<PAGE> 1
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 March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
--------------- ------------
Commission File Number: 1-11091
SYBRON INTERNATIONAL CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 22-2849508
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
- ----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(414) 274-6600
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At May 7, 1999 there were 103,515,558 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
<PAGE> 2
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Index Page
----- ----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets, March 31, 1999
and September 30, 1998 (unaudited) 2
Consolidated Statements of Income for the three and six months
ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Shareholders' Equity for the year
ended September 30, 1998 and the six months ended
March 31, 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
March 31, 1999 and 1998 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 32
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
March 31, September 30,
1999 1998
--------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 13,301 $ 23,891
Accounts receivable (less allowance for doubtful
receivables of $5,410 and $5,693, respectively)............... 197,623 192,657
Inventories (note 2)............................................ 185,280 165,793
Deferred income taxes........................................... 27,251 30,305
Net assets held for sale (note 7)............................... - 51,562
Prepaid expenses and other current assets....................... 19,873 17,429
-------- --------
Total current assets....................................... 443,328 481,637
------- --------
Property, plant and equipment net of accumulated depreciation
of $200,415 and $178,087, respectively........................ 226,171 222,759
Intangible assets................................................. 895,826 817,058
Deferred income taxes............................................. 13,409 15,242
Other assets...................................................... 6,479 8,848
--------- ---------
Total assets............................................... $1,585,213 $1,545,544
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 47,879 $ 49,713
Current portion of long-term debt............................... 3,899 39,396
Income taxes payable............................................ 29,700 19,997
Accrued payroll and employee benefits........................... 34,322 39,950
Restructuring reserve (note 5).................................. 5,097 7,609
Reserve for discontinued operations............................. 3,559 12,201
Deferred income taxes........................................... 10,939 9,072
Other current liabilities....................................... 31,168 37,785
--------- ---------
Total current liabilities................................... 166,563 215,723
--------- ---------
Long-term debt.................................................... 809,425 790,089
Deferred income taxes............................................. 48,067 50,564
Other liabilities................................................. 11,981 13,912
Commitments and contingent liabilities:
Shareholders' equity:
Preferred Stock, $.01 par value; authorized 20,000,000 shares - -
Common Stock, $.01 par value; authorized 250,000,000
shares, issued 103,370,502 and 102,902,496 shares, respectively 1,034 1,029
Equity Rights, 50 rights at $1.09 per right.................... - -
Additional paid-in capital...................................... 241,071 234,070
Retained earnings............................................... 335,592 260,845
Cumulative foreign currency translation adjustment.............. (28,520) (20,688)
Treasury common stock, 220 shares at cost ...................... - -
--------- ---------
Total shareholders' equity................................. 549,177 475,256
--------- ---------
Total liabilities and shareholders' equity................. $1,585,213 $1,545,544
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE> 4
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................................. $272,017 $226,006 $520,347 $440,826
Cost of sales:
Cost of product sold............................... 130,284 107,463 252,846 210,646
Depreciation of purchase accounting adjustments.... 169 165 336 330
------- ------- ------- -------
Total cost of sales................................... 130,453 107,628 253,182 210,976
------- ------- ------- -------
Gross profit.......................................... 141,564 118,378 267,165 229,850
Selling, general and administrative expenses.......... 65,464 58,234 128,235 116,044
Merger, transaction and integration expenses (note 6). - - 2,691 -
Depreciation and amortization of purchase
accounting adjustments............................... 7,600 6,315 14,860 12,392
------- ------- ------- -------
Operating income...................................... 68,500 53,829 121,379 101,414
------- ------- ------- -------
Other income (expense):
Interest expense................................... (14,033) (13,433) (28,149) (26,708)
Amortization of deferred financing fees............ (80) (55) (160) (108)
Other, net......................................... (874) (18) (633) (75)
------- ------- ------- -------
Income before income taxes and discontinued
operations .......................................... 53,513 40,323 92,437 74,523
Income taxes.......................................... 21,003 15,556 36,607 28,942
------- ------- -------- -------
Income from continuing operations..................... 32,510 24,767 55,830 45,581
Discontinued Operations:
Income from discontinued operations (net of income
taxes of $165, $801, $550 and $1,581, respectively)
(note 7)........................................... 124 1,551 663 2,683
Gain on disposal of discontinued operations, including
provision of $542 for operating losses during phase-
out period (less income taxes of $18,425) (note 7). 18,254 - 18,254 -
------- ------- ------ -------
Net income............................................ $ 50,888 $ 26,318 $ 74,747 $ 48,264
======= ======= ====== =======
Basic earnings per common share from continuing
operations........................................... $ .31 $ .24 $ .54 $ .45
Discontinued operations............................... .18 .02 .18 .02
--- --- --- ---
Basic earnings per share.............................. $ .49 $ .26 $ .72 $ .47
=== === === ===
Diluted earnings per common share from continuing
operations........................................... $ .31 $ .23 $ .53 $ .43
Discontinued operations............................... .17 .02 .17 .03
--- --- --- ---
Diluted earnings per common share..................... $ .48 $ .25 $ .70 $ .46
=== === === ===
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 5
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1998
AND THE SIX MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY TREASURY TOTAL
COMMON EQUITY PAID-IN RETAINED TRANSLATION COMMON SHAREHOLDERS'
STOCK RIGHTS CAPITAL EARNINGS ADJUSTMENT STOCK EQUITY
-------- ------ ------------ -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997..... $ 1,014 $ - $ 212,665 $189,963 $ (24,981) $ (1) $378,660
Shares issued in connection
with the exercise of 1,445,760
stock options..................... 15 - 12,970 - - - 12,985
Conversion of 200 equity rights to 872
shares of common stock ........... - - - (1) - 1 -
Tax benefits related to stock options - - 7,291 - - - 7,291
Dividends paid by "A" Company
prior to the merger.............. - - 314 (479) - - (165)
Dividends paid by Pinnacle Products of
Wisconsin prior to the merger.... - - - (4,682) - - (4,682)
Shares issued related to a deferred
compensation plan of "A" Company. - - 830 - - - 830
Net income ........................ - - - 76,044 - - 76,044
Cumulative foreign currency
translation adjustment............ - - - - 4,293 - 4,293
----- ---- ------- ------- -------- ---- -------
Balance at September 30, 1998 $ 1,029 $ - $ 234,070 $260,845 $ (20,688) $ - $475,256
===== ==== ======= ======= ======== ==== =======
Shares issued in connection
with the exercise of 467,892
stock options..................... 5 - 4,399 - - - 4,404
Tax benefits related to stock options - - 2,602 - - - 2,602
Net income ........................ - - - 74,747 - - 74,747
Cumulative foreign currency
translation adjustment............ - - - - (7,832) - (7,832)
----- ---- ------- ------- -------- ---- -------
Balance at March 31, 1999 $ 1,034 $ - $ 241,071 $335,592 $ (28,520) $ - $549,177
===== ==== ======= ======= ======== ==== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 6
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................ $ 74,747 $ 48,264
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of NPT...................................................... (18,796) -
Depreciation............................................................. 17,623 14,833
Amortization............................................................. 14,998 12,482
Provision for losses on doubtful accounts................................ 494 270
Inventory provisions..................................................... (409) 114
Deferred income taxes.................................................... (4,257) 1,770
Changes in assets and liabilities:
Decrease (increase) in accounts receivable............................... 2,522 (5,231)
Increase in inventories.................................................. (9,500) (7,252)
Decrease (increase) in prepaid expenses and other current assets......... 10,567 (4,934)
Decrease in accounts payable............................................. (4,725) (1,817)
Decrease in income taxes payable......................................... (6,641) (426)
Decrease in accrued payroll and employee benefits........................ (7,182) (5,382)
Decrease in reserve for discontinued operations.......................... (8,642) -
Decrease in restructuring reserve........................................ (2,512) -
Decrease in other current liabilities................................... (7,083) (966)
Net change in other assets and liabilities............................... (2,081) 6,288
--------- ---------
Net cash provided by operating activities................................ 49,123 58,013
Cash flows from investing activities:
Capital expenditures..................................................... (14,346) (17,350)
Proceeds from sales of property, plant, and equipment.................... 812 3,450
Proceeds from the sale of NPT net of sale expenses...................... 86,000 -
Payments for businesses acquired......................................... (119,512) (99,554)
-------- ---------
Net cash used in investing activities................................... (47,046) (113,454)
Cash flows from financing activities:
Proceeds - revolving credit facility...................................... 265,300 226,000
Principle payments - revolving credit facility............................ (195,500) (152,000)
Principal payments on long-term debt...................................... (87,284) (18,277)
Proceeds from the exercise of common stock options........................ 4,404 9,472
Dividends paid by Pinnacle and LRS prior to the mergers................... - (3,558)
Deferred financing fees................................................... (70) -
Other..................................................................... 1,137 (1,078)
-------- ---------
Net cash provided (used) in financing activities.......................... (12,013) 60,559
Effect of exchange rate changes on cash.................................... (654) (1,429)
Net increase (decrease) in cash and cash equivalents....................... (10,590) 3,689
Cash and cash equivalents at beginning of year............................. 23,891 18,003
-------- ---------
Cash and cash equivalents at end of period................................. $ 13,301 $ 21,692
======== =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 7
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................................. $ 28,670 $ 25,939
Cash paid during the period for income taxes.............................. 34,685 18,518
Capital lease obligations incurred........................................ 186 254
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 8
SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments which are necessary for a
fair statement of the results for the interim periods presented have been
included. Except as described below, all such adjustments were of a normal
recurring nature. The results for the three and six month periods ended
March 31, 1999 are not necessarily indicative of the results to be expected
for the full year. Certain amounts from the three and six month periods
ended March 31, 1998, as originally reported, have been reclassified to
conform with the three and six month periods ended March 31, 1999
presentation.
