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Previous: SCRIPPS E W CO /DE, 10-Q, 1999-11-09 |
Next: DATRONIC EQUIPMENT INCOME FUND XVII L P, 10-Q, 1999-11-09 |
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 September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 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 September 30, 1999
Common stock, $.01 par value 5,730,942
SYBRON CHEMICALS INC.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-Q Report contains information that is forward-looking, such as information relating to future capital expenditures and liquidity. Such forward-looking information involves important risks and uncertainties that could significantly affect expected results in the future from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks and uncertainties include, but are not limited to, uncertainties relating to economic conditions, fluctuations in exchange rates of various foreign currencies, and other risks associated with foreign operations, changes in governmental and regulatory policies including environmental regulations, the pricing of raw materials, the ability of the Company to make and successfully integrate corporate acquisitions, technological developments, the impact of Year 2000 issues on the Company and changes in the competitive environment in which the Company operates.
INDEX
Page No.
Part I Financial information
Item 1 - Financial Statements
Consolidated Balance Sheet -
September 30, 1999 and December 31, 1998 1
Consolidated Statement of Operations -
nine months ended September 30, 1999 and 1998 2
Consolidated Statement of Operations -
three months ended September 30, 1999 and 1998 3
Consolidated Statement of Cash Flows -
nine months ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 10
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11 - 15
Part II Other information
Item 1 Legal Proceedings 16
Exhibit Index 16
Signature 17
PART I - FINANCIAL INFORMATION
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands except share and per share data)
ASSETS
Unaudited Audited
Sept. 30, Dec. 31,
1999 1998
-------- -------
Current assets:
Cash and cash equivalents $ 18,634 $ 14,966
Accounts receivable, net 50,552 46,089
Inventories, net 35,751 36,466
Prepaid and other current assets 4,337 5,690
-------- --------
Total current assets 109,274 103,211
Property, plant and equipment, net 76,212 80,175
Intangible assets, net 80,984 81,967
Other assets 6,068 4,931
-------- --------
$272,538 $270,284
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ $ 2,093
Current portion of long-term debt 15,833 9,285
Accounts payable 25,144 23,642
Accrued liabilities 16,209 16,237
-------- --------
Total current liabilities 57,186 51,257
Long-term debt 124,104 136,008
Deferred income taxes 4,939 3,904
Postretirement benefits 3,649 3,739
Other liabilities 4,318 2,728
-------- --------
Total liabilities 194,196 197,636
-------- --------
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 5,941,165 and 5,938,050 shares 59 59
Additional paid-in capital 24,231 24,151
Retained earnings 67,795 60,414
Accumulated other comprehensive losses (9,538) (7,610)
Treasury stock, at cost - 210,223
and 218,299 shares (4,205) (4,366)
--------- ---------
Total shareholders' equity 78,342 72,648
--------- ----------
$272,538 $270,284
========= ==========
The accompanying notes are an integral part of
the financial statements
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited in thousands except per share amounts)
Nine months
ended
September 30,
--------------------
1999 1998
------ -------
Net sales $199,738 $156,389
-------- --------
Cost of sales 131,524 98,702
Selling, general and administrative 42,426 38,440
Research and development 3,892 3,124
-------- --------
177,842 140,266
-------- --------
Operating income 21,896 16,123
-------- --------
Other expense
Interest expense 8,270 3,048
Other - net 1,115 545
-------- ---------
9,385 3,593
-------- ---------
Income before income taxes
and extraordinary item 12,511 12,530
Provision for income taxes 5,130 5,137
-------- ---------
Income before extraordinary item 7,381 7,393
-------- --------
Extraordinary item - net of taxes 313
-------- --------
