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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 December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ____________
Commission File Number: 1-11091
SYBRON INTERNATIONAL CORPORATION
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(Exact name of registrant as specified in its charter)
Wisconsin 22-2849508
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
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(Address of principal executive offices) (Zip Code)
(414) 274-6600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No ___
At February 6, 1997 there were 47,131,099 shares of the Registrant's
Common Stock, par value $0.01 per share, outstanding.
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
Index Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, December 31, 1996 (unaudited)
and September 30, 1996 2
Consolidated Statements of Income, for the three months ended
December 31, 1996 (unaudited) and 1995 (unaudited) 3
Consolidated Statements of Shareholders' Equity for the
three months ended December 31, 1996 (unaudited) and the
year ended September 30, 1996 4
Consolidated Statements of Cash Flows, for the three months ended
December 31, 1996 (unaudited) and 1995 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1996
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<S> <C> <C>
ASSETS
(Unaudited)
Current assets:
Cash and cash equivalents ...................................... $ 21,800 $ 10,874
Accounts receivable (less allowance for doubtful
receivables of $2,360 and $2,429) .............................. 122,618 127,849
Inventories (note 2) ........................................... 123,757 120,317
Deferred income taxes .......................................... 10,261 11,588
Prepaid expenses and other current assets ...................... 15,301 12,012
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Total current assets ........................................ 293,737 282,640
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Property, plant and equipment net of depreciation of $129,854
and $123,429 ................................................... 170,024 170,151
Intangible assets .............................................. 505,189 502,079
Deferred income taxes .......................................... 15,775 12,563
Other non-current assets ....................................... 5,322 7,180
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Total assets ................................................ $990,047 $974,613
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 24,598 $ 30,398
Current portion of long-term debt .............................. 43,635 40,603
Income taxes payable ........................................... 13,822 7,636
Accrued payroll and employee benefits .......................... 23,593 29,824
Deferred income taxes .......................................... 3,662 2,542
Other current liabilities ...................................... 28,218 27,764
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Total current liabilities .................................... 137,528 138,767
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Long-term debt .................................................. 478,673 481,037
Deferred income taxes ........................................... 54,350 55,686
Other liabilities ............................................... 15,818 16,044
Commitments and contingent liabilities:
Shareholders' equity:
Common Stock, $.01 par value; authorized 110,000,000
shares, issued 47,079,178 and 46,924,588 shares, respectively .. 471 469
Preferred Stock, $.01 par value; authorized 20,000,000 shares .. - -
Equity Rights; 698 rights at $1.09 per right ................... 1 1
Additional paid-in capital ..................................... 183,343 179,954
Retained earnings .............................................. 127,248 111,845
Cumulative foreign currency translation adjustment ............. (7,384) (9,189)
Treasury common stock, 1,528 shares at cost .................... (1) (1)
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Total shareholders' equity .................................. 303,678 283,079
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Total liabilities and shareholders' equity .................. $990,047 $974,613
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1996 1995
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<S> <C> <C>
Net sales .......................................... $171,496 $146,862
Cost of sales:
Cost of product sold .............................. 85,620 73,049
Depreciation of purchase accounting
adjustments ..................................... 960 963
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Total cost of sales ................................ 86,580 74,012
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Gross profit ....................................... 84,916 72,850
Selling, general and administrative expenses ....... 44,615 38,792
Depreciation and amortization of purchase accounting
adjustments ....................................... 4,763 4,727
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Operating income ................................... 35,538 29,331
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Other income (expense):
Interest expense .................................. (9,151) (8,770)
Amortization of deferred financing fees ........... (72) (71)
Other, net ........................................ (152) (94)
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Income before income taxes ......................... 26,163 20,396
Income taxes ....................................... 10,760 8,674
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Net income ......................................... $ 15,403 $ 11,722
======= ========
Earnings per common share: ......................... $.32 $.25
======= ========
</TABLE>