All prior period data has been adjusted to reflect the results of LRS
Acquisition Corp. ("LRS"), the parent of "A" Company Orthodontics (`"A"
Company'), and Pinnacle Products of Wisconsin, Inc. ("Pinnacle"), which
merged with subsidiaries of the Company on April 9, 1998 and October 29,
1998, respectively (the "LRS Merger" and "Pinnacle Merger", respectively).
The results of LRS and Pinnacle, each of whose merger was accounted for as
a pooling of interests, were combined with the Company's previously
reported results as if the mergers occurred as of the beginning of all
reported periods.
In addition, all prior period data has been adjusted to reflect the March
31, 1999 sale of Nalge Process Technologies Group, Inc. ("NPT"). NPT has
been classified as a discontinued operation and the results have been
reported accordingly. (See note 7)
The following table reconciles sales and net income for the three and six
months ended March 31, 1998 as previously reported to sales and net income
for the three and six months ended March 31, 1998 after restatement for the
LRS and Pinnacle Mergers and the reclassification of NPT to discontinued
operations.
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, 1998 March 31, 1998
(In thousands) (In thousands)
Net sales: (Unaudited) (Unaudited)
--------------- -------------------
<S> <C> <C>
The Company $ 226,064 $ 436,191
LRS 9,443 23,945
Pinnacle 2,763 5,782
NPT (12,264) (25,092)
-------- --------
Total $ 226,006 $ 440,826
======== ========
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C> <C>
Net income (loss):
The Company $ 24,756 $ 44,091
LRS 33 1,448
Pinnacle 1,529 2,725
Pinnacle pro forma income tax expense (a) (612) (1,090)
------- -------
Pro forma net income $ 25,706 $ 47,174
Pinnacle pro forma income tax expense (a) 612 1,090
------- -------
Net income to be reported $ 26,318 $ 48,264
======= =======
Basic shares outstanding:
The Company 97,111 96,559
Shares issued in LRS Merger 3,216 3,216
Shares issued in Pinnacle Merger 1,897 1,897
------- -------
Basic shares to be reported 102,224 101,672
======= =======
Diluted shares outstanding:
The Company 100,985 100,491
Shares issued in LRS Merger 3,216 3,216
Shares issued in Pinnacle Merger 1,897 1,897
------- -------
Diluted shares to be reported 106,098 105,604
======= =======
Basic earnings per share:
To be reported $ .26 $ .47
Pro forma $ .25 $ .46
Diluted earnings per share
To be reported $ .25 $ .46
Pro forma $ .24 $ .45
</TABLE>
- ------------
(a) Prior to the merger, Pinnacle was as S corporation and, therefore, income
tax expense was not reflected in its historical net income.
2. Inventories at September 30, 1998 and March 31, 1999 consist of the
following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
<S> <C> <C>
Raw materials $ 53,222 $ 54,465
Work-in-process 35,556 32,502
Finished goods 101,083 84,759
LIFO Reserve (4,581) (5,933)
--------- -------
$ 185,280 $165,793
========= =======
</TABLE>
8
<PAGE> 10
3. Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130").
SFAS 130 requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of
income.
Comprehensive income and the components of comprehensive income (loss) for
the three and six month periods ended March 31, 1999 and 1998 are as
follows: (In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 50,888 $ 26,318 $ 74,747 $ 48,264
Other comprehensive income (loss)
Foreign currency translation (7,061) (3,829) (7,832) (3,963)
------ ------ ------ ------
Comprehensive income $ 43,827 $ 22,489 $ 66,915 $ 44,301
====== ====== ====== ======
</TABLE>
4. Acquisitions completed in the second quarter of fiscal 1999 are as follows:
(a) On January 5, 1999, a subsidiary of Sybron Laboratories Products Corporation
("SLPC") acquired the assets of Scientific Resources, Inc. ("SRI"), a
producer and distributor of chromatography supplies located in Eatontown,
New Jersey. SRI's principal products are vials, caps and septa, and
disposable products used mainly in gas chromatography and high pressure
liquid chromatography applications. SRI sells mainly to analytical chemistry
laboratories in the pharmaceutical, environmental, chemical, food, forensic,
academic and energy industries. Annual sales are approximately $4.5 million.
(b) On January 6, 1999, a subsidiary of SLPC acquired certain operating assets
of Rascher & Betzold, Inc., a manufacturer of high precision-grade
hydrometers, thermometers and scientific glassware located in Chicago,
Illinois. Annual sales are approximately $0.1 million.
(c) On January 6, 1999, a subsidiary of SLPC acquired the assets of Laboratory
Devices, Inc. ("LDI"), a manufacturer of melting point apparatus and other
constant temperature laboratory equipment. LDI's annual sales are
approximately $1.0 million.
(d) On January 7, 1999, a subsidiary of SLPC acquired the HistoScreen(R) and
HistoGel(TM) product lines of Perk Scientific. These products, with annual
sales of approximately $1.0 million, are used for handling small tissue
specimens during histology processing.
(e) On January 22, 1999, SLPC acquired Molecular BioProducts, Inc. ("MBP"),
located in San Diego, California. MBP is one of the leading manufacturers of
disposable liquid handling products used in molecular biology and life
science markets. MBP's annual sales are approximately $19.0 million.
9
<PAGE> 11
(f) On February 3, 1999, a subsidiary of SLPC acquired Stahmer, Weston & Co.,
Inc. ("Stahmer Weston") located in Portsmouth, New Hampshire. Stahmer Weston
produces a line of hand care products for health care workers and a line of
specimen container products. Annual sales are approximately $3.0 million.
All of the acquisitions were made for cash at an aggregate purchase price of
approximately $119.5 million and are being accounted for as purchase business
combinations with the results of the acquired entity being included in the
Company's financial statements from the date of the acquisition. The excess of
the purchase price over the fair value of the net identifiable assets acquired
in each of the aforementioned acquisitions totaling $48.7 million has been
recorded as goodwill and is being amortized on a straight line basis over 40
years.
5. In June 1998, the Company recorded a restructuring charge of approximately
$24.0 million (Approximately $16.7 million after tax or $.16 per share on a
diluted basis) for the rationalization of certain acquired companies,
combination of certain production facilities, movement of certain customer
service and marketing functions, and the exiting of several product lines.
The restructuring charge has been classified as components of cost of sales
(approximately $6.4 million relating entirely to the write-off of
inventory), selling, general and administrative expenses (approximately
$16.9 million) and income tax expense (approximately $0.7 million). Activity
with respect to the restructuring charge since June 1998 is as follows:
<TABLE>
<CAPTION>
Shut- Inventory
Lease down Write- Fixed Contractual
Severance(a) Pymts.(b) Costs(b)off(c) Assets(c) Tax(d) Goodwill(e) Obligations(f) Other Total
------------ --------- -------------- --------- ------ -------------------------- ----- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 Initial
Accrual $8,500 $400 $500 $6,400 $2,300 $700 $2,100 $1,000 $2,100 $24,000
1998 cash
payments 3,300 100 100 - - - - 400 700 4,600
Non-cash 1998
charges - - - 6,400 2,300 - 2,100 - 600 11,400
----- --- --- ----- ----- --- ----- --- --- ------
Balance 9/30/98 5,200 300 400 - - 700 - 600 800 8,000
1999 cash
payments 2,200 - - - - - - 300 - 2,500
Adjustments (g) - - - - - - - - 400 400
----- --- --- ----- ----- --- ----- --- --- -----
Balance 3/31/99 $3,000 $300 $400 $ - $ - $700 $ - $ 300 $ 400 $ 5,100
===== === === ===== ===== === ===== === === =====
</TABLE>
(a) Amount represents severance and termination costs for approximately 165
notified employees (primarily sales and marketing personnel). As of March
31,1999 ,152 employees were terminated as a result of the restructuring
plan. No significant adjustments were made to the liability.
(b) Amounts represent lease payments and shutdown costs on exited facilities.
(c) Amounts represent write-offs of inventory and fixed assets associated with
discontinued product lines.
(d) Amount represents a statutory tax relating to assets transferred from an
existed sales facility in Switzerland.
(e) Amount represents goodwill associated with exited product lines at SLPC.
(f) Amount represents certain terminated contractual obligations primarily
associated with Sybron Dental Specialties Corporation.
(g) Amount represents reserves transferred from NPT which were reclassified to
discontinued operations.
The Company expects to make further cash payments of approximately $1,500 and
$1,300 in the third and fourth quarters of fiscal 1999, respectively and
approximately $2,100 in fiscal 2000 and beyond. The actions associated with the
restructuring are expected to eliminate annual costs of $16.0 million. This
estimate has been adjusted from the first quarter of fiscal 1999 estimate of
$16.3
10
<PAGE> 12
million to reflect revisions from previous estimates. In the second quarter
of fiscal 1999, the Company estimates it saved approximately $4.0 million
(or $16.0 million on an annualized basis). We do not anticipate any
additional adjustments to the savings estimates.