Net income $ 7,381 $ 7,080
======== ========
Income per share before extraordinary item:
Basic $ 1.29 $ 1.30
Diluted $ 1.28 $ 1.26
Loss per share extraordinary item:
Basic $ (.06)
Diluted $ (.05)
Net income per share:
Basic $ 1.29 $ 1.24
======== =========
Diluted $ 1.28 $ 1.21
======== =========
Weighted average shares outstanding:
Basic 5,726,706 5,692,650
Diluted 5,765,377 5,872,036
The accompanying notes are an integral part of
the financial statements
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited in thousands except per share amounts)
Three months
ended
September 30,
--------------------
1999 1998
------ -------
Net sales $ 66,079 $ 58,834
-------- --------
Cost of sales 44,323 39,948
Selling, general and administrative 14,534 13,298
Research and development 1,227 1,138
-------- --------
60,084 54,384
-------- --------
Operating income 5,995 4,450
-------- --------
Other expense
Interest expense 2,750 2,210
Other - net 279 378
-------- ---------
3,029 2,588
-------- ---------
Income before income taxes
and extraordinary item 2,966 1,862
Provision for income taxes 1,217 744
-------- ---------
Income before extraordinary item 1,749 1,118
Extraordinary item 313
-------- --------
Net income $ 1,749 $ 805
======== ========
Income per share before extraordinary item:
Basic $ .31 $ .20
Diluted $ .30 $ .19
Loss per share extraordinary item:
Basic $ (.06)
Diluted $ (.05)
Net income per share:
Basic $ .31 $ .14
======== =========
Diluted $ .30 $ .14
======== =========
Weighted average shares outstanding:
Basic 5,729,936 5,710,599
Diluted 5,788,588 5,849,973
The accompanying notes are an integral part of
the financial statements
SYBRON CHEMICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited in thousands)
Nine months
ended
Sept. 30,
1999 1998
------ -------
Cash flows from operating activities:
Net income $ 7,381 $ 7,080
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item 313
Depreciation and amortization 10,109 5,986
Provision for losses on accounts receivable 668 436
Changes in assets and liabilities:
Accounts receivable (6,204) (1,078)
Inventory 128 886
Other current assets 691 (54)
Accounts payable and accrued expenses 2,596 (8,001)
Income taxes payable 1,581 (2,677)
Other assets and liabilities - net 337 615
-------- -------
Net cash provided by operating activities 17,287 3,506
-------- -------
Cash flows from investing activities:
Capital expenditures (4,023) (7,792)
Purchase of business assets (1,611) (6,817)
Acquisition (net of cash acquired) (110,616)
Other (200)
-------- ---------
Net cash used by investing activities (5,834) (125,225)
-------- ---------
Cash flows from financing activities:
Net repayments under revolving credit facilities (1,867) (17,148)
Loan proceeds 495 145,000
Repayment of debt (5,605) (12,643)
Direct costs of financing (287) (2,710)
Proceeds from exercise of stock options 31 351
-------- --------
Net cash (used) provided by financing activities (7,233) 112,850
-------- -------
Effect of exchange rate changes on cash (552) 26
-------- -------
Net increase (decrease) in cash and cash
equivalents 3,668 (8,843)
Cash and cash equivalents at beginning of period 14,966 26,592
------- -------
Cash and cash equivalents at end of period $18,634 $17,749
======= ========
The accompanying notes are an integral part of
the financial statements
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 September 30, 1999 and the results of its operations and changes in its cash flows for the nine months ended September 30, 1999 and 1998.
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, 1998 contained in the Company's Form 10-K which was filed with the Securities and Exchange Commission on March 31, 1999. 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" for the three and nine months ended September 30. There are no related tax effects for the three and nine month periods presented.
STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------- --------
Net income $ 1,749 $ 805
Other comprehensive income, net of tax:
Foreign currency translation adjustments 1,334 1,815
-------- -------
Comprehensive income $ 3,083 $ 2,620
======= =======
NOTE 2 - COMPREHENSIVE INCOME: (Cont'd.)
