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 April 30, 1998.
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.
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(Exact name of registrant as specified in its charter)
Delaware 22-1760285
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1135 Broad Street, Clifton, New Jersey 07013-3346
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(973) 470-8700
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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
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Number of shares of Common Stock outstanding as of June 5, 1998: 4,367,201.
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
April 30, July 31,
1998 1997
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ASSETS
Current assets:
Cash $ 488 $ 656
Accounts receivable 7,951 6,984
Inventories 8,802 8,974
Insurance claim receivable 565 -
Prepaid expenses and other current assets 543 395
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Total current assets 18,349 17,009
Property and equipment, at cost:
Furniture and equipment 2,124 2,009
Leasehold improvements 647 559
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2,771 2,568
Less accumulated depreciation and amortization (1,895) (1,801)
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876 767
Intangible assets, net 1,892 202
Other assets 592 624
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$21,709 $18,602
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,310 $ 3,732
Compensation payable 876 909
Other accrued expenses 920 706
Income taxes payable 140 556
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Total current liabilities 5,246 5,903
Long-term debt 3,128 1,594
Deferred income taxes 66 88
Stockholders' equity:
Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued - -
Common Stock, $.10 par value; authorized 7,500,000
shares; issued and outstanding April 30 -
4,356,166; July 31 - 4,166,322 shares 436 417
Additional capital 18,936 17,609
Accumulated deficit (4,387) (5,652)
Cumulative foreign currency translation adjustment (1,716) (1,357)
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Total stockholders' equity 13,269 11,017
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$21,709 $18,602
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See accompanying notes.
1
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
1998 1997 1998 1997
------- ------- ------- -------
Net sales:
Product sales $ 9,133 $ 6,833 $25,747 $21,884
Product service 1,035 1,088 2,827 3,063
------- ------- ------- -------
Total net sales 10,168 7,921 28,574 24,947
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Cost of sales:
Product sales 5,951 4,571 17,259 14,509
Product service 646 676 1,627 1,904
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Total cost of sales 6,597 5,247 18,886 16,413
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Gross profit 3,571 2,674 9,688 8,534
Operating expenses:
Shipping and warehouse 173 139 484 442
Selling 1,286 1,048 3,393 3,078
General and administrative 978 827 2,816 2,600
Research and development 244 178 621 460
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Total operating expenses 2,681 2,192 7,314 6,580
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Income from operations before
interest expense and income
taxes 890 482 2,374 1,954
Interest expense 45 33 127 125
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Income before income taxes 845 449 2,247 1,829
Income taxes 361 285 982 1,001
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Net income $ 484 $ 164 $ 1,265 $ 828
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Earnings per common share:
Basic $ 0.11 $ 0.04 $ 0.30 $ 0.20
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------- ------- ------- -------
Diluted $ 0.11 $ 0.04 $ 0.29 $ 0.19
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See accompanying notes.
2
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Nine Months Ended
April 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,265 $ 828
Adjustments to reconcile net income
to net cash (used in) provided by operating
activities:
Depreciation and amortization 218 231
Deferred income taxes (19) 5
Changes in assets and liabilities:
Accounts receivable (1,053) 1,022
Inventories 24 (622)
Prepaid expenses and other current assets (727) (182)
Accounts payable and accrued expenses (450) 773
Income taxes payable (400) 442
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Net cash (used in) provided by operating activities (1,142) 2,497
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CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (308) (249)
Acquisition of Chris Lutz Medical net assets (315) -
Other, net 27 (146)
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Net cash used in investing activities (596) (395)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under credit facilities 1,534 (2,566)
Proceeds from exercise of stock options and warrants 36 549
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Net cash provided by (used in) financing activities 1,570 (2,017)
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(Decrease) increase in cash (168) 85
Cash at beginning of period 656 682
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Cash at end of period $ 488 $ 767
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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, 1997, 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, 1997 was derived from
the audited consolidated balance sheet of the Company at that date.
Certain items in the April 30, 1997 financial statements have been
reclassified from statements previously presented to conform to the presentation
of the April 30, 1998 financial statements.
