<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 September 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)
Registrants 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 issuers
classes of common stock, as of September 30, 1998.
Class Outstanding at September 30, 1998
- - ------------------------------------------------------------------------
Common stock, par value $1.00 28,811,244 shares
<PAGE>2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VWR SCIENTIFIC PRODUCTS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, 1998 December 31, 1997
(Thousands of dollars) (Unaudited)
------------------ ------------------
ASSETS
Trade receivables, net $215,089 $180,345
Other receivables 7,219 6,632
Inventories 134,262 103,445
Other 15,611 11,166
-------- --------
Total current assets 372,181 301,588
Property and equipment, net 83,653 50,846
Excess of cost over net assets of
businesses acquired and other
assets, net 454,429 365,132
-------- --------
$910,263 $717,566
======== ========
LIABILITIES AND SHAREHOLDERS EQUITY
Bank checks outstanding,
less cash in bank $ 3,282 $ 10,077
Accounts payable and
accrued liabilities 138,940 109,447
-------- --------
Total current liabilities 142,222 119,524
Revolving credit facility 213,938 81,462
Subordinated debenture 152,610 150,947
-------- --------
Total long-term debt 366,548 232,409
Deferred income taxes and other 28,127 23,626
Shareholders equity 373,366 342,007
-------- --------
$910,263 $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 Nine Months
(Thousands, except Ended September 30, Ended September 30,
per share data) 1998 1997 1998 1997
-------------------- ----------------------
Sales $360,515 $329,079 $1,011,991 $930,418
Cost of sales 274,512 254,966 781,020 724,385
-------- -------- ---------- --------
Gross margin 86,003 74,113 230,971 206,033
Operating expenses 52,559 45,457 145,299 131,389
Depreciation and amortization 6,131 5,672 18,217 16,386
-------- -------- ---------- --------
Total operating expenses 58,690 51,129 163,516 147,775
-------- -------- ---------- --------
Operating income 27,313 22,984 67,455 58,258
Interest expense and other 7,676 8,509 19,795 27,179
-------- -------- ---------- --------
Income before income taxes and
extraordinary charge 19,637 14,475 47,660 31,079
Income taxes 7,919 6,080 19,198 13,053
-------- -------- ---------- --------
Income before extraordinary
charge 11,718 8,395 28,462 18,026
Extraordinary charge, net of
income tax (689) - (689) -
-------- -------- ---------- --------
Net income $ 11,029 $ 8,395 $ 27,773 $ 18,026
======== ======== ========== ========
Basic earnings per share:
Income before extraordinary
charge $ 0.41 $ 0.38 $ 0.99 $ 0.81
Extraordinary charge, net
of income tax (0.02) - (0.02) -
-------- -------- ---------- --------
Net income $ 0.38* $ 0.38 $ 0.97 $ 0.81
======== ======== ========== ========
Diluted earnings per share:
Income before extraordinary
charge $ 0.40 $ 0.37 $ 0.96 $ 0.79
Extraordinary charge, net
of income tax (0.02) - (0.02) -
-------- ------- ---------- --------
Net income $ 0.37* $ 0.37 $ 0.94 $ 0.79
======== ======= ========== ========
Basic weighted average number
of common shares outstanding 28,870 22,371 28,735 22,358
Diluted weighted average number
of common shares outstanding 29,612 22,925 29,566 22,774
See notes to condensed consolidated financial statements.
*Difference due to rounding.
<PAGE>4
VWR SCIENTIFIC PRODUCTS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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Nine Months Ended September 30,
(Thousands of dollars) 1998 1997
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OPERATING ACTIVITIES:
Net income $ 27,773 $ 18,026
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization,
including deferred debt issuance costs 18,564 17,229
Debenture issued in lieu of payment
of interest 1,663 12,283
Loss on early extinguishment of debt, net
of tax 689 -
Changes in assets and liabilities, net of
effect of businesses acquired:
Receivables (12,257) (37,241)
Inventories (9,919) 1,534
Other current assets (3,074) (3,003)
Accounts payable and other 18,815 23,764
Deferred taxes and other 4,068 261
-------- --------
Cash provided by operating activities 46,322 32,853
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment, net (29,544) (8,938)
Acquisition of businesses (132,600) --
Other -- (263)
-------- --------
Cash used in investing activities (162,144) (9,201)
-------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 373,787 162,561
Repayment of long-term debt (253,804) (186,136)
Net change in bank checks outstanding (6,508) (223)
Proceeds from exercise of stock options 2,045 --
Proceeds from shares issued under
Merck KGaA ownership rights 2,023 --
Deferred financing fees and other (1,721) 146
-------- ---------
Cash provided by (used in) financing 115,822 (23,652)
activities -------- ---------
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 $ 19,667 $ 13,064
Income taxes $ (248) $ (227)
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
---------------------
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 nine months ended September 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 Companys 1997 Annual Report on Form 10-K for further
information.
Certain prior year amounts have been reclassified to conform to current
years presentation.
New Accounting Standards
- - ------------------------
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 nine months ended
September 30, 1998 and 1997.