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, 1996
AND FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE AMOUNT
FOREIGN RELATED TO
ADDITIONAL CURRENCY TREASURY RECORDING TOTAL
COMMON EQUITY PAID-IN RETAINED TRANSLATION COMMON MINIMUM SHAREHOLDERS'
STOCK RIGHTS CAPITAL EARNINGS ADJUSTMENT STOCK PENSION LIABILITY EQUITY
------ ------ ---------- -------- ----------- -------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 $465 $1 $172,774 $ 54,261 $ 220 $(1) $ (470) $227,250
Shares issued in connection
with the exercise of 393,722
stock options ................. 4 - 5,635 - - - - 5,639
Tax benefits related to stock
options ....................... - - 1,545 - - - - 1,545
Net income .................... - - - 57,584 - - - 57,584
Cumulative foreign currency
translation adjustment ........ - - - - (9,409) - - (9,409)
Amount related to recording
minimum pension liability ..... - - - - - - 470 470
---- -- -------- -------- ------ --- --- -------
Balance at September 30, 1996 $469 $1 $179,954 $111,845 $(9,189) $(1) $ - $283,079
==== == ======== ======== ====== === === =======
Shares issued in connection
with the exercise of 155,464
stock options ................. 2 - 2,388 - - - - 2,390
Tax benefits related to stock
options ....................... - - 1,001 - - - - 1,001
Net income (Unaudited) ........ - - - 15,403 - - - 15,403
Cumulative foreign currency
translation adjustment ........ - - - - 1,805 - - 1,805
---- -- -------- -------- ------ --- --- -------
Balance at December 31, 1996
(Unaudited) ................... $471 $1 $183,343 $127,248 $(7,384) $(1) $ - $303,678
==== == ======== ======== ====== === === =======
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $15,403 $11,722
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ....................................................... 6,989 5,978
Amortization ....................................................... 4,756 4,721
Provision for losses on doubtful accounts .......................... 107 132
Inventory provisions ............................................... 779 (11)
Deferred taxes ..................................................... (2,101) (3,260)
Changes in assets and liabilities:
Decrease in accounts receivable .................................... 4,740 9,285
Increase in inventories ............................................ (3,202) (5,673)
Increase in prepaid expenses and other current assets .............. (4,406) (1,949)
Decrease in accounts payable ....................................... (5,728) (4,357)
Increase (decrease) in taxes payable ............................... 3,767 (7,416)
Decrease in accrued payroll and employee benefits .................. (5,891) (3,898)
Increase (decrease) in other current liabilities 1,604 (2,185)
Net change in other assets and liabilities ......................... 2,259 (1,203)
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Total adjustments ................................................ 3,673 (9,836)
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Net cash provided by operating activities .......................... 19,076 1,886
Cash flows from investing activities:
Capital expenditures ................................................ (6,576) (5,977)
Proceeds from sales of property, plant, and equipment .............. 127 25
Payments for businesses acquired ................................... (5,678) (13,451)
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Net cash used in investing activities .............................. (12,127) (19,403)
Cash flows from financing activities:
Net change in the revolving credit facility ......................... 8,900 26,500
Principal payments long-term debt ................................... (9,041) (9,055)
Proceeds from the exercise of common stock options and warrants ..... 2,390 918
Other ............................................................... 677 1,320
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Net cash provided by financing activities .......................... 2,926 19,683
Effect of exchange rate changes on cash ............................. 1,051 (780)
Net increase (decrease) in cash ..................................... 10,926 1,386
Cash and cash equivalents at beginning of year ...................... 10,874 9,243
------ -------
Cash and cash equivalents at end of period .......................... $21,800 $10,629
====== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............................ $ 8,690 $15,594
Cash paid during the period for income taxes ........................ 4,282 10,792
Capital lease obligations incurred .................................. 132 108
</TABLE>
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 period have been included.
All such adjustments were of a normal recurring nature. The results for
the three month period ended December 31, 1996 are not necessarily
indicative of the results to be expected for the full year. Certain
amounts from the three month period ended December 31, 1995, as originally
reported, have been reclassified to conform with the three month period
ended December 31, 1996 presentation.
2. Inventories at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Raw materials $ 32,742
Work-in-process 30,417
Finished goods 65,370
LIFO Reserve (4,772)
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$123,757
=======
</TABLE>
3. On October 1, 1996, the Company's subsidiary Nalge Nunc International
completed the acquisition of Pure Fit, Inc. Pure Fit, with annual sales of
approximately $2.7 million in 1996, is a manufacturer of stainless steel
fittings used in the fabrication and assembly of sanitary and of food
grade hose.
On October 1, 1996, The Naugatuck Glass Company, a subsidiary of the
Company's subsidiary Erie Scientific Company, acquired certain assets of
D & W, Inc. The acquired assets included the D & W customer lists and
several glass cutting machines. D & W's annual sales were approximately
$0.3 million in 1996.
