SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 30, 2001.
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: 0-6132
CANTEL MEDICAL CORP.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-1760285
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 CLOVE ROAD, LITTLE FALLS, NEW JERSEY 07424
- ------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(973) 890-7220
--------------
Indicate by check mark whether 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 the filing
requirements for the past 90 days. Yes /X/ No / /
Number of shares of Common Stock outstanding as of June 8, 2001: 4,552,901.
PART I - FINANCIAL INFORMATION
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
April 30, July 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,817 $ 2,169
Available-for-sale securities 897 --
Accounts receivable, net 8,922 8,970
Inventories 8,769 6,992
Net assets related to discontinued business -- 3,095
Prepaid expenses and other current assets 559 475
-------- --------
Total current assets 22,964 21,701
Property and equipment, net 911 901
Intangible assets, net 1,236 1,345
Other assets 2,095 1,008
-------- --------
$ 27,206 $ 24,955
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,889 $ 5,054
Compensation payable 931 943
Other accrued expenses 1,895 979
Income taxes 1,317 594
-------- --------
Total current liabilities 7,032 7,570
Long-term debt -- 125
Deferred income taxes 94 97
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued -- --
Common Stock, $.10 par value; authorized 12,000,000
shares; April 30 - 4,657,655 shares issued and
4,483,772 shares outstanding; July 31 - 4,597,220
shares issued and 4,438,381 shares outstanding 466 460
Additional capital 19,887 19,502
Retained earnings 3,099 96
Accumulated other comprehensive income:
Unrealized gain on securities 172 --
Unrealized gain on currency hedging 51 --
Cumulative foreign currency translation adjustment (2,575) (2,097)
Treasury Stock, at cost; April 30 -
173,883 shares; July 31 -158,839 shares (1,020) (798)
-------- --------
Total stockholders' equity 20,080 17,163
-------- --------
$ 27,206 $ 24,955
======== ========
See accompanying notes.
1
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net sales:
Product sales $ 11,373 $ 9,178 $ 29,460 $ 24,876
Product service 1,548 1,470 4,659 4,101
-------- -------- -------- --------
Total net sales 12,921 10,648 34,119 28,977
-------- -------- -------- --------
Cost of sales:
Product sales 7,086 5,583 17,712 15,440
Product service 845 825 2,435 2,265
-------- -------- -------- --------
Total cost of sales 7,931 6,408 20,147 17,705
-------- -------- -------- --------
Gross profit 4,990 4,240 13,972 11,272
Expenses:
Shipping and warehouse 158 95 445 364
Selling 1,410 1,344 4,142 3,745
General and administrative 1,340 1,222 3,948 3,308
Research and development 248 193 703 554
-------- -------- -------- --------
Total operating expenses 3,156 2,854 9,238 7,971
-------- -------- -------- --------
Income from continuing operations
before interest, other
income and income taxes 1,834 1,386 4,734 3,301
Interest (income) expense, net (1) 63 (7) 194
Other income -- -- (7) --
-------- -------- -------- --------
Income from continuing operations
before income taxes 1,835 1,323 4,748 3,107
Income taxes 694 644 1,970 1,420
-------- -------- -------- --------
Income from continuing operations 1,141 679 2,778 1,687
Gain on disposal of
discontinued operations 225 -- 225 --
Loss from discontinued operations -- (103) -- (33)
-------- -------- -------- --------
Net income $ 1,366 $ 576 $ 3,003 $ 1,654
======== ======== ======== ========
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.26 $ 0.15 $ 0.62 $ 0.38
Discontinued operations 0.05 (0.02) 0.05 (0.01)
-------- -------- -------- --------
Net income $ 0.31 $ 0.13 $ 0.67 $ 0.37
======== ======== ======== ========
Diluted:
Continuing operations $ 0.23 $ 0.15 $ 0.58 $ 0.38
Discontinued operations 0.05 (0.02) 0.05 (0.01)
-------- -------- -------- --------
Net income $ 0.28 $ 0.13 $ 0.63 $ 0.37
======== ======== ======== ========
See accompanying notes.