STATEMENT OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
-------- --------
Net income $ 7,381 $ 7,080
Other comprehensive income, net of tax:
Foreign currency translation adjustments (1,928) 834
-------- --------
Comprehensive income $ 5,453 $ 7,914
======= ========
The following table illustrates the components of accumulated other comprehensive income and their associated changes for the nine month period ending September 30, 1999:
ACCUMULATED OTHER
COMPREHENSIVE INCOME BALANCES
NINE MONTHS ENDING SEPTEMBER 30, 1999
Current
Beginning Period Ending
Balance Change Balance
--------- ------- -------
Foreign currency translation adjustments $(7,253) $(1,928) $(9,181)
Minimum pension liability adjustment (357) -- (357)
-------- -------- -------
Accumulated other comprehensive losses $(7,610) $(1,928) $(9,538)
======== ======== ========
NOTE 3 - ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not believe that the adoption of SFAS No. 133 will have a material effect on its consolidated financial statements.
NOTE 4 - INVENTORIES:
Inventories are stated at the lower of cost or market. For U.S. operations, except for Ruco, cost is determined using the last-in, first-out (LIFO) method. For all other operations, cost is determined using the first-in, first-out (FIFO) method.
NOTE 4 - INVENTORIES: (Cont'd.)
The components of inventories are:
Sept. 30, Dec. 31,
1999 1998
------- --------
Finished goods $28,641 $28,871
Raw materials 9,859 9,632
------- --------
38,500 38,503
Less reserves 2,749 2,037
------- --------
$35,751 $36,466
======= ========
NOTE 5 - ACQUISITIONS:
On July 31, 1998, the Company acquired all of the outstanding capital stock of Ruco Polymer Corporation and all of the outstanding membership interests of Ruco Polymer Company of Georgia, LLC (collectively "Ruco"). The aggregate purchase price for the acquisition was $110 million, including the repayment of bank debt owed by Ruco.
In April 1998, the Company acquired certain operating assets, not including manufacturing facilities, of the garment processing specialty chemicals businesses of Ocean Wash Inc. and Ocean Wash de Mexico de C.V., (collectively "Ocean Wash"), for $6.75 million. The acquired garment processing chemicals businesses have been merged into the Company's corresponding business sector.
The above described acquisitions have been accounted for as purchases and, accordingly, the operating results of the acquired businesses have been included in the Company's consolidated financial statements since the date of acquisition.
The Ocean Wash acquisition did not have a material effect on 1998 operating results. The following unaudited pro forma consolidated results of operations for the nine months ended September 30, 1998 assume the Ruco acquisition occurred on January 1, 1998:
1998
------
Net sales $204,011
Income before extraordinary item 6,704
Net income $ 6,391
Income per share before extraordinary item:
Basic $ 1.18
Diluted $ 1.14
Net income per share:
Basic $ 1.12
Diluted $ 1.09
NOTE 6 - SEGMENT INFORMATION:
The following schedules illustrate certain financial information about the Company's three business segments for the nine and three months ended September 30.
For 1999 the results of the Toners Strategic Business Unit, which was formerly a part of the Environmental Products and Services segment, is now included in the new Polymer Intermediate segment. This realignment coincided with the shift in management responsibility which was implemented in 1999 to help facilitate the planned growth in the solid polymer business.
NOTE 6 - SEGMENT INFORMATION: (Cont'd.)
Nine months ended September 30, 1999 compared to nine months ended September 30, 1998.