Note 2. 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 options and warrants using the treasury stock method and the average
market price for the period.
4
The following weighted average shares were used for the computation of
basic and diluted earnings per common share:
For the For the
three months ended nine months ended
April 30, April 30,
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1998 1997 1998 1997
--------- --------- --------- ---------
Basic 4,262,213 4,166,322 4,197,583 4,041,958
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted 4,505,625 4,401,291 4,426,205 4,359,601
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per common share for the three and nine month periods ended April
30, 1997 have been restated in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", which standard has been adopted by the
Company effective January 1, 1998 and requires the presentation of basic and
diluted earnings per common share.
Note 3. FINANCING ARRANGEMENTS
The Company has two credit facilities, a $5,000,000 revolving credit
facility for Carsen and a $1,500,000 revolving credit facility for MediVators.
Pursuant to the terms of the Carsen revolving credit facility, borrowings
under such facility must be paid in full no later than December 31, 1999.
Borrowings outstanding at April 30, 1998 and July 31, 1997 are in Canadian
dollars and bear interest at rates ranging from lender's Canadian prime rate to
.75% above the prime rate, depending upon Carsen's debt to equity ratio. At
April 30, 1998, the lender's Canadian prime rate was 6.5% and Carsen's
outstanding borrowings bear interest at such prime rate. Subsequent to April
30, 1998, Carsen's borrowings will bear interest a rate of .25% above such prime
rate. A commitment fee on the unused portion of this facility is payable in
arrears at a rate of .25% per annum, with interest on borrowings payable
monthly. There were $2,306,000 (U.S. dollars) of borrowings outstanding under
this facility at April 30, 1998.
Pursuant to the terms of the MediVators revolving credit facility,
borrowings under such facility must be paid in full no later than May 1, 1999.
Borrowings bear interest at 1.5% above the lender's United States prime rate.
The lender's prime rate was 8.5% at April 30, 1998. A commitment fee on the
unused portion of this facility is payable in arrears at a rate of .5% per
annum, with interest on borrowings payable monthly. There were $780,000 of
borrowings outstanding under this facility at April 30, 1998.
5
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; are
secured by substantially all assets of the subsidiary; and are guaranteed by
Cantel.
Note 4. INCOME TAXES
Income taxes primarily consist of income taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 44.9%
and 44.6% for the nine months ended April 30, 1998 and 1997, respectively. For
the nine months ended April 30, 1997, the consolidated effective tax rate is
higher than the Canadian effective tax rate due to the fact that losses
generated by the U.S. operations could not be used to offset income generated by
the Canadian operations.
Note 5. ACQUISITION OF LUTZ MEDICAL
On March 16, 1998, the Company acquired substantially all of the assets,
business and properties of Chris Lutz Medical, Inc. ("Lutz Medical") for a
combination of 180,690 shares of Cantel Common Stock, $315,000 of cash and the
assumption of certain liabilities. The transaction has been treated as a
purchase for accounting purposes.
Lutz Medical was a private company which designs, manufactures and markets
infection control equipment and supplies used for disinfecting flexible
endoscopes.
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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 the Company's wholly-owned
Canadian subsidiary, Carsen Group Inc. ("Carsen" or "Canadian subsidiary") and
its wholly-owned U.S. subsidiary, MediVators, Inc. ("MediVators" or "United
States subsidiary"). 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,
1997.