2
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
April 30,
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 2,778 $ 1,687
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities:
Income (loss) from discontinued operations 225 (33)
Depreciation and amortization of continuing
operations 416 341
Depreciation and amortization of discontinued
operations -- 57
Changes in assets and liabilities:
Accounts receivable (189) 527
Inventories (1,993) (670)
Prepaid expenses and other current assets 11 114
Accounts payable and accrued expenses (1,941) (1,101)
Income taxes 700 (91)
------- -------
Net cash provided by operating activities 7 831
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (335) (332)
Purchases of available-for-sale securities (725) --
Cash provided by (used in) discontinued operations 814 (1,517)
Proceeds from transfer of discontinued operations 2,350 --
Other, net (507) (33)
------- -------
Net cash provided by (used in) investing activities 1,597 (1,882)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under credit facilities (125) 1,190
Proceeds from exercise of stock options 169 8
Purchases of Treasury Stock -- (208)
------- -------
Net cash provided by financing activities 44 990
------- -------
Increase (decrease) in cash and cash equivalents 1,648 (61)
Cash and cash equivalents at beginning of period 2,169 534
------- -------
Cash and cash equivalents at end of period $ 3,817 $ 473
======= =======
See accompanying notes.
3
CANTEL MEDICAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and the requirements of Form 10-Q and Rule 10.01 of
Regulation S-X. Accordingly, they do not include certain information and note
disclosures required by generally accepted accounting principles for annual
financial reporting and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Annual Report of Cantel
Medical Corp. (the "Company" or "Cantel") on Form 10-K for the fiscal year ended
July 31, 2000, and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein. Cantel has two wholly-owned
operating subsidiaries, Carsen Group Inc. ("Carsen"), its Canadian subsidiary,
and MediVators, Inc. ("MediVators"), its United States subsidiary.
The unaudited interim financial statements reflect all adjustments which
management considers necessary for a fair presentation of the results of
operations for these periods. The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
The condensed consolidated balance sheet at July 31, 2000 was derived from
the audited consolidated balance sheet of the Company at that date.
Note 2. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "REPORTING COMPREHENSIVE INCOME," which establishes standards for the
reporting and disclosure of comprehensive income and its components in the
financial statements. The adoption of this Statement had no impact on the
Company's net income and an insignificant impact on stockholders' equity. The
Company's comprehensive income for the three and nine months ended April 30,
2001 and 2000 are set forth in the following table:
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 1,366,000 $ 576,000 $ 3,003,000 $ 1,654,000
Other comprehensive income (loss):
Unrealized gain on securities 101,000 -- 172,000 --
Unrealized gain (loss) on
currency hedging 18,000 -- (56,000) --
Foreign currency translation (381,000) (322,000) (478,000) 183,000
----------- ----------- ----------- -----------
Comprehensive income $ 1,104,000 $ 254,000 $ 2,641,000 $ 1,837,000
=========== =========== =========== ===========
4
Note 3. HEDGING ACTIVITIES
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS No. 133"). SFAS No. 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not designated as hedges must be adjusted to fair value through earnings. If
the derivative is designated as a hedge, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against the
change in the fair value of the hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of the change in fair
value of a derivative that is designated as a hedge will be immediately
recognized in earnings.
The Company's Canadian subsidiary purchases and pays for a substantial
portion of its products in United States dollars and is therefore exposed to
fluctuations in the rates of exchange between the United States dollar and
Canadian dollar. In order to hedge against the impact of such currency
fluctuations on the purchases of inventories, Carsen enters into foreign
currency forward contracts on firm purchases of such inventories in United
States dollars. Total commitments for such foreign currency forward contracts
amounted to $2,500,000 (United States dollars) at April 30, 2001 and cover a
portion of Carsen's projected purchases of inventories through July 2001. These
foreign currency forward contracts are designated as hedges, and therefore
recognition of gains and losses is deferred within other comprehensive income
until settlement of the underlying commitments. Realized gains and losses are
recorded within cost of sales upon settlement. The Company does not hold any
derivative financial instruments for speculative or trading purposes.
The adoption of SFAS No. 133 on August 1, 2000 did not have a material
impact on operations; however, it resulted in a $107,000 gain being recorded in
other comprehensive income. Additionally, the fair value of the Company's
derivatives was $51,000 at April 30, 2001, which resulted in the recording of an
unrealized loss of $56,000 during the nine months ended April 30, 2001. The
entire April 30, 2001 deferred gain of $51,000 will be recognized in earnings
during fiscal 2001.