Nine Months Ended Sept. 30,
-------------------------------
1999 1998
--------------- ---------------
% of % of
Amount Sales Amount Sales
------ ----- ------ -----
(in thousands except percentages)
Sales
Textile Chemical Specialties $ 98,018 49.1% $105,353 67.4%
Polymer Intermediates 64,107 32.1 13,903 8.9
Environmental Products and Services 37,613 18.8 37,133 23.7
--------- ------ -------- ------
Total 199,738 100.0 156,389 100.0
Cost of Sales
Textile Chemical Specialties 56,627 57.8 62,723 59.5
Polymer Intermediates 50,800 79.2 11,594 83.4
Environmental Products and Services 24,097 64.1 24,385 65.7
-------- --------
Total 131,524 65.8 98,702 63.1
Gross Margin
Textile Chemical Specialties 41,391 42.2 42,630 40.5
Polymer Intermediates 13,307 20.8 2,309 16.6
Environmental Products and Services 13,516 35.9 12,748 34.3
-------- --------
Total 68,214 34.2 57,687 36.9
Operating Expenses
Textile Chemical Specialties 32,626 33.3 31,853 30.2
Polymer Intermediates 5,271 8.2 1,074 7.7
Environmental Products and Services 8,421 22.4 8,637 23.3
-------- --------
Total 46,318 23.2 41,564 26.6
Operating Income
Textile Chemical Specialties 8,765 8.9 10,777 10.3
Polymer Intermediates 8,036 12.6 1,235 8.9
Environmental Products and Services 5,095 13.5 4,111 11.0
-------- --------
Total 21,896 11.0 16,123 10.3
Other Expense, Net (9,385) (4.7) (3,593) (2.3)
-------- ----- -------- ------
Income before income taxes
and extraordinary item 12,511 6.3 12,530 8.0
Provision for income taxes 5,130 2.6 5,137 3.3
-------- ----- -------- -----
Income before extraordinary item 7,381 3.7 7,393 4.7
Extraordinary item, net of tax 313 0.2
Net Income $ 7,381 3.7% $ 7,080 4.5%
======== ===== ======== =====
NOTE 6 - SEGMENT INFORMATION: (Cont'd.)
Three months ended September 30, 1999 compared to three months ended September 30, 1998.
Three Months Ended Sept. 30,
--------------------------------
1999 1998
--------------- ---------------
% of % of
Amount Sales Amount Sales
------ ----- ------ -----
(in thousands except percentages)
Sales
Textile Chemical Specialties $ 31,254 47.3% $ 32,971 56.1%
Polymer Intermediates 21,208 32.1 13,903 23.6
Environmental Products and Services 13,617 20.6 11,960 20.3
--------- ------ -------- ------
Total 66,079 100.0 58,834 100.0
Cost of Sales
Textile Chemical Specialties 18,190 58.2 20,402 61.9
Polymer Intermediates 16,875 79.6 11,594 83.4
Environmental Products and Services 9,258 68.0 7,952 66.5
-------- --------
Total 44,323 67.1 39,948 67.9
Gross Margin
Textile Chemical Specialties 13,064 41.8 12,569 38.1
Polymer Intermediates 4,333 20.4 2,309 16.6
Environmental Products and Services 4,359 32.0 4,008 33.5
-------- --------
Total 21,756 32.9 18,886 32.1
Operating Expenses
Textile Chemical Specialties 10,560 33.8 10,521 31.9
Polymer Intermediates 1,721 8.1 1,044 7.5
Environmental Products and Services 3,480 25.6 2,871 24.0
-------- --------
Total 15,761 23.8 14,436 24.5
Operating Income
Textile Chemical Specialties 2,504 8.0 2,048 6.2
Polymer Intermediates 2,612 12.3 1,265 9.1
Environmental Products and Services 879 6.4 1,137 9.5
-------- --------
Total 5,995 9.1 4,450 7.6
Other Expense, Net (3,029) (4.6) (2,588) (4.4)
-------- ----- -------- ------
Income before income taxes
and extraordinary item 2,966 4.5 1,862 3.2
Provision for income taxes 1,217 1.8 744 1.3
-------- ----- -------- -----
Income before extraordinary item 1,749 2.7 1,118 1.9
Extraordinary item, net of tax 313 0.5
Net Income $ 1,749 2.7% $ 805 1.4%
======== ===== ======== =====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONS
Revenues, operating income and net income increased for the third quarter of 1999 versus the prior year’s quarter. Earnings per share of 30 cents (fully diluted) were up 58% from the 19 cents per share (before an extraordinary item of 5 cents per share) recorded in the same period last year. Sales for the quarter were $66,079,000, a 12.3% increase over the same period last year. Operating income increased 34.7% to $5,995,000, while net income increased by 117.3% to $1,749,000 versus the $805,000 in the same quarter in 1998. The increases in sales and operating income were primarily a result of the inclusion of Ruco Polymer Corporation and Ruco Polymer Company of Georgia LLC which were acquired on July 31, 1998 ("Ruco"), for the full quarter in 1999.