6. For the six months ended March 31, 1999, the Company incurred approximately
$2.7 million ($1.6 million after tax or $.02 per share on a diluted basis)
of costs associated with the Pinnacle Merger and the integration of "A"
Company, a subsidiary of LRS, with SDS. The actual and anticipated costs
associated with the Pinnacle Merger and the integration of "A" Company were
primarily from the Pinnacle Merger non-shareholder compensation
(approximately $1.9 million). The remaining $0.8 million related to
miscellaneous expenses primarily related to completing the "A" Company
integration including customer announcements, professional fees, and
relocation expenses. The Company does not anticipate incurring any further
merger, transaction and integration expenses associated with the LRS and
Pinnacle Mergers.
7. On March 31, 1999, Sybron completed the sale of NPT to Norton Performance
Plastics Corporation, a subsidiary of Saint-Gobain - France. Net proceeds
from the sale, net of selling expenses of approximately $1.7 million,
amounted to approximately $86.0 million. The sales price is subject to
certain adjustments based upon the audited book value of NPT at March 31,
1999. The Company does not expect a significant change to the purchase price
as a result of the audit. The proceeds of the sale were used to repay
amounts previously owed under the Companies credit facilities.
Sales from NPT were $10.7 million and $12.2 million in the quarters ended
March 31, 1999 and 1998, respectively and $21.0 million and $25.1 million
for the six months ended March 31, 1999 and 1998, respectively. Certain
expenses have been allocated to discontinued operations including interest
expense which was allocated based upon the historical purchase prices and
cash flows of the companies comprising NPT.
The components of net assets held for sale of discontinued operations
included in the Consolidated Balance Sheet at September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
September 30,
1998
----
(Unaudited)
(In thousands)
<S> <C>
Cash $ 317
Net account receivables 8,977
Net inventories 10,152
Other current assets 158
Intangible assets 33,607
Property plant and equipment - net 2,930
Current portion of long term debt (25)
Accounts payable (2,339)
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C>
Accrued liabilities (1,012)
Deferred income taxes- net (1,195)
Long term debt (8)
-------
$ 51,562
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The subsidiaries of the Company are leading manufacturers of value-added
products for the laboratory and professional dental and orthodontic markets in
the United States and abroad. The laboratory businesses are grouped under Sybron
Laboratory Products Corporation ("SLPC"), and the dental and orthodontic
businesses are grouped under Sybron Dental Specialties, Inc. ("SDS"). Their
major product categories and their primary subsidiaries in each category are as
follows:
<TABLE>
<CAPTION>
SLPC
----
Labware and Life Sciences Diagnostics and Microbiology
- ------------------------- ----------------------------
<S> <C>
Nalge Nunc International Corporation Applied Biotech, Inc.
National Scientific Company CASCO-NERL Diagnostics Corporation
Nunc A/S Diagnostic Reagents, Inc.
Nalge (Europe), Ltd. Alexon-Trend, Inc.
Molecular BioProducts, Inc. Remel Inc.
Clinical and Industrial Technologies Laboratory Equipment
- ------------------------------------ --------------------
Erie Scientific Company Barnstead Thermolyne Corporation
Chase Scientific Glass, Inc. Lab-Line Instruments, Inc.
The Naugatuck Glass Company
Richard-Allan Scientific Company
Samco Scientific Corporation
Gerhard Menzel Glasbearbeitungswerk
GmbH & Co. K.G.
<CAPTION>
SDS
---
Professional Dental Orthodontics
- ------------------- ------------
<S> <C>
Kerr Corporation Ormco Corporation
Beavers Dental Company Allesee Orthodontic Appliances, Inc.
Metrex Research Corporation
Pinnacle Products, Inc
</TABLE>
Over the past several years the Company has been pursuing a growth
strategy designed to increase sales and enhance operating margins. Elements of
that strategy include emphasis on acquisitions, product line extensions, new
product introductions, international growth and rationalization of existing
businesses and product lines.
12
<PAGE> 14
When we use the terms "we" or "our" in this report, we are referring to
Sybron International Corporation and its subsidiaries. Our fiscal year ends on
September 30, and accordingly, all references to quarters refer to the Company's
fiscal quarters.
Our results for the six months ended March 31, 1999 include charges
relating to integration costs associated with the merger with LRS Acquisition
Corp. ("LRS") (the "LRS Merger"), the parent of "A" Company, and transaction
costs associated with the merger with Pinnacle Products of Wisconsin, Inc.
("Pinnacle") (the "Pinnacle Merger") (See Note 6 to the Unaudited Financial
Statements). In addition, because the LRS and Pinnacle Mergers are each
accounted for as a pooling of interests, all prior period data have been
adjusted to reflect the historical results of LRS and Pinnacle as if the Mergers
took place on the first day of the reporting period. In addition, historical
financial data relating to Nalge Process Technologies Group, Inc. ("NPT") have
been reclassified to discontinued operations. (See Note 7 to the Unaudited
Financial Statements)
All results referred to below include the adjustments to the historical
results for the pooling of interest transactions and the discontinued operation.
Both our sales and operating income for the quarter and six months ended
March 31, 1999 grew over the corresponding prior year period. Net sales for the
quarter and six months ended March 31, 1999 increased by 20.4% and 18.0%,
respectively, over the corresponding fiscal 1998 periods. Operating income for
the quarter and six months increased by 27.3% and 19.7%, respectively, over the
corresponding fiscal 1998 periods.
Sales growth in the quarter and the six months ended March 31, 1999 was
strong both domestically and internationally. Domestic and international sales
increased by 20.1% and by 20.9%, respectively, over the corresponding fiscal
1998 quarter and by 18.5% and by 17.2%, respectively, over the corresponding
fiscal 1998 six month period.
Acquisitions aided sales growth significantly during the quarter and six
month period, accounting for $29.5 million and $7.1 million of the domestic and
international sales increase, respectively, for the quarter and $51.3 million
and $15.9 million of the domestic and international sales increase,
respectively, for the six month period. Internal growth for the quarter and six
months ended March 31, 1999 was 4.4% and 4.3%, respectively.
We continue to maintain an active program of developing and marketing new
products and product line extensions, as well as pursuing growth through
acquisitions. We completed six acquisitions in the second quarter of fiscal
1999. (See Note 4 to the Unaudited Consolidated Financial Statements.)
Our results of operations include goodwill amortization, other
amortization, and depreciation. These non-cash charges totaled $16.8 million and
$13.8 million for the quarters ended March 31, 1999 and 1998, respectively, and
$32.6 million and $27.4 million for the six months ended March 31, 1999 and
1998, respectively. Because our operating results reflect significant
depreciation and amortization expense largely associated with stepped-up assets
and goodwill from our acquisition program and the
13
<PAGE> 15
leveraged buyout in 1987 of a company known at that time as Sybron Corporation
(the "Acquisition"), we believe our "Adjusted EBITDA" is a useful measure of our
ability to internally fund our liquidity requirements. "Adjusted EBITDA" (while
not a measure under generally accepted accounting principles, ("GAAP"), and not
a substitute for GAAP measured earnings or cash flows or an indication of
operating performance or a measure of liquidity) represents, for any relevant
period, net income from continuing operations plus (i) interest expense, (ii)
provision for income taxes, (iii) acquisition related expenses and (iv)
depreciation and amortization, all determined on a consolidated basis and in
accordance with GAAP. Our "Adjusted EBITDA" amounted to $84.3 million and $67.5
million for the quarters ended March 31, 1999 and 1998, respectively, and $155.9
million and $128.6 million for the six months ended March 31, 1999 and 1998,
respectively.
Substantial portions of our sales, income and cash flows are derived
internationally. The financial position and the results of operations from
substantially all of our international operations, other than most U.S. export
sales, are measured using the local currency of the countries in which such
operations are conducted and are then translated into U.S. dollars. While the
reported income of foreign subsidiaries will be impacted by a weakening or
strengthening of the U.S. dollar in relation to a particular local currency, the
effects of foreign currency fluctuations are partially mitigated by the fact
that manufacturing costs and other expenses of foreign subsidiaries are
generally incurred in the same currencies in which sales are generated. Such
effects of foreign currency fluctuations are also mitigated by the fact that
such subsidiaries' operations are conducted in numerous foreign countries and,
therefore, in numerous foreign currencies. In addition, our U.S. export sales
may be impacted by foreign currency fluctuations relative to the value of the
U.S. dollar as foreign customers may adjust their level of purchases upward or
downward according to the weakness or strength of their respective currencies
versus the U.S. dollar.
From time to time we may employ currency hedges to mitigate the impact of
foreign currency fluctuations. If currency hedges are not employed, we may be
exposed to earnings volatility as a result of foreign currency fluctuations. In
October 1997, we decided to employ a series of foreign currency options with a
U.S. dollar notional amount of approximately $13.6 million at a cost of
approximately $0.4 million. Two of these options were sold in the third quarter
of fiscal 1998 for $0.4 million. The remaining options expired worthless in the
fourth quarter of 1998. These options were designed to protect the Company from
potential detrimental effects of currency movements associated with the U.S.
dollar versus the German mark and the French franc as compared to the third and
fourth quarters of 1997. In October 1998, we again decided to employ a series of
foreign currency options with a U.S. dollar notional amount of approximately
$45.7 million at a cost of approximately $0.3 million. These options are
designed to protect the Company from potential detrimental effects of currency
movements associated with the U.S. dollar versus the German mark, French franc,
Swiss franc, and Japanese yen in the second, third and fourth quarters of fiscal
1999. The options, designed to protect the Company from detrimental effects of
foreign currency fluctuations in the second quarter, were sold or expired
worthless in the second quarter of fiscal 1999 at a net gain of $0.1 million.