Note 4. DISCONTINUED OPERATIONS
On October 6, 2000, Carsen consummated a transaction under an Asset
Purchase Agreement with Olympus America Inc. ("Olympus") pursuant to which
Carsen terminated its consumer products business and sold its inventories of
Olympus consumer products to Olympus. The transaction had an effective date of
July 31, 2000.
5
The purchase price for the inventory was $1,026,000, net of adjustments
related to estimated warranty claims and promotional program expenses payable to
Carsen's customers. During the nine months ended April 30, 2001, Carsen also
received additional consideration from Olympus under the Purchase Agreement,
including amounts related to transition services provided by Carsen subsequent
to July 31, 2000. Such consideration included (i) fixed cash amounts aggregating
approximately $615,000 and (ii) twelve and one-half percent (12 1/2%) of
Olympus' net sales of consumer products in Canada in excess of $8,000,000 during
the period from August 1, 2000 through March 31, 2001 aggregating approximately
$619,000. Olympus also reimbursed Carsen for certain expenses related to the
termination of Carsen's consumer products business. No additional amounts are
due from Olympus subsequent to April 30, 2001.
The discontinuance of the Consumer Products business has been reflected as
a discontinued operation and is presented separately in the Company's Condensed
Consolidated Financial Statements. The Company's Condensed Consolidated
Statements of Income for the three and nine months ended April 30, 2000 and
Condensed Consolidated Statement of Cash Flows for the nine months ended April
30, 2000 have been restated to conform to the current year's presentation. For
the three and nine months ended April 30, 2001, the gain on disposal of
discontinued operations consisted of a pretax gain of $380,000 less related
income taxes of $155,000. For the three months ended April 30, 2000, the loss
from discontinued operations consisted of a pretax loss of $184,000 less a
related income tax benefit of $81,000. For the nine months ended April 30, 2000,
the loss from discontinued operations consisted of a pretax loss of $59,000 less
a related income tax benefit of $26,000.
The components of net assets related to discontinued business in the
Condensed Consolidated Balance Sheets and the activity during the nine months
ended April 30, 2001 are set forth below:
July 31, Cash Received Other Gain (Loss) April 30,
2000 From Olympus Settlements On Disposal 2001
----------- ------------ ----------- ----------- -----------
Trade accounts receivable,
net of allowance for
doubtful accounts of
$99,000 at July 31 $ 3,047,000 $ -- $(3,132,000) $ 85,000 $ --
Consideration due under
Purchase Agreement 1,989,000 (2,350,000) 13,000 348,000 --
Inventories 235,000 -- (84,000) (151,000) --
Accounts payable (1,531,000) -- 1,531,000 -- --
Accrued expenses:
Customer promotions (332,000) -- 198,000 105,000 (29,000)
Compensation and other (313,000) -- 219,000 (7,000) (101,000)
----------- ----------- ----------- ----------- -----------
Net assets related to
discontinued business $ 3,095,000 $(2,350,000) $(1,255,000) $ 380,000 $ (130,000)
=========== =========== =========== =========== ===========
6
Note 5. EARNINGS PER COMMON SHARE
Basic earnings per common share are computed based upon the weighted
average number of common shares outstanding during the period.
Diluted earnings per common share are computed based upon the weighted
average number of common shares outstanding during the period plus the dilutive
effect of common stock equivalents using the treasury stock method and the
average market price for the period.
