<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, 2000
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 9, 2000, there were 104,543,125 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, 2000 (unaudited)
and September 30, 1999 2
Consolidated Statements of Income for the three and six months
ended March 31, 2000 (unaudited) and 1999 (unaudited) 3
Consolidated Statements of Shareholders' Equity for the year
ended September 30, 1999 and the six months ended
March 31, 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
March 31, 2000 (unaudited) and 1999 (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 37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 39
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 40
SIGNATURES 41
</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)
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
----------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 9,763 $ 18,491
Accounts receivable (less allowance for doubtful
receivables of $5,828 and $5,676, respectively) ..................... 245,096 231,506
Inventories (note 2) .................................................. 228,533 203,202
Deferred income taxes ................................................. 24,531 23,339
Prepaid expenses and other current assets ............................. 21,532 15,419
----------- -----------
Total current assets ............................................. 529,455 491,957
Available for sale security ............................................. 51,521 50,900
Property, plant and equipment, net of accumulated depreciation
of $232,168 and $212,995, respectively .............................. 252,567 245,247
Intangible assets ....................................................... 1,119,774 1,028,081
Deferred income taxes ................................................... 12,745 13,623
Other assets ............................................................ 10,524 13,109
----------- -----------
Total assets ..................................................... $ 1,976,586 $ 1,842,917
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable ...................................................... $ 55,133 $ 62,418
Current portion of long-term debt ..................................... 5,350 8,962
Income taxes payable .................................................. 24,982 23,490
Accrued payroll and employee benefits ................................. 42,578 49,006
Restructuring reserve (note 4) ........................................ 1,565 2,332
Deferred income taxes ................................................. 3,245 3,251
Other current liabilities ............................................. 29,497 42,490
----------- -----------
Total current liabilities ......................................... 162,350 191,949
----------- -----------
Long-term debt .......................................................... 969,923 875,254
Securities lending agreement ............................................ 51,521 50,461
Deferred income taxes ................................................... 89,022 84,527
Other liabilities ....................................................... 14,265 15,382
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 104,429,611 and 104,023,697 shares, respectively ............. 1,044 1,040
Equity Rights, 50 rights at $1.09 per right ........................... -- --
Additional paid-in capital ............................................ 258,001 251,251
Retained earnings ..................................................... 472,779 403,380
Accumulated other comprehensive income ................................ (42,319) (30,327)
Treasury common stock, 220 shares at cost ............................. -- --
----------- -----------
Total shareholders' equity ....................................... 689,505 625,344
----------- -----------
Total liabilities and shareholders' equity ....................... $ 1,976,586 $ 1,842,917
=========== ===========
</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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................................... $ 326,389 $ 272,017 $ 624,636 $ 520,347
Cost of sales:
Cost of product sold ............................. 155,353 130,284 299,249 252,846
Depreciation of purchase accounting adjustments .. 161 169 322 336
--------- --------- --------- ---------
Total cost of sales ................................. 155,514 130,453 299,571 253,182
--------- --------- --------- ---------
Gross profit ........................................ 170,875 141,564 325,065 267,165
Selling, general and administrative expenses ........ 78,309 65,464 153,271 128,235
Merger, transaction and integration expenses ........ -- -- -- 2,691
Depreciation and amortization of purchase
accounting adjustments ............................. 10,792 7,600 21,335 14,860
--------- --------- --------- ---------
Total selling, general and administrative expenses .. 89,101 73,064 174,606 145,786
--------- --------- --------- ---------
Operating income .................................... 81,774 68,500 150,459 121,379
Other income (expense):
Interest expense ................................. (18,259) (14,033) (36,182) (28,149)
Amortization of deferred financing fees .......... (221) (80) (399) (160)
Other, net ....................................... 820 (874) 776 (633)
--------- --------- --------- ---------
Income before income taxes and discontinued
operations ......................................... 64,114 53,513 114,654 92,437
Income taxes ........................................ 25,139 21,003 45,255 36,607
--------- --------- --------- ---------
Income from continuing operations ................... 38,975 32,510 69,399 55,830
Discontinued operations:
Income (loss) from discontinued operations (net of
income tax expense/(benefit) of ($165) and $80)
(note 5) ........................................... -- (418) -- 121
Extraordinary Item:
Gain on sale of discontinued operations (less income
taxes of $18,651) (note 5) ....................... -- 18,796 -- 18,796
--------- --------- --------- ---------
Net income .......................................... $ 38,975 $ 50,888 $ 69,399 $ 74,747
========= ========= ========= =========
Basic earnings per common share from continuing
operations ......................................... $ .37 $ .31 $ .67 $ .54
Discontinued operations ............................. -- -- -- --
Extraordinary item .................................. -- .18 -- .18
--------- --------- --------- ---------
Basic earnings per common share ..................... $ .37 $ .49 $ .67 $ .72
========= ========= ========= =========
Diluted earnings per common share from continuing
operations ......................................... $ .37 $ .31 $ .65 $ .53
Discontinued operations ............................. -- -- -- --
Extraordinary item .................................. -- .17 -- .17
--------- --------- --------- ---------
Diluted earnings per common share ................... $ .37 $ .48 $ .65 $ .70
========= ========= ========= =========
</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, 1999
AND THE SIX MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS INCOME EQUITY
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998 ......... $ 1,029 $ 234,070 $ 260,833 $ (20,688) $ 475,244
Comprehensive income:
Net income .......................... -- -- 142,547 -- 142,547
Translation adjustment .............. -- -- -- (9,905) (9,905)
Unrealized gain on security available
for sale .......................... -- -- -- 266 266
--------- --------- --------- --------- ---------
Total comprehensive income ............ -- -- 142,547 (9,639) 132,908
Shares issued in connection with the
exercise of 1,121,421 stock options.. 11 10,680 -- -- 10,691
Tax benefits related to stock options.. -- 6,501 -- -- 6,501
--------- --------- --------- --------- ---------
Balance at September 30, 1999 ......... 1,040 251,251 403,380 (30,327) 625,344
Comprehensive income:
Net income .......................... -- -- 69,399 -- 69,399
Translation adjustment .............. -- -- -- (12,362) (12,362)
0 0
Unrealized gain on security available
for sale ........................... -- -- -- 370 370
--------- --------- --------- --------- ---------
Total comprehensive income ............ -- -- 69,399 (11,992) 57,407
Shares issued in connection with the
exercise of 405,914 stock options .... 4 4,637 -- -- 4,641
Tax benefits related to stock options.. -- 2,113 -- -- 2,113
--------- --------- --------- --------- ---------
Balance at March 31, 2000 ............. $ 1,044 $ 258,001 $ 472,779 $ (42,319) $ 689,505
========= ========= ========= ========= =========
</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,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 69,399 $ 74,747
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of NPT ....................................................... -- (18,796)
Depreciation ............................................................... 19,254 17,623
Amortization ............................................................... 21,452 14,998
Provision for losses on doubtful accounts .................................. 592 494
Inventory provisions ....................................................... 1,199 (409)
Deferred income taxes ...................................................... 4,185 (4,257)
Changes in assets and liabilities, net of effects of businesses acquired:
Decrease (increase) in accounts receivable ................................. (5,954) 2,522
Increase in inventories .................................................... (12,201) (9,500)
Decrease (increase) in prepaid expenses and other current assets ........... (5,801) 10,567
Decrease in accounts payable ............................................... (8,480) (4,725)
Increase (decrease) in income taxes payable ................................ 3,198 (6,641)
Decrease in accrued payroll and employee benefits .......................... (5,928) (7,182)
Decrease in restructuring reserve .......................................... (767) (2,512)
Decrease in other current liabilities ...................................... (18,232) (15,725)
Net change in other assets and liabilities ................................. 25 (2,081)
--------- ---------
Net cash provided by operating activities ................................ 61,941 49,123
Cash flows from investing activities:
Capital expenditures ....................................................... (22,995) (14,346)
Proceeds from sales of property, plant and equipment ....................... 744 812
Proceeds (refund) from the sale of NPT, net of sale expenses ............... (2,600) 86,000
Payments for businesses acquired ........................................... (139,571) (119,512)
--------- ---------
Net cash used in investing activities ..................................... (164,422) (47,046)
Cash flows from financing activities:
Proceeds - revolving credit facility ........................................ 320,000 265,300
Principal payments - revolving credit facility .............................. (222,500) (195,500)
Principal payments on long-term debt ........................................ (3,810) (87,284)
Receipt of collateral under securities lending agreement .................... 1,011 --
Proceeds from the exercise of common stock options .......................... 4,645 4,404
Deferred financing fees ..................................................... (197) (70)
Other ....................................................................... (2,676) 1,137
--------- ---------
Net cash provided by (used in) financing activities ....................... 96,473 (12,013)
Effect of exchange rate changes on cash and cash equivalents ................. (2,720) (654)
Net decrease in cash and cash equivalents .................................... (8,728) (10,590)
Cash and cash equivalents at beginning of period ............................. 18,491 23,891
--------- ---------
Cash and cash equivalents at end of period ................................... $ 9,763 $ 13,301
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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SYBRON INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ........ $33,786 $28,670
======= =======
Cash paid during the period for income taxes .... $37,615 $34,685
======= =======
Capital lease obligations incurred .............. $ 43 $ 186
======= =======
</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 in note 5 below, all such adjustments were of
a normal recurring nature. The results for the three and six month periods
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the full year.
On April 24, 2000, Sybron International Corporation ("the Company")
announced its intention to spin-off its dental group by way of a pro rata
distribution of Sybron Dental Specialties, Inc. ("SDS") stock to Sybron
International Corporation shareholders. The spin-off is subject to a number
of conditions, including (i) receipt by the Company of a favorable ruling
from the Internal Revenue Service concerning the tax-free nature of the
distribution, (ii) effectiveness of a registration statement registering the
stock of SDS under the Securities Exchange Act of 1934, including an
information statement that would be sent to the Company's shareholders in
connection with the distribution, (iii) appropriate stock market conditions
for the distribution and (iv) approval by the Company's Board of Directors
of the final terms of the distribution, including, without limitation, the
formal declaration of a dividend to the Company's shareholders and other
specific actions necessary for the distribution. The spin-off process is
expected to take six to eight months. The results of SDS will continue to be
included in the Company's results from continuing operations until such time
as the conditions to the spin-off have been satisfied. Upon satisfaction of
the conditions, SDS will be shown as a discontinued operation.
2. Inventories at March 31, 2000 and September 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 88,747 $ 67,541
Work-in-process 41,547 39,439
Finished goods 108,531 106,010
Excess and obsolescence reserves (7,375) (7,091)
LIFO reserve (2,917) (2,697)
-------- --------
$228,533 $203,202
======== ========
</TABLE>
3. For the three and six month periods ended March 31, 2000, the Company
completed four and seven acquisitions, respectively, for cash. The aggregate
purchase price of the acquisitions for the quarter and year to date periods
(which are not significant, individually or in the aggregate), net of cash
acquired, was approximately $44.2 million and $136.1 million, respectively.
