<PAGE>1
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 June 30, 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 June 30, 1998.
Class Outstanding at June 30, 1998
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Common stock, par value $1.00 28,810,244 shares
<PAGE>2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VWR SCIENTIFIC PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, 1998 December 31, 1997
(Thousands of dollars) (Unaudited)
--------------- -----------------
ASSETS
Trade receivables, net $183,892 $180,345
Other receivables 9,109 6,632
Inventories 113,889 103,445
Other 12,156 11,166
-------- --------
Total current assets 319,046 301,588
Property and equipment, net 61,105 50,846
Excess of cost over net assets of
businesses acquired and other assets,
net 364,237 365,132
-------- --------
$744,388 $717,566
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank checks outstanding,
less cash in bank $ 7,115 $ 10,077
Accounts payable and
accrued liabilities 125,164 109,447
-------- --------
Total current liabilities 132,279 119,524
Revolving credit facility 72,181 81,462
Subordinated debenture 152,083 150,947
-------- --------
Total long-term debt 224,264 232,409
Deferred income taxes and other 25,216 23,626
Shareholders' equity 362,629 342,007
-------- --------
$744,388 $717,566
======== ========
See notes to condensed consolidated financial statements.
<PAGE>3
VWR SCIENTIFIC PRODUCTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months Six Months
(Thousands, except Ended June 30, Ended June 30,
per share data) 1998 1997 1998 1997
-------------------- ---------------------
Sales $330,998 $310,513 $651,476 $601,339
Cost of sales 257,668 242,009 506,508 469,419
-------- -------- -------- --------
Gross margin 73,330 68,504 144,968 131,920
Operating expenses 46,761 43,340 92,740 85,679
Depreciation and amortization 6,039 5,283 12,086 10,714
Acquisition-related charges -- -- -- 253
-------- -------- -------- --------
Total operating expenses 52,800 48,623 104,826 96,646
-------- -------- -------- --------
Operating income 20,530 19,881 40,142 35,274
Interest expense and other 5,870 9,399 12,119 18,670
-------- -------- -------- --------
Income before income taxes 14,660 10,482 28,023 16,604
Income taxes 5,834 4,402 11,279 6,973
-------- -------- -------- --------
Net income $ 8,826 $ 6,080 $ 16,744 $ 9,631
======== ======== ======== ========
Earnings per share:
Basic earnings per share $ .31 $ .27 $ .58 $ .43
Diluted earnings per share $ .30 $ .27 $ .57 $ .42
Basic weighted average number
of common shares outstanding 28,807 22,349 28,696 22,347
Diluted weighted average number
of common shares outstanding 29,624 22,749 29,571 22,694
See notes to condensed consolidated financial statements.
<PAGE>4
VWR SCIENTIFIC PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Six Months Ended June 30,
(Thousands of dollars) 1998 1997
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OPERATING ACTIVITIES:
Net income $ 16,744 $ 9,631
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization,
including deferred debt issuance costs 12,351 11,274
Debenture issued in lieu of payment
of interest 1,137 9,140
Changes in assets and liabilities, net of
effect of business acquired:
Receivables (4,450) (19,193)
Inventories (8,665) 5,964
Other current assets (2,157) (2,615)
Accounts payable and other 13,662 17,884
Deferred taxes and other 1,597 167
-------- --------
Cash provided by operating activities 30,219 32,252
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment, net (15,155) (2,959)
Acquisition of business (6,400) --
Other -- (16)
-------- --------
Cash used in investing activities (21,555) (2,975)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 129,975 110,575
Repayment of long-term debt (139,257) (139,815)
Net change in bank checks outstanding (2,966) (75)
Proceeds from exercise of stock options 2,033 58
Proceeds from shares issued under
Merck KGaA ownership rights 2,023 --
Other (472) (20)
-------- --------
Cash used in financing activities (8,664) (29,277)
-------- --------
Net change in cash 0 0
Cash at beginning of period 0 0
-------- --------
Cash at end of period $ 0 $ 0
======== ========
<PAGE>5
Supplemental disclosures of cash flow information:
Cash paid (received) during period for:
Interest $ 12,163 $ 8,827
Income taxes $ 1,453 $ (1,088)
See notes to condensed consolidated financial statements
<PAGE>6
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 six months ended June 30, 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.
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",
which establishes standards for reporting and displaying comprehensive
income and its components. Comprehensive income includes all changes in
shareholders' equity during a period, except those resulting from
investments by and distributions to shareholders. The difference between net
income and comprehensive income was not material for the three and six
months ended June 30, 1998 and 1997.
2. INVENTORY PRICING
-----------------
Inventory valued using the LIFO method comprised approximately 89% of
inventory at June 30, 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 June 30, 1998 and December 31, 1997 were
approximately $33.9 million and $32.9 million, respectively, less than
current cost.