The following table sets forth the computation of basic and diluted
earnings per common share:
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Numerator for basic and diluted
earnings (loss) per common share:
Income from continuing operations $ 1,141,000 $ 679,000 $ 2,778,000 $ 1,687,000
Income (loss) from
discontinued operations 225,000 (103,000) 225,000 (33,000)
------------- ------------- ------------- -------------
Net income $ 1,366,000 $ 576,000 $ 3,003,000 $ 1,654,000
============= ============= ============= =============
Denominator for basic and diluted
earnings (loss) per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 4,470,003 4,403,964 4,451,444 4,411,171
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 472,686 70,635 350,108 62,600
------------- ------------- ------------- -------------
Denominator for diluted earnings
per common share - weighted
average number of shares
outstanding and common
stock equivalents 4,942,689 4,474,599 4,801,552 4,473,771
============= ============= ============= =============
Basic earnings (loss) per common share:
Continuing operations $ 0.26 $ 0.15 $ 0.62 $ 0.38
Discontinued operations 0.05 (0.02) 0.05 (0.01)
------------- ------------- ------------- -------------
Net income $ 0.31 $ 0.13 $ 0.67 $ 0.37
============= ============= ============= =============
Diluted earnings (loss) per common share:
Continuing operations $ 0.23 $ 0.15 $ 0.58 $ 0.38
Discontinued operations 0.05 (0.02) 0.05 (0.01)
------------- ------------- ------------- -------------
Net income $ 0.28 $ 0.13 $ 0.63 $ 0.37
============= ============= ============= =============
7
Note 6. FINANCING ARRANGEMENTS
On February 23, 2001, the Company entered into a credit facility with a
United States bank and a Canadian bank which provides for i) a $2,500,000
revolving credit facility for Cantel and MediVators (the "U.S. Borrowers") (the
"U.S. Revolving Credit Facility") and ii) a $5,000,000 (United States dollars)
revolving credit facility for Carsen (the "Canadian Borrower") (the "Canadian
Revolving Credit Facility"), both of which revolving credit facilities expire on
February 22, 2004, and iii) a $12,500,000 acquisition facility available to the
U.S. Borrowers for permitted acquisitions in the United States through February
22, 2003 (the "Acquisition Facility"). Borrowings under the U.S. Revolving
Credit Facility and the Acquisition Facility will bear interest at rates ranging
from .25% to .75% above the United States lender's base rate, or at rates
ranging from 2% to 3% above the London Interbank Offered Rate ("LIBOR"),
depending upon the U.S. Borrowers' ratio of debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). Borrowings under the Canadian
Revolving Credit Facility may be in either Canadian dollars or United States
dollars and will bear interest at rates ranging from .25% to .75% above the
Canadian lender's base rate, or at rates ranging from 2% to 3% above the LIBOR
rate, depending upon the Canadian Borrower's ratio of debt to EBITDA. The base
rates associated with the United States lender and the Canadian lender were
7.00% and 6.25%, respectively, at June 8, 2001. Each of the credit facilities
provides for available borrowings based upon percentages of eligible accounts
receivable and inventories; requires the respective borrower to meet certain
financial covenants; and is secured by substantially all assets of the
respective borrower. In addition, the U.S. Revolving Credit Facility is secured
by the pledge of all of the outstanding shares of MediVators stock owned by
Cantel and the Canadian Revolving Credit Facility is secured by substantially
all assets (including the pledge of 65% of the outstanding shares of Carsen
stock owned by Cantel) of, and is guaranteed by, the U.S. Borrowers.
Note 7. INCOME TAXES
Income taxes consist primarily of taxes imposed on the Company's Canadian
operations. The effective tax rate on Canadian operations was 42.9% and 44.2%
for the nine months ended April 30, 2001 and 2000, respectively. For the nine
months ended April 30, 2001, the consolidated effective tax rate was lower than
the Canadian effective tax rate due to the fact that income generated by the
United States operations is substantially offset by tax benefits resulting from
the utilization of net operating loss carryforwards for Federal purposes. For
the nine months ended April 30, 2000, the consolidated effective tax rate was
higher than the Canadian effective tax rate due to the fact that losses
generated by the United States operations could not be used to offset income
generated by the Canadian operations.
8
Note 8. SUBSEQUENT EVENT - PROPOSED ACQUISITION OF MINNTECH CORPORATION
On May 31, 2001, the Company entered into a definitive merger agreement
under which the Company will acquire Minntech Corporation ("Minntech"), a public
company based in Minneapolis, Minnesota. Under the terms of the definitive
merger agreement, each share of Minntech will be converted into the right to
receive $10.50, consisting of $6.25 in cash, and a fraction of a share of common
stock of Cantel having a value of $4.25 (based on the average closing price of
Cantel stock during a defined period ending shortly before the merger, and
further subject to certain collar provisions fixing the number of shares of
Cantel common stock to be issued if the average closing price of Cantel stock is
less than $15.00 or exceeds $28.89). The total consideration for the proposed
transaction is approximately $70 million.
