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United States
Securities & Exchange Commission
Washington, DC 20549
Form 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended March 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to _________________
Commission File No. 0-14139
VWR SCIENTIFIC PRODUCTS CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 91-1319190
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(State of Incorporation) (I.R.S. Employer Identification No.)
1310 Goshen Parkway, West Chester, PA 19380
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(Address of principal executive offices) (zip code)
Registrant's telephone number (610-431-1700)
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(Former name, address, and fiscal year if changed since last report)
Indicate by a 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( )
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of March 31, 1998.
Class Outstanding at March 31, 1998
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Common stock, par value $1.00 28,685,400 shares
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VWR SCIENTIFIC PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, 1998 December 31, 1997
(Thousands of dollars) (Unaudited)
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ASSETS
Trade receivables, net $190,310 $180,345
Other receivables 7,594 6,632
Inventories 106,338 103,445
Other 12,317 11,166
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Total current assets 316,559 301,588
Property and equipment, net 55,168 50,846
Excess of cost over net assets of
businesses acquired and other assets,
net 362,183 365,132
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$733,910 $717,566
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LIABILITIES AND SHAREHOLDERS' EQUITY
Bank checks outstanding,
less cash in bank $ 8,221 $ 10,077
Accounts payable and
accrued liabilities 137,021 109,447
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Total current liabilities 145,242 119,524
Revolving credit facility 59,489 81,462
Subordinated debenture 151,507 150,947
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Total long-term debt 210,996 232,409
Deferred income taxes and other 25,168 23,626
Shareholders' equity 352,504 342,007
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$733,910 $717,566
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See notes to condensed consolidated financial statements.
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VWR SCIENTIFIC PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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(Thousands of dollars, Three Months Ended March 31,
except per share data) 1998 1997
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Sales $320,478 $290,826
Cost of sales 248,840 227,410
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Gross margin 71,638 63,416
Operating expenses 45,979 42,339
Depreciation and amortization 6,047 5,431
Acquisition-related charges - 253
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Total operating expenses 52,026 48,023
Operating income 19,612 15,393
Interest expense and other 6,249 9,271
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Income before income taxes 13,363 6,122
Income taxes 5,445 2,571
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Net income $ 7,918 $ 3,551
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Earnings per share:
Basic earnings per share $ 0.28 $ 0.16
Diluted earnings per share $ 0.27 $ 0.16
Basic weighted average number of
common shares outstanding 28,592 22,344
Diluted weighted average number of
common shares outstanding 29,526 22,639
See notes to condensed consolidated financial statements.
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VWR SCIENTIFIC PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Three Months Ended March 31,
(Thousands of dollars) 1998 1997
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OPERATING ACTIVITIES:
Net income $ 7,918 $ 3,551
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization,
including deferred debt issuance costs 6,179 5,702
Debentures issued in lieu of payment
of interest 560 4,401
Changes in assets and liabilities:
Receivables (10,927) (19,244)
Inventories (2,893) 8,085
Other current assets (1,635) (3,492)
Accounts payable and other 27,574 17,815
Deferred taxes and other 1,330 89
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Cash provided by operating activities 28,106 16,907
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INVESTING ACTIVITIES:
Additions to property and equipment, net (6,834) (1,450)
Other 22
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Cash used in investing activities (6,834) (1,428)
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FINANCING ACTIVITIES:
Proceeds from long-term debt 40,401 62,450
Repayment of long-term debt (62,374) (77,856)
Net change in bank checks outstanding (1,856) (49)
Proceeds from exercise of stock options 1,288
Proceeds from shares issued under
Merck KGaA ownership rights 1,256
Other 13 (24)
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Cash used in financing activities (21,272) (15,479)
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Net change in cash 0 0
Cash at beginning of period 0 0
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Cash at end of period $ 0 $ 0
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Supplemental disclosures of cash flow information:
Cash paid (received) during period for:
Interest $ 6,119 $ 2,977
Income taxes $ (1,217) $ (1,241)
See notes to condensed consolidated financial statements
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VWR SCIENTIFIC PRODUCTS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
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The accompanying unaudited condensed consolidated financial statements
of VWR Scientific Products Corporation (VWR Scientific Products or the
Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the
results which may be expected for the year ended December 31, 1998.
Refer to the consolidated financial statements and footnotes thereto
included in the Company's 1997 Annual Report on Form 10-K for further
information.
Certain prior-period amounts have been reclassified to conform to the
current periods presentation.
New Accounting Standards
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Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
Differences between net income and comprehensive income as well as
shareholders equity and accumulated comprehensive income for the first
quarter of 1998 and 1997 were not material and relate to foreign currency
translation gains and losses.
