon finalization of
the audited book value of NPT at March 31, 1999 and the related tax impact. The
Company does not expect a significant change to the purchase price or gain as a
result of the finalization of the audit and tax calculation. The proceeds of the
sale net of tax and expenses were used to repay approximately $67.9 million
previously owed under the Company's credit facilities.
NET INCOME. We had net income of $107.3 million for the nine months ended
June 30, 1999 compared to $53.5 million in the corresponding fiscal 1998 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 $8.1 million 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.
LIQUIDITY AND CAPITAL RESOURCES
As a result of a 1987 leveraged buyout transaction (the "Acquisition") and
the acquisitions we have completed since 1987, we have increased the carrying
value of certain tangible and intangible assets consistent with GAAP.
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 $59.4 million in the third quarter and by approximately $153.2
million in the nine months of fiscal 1999, primarily as a result of continued
acquisition activity. We believe, therefore, that although it is not a GAAP
measure and it is not a substitute for GAAP measured earnings and cash flows or
an indication of operating performance or a measure of liquidity, "Adjusted
EBITDA" represents a useful 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, 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 June 1998 restructuring, and the periodic expansion of physical facilities.
It is currently our intent 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 current credit facilities. 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. With respect to the restructuring charge of
approximately $24.0 million which was recorded in June, 1998, of which
approximately $12.6 million represented expected cash expenditures, as of June
30, 1999, we have made cash payments of approximately $8.1 million, reclassified
approximately $0.4 million to discontinued operations and made
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an adjustment of $0.9 million. Approximately $3.2 million remains to be paid of
which an estimated $2.5 million will 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 current 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 to date,
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 "Tranche A Term Loan Facility"), and a revolving credit
facility of $250 million (the "Revolving Credit Facility"). On the same day, we
borrowed $300 million under the Tranche A 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 Tranche A 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 Eurodollar Rate and Tranche A 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 Tranche A 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 provided us with the ability to use proceeds from the
issuance of additional unsecured, subordinated 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. On July 29, 1999, we entered into the Third Amended and Restated Credit
Agreement (the "Third Amendment"), and borrowed an additional $300 million under
a new term loan facility (the "Tranche B Term Loan Facility"). On July 29, 1999,
we used the $300 million of proceeds from the Tranche B Term Loan Facility
(after a reduction for fees of approximately $1.6 million) to repay $298.4
million of outstanding amounts under the Revolving Credit Facility.
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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 Tranche A Term Loan Facility and
Revolving Credit Facility provide for an annual interest rate, at our option,
equal to (a) the higher of (i) the rate from time to time publicly announced by
Chase in New York City as its prime rate, (ii) the federal funds rate plus 1/2
of 1%, and (iii) the base CD rate plus 1%, (collectively referred to as "Tranche
A ABR") or (b) the adjusted interbank offered rate for eurodollar deposits
("Eurodollar Rate") plus 1/2% to 7/8% (the "Tranche A Eurodollar Rate Margin")
depending upon the ratio of our total debt to Consolidated Adjusted Operating
Profit (as defined in the Third Amendment), or (c) with respect to certain
advances under Revolving Credit Facility, the rate set by the competitive bid
process among the parties to the Revolving Credit Facility ("CAF"). The Tranche
B Term Loan Facility provides for an annual interest rate, at our option, equal
to (a) the higher of (i) the rate from time to time publicly announced by Chase
in New York City as its prime rate plus 1% to 1 1/4%, (ii) the federal funds
rate plus of 1 1/2% to 1 3/4%, and (iii) the base CD rate plus 2% to 2 1/4%,
depending upon the ratio of our total debt to Consolidated Adjusted Operating
Profit or (b) the Eurodollar Rate plus 2% to 2 1/4% depending upon the ratio of
our total debt to Consolidated Adjusted Operating Profit. The average interest
rate on the Tranche A Term Loan Facility (inclusive of the swap agreements
described below) in the third quarter and first three quarters of fiscal 1999
was 6.8% and 6.5%, respectively. The average interest rate on the Revolving
Credit Facility in the third quarter and first three quarters of fiscal 1999 was
6.1% and 6.0%, respectively. The Company will pay an interest rate of 7.67% on
the Tranche B Term Loan Facility through January 2000.