Cantel has received a bank commitment, subject to certain conditions,
to provide a new credit facility to fund the financed portion of the cash
consideration to be paid in the merger as well as to replace the Company's
existing working capital credit facilities. With respect to the stock portion
of the consideration, the number of shares to be issued by Cantel will range
from approximately 967,000 to 1,863,000 shares, depending on Cantel's average
closing price during the specified period preceding the merger. The
transaction will be taxable to the shareholders of Minntech and accounted for
as a purchase.
The transaction is subject to customary closing conditions, including the
approval of the shareholders of each of Minntech and Cantel. Under the merger
agreement, Minntech has the right to terminate the agreement if the average
closing price of Cantel stock during a defined period ending shortly before the
merger is below $13.24, unless Cantel elects to provide to Minntech shareholders
additional consideration, in cash or Cantel shares, at Cantel's option, such
that the total consideration is no less than $10.00 for each Minntech share. No
assurance can be given that such conditions will be satisfied or that the merger
will be consummated.
Minntech is a leader in the development, manufacturing, and marketing of
disinfection/reprocessing systems for renal dialysis as well as filtration and
separation and other products for medical and non-medical applications. The
products are available through Minntech's distribution network in the United
States and in many international markets.
In connection with this transaction, a Form 8-K was filed by the Company
with the Securities and Exchange Commission ("SEC") on May 31, 2001, and a joint
proxy statement/prospectus will be filed with the SEC prior to the shareholder
meetings. The merger is expected to
9
close during the third quarter of calendar 2001.
At April 30, 2001, the Company had incurred professional fees aggregating
$901,000 associated with this transaction which are included within other assets
in the accompanying Condensed Consolidated Balance Sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF CONTINUING OPERATIONS
Reference is made to the discontinuance of the Company's Consumer Products
business, as more fully described in note 4 to the Condensed Consolidated
Financial Statements. The results of continuing operations reflect primarily the
results of Carsen and MediVators. Reference is also made hereafter to the impact
of a weaker Canadian dollar against the United States dollar during the three
and nine months ended April 30, 2001, compared with the three and nine months
ended April 30, 2000 (decrease in value of approximately 6% and 3% for the three
and nine months ended April 30, 2001, respectively, based upon average exchange
rates). The ensuing discussion should also be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2000.
The following table gives information as to the net sales and the
percentage to the total net sales accounted for by each operating segment of the
Company.
Three Months Ended Nine Months Ended
April 30, April 30,
---------------------------------------------- ----------------------------------------------
2001 2000 2001 2000
(Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ------- -------- -------- -------- ------- -------- -------
Medical Products $ 5,626 43.5 $ 4,691 44.1 $ 14,926 43.7 $ 12,717 43.9
Infection Control
Products 3,787 29.3 2,569 24.1 9,330 27.3 7,343 25.3
Scientific Products 2,120 16.4 2,217 20.8 5,691 16.7 5,401 18.6
Product Service 1,548 12.0 1,470 13.8 4,659 13.7 4,101 14.2
Elimination of inter-
company sales of
Infection Control
Products (160) (1.2) (299) (2.8) (487) (1.4) (585) (2.0)
-------- ------- -------- -------- -------- ------- -------- -------
$ 12,921 100.0 $ 10,648 100.0 $ 34,119 100.0 $ 28,977 100.0
======== ======= ======== ======== ======== ======= ======== =======
Net sales increased by $2,273,000, or 21.3%, to $12,921,000 for the three
months ended April 30, 2001, from $10,648,000 for the three months ended April
30, 2000. Net sales increased by $5,142,000, or 17.7%, to $34,119,000 for the
nine months ended April 30, 2001, from $28,977,000 for the nine months ended
April 30, 2000. Net sales were
10
adversely impacted for the three and nine months ended April 30, 2001, compared
with the three and nine months ended April 30, 2000, by approximately $599,000
and $1,018,000, respectively, due to the translation of Carsen's net sales using
a weaker Canadian dollar against the United States dollar.
These increases in sales were attributable to the Company's Medical
Products, Infection Control Products and Product Service business segments. The
increased sales of Medical Products was due primarily to an increase in demand,
a portion of which was attributable to the introduction of new flexible
endoscopy products, and selling price increases. The increased sales of
Infection Control Products was due primarily to an increase in demand for
infection control products in the United States. The increased sales of Product
Service was due primarily to an increase in demand and selling price increases.
