Item 7.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
.
The
following Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help you understand Cantel
Medical Corp. (Cantel). The MD&A is provided as a supplement to and
should be read in conjunction with our financial statements and the
accompanying notes. Our MD&A includes the following sections:
Overview
provides a brief description of our business and a summary of significant
activity that has affected or may affect our results of operations and
financial condition.
Results
of Operations
provides a discussion of the consolidated
results of continuing operations for fiscal 2007 compared with fiscal 2006, and
fiscal 2006 compared with fiscal 2005.
Liquidity
and Capital Resources
provides an overview of our working
capital, cash flows, contractual obligations, financing and foreign currency
activities.
Critical
Accounting Policies
provides a discussion of our accounting
policies that require critical judgments, assumptions and estimates.
Overview
Cantel is a leading provider of infection prevention and control
products in the healthcare market, specializing in the following
operating segments:
Dialysis
: Medical device reprocessing
systems, sterilants/disinfectants, dialysate concentrates and other supplies
for renal dialysis.
Healthcare Disposables (formerly known as Dental)
:
Single-use, infection control products used principally in the
dental market including face masks, towels and bibs, tray covers, saliva
ejectors, germicidal wipes, plastic cups, sterilization pouches and
disinfectants.
Water Purification and Filtration
: Water
purification equipment and services, filtration and separation products, and
disinfectants for the medical, pharmaceutical, biotech, beverage and commercial
industrial markets.
Endoscope
Reprocessing
: Medical device reprocessing systems and
sterilants/disinfectants for endoscopy.
Therapeutic Filtration
: Hollow fiber
membrane filtration and separation technologies for medical applications.
(Included in All Other reporting segment)
Specialty Packaging
: Specialty packaging
and thermal control products, as well as related compliance training, for the
transport of infectious and biological specimens and thermally sensitive
pharmaceutical, medical and other products. (Included in All Other reporting
segment)
Most
of our equipment, consumables and supplies are used to help prevent the
occurrence or spread of infections.
To be
more consistent with our strategy to expand our product offerings outside the
dental market, we have renamed our Dental operating segment to the Healthcare
Disposables operating segment. This change in segment description has no impact
upon any reported financial information of this segment.
Significant Activity
(i)
In connection
with our decision to not renew Olympus exclusive United States distribution
agreement when it expired on August 1, 2006, we commenced the sale and service
of our Medivators
®
endoscope reprocessing equipment, high-level
disinfectants, cleaners and consumables through our own United States field
sales and service organization on August 2, 2006, as more fully described
elsewhere in this MD&A, Risk Factors and Note 19 to the Consolidated
Financial Statements. The operating performance of our endoscope reprocessing
business was adversely
26
impacted during fiscal
2007, compared with fiscal 2006, by unabsorbed infrastructure costs associated
with the start-up of the Medivators direct sales and service effort in the
United States and the overall integration (including material, overhead and
warranty costs) of our MDS product line (formerly known as Dyped) manufactured
in the Netherlands, including delays in the development and launch of this
product line.
(ii)
The dialysis
industry has undergone significant consolidation, which adversely impacted
sales volume and average selling prices of some of our dialysis products, as
more fully described elsewhere in this MD&A and in Risk Factors. We
believe that the majority of the adverse impact of this consolidation on our
operating results has already occurred.
(iii)
Distributors of
our dental products have undergone consolidation during fiscal 2007, which
adversely impacted sales of our Healthcare Disposables segment in our fourth
quarter due to rationalization of duplicate inventories in the consolidated
companies. We cannot predict what impact consolidation in this industry will
have on future sales of our healthcare disposable products.
(iv)
Fiscal 2007
acquisitions: We acquired GE Water & Process Technologies water dialysis
business (the GE Water Acquisition or GE Water) on March 30, 2007 and Twist
2 It Inc. (Twist) on July 9, 2007, as more fully described in Business
Recent Events and Note 3 to the Consolidated Financial Statements.
(v)
On each of March
29 and May 17, 2007, we amended our existing revolving credit facility, as more
fully discussed elsewhere in this MD&A and in Note 8 to the Consolidated
Financial Statements.
(vi)
A stronger
Canadian dollar and Euro against the United States dollar impacted our results
of operations during fiscal 2007, compared with fiscal 2006, as more fully
described elsewhere in this MD&A. The increase in values of the Canadian
dollar and Euro were approximately 2.5% and 7.5%, respectively, compared with
fiscal 2006, based upon average exchange rates reported by banking
institutions.
(vii)
Post-fiscal 2007
acquisitions: Subsequent to July 31, 2007, we acquired Dialysis Services, Inc.