On January 6, 1997, Richard-Allan Scientific Company acquired the stock of
Trend Scientific, Inc., a manufacturer of diagnostic testing systems for
microbiology laboratories. Trend's annual sales were approximately $2.5
million in 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Both sales and operating income for Sybron International Corporation (the
"Company") for the quarter ended December 31, 1996 (the first quarter of fiscal
1997) grew over the corresponding prior year period. Net sales for the quarter
ended December 31, 1996 increased by 16.8% over the corresponding fiscal 1996
period. Sales growth in the first quarter of fiscal 1997 was stronger
domestically than internationally with increases of 22.8% and 7.1%,
respectively, over the corresponding 1996 period. International sales were
negatively impacted by the strengthening of the U.S. dollar. If currency
effects were removed from sales, the international increase would have been
10.1%. Acquisitions aided sales growth in the quarter ended December 31, 1996,
accounting for $15.5 million and $1.3 million of the domestic and international
sales increases, respectively. The Company's internal growth was 5.3% most of
which came from the dental side of the business this quarter. Management
continues to maintain an active program of developing and marketing both new
products and product line extensions, as well as growth through acquisitions.
The Company completed two acquisitions in the first quarter of fiscal 1997 (See
note 3 to the unaudited Consolidated Financial Statements) and a third in
January 1997.
The results of operations of the Company reflect goodwill amortization,
other amortization, and depreciation. These non-cash charges totaled $11.7
million and $10.7 million for the quarters ended December 31, 1996 and 1995,
respectively. The Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") which, as discussed below in "Liquidity and Capital
Resources", the Company believes is the appropriate measure of the Company's
ability to internally fund its liquidity requirements, amounted to $47.1
million and $39.9 million for the quarters ended December 31, 1996 and 1995,
respectively. EBITDA represents, for any relevant period, net income plus (i)
interest expense, (ii) provision for income taxes, (iii) depreciation and (iv)
amortization, all determined on a consolidated basis and in accordance with
generally accepted accounting principles.
Substantial portions of the Company's sales, income and cash flows are
derived internationally. The financial position and the results of operations
from substantially all of the Company's 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 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, the Company's U.S.
export sales may be impacted by foreign currency fluctuations to the relative
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 the U.S.
dollar.
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From time to time, management may employ currency hedges to mitigate the
impact of foreign currency fluctuations. If currency hedges are not employed,
the Company is exposed to earnings volatility as a result of foreign currency
fluctuations. The Company has decided not to employ foreign currency hedges at
this time.
In March of 1996, the Company recorded a restructuring charge of $8.3
million ($6.1 million after tax or $.13 per share) 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. As of December 31, 1996, approximately $5.5 million
was charged against this reserve. At December 31, 1996, approximately $ 2.7
million remains to be expended and is recorded in other current liabilities.
The Company expects to charge approximately $2.5 million against this reserve
in fiscal 1997. Principal items included in the reserve are severance and
termination costs for approximately 130 notified employees (primarily
production, sales and marketing personnel) (approximately $2.3 million),
remaining lease payments and shut down costs on exited facilities
(approximately $2.1 million), the non-cash write-off of certain fixed assets
and inventory associated with exited product lines, primarily at Sybron Dental
Specialties (approximately $2.5 million), a statutory tax penalty
(approximately $0.7 million) and other related restructuring costs
(approximately $0.7 million). The Company estimates that savings from this
restructuring will approximate $3.8 million annually, before income taxes. The
realization of most of the savings began in fiscal 1997.
As reported previously, on May 2, 1996, Combustion Engineering, Inc.
("CE") commenced legal proceedings in the New York Supreme Court, County of
Monroe (the "CE Litigation"), against the Company with respect to the former
Taylor Instruments ("Taylor") facility in Rochester, New York (the "Rochester
Site"), a discontinued operation. According to CE's complaint, its claims are
based on an asset purchase and sale agreement dated as of September 30, 1983,
pursuant to which Taylor was sold to CE (the "1983 Agreement"), and an
agreement between a subsidiary of the Company and CE dated August 14, 1987 (the
"1987 Agreement"). The complaint alleges that under the 1983 Agreement the
Company retained certain liabilities for, and indemnified CE with respect to,
environmental contamination, hazards and other conditions that existed at the
time of the sale of Taylor to CE, and that under the 1987 Agreement, the
Company agreed to bear 70 percent of the costs thereafter incurred to clean up,
remediate and remove mercury from the land and buildings at the Rochester Site.