Gross profit increased by $750,000, or 17.7%, to $4,990,000 for the three
months ended April 30, 2001, from $4,240,000 for the three months ended April
30, 2000. Gross profit increased by $2,700,000, or 24.0%, to $13,972,000 for the
nine months ended April 30, 2001, from $11,272,000 for the nine months ended
April 30, 2000.
Gross profit as a percentage of sales for the three and nine months ended
April 30, 2001 were 38.6% and 41.0%, respectively, compared with 39.8% and 38.9%
for the three and nine months ended April 30, 2000. The lower gross profit
percentage for the three months ended April 30, 2001 was primarily attributable
to the adverse impact of a weaker Canadian dollar relative to the United States
dollar, since the Company's Canadian subsidiary purchases substantially all of
its products in United States dollars and sells its products in Canadian
dollars, and competition in one significant sale in Medical Products. The higher
gross profit percentage for the nine months ended April 30, 2001 was primarily
attributable to a buy-in of Medical Products inventories during fiscal 2000
prior to receiving a supplier price increase, a majority of which inventories
were sold during the nine months ended April 30, 2001; selling price increases
in Medical Products and Product Service; favorable sales mix associated with
Product Service and Scientific Products; and favorable sales mix and
manufacturing efficiencies associated with Infection Control Products.
Shipping and warehouse expenses increased by $63,000 to $158,000 for the
three months ended April 30, 2001, from $95,000 for the three months ended April
30, 2000. For the nine months ended April 30, 2001, shipping and warehouse
expenses increased by $81,000 to $445,000, from $364,000 for the nine months
ended April 30, 2000. These increases were attributable to variable freight
costs associated with the increase in sales volume.
Selling expenses as a percentage of net sales were 10.9% and 12.1% for the
three and nine months ended April 30, 2001, compared with 12.6% and 12.9% for
the three and nine months ended April 30, 2000. For the
11
three and nine months ended April 30, 2001, the decreases in selling expenses as
a percentage of net sales was primarily attributable to the effect of the
increased sales against the fixed portion of selling expenses and the reduction
of commissions as a percentage of sales due to a restructuring of certain
compensation packages.
General and administrative expenses increased by $118,000 to $1,340,000
for the three months ended April 30, 2001, from $1,222,000 for the three months
ended April 30, 2000. For the nine months ended April 30, 2001, general and
administrative expenses increased by $640,000 to $3,948,000, from $3,308,000 for
the nine months ended April 30, 2000. These increases were primarily
attributable to additional personnel, incentive compensation, retirement plan
contributions, rent and depreciation and amortization.
Research and development expenses increased by $55,000 to $248,000 for the
three months ended April 30, 2001, from $193,000 for the three months ended
April 30, 2000. For the nine months ended April 30, 2001, research and
development expenses increased by $149,000 to $703,000, from $554,000 for the
nine months ended April 30, 2000. These increases were primarily attributable to
an increase in personnel.
Interest income was $1,000 for the three months ended April 30, 2001,
compared with interest expense of $63,000 for the three months ended April 30,
2000. For the nine months ended April 30, 2001, interest income was $7,000,
compared with interest expense of $194,000 for the nine months ended April 30,
2000. These changes in interest were attributable to interest income earned on
cash and cash equivalents during the three and nine months ended April 30, 2001,
compared with interest expense on outstanding borrowings under the Company's
revolving credit facilities during the three and nine months ended April 30,
2000.
Income from continuing operations before income taxes increased by
$1,641,000 to $4,748,000 for the nine months ended April 30, 2001, from
$3,107,000 for the nine months ended April 30, 2000.
Income taxes consist primarily of taxes imposed on the Company's Canadian
operations. The effective tax rate on Canadian operations was 42.9% and 44.2%
for the nine months ended April 30, 2001 and 2000, respectively. For the nine
months ended April 30, 2001, the consolidated effective tax rate was lower than
the Canadian effective tax rate due to the fact that income generated by the
United States operations is substantially offset by tax benefits resulting from
the utilization of net operating loss carryforwards for Federal purposes. For
the nine months ended April 30, 2000, the consolidated effective tax rate was
higher than the Canadian effective tax rate due to the fact that losses
generated by the United States operations could not be used to offset income
generated by the Canadian operations.