(DSI) on August 1, 2007, Verimetrix, LLC (Verimetrix) on September 17,
2007, and Strong Dental, Inc. (Strong Dental) on September 26, 2007, as more
fully described in Business Recent Events and Note 3 to the Consolidated
Financial Statements.
(viii)
Fiscal 2006
acquisitions: We acquired Crosstex International Inc. (Crosstex) on August 1,
2005 and Fluid Solutions, Inc. (FSI) on May 1, 2006, as more fully described
in Note 3 to the Consolidated Financial Statements.
(ix)
The Olympus
distribution agreements with Carsen, as well as Carsens active business
operations, terminated on July 31, 2006, as more fully described elsewhere in
this MD&A and Note 18 to the Consolidated Financial Statements.
Accordingly, Carsen is reported as a discontinued operation for all years
presented.
Results
of Operations
The
results of operations reflect the continuing operating results of Cantel and
its wholly-owned subsidiaries, but exclude the operating results of Carsen.
Since the GE Water
Acquisition was completed on March 30, 2007, its results of operations are
included in our results of operations for the portion of fiscal 2007 subsequent
to March 30, 2007 and are excluded from our results of operations for all other
periods presented. Additionally, the July 9, 2007 Twist acquisition had an
insignificant affect on our results of operations for fiscal 2007 due to both
the small size of this business as well as its inclusion for only a portion of
one month, and its results of operations are excluded for all prior periods.
Since the acquisitions of
DSI, Verimetrix and Strong Dental were
consummated after the end of fiscal 2007, the results of operations of
these acquisitions are not included in our results of operations for any of the
periods presented.
27
For
fiscal 2007 compared with fiscal 2006, discussion herein of our pre-existing
business refers to all of our reporting segments with the exception of the
operating results of the GE Water Acquisition included in our Water
Purification and Filtration reporting segment, as well as the discontinued
operations of Carsen.
Since
the Crosstex acquisition occurred on August 1, 2005, Crosstex is reflected in
our results of operations for fiscal 2007 and fiscal 2006, and is not reflected
in our results of operations for fiscal 2005.
For
fiscal 2006 compared with fiscal 2005, discussion herein of our pre-existing
business refers to all of our reporting segments with the exception of
Healthcare Disposables since this entire reporting segment is related to the
Crosstex acquisition, as well as the discontinued operations of Carsen.
The
following table gives information as to the net sales from continuing
operations and the percentage to the total net sales from continuing operations
for each of our reporting segments.
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollar Amounts in thousands)
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dialysis
|
|
$
|
58,696
|
|
26.8
|
|
$
|
58,908
|
|
30.7
|
|
$
|
65,457
|
|
47.7
|
|
Healthcare
Disposables
|
|
57,610
|
|
26.3
|
|
54,293
|
|
28.3
|
|
|
|
|
|
Water
Purification and Filtration
|
|
49,032
|
|
22.4
|
|
36,356
|
|
18.9
|
|
29,123
|
|
21.2
|
|
Endoscope
Reprocessing
|
|
38,941
|
|
17.8
|
|
30,403
|
|
15.8
|
|
28,677
|
|
20.9
|
|
All Other
|
|
14,765
|
|
6.7
|
|
12,219
|
|
6.3
|
|
13,900
|
|
10.2
|
|
|
|
$
|
219,044
|
|
100.0
|
|
$
|
192,179
|
|
100.0
|
|
$
|
137,157
|
|
100.0
|
|
Fiscal 2007 compared with Fiscal
2006
Net sales
Net
sales increased by $26,865,000, or 14.0%, to $219,044,000 in fiscal 2007 from
$192,179,000 in fiscal 2006. Net sales of our pre-existing business increased
by $19,916,000, or 10.4%, to $212,095,000 in fiscal 2007 compared with fiscal
2006. Net sales contributed by the GE Water Acquisition in fiscal 2007 were
$6,949,000.
Net
sales were positively impacted in fiscal 2007 compared with fiscal 2006 by
approximately $726,000 due to the translation of Euro net sales primarily of
our Endoscope Reprocessing and Dialysis operating segments using a stronger
euro against the United States dollar.
In
addition, net sales were positively impacted in fiscal 2007 compared with
fiscal 2006 by approximately $215,000 due to the translation of Canadian dollar
net sales primarily of our Water Purification and Filtration operating segment
using a stronger Canadian dollar against the United States dollar.
The
increase in net sales of our pre-existing business in fiscal 2007 was
principally attributable to increases in sales of endoscope reprocessing
products and services, water purification and filtration products and services,
healthcare disposable products, specialty packaging products and therapeutic
filtration products.