The remaining contracts with a notional value of $30.3 million remained in place
at March 31, 1999.
RESULTS OF OPERATIONS
14
<PAGE> 16
QUARTER ENDED MARCH 31, 1999 COMPARED TO THE QUARTER ENDED MARCH 31, 1998
NET SALES. Net sales for the three months ended March 31, 1999 were $272.0
million, an increase of $46.0 million (20.4%) from net sales of $226.0 million
for the corresponding three months ended March 31, 1998. Sales in the laboratory
segment were $175.4 million for the three months ended March 31, 1999, an
increase of 30.4% from the corresponding 1998 fiscal period. Increased sales in
the laboratory segment resulted primarily from (i) sales of products of acquired
companies (approximately $34.3 million), (ii) increased volume from sales of new
products (approximately $3.2 million), (iii) an improved product mix
(approximately $2.0 million), (iv) price increases (approximately $1.3 million)
and (v) favorable foreign currency impacts (approximately $1.0 million).
Increased sales in the laboratory segment were partially offset by a reduction
in volume from sales of existing products (approximately $0.9 million). In the
dental segment, net sales were $96.6 million for the three months ended March
31, 1999, an increase of 5.6% from the corresponding fiscal 1998 period.
Increased sales in the dental segment resulted primarily from (i) increased
volume from sales of new products (approximately $3.4 million), (ii) sales of
products of acquired companies, net of discontinued product lines (approximately
$2.9 million) and (iii) favorable foreign currency impacts (approximately $0.7
million). Increased sales in the dental segment were partially offset by reduced
volume from sales of existing products (approximately $1.9 million).
GROSS PROFIT. Gross profit for the three months ended March 31, 1999 was
$141.6 million, an increase of 19.6% from gross profit of $118.4 million for the
corresponding fiscal 1998 period. Gross profit in the laboratory segment was
$83.2 million (47.4% of net segment sales), an increase of 27.4% from gross
profit of $65.3 million (48.5% of net segment sales) during the corresponding
fiscal 1998 period. Gross profit in the laboratory segment increased primarily
as a result of (i) the effects of acquired companies (approximately $15.4
million), (ii) a favorable product mix (approximately $2.8 million), (iii) price
increases (approximately $1.3 million), (iv) increased volume (approximately
$1.0 million) and (v) favorable foreign currency impacts (approximately $0.2
million). Increased gross profit in the laboratory segment was partially offset
by increased manufacturing overhead (approximately $2.9 million). In the dental
segment, gross profit was $58.4 million (60.5% of net segment sales) for the
three months ended March 31, 1999, an increase of 10.0% from gross profit of
$53.1 million (58.1% of net segment sales) during the corresponding fiscal 1998
period. Increased gross profit in the dental segment resulted primarily from (i)
decreased manufacturing overhead (approximately $1.2 million), (ii) increased
volume (approximately $1.0 million), (iii) inventory factors (approximately $1.0
million), (iv) an improved product mix (approximately $1.0 million) and (v) the
effects of acquired companies (approximately $1.0 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1999 were $73.1
million (26.9% of net sales) as compared to $64.5 million (28.6% of net sales)
in the corresponding fiscal 1998 period. General and administrative expenses at
the corporate level, including amortization of purchase accounting adjustments
and goodwill associated with acquisitions, were $5.1 million, representing a
decrease of 1.5% from $5.2 million in the corresponding fiscal 1998 period. The
decrease at the corporate level was primarily due to decreased professional
service expenses. Selling, general and administrative expenses at the subsidiary
level, including amortization of intangibles, were $68.0 million (25.0% of net
sales),
15
<PAGE> 17
representing an increase of 14.5% from $59.4 million (26.3% of net sales) in the
corresponding fiscal 1998 period. Increases at the subsidiary level were
primarily due to (i) expenses related to newly acquired businesses
(approximately $6.4 million), (ii) increased marketing expense (approximately
$1.7 million), (iii) increased amortization of intangible assets related to
acquired businesses (approximately $1.2 million) and (iv) increased research and
development expenditures (approximately $0.2 million), partially offset by (i) a
reduction in general and administrative expenses (approximately $0.7 million)
and (ii) favorable foreign currency impacts (approximately $0.2 million).
OPERATING INCOME. Operating income was $68.5 million (25.2% of net sales)
for the three months ended March 31, 1999 compared to $53.8 million (23.8% of
net sales) in the corresponding fiscal 1998 period. Operating income in the
laboratory segment was $43.4 million (24.7% of net segment sales) compared to
$33.0 million (24.5% of net segment sales) in the corresponding fiscal 1998
period. Operating income in the dental segment was $25.1 million (26.0% of net
segment sales) compared to $20.8 million (22.8% of net segment sales) in the
corresponding fiscal 1998 period.
INTEREST EXPENSE. Interest expense was $14.0 million for the three months
ended March 31, 1999 compared to $13.4 million in the corresponding fiscal 1998
period. This increase resulted from a higher debt balance primarily from our
acquisition activity. Interest expense for the three months ended March 31, 1999
and 1998 included additional non-cash interest expense of $0.3 million resulting
from the adoption of SFAS No. 106.
INCOME TAXES. Taxes on income increased $5.4 million when compared to
the fiscal 1998 period primarily as a result of increased earnings.
INCOME FROM CONTINUING OPERATIONS. As a result of the foregoing, we had
net income from continuing operations of $32.5 million for the three months
ended March 31, 1999 compared to $24.8 million in the corresponding fiscal 1998
period.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations
for the three months ended March 31, 1999 was $0.1 million compared to $1.6
million in the corresponding fiscal 1998 period. The fiscal 1999 period includes
operating results of NPT for the period January 1, 1999 through the measurement
date of January 22, 1999, while the 1998 period includes a full three months of
operating results. Primarily, because of the differences in included periods,
sales volume decreased by approximately $8.8 million. Partially offsetting the
sales decrease were corresponding decreases in cost of sales (approximately $4.7
million), selling, general and administrative expenses (approximately $1.4
million), interest expense (approximately $0.2 million) and income taxes
(approximately $1.0 million).
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS. On March 31, 1999, Sybron
completed the sale of NPT to Norton Performance Plastics Corporation, a
subsidiary of Saint-Gobain - France. Net proceeds from the sale, net of
estimated selling expenses of $1.7 million, amounted to $86.0 million. The
Company realized a gain on this sale (net of tax and a provision for losses
during the phase out period of $18.4 million and $0.5 million, respectively) of
$18.3 million.
16
<PAGE> 18
NET INCOME. We had net income of $50.9 million for the three months
ended March 31, 1999 compared to $26.3 million in the corresponding fiscal 1998
period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense is
allocated among cost of sales, selling, general and administrative expenses and
other expense. Depreciation and amortization increased $3.0 million when
compared to the prior year three month period. This increase was primarily due
to the amortization of intangible assets and depreciation of property, plant and
equipment related to acquired companies.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales for the six months ended March 31, 1999 were $520.3
million, an increase of $79.5 million (18.0%) from net sales of $440.8 million
for the corresponding six months ended March 31, 1998. Sales in the laboratory
segment were $331.9 million for the six months ended March 31, 1999, an increase
of 28.2% from the corresponding 1998 fiscal period. Increased sales in the
laboratory segment resulted primarily from (i) sales of products of acquired
companies (approximately $62.2 million), (ii) increased volume from sales of new
products (approximately $4.3 million), (iii) price increases (approximately $3.0
million), (iv) favorable foreign currency impacts (approximately $1.7 million),
(v) a favorable product mix (approximately $1.2 million) and (vi) increased
volume from sales of existing products (approximately $0.6 million). In the
dental segment, net sales were $188.5 million for the first six months of fiscal
1999, an increase of 3.5% from the corresponding fiscal 1998 period. Increased
sales in the dental segment resulted primarily from (i) sales of products of
acquired companies, net of discontinued product lines (approximately $6.3
million), (ii) increased volume from sales of new products (approximately $3.8
million) and (iii) favorable foreign currency movements (approximately $0.6
million). Increased sales in the dental segment were partially offset by reduced
volume from sales of existing products (approximately $4.3 million).
GROSS PROFIT. Gross profit for the six months ended March 31, 1999 was
$267.2 million, an increase of 16.2% from gross profit of $229.9 million for the
corresponding fiscal 1998 period. Gross profit in the laboratory segment was
$156.8 million (47.3% of net segment sales), an increase of 26.2% from gross
profit of $124.3 million (48.0% of net segment sales) during the corresponding
fiscal 1998 period. Gross profit in the laboratory segment increased primarily
as a result of (i) the effects of acquired companies (approximately $28.3
million), (ii) price increases (approximately $3.0 million), (iii) increased
volume (approximately $2.3 million), (iv) a favorable product mix (approximately
$2.3 million) and (v) favorable foreign currency movements (approximately $0.4
million), partially offset by increased manufacturing overhead (approximately
$3.8 million). In the dental segment, gross profit was $110.4 million (58.6% of
net segment sales) for the six months ended March 31, 1999, an increase of 4.6%
from gross profit of $105.6 million (58.0% of net segment sales) during the
corresponding fiscal 1998 period. Increased gross profit in the dental segment
resulted primarily from (i) decreased manufacturing overhead (approximately $2.5
million), (ii) the effects of acquired companies (approximately $2.0 million),
(iii) an improved product mix (approximately $0.7 million), (iv) favorable
foreign currency impacts (approximately $0.5 million) and (v) increased volume
(approximately $0.2 million). Increases in gross profit were partially offset by
inventory adjustments (approximately $1.1 million).