<PAGE>7
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 common shares
outstanding used in the calculation of basic and diluted EPS:
Three Months Six Months
Ended June 30 Ended June 30,
(Thousands) 1998 1997 1998 1997
----- ----- ----- -----
Basic weighted average
common shares outstanding 28,807 22,349 28,696 22,347
Net effect of dilutive
stock options 409 200 438 174
Effect of Merck KGaA
ownership rights 408 200 437 173
------ ------ ------ ------
Diluted weighted average
common shares outstanding 29,624 22,749 29,571 22,694
====== ====== ====== ======
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.
4.SUBSEQUENT EVENTS
------------------
On July 31, 1998, the Company acquired all of the outstanding shares of The
Science Kit Group of Companies, a privately-held supplier of science
education products to school systems and educational institutions in the
United States and Canada, for $110 million, subject to adjustment. 1997
revenues for The Science Kit Group were $66 million. The acquisition will be
accounted for under the purchase method of accounting. The purchase price
was financed by a portion of the proceeds received from borrowings under the
Company's new five-year credit facility ("New Credit Facility") entered into
on July 31, 1998. The New Credit Facility consists of a $250 million
unsecured revolving line of credit which replaces the Credit Facility
entered into on September 15, 1995. The New Credit Facility bears interest
at a rate based on the London Interbank Offered Rate ("LIBOR") or the prime
rate, plus applicable margin.
The Company expects to record an extraordinary charge in the third quarter
1998 in the amount of $0.7 million (net of tax) as a result of writing off
the unamortized deferred debt issuance costs related to the replaced Credit
Facility dated September 15, 1995.
<PAGE>8
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 increased for the second quarter 1998 by $20.5 million, or 6.6%, to
$331.0 million from $310.5 million in the second quarter of 1997. Sales
increased on a year-to-date basis by $50.1 million, or 8.3 %, to $651.5
million from $601.3 million over the corresponding period in 1997. The sales
increase was principally due to increased sales to the Company's core
industrial business including pharmaceutical, biotechnology and chemical
markets and, to a lesser extent, growth in sales of cleanroom products.
Gross margin for the second quarter ended June 30, 1998 increased $4.8
million, or 7.0%, to $73.3 million from $68.5 million in the comparable
period of 1997. Gross margin for the first half of 1998 increased $13.0
million, or 9.9%, to $145.0 million from $131.9 million in the comparable
period of 1997. As a percentage of sales, gross margin for the second
quarter ended June 30, 1998 increased to 22.2% from 22.1% and for the first
half of 1998 increased to 22.3% from 21.9% compared to the same periods in
1997. The Company experienced declining margins in the first half of 1997
attributable to operating issues from the transition of the Baxter
Industrial business. The transition was completed in the first quarter of
1997. The increase in the Company's gross margin percentage for the six
months ended June 30, 1998 is primarily attributable to the continued focus
on margin improvement through internal programs.
Total operating expenses, as a percentage of sales, increased to 16.0% in
the second quarter 1998 from 15.7% in the comparable period of 1997. Total
operating expenses, as a percentage of sales, remained at 16.1% on a year-
to-date basis in 1998 and 1997. During the quarter, the Company redirected
and increased its sales force to respond to changes in the cleanroom market.
The Company also increased its accounts receivable collection efforts.
Depreciation and amortization increased during the second quarter and first
six months of 1998 due to accelerated amortization on current information
systems that are being replaced by the Company's project to enhance its
computer systems.
<PAGE>9
Interest expense for the second quarter ended June 30, 1998 decreased $3.5
million, or 37.5%, to $5.9 million from $9.4 million in the comparable
period of 1997. Interest expense for the first six months of 1998 decreased
$6.6 million, or 35.1%, to $12.1 million from $18.7 million in the
comparable period of 1997. The interest expense decrease in 1998 compared to
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
operations and the Company's 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 second quarter
ended June 30, 1998 decreased to 39.8% from 42.0% in the comparable period
of 1997, reflecting decreased state and Canadian effective tax rates.
Liquidity and Capital Resources
- --------------------------------
In the first six months of 1998, operations generated $30.2 million of cash
compared to $32.3 million in the comparable period of 1997. The increase in
accounts receivable during the first half 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 continues to be
addressed and the Company is reducing its accounts receivable days
outstanding. During the second quarter of 1998, accounts receivable have
continued to increase primarily due to increased sales. The decrease in
inventory during the first half of 1997 was the result of programs to
improve inventory management following the final Baxter Industrial
transition phase. The inventory increase during the first half 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 six months of 1998 and 1997 due to increased
cash generated from operations, net of capital expenditures and a 1998
acquisition for $6.4 million, which was used to pay down outstanding
borrowings under the Company's Credit Facility.
In connection with the acquisition of the outstanding shares of The Science
Kit Group of Companies as described in Note 4, the Company entered into a
new five-year credit facility ("New Credit Facility") on July 31, 1998. The
New Credit Facility consists of a $250 million unsecured revolving line of
credit and replaces the Credit Facility entered into on September 15, 1995.