2. INVENTORY PRICING
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Inventory valued using the LIFO method comprised approximately 89% of
inventory at March 31, 1998 and December 31, 1997. Cost of the
remaining inventories is determined using the FIFO method. Because the
actual inventory determination under the LIFO method is an annual
calculation, interim financial results are based on estimated LIFO
amounts and are subject to final year-end LIFO inventory adjustments.
Inventory values under the LIFO method at March 31, 1998 and December
31, 1997 were approximately $33.6 million and $32.9 million,
respectively, less than current cost.
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3.EARNINGS PER SHARE
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Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share, which required the Company to change the method used to compute
earnings per share (EPS) and to restate all prior periods presented. The
presentation of primary and fully diluted EPS has been replaced with basic and
diluted EPS, respectively. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of
securities that could be exercised or converted into common stock. The
following is a reconciliation between the weighted average shares outstanding
used in the calculation of basic and diluted EPS:
Three Months Ended March 31,
(Thousands) 1998 1997
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Basic weighted average
common shares outstanding 28,592 22,344
Net effect of dilutive
stock options 468 148
Effect of Merck KGaA
ownership rights 466 147
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Diluted weighted average
common shares outstanding 29,526 22,639
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Upon issuance of stock by the Company, including its stock incentive plans,
Merck KGaA has the option to purchase additional shares from the Company to
retain its 49.89% ownership interest pursuant to a Standstill Agreement.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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The following commentary should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements ("Notes") for the year ended December 31, 1997 and
Management's Discussion and Analysis of Results of Operations and
Financial Condition included in the Company's 1997 Annual Report on
Form 10-K.
On September 15, 1995, the Company acquired the Industrial Distribution
Business (Baxter Industrial) of Baxter Healthcare Corporation (Baxter
Healthcare), a subsidiary of Baxter International.
Results of Operations
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Sales for the three months ended March 31, 1998 increased $29.7 million,
or 10.2%, to $320.5 million from $290.8 million in the comparable period
of 1997. The sales increase was principally due to increased sales to
the Company's large "partnership" accounts, growth in the Company's
pharmaceutical and critical environment markets and, to a lesser extent,
increased prices.
Gross margin for the three months ended March 31, 1998 increased $8.2 million,
or 13.0%, to $71.6 million from $63.4 million in the comparable period of
1997. As a percentage of sales, gross margin for the three months ended March
31, 1998 increased to 22.4% from 21.8% for the comparable period of 1997. The
increase in the Company's gross margin percentage for the three months ended
March 31, 1998 is primarily attributable to the continued focus on margin
improvement through internal programs.
Total operating expenses for the three months ended March 31, 1998
increased $4.0 million, or 8.3%, to $52.0 million from $48.0 million for
the comparable period of 1997. As a percentage of sales, total operating
expenses for three months ended March 31, 1998 decreased to 16.2% from
16.5% in the comparable period of 1997. The decreases in the ratios are
principally due to continued synergies realized as a result of the
Baxter Industrial acquisition and subsequent revenue growth and, to a
lesser extent, the absence of acquisition-related charges in 1998
period. Acquisition-related charges consisted primarily of relocation,
severance and integration charges directly attributable to the Baxter
Industrial acquisition.
Interest expense for the three months ended March 31, 1998 decreased
$3.0 million, or 32.6%, to $6.2 million from $9.3 million in the
comparable period of 1997. The interest expense decrease in the first
quarter of 1998 compared to the first quarter of 1997 is largely
attributable to lower average borrowings under the Company's Credit
Facility and, to a lesser extent, lower interest rates on the Credit
Facility. Lower average borrowings are the result of cash generated from
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operations and the Companys 1997 public offering and concurrent private
placement to affiliates of Merck KGaA which raised net proceeds of
$132.7 million.
The Company's annual estimated effective tax rate for the three months
ended March 31, 1998 decreased to 40.7% from 42.0% in the comparable
period of 1997, reflecting increased contributions of the Companys U.S.
operations.
Liquidity and Capital Resources
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In the first three months of 1998, operations generated $28.1 million of
cash compared to $16.9 million in the comparable period of 1997. The
improvement in cash from operations is largely attributable to the
completion of the Baxter Industrial integration during the first quarter
of 1997.
The Company's current ratio was 2.2 at March 31, 1998 as compared to 2.5
at December 31, 1997. The increase in accounts receivable during the
first quarter of 1997 was due to increases in sales and the integration
of the Baxter Industrial business. In addition, during 1997, the Company
experienced a backlog in collection efforts resulting from the Baxter
Industrial integration. This issue has been addressed and the Company is
taking actions to reduce its accounts receivable days outstanding.