17
<PAGE> 19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended March 31, 1999 were $145.8
million (28.0% of net sales) as compared to $128.4 million (29.1% of net sales)
in the corresponding fiscal 1998 period. General and administrative expenses at
the corporate level, including amortization of purchase accounting adjustments
and goodwill associated with acquisitions, were $11.0 million, representing an
increase of 6.0% from $10.4 million in the corresponding fiscal 1998 period. The
increase at the corporate level was primarily due to increased professional
service expenses. Selling, general and administrative expenses at the subsidiary
level, including amortization of intangibles, were $134.8 million (25.9% of net
sales), representing an increase of 14.2% from $118.0 million (26.8% of net
sales) in the corresponding fiscal 1998 period. Increases at the subsidiary
level were primarily due to (i) expenses related to newly acquired businesses
(approximately $11.7 million), (ii) costs associated with the Pinnacle Merger
and the integration of LRS (approximately $2.7 million), (iii) increased
amortization of intangible assets related to acquired businesses (approximately
$2.4 million), (iv) increased research and development expenditures
(approximately $0.5 million) and (v) increased marketing expense (approximately
$0.4 million). Increases in selling, general and administrative expenses were
partially offset by (i) favorable foreign currency impacts (approximately $0.5
million) and (ii) a reduction in general and administrative expense
(approximately $0.4 million).
OPERATING INCOME. Operating income was $121.4 million (23.3% of net sales)
for the six months ended March 31, 1999 compared to $101.4 million (23.0% of net
sales) in the corresponding fiscal 1998 period. Operating income in the
laboratory segment was $78.0 million (23.5% of net segment sales) compared to
$60.7 million (23.5% of net segment sales) in the corresponding fiscal 1998
period. Operating income in the dental segment was $43.4 million (23.0% of net
segment sales) compared to $40.7 million (22.4% of net segment sales) in the
corresponding fiscal 1998 period.
INTEREST EXPENSE. Interest expense was $28.1 million for the six months
ended March 31, 1999 compared to $26.7 million in the corresponding fiscal 1998
period. This increase resulted from a higher debt balance primarily from our
acquisition activity. Interest expense for the six months ended March 31, 1999
and 1998 included additional non-cash interest expense of $0.6 million resulting
from the adoption of SFAS No. 106.
INCOME TAXES. Taxes on income increased $7.7 million when compared to the
fiscal 1998 period primarily as a result of increased earnings.
INCOME FROM CONTINUING OPERATIONS. As a result of the foregoing, we had
net income from continuing operations of $55.8 million for the six months ended
March 31, 1999 compared to $45.6 million in the corresponding fiscal 1998
period.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations
for the six months ended March 31, 1999 was $0.7 million compared to $2.7
million in the corresponding fiscal 1998 period. The fiscal 1999 period includes
operating results of NPT for the period October 1, 1999 through the measurement
date of January 22, 1999, while the 1998 period includes a full six months of
operating results. Because of the differences in included periods, sales volume
decreased by approximately $8.8 million. Partially offsetting the sales decrease
were corresponding decreases in cost of sales
18
<PAGE> 20
(approximately $4.7 million), selling, general and administrative expenses
(approximately $1.4 million), interest expense (approximately $0.2 million) and
income taxes (approximately $1.0 million). In addition, due to the cyclicality
of the business we experienced a reduction in sales volume of existing products
(approximately $2.5 million) partially offset by reductions in cost of sales
(approximately $1.0 million), income taxes (approximately $0.6 million), selling
general and administrative expenses (approximately $0.2 million) and
miscellaneous expenses ($0.2 million).
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS. On March 31, 1999, Sybron
completed the sale of NPT to Norton Performance Plastics Corporation, a
subsidiary of Saint-Gobain - France. Net proceeds from the sale, net of
estimated selling expenses of $1.7 million, amounted to $86.0 million. The
Company realized a gain on this sale (net of tax and a provision for losses
during the phase out period of $18.4 million and $0.5 million, respectively) of
$18.3 million.
NET INCOME. We had net income of $74.7 million for the six months
ended March 31, 1999 compared to $48.3 million in the corresponding fiscal 1998
period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense is
allocated among cost of sales, selling, general and administrative expenses and
other expense. Depreciation and amortization increased $5.3 million when
compared to the prior year six month period. This increase was primarily due to
the amortization of intangible assets and depreciation of property, plant and
equipment related to acquired companies.
LIQUIDITY AND CAPITAL RESOURCES
As a result of a 1987 leveraged buyout transaction (the "Acquisition") and
the acquisitions we have completed since 1987, we have increased the carrying
value of certain tangible and intangible assets consistent with GAAP.
Accordingly, our results of operations include a significant level of non-cash
expenses related to the depreciation of fixed assets and the amortization of
intangible assets, including goodwill. Goodwill and intangible assets increased
by approximately $48.7 million in the second quarter and by approximately $93.8
million in the first six months of fiscal 1999, primarily as a result of
continued acquisition activity. We believe, therefore, that although it is not a
GAAP measure and it is not a substitute for GAAP measured earnings and cash
flows or an indication of operating performance or a measure of liquidity,
"Adjusted EBITDA" represents a useful measure of our ability to internally fund
our capital requirements.
Our capital requirements arise principally from indebtedness incurred in
connection with the permanent financing for the Acquisition, our subsequent
refinancings, our working capital needs, primarily related to inventory and
accounts receivable, our capital expenditures, primarily related to purchases of
machinery and molds, the purchase of various businesses and product lines in
execution of our acquisition strategy, payments to be made in connection with
our June 1998 restructuring, and the periodic expansion of physical facilities.
It is currently our intent to pursue our acquisition strategy. If acquisitions
continue at our historical pace, of which there can be no assurance, we will
require financing beyond the capacity of our Credit Facilities (as defined
below). In addition, certain
19
<PAGE> 21
acquisitions previously completed contain "earnout provisions" requiring further
payments in the future if certain financial results are achieved by the acquired
companies. With respect to the restructuring charge of approximately $24.0
million which was recorded in June, 1998, of which approximately $12.6 million
represents cash expenditures, as of March 31, 1999, we have made cash payments
of approximately $7.1 million and reclassified approximately $0.4 million to
discontinued operations. Approximately $5.1 million remains to be paid over the
next twelve months.
The statement contained in the immediately preceding paragraph concerning
our intent to continue to pursue our acquisition strategy is a forward-looking
statement. Our ability to continue our acquisition strategy is subject to a
number of uncertainties, including, but not limited to, our ability to raise
capital beyond the capacity of our Credit Facilities and the availability of
suitable acquisition candidates at reasonable prices.
See "Cautionary Factors" below.
On July 31, 1995, we entered into a credit agreement (as amended, 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, we borrowed $300 million under the Term Loan
Facility and approximately $122.5 million under the Revolving Credit Facility.
Approximately $158.5 million of the borrowed funds were used to finance the
acquisition of the Nunc group of companies (approximately $9.1 million of the
acquisition price for Nunc was borrowed under our previous credit facilities).
The remaining borrowed funds of approximately $264.0 million were used to repay
outstanding amounts, including accrued interest, under our previous credit
facilities and to pay certain fees in connection with such refinancing. On July
9, 1996, under the First Amendment to the Credit Agreement (the "First
Amendment"), the capacity of the Revolving Credit Facility was increased to $300
million, and a competitive bid process was established as an additional option
for us in setting interest rates. On April 25, 1997, we entered into the Second
Amended and Restated Credit Agreement (the "Second Amendment"). The Second
Amendment was an expansion of the Credit Facilities. The Term Loan Facility was
restored to $300 million by increasing it by $52.5 million (equal to the amount
previously repaid through April 24, 1997) and the Revolving Credit Facility was
expanded from $300 million to $600 million. On April 25, 1997, we borrowed a
total of $622.9 million under the Credit Facilities. The proceeds were used to
repay $466.3 million of previously existing LIBOR and ABR loans (as defined
below) (including accrued interest and certain fees and expenses) under the
Credit Facilities and to pay $156.6 million with respect to the purchase of
Remel Limited Partnership which includes both the purchase price and payment of
assumed debt. The $72 million of CAF borrowings (as defined below) remained in
place. On July 1, 1998, we completed the First Amendment to the Second Amended
Credit Agreement (the "Additional Amendment"). The Additional Amendment provided
for an increase in the Term Loan Facility of $100 million. On July 1, 1998, we
used the $100 million of proceeds from the Additional Amendment to pay $100
million of existing debt balances under the Revolving Credit Facility. The
Additional Amendment also provides us with the ability to use proceeds from the
issuance of additional unsecured, subordinated indebtedness of up to $300
million, to pay amounts outstanding under the Revolving Credit Facility without
reducing our ability to borrow under the Revolving Credit Facility in the
future.