CE's complaint seeks declaratory relief and claims damages of at least $10
million with respect to expenses CE has incurred and expects to incur to
remediate and remove mercury contamination from the land and buildings sold to
CE at the Rochester Site. The complaint also seeks declaratory relief and
claims damages in excess of $1 million with respect to expenses incurred and
expected to be incurred for remediating other alleged environmental hazards
associated with the Rochester Site. Some of CE's claims relate to the cost to
demolish and dispose of the buildings at the Rochester Site, which CE maintains
it had to do because the buildings were contaminated with mercury. CE
previously informed the Company that CE claims that the Company's share of such
demolition and disposal costs is approximately $4.2 million. The Company
denies it has any liability for such costs. CE's remaining claims relate to
alleged soil and groundwater contamination, including mercury contamination,
for which the Company also denies liability. CE implemented a plan in early
1996 to assess the extent of potential soil and groundwater
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contamination at the Rochester Site, the results of which have been
provided by CE to the Company. The results indicate there is mercury and
inorganic and volatile organic compound contamination in the soil and
groundwater at certain Rochester Site locations. CE has prepared a voluntary
clean-up proposal based on these results which it has presented to the New York
Department of Environmental Conservation (the "NYDEC") for consideration. The
cost to remediate the Rochester Site will depend upon the remediation standards
incorporated into the voluntary clean-up agreement CE is negotiating with the
NYDEC. Because the clean-up standards which may be applied have not been
determined, the extent of remediation to be undertaken, and its cost, is
unknown. As a result, the Company cannot, at this time, estimate the cost of
the soil and groundwater remediation claims. The Company previously reported
that prior to beginning the Rochester Site assessment which generated the
current test results, CE had indicated to the Company that, based upon
information available to it and subject to a number of caveats, including the
lack of assessment information and the fact that clean-up standards which may be
applied to the Rochester Site have not been determined, the cost to remediate
the soil and groundwater would range from $3 million to $5 million. Because the
bases for this estimate were not disclosed by CE to the Company, the Company
cannot make a judgment about how the test results it has been provided would
affect this estimate. The Company intends to pursue insurance coverage for CE's
claims and has therefore provided notice of CE's claims to its third party
liability insurance carriers. To date the carriers have denied coverage.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO THE QUARTER ENDED DECEMBER 31, 1995
NET SALES. Net sales for the three months ended December 31, 1996 were
$171.5 million, an increase of $24.6 million (16.8%) from net sales of $146.9
million for the corresponding three months ended December 31, 1995. Sales in
the laboratory segment were $100.8 million for the three months ended December
31, 1996, an increase of 18.7% from the corresponding 1996 fiscal period.
Increased sales in the laboratory segment resulted primarily from (i) sales of
products of acquired companies (approximately $13.9 million), (ii) price
increases at Barnstead/Thermolyne (approximately $0.7 million) and at Nalge
Nunc International (approximately $0.5 million), (iii) increased volume from
sales of existing products at Erie (approximately $1.0 million) and at Nalge
Nunc International (approximately $0.2 million) and (iv) increased volume from
sales of new products at Erie (approximately $0.4 million: primarily sales from
the Daiichi line of electrophoresis devices and consumables, BURST-PAK(TM)
Sequencing gels, and sales from the Standard Stain line), at Nalge Nunc
International (approximately $0.3 million; primarily their line of Bio-Media
packaging and safety products) and at Barnstead/Thermolyne (approximately $0.2
million; primarily sales from their NCAT Asphalt Furnace and STERILEMAX(TM)
line of sterilization products). Increased sales in the laboratory segment were
partially offset by (i) reduced volume from sales of existing products at
Barnstead/Thermolyne (approximately $0.9) and (ii) unfavorable foreign currency
impacts at Nalge Nunc International (approximately $0.5 million) and at Erie
(approximately $0.2 million). In the dental segment, net sales were $70.7
million for the three months ended December 31, 1996, an increase of 14.1% from
the corresponding fiscal 1996 period. Increased sales in the dental segment
resulted primarily from (i) increased volume from
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sales of existing products (approximately $6.7 million), (ii) sales of
products of acquired companies (approximately $2.9 million) and (iii) increased
volume from sales of new products (approximately $0.4 million; primarily sales
from the OPTIBOND SOLO(TM) product line and sales of CANTILEVER BITE JUMPER(TM)
kits), partially offset by unfavorable foreign currency impacts (approximately
$1.3 million).