For the nine months ended September 30, 1999, earnings per share (fully diluted) increased to $1.28 compared to $1.26 before the extraordinary item of 5 cents per share for the first nine months of 1998.
For the nine month period ended September 30, 1999, sales were $199,738,000 a 27.7% increase over the same period last year. The increase in sales was primarily the result of the acquisition of Ruco, which increased sales by $47,212,000 or 30.2%. Partially offsetting this increase was a reduction in North American sales of products for processing of textiles and garments, which resulted in a 5.8% reduction in sales. Operating income increased 35.8% to $21,896,000, primarily attributable to Ruco while net income increased 4.3% to $7,381,000 versus the $7,080,000 in the first nine months of 1998.
For the third quarter of 1999, sales in the Textile Chemical Specialties segment of $31,254,000 were $1,717,000 (5.2%) lower than the same period in 1998, while operating income of $2,504,000 was $456,000 above 1998, an increase of 22.3%. Continued softness in the garment processing markets in North America was responsible for an 11.2% reduction in sales. Also, sales in this quarter have been negatively impacted by the change in the Dutch Guilder vs. US Dollar exchange rate. Somewhat offsetting this decline was increased Textile Chemical sales in Latin America and Asia, reflecting the increased focus being placed on these markets. Sales of organic chemicals, included in this segment, also increased, due to new toll manufacturing business and greater sales of proprietary products. Gross profit of the segment increased by 3.7 percentage points, mainly as a result of cost control efforts in North America, reduced raw material costs and the increase in higher margin Organic sales. The increase in operating profit for this segment was primarily due to the above gross margin improvements and to continued cost control efforts in North America.
For the nine month period ending September 30, 1999, Textile Chemical sales were $7,335,000 (7.0%) below the same period last year reflecting the softness in the North American and European textile and garment markets. Operating income was $2,012,000 (18.7%) below the same period reflecting the lower sales and increased costs in Europe for the enterprise systems implementation and increased selling expenses in Asia and Latin America as those operations have expanded, consistent with the Company's regional growth plans. Reduced selling costs in North America partially offset these increases.
Sales for the third quarter in the Polymer Intermediates segment, formed by Ruco and the toner polymer business (which is reported in Environmental Products and Services for 1998), were $21,208,000 versus $13,903,000 in the third quarter of 1998. Ruco was acquired on July 31, 1998, therefore only 2 months of sales were included in that period. Unit sales of powder coating resins increased by 11.2% with dollar volume up by only 3.3% (on a proforma basis) due to price decreases, which were offset by raw material cost reductions. The segment contributed operating profit of $2,612,000 versus $1,265,000 in the same period last year.
For the nine month period ending September 30, 1999, Polymer Intermediate segment sales were $64,107,000 versus $13,903,000 in the same period last year. Operating profits of $8,036,000 are $6,801,000 greater than the same period last year when only two months of operations were included in the results.