As a result of the terms of our 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. As of
June 30, 1999, the Company has seven interest rate swaps outstanding aggregating
a notional amount of $375 million. Under the terms of the swap agreements, the
Company is required to pay a fixed rate amount equal to the swap agreement rate
listed below. In exchange for the payment of the fixed rate amount, the Company
receives a floating rate amount equal to the three-month LIBOR rate in effect on
the date of the swap agreements and the subsequent reset dates. For each of the
swap agreements the rate resets on each quarterly anniversary of the swap
agreement date until the swap expiration date. The net interest rate paid by the
Company is approximately equal to the sum of the swap agreement rate plus the
applicable Tranche A Eurodollar Rate Margin. For the quarter and first
nine-months of fiscal 1999, the Tranche A Eurodollar Rate Margin was .75%. The
swap agreement rates and duration as of June 30, 1999 are as follows:
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SWAP AGREEMENT SWAP AGREEMENT
EXPIRATION DATE NOTIONAL AMOUNT DATE RATE
- --------------- --------------- ---- ----
August 13, 1999 $50 million August 13, 1993 5.540%
June 8, 2002 $50 million December 8, 1995 5.500%
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.897%
September 10, 2001 $50 million December 8, 1995 5.623%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23, 1998 4.733%
Also as part of the permanent financing for the Acquisition, on December 22,
1988, we entered into the sale and leaseback of what were our principal domestic
facilities at that time (the "Sale/Leaseback"). In January 1999, the annual
obligation under the Sale/Leaseback increased from $3.3 million to $3.6 million,
payable monthly. On the fifth anniversary of the leases and every five years
thereafter (including renewal terms), the rent will be increased by the
percentage equal to 75% of the percentage increase in the Consumer Price Index
over the preceding five years. The percentage increase to the rent in any
five-year period is capped at 15%. The next adjustment will occur on January 1,
2004.
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 from those sources, particularly with
respect to our acquisition strategy, we intend to raise additional capital.
The Revolving Credit Facility provides up to $600 million in available
credit. At June 30, 1999, there was approximately $56.5 million of available
credit under the Revolving Credit Facility. After completion of the Third
Amendment to the Credit Agreement on July 29, 1999 the proceeds of $300 million
(after reduction for approximately $1.6 million of fees) were used to repay
outstanding borrowings under the Revolving Credit Facility, increasing our
available credit by $298.4 million. On July 29, 1999, after completion of the
Third Amendment, the Company had available credit of $337.6 million. Under the
Tranche A 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 fiscal
1997, $35.0 million due in fiscal 1998 and $17.5 million of the $36.25 million
due in fiscal 1999. On March 31, 1999, as a result of the sale of NPT, the
Company received approximately $87.7 million (approximately $86.0 million net of
fees and expenses). Net proceeds of the sale, after a reduction for estimated
applicable income taxes, were required to be used to repay amounts owed by the
Company under the Tranche A Term Loan Facility. On March 31, 1999, the Company
paid principal of approximately $67.9 million due under the Tranche A Term Loan
Facility. The following table shows how the payments were applied, and the
resulting revised schedule of principal payments under the Tranche A Term Loan
Facility.
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Payments Previously Principal Due
Applied from Scheduled After Application
NPT Sale Principal of NPT Proceeds
-------- --------- ---------------
(In Millions)
Remaining payments
due in fiscal 1999 $ 18.75 $ 18.75 $ --
Payments due in 2000 42.50 42.50 --
Payments due in 2001 1.29 53.75 52.46
Payments due in 2002 5.37 223.75 218.38
------- -------- -------
Total $ 67.91 $ 338.75 $270.84
======= ======== =======
In addition, under the terms of the Tranche B Term Loan Facility, the
Company will be required to repay principal in consecutive quarterly
installments beginning on January 31, 2000 as follows: $0.75 million due in
fiscal 2000, $1.0 million due in fiscal 2001, $1.0 million due in fiscal 2002,
$120.25 million due in fiscal 2003 and $177 million due in fiscal 2004, with the
final payment due on July 31, 2004.