GROSS PROFIT. Gross profit for the first quarter of fiscal 1997 was $84.9
million, an increase of 16.6% from gross profit of $72.9 million for the
corresponding fiscal 1996 period. Gross profit in the laboratory segment was
$45.5 million (45.2% of net segment sales) in the first quarter of fiscal 1997,
an increase of 18.2% from gross profit of $38.5 million (45.4% of net segment
sales) during the corresponding fiscal 1996 period. Gross profit in the
laboratory segment increased primarily as a result of (i) the effects of
acquired companies (approximately $5.9 million), (ii) an improved product mix
at Nalge Nunc International (approximately $1.4 million) and (iii) increased
volume at Erie (approximately $1.2 million). Increased gross profit was
partially offset by (i) an unfavorable product mix at Erie (approximately $1.3
million) and (ii) increased material costs at Nalge Nunc International
(approximately $0.3 million). In the dental segment, gross profit was $39.4
million (55.7% of net segment sales) in the first quarter of fiscal 1997, an
increase of 14.7% from gross profit of $34.3 million (55.4% of net segment
sales) during the corresponding fiscal 1996 period. Increased gross profit in
the dental segment resulted primarily from (i) increased volume (approximately
$4.4 million) and (ii) the effects of acquired companies (approximately $1.5
million), partially offset by unfavorable foreign currency (approximately $0.9
million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first quarter of fiscal 1997 were $49.4 million
(28.8% of net sales) as compared to $43.5 million (29.6% of net sales) in the
corresponding fiscal 1996 period. General and administrative expenses at the
corporate level, including amortization of purchase accounting adjustments and
goodwill associated with acquisitions, were $5.6 million in the first quarter
of fiscal 1996, representing an increase of 1.7% from $5.5 million in the
corresponding fiscal 1996 period. Selling, general and administrative expenses
at the subsidiary level, including amortization of intangibles, were $43.7
million (25.5% of sales), representing an increase of 15.2% from $38.0 million
(25.9% of sales) in the corresponding fiscal 1996 period. Increases at the
subsidiary level were primarily due to (i) increased marketing expense
(approximately $2.5 million), (ii) expenses related to newly acquired
businesses (approximately $2.5 million), (iii) increased research and
development expenses (approximately $0.6 million), (iv) increased general and
administrative expense (approximately $0.5 million) and (v) increased
amortization of intangible assets as a result of acquisitions (approximately
$0.2 million) partially, offset by favorable foreign currency impacts
(approximately $0.6 million).
OPERATING INCOME. As a result of the foregoing, operating income was
$35.5 million (20.7% of net sales) in the first quarter of fiscal 1997 compared
to $29.3 million (20.0% of net sales) in the corresponding fiscal 1996 period.
Operating income in the laboratory segment was $21.2 million (21.0% of net
segment sales) in the first quarter of fiscal 1997 compared to $17.5 million
(20.6% of net segment sales) in the corresponding fiscal 1996 period.
Operating income in the dental
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segment was $14.3 million (20.3% of net segment sales) in the first
quarter of fiscal 1997 compared to $11.8 million (19.1% of net segment sales) in
the corresponding fiscal 1996 period.
INTEREST EXPENSE. Interest expense was $9.2 million in the first
quarter of fiscal 1997 compared to $8.8 million in the corresponding fiscal 1996
period. The increase resulted from a higher debt balance primarily from the
Company's acquisition activity. Interest expense during the quarters ended
December 31, 1996 and 1995 included additional non-cash interest expense of $0.3
million resulting from the adoption of SFAS No. 106.
INCOME TAXES. Taxes on income increased $2.1 million in the first quarter
of fiscal 1997, primarily as a result of increased earnings.
NET INCOME. As a result of the foregoing, the Company had net income of
$15.4 million in the first quarter of fiscal 1997 compared to $11.7 million in
the corresponding 1996 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 by $1.0 million (9.8%)
in the first quarter of fiscal 1997 when compared to the corresponding fiscal
1996 period. This increase is primarily due to increased amortization of
intangible assets and depreciation of property, plant and equipment related to
acquired companies.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the leveraged buyout in 1987 of a company known at the time
as Sybron Corporation ("the Acquisition"), subsequent adoption of SFAS 109 and
the acquisitions completed since 1987, the Company increased the carrying value
of certain tangible and intangible assets consistent with generally accepted
accounting principles. Also, as a result of the permanent financing effected
in August 1988 for the Acquisition, the Company incurred approximately $372
million of debt. Accordingly, the Company's 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 $3.7 million in the three months ended
December 31, 1996 as a result of acquisitions. The Company believes,
therefore, that EBITDA represents the more appropriate measure of the Company's
ability to internally fund its capital requirements.
