FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 0-19983
SYBRON CHEMICALS INC.
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0301280
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Birmingham Rd., P.O. Box 66, Birmingham New Jersey 08011
-------------------------------------------------- -----
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (609) 893-1100
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 shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1998
----- -----------------------------
Common stock, $.01 par value 5,686,041
<PAGE>
SYBRON CHEMICALS INC.
INDEX
Page No.
Part I Financial information
Item 1 - Financial Statements
Consolidated Balance Sheet -
March 31, 1998 and December 31, 1997 1
Consolidated Statement of Operations -
three months ended March 31, 1998 and 1997 2
Consolidated Statement of Cash Flows -
three months ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4 - 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7 - 11
Part II Other information
Item 1 Legal Proceedings 11
<PAGE>
PART I - FINANCIAL INFORMATION
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited in thousands except share and per share data)
ASSETS
Mar. 31, Dec. 31,
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 5,715 $ 26,592
Accounts receivable, net 38,197 37,367
Inventories, net 27,062 28,205
Prepaid and other current assets 3,157 3,019
Deferred income taxes 127 140
-------- --------
Total current assets 74,258 95,323
Property, plant and equipment, net 35,715 34,224
Intangible assets, net 19,556 20,086
Other assets 667 600
-------- --------
$130,196 $150,233
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,501 $ 1,760
Current portion of long-term debt 2,429 2,429
Accounts payable 15,987 27,653
Accrued liabilities 14,677 16,087
Income taxes payable 3,034 3,951
Deferred income taxes 16 12
------- --------
Total current liabilities 38,644 51,892
Long-term debt 17,761 27,390
Deferred income taxes 2,448 2,502
Postretirement benefits 3,899 3,919
Other liabilities 2,085 2,119
-------- --------
Total liabilities 64,837 87,822
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value -
500,000 shares authorized; none issued
Common stock - $.01 par value -
20,000,000 shares authorized;
issued 5,913,430 and 5,908,260 shares 59 59
Additional paid-in capital 23,740 23,580
Retained earnings 55,753 51,989
Accumulated other comprehensive losses (9,645) (8,544)
Treasury stock, at cost - 227,389
and 233,648 shares (4,548) (4,673)
--------- ---------
Total shareholders' equity 65,359 62,411
--------- --------
$130,196 $150,233
======== ========
The accompanying notes are an integral part of
the financial statements
-1-
<PAGE>
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited in thousands except per share amounts)
Three months
ended
March 31,
---------
1998 1997
---- ----
Net sales $ 48,572 $ 44,709
-------- --------
Cost of sales 28,793 27,400
Selling 9,047 7,974
General and administrative 2,970 2,629
Research and development 954 919
-------- --------
41,764 38,922
Operating income 6,808 5,787
-------- --------
Other income(expense)
Interest income 69 95
Interest expense (338) (452)
Amortization of intangible assets (465) (335)
Other - Net 305 (97)
--------- ---------
(429) (789)
Income before income taxes 6,379 4,998
Provision for income taxes 2,615 2,024
--------- --------
Net income $ 3,764 $ 2,974
======== ========
Net income per share:
Basic $ .66 $ .53
======== ========
Diluted $ .64 $ .52
======== ========
Weighted average shares outstanding:
Basic 5,678,245 5,655,262
Diluted 5,881,797 5,729,848
The accompanying notes are an integral part of
the financial statements
-2-
<PAGE>
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited in thousands)
Three months
ended
March 31,
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 3,764 $ 2,974
-------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,550 1,620
Provision for losses on accounts receivable 140 226
Changes in assets and liabilities:
Accounts receivable (1,451) (3,177)
Inventory 906 (599)
Other current assets (150) (248)
Accounts payable and accrued expenses (12,465) (307)
Income taxes payable (837) 1,271
Other assets and liabilities - net (719) 852
-------- -------
Net cash (used) provided by operating activities (9,262) 2,612
-------- -------
Cash flows from investing activities:
Capital expenditures (2,816) (1,768)
Other, net -- 18
-------- -------
Net cash used by investing activities (2,816) (1,750)
-------- --------
Cash flows from financing activities:
Net (repayments) borrowings under revolving
credit facilities (8,820) 1,264
Proceeds from exercise of stock options 73 --
-------- -------
Net cash (used) provided by financing activities (8,747) 1,264
-------- -------
Effect of exchange rate changes on cash (52) (1,492)
-------- --------
Net (decrease) increase in cash and cash
equivalents (20,877) 634
Cash and cash equivalents at beginning of period 26,592 14,909
-------- -------
Cash and cash equivalents at end of period $ 5,715 $15,543
======== =======
The accompanying notes are an integral part of
the financial statements
-3-
<PAGE>
SYBRON CHEMICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited in thousands)
NOTE 1 - ACCOUNTING POLICIES:
- -----------------------------
The accompanying consolidated financial statements are unaudited and have
been prepared by management pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
consolidated financial statements contain all of the adjustments, consisting
only of normal recurring adjustments, necessary to present fairly, in summarized
form, the financial position of the Company at March 31, 1998 and the results of
its operations and changes in its cash flows for the three months ended March
31, 1998 and 1997.
