SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 For the quarterly period ended October 31,
1999.
or
/ / Transition Report pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934 For the transition period from _____ to
_____.
Commission file number: 0-6132
CANTEL INDUSTRIES, INC.
-----------------------
(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.)
1135 Broad Street, Clifton, New Jersey 07013-3346
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(973) 470-8700
--------------
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 December 3, 1999: 4,417,695.
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
October 31, July 31,
1999 1999
----------- ---------
ASSETS
Current assets:
Cash $ 607 $ 534
Accounts receivable, net 10,220 11,208
Inventories 9,444 8,971
Prepaid expenses and other current assets 879 851
----------- ---------
Total current assets 21,150 21,564
Property and equipment, net 926 895
Intangible assets, net 1,633 1,666
Other assets 1,008 914
----------- ---------
$24,717 $25,039
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,964 $ 6,099
Compensation payable 536 868
Other accrued expenses 1,047 1,321
Income taxes payable 112 546
----------- ---------
Total current liabilities 7,659 8,834
Long-term debt 1,779 1,567
Deferred income taxes 95 93
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; issued - 4,517,945 shares; outstanding
October 31 - 4,415,545 shares; outstanding July 31 -
4,440,545 shares 452 452
Additional capital 19,304 19,304
Accumulated deficit (2,093) (2,588)
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment (1,960) (2,230)
Treasury Stock, at cost; October 31 -
102,400 shares; July 31 - 77,400 shares (519) (393)
----------- ---------
Total stockholders' equity 15,184 14,545
----------- ---------
$24,717 $25,039
=========== =========
See accompanying notes.
1
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
October 31,
1999 1998
------- -------
Net sales:
Product sales $11,222 $ 9,730
Product service 1,319 1,136
------- -------
Total net sales 12,541 10,866
------- -------
Cost of sales:
Product sales 7,798 6,914
Product service 784 690
------- -------
Total cost of sales 8,582 7,604
------- -------
Gross profit 3,959 3,262
Expenses:
Shipping and warehouse 203 162
Selling 1,610 1,282
General and administrative 1,124 917
Research and development 142 187
------- -------
Total operating expenses 3,079 2,548
------- -------
Income from operations before
interest expense and income
taxes 880 714
Interest expense 56 78
------- -------
Income before income taxes 824 636
Income taxes 329 224
------- -------
Net income $ 495 $ 412
======= =======
Earnings per common share:
Basic $ 0.11 $ 0.09
======= =======
Diluted $ 0.11 $ 0.09
======= =======
See accompanying notes.
2
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
October 31,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 495 $ 412
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 121 111
Deferred income taxes - 7
Changes in assets and liabilities:
Accounts receivable 1,204 (133)
Inventories (295) (117)
Prepaid expenses and other current assets (24) 13
Accounts payable and accrued expenses (900) (1,098)
Income taxes payable (443) (99)
-------- --------
Net cash provided by (used in) operating activities 158 (904)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (101) (69)
Other, net (76) (45)
-------- --------
Net cash used in investing activities (177) (114)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 218 1,031
Proceeds from exercise of stock options - 43
Purchases of Treasury Stock (126) -
-------- --------
Net cash provided by financing activities 92 1,074
-------- --------
Increase in cash 73 56
Cash at beginning of period 534 493
-------- --------
Cash at end of period $ 607 $ 549
======== ========
See accompanying notes.
3
CANTEL INDUSTRIES, INC.
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
Industries, Inc. (the "Company" or "Cantel") on Form 10-K for the fiscal year
ended July 31, 1999, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. Cantel has two
wholly-owned 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, 1999 was derived
from the audited consolidated balance sheet of the Company at that date.
Certain items in the October 31, 1998 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the October 31, 1999 financial statements.