There are no future purchase price adjustments with respect to earnout
provisions for any of these transactions. All of these acquisitions have
been accounted for as purchases. The results of these acquisitions were
included as of the date they were acquired. The total goodwill and
intangibles for the three and six month periods ended March 31, 2000 for
acquired companies was approximately $28.2 million and
7
<PAGE> 9
$110.2 million, respectively, and will be amortized over 5 to 20 years.
Descriptions of the companies acquired in the second quarter are as follows:
(a) On February 1, 2000, the Company acquired the Versi-Dry(R) product line
from National Packaging Services Corporation located in Green Bay,
Wisconsin. The Versi-Dry(R) product is an absorbent pad used in
research and industrial laboratories and is designed to absorb and
contain chemicals and other spillage occurring in the laboratory. Sales
revenues in 1999 were approximately $2.5 million. The Versi-Dry(R)
product line will be included in the Labware and Life Sciences business
segment.
(b) On February 4, 2000, the Company acquired Sun International ("Sun"), a
leading supplier of consumables for high-pressure liquid
chromatography, gas chromatography and high throughput screening
applications. Sales revenues in 1999 were approximately $5.8 million.
Sun will be included in the Labware and Life Sciences business segment.
(c) On February 29, 2000, the Company acquired Safe-Wave Products Inc.
("Safe-Wave"), a manufacturer of disposable tips and adapters for
air/water syringes used in dental operatory. Sales revenues in 1999
were approximately $4.0 million. Safe-Wave will be included in the
Professional Dental business segment.
(d) On March 6, 2000, the Company acquired the assets of the Consolidated
Technologies operations of Sera Care, Inc. ("CTI"). CTI products
include intermediate biological products, calibration, and controls
used in immunology, clinical chemistry, toxicology, infectious disease
and nucleic acid testing. CTI's sales revenues in 1999 were
approximately $7.8 million. CTI will be included in the Diagnostic and
Microbiology business segment.
An acquisition was completed for cash after the second fiscal quarter of
2000 and will be accounted for as a purchase. The aggregate purchase price
was not significant. There are no future purchase price adjustments due to
earnout provisions from this transaction. The results of this acquisition
will be included as of the date it was acquired. The total goodwill for the
acquired company is currently being assessed. A descriptions of the acquired
company is as follows:
(a) On May 9, 2000, the Company acquired Genevac Limited ("Genevac"),
located in Ipswich , England. Genevac is a designer and manufacturer of
specialty evaporators used in chemical, agrochemical and biotechnology
laboratories for drug discovery and other chemistry related
applications. Sales revenues in 1999 were approximately $11.2 million.
Genevac will be included in the Labware and Life Sciences business
segment.
4. The following table updates activity to the Company's 1998 restructuring
charges as described in footnote 11 to the Company's 1999 annual report
filed on Form 10-K.
<TABLE>
<CAPTION>
SEVERANCE LEASE SHUT-DOWN INVENTORY FIXED CONTRACTUAL
--------- ----- --------- --------- ----- -----------
(A) PAYMENTS COSTS (B) WRITE-OFF ASSETS TAX GOODWILL (E) OBLIGATIONS
--- -------- --------- --------- ------ --- ------------ -----------
(B) (C) (C) (D) (F) OTHER TOTAL
--- --- --- --- --- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
8
<PAGE> 10
<TABLE>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
Restructuring
charge $ 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
1998 non-cash
charges -- -- -- 6,400 2,300 -- 2,100 -- 600 11,400
--------- -------- -------- -------- -------- -------- --------- --------- --------- -----------
September 30,
1998 balance $ 5,200 $ 300 $ 400 $ -- $ -- $ 700 $ -- $ 600 $ 800 $ 8,000
1999 cash
payments 3,400 300 400 -- -- -- -- 300 400 4,800
Adjustments (a) 900 -- -- -- -- -- -- -- -- 900
--------- -------- -------- -------- -------- -------- --------- --------- --------- -----------
September 30,
1999 balance $ 900 $ -- $ -- $ -- $ -- $ 700 $ -- $ 300 $ 400 $ 2,300
2000 cash
payments 400 -- -- -- -- -- -- 200 100 700
--------- -------- -------- -------- -------- -------- --------- --------- --------- -----------
March 31, 2000
balance $ 500 $ -- $ -- $ -- $ -- $ 700 $ -- $ 100 $ 300 $ 1,600
========= ======== ======== ======== ======== ======== ========= ========= ========= ===========
</TABLE>
(a) Amount represents severance and termination costs for approximately 165
terminated employees (primarily sales and marketing personnel). As of March
31, 2000, 154 employees have been terminated as a result of the
restructuring plan. Payments will continue to certain employees previously
terminated under this restructuring plan. An adjustment of approximately
$900 was made in the third quarter of fiscal 1999 to adjust the accrual
primarily representing over accruals for anticipated costs associated with
outplacement services, accrued fringe benefits, and severance associated
with employees who were previously notified of termination and subsequently
filled other Company positions. No additional employees will be terminated
under this restructuring plan.
(b) Amount represents lease payments and shutdown costs on exited facilities.
(c) Amount represents write-offs of inventory and fixed assets associated with
discontinued product lines.
(d) Amount represents a statutory tax relating to assets transferred from an
exited sales facility in Switzerland.
(e) Amount represents goodwill associated with exited product lines at Sybron
Laboratory Products Corporation.
(f) Amount represents certain terminated contractual obligations primarily
associated with SDS.
The Company expects to make future cash payments of approximately $300 in
the remainder of fiscal 2000 and approximately $1,300 in fiscal 2001 and
beyond.
5. On March 31, 1999, the Company completed the sale of Nalge Process
Technologies Group, Inc. ("NPT"). The results and gain on the sale of NPT in
the fiscal 1999 period are classified as discontinued operations and an
extraordinary item, respectively. In addition, in the first quarter of
fiscal 2000, the Company refunded approximately $2.6 million of previously
accrued purchase price adjustments to the purchaser. The Company does not
anticipate any additional adjustments to the purchase price.
6. The Company's operating subsidiaries are engaged in the manufacture and sale
of laboratory and dental products in the United States and other countries.
Laboratory products are categorized in the business segments of a) Labware
and Life Sciences, b) Clinical and Industrial, c) Diagnostics and
Microbiology and d) Laboratory Equipment. Dental products are categorized in
the business segments of a) Professional Dental, b) Orthodontics and c)
Infection Control Products.
Information on these business segments is summarized on the following two
pages:
9
<PAGE> 11
<TABLE>
<CAPTION>
LABWARE CLINICAL DIAGNOSTICS
AND LIFE AND AND LABORATORY
SCIENCES INDUSTRIAL MICROBIOLOGY EQUIPMENT
-------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED 3/31/99
Revenues:
External customer ................. $67,270 $44,144 $40,074 $23,917
Intersegment ...................... 287 1,585 85 181
Total revenues .................. 67,557 45,729 40,159 24,098
Gross profit ........................ 34,215 18,503 20,433 9,943
Selling, general and admin .......... 16,773 7,381 9,834 4,907
Operating income .................... 17,442 11,122 10,599 5,036
THREE MONTHS ENDED 3/31/00
Revenues:
External customer ................. 85,584 54,666 53,179 24,645
Intersegment ...................... 285 1,768 91 229
Total revenues .................. 85,869 56,434 53,270 24,874
Gross profit ........................ 45,166 23,264 28,434 10,301
Selling, general and admin .......... 23,773 9,248 14,022 5,292
Operating income .................... 21,393 14,016 14,412 5,009
<CAPTION>
ELIMIN- TOTAL PROFESSIONAL
ATIONS SLP DENTAL ORTHODONTICS
------ --- ------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED 3/31/99
Revenues:
External customer ................ $ -- $ 175,405 $ 46,881 $ 43,536
Intersegment ..................... (1,993) 145 56 949
Total revenues.................. (1,993) 175,550 46,937 44,485
Gross profit ....................... -- 83,094 26,813 28,211
Selling, general and admin ......... -- 38,895 15,297 14,435
Operating income ................... -- 44,199 11,516 13,776
THREE MONTHS ENDED 3/31/00
Revenues:
External customer ................ -- 218,074 55,217 46,699
Intersegment ..................... (2,216) 157 293 2,074
Total revenues ................. (2,216) 218,231 55,510 48,773
Gross profit ....................... -- 107,165 32,342 28,674
Selling, general and admin ......... -- 52,335 15,764 15,186
Operating income ................... -- 54,830 16,578 13,488
<CAPTION>
INFECTION
CONTROL ELIMIN- TOTAL
PRODUCTS ATIONS SDS OTHER (a) TOTAL
-------- ------ --- -------- -----
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED 3/31/99
Revenues:
External customer ............... $6,195 $ -- $ 96,612 $ -- $ 272,017
Intersegment .................... -- (1,005) -- (145) --
Total revenues ................ 6,195 (1,005) 96,612 (145) 272,017
Gross profit ...................... 3,446 -- 58,470 -- 141,564
Selling, general and admin......... 2,506 -- 32,238 1,931 73,064
Operating income .................. 940 -- 26,232 (1,931) 68,500
THREE MONTHS ENDED 3/31/00
Revenues:
External customer ............... 6,399 -- 108,315 -- 326,389
Intersegment .................... 4 (2,371) -- (157) --
Total revenues ................ 6,403 (2,371) 108,315 (157) 326,389
Gross profit ...................... 2,694 -- 63,710 -- 170,875
Selling, general and admin ........ 2,622 -- 33,572 3,194 89,101
Operating income .................. 72 -- 30,138 (3,194) 81,774
</TABLE>
- ---------------
(a) Includes the elimination of intergroup and corporate office activity.