<PAGE>10
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. Pursuant to the Credit
Facility entered into on September 15, 1995, the Company was obligated to
provide for interest rate protection on at least 25% of the Credit Facility.
The Company is no longer obligated to provide interest rate protection on
the New Credit Facility. However, the Company will continue to provide
protection to meet actual exposures and does not speculate in derivatives.
At June 30, 1998, the Company had a notional amount of $40 million of swaps
in effect. These swaps expire between 1998 and 2000. The amount of floating
rate debt protected by the swaps ranges from $40 million to $10 million
during the period outstanding with fixed rates ranging from 5.9% to 6.4%.
The Company's use of swaps for interest rate protection did not materially
effect interest expense for the six months ending June 30, 1998. The Company
is exposed to credit loss in the event of nonperformance by the other
parties to the interest rate swap agreements. The Company does not
anticipate nonperformance by the counterparties.
The Company has begun a project to enhance its computer systems to satisfy
its future requirements. This 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,
including the replacement of computer equipment, 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
June 30, 1998, the Company has expended approximately $19.5 million. The
remaining amounts are expected to be expended over the next 12 months.
The Company has had an external review conducted 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. Such inaccurate calculations could have
a material adverse effect on the Company. The external review conducted
identified which systems would be affected by the Year 2000 issue, when they
would be affected, and how the Year 2000 issues may be remedied.
The Company's system enhancement project, together with other planned system
changes, is intended to correct the Year 2000 issue. The Company expects to
implement its new systems on a regional basis beginning in the third quarter
of 1998 and ending in the second quarter of 1999. This timeline has been
coordinated with the results of the Company's Year 2000 external review in
determining the extent of Year 2000 remediation necessary. 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 developed a contingency plan to complete the
Year 2000 remediation if the new systems are not implemented in a timely
manner.
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 Company's
systems or otherwise impact its operations.
<PAGE>11
On July 31, 1998, the Company acquired all of the outstanding shares of The
Science Kit Group of Companies, a privately-held supplier of science
education products to school systems and educational institutions in the
United States and Canada, for $110 million, subject to adjustment. 1996
revenues for The Science Kit Group were $66 million. The acquisition will be
accounted for under the purchase method of accounting. The purchase price
was financed by a portion of the proceeds received from borrowings under the
New Credit Facility.
The Company expects that estimated working capital requirements and
estimated capital expenditures will be funded by cash from operations and
availability under the New Credit Facility entered into July 31, 1998.
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.
<PAGE>12
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on May 1,
1998. At the meeting, shareholders were asked (a) to elect four
directors for three-year terms,(b) to amend the Company's Articles of
Incorporation to increase the authorized Common Shares to 120,000,000
and to increase the authorized Preferred Shares to 25,000,000 and (c) to
ratify the selection of Ernst & Young LLP as independent auditors for
the year ending December 31, 1998.
(a) The following is a summary of the votes for elected directors:
Nominee Votes For Votes Withheld
------- ---------- --------------
Jerrold B. Harris 22,742,530 216,231
Donald P. Neilsen 22,809,663 216,231
Dr. Harald J. Schroder 22,729,306 216,231
Walter W. Zwyottek 22,791,719 216,231
(b) The following is a summary of the votes to amend the Company's
Articles of Incorporation to increase the authorized Common Shares to
120,000,000 and to increase the authorized Preferred Shares to
25,000,000:
Votes For Votes Against Abstentions
---------- ------------- -----------
16,733,039 4,295,441 147,264
(c) The following is a summary of the votes on the proposal regarding
Ernst & Young LLP:
Votes For Votes Against Abstentions
---------- ------------- -----------
22,915,291 26,690 77,082
<PAGE>13
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 June 30, 1998
<PAGE>14
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) /s/David M. Bronson
DAVID M. BRONSON
SENIOR VICE PRESIDENT FINANCE
AND CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting Officer)
DATE August 14, 1998
<PAGE>15
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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 185,961
<ALLOWANCES> 2,069
<INVENTORY> 113,889
<CURRENT-ASSETS> 319,046
<PP&E> 115,382
<DEPRECIATION> 54,277
<TOTAL-ASSETS> 744,388
<CURRENT-LIABILITIES> 132,279
<BONDS> 224,264
0
0
<COMMON> 28,815
<OTHER-SE> 333,814
<TOTAL-LIABILITY-AND-EQUITY> 744,388
<SALES> 651,476
<TOTAL-REVENUES> 651,476
<CGS> 506,508
<TOTAL-COSTS> 506,508
<OTHER-EXPENSES> 104,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,119
<INCOME-PRETAX> 28,023
<INCOME-TAX> 11,279
<INCOME-CONTINUING> 16,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,744
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
</TABLE>