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 or stockholders' equity. The Company's comprehensive income
for the three months ended October 31, 1999 and 1998 are set forth in the
following table:
4
Three Months Ended October 31,
------------------------------
1999 1998
---------- -----------
Net income $ 495,000 $ 412,000
Other comprehensive income (loss):
Foreign currency translation
adjustment 270,000 (207,000)
---------- -----------
Comprehensive income $ 765,000 $ 205,000
========== ===========
Note 3. 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 weighted average shares were used for the computation of
basic and diluted earnings per common share:
Three Months Ended October 31,
------------------------------
1999 1998
---------- ----------
Numerator for basic and diluted
earnings per common share:
Net income $ 495,000 $ 412,000
========== ==========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 4,417,773 4,371,952
Dilutive effect of common stock
equivalents using the treasury
stock method and the average
market price for the period 66,444 269,604
---------- ----------
Denominator for diluted earnings
per common share - weighted
average number of shares and
common stock equivalents 4,484,217 4,641,556
========== ==========
Basic earnings per common share $0.11 $0.09
========== ==========
Diluted earnings per common share $0.11 $0.09
========== ==========
5
Note 5. FINANCING ARRANGEMENTS
The Company has two credit facilities, a $5,000,000 (United States
dollars) revolving credit facility for Carsen expiring on December 31, 2002
and a $1,500,000 revolving credit facility for MediVators expiring on August
1, 2000. Borrowings under the Carsen revolving credit facility are in
Canadian dollars and bear interest at rates ranging from lender's prime rate
to .75% above the prime rate, depending upon Carsen's debt to equity ratio.
Borrowings under the MediVators revolving credit facility bear interest at
the lender's prime rate plus 1%. The prime rates associated with the Carsen
and MediVators revolving credit facilities were 6.25% and 8.25%,
respectively, at October 31, 1999. Each of the credit facilities provides for
restrictions on available borrowings based primarily upon percentages of
eligible accounts receivable and inventories; requires the subsidiary to meet
certain financial covenants; is secured by substantially all assets of the
subsidiary; and is guaranteed by Cantel.
Note 6. INCOME TAXES
Income taxes consist primarily of taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 44.1% and
47.9% for the three months ended October 31, 1999 and 1998, respectively. For
the three months ended October 31, 1999 and 1998, the consolidated effective tax
rate is 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.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The results of operations reflect the results of Carsen and MediVators.
Reference is made hereafter to the impact on the Company's results of operations
of a stronger Canadian dollar against the United States dollar during the three
months ended October 31, 1999 compared with the three months ended October 31,
1998 (increase in value of approximately 4% for the three months ended October
31, 1999 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, 1999.
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
October 31,
------------------------------
1999 1998
------------------------------
(Dollar amounts in thousands)
$ % $ %
------- ---- ------- ----
Medical Products $ 3,256 25.9 $ 3,106 28.6
Infection Control Products 2,334 18.6 2,514 23.1
Scientific Products 1,400 11.2 893 8.2
Product Service 1,319 10.5 1,136 10.5
Consumer Products 4,337 34.6 3,350 30.8
Elimination of intercompany
sales of Infection
Control Products (105) (.8) (133) (1.2)
-------- ------ -------- ------
$12,541 100.0 $10,866 100.0
======== ====== ======== ======
Net sales increased by $1,675,000, or 15.4%, to $12,541,000 for the
three months ended October 31, 1999, from $10,866,000 for the three months ended
October 31, 1998. This increase was principally attributable to increased sales
of Scientific Products, Product Service and Consumer Products. Net sales were
positively impacted for the three months ended October 31, 1999, compared with
the three months ended October 31, 1998, by approximately $405,000 due to the
translation of Carsen's net sales using a stronger Canadian dollar against the
United States dollar.
The increased sales of Scientific Products was primarily attributable to an
increase in demand for microscopes and related imaging equipment. The increased
sales of Product Service was attributable to an expansion of the Company's
service business at Carsen. The increased sales of Consumer Products was due
primarily to stronger demand from national accounts for both 35 mm. and digital
cameras.