2. INVENTORY PRICING
-----------------
Inventory valued using the LIFO method comprised approximately 93% of
inventory at September 30, 1998 and 89% at 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 September 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
------------------
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 Nine Months
Ended September 30, Ended September 30,
(Thousands) 1998 1997 1998 1997
----- ----- ----- -----
Basic weighted average
common shares outstanding 28,870 22,371 28,735 22,358
Net effect of dilutive
stock options 372 277 416 208
Effect of Merck KGaA
ownership rights 370 277 415 208
------ ------ ------ ------
Diluted weighted average common
share outstanding 29,612 22,925 29,566 22,774
====== ====== ====== ======
For the three and nine months ended September 30, 1998, the Company had
options outstanding to purchase 1.3 million shares that could potentially
dilute basic earnings per share that were excluded from the diluted earnings
per share computation because to do so would have been antidilutive.
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. ACQUISITION
-----------
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 has
been accounted for under the purchase method of accounting and the Company
has included the Science Kit Groups results of operations from the date of
the acquisition. The purchase price was financed by a portion of the
proceeds received from borrowings under the Companys new five-year credit
facility (New Credit Facility) entered into on July 31, 1998.
In addition, the Company acquired two other companies, A.J. Reynolds, Inc.
and HPC Scientific, for an aggregate purchase price of $22.6 million.
Combined 1997 revenues for these two companies were approximately $29
million. Both were accounted for under the purchase method of accounting.
<PAGE>8
5. REVOLVING CREDIT FACILITY
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On July 31, 1998, the Company entered into a new five-year revolving credit
facility (New Credit Facility). The New Credit Facility consists of a $250
million unsecured revolving line of credit, which replaces the Companys
former $150 million revolving credit facility entered into on September 14,
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 recorded 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>9
ITEM 2 - MANAGEMENTS 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 Managements Discussion and Analysis
of Results of Operations and Financial Condition included in the Companys
1997 Annual Report on Form 10-K.
Results of Operations
- - ----------------------
Sales increased during the third quarter of 1998 by $31.4 million, or 9.6%,
to $360.5 million from $329.1 million in the third quarter of 1997. Sales
increased on a year-to-date basis by $81.6 million, or 8.8%, to $1,012.0
million from $930.4 million over the corresponding period in 1997. The sales
increase during the third quarter was principally due to newly acquired
businesses and, to a lesser extent, growth in the Companys core industrial
business. On a year-to-date basis, approximately two thirds of the sales
growth was due to increased sales to the Companys core industrial business
including pharmaceutical, biotechnology and chemical markets and, to a
lesser extent, growth in sales of cleanroom products.
Gross margin for the third quarter ended September 30, 1998 increased $11.9
million, or 16.0%, to $86.0 million from $74.1 million in the comparable
period of 1997. Gross margin for the nine months ending 1998 increased $24.9
million, or 12.1%, to $231.0 million from $206.0 million in the comparable
period of 1997. As a percentage of sales, gross margin for the third quarter
ended September 30, 1998 increased to 23.9% from 22.5% and for the first
nine months of 1998 increased to 22.8% from 22.1% compared to the same
periods in 1997. The increase in the Companys gross margin percentage for
the third quarter and the nine month 1998 period was primarily attributed to
a shift in sales mix towards the education market, resulting from the
July 31, 1998 acquisition of the Science Kit Group of Companies (Science
Kit) as described in Note 4. The science education markets sales are
weighted towards the third quarter. The Companys gross margin percentage on
a year-to-date basis was also effected by a continued focus on margin
improvement through internal programs. In addition, the Company experienced
declining margins in the first half of 1997 attributable to operating issues
from the transition of the Industrial Distribution Business (Baxter
Industrial) of Baxter Healthcare Corporation (Baxter Healthcare), a
subsidiary of Baxter International, which was acquired in September 1995.
The transition was completed in the first quarter of 1997.
Total operating expenses, as a percentage of sales, increased to 16.3% in
the third quarter of 1998 from 15.5% in the comparable period of 1997. Total
operating expenses, as a percentage of sales, increased to 16.2% from 15.9%
on a year-to-date basis in 1998 and 1997. The increase in operating
expenses, as a percentage of sales, is primarily due to the Science Kit
acquisition. The education market in which Science Kit operates has both
higher margins and higher expenses as a percentage of sales. The net effect
of these is a lower ratio of operating expenses to gross margin. This is
reflected in a slight decrease of operating expenses as a percentage of
gross margin from 69.0% to 68.2% and from 71.7% to 70.8% for the third
<PAGE>10
quarter and nine month periods of 1997 and 1998, respectively. Also
contributing to the higher expenses as a percentage of sales are efforts the
Company has taken to redirect and increase its sales force to respond to
changes in the cleanroom market as well as to increase accounts receivable
collection efforts. Depreciation and amortization increased in 1998
primarily as a result of goodwill amortization for acquired companies as
well as accelerated amortization on current information systems that are
being replaced by the Companys project to enhance its computer systems.
