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 January 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 March 5, 1999: 4,382,268.
PART I - FINANCIAL INFORMATION
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
January 31, July 31,
1999 1998
----------- --------
ASSETS
Current assets:
Cash $ 405 $ 493
Accounts receivable 8,541 8,446
Inventories 9,574 9,207
Insurance claim receivable 249 563
Prepaid expenses and other current assets 803 465
------- -------
Total current assets 19,572 19,174
Property and equipment, net 888 841
Intangible assets, net 1,753 1,823
Other assets 716 640
------- -------
$22,929 $22,478
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,557 $ 4,148
Compensation payable 497 989
Other accrued expenses 891 893
Income taxes payable 212 164
------- -------
Total current liabilities 5,157 6,194
Long-term debt 3,471 3,004
Deferred income taxes 70 54
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 January 31 -
4,382,268 shares; July 31 - 4,367,201 shares 438 437
Additional capital 19,103 19,019
Accumulated deficit (3,043) (3,957)
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment (2,267) (2,273)
------- -------
Total stockholders' equity 14,231 13,226
------- -------
$22,929 $22,478
======= =======
See accompanying notes.
1
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
1999 1998 1999 1998
------- ------- ------- -------
Net sales:
Product sales $11,046 $ 9,384 $20,776 $16,614
Product service 1,295 830 2,431 1,792
------- ------- ------- -------
Total net sales 12,341 10,214 23,207 18,406
------- ------- ------- -------
Cost of sales:
Product sales 7,558 6,343 14,472 11,308
Product service 684 444 1,374 981
------- ------- ------- -------
Total cost of sales 8,242 6,787 15,846 12,289
------- ------- ------- -------
Gross profit 4,099 3,427 7,361 6,117
Expenses:
Shipping and warehouse 195 168 357 311
Selling 1,479 1,156 2,761 2,107
General and administrative 1,084 1,006 2,001 1,838
Research and development 240 187 427 377
Non-recurring costs 74 - 74 -
------- ------- ------- -------
Total operating expenses 3,072 2,517 5,620 4,633
------- ------- ------- -------
Income from operations before
interest expense and income
taxes 1,027 910 1,741 1,484
Interest expense 91 49 169 82
------- ------- ------- -------
Income before income taxes 936 861 1,572 1,402
Income taxes 434 373 658 621
------- ------- ------- -------
Net income $ 502 $ 488 $ 914 $ 781
======= ======= ======= =======
Earnings per common share:
Basic $ .11 $ .12 $ .21 $ .19
======= ======= ======= =======
Diluted $ .11 $ .11 $ .20 $ .18
======= ======= ======= =======
See accompanying notes.
2
CANTEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Six Months Ended
January 31,
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 914 $ 781
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 228 130
Deferred income taxes 16 (17)
Changes in assets and liabilities:
Accounts receivable (89) 872
Inventories (363) (548)
Prepaid expenses and other current assets (29) (101)
Accounts payable and accrued expenses (1,091) (1,257)
Income taxes payable 49 (456)
-------- --------
Net cash used in operating activities (365) (596)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (195) (243)
Other, net (95) 54
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Net cash used in investing activities (290) (189)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under credit facilities 482 699
Proceeds from exercise of stock options 85 -
-------- --------
Net cash provided by financing activities 567 699
-------- --------
Decrease in cash (88) (86)
Cash at beginning of period 493 656
-------- --------
Cash at end of period $ 405 $ 570
======== ========
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, 1998, 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, 1998 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 or stockholders' equity. The Company's comprehensive income
for the three and six months ended January 31, 1999 and 1998 are set forth in
the following table:
Three Months Ended Six Months Ended
January 31, January 31,
1999 1998 1999 1998
-------- --------- -------- ---------
Net income $502,000 $ 488,000 $914,000 $ 781,000
Other comprehensive income (loss):
Foreign currency translation
adjustment 213,000 (295,000) 6,000 (510,000)
-------- --------- -------- ---------
Comprehensive income $715,000 $ 193,000 $920,000 $ 271,000
======== ========= ======== =========
4
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 options and warrants 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 Six Months Ended
January 31, January 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerator for basic and diluted
earnings per common share:
Net income $ 502,000 $ 488,000 $ 914,000 $ 781,000
========== ========== ========== ==========
Denominator for basic and diluted
earnings per common share:
Denominator for basic earnings
per common share - weighted
average number of shares
outstanding 4,377,048 4,166,322 4,374,500 4,166,322
Dilutive effect of options and
warrants using the treasury
stock method and the average
market price for the period 216,696 229,367 240,857 222,648
---------- ---------- ---------- ----------
Denominator for diluted earnings
per common share - weighted
average number of shares and
common stock equivalents 4,593,744 4,395,689 4,615,357 4,388,970
========== ========== ========== ==========
Basic earnings per common share $ .11 $ .12 $ .21 $ .19
========== ========== ========== ==========
Diluted earnings per common share $ .11 $ .11 $ .20 $ .18
========== ========== ========== ==========
Note 4. NON-RECURRING COSTS
Non-recurring costs of $74,000 for the three and six month periods
ended January 31, 1999 related to professional fees associated with the
termination of a proposed acquisition.