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 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
Historically, certain computer programs were written using two digits rather
than four to identify the applicable year. Accordingly, software used by the
Company and others with whom it does business may be unable to interpret dates
in the calendar year 2000. This situation, commonly referred to as the Year 2000
("Y2K") issue, could result in computer failures or miscalculations, causing
disruption of normal business activities. The Y2K issue could arise at any point
in our supply, manufacturing, distribution, administration, information,
accounting and financial systems. Incomplete or untimely resolution of the Y2K
issue by the Company, key suppliers, customers and other parties, could have a
material adverse effect on the Company's results of operations, financial
condition and cash flow.
We have been addressing the Y2K 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 Executive Vice President and Chief Financial Officer of SLPC and the Vice
President and Chief Information Officer of SDS. The four main phases of the
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initiative include (1) identification of affected mission critical software
utilized by both information and non-information technology systems, (2)
assessment of the risk associated with such affected software and development of
a plan for modifying or replacing the software, (3) implementation of solutions
under the plan, and (4) testing of the solutions. The initiative also includes
communication with our significant suppliers, vendors and customers to determine
the extent to which we are vulnerable to any failures by them to address the Y2K
issue. The program contemplates the development of contingency plans where
needed to deal with Company systems and third party issues.
We have substantially completed the identification, risk-assessment and plan
development phases (phases (1) and (2)) of our initiative with respect to our
internal systems. Our work in these phases has included both information
technology ("IT") and non-information technology ("non-IT") systems. The IT
systems include accounting, financial, budgeting, invoicing and other business
systems. Non-IT systems include manufacturing production lines and equipment,
elevators, heating, ventilation and air conditioning systems, and telephone
systems. Although we believe we have substantially completed these phases, we
recognize that because of the nature of the Year 2000 problem, work in these
phases will continue up to the Year 2000 as new equipment, software, product
lines and businesses are added in the normal course of our operations, including
our acquisition program.
We have completed in excess of 95% of our implementation phase (phase (3))
with respect to our internal systems. In most cases, we are upgrading existing
software to versions which are Y2K 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.
Although we have work remaining in this area, we believe all of our critical Y2K
implementations have been made.
The testing phase (phase (4)) is also well along, as we have completed in
excess of 95% of the testing required for systems that have been remediated or
replaced to date. Our efforts in this phase include testing by end users and
determination by appropriate local Y2K project managers that the remediated or
replaced systems are Y2K compliant. In those cases where testing cannot be
conducted by Company personnel, as in the case of certain imbedded logic
components, we rely on vendor certifications. Again, although we have some work
remaining in this area, we believe we have completed the testing of all of the
critical systems.
The Company and each of its subsidiaries have project schedules which
include the task of corresponding with critical vendors, customers, suppliers
and other third parties to inquire about their Y2K readiness. The Company and
it's subsidiaries have sent Y2K inquires to substantially all critical third
parties. Based on the responses or lack of responses to date, the Company has
determined there is a risk that some critical suppliers (i.e. those that are key
to a product line or which represent a sole source of supply), will not be Y2K
compliant. The Company's subsidiaries are developing contingency plans to deal
with this risk. Depending on the vendor and product at issue, the Company will
establish an alternative source, build inventory, or identify substitute
products. Based upon the information we have to date, we believe our contingency
plans will enable our subsidiaries to continue to operate without any
significant disruption.
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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. Based upon the testing of our internal systems to date, we
believe that significant operational problems and costs (including loss of
revenue) are not reasonably likely to result from the failure of such systems as
a result of the Y2K issue. We believe our most reasonably likely worst case
scenarios would be the failure of an important supplier to deliver requested
materials, parts or products or the failure of a significant distributor to get
our products to end users. With respect to suppliers, as set forth in the
previous paragraph, the Company's subsidiaries are developing contingency plans
to deal with this risk. Based on our analysis to date, we believe that the
operational problems that would reasonably likely result from the failure of
critical suppliers would not be significant. The associated costs relating to
supplier problems and the cost of associated contingency planning (including the
cost of building inventory, qualifying alternative suppliers, and potential lost
revenue) have not been fully analyzed, but at this time are believed to be
insignificant. Although we have not done an analysis to determine the effect of
the failure of a significant distributor to be able to ship our products to end
users as a result of Y2K issues, our review to date has not identified any
significant distributor to be reasonably likely to have significant Y2K
compliance issues.