The Company presumes that users of this Quarterly Report on Form 10-Q have
read or have access to the audited financial statements for the year ended
December 31, 1997 contained in the Company's Form 10-K which was filed with the
Securities and Exchange Commission on March 31, 1998. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained
therein have been omitted.
NOTE 2 - COMPREHENSIVE INCOME:
- ------------------------------
The Company has adopted the Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards
for the reporting and display of comprehensive income and its components in
general-purpose financial statements.
The tables below set forth "comprehensive income" and each components
related tax effect for the three months ended March 31:
Statement of Comprehensive Income
Three Months Ended March 31,
1998 1997
---- ----
Net income $ 3,764 $ 2,974
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,101) (2,448)
Minimum pension liability adjustment -- --
Other comprehensive income (1,101) (2,448)
------- -------
Comprehensive income $ 2,663 $ 526
======= ======
-4-
<PAGE>
Related Tax Effects of Each Component
of Comprehensive Income
Three Months Ended March 31,
<TABLE>
<CAPTION>
1998 1997
---------------------------------- --------------------------------
Tax Net of Tax Net of
Pre-Tax (Expense) Tax Pre-Tax (Expense) Tax
Amount Benefit Amount Amount Benefit Amount
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments (1,101) -- (1,101) (2,448) -- (2,448)
Minimum pension
liability adjustment -- -- -- -- -- --
----- ------ ------ ------ ------ ------
Total comprehensive
income (1,101) -- (1,101) (2,448) -- (2,448)
</TABLE>
The following table illustrates the components of accumulated other
comprehensive income and their associated changes for the three month period
ending March 31, 1998:
Accumulated Other
Comprehensive Income Balances
Three Months Ending March 31, 1998
Current
Beginning Period Ending
Balance Change Balance
------- ------ -------
Foreign currency translation adjustments (8,359) (1,101) (9,460)
Minimum pension liability adjustment (185) -- (185)
------- ------- -------
Accumulated other comprehensive loss (8,544) (1,101) (9,645)
======= ======= =======
NOTE 3 - ACCOUNTING PRONOUNCEMENTS:
- -----------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement establishes
standards for reporting information about operating segments in annual financial
statements and requires the reporting of selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997, and in the initial
year of application, comparative information for earlier years is to be
restated. The Company will adopt this statement in the fourth quarter of 1998
and does not expect a significant impact on present segment reporting.
-5-
<PAGE>
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers Disclosure About Pensions and Other Post-retirement
Benefits, an amendment of FASB Statements No. 87, 88, and 106" (SFAS 132). This
statement revises disclosures about pension and other post-retirement benefit
plans. It does not change the measurement or recognition of those plans. The
statement is effective for fiscal years beginning after December 15, 1997. The
Company will adopt SFAS 132 in the fourth quarter of 1998.
NOTE 4 - INVENTORIES:
- ---------------------
Inventories are stated at the lower of cost or market. For U.S. operations,
cost is determined using the last-in, first-out (LIFO) method. For foreign
operations, cost is determined using the first-in, first-out (FIFO) method.
The components of inventories are:
March 31, Dec. 31,
1998 1997
---- ----
Finished goods $20,923 $21,317
Raw materials 7,174 7,864
-------- -------
28,097 29,181
Less reserves 1,035 976
-------- -------
$27,062 $28,205
======== =======
-6-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 compared to Three Months Ended March 31, 1997.
The following tables set forth certain information about the Company's two
business segments, Environmental Products and Services and Textile Chemical
Specialties.