10
<PAGE> 12
<TABLE>
<CAPTION>
LABWARE CLINICAL DIAGNOSTICS
AND LIFE AND AND LABORATORY
SCIENCES INDUSTRIAL MICROBIOLOGY EQUIPMENT
-------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED 3/31/99
Revenues:
External customer ........... $ 121,917 $ 84,414 $ 76,923 $ 48,564
Intersegment ................ 549 3,053 180 358
Total revenues ............ 122,466 87,467 77,103 48,922
Gross profit .................. 61,985 35,107 39,491 20,131
Selling, general and admin..... 31,836 14,529 19,737 10,314
Operating income .............. 30,149 20,578 19,754 9,817
SIX MONTHS ENDED 3/31/00
Revenues:
External customer ........... 165,482 106,577 103,795 47,103
Intersegment ................ 638 3,327 193 442
Total revenues ............ 166,120 109,904 103,988 47,545
Gross profit .................. 86,023 44,910 56,433 19,890
Selling, general and admin..... 46,978 18,195 28,862 10,362
Operating income .............. 39,045 26,715 27,571 9,528
Segment Assets ................ 548,992 295,467 440,839 130,364
<CAPTION>
ELIMIN- TOTAL PROFESSIONAL
ATIONS SLP DENTAL ORTHODONTICS
------ --- ------ ------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED 3/31/99
Revenues:
External customer ............ $ -- $ 331,818 $ 91,992 $ 84,950
Intersegment ................. (3,860) 280 196 2,074
Total revenues ............. (3,860) 332,098 92,188 87,024
Gross profit ................... -- 156,714 51,420 52,640
Selling, general and admin...... -- 76,416 31,602 28,630
Operating income ............... -- 80,298 19,818 24,010
SIX MONTHS ENDED 3/31/00
Revenues:
External customer ............ -- 422,957 102,822 86,760
Intersegment ................. (4,315) 285 439 2,672
Total revenues ............. (4,315) 423,242 103,261 89,432
Gross profit ................... -- 207,256 58,586 53,600
Selling, general and admin...... -- 104,397 -- 28,979
Operating income ............... -- 102,859 29,607 23,622
Segment Assets ................. -- 1,415,662 199,422 190,518
</TABLE>
<TABLE>
<CAPTION>
INFECTION
CONTROL ELIMIN- TOTAL
PRODUCTS ATIONS SDS OTHER (A) TOTAL
-------- ------ --- --------- -----
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED 3/31/99
Revenues:
External customer ........... $ 11,587 $ -- $ 188,529 $ -- $ 520,347
Intersegment ................ -- (2,270) -- (280) --
Total revenues ............ 11,587 (2,270) 188,529 (280) 520,347
Gross profit .................. 6,391 -- 110,451 -- 267,165
Selling, general and admin..... 4,732 -- 64,964 4,406 145,786
Operating income .............. 1,659 -- 45,487 (4,406) 121,379
SIX MONTHS ENDED 3/31/00
Revenues:
External customer ........... 12,097 -- 201,679 -- 624,636
Intersegment ................ 4 (3,115) -- (285) --
Total revenues ............ 12,101 (3,115) 201,679 (285) 624,636
Gross profit .................. 5,623 -- 117,809 -- 325,065
Selling, general and admin..... 4,971 -- 63,928 6,281 174,606
Operating income .............. 652 -- 53,881 (6,281) 150,459
Segment Assets ................ 56,756 -- 446,696 114,228 1,976,586
</TABLE>
- ----------------
(a) Includes the elimination of intergroup and corporate office activity.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The subsidiaries of Sybron International Corporation (the "Company" or
"Sybron") are leading manufacturers of value-added products for the Labware and
Life Sciences, Clinical and Industrial, Diagnostics and Microbiology, Laboratory
Equipment, Professional Dental, Orthodontics and Infection Control Products
markets in the United States and abroad. Our Labware and Life Sciences, Clinical
and Industrial, Diagnostics and Microbiology and Laboratory Equipment business
segments are grouped under Sybron Laboratory Products Corporation ("SLP"), and
our Professional Dental, Orthodontics and Infection Control Products business
segments are grouped under Sybron Dental Specialties, Inc. ("SDS"). SLP and SDS
are both first-tier wholly owned subsidiaries of Sybron. The primary
subsidiaries in each of our business segments are as follows:
<TABLE>
<CAPTION>
SLP
<S> <C>
Labware and Life Sciences Clinical and Industrial
------------------------- -----------------------
Matrix Technologies Corporation Erie Scientific Company
Nalge Nunc International Corporation Chase Scientific Glass, Inc.
National Scientific Company The Naugatuck Glass Company
Nunc A/S Richard-Allan Scientific Company
Molecular BioProducts, Inc. Samco Scientific Corporation
Robbins Scientific Corporation Microm Laborgerate GmbH
Gerhard Menzel Glasbearbeitungswerk
GmbH & Co. K.G.
Diagnostics and Microbiology Laboratory Equipment
---------------------------- --------------------
Applied Biotech, Inc. Barnstead Thermolyne Corporation
Microgenics Corporation Lab-Line Instruments, Inc.
Alexon-Trend, Inc.
Remel Inc.
<CAPTION>
SDS
<S> <C>
Professional Dental Orthodontics
------------------- ------------
Kerr Corporation Ormco Corporation
Beavers Dental Company Ormodent Group
Infection Control Products
--------------------------
Metrex Research Corporation
Alden Scientific, Inc.
</TABLE>
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
12
<PAGE> 14
quarters refer to the Company's fiscal quarters. The quarters ended March 31,
1999 and 2000, refer to the Company's second fiscal quarters of 1999 and 2000,
respectively.
PROPOSED SPIN-OFF OF SDS
On April 24, 2000, Sybron International Corporation ("the Company")
announced its intention to spin off its dental group by way of a pro rata
distribution of Sybron Dental Specialties, Inc. ("SDS") stock to Sybron
International Corporation shareholders. The spin-off is subject to a number of
conditions, including (i) receipt by the Company of a favorable ruling from the
Internal Revenue Service concerning the tax-free nature of the distribution,
(ii) effectiveness of a Registration Statement registering the stock of SDS
under the Securities Exchange Act of 1934, including an information statement
that would be sent to the Company's shareholders in connection with the
distribution, (iii) appropriate stock market conditions for the distribution and
(iv) approval by the Company's Board of Directors of the final terms of the
distribution, including, without limitation, the formal declaration of a
dividend to the Company's shareholders and other specific actions necessary for
the distribution. The spin-off process is expected to take six to eight months.
The results of SDS will continue to be included in the Company's results from
continuing operations until such time as the conditions to the spin-off have
been satisfied. Upon satisfaction of the conditions, SDS will be shown as a
discontinued operation.
In the opinion of management, the spin-off of SDS will enhance the
success of each of the Company's major lines of business, the life science and
laboratory business (grouped under SLP) and the dental business (grouped under
SDS). The separation will allow management of each of the groups to adopt
strategies and pursue objectives that are appropriate to their respective
businesses, recognizing that the two businesses have unique financial,
investment and operating characteristics, human resource concerns, return on
invested capital profiles, capital requirements and growth opportunities.
OVERVIEW
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. We rely heavily on debt to finance our growth
strategy, and our growth strategy has resulted over the years in substantial
portions of our sales, income and cash flows coming from international markets.
The environment for execution of our strategy has become significantly more
challanging over the past year as interest rates have increased and as the U.S.
dollar has strengthened against currencies in key markets for us. For further
information about our interest rate risk, see "Liquidity and Capital Resources,"
below, and "Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -Interest Rates." For further information about our foreign exchange risk, see
the last two paragraphs of this "Overview" section, and "Item 3. Quantitative
and Qualitative Disclosures about Market Risk - Foreign Exchange."
Our results for the six months ended March 31, 1999 include approximately
$2.7 million of charges relating to integration costs associated with two
mergers (the "1999 Special Charges").
13
<PAGE> 15
Both our sales and operating income for the quarter and year to date
period ended March 31, 2000 grew over the corresponding prior year periods. Net
sales for both the second quarter and first half of fiscal 2000 increased by
20.0% over the corresponding fiscal 1999 periods. Operating income for the
second quarter and first half of fiscal 2000 increased by 19.4% and 24.0%,
respectively over the corresponding fiscal 1999 periods. Excluding the 1999
Special Charges, operating income for the first half of fiscal 2000 increased by
21.3% over the corresponding fiscal 1999 period.
Sales growth in the quarter was strong both domestically and
internationally. In the second quarter of fiscal 2000, domestic and
international sales increased by 21.5% and by 16.7%, respectively, over the
corresponding fiscal 1999 quarter. For the first half of fiscal 2000, domestic
and international sales increased by 21.8% and 16.4%, respectively, over the
corresponding fiscal 1999 period. In both the second quarter and first half of
fiscal 2000, international sales growth was negatively impacted by the
strengthening of the U.S. dollar. Without the negative currency effects,
international sales growth for the quarter and first half of fiscal 2000 would
have been 20.3% and 20.4%, respectively, over the corresponding fiscal 1999
periods.
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 seven acquisitions in the first half of fiscal 2000.
(See Note 3 to the Unaudited Consolidated Financial Statements.) Our ability to
continue to grow at historical rates through acquisitions is subject to a number
of uncertainties, including but not limited to the availability of suitable
acquisition candidates at reasonable prices, our ability to raise, and the cost
of capital for acquisitions.
NON-CASH CHARGES
Our results of operations include goodwill amortization, other
amortization, and depreciation. These non-cash charges totaled $19.9 million and
$16.8 million for the quarters ended March 31, 2000 and 1999, respectively, and
$40.7 million and $32.6 million for the first half ended March 31, 2000 and
1999, respectively. Because our operating results reflect significant
depreciation and amortization expense largely associated with stepped-up assets,
goodwill and other intangibles from our acquisition program and the 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) the 1999 Special Charges, and (iv)
depreciation and amortization, all determined on a consolidated basis and in
accordance with GAAP. Our "Adjusted EBITDA" amounted to $102.3 million and $84.3
million for the quarters ended March 31, 2000 and 1999, respectively, and $191.5
million and $155.9 million for the first half ended March 31, 2000 and 1999,
respectively.
INTERNATIONAL OPERATIONS
14
<PAGE> 16
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 1998, we 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 were 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. These options were sold
or expired worthless in their respective quarters of fiscal 1999 at a net gain
of $1.1 million. In November 1999, we again decided to employ a series of
foreign currency options with a U.S. dollar notional amount of approximately
$47.6 million at a cost of approximately $1.2 million. These options are
designed to protect the Company from potential detrimental effects of currency
movements associated with the U.S. dollar verses the Euro, Danish krone and
Japanese yen in the second, third and fourth quarters of fiscal 2000 as compared
to the second, third and fourth quarters of fiscal 1999. The options, designed
to mitigate the detrimental effects on the Company from a strengthening of the
U.S. dollar in the second quarter of fiscal 2000 were sold or expired worthless
during the second quarter of fiscal 2000, at a net gain of $0.7 million. The
remaining contracts with a notional value of $31.6 million remained in place at
March 31, 2000.
RESULTS OF OPERATIONS
15
<PAGE> 17
QUARTER ENDED MARCH 31, 2000
COMPARED TO THE QUARTER ENDED MARCH 31, 1999
NET SALES.