Net sales of endoscope
reprocessing products and services increased by 28.1% in fiscal 2007, compared with
fiscal 2006, primarily due to an increase in selling prices of our Medivators
endoscope reprocessing equipment and related products and service in the United
States as a result of selling directly to our customers and not through a
distributor, as more fully described elsewhere in this MD&A, and an
increase in demand for our endoscope disinfection equipment in Europe and
disinfectants and product service both in the United States and
internationally. The increase in demand for our disinfectants and product
service is attributable to the increased field population of equipment and our
ability to convert users of competitive disinfectants to our products. The
increase in customer prices as a result of the direct sales effort increased
sales by approximately $4,700,000 in fiscal 2007, compared with fiscal 2006.
Net sales of water
purification and filtration products and services from our pre-existing
business increased by 15.8% in fiscal 2007, compared with fiscal 2006,
primarily due to the acquisition of Fluid Solutions on May 1, 2006, which
contributed approximately $4,015,000 of incremental net sales in fiscal 2007.
In early fiscal 2007, a decision was made to refocus the consumer and
industrial (large capital) portion of the water purification and filtration
equipment business by
28
eliminating contracts
with low profitability; as such, revenue growth in this segment for the total
year was moderated by this activity.
Net sales of healthcare
disposable products increased by 6.1% in fiscal 2007, compared with fiscal
2006, primarily due to increased demand in the United States for our face masks
and instrument sterilization pouches, and increases in selling prices of
approximately $1,500,000. Such selling price increases were implemented to
offset corresponding supplier cost increases and therefore did not have a
significant impact on gross profit.
Net
sales contributed by the Specialty Packaging operating segment were $6,979,000,
an increase of 34.0%, in fiscal 2007 compared with fiscal 2006. This increase
in sales was primarily due to increased customer demand in the United States
for our specialty packaging and compliance training products and increases in
selling prices of approximately $730,000. There can be no assurance that the
sales growth of specialty packaging products in fiscal 2008 will be comparable
with fiscal 2007.
Net
sales contributed by the Therapeutic Filtration operating segment were
$7,786,000, an increase of 11.1%, in fiscal 2007 compared with fiscal 2006. The
increase in sales in fiscal 2007 was primarily due to an increase in demand
internationally for our hemoconcentrator products (a device used to concentrate
red blood cells and remove excess fluid from the bloodstream during open-heart
surgery) and the recommencement of sales of filters manufactured by us on an
OEM basis for a single customers hydration system. This customer had
previously experienced a voluntary recall of the system (unrelated to our
product) and was not purchasing filters until their sales of hydration systems
recommenced; there can be no assurance that future sales of such filters will
continue at current levels.
Sales
of dialysis products and services in fiscal 2007 were comparable with fiscal
2006. Such sales decreased primarily due to lower average selling prices for
Renalin
®
sterilant and Renatron
®
equipment due to
increased sales to large national chains that typically receive more favorable
pricing, and reduced demand for Renalin sterilant domestically primarily due to
the acquisition of Renal Care Group (RCG) by Fresenius Medical Care (Fresenius),
as discussed below. Offsetting this decrease was an increase in customer demand
for Renatron equipment, both in the United States and internationally, and dialysate
concentrate (a concentrated acid or bicarbonate used to prepare dialysate, a
chemical solution that draws waste products from a patients blood through a
dialyzer membrane during hemodialysis treatment) internationally (partially
offset by decreased demand for concentrate in the United States), as well as an
increase of approximately $2,900,000 in net sales as a result of shipping and
handling fees, such as freight, invoiced to customers in fiscal 2007 (related
costs of a similar amount are included within cost of sales). The majority of
this amount related to two of our larger customers who were previously
responsible for transportation related to the products they purchased from us;
during fiscal 2007, we became responsible for the transportation and invoiced
them for such costs.
The
dialysis industry has undergone significant consolidation through the
acquisition by certain major dialysis chains of other major chains, as well as
smaller chains and independents. In October 2005, DaVita Inc. (DaVita), the
second-largest dialysis chain in the United States, acquired Gambro ABs United
States dialysis clinic business, Gambro Healthcare, Inc. (Gambro US).
DaVita/Gambro US are significant customers of our dialysis reuse products and
accounted for approximately 29% and 25% of our dialysis net sales in fiscal
2007 and 2006, respectively. The DaVita/Gambro US acquisition has resulted in
greater buying power for the larger resulting entity and thereby a reduction in
our net sales and profit margins due to reduced average selling prices of our
dialyzer reprocessing products beginning in November 2005; however, offsetting
this reduction is increased demand for our Renatron equipment and Renalin
sterilant from DaVita/Gambro in fiscal 2007, as compared with fiscal 2006.