Third quarter sales in the Environmental Products and Services segment were $13,617,000. The 13.9% increase from the same period last year results from increased sales of Biochemicals primarily from the acquisition of Green Releaf Bio Tech Inc. ("Green Releaf") and the introduction of new specialty chemical products. Ion exchange products physical volume increased by 10.8%, however, this was offset by price decreases resulting in a 1.7% increase in revenue. Sales of specialty polymers increased by $1,463,000, a 231.9% increase as a result of the introduction of new aziridine based products. Gross profit for the segment declined by 1.5 percentage points from the same quarter last year, mainly a result of ion exchange sales price declines which exceeded raw material savings and lower margins on the new aziridine resale products. Operating income in this segment was $879,000 for the quarter, a decline of 22.7% from the third quarter of 1998. The decline is attributed to the decline in ion exchange selling prices and increased selling expenses in the Biochemicals business.
For the nine month period ended September 30, 1999, Environmental Products and Services segment sales were $480,000 (1.3%) above the same period last year reflecting the Green Releaf acquisition and the increased aziridine product sales offset by the exclusion of the Toner Polymer business. Operating income was $984,000 (23.9%) above the same period last year reflecting a $1,500,000 insurance settlement recorded in the first quarter of 1999, partially offset by reduced income from ion exchange products.
The overall gross margin for the third quarter of 1999 was 32.9% versus 32.1% in 1998. The increase is due to increased margins in the Textile Chemicals Specialty and Polymer Intermediates segments offset by lower margins in the Environmental Products and Services segment, as previously discussed.
The gross margin of the Polymer Intermediate segment was 20.4% for the third quarter of 1999, a 3.8 percentage point increase over 1998. The improvement results from reduced raw material costs partially offset by reduced sales prices.
For the nine month period ended September 30, 1999, the overall gross margin was 34.2% versus the margin of 36.9% in the same period in 1998. The decline is primarily the result of the inclusion of Ruco which has lower gross margins but lower operating costs. The gross margin in the Textile Chemical Specialties segment increased by 1.7 percentage points to 42.2% reflecting lower sales of lower gross margin garment products, the relatively larger high margin European sales and reduced raw material costs. Gross margin for Environmental Products and Services increased 1.6 percentage points to 35.9% primarily as a result of the acquisition of Green Releaf which has margins significantly above the average in this segment. Margins of 20.8% in the Polymer Intermediates segment are 4.2 percentage points above 1998 margins primarily as a result of reduced raw material costs.
Other expense of $3,029,000 for the quarter was $441,000 higher than the same period in 1998 primarily due to the increased interest costs relating to the Ruco acquisition.
For the nine month period ended September 30, 1999, Other Expense was $5,792,000 higher than the same period last year, primarily related to the additional interest expense associated with the Ruco acquisition.
Operating expenses as a percent of sales decreased .7 percentage points to 23.8% in the third quarter of 1999 because of the lower operating cost structure of the Polymer Intermediates segment. The acquisition of Ruco occurred on July 1, 1998 therefore, only two months' activity was recorded in 1998's third quarter. The Textile Chemical Specialties segment operating expenses increased 1.9 percentage points to 33.8% of sales primarily as a result of increased selling and administrative expenses in Latin America and Asia with the start-up of new operations in Columbia, Argentina and Hong Kong consistent with the Company’s plans to grow the business in those geographic areas, as well as the decrease in sales in North America. The Environmental Products and Services segment operating expenses increased 1.6 percentage points to 25.6% primarily as a result of increased selling expenses associated with the Green Releaf business.
For the nine month period ended September 30, 1999, operating expenses as a percentage of sales were 23.2% versus 26.6% in the same period in 1998. Operating expenses as a percentage of sales decreased as a result of the lower cost structure in the Polymer Intermediates segment and in the Environmental Products and Services segment reflecting the first quarter 1999 insurance settlement. Operating expense increased in the Textile Chemical Specialties segment as a result of selling and administrative expense increases in Latin America and Asia due to the focus on expanding in these areas. Expenses increased in Europe as a result of the implementation of an enterprise computer system.
The Company’s provision for income taxes was computed using applicable prevailing income tax rates. Sybron's effective tax rate was 41.0% for 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents of $18.6 million as of September 30, 1999 were $3.7 million above the balance as of December 31, 1998.