<TABLE>
<CAPTION>
FISCAL FISCAL DOLLAR PERCENT
NET SALES: (IN THOUSANDS) 1999 2000 CHANGE CHANGE
------------------------- ---- ---- ------ ------
<S> <C> <C> <C> <C>
SLP:
Labware and Life Sciences $ 67,270 $ 85,584 $ 18,314 27.2%
Clinical and Industrial 44,144 54,666 10,522 23.8%
Diagnostics and Microbiology 40,074 53,179 13,105 32.7%
Laboratory Equipment 23,917 24,645 728 3.0%
-------- -------- -------- -----
Subtotal SLP 175,405 218,074 42,669 24.3%
SDS:
Professional Dental 46,881 55,217 8,336 17.8%
Orthodontics 43,536 46,699 3,163 7.3%
Infection Control Products 6,195 6,399 204 3.3%
-------- -------- -------- -----
Subtotal SDS 96,612 108,315 11,703 12.1%
-------- -------- -------- -----
Total Net Sales $272,017 $326,389 $ 54,372 20.0%
======== ======== ======== =====
</TABLE>
Overall Company. Net sales for the second quarter of fiscal 2000, ended
March 31, 2000 increased by $54.4 million or 20.0% from the corresponding fiscal
1999 quarter. Net sales at SLP increased by $42.7 million in the second quarter
of fiscal 2000, an increase of 24.3% from SLP's net sales in the corresponding
fiscal 1999 quarter. Net sales at SDS increased by $11.7 million in the second
quarter of fiscal 2000, an increase of 12.1% from SDS's net sales in the
corresponding fiscal 1999 quarter.
Labware and Life Sciences. Increased net sales in the Labware and Life
Sciences segment resulted primarily from: (a) net sales of products of acquired
companies (approximately $14.3 million), (b) increased net sales of existing
products (approximately $4.3 million) and (c) increased net sales of new
products (approximately $0.4 million). Increased net sales were partially offset
by: (a) unfavorable foreign currency fluctuations (approximately $0.6 million)
and (b) price decreases (approximately $0.1 million).
Clinical and Industrial. Increased net sales in the Clinical and Industrial
segment resulted primarily from: (a) net sales of products of acquired companies
(approximately $6.5 million), (b) increased net sales of existing products
(approximately $3.3 million) and (c) price increases (approximately $1.5
million). Increased net sales were partially offset by unfavorable foreign
currency fluctuations (approximately $0.8 million).
Diagnostics and Microbiology. Increased net sales in the Diagnostics and
Microbiology segment resulted primarily from: (a) net sales of products of
acquired companies net of discontinued products (approximately $9.4 million),
(b) increased net sales of existing products (approximately $2.8 million) and
(c) increased net sales of new products (approximately $0.6 million) and (d)
price increases (approximately $0.3 million).
Laboratory Equipment. Increased net sales in the Laboratory Equipment
segment resulted primarily from (a) price increases (approximately $0.3
million), (b) increased net sales of new products (approximately $0.2 million),
(c) net sales of products of acquired companies (approximately $0.1 million) and
(d) increased net sales of existing products (approximately $0.1 million).
16
<PAGE> 18
Professional Dental. Increased net sales in the Professional Dental segment
resulted primarily from (a) increased net sales of new products (approximately
$8.5 million) and (b) net sales of products from an acquired company
(approximately ($0.4 million). Increased net sales were partially offset by: (a)
unfavorable foreign currency fluctuations (approximately $0.5 million) and (b) a
decrease in existing product net sales (approximately $0.1 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of new products (approximately $2.2
million), (b) net sales of products from an acquired company (approximately $1.5
million) and (c) increased net sales of existing products (approximately $0.8
million). Increased net sales were partially offset by: (a) unfavorable foreign
currency fluctuations (approximately $1.3 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from net sales of products of an acquired
company (approximately $1.0 million) partially offset by decreased net sales of
existing products (approximately $0.8 million). Decreased net sales of existing
products resulted primarily from a voluntary suppression of sales of certain
products as the result of issues raised by an FDA inspection of Metrex Research,
Inc.'s Parker, Colorado facility. The impact of the action was mitigated by
Metrex's ability to supply substitute products to its customers. Metrex also
conducted a voluntary recall of certain of their products, for which it incurred
a charge of approximately $0.5 million in the quarter ended March 31, 2000.
Metrex may incur an additional charge of up to $0.6 million during the third
quarter of fiscal 2000 for inventory adjustments and disposal costs related to
this matter.
GROSS PROFIT.
<TABLE>
<CAPTION>
FISCAL PERCENT OF FISCAL PERCENT OF DOLLAR PERCENT
GROSS PROFIT: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ---------------------------- ---- ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SLP:
Labware and Life Sciences $ 34,215 50.9% $ 45,166 52.8% $ 10,951 32.0%
Clinical and Industrial 18,503 41.9% 23,264 42.6% 4,761 25.7%
Diagnostics and Microbiology 20,433 51.0% 28,434 53.3% 8,001 39.2%
Laboratory Equipment 9,943 41.6% 10,301 41.8% 358 3.6%
--------- ---- -------- ---- -------- -----
Subtotal SLP 83,094 47.4% 107,165 49.1% 24,071 29.0%
SDS:
Professional Dental 26,813 57.2% 32,342 58.6% 5,529 20.6%
Orthodontics 28,211 64.8% 28,674 61.4% 463 1.6%
Infection Control Products 3,446 55.6% 2,694 42.1% (752) (21.8)%
--------- ---- --------- ---- ------- -----
Subtotal SDS 58,470 60.5% 63,710 58.8% 5,240 9.0%
-------- ---- -------- ---- -------- -----
Total Gross Profit $141,564 52.0% $170,875 52.4% $ 29,311 20.7%
======== ==== ======== ==== ======== =====
</TABLE>
Overall Company. Gross profit for the quarter ended March 31, 2000 increased
by $29.3 million or 20.7% from the corresponding fiscal 1999 period. Gross
profit at SLP increased by $24.1 million in the second quarter of fiscal 2000,
an increase of 29.0% from SLP's gross profit in the corresponding fiscal 1999
quarter. Gross profit at SDS increased by $5.2 million in the second quarter of
fiscal 2000, an increase of 9.0% from SDS's gross profit in the corresponding
fiscal 1999 quarter.
Labware and Life Sciences. Increased gross profit in the Labware and Life
Sciences segment resulted primarily from: (a) the effects of acquired companies
(approximately $8.3 million), (b) increased volume
17
<PAGE> 19
(approximately $2.3 million), (c) a favorable product mix (approximately $1.7
million), (d) favorable foreign currency fluctuations (approximately $1.0
million) and (e) inventory valuation adjustments (approximately $0.6 million).
Increased gross profit was partially offset by: (a) increased manufacturing
overhead (approximately $2.8 million) and (b) price decreases (approximately
$0.1 million).
Clinical and Industrial. Increased gross profit in the Clinical and
Industrial segment resulted primarily from: (a) increased volume (approximately
$1.6 million), (b) price increases (approximately $1.5 million), (c) the effects
of acquired companies (approximately $1.4 million), (d) an improved product mix
(approximately $1.2 million) and (e) inventory valuation adjustments
(approximately $0.3 million). Increased gross profit was partially offset by:
(a) increased manufacturing overhead (approximately $1.1 million) and (b)
unfavorable foreign currency fluctuations (approximately $0.1 million).
Diagnostics and Microbiology. Increased gross profit in the Diagnostics and
Microbiology segment resulted primarily from: (a) the effects of acquired
companies net of discontinued product lines (approximately $6.2 million), (b) a
favorable product mix (approximately $1.8 million), (c) increased volume
(approximately $0.9 million) and (d) price increases (approximately $0.3
million). Increased gross profit was partially offset by increased manufacturing
overhead (approximately $1.2 million).
Laboratory Equipment. Increased gross profit in the Laboratory Equipment
segment resulted primarily from: (a) price increases (approximately $0.3
million), (b) increased volume (approximately $0.2 million), (c) the effects of
acquired companies (approximately $0.1 million) and (d) inventory valuation
adjustments (approximately $0.2 million). Increased gross profit was partially
offset by increased manufacturing overhead (approximately $0.4 million).
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $5.0
million), (b) a favorable product mix (approximately $0.7 million), (c) the
effects of an acquired company (approximately $0.2 million) and (d) inventory
valuation adjustments (approximately $0.1 million). Increased gross profit was
partially offset by: (a) increased manufacturing overhead (approximately $0.4
million) and (b) unfavorable foreign currency fluctuations (approximately $0.1
million).
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) increased volume (approximately $2.0 million), (b) the
effects of an acquired company (approximately $0.4 million) and (c) a favorable
product mix (approximately $0.3 million). Increased gross profit was partially
offset by: (a) unfavorable foreign currency fluctuations (approximately $1.3
million), (b) increased manufacturing overhead (approximately $0.3 million) and
(c) inventory valuation adjustments (approximately $0.6 million).
Infection Control Products. Decreased gross profit in the Infection Control
Products segment resulted primarily from: (a) costs associated with the product
recall referred to above, including the write-off of inventory (approximately
$0.6 million), (b) decreased volume (approximately $0.5 million) and (c) an
unfavorable product mix (approximately $0.3 million). Decreased gross profit was
partially offset by the effects of an acquired company (approximately $0.6
million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
18
<PAGE> 20
<TABLE>
<CAPTION>
SELLING GENERAL AND ADMINISTRATIVE PERCENT OF PERCENT OF DOLLAR PERCENT
EXPENSES: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ----------------------------- ---- ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SLP:
Labware and Life Sciences $ 16,773 24.9% $ 23,773 27.8% $ 7,000 41.7%
Clinical and Industrial 7,381 16.7% 9,248 16.9% 1,867 25.3%
Diagnostics and Microbiology 9,834 24.5% 14,022 26.4% 4,188 42.6%
Laboratory Equipment 4,907 20.5% 5,292 21.5% 385 7.8%
-------- ---- -------- ---- -------- -----
Subtotal SLP 38,895 22.2% 52,335 24.0% 13,440 34.6%
SDS:
Professional Dental 15,297 32.6% 15,764 28.5% 467 3.1%
Orthodontics 14,435 33.2% 15,186 32.5% 751 5.2%
Infection Control Products 2,506 40.5% 2,622 41.0% 116 4.6%
-------- ---- -------- ---- -------- -----
Subtotal SDS 32,238 33.4% 33,572 31.0% 1,334 4.1%
Corporate Office 1,931 N/A 3,194 N/A 1,263 65.4%
-------- ---- -------- ---- -------- ----
Total Selling General and
Administrative Expenses $ 73,064 26.9% $ 89,101 27.3% $ 16,037 21.9%
======== ==== ======== ==== ======== ====
</TABLE>
Overall Company. Selling, general and administrative expenses for the
quarter ended March 31, 2000 increased by $16.0 million or 21.9% from the
corresponding fiscal 1999 quarter. Selling, general and administrative expenses
at SLP increased by $13.4 million in the second quarter of fiscal 2000, an
increase of 34.6% from SLP's corresponding fiscal 1999 quarter. Selling, general
and administrative expenses at SDS increased by $1.3 million in the second
quarter of fiscal 2000, an increase of 4.1% from SDS's corresponding fiscal 1999
quarter. Selling, general and administrative expenses at the corporate office
increased by $1.3 million in the second quarter of fiscal 1999, an increase of
65.4% from the corporate office's corresponding fiscal 1999 quarter.