In addition, on March 31,
2006, Fresenius, the largest dialysis chain in the United States and a provider
of single-use dialyzer products, completed its acquisition of RCG, which was a
significant customer of our dialysis reuse products. Combined net sales of
Fresenius and RCG accounted for approximately 12% and 19% of our dialysis net
sales in fiscal 2007 and 2006, respectively. We believe Fresenius has converted
most of the dialysis clinics of RCG into single-use facilities, which has
adversely affected our sales of reuse dialysis products. In addition, the
Fresenius acquisition has resulted in the loss of low margin concentrate
business to the RCG dialysis centers since Fresenius manufactures dialysate
concentrate.
We believe that the
majority of the adverse impact of these acquisitions has already occurred and
is therefore reflected in the operating results of our dialysis segment for the
last nine months of fiscal 2007.
Gross profit
Gross profit increased by
$9,796,000, or 14.2%, to $79,012,000 in fiscal 2007 from $69,216,000 in fiscal
2006. Gross profit of our pre-existing business increased by $7,792,000, or
11.3%, to $77,008,000 in fiscal 2007 compared with fiscal 2006.
29
Gross profit contributed
by the GE Water Acquisition for the four month period ended July 31, 2007 was
$2,004,000 (since the date of the acquisition).
Gross profit as a
percentage of net sales in fiscal 2007 and 2006 was 36.1% and 36.0%,
respectively. Gross profit as a percentage of net sales of our pre-existing
business in fiscal 2007 was 36.3%. Gross profit as a percentage of net sales
for the GE Water Acquisition for the four month period ended July 31, 2007 was
28.8% (since the date of the acquisition).
The higher gross profit
percentage of our pre-existing business in fiscal 2007, compared with fiscal
2006, was primarily attributable to an increase in gross profit percentage on
our dialysis products due to (i) an improvement in both customer and product
mix related to our dialysate concentrate product, which improvements resulted
from the Fresenius acquisition of RCG and our strategy of only maintaining
concentrate business with an acceptable gross margin, (ii) lower manufacturing
costs including the closing of a distribution center and (iii) more favorable
transportation costs due to new freight arrangements with certain customers.
The increase in gross profit percentage was also attributable to selling our
Medivators brand endoscope reprocessing equipment, high-level disinfectants,
cleaners and consumables directly to customers through our own United States
field sales and service organization instead of through a distributor;
increases in sales of higher margin healthcare disposable products, such as our
face masks and instrument sterilization pouches, and specialty packaging
products; and the non-reoccurrence of a $658,000 one-time purchase accounting
charge related to our Healthcare Disposables segments inventory incurred
during the first quarter of fiscal 2006.
Partially offsetting
these increases in gross profit percentage were a lower gross profit percentage
due to (i) MDS integration costs (including material, overhead and warranty
costs) and increased international sales of our low margin MDS product line of
endoscope reprocessing equipment, (ii) endoscope reprocessing services
primarily due to a low level of billable time for our newly developed U.S.
field service organization since most machines sold directly to our customers
under our new direct sales and service strategy are still under warranty and
(iii) water purification and filtration products and services primarily due to
unabsorbed manufacturing overhead, as well as the sale of water purification
equipment at lower than normal margins due to start-up costs of a new line of
machines.
With
respect to the increase in gross profit (as opposed to gross profit
percentage), increases in net sales as explained above, as well as the
aforementioned reasons for the increase in gross profit percentage, constitute the
most significant factors in the increase in gross profit.
Operating expenses
Selling expenses
increased by $5,288,000, or 28.5%, to $23,818,000 in fiscal 2007 from
$18,530,000 in fiscal 2006 principally due to a higher cost structure of
approximately $3,700,000 for our endoscope reprocessing direct sales network as
a result of our decision to not renew Olympus exclusive United States
distribution agreement when it expired on August 1, 2006; the inclusion of
approximately $740,000 of selling expenses related to the acquisitions of GE
Water and Fluid Solutions; an increase in advertising and marketing expense
primarily related to our Healthcare Disposables and Endoscope Reprocessing
segments; and an increase in compensation expense primarily due to additional
sales and marketing personnel in our Specialty Packaging and Healthcare
Disposables segments.
Selling
expenses as a percentage of net sales were 10.9% in fiscal 2007 compared with
9.6% in fiscal 2006. The increase in selling expenses as a percentage of net
sales was primarily attributable to a higher cost structure for our endoscope
reprocessing direct sales network as a result of our decision to not renew
Olympus exclusive United States distribution agreement when it expired on
August 1, 2006.
