Abatix IESI Total
Nine Months Ended ---------------- ----------------- -----------------
September 30, 2001
- ----------------------------------------
Sales from external customers $39,738,435 $1,746,256 $41,484,691
Intersegment sales - 464,971 464,971
Interest expense 304,091 - 304,091
Depreciation and amortization 431,101 2,864 433,965
Segment profit 1,346,177 247,356 1,593,533
Segment assets 17,897,471 638,780 18,536,251
Capital expenditures 393,339 - 393,339
Nine Months Ended
September 30, 2000
- ----------------------------------------
Sales from external customers $34,090,581 $2,845,645 $36,936,226
Intersegment sales - 496,968 469,968
Interest expense 436,732 - 436,732
Depreciation and amortization 405,164 5,429 410,593
Segment profit 612,286 355,730 968,016
Segment assets 16,117,770 1,130,583 17,248,353
Capital expenditures 391,226 1,538 392,764
Below is a reconciliation of (i) total segment profit to earnings before income taxes on the Consolidated Statements of Operations, and (ii) total segment assets to total assets on the Consolidated Balance Sheets for all periods presented. The sales from external customers represent the net sales on the Consolidated Statements of Operations.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------- -----------------------------------------
2001 2000 2001 2000
------------------ ------------------ ------------------ ------------------
Profit for reportable segments
$633,730 $378,488 $1,593,533 $968,016
Elimination of intersegment profits
(16,909) (9,055) (27,346) (8,921)
------------------ ------------------ ------------------ ------------------
Earnings before income taxes
$616,821 $369,433 $1,566,187 $959,095
================== ================== ================== ==================
Total assets for reportable segments $18,536,251 $17,248,353
Elimination of intersegment assets (164,315) (806,129)
------------------ ------------------
Total assets $18,371,936 $16,442,224
================== ==================
The Company’s sales, substantially all of which are on an unsecured credit basis, are to various customers from its distribution centers in Texas, California, Arizona, Washington and Nevada. The Company evaluates credit risks on an individual basis before extending credit to its customers and it believes the allowance for doubtful accounts adequately provides for loss on uncollectible accounts. During the nine months ended September 30, 2001 and 2000, no single customer accounted for more than 10 percent of net sales, although sales to environmental contractors were approximately 48 percent and 35 percent of consolidated net sales in those periods, respectively. A reduction in spending on environmental projects could significantly impact sales.
Although no vendor accounted for more than 10 percent of purchases, one product class accounted for approximately 14 percent of net sales during the nine months ended September 30, 2001 and 2000, respectively. A major component of these products is petroleum. Increases in oil prices or shortages in supply could significantly impact sales and the Company’s ability to supply its customers with certain products at a reasonable price.
ABATIX CORP. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Three Month Period Ended September 30, 2001 Compared to Three Month Period Ended September 30, 2000.
Consolidated net sales for the three months ended September 30, 2001, increased 18 percent to $14,569,000 from $12,354,000 in 2000. The Abatix operating segment net sales grew 24 percent to $13,903,000 in 2001 and the IESI operating segment net sales decreased 41 percent to $666,000 in 2001. Sales were significantly impacted by the increasing awareness of toxic molds in homes and buildings and by the continuing cleanup from the effects of Tropical Storm Allison on the Houston area. The decrease in IESI sales is due to the exit from a distribution channel during the second quarter 2001.
Gross profit in the third quarter of 2001 of $4,103,000 increased 23 percent from gross profit in 2000 of $3,333,000 due to increased sales volume. As expected, margins varied from location to location due to sales mix and local market conditions. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 28 and 27 percent for 2001 and 2000, respectively.
Selling, general and administrative expenses for the third three months of 2001 of $3,372,000 increased 20 percent over 2000 expenses of $2,815,000. These expenses were 23 percent of sales for both 2001 and 2000. Selling, general and administrative expenses are expected to be in the 23 to 24 percent range for the year ended December 31, 2001.
Interest expense of $117,000 decreased approximately $38,000 from 2000 interest expense of $155,000. Lower interest rates in 2001 reduced interest expense in the current period. The Company’s credit facilities are variable rate notes tied to the Company’s lending institution’s prime rate. Increases in the prime rate could negatively affect the Company’s earnings.
Net earnings for the three months ended September 30, 2001, of $383,000, or $.22 per share, increased $160,000 from net earnings of $223,000, or $.13 per share, for the same period in 2000. The increase in net earnings is primarily due to increased sales volume and lower interest expense.
Nine Month Period Ended September 30, 2001 Compared to Nine Month Period Ended September 30, 2000.