Because of the nature of the Y2K problem, we expect to continue all phases
of our initiative until the Year 2000, and expect to have to continue to develop
contingency plans for Y2K issues arising between now and the Year 2000. In
addition, even though phases (1) through (4) of our initiative are substantially
completed for our core businesses, we will have to establish appropriate Y2K
compliance goals for businesses we acquire in the future pursuant to our
acquisition program.
The historical and estimated future costs to the Company of Y2K compliance
are contained in the following table. The primary components of the reported
costs are external consulting and hardware and software upgrades. We do not
separately track internal costs of the Y2K initiative. Internal costs are
principally payroll costs of employees involved in the initiative. 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.
Year 2000 Fiscal 1999 Fiscal 1999
(in thousands)(est.) Fiscal 1998 9 months Last 3 months (est.)
===================================================================================
Capital Costs $1,657 $ 774 $ 426
- -----------------------------------------------------------------------------------
Expenses 914 391 160
- -----------------------------------------------------------------------------------
Total $2,571 $ 1,165 $ 586
- -----------------------------------------------------------------------------------
The foregoing statements about our beliefs regarding the potential effects
of the Y2K issue on our businesses, and the foregoing estimates of our Y2K costs
are forward looking statements. These statements and estimates are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events, including the continued availability of certain
resources, third-party remediation plans, and other factors. There can be no
assurance that these
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estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. Specific factors that could cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in Y2K issues, the ability to identify, assess, remediate
and test all relevant computer codes and embedded technology, the indirect
impact of third parties with whom we do business and who do not mitigate their
Y2K compliance problems, and similar uncertainties.
EUROPEAN ECONOMIC MONETARY UNIT
On January 1, 1999, eleven of the European Union countries (including four
countries in which we have operations) adopted the Euro as their single
currency. At that time, a fixed exchange rate was established between the Euro
and the individual countries' existing currencies (the "legacy currencies"). The
Euro trades on currency exchanges and is available for non-cash transactions.
Following the introduction of the Euro, the legacy currencies will remain legal
tender in the participating countries during a transition period from January 1,
1999 through January 1, 2002. Beginning on January 1, 2002, the European Central
Bank will issue Euro-denominated bills and coins for use in cash transactions.
On or before July 1, 2002, the participating countries will withdraw all legacy
bills and coins and use the Euro as their legal currency.
Our operating units located in European countries affected by the Euro
conversion intend to keep their books in their respective legacy currencies
through a portion of the transition period. At this time, we do not expect
reasonably foreseeable consequences of the Euro conversion to have a material
adverse effect on our business operations or financial condition.
CAUTIONARY FACTORS
This report contains various forward-looking statements concerning our
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by us from time to time in other
reports and documents as well as oral presentations. When used in written
documents or oral statements, the words "anticipate", "believe", "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:
- - 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; and
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risks associated with the economic downturn in Japan, Russia, other Asian
countries and Latin America.
- - 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 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.
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- - 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 our existing
assets.
- - 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.
- - Factors affecting our operations in European countries related to the
conversion from local legacy currencies to the Euro.
- - Other business and investment considerations that may be disclosed from
time to time in our Securities and Exchange Commission filings or in other
publicly available written documents.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
RISK MANAGEMENT
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates. To reduce our risk from these foreign currency rate
and interest rate fluctuations, we occasionally enter into various hedging
transactions. We do not anticipate material changes to our primary market risks
other than fluctuations in magnitude from increased or decreased foreign
currency denominated business activity or floating rate debt levels. We do not
use financial instruments for trading purposes and are not a party to any
leveraged derivatives.