General
and administrative expenses increased by $3,282,000, or 10.9%, to $33,507,000
in fiscal 2007, from $30,225,000 in fiscal 2006 principally due to increased
compensation expense, including additional personnel, of approximately
$1,250,000; the inclusion of approximately $570,000 of expenses related to the
acquisitions of GE Water and Fluid Solutions; increased accounting and other
professional fees (including executive transition expenses) of approximately
$700,000; an increase in stock-based compensation expense of $413,000; $325,000
in higher medical insurance costs; and $137,000 in incentive compensation
directly related to the GE Water Acquisition. Partially offsetting these
increases were the non-reoccurrences of $345,000 in incentive compensation directly
related to the Crosstex acquisition and $160,000 in debt financing costs
related to our amended and restated credit facilities, both of which charges
were incurred during the first three months of fiscal 2006.
General and
administrative expenses as a percentage of net sales were 15.3% in fiscal 2007,
compared with 15.7% in fiscal 2006.
30
Research
and development expenses (which include continuing engineering costs) were
$4,848,000 and $5,117,000 in fiscal 2007 and 2006, respectively. The majority
of our research and development expenses related to our MDS endoscope
reprocessor and specialty filtration products. The decrease in research and
development expense in fiscal 2007, compared with fiscal 2006, is due to less
development work on the European version of our MDS endoscope reprocessor.
Interest
Interest
expense decreased by $724,000 to $3,508,000 in fiscal 2007 from $4,232,000 in
fiscal 2006 primarily due a decrease in average outstanding borrowings,
partially offset by an increase in average interest rates. Interest expense
specifically related to the financing of the GE Water Acquisition was $578,000
since the date of the acquisition.
Interest
income decreased by $68,000 to $771,000 in fiscal 2007 from $839,000 in fiscal
2006 primarily due to a decrease in average cash and cash equivalents partially
offset by an increase in average interest rates.
Income from continuing operations before taxes
Income
from continuing operations before income taxes increased by $2,151,000 to
$14,102,000 in fiscal 2007 from $11,951,000 in fiscal 2006.
Income taxes
The
consolidated effective tax rate was 42.5% and 44.3% for fiscal 2007 and 2006,
respectively.
Our results of continuing
operations for fiscal 2007 and 2006 reflect income tax expense for our United
States, Canada and Japan operations at their respective statutory rates, which
rates in fiscal 2007 were 38.1%, 33.7% and 49.7% , respectively. However, only
a partial tax benefit was recorded in fiscal 2007 and 2006 at our Netherlands
subsidiary, thereby causing our overall effective tax rate to exceed statutory
rates.
The decrease in the
overall effective tax rate for fiscal 2007, compared with fiscal 2006, was
principally due to the geographic mix of pretax income, particularly in our
fourth quarter of 2007. This decrease was also attributable to a reduction in
the statutory United States tax rate to 34.3% in fiscal 2007, compared with
35.0% in fiscal 2006. In fiscal 2008, we believe our consolidated effective tax
rate will be approximately 40%.
In July 2006, the
Financial Accounting Standards Board (FASB) issued FIN No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109
(FIN No. 48). FIN No. 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN No. 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006 and therefore is effective for our
fiscal year 2008. We are assessing the impact of the adoption of FIN 48 and
currently do not believe that the adoption will have a material effect on our
financial position or results of operations.
Stock-Based Compensation
On August 1, 2005, we adopted
Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment (Revised 2004)
(SFAS 123R) using the
modified prospective method for the transition. Under the modified prospective
method, stock-based compensation expense will be recognized for any option
grant or stock award granted on or after August 1, 2005, as well as the
unvested portion of stock options granted prior to August 1, 2005, based upon
the awards fair value. For fiscal 2005 and earlier periods, we have accounted
for stock options using the intrinsic value method under which stock
compensation expense is not recognized because we granted stock options with
exercise prices equal to the market value of the shares at the date of grant.
31
The
following table shows the allocation of total stock-based compensation expense
relating to continuing operations recognized in the Consolidated Statements of
Income:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
43,000
|
|
$
|
50,000
|
|
Operating
expenses:
|
|
|
|
|
|
Selling
|
|
159,000
|
|
141,000
|
|
General and
administrative
|
|
1,258,000
|
|
845,000
|
|
Research and
development
|
|
22,000
|
|
20,000
|
|
Total operating
expenses
|
|
1,439,000
|
|
1,006,000
|
|
Discontinued
operations
|
|
|
|
122,000
|
|
Stock-based
compensation before income taxes
|
|
1,482,000
|
|
1,178,000
|
|
Income tax
benefits
|
|
(490,000
|
)
|
(248,000
|
)
|
Total stock-based
compensation expense, net of tax
|
|
$
|
992,000
|
|
$
|
930,000
|
|
In
fiscal 2007 and 2006, the above stock-based compensation expense before income
taxes was recorded in the Consolidated Financial Statements as stock-based
compensation expense (which decreased both basic and diluted earnings per share
from net income by $0.06 and $0.05 in fiscal 2007 and 2006, respectively) and
an increase to additional capital. The related income tax benefits (which
pertain only to stock awards and options that do not qualify as incentive stock
options) were recorded as an increase to long-term deferred income tax assets
(which are netted with long-term deferred income tax liabilities) or a
reduction to income taxes payable, depending on the timing of the deduction, and
a reduction to income tax expense.