LIQUIDITY AND CAPITAL RESOURCES
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At April 30, 2001, the Company's working capital was $15,932,000, compared
with $14,131,000 at July 31, 2000. This increase primarily reflects increases in
cash and cash equivalents and inventories and a decrease in accounts payable,
partially offset by a decrease in net assets related to discontinued business.
Net cash provided by operating activities was $7,000 for the nine months
ended April 30, 2001 and $831,000 for the nine months ended April 30, 2000. For
the nine months ended April 30, 2001, the net cash provided by operating
activities was primarily due to income from continuing operations, after
adjusting for depreciation and amortization, and an increase in income taxes,
offset by an increase in inventories and a decrease in accounts payable and
accrued expenses. For the nine months ended April 30, 2000, the net cash
provided by operating activities was primarily due to income from continuing
operations, after adjusting for depreciation and amortization, partially offset
by a decrease in accounts payable and accrued expenses.
Net cash provided by investing activities was $1,597,000 for the nine
months ended April 30, 2001 compared with net cash used in investing activities
of $1,882,000 for the nine months ended April 30, 2000. For the nine months
ended April 30, 2001, the net cash provided by investing activities was
primarily due to proceeds from the transfer of discontinued operations and a
decrease in net assets related to discontinued business, partially offset by
purchases of available-for-sale securities. For the nine months ended April 30,
2000, net cash used in investing activities was primarily due to an increase in
net assets related to discontinued business.
Net cash provided by financing activities was $44,000 for the nine months
ended April 30, 2001 and $990,000 for the nine months ended April 30, 2000.
These changes were principally due to the fluctuations in outstanding borrowings
under the Company's revolving credit facilities and, for the nine months ended
April 30, 2001, proceeds from the exercise of stock options, partially offset
for the nine months ended April 30, 2000 by purchases of Treasury Stock.
On February 23, 2001, the Company entered into a credit facility with a
United States bank and a Canadian bank which provides for i) a $2,500,000
revolving credit facility for Cantel and MediVators (the "U.S. Borrowers") (the
"U.S. Revolving Credit Facility") and ii) a $5,000,000 (United States dollars)
revolving credit facility for Carsen (the "Canadian Borrower") (the "Canadian
Revolving Credit Facility"), both of which revolving credit facilities expire on
February 22, 2004, and iii) a $12,500,000 acquisition facility available to the
U.S. Borrowers for permitted acquisitions in the United States through February
22, 2003 (the "Acquisition Facility"). Borrowings under the U.S. Revolving
Credit Facility and the Acquisition Facility will bear interest at rates ranging
from .25% to .75% above the United States lender's base rate, or at rates
ranging from 2% to 3% above the London Interbank Offered Rate ("LIBOR"),
13
depending upon the U.S. Borrowers' ratio of debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). Borrowings under the Canadian
Revolving Credit Facility may be in either Canadian dollars or United States
dollars and will bear interest at rates ranging from .25% to .75% above the
Canadian lender's base rate, or at rates ranging from 2% to 3% above the LIBOR
rate, depending upon the Canadian Borrower's ratio of debt to EBITDA. The base
rates associated with the United States lender and the Canadian lender were
7.00% and 6.25%, respectively, at June 8, 2001. Each of the credit facilities
provides for available borrowings based upon percentages of eligible accounts
receivable and inventories; requires the respective borrower to meet certain
financial covenants; and is secured by substantially all assets of the
respective borrower. In addition, the U.S. Revolving Credit Facility is secured
by the pledge of all of the outstanding shares of MediVators stock owned by
Cantel and the Canadian Revolving Credit Facility is secured by substantially
all assets (including the pledge of 65% of the outstanding shares of Carsen
stock owned by Cantel) of, and is guaranteed by, the U.S. Borrowers.
For the nine months ended April 30, 2001, compared with the nine months
ended April 30, 2000, the average value of the Canadian dollar decreased by 3%
relative to the value of the United States dollar. Changes in the value of the
Canadian dollar against the United States dollar affects the Company's results
of operations because the Company's Canadian subsidiary purchases substantially
all of its products in United States dollars and sells its products in Canadian
dollars. Such currency fluctuations also result in a corresponding change in the
United States dollar value of the Company's assets that are denominated in
Canadian dollars.