Labware and Life Sciences. Increased selling, general and administrative
expenses in the Labware and Life Sciences segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $4.6 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $1.3 million),
(c) increased general and administrative expenses (approximately $0.8 million)
and (d) increased selling and marketing expenses (approximately $0.3 million).
Clinical and Industrial. Increased selling, general and administrative
expenses in the Clinical and Industrial segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $1.3 million), (b) increased general and
administrative expenses (approximately $0.3 million), (c) increased selling and
marketing expenses (approximately $0.2 million) and (d) increased amortization
of intangibles primarily as a result of acquisitions (approximately $0.2
million). Increased selling, general and administrative expenses were partially
offset by favorable foreign currency fluctuations (approximately $0.1 million).
Diagnostics and Microbiology. Increased selling, general and administrative
expenses in the Diagnostics and Microbiology segment resulted primarily from:
(a) increased selling, general and administrative expenses as a result of
acquired businesses (approximately $2.7 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $1.2 million),
(c) increased general and administrative expenses (approximately $0.4 million)
and (d) increased selling and marketing expense (approximately $0.1 million).
Increased selling, general and administrative expenses were partially offset by
decreased research and development expense (approximately $0.2 million).
19
<PAGE> 21
Laboratory Equipment. Increased selling, general and administrative expenses
in the Laboratory Equipment segment resulted primarily from: (a) increased
research and development expenses (approximately $0.3 million) and (b) increased
amortization of intangibles primarily as a result of acquisitions (approximately
$0.1 million).
Professional Dental. Increased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) unfavorable
foreign currency fluctuations (approximately $0.2 million), (b) increased
general and administrative expenses (approximately $0.1 million), (c) increased
research and development expenses (approximately $0.1 million) and (d) increased
amortization of intangibles primarily as a result of an acquisition
(approximately $0.1 million).
Orthodontics. Increased selling, general and administrative expenses in the
Orthodontics segment resulted primarily from: (a) increased general and
administrative expenses (approximately $0.6 million), (b) increased selling,
general and administrative expenses as a result of acquired companies
(approximately $0.4 million) and (c) increased amortization of intangibles
primarily as a result of an acquisition (approximately $0.2 million). Increased
selling, general and administrative expenses in the Orthodontics segment were
partially offset by (a) decreased selling and marketing expenses (approximately
$0.2 million) and (b) decreased research and development expenses (approximately
$0.2 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of an
acquired company (approximately $0.1 million), (b) amortization of intangibles
primarily from acquired businesses (approximately $0.1 million) and (c)
increased selling and marketing expenses (approximately $0.1 million). Increased
selling, general and administrative expenses were partially offset by decreased
general and administrative expenses (approximately $0.2 million).
Corporate Office. Increased selling, general and administrative expenses at
the corporate office resulted primarily from: (a) an increase in legal expense
and professional fees (approximately $1.3 million).
OPERATING INCOME
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF DOLLAR PERCENT
OPERATING INCOME: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ------------------------------- ---- ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SLP:
Labware and Life Sciences $ 17,442 25.9% $ 21,393 25.0% $ 3,951 22.7%
Clinical and Industrial 11,122 25.2% 14,016 25.6% 2,894 26.0%
Diagnostics and Microbiology 10,599 26.4% 14,412 27.1% 3,813 36.0%
Laboratory Equipment 5,036 21.1% 5,009 20.3% (27) (0.5)%
-------- ---- -------- ---- -------- ----
Subtotal SLP 44,199 25.2% 54,830 25.1% 10,631 24.1%
SDS:
Professional Dental 11,516 24.6% 16,578 30.0% 5,062 44.0%
</TABLE>
20
<PAGE> 22
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Orthodontics 13,776 31.6% 13,488 28.9% (288) (2.1)%
Infection Control Products 940 15.2% 72 1.1% (868) (92.3)%
--------- ---- --------- ----- -------- ----
Subtotal SDS 26,232 27.2% 30,138 27.8% 3,906 14.9%
Corporate Office (1,931) N/A (3,194) N/A (1,263) 65.4%
--------- ---- --------- ----- -------- ----
Total Operating Income $ 68,500 25.2% $ 81,774 25.1% $ 13,274 19.4%
========= ==== ========= ===== ======== ====
</TABLE>
As a result of the foregoing, operating income in the second quarter of
fiscal 2000 increased by 19.4% or $13.3 million over operating income in the
corresponding quarter of fiscal 1999.
INTEREST EXPENSE.
Interest expense was $18.3 million in the second quarter of fiscal 2000, an
increase of $4.2 million from the corresponding fiscal 1999 quarter. The
increase resulted from a higher average debt balance in 2000, resulting
primarily from funding acquisitions (partially offset by the application of
proceeds from the sale of Nalge Process Technologies Group, Inc. ("NPT") in
March 1999 and an increase in average interest rates primarily due to the
addition of a Term B Loan in July 1999.
INCOME TAXES.
Taxes on income from continuing operations in the second quarter of fiscal
2000 were $25.1 million, an increase of $4.1 million from the corresponding 1999
quarter. The increase resulted primarily from increased taxable earnings.
INCOME FROM CONTINUING OPERATIONS.
As a result of the foregoing we had net income from continuing operations of
$39.0 million in the second quarter of fiscal 2000, as compared to $32.5 million
in the corresponding 1999 period.
DISCONTINUED OPERATIONS.
Loss from discontinued operations was $0.4 million in the second quarter of
fiscal 1999. The 1999 discontinued operations resulted from the operating
results of NPT.
EXTRAORDINARY ITEM.
On March 31, 1999, Sybron completed the sale of NPT to Norton Performance
Plastics Corporation. 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 in the second quarter of fiscal 1999 (net of tax of $18.7 million)
of $18.8 million. Reductions to the gain were made in the Company's third and
fourth fiscal quarters of 1999 of $0.8 million each reducing the final gain on
the sale of NPT to $17.2 million.
NET INCOME.
21
<PAGE> 23
As a result of the foregoing, we had net income of $39.0 million in the
second quarter of fiscal 2000, as compared to net income of $50.9 million in the
corresponding 1999 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 $3.1 million in the second quarter of fiscal 2000 due to
additional depreciation and amortization from the step-up of assets, goodwill
and intangibles recorded from the various acquisitions as well as routine
operating capital expenditures.
FIRST SIX MONTHS ENDED MARCH 31, 2000
COMPARED TO THE FIRST SIX MONTHS ENDED MARCH 31, 1999
NET SALES.
<TABLE>
<CAPTION>
FISCAL FISCAL DOLLAR PERCENT
NET SALES: (IN THOUSANDS) 1999 2000 CHANGE CHANGE
- ------------------------- ---- ---- ------ ------
<S> <C> <C> <C> <C>
SLP:
Labware and Life Sciences $ 121,917 $ 165,482 $ 43,565 35.7%
Clinical and Industrial 84,414 106,577 22,163 26.3%
Diagnostics and Microbiology 76,923 103,795 26,872 34.9%
Laboratory Equipment 48,564 47,103 (1,461) (3.0)%
--------- --------- -------- -------
Subtotal SLP 331,818 422,957 91,139 27.5%
SDS:
Professional Dental 91,992 102,822 10,830 11.8%
Orthodontics 84,950 86,760 1,810 2.1%
Infection Control Products 11,587 12,097 510 4.4%
--------- --------- -------- -------
Subtotal SDS 188,529 201,679 13,150 7.0%
--------- --------- -------- -------
Total Net Sales $ 520,347 $ 624,636 $104,289 20.0%
========= ========= ======== =======
</TABLE>
Overall Company. Net sales for the six months ended March 31, 2000 increased
by $104.3 million or 20.0% from the corresponding fiscal 1999 period. Net sales
at SLP increased by $91.1 million in the first half of fiscal 2000, an increase
of 27.5% from SLP's net sales in the corresponding fiscal 1999 period. Net sales
at SDS increased by $13.2 million in the first half of fiscal 2000, an increase
of 7.0% from SDS's net sales in the corresponding fiscal 1999 quarter.
Labware and Life Sciences. Increased net sales in the Labware and Life
Sciences segment resulted primarily from: (a) net sales of products of acquired
companies (approximately $33.4 million), (b) increased net sales of existing
products (approximately $10.5 million), (c) increased net sales of new products
(approximately $0.8 million) and (d) price increases (approximately $0.2
million). Increased net sales were partially offset by unfavorable foreign
currency fluctuations (approximately $1.3 million).
Clinical and Industrial. Increased net sales in the Clinical and Industrial
segment resulted primarily from: (a) net sales of products of acquired companies
(approximately $14.6 million), (b) increased net sales of existing products
(approximately $6.0 million) and (c) price increases (approximately $2.9
million). Increased net sales were partially offset by unfavorable foreign
currency fluctuations (approximately $1.3 million).
22
<PAGE> 24
Diagnostics and Microbiology. Increased net sales in the Diagnostics and
Microbiology segment resulted primarily from: (a) net sales of products of
acquired companies net of discontinued products (approximately $19.7 million),
(b) increased net sales of existing products (approximately $6.3 million) and
(c) increased net sales of new products (approximately $1.0 million). Increased
net sales were partially offset by price decreases (approximately $0.1 million).
Laboratory Equipment. Decreased net sales in the Laboratory Equipment
segment resulted primarily from decreased net sales of existing products
primarily related to the constant temperature business, ovens and incubators
(approximately $3.1 million) and (b) unfavorable foreign currency fluctuations
(approximately $0.1 million). The constant temperature business is expected to
continue to undergo pressure due to the large number of competing companies in
the marketplace. Decreased net sales were partially offset by: (a) net sales of
products of acquired companies (approximately $0.7 million), (b) increased net
sales of new products (approximately $0.6 million) and (c) price increases
(approximately $0.4 million).
Professional Dental. Increased net sales in the Professional Dental segment
resulted primarily from increased net sales of new products (approximately $13.1
million). Increased net sales were partially offset by: (a) decreased net sales
of existing products (approximately $1.0 million), (b) unfavorable foreign
currency fluctuations (approximately $1.2 million) and (c) discontinued product
lines (net of sales from an acquired company) (approximately $0.1 million).
Orthodontics. Increased net sales in the Orthodontics segment resulted
primarily from: (a) increased net sales of new products (approximately $3.1
million) and (b) increased net sales of products of an acquired company
(approximately $2.0 million). Increased net sales were partially offset by: (a)
decreased net sales of existing products (approximately $1.0 million) and (b)
unfavorable foreign currency fluctuations (approximately $2.3 million).
Infection Control Products. Increased net sales in the Infection Control
Products segment resulted primarily from net sales of products of an acquired
company (approximately $2.0 million) partially offset by decreased net sales of
existing products due to product life cycle maturities and from a voluntary
suppression of sales of certain products as the result of issues raised by an
FDA inspection of Metrex Research, Inc.'s Parker, Colorado facility. The impact
of the action was mitigated by Metrex's ability to supply substitute products to
its customers (approximately $1.5 million).