The
stock-based compensation expense recorded in our Consolidated Financial
Statements may not be representative of the effect of stock-based compensation
expense in future periods due to the level of awards issued in past years
(which level may not be similar in the future), assumptions used in determining
fair value, and estimated forfeitures. We determine the fair value of each
unvested stock award using the closing market price of our Common Stock on the
date of grant. We estimate the fair value of each option grant on the date of
grant using the Black-Scholes option valuation model. The determination of fair
value using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of subjective variables. These variables
include, but are not limited to, the expected stock price volatility over the
term of the expected option life (which is determined by using the historical
closing prices of our Common Stock), the expected dividend yield (which is
expected to be 0%), and the expected option life (which is based on historical
exercise behavior). If factors change and we employ different assumptions in
the application of SFAS 123R in future periods, the compensation expense that
we would record under SFAS 123R may differ significantly from what we have
recorded in the current period. With respect to stock options granted during
the last nine months of fiscal 2007, we reassessed both the expected option
life and stock price volatility assumptions by evaluating more recent
historical exercise behavior and stock price activity; such reevaluation
resulted in reductions in both the expected option lives and volatility.
Most
of our stock option and nonvested stock awards are subject to graded vesting in
which portions of the award vest at different times during the vesting period,
as opposed to awards that vest at the end of the vesting period. We recognize
compensation expense for awards subject to graded vesting using the
straight-line basis, reduced by estimated forfeitures. At July 31, 2007, total
unrecognized stock-based compensation expense, net of tax, related to total
nonvested stock options and stock awards was $2,659,000 with a remaining
weighted average period of 30 months over which such expense is expected to be
recognized. Such unrecognized stock-based compensation expense increased in
fiscal 2007, compared with fiscal 2006, due to additional employee stock option
and nonvested stock grants.
Upon
exercise of stock options or grant of nonvested shares, we typically issue new
shares of our Common Stock (as opposed to using treasury shares).
If
certain criteria are met when options are exercised or the underlying shares
are sold, the Company is allowed a deduction on its income tax return.
Accordingly, we account for the income tax effect on such income tax deductions
as additional capital (assuming deferred tax assets do not exist pertaining to
the exercised stock options) and as a reduction of income taxes
32
payable. In fiscal 2007
and 2006, options exercised resulted in income tax deductions that reduced
income taxes payable by $1,137,000 and $1,166,000, respectively.
At July 31, 2005 (prior to the adoption of SFAS
123R), we presented all tax benefits of deductions resulting from the exercise
of stock options as operating cash flows in the consolidated statements of cash
flows. Beginning August 1, 2005, we changed our cash flow presentation in
accordance with SFAS 123R, which requires the cash flows resulting from excess
tax benefits to be classified as financing cash flows. Excess tax benefits
arise when the ultimate tax effect of the deduction for tax purposes is greater
than the tax benefit on stock compensation expense (including tax benefits on
stock compensation expense that has only been reflected in the pro forma
disclosures) which was determined based upon the awards fair value.
In
fiscal 2005, we accelerated the vesting of certain unvested and out-of-the-money
stock options previously awarded to certain executive officers and other
employees (67 individuals in total) under our 1997 Employee Stock Option Plan.
Such options had exercise prices greater than $16.85, the closing price on June
24, 2005, the date that our Board of Directors authorized such acceleration.
Options to purchase 759,650 shares of common stock (of which approximately
577,500 shares are subject to options held by executive officers) were subject
to this acceleration. All other terms and conditions of the options remain in
effect. Options held by non-employee directors were not included in the
acceleration. Because these options had exercise prices in excess of the market
value of Cantel common stock on June 24, 2005, and therefore were not fully
achieving our original objectives of incentive compensation and employee
retention, we believe the acceleration may have had a positive effect on
employee morale, retention and perception of option value. The acceleration
eliminated any future compensation expense we would otherwise recognize in our
income statement with respect to these options with the August 1, 2005
implementation of SFAS 123R. The compensation expense, after tax, related to
this acceleration totaled approximately $3,400,000. If such acceleration did
not occur, we would have recognized additional compensation expense, net of
tax, of approximately $1,300,000, $1,300,000, $600,000 and $200,000 in fiscal
2006, 2007, 2008 and 2009, respectively, based on the fair value of the options
granted at grant date over the original vesting period.