For the nine month period ended September 30, 1999, operating activities generated $17.3 million versus a generation of $3.5 million in the same period in 1998. Non cash expenses of $10.8 million were $4.4 million above the 1998 period primarily as a result of the amortization and depreciation expense related to the Ruco assets acquired. The 1998 period reflected a utilization of cash of $8.0 million for substantial reductions in accounts payable and accrued liabilities. Cash utilized from investing activities was $5.8 million in 1999 versus $125.2 million in 1998. The 1999 period reflects capital expenditures of $4.0 million and the purchase of Green Releaf. The 1998 period reflects capital expenditures of $7.8 million, the purchase of Ocean Wash for $6.8 million and the acquisition of Ruco for $110.0 million.
Cash utilized for financing activities for the nine month period in 1999 was $7.2 million versus generation of $112.9 million, in 1998. The repayment of long-term debt of $5.6 million and repayment of $1.9 million of short-term debt were the primary uses of funds in 1999. In 1998, $145.0 million was generated from long-term borrowing related to the Ruco and Ocean Wash acquisitions offset by loan repayments of $29.8 million.
In the third quarter 1999, the long-term loan agreement was amended to extend the then existing leverage ratio until the fourth quarter 1999. Management believes that its capital expenditures for existing operations can be funded from operating cash flow. Management also believes that cash flow from operations and available credit will be sufficient to finance its operations and debt service requirements for the foreseeable future.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, in less than three months, computer systems and/or software used by many companies in a wide variety of applications will experience operating difficulties unless they are modified or upgraded to adequately process information involving, related to or dependent upon the century change. Significant uncertainty exists concerning the scope and magnitude of problems associated with the century change.
The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software failures and a project team has been working for almost two years to address Year 2000 risks. The project team has and will continue to coordinate the identification of and implementation of changes to computer hardware and software applications that will attempt to ensure availability and integrity of the Company’s information systems and the reliability of its operational systems and manufacturing processes. The Company is also assessing the potential overall impact of the impending century change on its business, results of operations and financial position.
The Company has reviewed its information and operational systems and manufacturing and laboratory processes in order to identify those services or systems that were not Year 2000 compliant. As a result of this review, the Company has modified or replaced certain information and operational systems so they will be Year 2000 compliant. The total cost of these Year 2000 compliance activities, estimated at less than $500,000, has not been material to the Company’s financial position or its results of operations. Based on available information, the Company does not believe any material exposure to significant business interruption exist as a result of Year 2000 compliance issues. However, the Company continues to evaluate a contingency plan in the event unforeseen events occur when the Year 2000 arrives. These costs of completion of its Year 2000 modification and testing processes are based on management’s best estimates. However, there can be no assurance that the Company will timely identify and remediate all significant Year 2000 problems, that unforeseen remedial efforts will not involve significant time and expense, or that such problems will not have a material adverse effect on the Company’s business, results of operations or financial position.
The Company also faces risk to the extent that suppliers of products, services and systems and others with whom the Company transacts business on a worldwide basis do not comply with Year 2000 requirements. The Company has had formal communications with significant suppliers and customers to determine the extent the Company is vulnerable to these third parties failure to remediate their own Year 2000 issues. In the event any such third parties cannot provide the Company with products, services, or systems that meet the year 2000 requirements on a timely basis, or in the event Year 2000 issues prevent such third parties from timely delivery of products or services required by the Company, and the duration of such failure, the Company’s results of operations could be materially adversely affected. To the extent Year 2000 issues cause significant delays in, or cancellation of, orders for the company’s products or services, the Company’s business, results of operations and financial position could be materially adversely affected.
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, 1999.
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule, filed electronically herewith.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/ Steven F. Ladin
Steven F. Ladin
Vice President, Finance and
Chief Financial Officer
Date: November 9, 1999
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