GROSS PROFIT.
<TABLE>
<CAPTION>
FISCAL PERCENT OF FISCAL PERCENT OF DOLLAR PERCENT
GROSS PROFIT: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
- ---------------------------- ---- ----- ---- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
SLP:
Labware and Life Sciences $ 61,985 50.8% $86,023 52.0% 24,038 38.8%
Clinical and Industrial 35,107 41.6% 44,910 42.1% 9,803 27.9%
Diagnostics and Microbiology 39,491 51.3% 56,433 54.4% 16,942 42.9%
Laboratory Equipment 20,131 41.5% 19,890 42.2% (241) (1.2)%
--------- ---- ------- ---- ------- -------
Subtotal SLP 156,714 47.2% 207,256 49.0% 50,542 32.3%
SDS:
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Professional Dental 51,420 55.9% 58,586 57.0% 7,166 13.9%
Orthodontics 52,640 62.0% 53,600 61.8% 960 1.8%
Infection Control Products 6,391 55.2% 5,623 46.5% (768) (12.0)%
--------- ---- -------- ---- -------- -----
Subtotal SDS 110,451 58.6% 117,809 58.4% 7,358 6.7%
--------- ---- -------- ---- -------- -----
Total Gross Profit $267,165 51.3% $325,065 52.0% $ 57,900 21.7%
========= ==== ======== ==== ======== =====
</TABLE>
Overall Company. Gross profit for the six months ended March 31, 2000
increased by $57.9 million or 21.7% from the corresponding fiscal 1999 period.
Gross profit at SLP increased by $50.5 million in the first half of fiscal 2000,
an increase of 32.3% from SLP's gross profit in the corresponding fiscal 1999
period. Gross profit at SDS increased by $7.4 million in the first half of
fiscal 2000, an increase of 6.7% from SDS's gross profit in the corresponding
fiscal 1999 period.
Labware and Life Sciences. Increased gross profit in the Labware and Life
Sciences segment resulted primarily from: (a) the effects of acquired companies
(approximately $18.2 million), (b) increased volume (approximately $5.1
million), (c) inventory valuation adjustments (approximately $1.2 million), (d)
a favorable product mix (approximately $2.2 million), (e) price increases
(approximately $0.2 million) and (f) favorable foreign currency fluctuations
(approximately $1.0 million). Increased gross profit was partially offset by
increased manufacturing overhead (approximately $3.9 million).
Clinical and Industrial. Increased gross profit in the Clinical and
Industrial segment resulted primarily from: (a) the effects of acquired
companies (approximately $5.5 million), (b) an improved product mix
(approximately $2.7 million), (c) price increases (approximately $2.9 million),
(d) increased volume (approximately $2.2 million) and (e) inventory valuation
adjustments (approximately $0.2 million). Increased gross profit was partially
offset by: (a) increased manufacturing overhead (approximately $3.6 million) and
(b) unfavorable effects of foreign currency fluctuations (approximately $0.1
million).
Diagnostics and Microbiology. Increased gross profit in the Diagnostics and
Microbiology segment resulted primarily from: (a) the effects of acquired
companies net of discontinued product lines (approximately $13.4 million), (b)
increased volume (approximately $2.6 million), (c) a favorable product mix
(approximately $2.9 million) and (d) inventory valuation adjustments
(approximately $0.8 million). Increased gross profit was partially offset by:
(a) increased manufacturing overhead (approximately $2.7 million) and (b) price
decreases (approximately $0.1 million).
Laboratory Equipment. Decreased gross profit in the Laboratory Equipment
segment resulted primarily from: (a) reduced volume (approximately $1.0 million)
and (b) increased manufacturing overhead (approximately $0.1 million). Decreased
gross profit was partially offset by: (a) the effects of acquired companies
(approximately $0.4 million), (b) price increases (approximately $0.4 million)
and (c) an improved product mix (approximately $0.1 million).
Professional Dental. Increased gross profit in the Professional Dental
segment resulted primarily from: (a) increased volume (approximately $7.3
million) and (b) a favorable product mix (approximately $1.4 million). Increased
gross profit was partially offset by: (a) inventory valuation adjustments
(approximately $0.4 million), (b) increased manufacturing overhead
(approximately $0.7 million), (c) unfavorable foreign currency fluctuations
(approximately $0.3 million) and (d) discontinued product lines (net of an
acquired company) (approximately $0.1 million).
24
<PAGE> 26
Orthodontics. Increased gross profit in the Orthodontics segment resulted
primarily from: (a) a favorable product mix (approximately $2.8 million) (b)
increased volume (approximately $1.4 million) and (c) the effects of an acquired
company (approximately $0.6 million). Increased gross profit was partially
offset by: (a) unfavorable foreign currency fluctuations (approximately $2.3
million), (b) increased manufacturing overhead (approximately $0.7 million) and
(d) inventory valuation adjustments (approximately $0.8 million).
Infection Control Products. Decreased gross profit in the Infection Control
Products segment resulted primarily from: (a) decreased volume (approximately
$0.9 million) (b) costs associated with the product recall referred to above,
including the write-off of inventory (approximately $0.6 million) and (c)
increased manufacturing overhead (approximately $0.5 million). Decreased gross
profit was partially offset by: the effects of an acquired company
(approximately $1.2 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
<TABLE>
<CAPTION>
SELLING GENERAL AND PERCENT OF PERCENT OF DOLLAR PERCENT
ADMINISTRATIVE EXPENSES: 1999 SALES 2000 SALES CHANGE CHANGE
- ------------------------ ---- ----- ---- ----- ------ ------
(IN THOUSANDS)
- --------------
SLP:
<S> <C> <C> <C> <C> <C> <C>
Labware and Life Sciences $ 31,836 26.1% $ 46,978 28.4% $ 15,142 47.6%
Clinical and Industrial 14,529 17.2% 18,195 17.1% 3,666 25.2%
Diagnostics and Microbiology 19,737 25.7% 28,862 27.8% 9,125 46.2%
Laboratory Equipment 10,314 21.2% 10,362 22.0% 48 0.5%
-------- ---- -------- ---- -------- ----
Subtotal SLP 76,416 23.0% 104,397 24.7% 27,981 36.6%
SDS:
Professional Dental 31,602 34.4% 28,979 28.2% (2,623) (8.3)%
Orthodontics 28,630 33.7% 29,978 34.6% 1,348 4.7%
Infection Control Products 4,732 40.8% 4,971 41.1% 239 5.1%
-------- ---- -------- ---- -------- ----
Subtotal SDS 64,964 34.5% 63,928 31.7% (1,036) (1.6)%
Corporate Office 4,406 N/A 6,281 N/A 1,875 42.6%
-------- ---- -------- ---- -------- ----
Total Selling General and
Administrative Expenses $145,786 28.0% $174,606 28.0% $ 28,820 19.8%
======== ==== ======== ==== ======== ====
</TABLE>
Overall Company. Selling, general and administrative expenses for the six
months ended March 31, 2000 increased by $28.8 million or 19.8% from the
corresponding fiscal 1999 period. Selling, general and administrative expenses
at SLP increased by $28.0 million in the first half of fiscal 2000, an increase
of 36.6% from SLP's corresponding fiscal 1999 period. Selling, general and
administrative expenses at SDS decreased by $1.0 million in the first half of
fiscal 2000, a decrease of 1.6% from SDS's corresponding fiscal 1999 period.
Selling, general and administrative expenses at the corporate office increased
by $1.9 million in the first half of fiscal 1999, an increase of 42.6% from the
corporate office's corresponding fiscal 1999 period.
Labware and Life Sciences. Increased selling, general and administrative
expenses in the Labware and Life Sciences segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $10.1 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $2.6 million),
(c) increased selling and marketing expenses (approximately $1.3 million) and
(d) increased general and administrative expenses (approximately $1.2 million).
Increased selling, general and administrative expenses were partially offset by
favorable foreign currency fluctuations (approximately $0.1 million).
25
<PAGE> 27
Clinical and Industrial. Increased selling, general and administrative
expenses in the Clinical and Industrial segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
businesses (approximately $2.8 million), (b) increased selling and marketing
expenses (approximately $0.6 million) and (c) increased amortization of
intangibles primarily as a result of acquisitions (approximately $0.5 million).
Increased selling, general and administrative expenses were partially offset by
favorable foreign currency fluctuations (approximately $0.2 million).
Diagnostics and Microbiology. Increased selling, general and administrative
expenses in the Diagnostics and Microbiology segment resulted primarily from:
(a) increased selling, general and administrative expenses as a result of
acquired businesses (approximately $5.4 million), (b) increased amortization of
intangibles primarily as a result of acquisitions (approximately $2.5 million)
and (c) increased selling and marketing expenses (approximately $1.2 million).
Laboratory Equipment. Selling, general and administrative expenses in the
Laboratory Equipment segment were flat and resulted primarily from: (a)
increased research and development expenses (approximately $0.3 million), (b)
increased amortization of intangibles primarily as a result of acquired
businesses (approximately $0.1 million) and (c) increased selling, general and
administrative expense as a result of acquisitions (approximately ($0.1
million). Increased selling, general and administrative expenses were offset by:
(a) decreased selling and marketing expenses (approximately $0.5 million).
Professional Dental. Decreased selling, general and administrative expenses
in the Professional Dental segment resulted primarily from: (a) the
non-recurring 1999 Special Charges (approximately $2.0 million), (b) decreased
selling and marketing expenses (approximately $0.6 million), (c) reduced general
and administrative expenses (approximately $0.2 million) and (d) decreased
research and development expenses (approximately $0.1 million). Decreased
selling, general and administrative expenses in the Professional Dental segment
were partially offset by: (a) unfavorable foreign currency fluctuations
(approximately ($0.2 million) and (b) increased amortization of intangibles
primarily as a result of an acquisition (approximately $0.1 million).
Orthodontics. Increased selling, general and administrative expenses in the
Orthodontics segment resulted primarily from: (a) increased general and
administrative expenses (approximately $1.4 million), (b) increased selling,
general and administrative expenses as a result of acquired companies
(approximately $0.6 million), (c) increased amortization of intangibles
primarily as a result of acquisitions (approximately $0.4 million) and (d)
unfavorable foreign currency fluctuations (approximately $0.1 million).
Increased selling, general and administrative expenses in the Orthodontics
segment were partially offset by (a) the non-recurring 1999 Special Charges
(approximately $0.7 million), (b) decreased research and development expenses
(approximately $0.3 million) and (c) decreased selling and marketing expenses
(approximately $0.2 million).