Three Months Ended March 31,
1998 1997
---- ----
% of % of
Amount Sales Amount Sales
------ ----- ------ -----
(in thousands except percentages)
Sales
Environmental Products and Services $12,840 26.4% $13,955 31.2%
Textile Chemical Specialties 35,732 73.6 30,754 68.8
-------- ------ -------- -----
Total 48,572 100.0 44,709 100.0
Cost of Sales
Environmental Products and Services 8,310 64.7 9,641 69.1
Textile Chemical Specialties 20,483 57.3 17,759 57.7
-------- --------
Total 28,793 59.3 27,400 61.3
Gross Margin
Environmental Products and Services 4,530 35.3 4,314 30.9
Textile Chemical Specialties 15,249 42.7 12,995 42.3
-------- --------
Total 19,779 40.7 17,309 38.7
Operating Expense
Environmental Products and Services 2,944 22.9 2,902 20.8
Textile Chemical Specialties 10,027 28.1 8,620 28.0
-------- --------
Total 12,971 26.7 11,522 25.8
Operating Income
Environmental Products and Services 1,586 12.4 1,412 10.1
Textile Chemical Specialties 5,222 14.6 4,375 14.2
-------- --------
Total 6,808 14.0 5,787 12.9
Other Expense (429) (0.9) (789) (1.7)
-------- ----- -------- -----
Income Before Income Taxes 6,379 13.1 4,998 11.2
Provision for Income Taxes 2,615 5.4 2,024 4.5
-------- ----- -------- ----
Net Income $ 3,764 7.7% $ 2,974 6.7%
======== ===== ======== =====
-7-
<PAGE>
Operations
Sales for the quarter ended March 31, 1998 were $48.6 million, an increase
of 8.6% over the $44.7 million in the year earlier quarter on the strength of a
16.2% improvement in the Textile Chemical Specialties segment. This increase
more than offset an 8.0% decrease in sales in the Environmental Products and
Services segment. Operating income was $6.8 million, a 17.6% improvement over
the $5.8 million recorded in 1997. On a fully diluted basis, net income was $.64
per share versus $.52 per share for the first quarter of 1997, an improvement of
23.1%.
In the Textile Chemical Specialties segment, combined North America/Asia
textile chemical sales for the first quarter jumped 25.6%. This reflected the
impact of the Ivax garment processing and textile chemicals business acquired in
July 1997, continued growth in Mexico, and strong sales in the related organic
chemicals toll manufacturing business. The U.S. portion of this segment was
unfavorably impacted by continued weak textile manufacturing activities and a
style change in the garment sector from light colored denim to black which
requires less of the Company's enzyme products to create the stone-washed
effect. Europe division textile chemical sales improved 5.6% for the quarter in
terms of U.S. dollars. Increased sales primarily in the Middle East and the
former Soviet Republics coupled with new product introductions into Western
Europe resulted in an overall physical volume increase of 10.7%. This volume
growth more than offset the 8.2% net negative currency effect primarily due to
the stronger U.S. dollar versus the Dutch guilder.
More than half of the decline in sales in the Environmental Product and
Services segment was the result of the sale of the reverse osmosis membranes
business in December 1997. The ongoing operations in this segment showed a 3.2%
sales drop for the quarter versus the same 1997 period, primarily a result of
weak ion exchange industrial market conditions both domestically (especially for
replacement resins) and in the Far East. These were somewhat offset by new
product sales and major growth at key customers in the toner/polymer product
line and growth in biochemical sales in Europe.
The overall gross margin for the quarter ending March 31, 1998 was 40.7%, a
substantial improvement over the 38.7% experienced during the similar 1997
period. The gross margin in the Textile Chemical Specialties segment increased
slightly to 42.7% for the quarter versus last year's rate of 42.3%. Margins in
North America/Asia improved significantly primarily due to favorable customer
mix and manufacturing fixed cost controls in the U.S. In the related organics
chemical business, margins also improved as a direct result of the increase in
higher margin toll manufacturing business. Margins in Europe improved slightly
as the continued
-8-
<PAGE>
favorable impact of a weaker guilder as compared with certain other European
currencies coupled with a small selling price increase were almost completely
offset by higher raw material costs and an unfavorable product mix.
The gross margin in the Environmental Products and Services segment
increased to 35.3% for the quarter, a substantial increase over the prior year
margin of 30.9% as all product lines in this segment showed improvement. Overall
margins in this segment were positively impacted by the results of several
strategic actions which were set in motion last year including: the alliance
with Dow Chemical for supply of certain ion exchange resins with consequent cost
reductions; the switch from purchasing to manufacturing in-house a raw material
used in the polymer product line; and the aforementioned divestiture of the
reverse osmosis membrane business which carried substantially lower margins. In
addition, margins in this segment also improved due to average selling price
increases and a favorable product/customer mix in the biochemical product line.