Under the Carsen Revolving Credit Facility, the Company's Canadian
subsidiary has a $15,000,000 (United States dollars) foreign currency hedging
facility which is available to be used to hedge against the impact of such
currency fluctuations on the purchases of inventories. Total commitments for
foreign currency forward contracts ( a portion of which are outstanding under a
prior Carsen credit facility) amounted to $6,250,000 (United States dollars) at
June 8, 2001 and cover a portion of Carsen's projected purchases of inventories
through July 2001. The weighted average exchange rate of the forward contracts
open at June 8, 2001 was $1.5242 Canadian dollar per United States dollar, or
$.6561 United States dollar per Canadian dollar. The exchange rate published by
the Wall Street Journal on June 8, 2001 was $1.5217 Canadian dollar per United
States dollar, or $.6572 United States dollar per Canadian dollar.
Effective August 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, as amended, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS No. 133"). In accordance with SFAS No. 133, these
foreign currency forward contracts are designated as hedges, and recognition of
gains and losses is deferred within other comprehensive income until settlement
of the
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underlying commitments. Realized gains and losses are recorded within cost of
sales upon settlement. The adoption of SFAS No. 133 did not have a material
impact on operations; however, it resulted in a $107,000 gain being recorded in
other comprehensive income. Additionally, the fair value of the Company's
derivatives was $51,000 at April 30, 2001, which resulted in the recording of an
unrealized loss of $56,000 during the nine months ended April 30, 2001.
For purposes of translating the balance sheet, at April 30, 2001 compared
with July 31, 2000, the value of the Canadian dollar decreased by 3% relative to
the value of the United States dollar. As a result, at April 30, 2001, the
negative cumulative foreign currency translation adjustment was increased by
$478,000 compared to July 31, 2000, thereby decreasing stockholders' equity.
The Company believes that its current cash position, anticipated cash flow
from operations and the funds available under the credit facilities will be
sufficient to satisfy the Company's cash operating requirements for its existing
operations for the foreseeable future. At June 8, 2001, $7,233,000 was available
under the credit facilities.
Inflation has not significantly impacted the Company's operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. All forward-looking statements
involve risks and uncertainties, including, without limitation, acceptance and
demand of new products, the impact of competitive products and pricing, the
Company's ability to successfully integrate and operate acquired and merged
businesses and the risks associated with such businesses, and the risks detailed
in the Company's filings and reports with the Securities and Exchange
Commission. Such statements are only predictions, and actual events or results
may differ materially from those projected.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK.
Foreign currency market risk: Carsen purchases and pays for a substantial
portion of its products in United States dollars, and Carsen's business could be
materially and adversely affected by the imposition of trade barriers,
fluctuations in the rates of currency exchange, tariff increases and import and
export restrictions between the United States and Canada. Additionally, Carsen's
financial statements are translated using the accounting policies described in
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 2000. During the nine
months ended April 30, 2001 compared with the nine months ended April 30, 2000,
fluctuations in the exchange rates between the United States dollar and Canadian
dollar had an adverse impact upon the Company's results of operations and
stockholders' equity, as described in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
15
Interest rate market risk: The Company has two credit facilities for which
the interest rate on outstanding borrowings, if any, is variable. Therefore,
interest expense is affected by the general level of interest rates in the
United States and Canada.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no submission of matters to a vote during the three months
ended April 30, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10(a) - Employment Agreement, dated as of November 1, 2000,
between the Registrant and Joseph Harris.
10(b) - Revolving Credit Loan, Acquisition/Term Loan and F/X
Line of Credit Loan Agreement, dated as of February 23, 2001, among Registrant,
MediVators, Inc., Carsen Group Inc., Summit Bank, Mellon Bank, N.A., Canada
Branch, and Mellon Bank, N.A.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended April 30, 2001.
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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.
CANTEL MEDICAL CORP.
Date: June 8, 2001
By: /s/ James P. Reilly
------------------------
James P. Reilly, President
and Chief Executive Officer
(Principal Executive Officer
and Principal Financial Officer)
By: /s/ Craig A. Sheldon
----------------------
Craig A. Sheldon, Vice
President and Controller
(Chief Accounting Officer)
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