The Company's capital requirements arise principally from indebtedness
incurred in connection with the permanent financing for the Acquisition and its
subsequent refinancings, the Company's working capital needs, primarily related
to inventory and accounts receivable, the Company's capital expenditures,
primarily related to purchases of machinery and molds, the purchase of various
businesses and product lines in execution of the Company's acquisition
strategy, the periodic expansion of physical facilities and, in the short term,
payments related to the restructuring charge (as described above). In
addition, in the event the Company should be held liable for CE's claims in the
CE Litigation (described above), liability for which the Company denies, the
Company could require capital to satisfy such liabilities, depending upon their
magnitude. With respect to the restructuring charge, as of December 31, 1996,
the
11
<PAGE> 13
Company has paid approximately $2.9 million and charged an additional
$2.6 million to inventory and fixed assets. The Company intends to expend an
additional $2.5 million by the end of fiscal 1997 and $0.3 million over the
remaining terms of exited facilities leases and severance agreements. With
respect to acquisitions, it is currently the Company's intent to continue to
pursue its acquisition strategy. If acquisitions are to continue at the
Company's historical pace, the Company will require financing beyond the
capacity of its existing Credit Facilities (as defined below). 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.
The statement contained in the immediately preceding paragraph concerning
the Company's intent to continue to pursue its acquisition strategy is a
forward-looking statement. The Company's ability to continue its acquisition
strategy is subject to a number of uncertainties, including, but not limited
to, its ability to raise capital beyond the capacity of its existing Credit
Facilities and the availability of suitable acquisitions candidates at
reasonable prices. See "Cautionary Factors" below.
On July 31, 1995, the Company and its domestic subsidiaries entered into a
new credit agreement (the "Credit Agreement") with Chemical Bank (now known as
The Chase Manhattan Bank ("Chase")) and certain other lenders providing for a
term loan facility of $300 million (the "Term Loan Facility"), and a revolving
credit facility of $250 million (the "Revolving Credit Facility") (collectively
the "Credit Facilities"). On the same day, the Company and its subsidiaries
borrowed $300 million under the Term Loan Facility and approximately $122.5
million was borrowed 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 the Company's previous credit facilities (the "Previous
Credit Facilities"). The remaining borrowed funds of approximately $264.0
million were used to repay outstanding amounts, including accrued interest,
under the Company's 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 "Amendment"), the capacity of the Revolving Credit
Facility was increased to $300 million, and a competitive bid process was
established as an additional option to the Company in setting interest rates.
Payment of principal and interest with respect to the Credit Facilities
and the Sale/Leaseback (as defined later herein) are anticipated to be the
Company's largest use of funds in the future. The Credit Facilities provide for
an annual interest rate, at the option of the Company, 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%, or (b) the London interbank offered rate ("LIBOR") plus
1/2% to 1% (the "LIBOR Margin") depending upon the level of certain financial
ratios, or (c) with respect to the Revolving Credit Facility, the rate set by
the competitive bid process among the parties to the Revolving Credit Facility
established in the Amendment. In the first quarter of 1997, the average
interest rates on the Term Loan Facility (inclusive of the swap agreements
described below) and the Revolving Credit Facility were 6.2% and 6.4%,
respectively.
12
<PAGE> 14
As a result of the terms of the Credit Agreement and the agreement
governing the Previous Credit Facilities, the Company is sensitive to a rise in
interest rates. In order to reduce its sensitivity to interest rate increases,
the Company entered into five interest rate swap agreements, aggregating a
notional amount of $250 million, to hedge against a rise in interest rates. The
net interest rate paid by the Company is approximately equal to the sum of the
swap agreement rate plus the applicable LIBOR Margin. During the first quarter
of fiscal 1997, the LIBOR Margin was .75%. The swap agreement rates and
duration are as follows:
<TABLE>
SWAP AGREEMENT SWAP AGREEMENT
EXPIRATION DATE NOTIONAL AMOUNT DATE RATE
--------------------- --------------- ----------------- --------------
<S> <C> <C> <C>
December 15, 1997 ... $50 million December 16, 1996 5.64%
July 7, 1998 ........ $50 million July 7, 1993 5.17%
August 13, 1999 ..... $50 million August 13, 1993 5.54%
September 8, 2000 ... $50 million December 8, 1995 5.56%
September 10, 2001 .. $50 million December 8, 1995 5.623%
</TABLE>
Also as part of the permanent financing for the Acquisition, on December
22, 1988, the Company entered into the sale and leaseback of its principal
domestic facilities (the "Sale/Leaseback"). In January 1994, the annual
obligation under the Sale/Leaseback increased from $2.9 million to $3.3
million, payable monthly. On the fifth anniversary of the leases and every
five years thereafter (including renewal terms), the rent will be increased by
the percentage equal to 75% of the percentage increase in the Consumer Price
Index over the preceding five years. The percentage increase to the rent in
any five-year period is capped at 15%. The next adjustment will not occur
until January 1, 1999.