Fiscal 2006 compared with Fiscal
2005
Net sales
Net sales increased by
$55,022,000, or 40.1%, to $192,179,000 in fiscal 2006 from $137,157,000 in
fiscal 2005. Net sales of our pre-existing business increased by $729,000, or
0.5%, to $137,886,000 for fiscal 2006 compared with fiscal 2005. Net sales
contributed by our Healthcare Disposables segment in fiscal 2006 were
$54,293,000.
Net
sales were positively impacted in fiscal 2006 compared with fiscal 2005 by
approximately $485,000 due to the translation of Canadian dollar net sales
primarily of our Water Purification and Filtration operating segment using a
stronger Canadian dollar against the United States dollar.
In
addition, net sales were negatively impacted in fiscal 2006 compared with fiscal
2005 by approximately $481,000 due to the translation of Euro net sales
primarily of our Dialysis operating segment using a weaker euro against the
United States dollar.
Increases
in selling prices of our products did not have a significant effect on net
sales in fiscal 2006. However, as discussed below, we experienced a reduction
in our dialysis net sales and profit margins in fiscal 2006 due to reduced
average selling prices attributable to the DaVita/Gambro US acquisition.
The
increase in net sales of our pre-existing business in fiscal 2006 was
principally attributable to increases in sales of water purification and
filtration products and services and endoscope reprocessing products and
services. These increases in net sales were partially offset by decreases in
sales of dialysis products and therapeutic products.
The increase in sales of
water purification and filtration products and services of $7,233,000, or
24.8%, in fiscal 2006 compared with fiscal 2005 was primarily due to increased
demand in North America for our water purification and filtration equipment,
and was partially attributable to the restructuring, strengthening, and
consolidation of our sales and marketing organization. Additionally, we
acquired certain of the assets and assumed certain of the liabilities of Fluid
Solutions, Inc. on May 1, 2006 which resulted in approximately $1,500,000 of
incremental net sales in fiscal 2006.
The increase in sales of
endoscope reprocessing products and services of 6.0% in fiscal 2006 compared with
fiscal 2005 was primarily due to an increase in demand for our endoscope
disinfection equipment, disinfectants and product service both in the United
States and internationally. The increase in demand for our disinfectants and
product service is attributable
33
to the increased field
population of equipment (including our Dyped endoscope disinfection equipment
in Europe) and our ability to convert users of competitive disinfectants to our
products.
Sales
of dialysis products and services decreased by 10.0% in fiscal 2006 compared
with fiscal 2005 primarily due to a decrease in demand from domestic and
international customers for dialysate concentrate (a concentrated acid or
bicarbonate used to prepare dialysate, a chemical solution that draws waste
products from a patients blood through a dialyzer membrane during hemodialysis
treatment) and Renatron dialyzer reprocessing equipment both in the United
States and internationally, and lower average selling prices for Renatron
equipment and Renalin sterilant due to increased sales to large national chains
that typically receive more favorable pricing. Partially offsetting the
decrease in sales of dialysis products and services was an increase of approximately
$1,512,000 in net sales as a result of shipping and handling fees, such as
freight, invoiced to customers during fiscal 2006 (related costs of a similar
amount are included within cost of sales). During fiscal 2005, two of our
largest customers were responsible for transportation related to the products
they purchased from us; in fiscal 2006, these two customers requested that we
undertake and invoice them for such transportation.
The
dialysis industry has been undergoing significant consolidation through the
acquisition by certain major dialysis chains of smaller chains and
independents. In October 2005, DaVita, the second-largest dialysis chain in the
United States, acquired Gambro ABs United States dialysis clinic business,
Gambro US. DaVita/Gambro US are significant customers of our dialysis reuse
products and accounted for approximately 25% of our dialysis net sales during
fiscal 2006. The DaVita/Gambro US acquisition has resulted in greater buying
power for the larger resulting entity and thereby a reduction in our net sales
and profit margins due to reduced average selling prices of our dialyzer
reprocessing products.
In addition, on March 31,
2006, Fresenius, the largest dialysis chain in the United States and a provider
of single-use dialyzer products, announced the closing of its acquisition of
RCG. RCG has been a significant customer of our dialysis reuse products.