Interest expense for the third quarter ended September 30, 1998 decreased
$0.8 million, or 9.8%, to $7.7 million from $8.5 million in the comparable
period of 1997. Interest expense for the nine months ending 1998 decreased
$7.4 million, or 27.2%, to $19.8 million from $27.2 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 Companys 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 Companys 1997 public offering and concurrent private
placement to affiliates of Merck KGaA which raised net proceeds of $132.7
million. Offsetting the effects of the 1997 offering on average borrowings,
particularly in the quarter-to-quarter comparison, are the borrowings used
for the 1998 acquisitions.
The Company recorded 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 former credit
facility dated September 15, 1995.
The Companys annual estimated effective tax rate for the three and nine
months periods ended September 30, 1998 decreased to 40.3% from 42.0% in the
comparable periods of 1997, reflecting decreased state and Canadian
effective tax rates.
Liquidity and Capital Resources
- - --------------------------------
In the first nine months of 1998, operations generated $46.3 million of cash
compared to $32.9 million in the comparable period of 1997. During the first
nine months of 1997, accounts receivable increased 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
1998, excluding the effect of acquisitions, accounts receivable has
continued to increase primarily due to increased sales. The inventory
increase during 1998, excluding the effect of acquisition, is primarily to
support 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 increased in 1998 as a result of the funding of several acquisitions
made by the Company for a total of $132.6 million, including the acquisition
of the Science Kit Group of Companies as described in Note 4. In connection
with the acquisitions, 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 14, 1995. The debt increase
was partially offset by cash generated from operations, which was used to
pay down outstanding borrowings under the Companys Credit Facility.
<PAGE>11
The Company has entered into various interest rate swap agreements with
financial institutions which effectively change the Companys interest-rate
exposure on a notional amount of debt from variable rates to fixed rates.
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
has continued to provide interest rate protection and does not speculate in
derivatives. At September 30, 1998, the Company had a notional amount of $40
million of swaps in effect. These swaps expire between 1999 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%. Companys use of swaps for interest rate protection did not
materially effect interest expense for the nine months ending September 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 counterparts.
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 has
been 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. In addition, the Company acquired two other
companies, A.J. Reynolds, Inc. and HPC Scientific, for an aggregate purchase
price of $22.6 million. Combined 1997 revenues for these two companies were
approximately $29 million. Both were accounted for under the purchase
method of accounting.
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.
Computer Systems; Year 2000
- - ---------------------------
The Company is implementing enhancements to its computer systems to satisfy
its future requirements. This is resulting in the replacement of many of the
Companys systems including order entry, purchasing, and financial systems.
A substantial portion of the costs associated with the replacement of existing
systems will be recorded as assets and amortized. At September 30, 1998, the
Company has expended approximately $33.0 million. The Company estimates that
the remaining amounts to be expended will range from $7 to $12 million,
which will be incurred over the next six to nine months.
<PAGE>12
The Company has had an external review conducted by an independent
information technology consulting firm 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 Companys 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 Companys computer systems to
perform inaccurate calculations. Such inaccurate calculations could have a
material adverse effect on the Company. The external review 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 Companys system enhancement project, together with other planned system
changes, is intended to correct the Year 2000 issue. The Company has begun
implementation of its new systems on a regional basis during the third
quarter of 1998 and expects to be completed in the second quarter of 1999.
The extent of Year 2000 remediation expected to be performed by the Company
has been coordinated with the new systems implementation timetable. 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, by correcting problems in the Companys
legacy systems, if the new systems are not implemented in a timely manner.
The Company is also making inquiries of its significant suppliers and large
customers to assess their Year 2000 readiness where their systems interface
with the Companys systems or otherwise impact its operations.
The Companys dependence on its computer systems, the implementation of the
new systems in a timely and successful manner, the dependence on the
technical skills of employees and independent contractors if the Company is
required to fully implement its Year 2000 remediation plan, and especially
the representations and readiness of customers and vendors are among the
factors that could cause the Companys efforts to be less than fully
effective. In addition, the Year 2000 issues present a number of risks that
are beyond the Companys reasonable control, such as continued service from
outside parties such as utility companies, financial institutions, and
transportation and delivery companies. While the Company does not
currently foresee any material problems, there can be no assurance that the
Company and its material customers and vendors will be Year 2000 compliant
by January 1, 2000 and that any such non-compliance will not have a material
adverse effect on the Company.
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, economic
conditions in the Companys principal customer markets, 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>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. The following reports on Form 8-K were filed during the three-
month period ended September 30, 1998:
July 22, 1998 Signing of definitive agreement to acquire the
Science Kit Group of Companies.
July 31, 1998 Acquisition of the Science Kit Group of Companies
refinancing.
<PAGE>14
SIGNATURES
- - ----------
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 November 16, 1998
<PAGE>15
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION
- - -------------- -----------
Financial Data Schedule (submitted only in electronic format)
99810-Q.doc
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<NAME> VWR SCIENTIFIC PRODUCTS CORPORATION
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<PERIOD-END> SEP-30-1998
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