20
<PAGE> 22
Payment of principal and interest with respect to the Credit Facilities
and the Sale/Leaseback (as defined later herein) is anticipated to be our
largest use of operating funds in the future. The Credit Facilities provide for
an annual interest rate, at our option, equal to (a) the higher of (i) the rate
from time to time publicly announced by Chase in New York City as its prime
rate, (ii) the federal funds rate plus 1/2 of 1%, and (iii) the base CD rate
plus 1%, (collectively referred to as "ABR") or (b) the London interbank offered
rate ("LIBOR") plus 1/2% to 7/8% (the "LIBOR Margin") depending upon the ratio
of our total debt to Consolidated Adjusted Operating Profit (as defined), 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 First Amendment ("CAF"). The average interest rate on the Term Loan Facility
(inclusive of the swap agreements described below) in both the second quarter
and first half of fiscal 1999 was 6.5% and the average interest rate on the
Revolving Credit Facility in the second quarter and first half of fiscal 1999
was 5.8% and 5.9%, respectively.
As a result of the terms of the Credit Agreement, we are sensitive to a
rise in interest rates. In order to reduce our sensitivity to interest rate
increases, from time to time we enter into interest rate swap agreements. As of
March 31, 1999, the Company has seven interest rate swaps outstanding
aggregating a notional amount of $375 million. Under the terms of the swap
agreements, the Company is required to pay a fixed rate amount equal to the swap
agreement rate listed below. In exchange for the payment of the fixed rate
amount, the Company receives a floating rate amount equal to the three-month
LIBOR rate in effect on the date of the swap agreements and the subsequent reset
dates. For each of the swap agreements the rate resets on each quarterly
anniversary of the swap agreement date until the swap expiration date. The net
interest rate paid by the Company is approximately equal to the sum of the swap
agreement rate plus the applicable LIBOR Margin. For the quarter and first half
of fiscal 1999, the LIBOR margin was .75%. The swap agreement rates and duration
as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
SWAP AGREEMENT SWAP AGREEMENT
EXPIRATION DATE NOTIONAL AMOUNT DATE RATE
- --------------- --------------- ---- ----
<S> <C> <C> <C>
August 13, 1999 $50 million August 13, 1993 5.540%
June 8, 2002 $50 million December 8, 1995 5.500%
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.897%
September 10, 2001 $50 million December 8, 1995 5.623%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23, 1998 4.733%
</TABLE>
Also as part of the permanent financing for the Acquisition, on December
22, 1988, we entered into the sale and leaseback of what were our principal
domestic facilities at that time (the "Sale/Leaseback"). In January 1999, the
annual obligation under the Sale/Leaseback increased from $3.3 million to $3.6
million, payable monthly. On the fifth anniversary of the leases and every five
years thereafter (including renewal terms), the rent will be increased by the
percentage equal to 75% of the percentage increase in the Consumer Price Index
over the preceding five years. The percentage increase to the rent in any
five-year period is capped at 15%. The next adjustment will occur on January 1,
2004.
21
<PAGE> 23
We intend to fund our acquisitions, working capital requirements, capital
expenditure requirements, principal and interest payments, obligations under the
Sale/Leaseback, restructuring expenditures, other liabilities and periodic
expansion of facilities, to the extent available, with funds provided by
operations and short-term borrowings under the Revolving Credit Facility. To the
extent that funds are not available from those sources, particularly with
respect to our acquisition strategy, we intend to raise additional capital.
As set forth above, after the Second Amendment, the Revolving Credit
Facility provides up to $600 million in available credit. At March 31, 1999,
there was approximately $82.2 million of available credit under the Revolving
Credit Facility. Under the Term Loan Facility, on July 31, 1997 we began to
repay principal in 21 consecutive quarterly installments by paying the $8.75
million due in fiscal 1997, $35.0 million due in fiscal 1998 and $17.5 million
of the $36.25 million due in fiscal 1999. On March 31, 1999, as a result of the
sale of NPT, the Company received approximately $87.7 million (approximately
$86.0 million net of fees and expenses). Net proceeds of the sale, after a
reduction for estimated applicable income taxes, were required to be used to
repay amounts owed by the Company under the Term Loan Facility. On March 31,
1999, the Company paid principal of approximately $67.9 million due under the
Term Loan Facility. The following table shows how the payments were applied, and
the resulting revised schedule of principal payments under the Term Loan
Facility, are as follows:
<TABLE>
<CAPTION>
Payments Previously Principal Due
Applied from Scheduled After Application
NPT Sale Principal of NPT Proceeds
-------- --------- ---------------
(In Millions)
<S> <C> <C> <C>
Remaining payments
due in fiscal 1999 $ 18.75 $ 18.75 $ -
Payments due in 2000 42.50 42.50 -
Payments due in 2001 1.29 53.75 52.46
Payments due in 2002 5.37 223.75 218.38
----- ------ ------
Total $ 67.91 $338.75 $270.84
===== ====== ======
</TABLE>
The Credit Agreement contains numerous financial and operating covenants,
including, among other things, restrictions on investments; requirements that we
maintain certain financial ratios; restrictions on our ability to incur
indebtedness or to create or permit liens or to pay cash dividends in excess of
$50.0 million plus 50% of our consolidated net income for each fiscal quarter
ending after June 30, 1995, less any dividends paid after June 22, 1994; and
limitations on incurrence of additional indebtedness. The Credit Agreement
permits us to make acquisitions provided we continue to satisfy all financial
covenants upon any such acquisition. Our ability to meet our debt service
requirements and to comply with such covenants is dependent upon our future
performance, which is subject to financial, economic, competitive and other
factors affecting us, many of which are beyond our control.
22
<PAGE> 24
YEAR 2000
Historically, certain computer programs were written using two digits
rather than four to identify the applicable year. Accordingly, software used by
the Company and others with whom it does business may be unable to interpret
dates in the calendar year 2000. This situation, commonly referred to as the
Year 2000 ("Y2K") issue, could result in computer failures or miscalculations,
causing disruption of normal business activities. The Y2K issue could arise at
any point in our supply, manufacturing, distribution, administration,
information, accounting and financial systems. Incomplete or untimely resolution
of the Y2K issue by the Company, key suppliers, customers and other parties,
could have a material adverse effect on the Company's results of operations,
financial condition and cash flow.
We have been addressing the Y2K issue with a corporate-wide initiative
sponsored by Sybron's Vice President-Finance and Chief Financial Officer and its
Vice President-General Counsel and Secretary, and led at the subsidiary level by
the Executive Vice President and Chief Financial Officer of SLPC and the Vice
President and Chief Information Officer of SDS. The four main phases of the
initiative include (1) identification of affected mission critical software
utilized by both information and non-information technology systems, (2)
assessment of the risk associated with such affected software and development of
a plan for modifying or replacing the software, (3) implementation of solutions
under the plan, and (4) testing of the solutions. The initiative also includes
communication with our significant suppliers, vendors and customers to determine
the extent to which we are vulnerable to any failures by them to address the Y2K
issue. The program contemplates the development of contingency plans where
needed to deal with Company systems and third party issues.
We have completed in excess of 95% of the identification,
risk-assessment and plan development phases (phases (1) and (2)) of our
initiative with respect to our internal systems. Our work in these phases has
included both information technology ("IT") and non-information technology
("non-IT") systems. The IT systems include accounting, financial, budgeting,
invoicing and other business systems. Non-IT systems include manufacturing
production lines and equipment, elevators, heating, ventilation and air
conditioning systems, and telephone systems. Although we believe we have
substantially completed these phases, we recognize that because of the nature of
the Year 2000 problem, work in these phases will continue up to the Year 2000 as
new equipment, software, product lines and businesses are added in the normal
course of our operations, including our acquisition program.
We are approximately 90-95% along in our implementation phase (phase
(3)) with respect to our internal systems. In most cases, we are upgrading
existing software to versions which are Y2K compliant. In other cases entire
software platforms are being replaced with more current, compliant systems,
internally developed software is being reprogrammed, and hardware is being
replaced. Although we have work remaining in this area, we believe all of our
critical Y2K implementations have been made.
The testing phase (phase (4)) is also well along, as we have completed
approximately 90-95% of the testing required for systems that have been
remediated or replaced to date. Our efforts in this
23
<PAGE> 25
phase include testing by end users and determination by appropriate local Y2K
project managers that the remediated or replaced systems are Y2K compliant. In
those cases where testing cannot be conducted by Company personnel, as in the
case of certain imbedded logic components, we rely on vendor certifications.
The Company and each of its subsidiaries have project schedules which
include the task of corresponding with critical vendors, customers, suppliers
and other third parties to inquire about their Y2K readiness. The Company, and
it's subsidiaries have sent Y2K inquires to substantially all critical third
parties. Based on the responses or lack of responses to date, the Company has
determined there is a risk that some critical suppliers (i.e. those that are key
to a product line or which represent a sole source of supply), will not be Y2K
compliant. The Company's subsidiaries are developing contingency plans to deal
with this risk. Depending on the vendor and product at issue, the Company will
establish alternative sourcing, build inventory, or identify substitute
products. Based upon the information we have to date, we believe our contingency
plans will enable our subsidiaries to continue to operate without any
significant disruption.