The Company intends to fund its 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,
particularly with respect to the Company's acquisition strategy, the Company
will have to raise additional capital.
As set forth above, the Revolving Credit Facility will provide up to $300
million in available credit. As of December 31, 1996, there was $61.6 million
of available credit under the Revolving Credit Facility. Under the Term Loan
Facility, on October 31, 1995 the Company began to repay principal in 28
consecutive quarterly installments; $35 million was paid in fiscal 1996.
Through December 31, 1996, the Company has paid $8.75 million of the $35
million obligation due in fiscal 1997. Annual payments are due as follows:
$35 million, $40 million, $40 million, $50 million, $50 million, and $50
million in fiscal years 1997 through 2002, respectively.
The Credit Agreement contains numerous financial and operating covenants,
including, among other things, restrictions on investments; requirements that
the Company maintain certain
13
<PAGE> 15
financial ratios; restrictions on the ability of the Company and its
subsidiaries to incur indebtedness or to create or permit liens, to make
capital expenditures, or to pay cash dividends in excess of $50.0 million plus
50% of the defined consolidated net income of the Company for each fiscal
quarter ending after June 30, 1995, less any dividends paid after June 22,
1994; restrictions on annual capital expenditures to amounts ranging from $36.0
million to $40.0 million during the remaining term of the Credit Agreement; and
limitations on incurrence of additional indebtedness. The Credit Agreement
permits the Company to make acquisitions provided the Company continues to
satisfy all financial covenants upon any such acquisition. The ability of the
Company to meet its debt service requirements and to comply with such covenants
is dependent upon the Company's future performance, which is subject to
financial, economic, competitive and other factors affecting the Company, many
of which are beyond its control.
CAUTIONARY FACTORS
This report contains various forward-looking statements concerning the
Company's prospects that are based on the current expectations and beliefs of
management. Forward-looking statements may also be made by the Company 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 the Company's control, that
could cause the Company's 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 the business and financial prospects of the Company:
- Factors affecting the Company's international operations, including
relevant foreign currency exchange rates, which can affect the cost to
produce the Company's products or the ability to sell the Company's
products in foreign markets, and the value in United States dollars of
sales made in foreign currencies. Other factors include the Company's
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.
- Factors affecting the Company's ability to continue pursuing its
current acquisition strategy, including the Company's ability to raise
capital beyond the capacity of its existing Credit Facilities or to use
the Company's stock for acquisitions, the cost of the capital required to
effect the Company's acquisition strategy, the availability of suitable
acquisition candidates at reasonable prices, the ability of the Company
to realize the synergies expected to result from acquisitions, and the
ability of existing Company
14
<PAGE> 16
personnel to efficiently handle increased transactional
responsibilities resulting from acquisitions.
- Factors affecting the Company's ability to profitably distribute and
sell its products, including any changes in the Company's business
relationships with its principal distributors, primarily in the
laboratory segment, competitive factors such as the entrance of
additional competitors into the Company's 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
operations.
- Factors affecting the Company's ability to hire and retain competent
employees, including unionization of the Company's non-union employees
and changes in relationships with the Company's unionized employees.
- The risk of strikes or other labor disputes at those locations which
are unionized which could affect the Company's operations.
- Factors affecting the Company's ability to continue manufacturing
and selling those of its 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 the Company's products into categories
subject to more stringent requirements, or the withdrawal of the approval
needed to sell one or more of the Company's products.
- Factors affecting the economy generally, including the financial and
business conditions of the Company's 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 the Company's
products.
- Factors affecting the Company's financial performance or condition,
including tax legislation, unanticipated restrictions on the Company's
ability to transfer funds from its subsidiaries and changes in applicable
accounting principles or environmental laws and regulations.
15
<PAGE> 17
- The cost and other effects of claims involving the Company's
products and other legal and administrative proceedings, including the
expense of investigating, litigating and settling any claims.
- Factors affecting the Company's 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 existing assets.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Quorum
The Company, a Wisconsin corporation, held its Annual Meeting of
Shareholders on January 22, 1997. Under Wisconsin law, a majority of the votes
entitled to be cast by shares entitled to vote, represented in person or by
proxy, constitutes a quorum at the Annual Meeting. Abstentions and broker
non-votes are counted for determining the presence or absence of a quorum. A
quorum was present at the Annual Meeting, with 42,163,677 shares out of a total
of 46,989,194 shares entitled to cast votes represented in person or by proxy
at the meeting.