5
Note 5. FINANCING ARRANGEMENTS
The Company has two credit facilities, a $5,000,000 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%. 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 47.3% and
45.3% for the six months ended January 31, 1999 and 1998, respectively. For the
six months ended January 31, 1999, 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 weaker Canadian dollar against the United States
dollar during the three and six months ended January 31, 1999 compared with
the three and six months ended January 31, 1998 (decrease in value of
approximately 7% and 8% for the three and six months ended January 31, 1999,
respectively, based upon month-end 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, 1998.
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 Six Months Ended
January 31, January 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------------------------- -------------------------------
(Dollar amounts in thousands)
$ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------
Medical Products $ 3,930 31.9 $ 3,184 31.2 $ 7,036 30.3 $ 5,549 30.1
Infection Control
Products 2,446 19.8 2,078 20.3 4,960 21.4 3,610 19.6
Scientific Products 1,494 12.1 1,489 14.6 2,387 10.3 2,960 16.1
Product Service 1,295 10.5 830 8.1 2,431 10.5 1,792 9.7
Consumer Products 3,381 27.4 2,745 26.9 6,731 29.0 4,668 25.4
Elimination of inter-
company sales of
Infection Control
Products (205) (1.7) (112) (1.1) (338) (1.5) (173) (0.9)
------- ----- ------- ----- ------- ----- ------- -----
$12,341 100.0 $10,214 100.0 $23,207 100.0 $18,406 100.0
======= ===== ======= ===== ======= ===== ======= =====
Net sales increased by $2,127,000, or 20.8%, to $12,341,000 for the
three months ended January 31, 1999, from $10,214,000 for the three months ended
January 31, 1998. Net sales increased by $4,801,000, or 26.1%, to $23,207,000
for the six months ended January 31, 1999, from $18,406,000 for the six months
ended January 31, 1998. These increases were principally attributable to
increased sales of Medical Products, Infection Control Products, Product Service
and Consumer Products. Net sales were adversely impacted for the three and six
months ended January 31, 1999 compared with the three and six months ended
January 31, 1998 by approximately $727,000 and $1,634,000, respectively, due to
the translation of Carsen's net sales using a weaker Canadian dollar against the
United States dollar.
7
The increased sales of Medical Products in Canada was principally due
to an increase in demand, as well as selling price increases. The increased
sales of Infection Control Products was attributable to an increase in demand
for infection control products in the United States; continued expansion and
improvement of the international distribution of MediVators' infection control
products; and selling price increases. The increased sales of Product Service
was attributable to an expansion of the Company's service business at each of
Carsen and MediVators. The increased sales of Consumer Products was due to
stronger demand for certain 35 mm. camera models, as well as the strong demand
for an expanded line of digital cameras.
Gross profit increased by $672,000, or 19.6%, to $4,099,000 for the
three months ended January 31, 1999, from $3,427,000 for the three months ended
January 31, 1998. Gross profit increased by $1,244,000, or 20.3%, to $7,361,000
for the six months ended January 31, 1999, from $6,117,000 for the six months
ended January 31, 1998. The gross profit margins for the three and six months
ended January 31, 1999 were 33.2% and 31.7%, respectively, compared with 33.6%
and 33.2% for the three and six months ended January 31, 1998. The lower gross
profit margins for the three and six months ended January 31, 1999 were
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; increased sales of consumer products, which
generally have lower gross profit margins; more competitive sales of medical
products; and sales mix associated with consumer products. These margin
decreases were partially offset by volume related manufacturing efficiencies,
favorable sales mix and selling price increases, associated with infection
control products. Gross profit was adversely impacted for the three and six
months ended January 31, 1999 compared with the three and six months ended
January 31, 1998 by approximately $208,000 and $450,000, respectively, due to
the translation of Carsen's gross profit using a weaker Canadian dollar against
the United States dollar.
Shipping and warehouse expenses increased by $27,000 to $195,000 for
the three months ended January 31, 1999, from $168,000 for the three months
ended January 31, 1998. For the six months ended January 31, 1999, shipping and
warehouse expenses increased by $46,000 to $357,000, from $311,000 for the six
months ended January 31, 1998. These increases were attributable to variable
freight costs associated with the increase in sales volume.