Operating expenses as a percent of sales increased to 26.7% for the first
quarter as compared with the 25.8% reported in the similar period in 1997. The
Textile Chemical Specialties segment expenses as a percent of sales were
essentially equal to the 1997 level. Expenses increased by $1.4 million
primarily as a result of the Ivax acquisition, while the sales volume also
increased at a proportionate level. The lower sales volume caused the
Environmental Products and Services segment expenses as a percent of sales to
increase over the similar quarter in 1997.
Income Taxes and Other Items
The Company's provision for income taxes was computed using applicable
prevailing income tax rates.
The Company's effective tax rate of 41.0% for the first quarter of 1998 was
slightly higher than last year's equivalent rate of 40.5%.
Other income (expense) was ($0.4) million for the quarter versus ($0.8)
million in last year's comparable period. The decrease was primarily due to
lower interest costs and a favorable currency adjustment of $0.7 million. This
currency impact resulted from the Korean Won strengthening against the U.S.
dollar, reversing part of the loss taken in the last quarter of 1997, and the
revaluation of a Dutch guilder loan from the European subsidiary to the U.S. due
to the guilder weakening against the dollar. The quarter's results also included
$0.2 million in costs associated with the recently terminated merger agreement.
-9-
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents of $5.7 million as of March 31, 1998 were $20.9
million under the December 31, 1997 balance of $26.6 million, primarily the
result of using cash from the Company's European subsidiary to pay off revolving
debt.
Operating activities generated a net cash flow usage of $9.3 million for
the first quarter of 1998 versus a $2.6 million net cash provision for the same
period in 1997. This was primarily the result of a substantial reduction in
accounts payable and accrued expenses due to: the return to the Dutch taxing
authorities of an erroneous tax refund in the Netherlands; executive bonus
payouts; and payments for annual pensions, the terminated merger agreement and
for high inventory and capital expenditures.
Net cash used by investing activities totalled $2.8 million for the first
quarter as compared with $1.8 million for the comparable 1997 period. The
quarter-to-quarter increase was the result of the purchase of property adjacent
to the manufacturing site in Ede, Holland which will be used for future
expansion.
Financing activities used $8.7 million in net cash during the first quarter
of 1998 due to repayment of revolving credit facilities. The similar period in
1997 showed a net cash provision of $1.3 million.
The Company has a $40 million unsecured multi-currency revolving line of
credit with CoreStates Bank which expires in February, 2002. The amount owed
under this credit facility was $8.0 million as of March 31, 1998.
On April 7, 1998 the Company purchased certain assets of the garment
processing specialty chemicals business of Ocean Wash Inc. and Ocean Wash de
Mexico S.A. de C.V. The Company funded this purchase from the aforementioned
revolving line of credit.
During 1998, the Company believes its capital expenditures for existing
operations can be funded from operating cash flow and are expected to be
slightly higher than 1997 levels. The Company further believes that between its
anticipated operating cash flow and present credit facilities, it will be able
to meet both short-term and long-term financial obligations in the foreseeable
future. However, the Company may seek, as required, equity or debt financing to
provide capital to fund strategic business opportunities, including possible
business acquisitions, which could require substantial capital outlays. The
timing and amount of such potential capital requirements cannot be determined at
this time and will depend on a number of factors, including the nature and size
of strategic business opportunities that the Company may elect to pursue.
Foreign Exchange
The Company has foreign subsidiaries in Europe, Asia, Africa and the
Americas and, for all subsidiaries, except the Company's Mexican subsidiary, the
Company has determined the functional currencies are the subsidiaries' local
currency. The Company's Mexican subsidiary's functional currency is considered
-10-
<PAGE>
to be the U.S. dollar because of that country's designation as a highly
inflationary economy. The Company has a large manufacturing facility in Ede,
Holland where chemicals are manufactured and sold either directly to customers
or to various subsidiaries, which are principally in Europe. Intercompany
balances arise between the Dutch operation and various subsidiaries. Overall,
the Company recognized an exchange gain of $0.7 million in the first quarter of
1998 versus a slight currency exchange loss in the similar period in 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
There have been no material developments in connection with any pending
legal proceedings as reported in the Registrant's Form 10-K Annual Report which
was filed with the Securities and Exchange Commission on March 31, 1998.
-11-
<PAGE>
SIGNATURE
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 CHEMICALS INC.
/s/ Dennis J. Fiore
-------------------
Dennis J. Fiore
Vice President, Finance and
Chief Financial Officer
Date: May 14, 1998
<PAGE>
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<NAME> SYBRON CHEMICALS INC.
<S> <C>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,715,000
<SECURITIES> 0
<RECEIVABLES> 38,197,000
<ALLOWANCES> 0
<INVENTORY> 27,062,000
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<CURRENT-LIABILITIES> 38,644,000
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<COMMON> 59,000
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