Our Year 2000 initiative contemplates the development of contingency
plans as we test our software solutions and complete our risk assessments with
respect to third parties. Based upon the testing of our internal systems to
date, we believe that significant operational problems and costs (including loss
of revenue) are not reasonably likely to result from the failure of such systems
as result of the Y2K issue. We believe our most reasonably likely worst case
scenarios would be the failure of an important supplier to deliver requested
materials, parts or products or the failure of a significant distributor to get
our products to end users. With respect to suppliers, as set forth in the
previous paragraph, the Company's subsidiaries are developing contingency plans
to deal with this risk. Based on our analysis to date, we believe that the
operational problems that would reasonably likely result from the failure of
critical suppliers would not be significant. The associated costs relating to
supplier problems and the cost of associated contingency planning (including the
cost of building inventory, qualifying alternative suppliers, and potential lost
revenue) have not been fully analyzed, but at this time are believed to be
insignificant. Although we have not done an analysis to determine the effect of
the failure of a significant distributor to be able to ship our products to end
users as a result of Y2K issues, our review to date has not identified any
significant distributor to be reasonably likely to have significant Y2K
compliance issues.
Because of the nature of the Y2K problem, we expect to continue all
phases of our initiative until the Year 2000, and expect to have to continue to
develop contingency plans for Y2K issues arising between now and the Year 2000.
In addition, even though phases (1) through (4) of our initiative are almost
completed for our core businesses, we will have to establish appropriate Y2K
compliance goals for businesses we acquire in the future pursuant to our
acquisition program.
The historical and estimated future costs to the Company of Y2K
compliance are contained in the following table. The primary components of the
reported costs are external consulting and hardware and software upgrades. We do
not separately track internal costs of the Y2K initiative. Internal costs are
principally payroll costs of employees involved in the initiative. Our Year 2000
remediation efforts are funded from the Company's cash flow and from borrowings
under the
24
<PAGE> 26
Revolving Credit Facility. The Company has not deferred any significant
information technology projects due to its Year 2000 efforts.
<TABLE>
<CAPTION>
Year 2000 Fiscal 1999 Fiscal 1999
(in thousands) (est.) Fiscal 1998 First 6 months Last 6 months
===============================================================================
<S> <C> <C> <C>
Capital Costs $1,657 $411 $614
Expenses 914 241 303
------ ---- ----
Total $2,571 $652 $917
====== ==== ====
</TABLE>
The foregoing statements about our beliefs regarding the potential
effects of the Y2K issue on our businesses, and the foregoing estimates of our
Y2K costs are forward looking statements. These statements and estimates are
based upon management's best estimates, which were derived using numerous
assumptions regarding future events, including the continued availability of
certain resources, third-party remediation plans, and other factors. There can
be no assurance that these estimates will prove to be accurate, and actual
results could differ materially from those currently anticipated. Specific
factors that could cause such material differences include, but are not limited
to, the availability and cost of personnel trained in Y2K issues, the ability to
identify, assess, remediate and test all relevant computer codes and embedded
technology, the indirect impact of third parties with whom we do business and
who do not mitigate their Y2K compliance problems, and similar uncertainties.
European Economic Monetary Unit
On January 1, 1999, eleven of the European Union countries (including
four countries in which we have operations) adopted the Euro as their single
currency. At that time, a fixed exchange rate was established between the Euro
and the individual countries' existing currencies (the "legacy currencies"). The
Euro trades on currency exchanges and is available for non-cash transactions.
Following the introduction of the Euro, the legacy currencies will remain legal
tender in the participating countries during a transition period from January 1,
1999 through January 1, 2002. Beginning on January 1, 2002, the European Central
Bank will issue Euro-denominated bills and coins for use in cash transactions.
On or before July 1, 2002, the participating countries will withdraw all legacy
bills and coins and use the Euro as their legal currency.
Our operating units located in European countries affected by the Euro
conversion intend to keep their books in their respective legacy currencies
through a portion of the transition period. At this time, we do not expect
reasonably foreseeable consequences of the Euro conversion to have a material
adverse effect on our business operations or financial condition.
CAUTIONARY FACTORS
This report contains various forward-looking statements concerning our
prospects that are based on the current expectations and beliefs of management.
Forward-looking statements may also be made by us from time to time in other
reports and documents as well as oral presentations. When used in written
25
<PAGE> 27
documents or oral statements, the words "anticipate", "believe", "estimate",
"expect", "objective" and similar expressions are intended to identify
forward-looking statements. The statements contained herein and such future
statements involve or may involve certain assumptions, risks and uncertainties,
many of which are beyond our control, that could cause our actual results and
performance to differ materially from what is expected. In addition to the
assumptions and other factors referenced specifically in connection with such
statements, the following factors could impact our business and financial
prospects:
- - Factors affecting our international operations, including relevant
foreign currency exchange rates, which can affect the cost to produce
our products or the ability to sell our products in foreign markets,
and the value in U.S. dollars of sales made in foreign currencies.
Other factors include our ability to obtain effective hedges against
fluctuations in currency exchange rates; foreign trade, monetary and
fiscal policies; laws, regulations and other activities of foreign
governments, agencies and similar organizations; and risks associated
with having major manufacturing facilities located in countries, such
as Mexico, Hungary and Italy, which have historically been less stable
than the United States in several respects, including fiscal and
political stability; and risks associated with the economic downturn in
Japan, Russia, other Asian countries and Latin America.
- - Factors affecting our ability to continue pursuing our current
acquisition strategy, including our ability to raise capital beyond the
capacity of our existing Credit Facilities or to use our stock for
acquisitions, the cost of the capital required to effect our
acquisition strategy, the availability of suitable acquisition
candidates at reasonable prices, our ability to realize the synergies
expected to result from acquisitions, and the ability of our existing
personnel to efficiently handle increased transitional responsibilities
resulting from acquisitions.
- - Factors affecting our ability to profitably distribute and sell our
products, including any changes in our business relationships with our
principal distributors, primarily in the laboratory segment,
competitive factors such as the entrance of additional competitors into
our markets, pricing and technological competition, and risks
associated with the development and marketing of new products in order
to remain competitive by keeping pace with advancing dental,
orthodontic and laboratory technologies.
- - With respect to Erie, factors affecting its Erie Electroverre S.A.
subsidiary's ability to manufacture the glass used by Erie's worldwide
manufacturing operations, including delays encountered in connection
with the periodic rebuild of the sheet glass furnace and furnace
malfunctions at a time when inventory levels are not sufficient to
sustain Erie's flat glass operations.
- - Factors affecting our ability to hire and retain competent employees,
including unionization of our non-union employees and changes in
relationships with our unionized employees.
- - The risk of strikes or other labor disputes at those locations which
are unionized which could affect our operations.
26
<PAGE> 28
- - Factors affecting our ability to continue manufacturing and selling
those of our products that are subject to regulation by the United
States Food and Drug Administration or other domestic or foreign
governments or agencies, including the promulgation of stricter laws or
regulations, reclassification of our products into categories subject
to more stringent requirements, or the withdrawal of the approval
needed to sell one or more of our products.
- - Factors affecting the economy generally, including a rise in interest
rates, the financial and business conditions of our customers and the
demand for customers' products and services that utilize Company
products.
- - Factors relating to the impact of changing public and private health
care budgets which could affect demand for or pricing of our products.
- - Factors affecting our financial performance or condition, including tax
legislation, unanticipated restrictions on our ability to transfer
funds from our subsidiaries and changes in applicable accounting
principles or environmental laws and regulations.
- - The cost and other effects of claims involving our products and other
legal and administrative proceedings, including the expense of
investigating, litigating and settling any claims.
- - Factors affecting our ability to produce products on a competitive
basis, including the availability of raw materials at reasonable
prices.
- - Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of our existing
assets.
- - Unanticipated developments while implementing the modifications
necessary to mitigate Year 2000 compliance problems, including the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the indirect impacts of
third parties with whom we do business and who do not mitigate their
Year 2000 compliance problems, and similar uncertainties, and
unforeseen consequences of the Year 2000 problem.
- - Factors affecting our operations in European countries related to the
conversion from local legacy currencies to the Euro.
- - Other business and investment considerations that may be disclosed from
time to time in our Securities and Exchange Commission filings or in
other publicly available written documents.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
RISK MANAGEMENT
27
<PAGE> 29
We are exposed to market risk from changes in foreign currency exchange
rates and interest rates. To reduce our risk from these foreign currency rate
and interest rate fluctuations, we occasionally enter into various hedging
transactions. We do not anticipate material changes to our primary market risks
other than fluctuations in magnitude from increased or decreased foreign
currency denominated business activity or floating rate debt levels. We do not
use financial instruments for trading purposes and are not a party to any
leveraged derivatives.
FOREIGN EXCHANGE
We have, from time to time, used foreign currency options to hedge our
exposure from adverse changes in foreign currency rates. Our foreign currency
exposure exists primarily in the French Franc, German Mark, Swiss Franc and the
Japanese Yen values versus the U.S. dollar. Hedging is accomplished by the use
of foreign currency options, and the gain or loss on these options is used to
offset gains or losses in the foreign currencies to which they pertain. Hedges
of anticipated transactions are accomplished with options that expire on or near
the maturity date of the anticipated transactions. In October 1998 we entered
into twelve foreign currency options to hedge our exposure to each of the
aforementioned currencies. During the second quarter of fiscal 1999, three of
the option contracts were sold and a fourth expired worthless resulting in a
gain of $0.1 million. As of March 31, 1999 eight foreign currency options remain
with a notional value of $30.3 million and a cost of $0.2 million which at March
31, 1999, approximates fair market value. These options are designed to protect
us from potential detrimental effects of a strengthening U.S. dollar in our
third and fourth quarters of fiscal 1999.