Selling expenses as a percentage of net sales increased to 12.0% and
11.9% for the three and six months ended January 31, 1999, from 11.3% and 11.4%
for the three and six months ended January 31, 1998. These increases were
principally attributable to
8
an increase in advertising and sales promotion costs, and higher personnel
costs, partially offset by the effect of the increased sales against the fixed
portion of selling expenses.
General and administrative expenses increased by $78,000 to $1,084,000
for the three months ended January 31, 1999, from $1,006,000 for the three
months ended January 31, 1998. For the six months ended January 31, 1999,
general and administrative expenses increased by $163,000 to $2,001,000, from
$1,838,000 for the six months ended January 31, 1998. These increases were
primarily attributable to professional fees, amortization of intangible assets,
personnel costs and regulatory costs, including ISO 9000 certification.
Non-recurring costs of $74,000 for the three and six month periods
ended January 31, 1999 related to professional fees associated with the
termination of a proposed acquisition.
Research and development expenses increased by $53,000 to $240,000 for
the three months ended January 31, 1999, from $187,000 for the three months
ended January 31, 1998. For the six months ended January 31, 1999, research and
development expenses increased by $50,000 to $427,000, from $377,000 for the six
months ended January 31, 1998. These increases were substantially due to the
ongoing development of infection control products at MediVators.
Interest expense increased to $91,000 for the three months ended
January 31, 1999, from $49,000 for the three months ended January 31, 1998. For
the six months ended January 31, 1999, interest expense increased to $169,000,
from $82,000 for the six months ended January 31, 1998. These increases were
primarily attributable to an increase in average borrowings under the Carsen
revolving credit facility during the three and six month periods ended January
31, 1999.
Income before income taxes increased by $170,000 to $1,572,000 for the
six months ended January 31, 1999, from $1,402,000 for the six months ended
January 31, 1998.
Income taxes consist primarily of taxes imposed on the Company's
Canadian operations. The effective tax rate on Canadian operations was 47.3% and
45.3% for the six months ended January 31, 1999 and 1998, respectively. For the
six months ended January 31, 1999, 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.
9
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company's working capital was $14,415,000,
compared with $12,980,000 at July 31, 1998. This increase primarily reflects
decreases in accounts payable and compensation payable and an increase in
inventories.
Net cash used in operating activities was $365,000 for the six months
ended January 31, 1999 and $596,000 for the six months ended January 31, 1998.
The net cash used in operating activities for these periods was primarily due to
decreases in accounts payable and accrued expenses and an increase in
inventories, partially offset by net income, after adjusting for depreciation
and amortization, and for the six months ended January 31, 1998, a decrease in
accounts receivable.
Net cash used in investing activities was $290,000 for the six months
ended January 31, 1999 and $189,000 for the six months ended January 31, 1998,
which was principally attributable to capital expenditures.
Net cash provided by financing activities was $567,000 for the six
months ended January 31, 1999 and $699,000 for the six months ended January 31,
1998. These changes were principally due to the increase in outstanding
borrowings under the Company's revolving credit facilities.
The Company has two credit facilities, a $5,000,000 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%. 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.
During the six months ended January 31, 1999, the value of the Canadian
dollar compared to the value of the United States dollar was relatively
constant. However, when compared to the six months ended January 31, 1998, the
value of the Canadian dollar declined 8% compared to the value of the United
States dollar. A further decrease in the value of the Canadian dollar against
the United States dollar would adversely affect 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 adverse currency
10
fluctuations would also result in a corresponding adverse 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 (U.S. dollars) foreign exchange hedging facility which is
available to be used to minimize future adverse currency fluctuations as they
relate to purchases of inventories. Carsen had foreign exchange forward
contracts at March 5, 1999 aggregating $5,434,000 (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 the
Canadian subsidiary's projected purchases of inventories through April 1999. The
average exchange rate of the contracts open at March 5, 1999 was $1.5079
Canadian dollar per United States dollar, or $.6632 United States dollar per
Canadian dollar. The exchange rate published by the Wall Street Journal on March
5, 1999 was $1.5192 Canadian dollar per United States dollar, or $.6582 United
States dollar per Canadian dollar.
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 March 5, 1999, $2,862,000 was available under the credit
facilities.
The Company has assessed the ability of its computerized information
systems to process transactions relating to year 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. 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, but has not yet received indications from all
of these parties as to whether or not they are 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
11
businesses, the ability of the Company's vendors and distributors to complete
the necessary actions to achieve a year 2000 conversion for its 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.
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 January 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 for the three months ended
January 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: March 22, 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)
14