Consolidated net sales for the nine months ended September 30, 2001, increased 12 percent to $41,485,000 from $36,936,000 in 2000. The Abatix operating segment net sales grew 17 percent to $39,738,000 in 2001 and the IESI operating segment net sales decreased 39 percent to $1,746,000 in 2001. Sales were significantly impacted by the increasing awareness of toxic molds in homes and buildings and by the effects of Tropical Storm Allison on the Houston area in June. The decrease in IESI sales is due to the exit from a distribution channel during the second quarter 2001.
Gross profit in the first three quarters of 2001 of $11,510,000 increased 14 percent from gross profit in 2000 of $10,070,000 due to increased sales volume. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 28 percent for 2001 and 27 percent for 2000. Although overall margins are expected to remain at their current levels in 2001, competitive pressures could negatively impact any and all efforts by the Company to maintain or improve product margins.
Selling, general and administrative expenses for the first nine months of 2001 of $9,601,000 increased 11 percent over 2000 expenses of $8,671,000. These expenses were 23 percent of sales for both 2001 and 2000. Selling, general and administrative expenses are expected to be in the 23 to 24 percent range for the year ended December 31, 2001.
Interest expense of $304,000 decreased $133,000 from 2000 interest expense of $437,000. During the second half of 2000, the Company reduced debt outstanding with cash provided by operations resulting in lower average debt outstanding for the first half of 2001. Lower interest rates in 2001 also contributed to reduced interest expense in the current year. The Company’s credit facilities are variable rate notes tied to the Company’s lending institution’s prime rate. Increases in the prime rate could negatively affect the Company’s earnings.
Net earnings for the nine months ended September 30, 2001, of $947,000, or $.55 per share, increased $369,000 from net earnings of $578,000, or $.34 per share, for the same period in 2000. The increase in net earnings is primarily due to increased sales volume and lower interest expense.
Liquidity and Capital Resources
The Company’s working capital requirements historically result from the growth of its accounts receivable and inventories, partially offset by increased accounts payable and accrued expenses, associated with increases in sales volume. Net cash used in operations during the first nine months of 2001 of $2,387,000 resulted principally from the normal seasonal increase in accounts receivable and inventories. However, higher sales during the third quarter led to higher than normal fluctuations in these two accounts at quarter end.
Cash requirements for non-operating activities during the first nine months of 2001 resulted primarily from borrowings of notes payable to the bank and $393,000 for purchases of property and equipment. The working capital line of credit borrowings, net of payments, occurred primarily as a result of increases in accounts receivable and inventory. The majority of the purchases of property and equipment related to the new e-commerce site, two delivery vehicles and computer hardware.
Cash flow from operations for the entire year of 2001 is expected to be positive, although at any given point, it may be negative. The development of the Company’s e-commerce solution has required a significant capital outlay. This solution will cost approximately $200,000 to implement, market and maintain in 2001; it provides customers a more efficient method of doing business with Abatix and could provide some cost savings in the future, as well as expand the customer base.
In August 2001, the Company increased its working capital line of credit at a commercial lending institution from $7,000,000 to $8,000,000 to help fund additional working capital requirements due to higher sales. The working capital line of credit agreement allows the Company to borrow up to 80 percent of the book value of eligible trade receivables plus the lesser of 40 percent of eligible inventory or $2,000,000. As of October 29, 2001, there are advances outstanding under this credit facility of $5,652,000. Based on the borrowing formula, the Company had the capacity to borrow an additional $2,348,000 as of October 29, 2001. The Company also maintains a $550,000 capital equipment credit facility providing for borrowings at 80 percent of cost on purchases. The advances outstanding under this credit facility as of October 29, 2001, were $90,000. Both credit facilities are payable on demand and bear a variable rate of interest computed at the prime rate.
Management believes the Company’s current credit facilities, together with cash provided by operations, will be sufficient for its capital and liquidity requirements for the next twelve months. In the event the Company pursues acquisitions and is unable to use its common stock as payment, the Company may need to negotiate with a lender to secure additional borrowings to be used to acquire another company’s assets.
Except for the historical information contained herein, the matters set forth in this form 10-Q are forward looking and involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: the long-term impact of the September 11, 2001, tragic events on the commercial construction and domestic preparedness markets, the impact of insurance coverage on mold remediation jobs, inability to hire and train quality people, changes in interest rates, unavailability of products and strong competition. In addition, increases in oil prices or shortages in oil supply could significantly impact the Company’s petroleum based products and its ability to supply those products at a reasonable price. Furthermore, lack of acceptance of our e-commerce solution or an impairment of goodwill resulting from the 1999 acquisitions could cause actual results to differ materially.
ABATIX CORP. AND SUBSIDIARY
PART II
Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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 as both a duly authorized officer and as the principal financial and accounting officer by the Registrant.
ABATIX CORP.
(Registrant)
By:/s/ Frank J. Cinatl, IV
Frank J. Cinatl, IV
Vice President and Chief Financial
Officer of Registrant
(Principal Accounting Officer)
Date:November 1, 2001 |