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,
--------------------------------- ---------------------------------
1998 1997 1998 1997
(Dollar amounts in thousands)
--------------- --------------- --------------- ---------------
$ % $ % $ % $ %
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Medical, Infection
Control and Scientific
Products:
Medical and
Infection Control
Products $ 5,636 55.4 $4,321 54.5 $14,622 51.2 $13,605 54.5
Scientific
Products 1,275 12.5 1,288 16.3 4,235 14.8 4,317 17.3
Product Service 1,035 10.2 1,088 13.7 2,827 9.9 3,063 12.3
Consumer Products 2,222 21.9 1,224 15.5 6,890 24.1 3,962 15.9
------- ----- ------- ----- ------- ----- ------- -----
$10,168 100.0 $ 7,921 100.0 $28,574 100.0 $24,947 100.0
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Net sales increased by $2,247,000, or 28.4%, to $10,168,000 for the three
months ended April 30, 1998, from $7,921,000 for the three months ended April
30, 1997. Net sales increased by $3,627,000, or 14.5%, to $28,574,000 for the
nine months ended April 30, 1998, from $24,947,000 for the nine months ended
April 30, 1997. These increases were principally attributable to increased
sales of Medical and Infection Control Products and Consumer Products.
The increased sales of Medical and Infection Control Products for the three
months ended April 30, 1998 was attributable to an increase in demand for both
medical and infection control products. For the nine months ended April 30,
1998, the increased sales of Medical and Infection Control Products was
attributable to an increase in demand for infection control products, partially
offset by a decrease in demand for medical products. The increased sales of
Consumer Products for the three and nine months ended April 30, 1998 were
primarily attributable to stronger demand for certain
7
35 mm and digital camera models and related accessories, some of which were not
available during the comparable fiscal 1997 periods.
Gross profit increased by $897,000, or 33.5%, to $3,571,000 for the three
months ended April 30, 1998, from $2,674,000 for the three months ended April
30, 1997. Gross profit increased by $1,154,000, or 13.5%, to $9,688,000 for the
nine months ended April 30, 1998, from $8,534,000 for the nine months ended
April 30, 1997. The gross profit margins for the three and nine months ended
April 30, 1998 were 35.1% and 33.9%, respectively, compared with 33.8% and 34.2%
for the three and nine months ended April 30, 1997. The higher gross profit
margin for the three months ended April 30, 1998 was principally due to improved
margins on the sale of infection control equipment attributable to manufacturing
efficiencies achieved through an increase in volume; customer price increases;
and sales mix, including new products. Partially offsetting these margin
increases were the increased sales of consumer products, which generally have
lower profit margins. For the nine months ended April 30, 1998, the lower gross
profit margin was primarily attributable to the adverse impact of the increased
sales of consumer products, partially offset by improved margins on sales of
infection control equipment.
Shipping and warehouse expenses increased by $34,000 to $173,000 for the
three months ended April 30, 1998, from $139,000 for the three months ended
April 30, 1997. For the nine months ended April 30, 1998, shipping and
warehouse expenses increased by $42,000 to $484,000, from $442,000 for the nine
months ended April 30, 1997. These increases were principally due to increases
in personnel and freight costs.
Selling expenses as a percentage of net sales decreased to 12.6% and 11.9%
for the three and nine months ended April 30, 1998, from 13.2% and 12.3% for the
three and nine months ended April 30, 1997. These decreases were principally
attributable to the impact of the increased sales for the three and nine months
ended April 30, 1998 against the fixed portion of these expenses, partially
offset by an increase in advertising costs.
General and administrative expenses increased by $151,000 to $978,000 for
the three months ended April 30, 1998, from $827,000 for the three months ended
April 30, 1997. For the nine months ended April 30, 1998, general and
administrative expenses increased by $216,000 to $2,816,000, from $2,600,000 for
the nine months ended April 30, 1997. These increases were primarily
attributable to increased personnel costs, including incentive compensation, and
costs of ISO 9000 certification.
Research and development expenses increased by $66,000 to $244,000 for the
three months ended April 30, 1998, from $178,000 for the three months ended
April 30, 1997. For the nine months ended April 30, 1998, research and
development expenses increased
8
by $161,000 to $621,000, from $460,000 for the nine months ended April 30, 1997.
These increases were substantially due to the ongoing development of infection
control products at MediVators.
Interest expense increased to $45,000 for the three months ended April 30,
1998, from $33,000 for the three months ended April 30, 1997. For the nine
months ended April 30, 1998, interest expense increased to $127,000, from
$125,000 for the nine months ended April 30, 1997.