Infection Control Products. Increased selling, general and administrative
expenses in the Infection Control Products segment resulted primarily from: (a)
increased selling, general and administrative expenses as a result of acquired
companies (approximately $0.2 million) and (b) amortization of intangibles
primarily from acquired businesses (approximately $0.2 million). Increased
selling, general and administrative expenses were partially offset by: (a)
decreased selling and marketing expenses (approximately $0.1 million) and (b)
decreased general and administrative expenses (approximately $0.1
26
<PAGE> 28
million).
Corporate Office. Increased selling, general and administrative expenses at
the corporate office resulted primarily from: (a) an increase in legal expense
and professional fees (approximately $1.9 million).
27
<PAGE> 29
OPERATING INCOME.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF DOLLAR PERCENT
OPERATING INCOME: (IN THOUSANDS) 1999 SALES 2000 SALES CHANGE CHANGE
-------------------------------- ---- ----- ---- ----- ------ -------
SLP:
<S> <C> <C> <C> <C> <C> <C>
Labware and Life Sciences $ 30,149 24.7% $ 39,045 23.6% $ 8,896 29.5%
Clinical and Industrial 20,578 24.4% 26,715 25.1% 6,137 29.8%
Diagnostics and Microbiology 19,754 25.7% 27,571 26.6% 7,817 39.6%
Laboratory Equipment 9,817 20.2% 9,528 20.2% (289) (2.9)%
-------- ---- -------- ---- ------- -----
Subtotal SLP 80,298 24.2% 102,859 24.3% 22,561 28.1%
SDS:
Professional Dental 19,818 21.5% 29,607 28.8% 9,789 49.4%
Orthodontics 24,010 28.3% 23,622 27.2% (388) (1.6)%
Infection Control Products 1,659 14.3% 652 5.4% (1,007) (60.7)%
-------- ---- -------- ----- ------- -----
Subtotal SDS 45,487 24.1% 53,881 26.7% 8,394 18.5%
Corporate Office (4,406) N/A (6,281) N/A (1,875) 42.6%
-------- ---- -------- ---- ------- ----
Total Operating Income $121,379 23.3% $150,459 24.1% $29,080 24.0%
======== ==== ======== ==== ======= ====
</TABLE>
As a result of the foregoing, operating income in the first six months of
fiscal 2000 increased by 24.0% or $29.1 million over operating income in the
corresponding fiscal 1999 period.
INTEREST EXPENSE.
Interest expense was $36.2 million in the first half of fiscal 2000, an
increase of $8.0 million from the corresponding fiscal 1999 period. The increase
resulted from a higher average debt balance in 2000, resulting primarily from
funding acquisitions (partially offset by the application of proceeds from the
sale of Nalge Process Technologies Group, Inc. ("NPT") in March 1999) and an
increase in average interest rates primarily due to the addition of a Term B
Loan in July 1999.
INCOME TAXES.
Taxes on income from continuing operations in the first half of fiscal 2000
were $45.3 million, an increase of $8.6 million from the corresponding 1999
period. The increase resulted primarily from increased taxable earnings.
INCOME FROM CONTINUING OPERATIONS.
As a result of the foregoing we had net income from continuing operations of
$69.4 million in the first half of fiscal 2000, as compared to $55.8 million in
the corresponding 1999 period.
DISCONTINUED OPERATIONS.
Income from discontinued operations was $0.1 million in the first half of
fiscal 1999. The 1999 discontinued operations resulted from the operating
results of NPT.
EXTRAORDINARY ITEM.
On March 31, 1999, Sybron completed the sale of NPT to Norton Performance
Plastics Corporation. Net proceeds from the sale, net of estimated selling
expenses of $1.7 million, amounted to $86.0 million.
28
<PAGE> 30
The Company realized a gain on this sale in the second quarter of fiscal 1999
(net of tax of $18.7 million) of $18.8 million. Reductions to the gain were made
in the Company's third and fourth fiscal quarters of 1999 of $0.8 million each
reducing the final gain on the sale of NPT to $17.2 million.
NET INCOME.
As a result of the foregoing, we had net income of $69.4 million in the
first half of fiscal 2000, as compared to net income of $74.7 million in the
corresponding 1999 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 $8.1 million in the first half of fiscal 2000 due to
additional depreciation and amortization from the step-up of assets, goodwill
and intangibles recorded from the various acquisitions as well as routine
operating capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the acquisition of Sybron's predecessor in 1987 and the
acquisitions we completed since 1987, we have increased the carrying value of
certain tangible and intangible assets consistent with generally accepted
accounting principles. 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 other intangible assets increased by approximately $28.9 million and $113.1
million in the second quarter and first half of fiscal 2000, respectively,
primarily as a result of continued acquisition activity. We believe, therefore,
that Adjusted EBITDA represents the more appropriate 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 1987 acquisition and our
subsequent refinancings, our obligation to pay rent under the Sale/Leaseback
facility (as defined later herein), 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 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 may require financing beyond the capacity of our
Credit Facilities (as defined below). In addition, certain acquisitions
previously completed contain "earnout provisions" requiring further payments in
the future if certain financial results are achieved by the acquired companies.
The preceding statement about 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 or use of stock for acquisitions, the cost of 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
29
<PAGE> 31
responsibilities resulting from acquisitions. See "Cautionary Factors" below.
Approximately $61.9 million of cash was generated from operating activities
in the first half of fiscal 2000, an increase of $12.8 million or 26.1%, from
the corresponding 1999 period. Increased cash flow from operating activities
resulted primarily from an increase in Adjusted EBITDA (approximately $35.6
million) partially offset by increases in other net assets (approximately $14.8
million) an increase in interest paid (approximately $5.1 million) and an
increase in taxes paid (approximately $2.9 million). Approximately $164.4
million of cash was used in investing activities in the first half of fiscal
2000, an increase of $117.4 million, or 249.5%, from the corresponding 1999
period. Increased investing activities resulted primarily from the proceeds of
the sale of NPT on March 31, 1999 net of a refund of $2.6 million in the first
half of fiscal 2000 (approximately $88.6 million), an increase in acquisitions
(approximately $20.1 million) and increased capital expenditures (approximately
$8.7 million). Approximately $96.5 million of cash was provided from financing
activities, primarily from the Company's existing Credit Facilities
(approximately $93.7 million), payments received from the exercise of employee
stock options (approximately $4.6 million), borrowings under other financing
sources (approximately $2.8 million) and a refund of collateral under a
securities loan agreement (approximately $1.0 million). With respect to the 1998
restructuring charge of approximately $24.0 million, of which approximately
$11.7 million represents cash expenditures, as of March 31, 2000, we have made
cash payments of approximately $10.1 million. The Company expects to make future
cash payments of approximately $0.3 million in fiscal 2000 and approximately
$1.3 million in fiscal 2001 and beyond.
On July 31, 1995, we entered into a credit agreement (as amended to date,
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 "Tranche A Term Loan Facility"), and a revolving credit
facility of $250 million (the "Revolving Credit Facility"). On the same day, we
borrowed $300 million under the Tranche A 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 Tranche A 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 Eurodollar Rate and Tranche A 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 Tranche A Term Loan Facility
30
<PAGE> 32
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 provided 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. On July 29, 1999, we entered into the
Third Amended and Restated Credit Agreement (the "Third Amendment") and borrowed
an additional $300 million under a new term loan facility (the "Tranche B Term
Loan Facility"). On July 29, 1999, we used the $300 million of proceeds from the
Tranche B Term Loan Facility (after a reduction for fees of approximately $1.6
million) to repay $298.4 million of outstanding amounts under the Revolving
Credit Facility.
Payment of principal and interest with respect to the credit facilities and
the Sale/Leaseback (as defined later herein) are anticipated to be our largest
use of operating funds in the future. The Tranche A Term Loan Facility and
Revolving Credit Facility 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 "Tranche
A ABR") or (b) the adjusted interbank offered rate for eurodollar deposits
("Eurodollar Rate") plus 1/2% to 7/8% (the "Tranche A Eurodollar Rate Margin")
depending upon the ratio of our total debt to Consolidated Adjusted Operating
Profit (as defined in the Third Amendment), or (c) with respect to certain
advances under Revolving Credit Facility, the rate set by the competitive bid
process among the parties to the Revolving Credit Facility ("CAF"). The Tranche
B Term Loan Facility provides 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 plus 1% to 1 1/4%, (ii) the federal funds
rate plus of 1 1/2% to 1 3/4%, and (iii) the base CD rate plus 2% to 2 1/4%,
depending upon the ratio of our total debt to Consolidated Adjusted Operating
Profit or (b) the Eurodollar Rate plus 2% to 2 1/4% depending upon the ratio of
our total debt to Consolidated Adjusted Operating Profit. The average interest
rate on the Tranche A Term Loan Facility (inclusive of the swap agreements
described below) in the second quarter and first half of fiscal 2000 was 6.3% in
both periods. The average interest rate on the Tranche B Term Loan Facility in
the second quarter and first half of fiscal 2000 was 7.9% and 7.8%,
respectively. The average interest rate on the Revolving Credit Facility in the
second quarter and first half of fiscal 2000 was 6.8% and 6.7%, respectively.
As a result of the terms of our credit facilities, we are sensitive to a
rise in interest rates. A rise in interest rates would result in increased
interest expense on our outstanding debt. 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, 2000, the Company has eight interest rate swaps
outstanding aggregating a notional amount of $383.5 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 Eurodollar Rate Margin. In the first
quarter of fiscal 2000, the Tranche A and Revolver Eurodollar Rate Margins were
.75%. The Tranche B Eurodollar Margin, which became applicable on July 29, 1999,
was 2.0%. The swap agreement rates and durations as of March 31, 2000 are as
follows:
31
<PAGE> 33
<TABLE>
<CAPTION>
EXPIRATION DATE NOTIONAL AMOUNT SWAP AGREEMENT DATE SWAP AGREEMENT RATE
--------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.900%
September 10, 2001 $50 million December 8, 1995 5.623%
December 31, 2001 $8.5 million March 24, 1999 5.500%
June 8, 2002 $50 million December 8, 1995 5.500%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23, 1998 4.733%
October 1, 2002 $50 million October 1, 1999 6.260%
</TABLE>
Also as part of the permanent financing for the acquisition of Sybron's
predecessor in 1987, 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.
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 would have to raise additional capital.
The Revolving Credit Facility provides up to $600 million in available
credit. At March 31, 2000, there was approximately $217.7 million of available
credit under the Revolving Credit Facility. Under the Tranche A 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, during the first half of fiscal 1999, $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). The net proceeds were
subsequently reduced in October 1999 by approximately $2.8 million relating to a
reduction in the purchase price of approximately $2.6 million and additional
fees of $0.2 million. 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 Tranche A Term Loan Facility. On March 31, 1999, the Company
paid principal of approximately $67.9 million due under the Tranche A Term Loan
Facility. The following table shows how the payments were applied, and the
resulting revised schedule of principal payments under the Tranche A Term Loan
Facility.