7
Gross profit increased by $697,000, or 21.4%, to $3,959,000 for the
three months ended October 31, 1999, from $3,262,000 for the three months ended
October 31, 1998. The gross profit margin for the three months ended October 31,
1999 was 31.6% compared with 30.0% for the three months ended October 31, 1998.
The higher gross profit margin for the three months ended October 31, 1999 was
primarily attributable to the positive impact of a stronger 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; selling price increases combined with a
decrease in the cost of purchasing inventories from Carsen's principal supplier
and a reduction in cash discounts and volume rebates, associated with consumer
products; and sales mix associated with infection control products. These margin
increases were net of a reduction in gross profit margin attributable to the
increased sales of consumer products, which generally have lower gross profit
margins.
Gross profit was positively impacted for the three months ended October
31, 1999, compared with the three months ended October 31, 1998, by
approximately $113,000 due to the translation of Carsen's gross profit using a
stronger Canadian dollar against the United States dollar.
Shipping and warehouse expenses increased by $41,000 to $203,000 for
the three months ended October 31, 1999, from $162,000 for the three months
ended October 31, 1998. This increase was attributable to variable freight costs
associated with the increase in sales volume.
Selling expenses as a percentage of net sales increased to 12.8% for
the three months ended October 31, 1999, from 11.8% for the three months ended
October 31, 1998. This increase was principally attributable to additional
personnel and an increase in advertising and sales promotion costs associated
with consumer products, partially offset by the effect of the increased sales
against the fixed portion of selling expenses.
General and administrative expenses increased by $207,000 to $1,124,000
for the three months ended October 31, 1999, from $917,000 for the three months
ended October 31, 1998. This increase was primarily attributable to personnel
costs, including incentive compensation, and professional fees.
Research and development expenses decreased by $45,000 to $142,000 for
the three months ended October 31, 1999, from $187,000 for the three months
ended October 31, 1998. This decrease was due to a reduction in personnel costs
and third party laboratory testing.
8
Interest expense decreased to $56,000 for the three months ended
October 31, 1999, from $78,000 for the three months ended October 31, 1998. This
decrease was attributable to a decrease in average outstanding borrowings under
the Company's revolving credit facilities during the three months ended October
31, 1999.
Income before income taxes increased by $188,000 to $824,000 for the
three months ended October 31, 1999, from $636,000 for the three months ended
October 31, 1998.
Income taxes consist primarily of taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 44.1%
and 47.9% for the three months ended October 31, 1999 and 1998, respectively.
For the three months ended October 31, 1999 and 1998, the consolidated
effective tax rate is 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.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, the Company's working capital was $13,491,000,
compared with $12,730,000 at July 31, 1999. This increase primarily reflects an
increase in inventories and decreases in compensation payable, other accrued
expenses and income taxes payable, partially offset by a decrease in accounts
receivable.
Net cash provided by operating activities was $158,000 for the three
months ended October 31, 1999 compared with net cash used in operating
activities of $904,000 for the three months ended October 31, 1998. The net cash
provided by operating activities for the three months ended October 31, 1999 was
primarily due to net income, after adjusting for depreciation and amortization,
and a decrease in accounts receivable, partially offset by decreases in accounts
payable and accrued expenses and income taxes payable. The net cash used in
operating activities for the three months ended October 31, 1998 was primarily
due to a decrease in accounts payable and accrued expenses, partially offset by
net income, after adjusting for depreciation and amortization.
Net cash used in investing activities was $177,000 for the three months
ended October 31, 1999 and $114,000 for the three months ended October 31, 1998,
which was principally for capital expenditures.
Net cash provided by financing activities was $92,000 for the three
months ended October 31, 1999 and $1,074,000 for the three months ended October
31, 1998, which was principally due to net increases in outstanding borrowings
under the Company's revolving
9
credit facilities, partially offset for the fiscal 1999 period by the purchase
of Treasury Stock.