Proposal Number 1: To Elect Two Directors to Serve as Class II Directors Until
the 2000 Annual Meeting of Shareholders and Until Their Respective
Successors are Duly Elected and Qualified.
The shareholders voted to elect Thomas O. Hicks and Robert B. Haas to serve as
Class II directors until the 2000 Annual Meeting of Shareholders and until
their respective successors are duly elected and qualified. The results of the
vote are as follows:
<TABLE>
<CAPTION>
MR. HICKS MR. HAAS
---------- ----------
<S> <C> <C>
For 42,116,885 42,116,885
Withheld From 46,792 46,792
Abstentions 0 0
Broker Non-Votes 0 0
</TABLE>
Under Wisconsin law, directors are elected by a plurality of the votes cast by
shares entitled to vote in the election of directors. "Plurality" means that
the individuals who receive the largest
16
<PAGE> 18
number of votes are elected as directors up to the maximum number of
directors to be chosen in the election. Any shares not voted, whether by
withheld authority, broker non-vote or otherwise, have no effect in the election
of directors except to the extent that the failure to vote for an individual
results in another individual receiving a larger number of votes. Accordingly,
the above referenced results indicate that each of Messrs. Hicks and Haas
received a plurality of the votes cast by shares present in person or by proxy
at the meeting and entitled to vote on the election of directors.
The terms of office as directors of Don H. Davis Jr., Richard W. Vieser,
Kenneth F. Yontz and Joe L. Roby continued after the meeting.
Proposal Number 2: To Amend the Sybron International Corporation Senior
Executive Incentive Compensation Plan.
The shareholders voted to approve a proposal to amend the Sybron
International Corporation Senior Executive Incentive Compensation Plan (the
"Incentive Plan") to: (1) clarify that a participant's salary grade for
purposes of calculating an award pursuant to the Incentive Plan is the
participant's salary grade at the end of the plan year; and (2) limit the actual
award which may be paid to any Incentive Plan participant during any plan year
to a maximum of $2.8 million. The results of the vote are as follows:
<TABLE>
<S> <C>
For 41,543,201
Against 547,367
Abstentions 73,109
Broker Non-Votes 0
</TABLE>
Under Wisconsin law, the affirmative vote of a majority of the votes cast
thereon is required for the approval of Proposal Number 2. Because neither
abstentions nor broker non-votes are considered votes cast, neither has an
effect on the voting for the proposal. Accordingly, the above referenced
results indicate the proposal to amend the Company's Incentive Plan received
the affirmative vote of 41,543,201 shares, constituting 98.7% of the 42,090,568
votes cast thereon at the meeting.
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.
17
<PAGE> 19
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 February 13, 1997 /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.
18
<PAGE> 20
SYBRON INTERNATIONAL CORPORATION
(COMMISSION FILE NO. 1-11091)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
11 Statement re Computation of Per Share X
Earnings
27 Financial Data Schedule X
19
<PAGE> 1
EXHIBIT 11
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
Three Months Ended
December 31,
1996 1995
---- ----
<S> <C> <C>
Primary:
Net income ........................ $15,403 $11,722
====== ======
Shares
Weighted average Common shares .. 46,980 46,552
Common equivalent shares ........ 1,641 930
------ ------
48,621 47,482
====== ======
Primary earnings per share ...... $ .32 $ .25
====== ======
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements of Sybron International Corporation
for the three months ended December 31, 1996 and qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,800
<SECURITIES> 0
<RECEIVABLES> 122,618
<ALLOWANCES> 2,360
<INVENTORY> 123,757
<CURRENT-ASSETS> 293,737
<PP&E> 170,024
<DEPRECIATION> 129,854
<TOTAL-ASSETS> 990,047
<CURRENT-LIABILITIES> 137,528
<BONDS> 478,673
0
0
<COMMON> 471
<OTHER-SE> 303,207
<TOTAL-LIABILITY-AND-EQUITY> 990,047
<SALES> 171,496
<TOTAL-REVENUES> 171,496
<CGS> 86,580
<TOTAL-COSTS> 49,378
<OTHER-EXPENSES> 224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,151
<INCOME-PRETAX> 26,163
<INCOME-TAX> 10,760
<INCOME-CONTINUING> 15,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,403
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