FOREIGN EXCHANGE
We have, from time to time, used foreign currency options to hedge our
exposure from adverse changes in foreign currency rates. Our foreign currency
exposure exists primarily in the French Franc, German Mark, Swiss Franc and the
Japanese Yen values versus the U.S. dollar. Hedging is accomplished by the use
of foreign currency options, and the gain or loss on these options is used to
offset gains or losses in the foreign currencies to which they pertain. Hedges
of anticipated
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transactions are accomplished with options that expire on or near the maturity
date of the anticipated transactions. In October 1998 we entered into twelve
foreign currency options to hedge our exposure to each of the aforementioned
currencies. During the third quarter of fiscal 1999, three of the option
contracts were sold and a fourth expired worthless resulting in a gain of $0.5
million. As of June 30, 1999 four foreign currency options remain with a
notional value of $15.1 million and a cost of $0.1 million which at June 30,
1999, approximates fair market value. These options are designed to protect us
from potential detrimental effects of a strengthening U.S. dollar in our fourth
quarter of fiscal 1999.
In fiscal 1999, we expect our exposure from our primary foreign currencies
to approximate the following:
ESTIMATED
EXPOSURE DENOMINATED ESTIMATED
IN THE RESPECTIVE EXPOSURE
CURRENCY FOREIGN CURRENCY IN U.S. DOLLARS
- -------- -------------------- ---------------
(IN THOUSANDS)
French Franc (FRF) 157,453 FRF $25,712
German Mark (DEM) 26,450 DEM $14,171
Swiss Franc (CHF) 19,396 CHF $12,887
Japanese Yen (JPY) 886,358 JPY $ 6,754
As a result of these anticipated exposures, we entered into a series of
options expiring at the end of the second, third and fourth quarters of fiscal
1999 to protect ourselves from possible detrimental effects of foreign currency
fluctuations as compared to the second, third and fourth quarters of 1998. We
accomplished this by taking approximately one-fourth of the exposure in each of
the foreign currencies listed above and purchasing a put option on that currency
(giving us the right but not the obligation to sell the foreign currency at a
predetermined rate). We purchased put options on the foreign currencies at
amounts approximately equal to our quarterly exposure. These options expire on a
quarterly basis, at an exchange rate approximately equal to the prior year's
corresponding quarter's actual exchange rate. In the second quarter, three of
the options were sold and a fourth expired worthless, in aggregate, netting a
gain of $0.5 million to the Company. In October 1998, we acquired the following
put options:
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NOTIONAL OPTION STRIKE
CURRENCY AMOUNT(A) EXPIRATION DATE PRICE PRICE(B)
- -------- --------- --------------- ------ --------
(IN THOUSANDS, EXCEPT STRIKE PRICES)
FRF (c) 40,000 March 26, 1999 $ 22 6.00
FRF (d) 40,000 June 28, 1999 $ 40 6.00
FRF 40,000 September 28, 1999 $ 69 5.95
DEM (c) 6,500 March 26, 1999 $ 9 1.80
DEM (d) 6,500 June 28, 1999 $ 17 1.80
DEM 6,500 September 28, 1999 $ 24 1.80
CHF (c) 4,800 March 26, 1999 $ 11 1.46
CHF (d) 4,800 June 28, 1999 $ 12 1.49
CHF 4,800 September 28, 1999 $ 21 1.48
JPY (c) 220,000 March 30, 1999 $ 39 128.00
JPY (d) 220,000 June 30, 1999 $ 28 134.00
JPY 220,000 September 30, 1999 $ 21 140.00
- -------------
(a) Amounts expressed in units of foreign currency
(b) Amounts expressed in foreign currency per U.S. dollar
(c) Options sold or expired in the second quarter of fiscal 1999 at a net gain
of $0.1 million.
(d) Options sold or expired in the third quarter of fiscal 1999
at a net gain of $0.5 million.