The Company has two credit facilities, a $5,000,000 (United States
dollars) revolving credit facility for Carsen expiring on December 31, 2002
and a $1,500,000 revolving credit facility for MediVators expiring on August
1, 2000. Borrowings under the Carsen revolving credit facility are in
Canadian dollars and bear interest at rates ranging from lender's prime rate
to .75% above the prime rate, depending upon Carsen's debt to equity ratio.
Borrowings under the MediVators revolving credit facility bear interest at
the lender's prime rate plus 1%. The prime rates associated with the Carsen
and MediVators revolving credit facilities were 6.25% and 8.25%,
respectively, at October 31, 1999. Each of the credit facilities provides for
restrictions on available borrowings based primarily upon percentages of
eligible accounts receivable and inventories; requires the subsidiary to meet
certain financial covenants; is secured by substantially all assets of the
subsidiary; and is guaranteed by Cantel.
For the three months ended October 31, 1999, compared with the three
months ended October 31, 1998, the average value of the Canadian dollar
increased 4% 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 credit facility the Company's Canadian subsidiary has
a $15,000,000 (United States dollars) foreign exchange hedging facility which
is available to be used to minimize future adverse currency fluctuations as
they relate to purchases of inventories. At December 3, 1999, Carsen had
foreign exchange forward contracts aggregating $4,626,000 (United States
dollars), and foreign exchange option contracts aggregating $3,000,000
(United States dollars), to hedge against possible declines in the value of
the Canadian dollar which would otherwise result in higher inventory costs.
Such contracts represent a substantial portion of the Canadian subsidiary's
projected purchases of inventories through February 2000. The weighted
average exchange rate of the forward contracts open at December 3, 1999 was
$1.4732 Canadian dollar per United States dollar, or $.6788 United States
dollar per Canadian dollar. The weighted average range of the option
contracts open at December 3, 1999 was $1.4768 to $1.4134 Canadian dollar per
United States dollar, or $.6771 to $.7075 United States dollar per Canadian
dollar. The exchange rate published by the Wall Street Journal on December 3,
1999 was $1.4819 Canadian dollar
10
per United States dollar, or $.6748 United States dollar per Canadian dollar.
For purposes of translating the balance sheet, at October 31, 1999
compared with July 31, 1999, the value of the Canadian dollar increased by 2%
relative to the value of the United States dollar. As a result, at October 31,
1999, the negative cumulative foreign currency translation adjustment was
reduced by $270,000 compared to July 31, 1999, thereby increasing stockholders'
equity.
The Company believes that its 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 December 3, 1999, $2,986,000 was available under the
credit facilities.
The Company has assessed the ability of its computerized information
systems to process transactions relating to years 2000 and beyond. While
certain modifications are required, the Company expects to achieve necessary
modifications on a timely basis at a cost of approximately $50,000, the
majority of which will be capital expenditures and most of which have already
been incurred. Only minor modifications remain to be completed, and the
Company will have fully completed all year 2000 modifications by December 31,
1999. There can be no assurance, however, that the systems of other companies
on which the Company relies, including major suppliers and customers, will be
timely converted, or that a failure to successfully convert by another
company, or a conversion that is incompatible with the Company's systems,
would not have an adverse impact on the Company's operations. Management has
requested a complete year 2000 assessment from all of its major suppliers and
customers, the majority of which have indicated that they are, or will be,
year 2000 compliant.
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, the ability
of the Company's vendors and distributors to complete the necessary actions to
achieve a year 2000 conversion for their computer systems and applications, 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.
11
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK.
Foreign currency market risk: Carsen 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 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, 1999. During the three months ended October 31,
1999 compared with the three months ended October 31, 1998, fluctuations in the
exchange rates between the United States and Canada had a positive 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.
Interest rate market risk: The Company has two credit facilities for
which the interest rate on outstanding borrowings is variable. Therefore,
interest expense is affected by the general level of interest rates in the
United States and Canada.
12
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 October 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
three months ended October 31, 1999.
13
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 INDUSTRIES, INC.
Date: December 10, 1999 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)