During the first quarter of 1998, accounts receivable have continued to
increase primarily due to increased sales. The decrease in inventory
during the first quarter of 1997 was the result of programs to improve
inventory management following the final Baxter Industrial transition
phase. The inventory increase during the first quarter of 1998 reflects
increased sales partially offset by inventory management programs. The
increase in accounts payable and other accrued liabilities is
attributable to growth in the business and timing of payments.
Debt decreased during the first quarters of 1997 and 1998 due to
increased cash generated from operations which was used to pay down
outstanding borrowings under the Companys Credit Facility.
The Company has entered into various interest rate swap agreements with
financial institutions which effectively change the Company's interest-
rate exposure on a notional amount of debt from variable rates to fixed
rates. The notional amounts of the interest rate swaps are based upon
expected debt levels during the period of the Credit Facility. Average
borrowings under the Credit Facility were $76.3 million in the first
quarter of 1998. The Company provides protection to meet actual
exposures and does not speculate in derivatives. At March 31, 1998, the
Company had a notional amount of $65 million of swaps in effect. These
swaps expire between 1998 and 2000. The amount of floating rate debt
protected by the swaps ranges from $65 million to $10 million during the
period outstanding with fixed rates ranging from 5.5% to 6.4%. The
Company is exposed to credit loss in the event of nonperformance by the
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other parties to the interest rate swap agreements. The Company does not
anticipate nonperformance by the counterparties.
The Company's use of swaps and collars for interest rate protection did
not materially effect interest expense for the three months ending March
31, 1998. Pursuant to the Credit Facility, the Company is obligated to
provide interest rate protection on at least 25% of the Credit Facility.
The Company has begun a project to enhance its computer systems to
satisfy its future requirements. This enhancement will result in the
replacement of many of the Company's current systems including order
entry, purchasing, and financial systems. The Company anticipates that
the total cost of its new system will be between $25 million and $30
million. A substantial portion of the costs associated with the
replacement of existing systems will be recorded as assets and
amortized. At March 31, 1998, the Company has expended approximately
$12.0 million. The remaining amounts are expected to be expended over
the next 15 months.
The Company has conducted a review to identify the systems that could be
affected by the "Year 2000" issue. The Year 2000 issue is
the result of computer programs being written using two digits (rather
than four) to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000, which could cause the Company's
computer systems to perform inaccurate calculations. The Company has
developed a timeline for enhancing its computer systems. The
enhancement, together with other planned system changes, is intended to
correct the Year 2000 issue. The Company does not expect the amounts
required to be expensed to correct the Year 2000 issue, to have a
material effect on its financial condition or results of operations. The
Company has also initiated discussions with its significant suppliers
and large customers to ensure that those parties have appropriate plans
to remediate Year 2000 issues where their systems interface with the
Companys systems or otherwise impact its operations.
The Company expects that estimated working capital requirements and
estimated capital expenditures will be funded by cash from operations
and availability under the Credit Facility.
Certain information in this report contains forward-looking statements
as such term is defined in Section 27A of the Securities Act and Section
21E of the Exchange Act. Certain factors such as competitive pressures,
customer and product mix, system conversion and Year 2000 issues,
regulatory changes, and capital markets could cause actual results to
differ materially from those in forward-looking statements.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBIT AND REPORTS ON FORM 8-K
a. Exhibit
Exhibit 27--Financial Data Schedule (submitted only in
electronic format)
b. No reports on Form 8-K were filed during the three-month period
ended March 31, 1998
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SIGNATURES
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Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
(REGISTRANT) VWR SCIENTIFIC PRODUCTS CORPORATION
BY (SIGNATURE)
(NAME AND TITLE) DAVID M. BRONSON
SENIOR VICE PRESIDENT FINANCE
AND CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
DATE May 15, 1998
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EXHIBIT INDEX
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EXHIBIT NUMBER DESCRIPTION
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Financial Data Schedule (submitted only in electronic format)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000788043
<NAME> VWR SCIENTIFIC PRODUCTS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 193,049
<ALLOWANCES> 2,739
<INVENTORY> 106,338
<CURRENT-ASSETS> 316,559
<PP&E> 106,800
<DEPRECIATION> 51,632
<TOTAL-ASSETS> 733,910
<CURRENT-LIABILITIES> 145,242
<BONDS> 210,996
0
0
<COMMON> 28,690
<OTHER-SE> 323,814
<TOTAL-LIABILITY-AND-EQUITY> 733,910
<SALES> 320,478
<TOTAL-REVENUES> 320,478
<CGS> 248,840
<TOTAL-COSTS> 248,840
<OTHER-EXPENSES> 52,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,249
<INCOME-PRETAX> 13,363
<INCOME-TAX> 5,445
<INCOME-CONTINUING> 7,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,918
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
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