In fiscal 1999, we expect our exposure from our primary foreign currencies
to approximate the following:
<TABLE>
<CAPTION>
ESTIMATED
EXPOSURE DENOMINATED ESTIMATED
IN THE RESPECTIVE EXPOSURE
CURRENCY FOREIGN CURRENCY IN U.S. DOLLARS
- -------- ---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
French Franc (FRF) 157,453 FRF $25,712
German Mark (DEM) 26,450 DEM $14,171
Swiss Franc (CHF) 19,396 CHF $12,887
Japanese Yen (JPY) 886,358 JPY $ 6,754
</TABLE>
As a result of these anticipated exposures, we entered into a series of
options expiring at the end of the second, third and fourth quarters of fiscal
1999 to protect ourselves from possible detrimental effects of foreign currency
fluctuations as compared to the second, third and fourth quarters of 1998. We
accomplished this by taking approximately one-fourth of the exposure in each of
the foreign currencies listed above and purchasing a put option on that currency
(giving us the right but not the obligation to sell the foreign currency at a
predetermined rate). We purchase put options on the foreign currencies at
amounts approximately equal to our quarterly exposure. These options expire on a
quarterly basis, at an exchange rate approximately equal to the prior year's
corresponding quarter's actual exchange rate. In the second quarter, three of
the options were sold and a fourth
28
<PAGE> 30
expired worthless, in aggregate, netting a gain of $0.1 million to the Company.
In October 1998, we acquired the following put options:
<TABLE>
<CAPTION>
NOTIONAL OPTION STRIKE
CURRENCY AMOUNT(A) EXPIRATION DATE PRICE PRICE(B)
- -------- --------- --------------- ----- --------
(IN THOUSANDS, EXCEPT STRIKE PRICES)
<S> <C> <C> <C> <C> <C>
FRF (c) 40,000 March 26, 1999 $ 22 6.00
FRF 40,000 June 28, 1999 $ 40 6.00
FRF 40,000 September 28, 1999 $ 69 5.95
DEM (c) 6,500 March 26, 1999 $ 9 1.80
DEM 6,500 June 28, 1999 $ 17 1.80
DEM 6,500 September 28, 1999 $ 24 1.80
CHF (c) 4,800 March 26, 1999 $ 11 1.46
CHF 4,800 June 28, 1999 $ 12 1.49
CHF 4,800 September 28, 1999 $ 21 1.48
JPY (c) 220,000 March 30, 1999 $ 39 128.00
JPY 220,000 June 30, 1999 $ 28 134.00
JPY 220,000 September 30, 1999 $ 21 140.00
</TABLE>
- -------------
(a) Amounts expressed in units of foreign currency
(b) Amounts expressed in foreign currency per U.S. dollar
(c) Options sold or expired in the second quarter of fiscal 1999 at a net gain
of $0.1 million.
Our exposure in terms of these options is limited to the purchase price.
As an example, using the French Franc contract due to expire at June 28, 1999:
<TABLE>
<CAPTION>
FRF EXCHANGE GAIN/(LOSS) GAIN/(LOSS) NET GAIN/
RATE ON OPTION (A) FROM PRIOR YEAR RATE (B) (LOSS)
---- ------------- ------------------------ ------
(IN THOUSANDS, EXCEPT EXCHANGE RATE)
<C> <C> <C> <C>
5.5 $ (40) $ 606 $ 566
6.0 (40) 0 (40)
6.5 472 (512) (40)
</TABLE>
- -------------
(a) Calculated as (notional amount/strike price) - (notional amount/exchange
rate) - premium paid, with losses limited to the premium paid on the
contract.
(b) Calculated as (notional amount/exchange rate) - (notional amount/strike
price).
INTEREST RATES
We use interest rate swaps to reduce our exposure to interest rate
movements. Our net exposure to interest rate risk consists of floating rate
instruments whose interest rates are determined by LIBOR. Interest rate risk
management is accomplished by the use of swaps to create fixed debt amounts by
resetting LIBOR loans concurrently with the rates applying to the swap
agreements. At March 31, 1999, we had floating rate debt of approximately $785.6
million of which a total of $375
29
<PAGE> 31
million was swapped to fixed rates. The net interest rate paid by us is
approximately equal to the sum of the swap agreement rate plus the
applicable LIBOR Margin. During the second quarter and year to date of
fiscal 1999, the LIBOR Margin was .75%. The swap agreement rates and
duration as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
SWAP AGREEMENT SWAP AGREEMENT
EXPIRATION DATE NOTIONAL AMOUNT DATE RATE
- --------------- --------------- ---- ----
<S> <C> <C> <C>
August 13, 1999 $50 million August 13, 1993 5.540%
June 8, 2002 $50 million December 8, 1995 5.500%
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.897%
September 10, 2001 $50 million December 8, 1995 5.623%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23,1998 4.733%
</TABLE>
The model below quantifies the Company's sensitivity to interest rate
movements as determined by LIBOR and the effect of the interest rate swaps which
reduce that risk. The model assumes i) a base LIBOR rate of 5.1% (the "Base
Rate") which approximates the March 31, 1999 LIBOR three month LIBOR rate), ii)
the Company's floating rate debt is equal to it's March 31, 1999 floating rate
debt balance of $785.6 million, iii) the Company pays interest on floating rate
debt equal to LIBOR + 75 basis points, iv) that the Company has interest rate
swaps with a notional amount of $375.0 million (equal to the notional amount of
the Company's interest rate swaps at March 31, 1999) and v) that LIBOR varies by
10% of the Base Rate.
<TABLE>
<CAPTION>
Interest expense Interest expense
increase from a decrease from a
10% increase in the 10% decrease in the
Interest rate exposure LIBOR Base Rate LIBOR Base Rate
- ---------------------- --------------- ---------------
<S> <C> <C>
Without interest rate swaps: $4.0 million ($4.0 million)
With interest rate swaps: $2.1 million ($2.1 million)
</TABLE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
See the Exhibit Index following the Signature page in this report,
which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
30
<PAGE> 32
No reports on Form 8-K were filed during the quarter for which this
report is filed.
31
<PAGE> 33
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 May 17, 1999 /s/ Dennis Brown
------------ -------------------------------
Dennis Brown
Vice President - Finance, Chief
Financial Officer & Treasurer*
* executing as both the principal financial
officer and the duly authorized officer
of the Company.
32
<PAGE> 34
SYBRON INTERNATIONAL CORPORATION
(THE "REGISTRANT")
(COMMISSION FILE NO. 1-11091)
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
<S> <C> <C> <C>
10.1 1999 Outside Director's Stock Exhibit A to the Registrant's
Option Plan Proxy Statement dated
December 23, 1998 for
its Annual Meeting of
Shareholders on
January 27, 1999
27.1 Financial Data Schedule X
27.2 Restated Financial Data Schedule
(six month period ended March 31,
1998) X
</TABLE>
<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 six months ended March 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 13,301
<SECURITIES> 0
<RECEIVABLES> 197,623
<ALLOWANCES> 5,410
<INVENTORY> 185,280
<CURRENT-ASSETS> 443,328
<PP&E> 226,171
<DEPRECIATION> 200,415
<TOTAL-ASSETS> 1,585,213
<CURRENT-LIABILITIES> 166,563
<BONDS> 809,425
0
0
<COMMON> 1,034
<OTHER-SE> 548,143
<TOTAL-LIABILITY-AND-EQUITY> 1,585,213
<SALES> 520,347
<TOTAL-REVENUES> 520,347
<CGS> 253,182
<TOTAL-COSTS> 145,786
<OTHER-EXPENSES> (793)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,149
<INCOME-PRETAX> 92,437
<INCOME-TAX> 36,607
<INCOME-CONTINUING> 55,830
<DISCONTINUED> 28,917
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,747
<EPS-PRIMARY> .72
<EPS-DILUTED> .71
<FN>
<F1>See notes to unaudited Consolidated Financial Statements.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information extracted from
the unaudited consolidated financial statements of Sybron International
Corporation for the six months ended March 31, 1998, as restated to reflect the
mergers of LRS Acquisition Corp. and Pinnacle Products of Wisconsin, Inc.,
which are accounted for as pooling of interests, and the reclassification of
Nalge Process Technologies Group, Inc. to discontinued operations, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 21,692
<SECURITIES> 0
<RECEIVABLES> 178,491
<ALLOWANCES> 4,573
<INVENTORY> 156,196
<CURRENT-ASSETS> 449,626
<PP&E> 202,063
<DEPRECIATION> 164,746
<TOTAL-ASSETS> 1,373,634
<CURRENT-LIABILITIES> 148,211
<BONDS> 729,614
0
0
<COMMON> 1,026
<OTHER-SE> 434,964
<TOTAL-LIABILITY-AND-EQUITY> 1,373,634
<SALES> 440,826
<TOTAL-REVENUES> 440,826
<CGS> 210,976
<TOTAL-COSTS> 128,436
<OTHER-EXPENSES> (183)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,708
<INCOME-PRETAX> 74,523
<INCOME-TAX> 28,942
<INCOME-CONTINUING> 45,581
<DISCONTINUED> 2,683
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,264
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
<FN>
<F1>See notes to unaudited Consolidated Financial Statements.
</FN>
</TABLE>