Our exposure in terms of these options is limited to the purchase price. As
an example, using the French Franc contract due to expire at September 28, 1999:
FRF EXCHANGE GAIN/(LOSS) GAIN/(LOSS) NET GAIN/
RATE ON OPTION (A) FROM PRIOR YEAR RATE (B) (LOSS)
- ------------ ------------ ----------------------- --------
(IN THOUSANDS, EXCEPT EXCHANGE RATE)
5.5 $ (69) $ 550 $ 481
6.0 (13) (56) (69)
6.5 500 (569) (69)
(a) Calculated as (notional amount/strike price)-(notional amount/exchange
rate)-premium paid, with losses limited to the premium paid on the contract.
(b) Calculated as (notional amount/exchange rate) - (notional amount/strike
price).
INTEREST RATES
We use interest rate swaps to reduce our exposure to interest rate
movements. Our net exposure to interest rate risk consists of floating rate
instruments whose interest rates are determined by the Eurodollar Rate. Interest
rate risk management is accomplished by the use of swaps to create fixed debt
amounts by resetting Eurodollar Rate loans concurrently with the rates applying
to the swap agreements. At June 30, 1999, we had floating rate debt of
approximately $810.7 million of which a
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total of $375 million was swapped to fixed rates. The net interest rate paid by
us is approximately equal to the sum of the swap agreement rate plus the
applicable Tranche A Eurodollar Rate Margin. During the second quarter and year
to date of fiscal 1999, the Tranche A Eurodollar Rate Margin was .75%. The swap
agreement rates and duration as of June 30, 1999 are as follows:
SWAP AGREEMENT SWAP AGREEMENT
EXPIRATION DATE NOTIONAL AMOUNT DATE RATE
- --------------- --------------- ---- ----
August 13, 1999 $50 million August 13, 1993 5.540%
June 8, 2002 $50 million December 8, 1995 5.500%
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.897%
September 10, 2001 $50 million December 8, 1995 5.623%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23,1998 4.733%
The model below quantifies the Company's sensitivity to interest rate
movements as determined by the Eurodollar Rate and the effect of the interest
rate swaps which reduce that risk. The model assumes i) a base Eurodollar Rate
of 5.1% (the "Eurodollar Base Rate") which approximates the June 30, 1999 three
month Eurodollar Rate), ii) the Company's floating rate debt is equal to it's
June 30, 1999 floating rate debt balance of $810.7 million, iii) the Company
pays interest on floating rate debt equal to the Eurodollar Rate + 75 basis
points, iv) that the Company has interest rate swaps with a notional amount of
$375.0 million (equal to the notional amount of the Company's interest rate
swaps at June 30, 1999) and v) that the Eurodollar Rate varies by 10% of the
Base Rate.
Interest expense Interest expense
increase from a decrease from a
10% increase in the 10% decrease in the
Interest rate exposure Eurodollar Base Rate Eurodollar Base Rate
- ---------------------- -------------------- --------------------
Without interest rate swaps: $4.1 million ($4.1 million)
With interest rate swaps: $2.2 million ($2.2 million)
PART II - OTHER INFORMATION
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.
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35
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 16, 1999 /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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36
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, 1999
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
4.1 Third Amended and Restated Credit X
Agreement, dated as of July 29, 1999
(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 Revolving Credit Note, dated
July 29, 1999, pursuant to the
Credit Agreement X
4.3 Form of Tranche A Term Note, dated
July 29, 1999, pursuant to the
Credit Agreement X
4.4 Form of Additional Tranche A Term Note,
dated July 29, 1999, pursuant to the
Credit Agreement X
4.5 Form of Tranche B Term Note, dated
July 29, 1999, pursuant to the
Credit Agreement X
4.6 Form of Swing Line Note, dated
July 29, 1999, pursuant to the
Credit Agreement X
4.7 Fourth Amended and Restated X
Parent Pledge Agreement, dated as of
July 29, 1999, executed pursuant to the
Credit Agreement
4.8 Fourth Amended and Restated X
Subsidiaries Guarantee, dated as of
July 29, 1999, executed pursuant to the
Credit Agreement
EI-1
37
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
4.9 Fourth Amended and Restated X
Subsidiaries Pledge Agreement, dated
as of July 29, 1999, executed pursuant
to the Credit Agreement
27.1 Financial Data Schedule X
27.2 Restated Financial Data Schedule (nine
month period ended June 30, 1998) X
EI-2