<TABLE>
<CAPTION>
PAYMENTS PREVIOUSLY PRINCIPAL DUE
APPLIED FROM SCHEDULED AFTER APPLICATION
NPT SALE PRINCIPAL OF NPT PROCEEDS
<S> <C> <C> <C>
</TABLE>
32
<PAGE> 34
<TABLE>
(IN MILLIONS)
<S> <C> <C> <C>
Payments previously 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 5.37 223.75 218.3
------- -------- --------
Total $ 67.91 $ 338.75 $ 270.84
======= ======== ========
</TABLE>
In addition, under the terms of the Tranche B Term Loan Facility, the
Company is required to repay principal in consecutive quarterly installments
beginning on January 31, 2000 as follows: $0.75 million due in fiscal 2000, $1.0
million due in fiscal 2001, $1.0 million due in fiscal 2002, $120.25 million due
in fiscal 2003 and $177 million due in fiscal 2004, with the final payment due
on July 31, 2004. The Company paid $0.25 million of its fiscal 2000 obligations
on January 31, 2000. The remaining payments of $0.25 million each will be made
on April 30, 2000 and July 31, 2000. To secure the repayment of borrowings under
the Credit Agreement, the Company has pledged to Chase, as collateral agent for
the lenders, all of the capital stock of the Company's principal domestic
subsidiaries and 65% of the capital stock of its principal foreign subsidiaries
(excluding capital stock not owned by the Company directly or indirectly, and
also excluding certain immaterial subsidiaries), and certain intra-company
promissory notes issued in connection with the acquisition of Nunc.
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 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.
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
33
<PAGE> 35
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
documents or oral statements, the words "may", "goal", "continue", "outlook",
"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 downturns
in other countries.
- - 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.
- - Our reliance on major independent distributors for a substantial
portion of our sales subjects our sales performance to volatility in
demand if distributor inventories get out of balance with end user
demand. This can happen when distributors merge or consolidate, or when
inventories are not managed to end-user demand. This volatility in
demand can also arise with large OEM customers to whom we sell direct
when such customers fail to balance their needs for out products with
sales of their products with which our products are used.
- - Factors affecting certain high growth industries we serve, such as
consolidation in the drug discovery and diagnostics industries.
- - Factors affecting our ability to profitably distribute and sell our
products, including any changes in our business relationships with our
principal distributors, competitive factors such as the entrance
34
<PAGE> 36
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.
- - 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.
- - Factors affecting our operations in European countries related to the
conversion from local legacy currencies to the Euro.
35
<PAGE> 37
- - Factors affecting our ability to complete the proposed spin-off of the
Company's dental group, including but not limited to a favorable ruling
by the Internal Revenue Service regarding the tax-free nature of the
transaction and market conditions favorable to completing the spin-off.
- - 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.
36
<PAGE> 38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
RISK MANAGEMENT
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 Euro, Danish Krone 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 November 1999 we entered into nine
foreign currency options to hedge our exposure to each of the aforementioned
currencies.
In 2000, 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>
Euro (EUR) 42,000 EUR $ 44,520
Danish Krone (DKK) 87,400 DKK 12,485
Japanese Yen (JPY) 800,000 JPY 7,619
</TABLE>
As a result of these anticipated exposures, in November 1999 we entered into
a series of options expiring at the end of the second, third and fourth quarters
of 2000 to protect ourselves from possible detrimental effects of foreign
currency fluctuations. 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 purchased put options on the
foreign currencies at amounts approximately equal to our quarterly exposure. The
EUR and DKK options expire on a quarterly basis, at an exchange rate
approximately equal to the spot exchange rate at the date of purchase for each
of the respective currencies. The JPY options expire on a quarterly basis at an
exchange rate approximately equal to the prior year's respective quarters actual
exchange rate. In the second quarter, two of the options were sold and the third
expired worthless, in aggregate netting a gain of $0.7 million. In November
1999, we acquired the following put options:
37
<PAGE> 39
<TABLE>
<CAPTION>
NOTIONAL OPTION STRIKE
CURRENCY AMOUNT(A) EXPIRATION DATE PRICE PRICE(B)
-------- --------- --------------- ----- --------
(In thousands, except strike prices)
<S> <C> <C> <C> <C>
EUR 10,500 March 29, 2000 $ 250 . 9524
EUR 10,500 June 28, 2000 297 . 9524
EUR 10,500 September 26, 2000 329 . 9524
DKK 21,850 March 29, 2000 88 7.00
DKK 21,850 June 28, 2000 103 7.00
DKK 21,850 September 26, 2000 114 7.00
JPY 200,000 March 29, 2000 9 116.00
JPY 200,000 June 28, 2000 10 120.00
JPY 200,000 September 26, 2000 24 115.00
</TABLE>
- ---------------------
(a) Amounts expressed in units of foreign currency.
(b) Amounts expressed in foreign currency per U.S. dollar.
Our exposure in terms of these options is limited to the purchase price. To
illustrate this, the following example uses the Euro contract due to expire at
September 26, 2000.
<TABLE>
<CAPTION>
EUR EXCHANGE GAIN/(LOSS) GAIN/(LOSS)
RATE ON OPTION (A) FROM PRIOR YEAR RATE (B) NET GAIN/(LOSS)
------------ ------------- ------------------------ ---------------
(IN THOUSANDS, EXCEPT EXCHANGE RATE)
<S> <C> <C> <C>
.90 $ (329) $ 659 330
.95 (329) 45 (284)
1.0 196 (507) (311)
</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/prior year
exchange rate of .9539).
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 the Eurodollar Rate. Interest
rate risk management is accomplished by the use of swaps to create fixed
interest rate debt by resetting Eurodollar Rate loans concurrently with the
rates applying to the swap agreements. At March 31, 2000 we had floating rate
debt of approximately $949.9 million of which a total of $383.5 million was
swapped to fixed rates. The net interest rate paid by the Company is
approximately equal to the sum of the swap agreement rate plus the applicable
Eurodollar Rate Margin. In the first half of fiscal 2000, the Tranche A and
Revolver Eurodollar Rate Margins were .75%. The Tranche B Eurodollar Margin,
which became applicable on July 29, 1999, was 2.0%. The swap agreement rates and
durations as of March 31, 2000 are as follows:
38
<PAGE> 40
<TABLE>
<CAPTION>
EXPIRATION DATE NOTIONAL AMOUNT SWAP AGREEMENT DATE SWAP AGREEMENT RATE
--------------- --------------- ------------------- -------------------
<S> <C> <C> <C>
February 7, 2001 $50 million August 7, 1997 5.910%
August 7, 2001 $50 million August 7, 1997 5.900%
September 10, 2001 $50 million December 8, 1995 5.623%
December 31, 2001 $8.5 million March 24, 1999 5.500%
June 8, 2002 $50 million December 8, 1995 5.500%
July 31, 2002 $75 million May 7, 1997 6.385%
July 31, 2002 $50 million October 23, 1998 4.733%
October 1, 2002 $50 million October 1, 1999 6.260%
</TABLE>
In addition to the aforementioned swaps, on September 29, 1999, the Company
entered into a repurchase agreement in which we purchased a United States
Treasury Bond ("Treasury") with a par value of $50 million, an interest rate of
6.15% and a maturity date of August 15, 2029. Concurrent with the purchase of
the Treasury, the Company lent the security to an unrelated third party for a
period of 23 years. In exchange for the loaned Treasury, the Company has
received collateral equal to the market value of the Treasury on the date of the
loan, and adjusted on a weekly basis. For a period of five years the Company is
obligated to pay a rebate on the loaned collateral at an annual fixed rate of
6.478% and is entitled to receive a fee for the loan of the security at a
floating rate equal to LIBOR minus .75%. Thereafter, the Company is required to
pay the unrelated third party a collateral fee equal to the one-week general
collateral rate of interest (as determined weekly in good faith by the unrelated
third party, provided that such rate shall not exceed the federal funds rate in
effect as of the day of determination plus .25%).
The model below quantifies the Company's sensitivity to interest rate
movements as determined by the Eurodollar Rate and the effect of the interest
rate swaps which reduce that risk. The model assumes a) a base Eurodollar Rate
of 6.30% (the "Eurodollar Base Rate") which approximates the March 31, 2000
three month Eurodollar Rate, b) the Company's floating rate debt is equal to
it's March 31, 2000 floating rate debt balance of $949.9 million, c) the Company
pays interest on floating rate debt equal to the Eurodollar Rate + 75 basis
points, d) the Company has interest rate swaps (including the repurchase
agreement) with a notional amount of $433.5 million (equal to the notional
amount of the Company's interest rate swaps at March 31, 2000), and e) the
Eurodollar Rate varies by 10% of the Base Rate.
<TABLE>
<CAPTION>
INTEREST EXPENSE INCREASE FROM A 10% INTEREST EXPENSE DECREASE FROM A 10%
ANNUAL INTEREST RATE EXPOSURE INCREASE IN THE EURODOLLAR BASE RATE DECREASE IN THE EURODOLLAR BASE RATE
- ----------------------------- ------------------------------------ ------------------------------------
<S> <C> <C>
Without interest rate swaps: $6.0 million ($6.0 million)
With interest rate swaps: $3.2 million ($3.2 million)
</TABLE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information regarding our annual meeting of shareholders held on February
2, 2000 was previously reported in out Form 10-Q for the quarter ended December
31, 1999.
39
<PAGE> 41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
See the Exhibit Index following the Signature page in this report,
which is incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed. However, subsequent to the end of the quarter the following
report was filed:
A Form 8-K dated as of April 24, 2000 was filed on April 25, 2000 to
report, under Item 5, the projected spin- off of the Company's dental group. A
copy of the Company's Press Release dated April 24, 2000, was filed as an
exhibit.
40
<PAGE> 42
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 15, 2000 /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.
41
<PAGE> 43
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, 2000
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO HEREWITH
<S> <C> <C> <C>
27 Financial Data Schedule X
</TABLE>
EI-1
<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, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 9,763
<SECURITIES> 0
<RECEIVABLES> 245,096
<ALLOWANCES> 5,828
<INVENTORY> 228,533
<CURRENT-ASSETS> 529,455
<PP&E> 252,567
<DEPRECIATION> 232,168
<TOTAL-ASSETS> 1,976,586
<CURRENT-LIABILITIES> 162,350
<BONDS> 969,923
0
0
<COMMON> 1,044
<OTHER-SE> 688,461
<TOTAL-LIABILITY-AND-EQUITY> 1,976,586
<SALES> 624,636
<TOTAL-REVENUES> 624,636
<CGS> 299,571
<TOTAL-COSTS> 174,600
<OTHER-EXPENSES> (377)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,182
<INCOME-PRETAX> 114,654
<INCOME-TAX> 45,255
<INCOME-CONTINUING> 69,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,399
<EPS-BASIC> .67
<EPS-DILUTED> .65
</TABLE>