Income before income taxes increased by $418,000 to $2,247,000 for the nine
months ended April 30, 1998, from $1,829,000 for the nine months ended April 30,
1997.
Income taxes primarily consist of income taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 44.9%
and 44.6% for the nine months ended April 30, 1998 and 1997, respectively. For
the nine months ended April 30, 1997, the consolidated effective tax rate is
higher than the Canadian effective tax rate due to the fact that losses
generated by the U.S. operations could not be used to offset income generated by
the Canadian operations.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company's working capital was $13,103,000, compared
with $11,106,000 at July 31, 1997. This increase primarily reflects increases
in accounts receivable and insurance claim receivable, and decreases in accounts
payable and income taxes payable.
Net cash used in operating activities was $1,142,000 for the nine months
ended April 30, 1998, compared with net cash provided by operating activities of
$2,497,000 for the nine months ended April 30, 1997. For the nine months ended
April 30, 1998, the net cash used in operating activities was primarily due to
increases in accounts receivable and prepaid expenses and other current assets,
and decreases in accounts payable and accrued expenses and income taxes payable,
partially offset by income from operations after adjusting for depreciation and
amortization. For the nine months ended April 30, 1997, the net cash provided
by operating activities was primarily due to income from operations after
adjusting for depreciation and amortization, a decrease in accounts receivable,
and increases in accounts payable and accrued expenses and income taxes payable,
partially offset by an increase in inventories.
Net cash used in investing activities was $596,000 for the nine months
ended April 30, 1998 and $395,000 for the nine months ended April 30, 1997,
which was principally due to additions to property and equipment and, for the
fiscal 1998 period, the acquisition of the Lutz Medical net assets, as described
in Note 5 to the Condensed Consolidated Financial Statements.
9
Net cash provided by financing activities was $1,570,000 for the nine
months ended April 30, 1998, compared with net cash used in financing activities
of $2,017,000 for the nine months ended April 30, 1997. These changes were
principally due to the fluctuations in outstanding borrowings under the
Company's revolving credit facilities, partially offset during the nine months
ended April 30, 1997 by proceeds from the exercise of stock options and
warrants.
The Company has two credit facilities, a $5,000,000 revolving credit
facility for Carsen and a $1,500,000 revolving credit facility for MediVators as
described in Note 3 to the Condensed Consolidated Financial Statements.
A decrease in the value of the Canadian dollar against the United States
dollar could adversely affect the Company because the Company's Canadian
subsidiary purchases substantially all of its products in United States dollars
and sells its products in Canadian dollars. Under the Canadian credit facility,
the Company's Canadian subsidiary has a foreign exchange hedging facility of up
to $15,000,000 (U.S. dollars) which could be used to minimize future adverse
currency fluctuations as they relate to purchases of inventories. The Canadian
subsidiary has foreign exchange forward contracts outstanding at June 5, 1998
aggregating $500,000 (U.S. dollars) to hedge against the decline in the value of
the Canadian dollar which would otherwise result in higher inventory costs.
Such contracts represented a portion of the Canadian subsidiary's projected
purchases of inventories for the month of May 1998. The average exchange rate
of the contracts open at June 5, 1998 was $1.3535 Canadian dollar per United
States dollar, or $.7388 United States dollar per Canadian dollar. The exchange
rate published by the Wall Street Journal on June 5, 1998 was $1.4582 Canadian
dollar per United States dollar, or $.6858 United States dollar per Canadian
dollar. Such adverse currency fluctuations could also result in a corresponding
adverse change in the United States dollar value of the Company's assets that
are denominated in Canadian dollars. During the nine months ended April 30,
1998, such adverse currency fluctuations reduced stockholders' equity by
$359,000.
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 June 5, 1998, $4,945,000 was
available under the credit facilities.
Inflation has not significantly impacted the Company's operations.
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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, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11, Computation of Earnings Per Share
Exhibit 27, Financial Data Schedule
Exhibit 27.1, Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended April 30, 1998.
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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 INDUSTRIES, INC.
Date: June 11, 1998 By: /s/ James P. Reilly
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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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