Combined net sales of Fresenius and RCG accounted for approximately 19% of our
dialysis net sales during fiscal 2006. We anticipate Fresenius will convert all
or substantially all of the dialysis clinics of RCG into single-use facilities,
which will adversely affect our sales of dialysis products. Given the
uncertainty of the post-acquisition operating strategies for Fresenius/RCG, we
are currently unable to determine the timing and impact on our future sales of
dialysis products and services. In addition, the DaVita and Fresenius
acquisitions have resulted in the loss of low margin dialysate concentrate
business since Gambro and Fresenius manufacture dialysate concentrate
themselves. Consequently, the DaVita and RCG dialysis centers have reduced
their purchases of dialysate concentrate from us.
Net
sales contributed by the Therapeutic Filtration operating segment were
$7,012,000, a decrease of $1,804,000, or 20.5% in fiscal 2006 compared with
fiscal 2005. This decrease in sales was primarily due to reduced sales in the
United States of pediatric filters, manufactured by us on an OEM basis for a
single customers hydration system, due to a voluntary recall of the system
(unrelated to our product) by such customer. We anticipate that sales to the
manufacturer will recommence in the near future. The reduction was also due to
decreases in demand for our hemoconcentrator products (a device used to
concentrate red blood cells and remove excess fluid from the bloodstream during
open-heart surgery) and hemofilter products (a product that performs a slow,
continuous blood filtration therapy used to control fluid overload and acute
renal failure in unstable, critically ill patients who cannot tolerate the
rapid filtration rates of conventional hemodialysis), both in the United States
and internationally.
Gross
profit
Gross profit increased by
$15,335,000, or 28.5%, to $69,216,000 in fiscal 2006 from $53,881,000 in fiscal
2005. Gross profit of our pre-existing business decreased by $2,857,000, or
5.3%, to $51,024,000 in fiscal 2006 compared with fiscal 2005. Gross profit
contributed by our Healthcare Disposables segment in fiscal 2006 was $18,192,000.
Gross profit as a
percentage of net sales was 36.0% in fiscal 2006 compared with 39.3% in fiscal
2005. Gross profit as a percentage of net sales of our pre-existing business in
fiscal 2006 was 37.0%. Gross profit as a percentage of net sales for our
Healthcare Disposables segment in fiscal 2006 was 33.5%, which was adversely
impacted by a $658,000 one-time purchase accounting charge related to our
Healthcare Disposables segments inventory during the three months ended
October 31, 2005. Excluding this one-time charge, gross profit as a percentage
of net sales for our Healthcare Disposables segment in fiscal 2006 was 34.7%.
The lower gross profit
percentage from our pre-existing business in fiscal 2006 as compared with
fiscal 2005 was primarily attributable to a lower gross profit percentage on
our dialysis products due to lower average selling prices on dialysate
concentrate, Renatron equipment and sterilants principally as a result of
increased sales to large national chains that typically receive more favorable
pricing, unfavorable overhead absorption associated with the decrease in sales
to domestic and international customers, and higher distribution costs.
Additionally, gross profit percentage for fiscal 2006 was adversely impacted by
the sale of some large water purification and filtration systems at lower than
normal margins.
34
With respect to the
reduction in gross profit (as opposed to gross profit percentage), the loss in
gross profit attributable to decreases in net sales as explained above, as well
as the aforementioned reasons for the reduction in gross profit percentage,
constitute the most significant factors in the decrease in gross profit.
Operating
expenses
Selling expenses
increased by $3,264,000, or 21.4%, to $18,530,000 in fiscal 2006 from
$15,266,000 in fiscal 2005 principally due to the inclusion of $2,496,000 of
our Healthcare Disposables segments selling expenses; the initial cost of
$806,000 to develop our endoscope reprocessing direct sales and service network
as a result of our decision to not renew Olympus exclusive United States
distribution agreement when it expired on August 1, 2006, as more fully
described elsewhere is this MD&A; an increase in salary expense of approximately
$230,000 in our Specialty Packaging operating segment primarily for the
increase in our sales and marketing personnel; the recording of $141,000 of
stock-based compensation expense in fiscal 2006; and the translation of
Canadian expenses in our Water Purification and Filtration and Specialty
Packaging segments using a stronger Canadian dollar against the United States
dollar which resulted in an additional $107,000 of selling expenses. Partially
offsetting the increase in selling expenses were decreases in sales and
marketing personnel and commissions in our dialysis reporting segment in
response to the consolidation of the dialysis industry since an increasing
percentage of sales of our dialysis products are to major dialysis chains as
compared to small chains and independent dialysis clinics.
Selling expenses as a
percentage of net sales were 9.6% in fiscal 2006 compared with 11.1% in fiscal
2005. The decrease in selling expenses as a percentage of net sales was
primarily attributable to the inclusion of the lower selling cost structure of
our Healthcare Disposables segment (which selling expenses as a percentage of
our Healthcare Disposables segment net sales were 4.6% in fiscal 2006) and
decreases in sales and marketing personnel and commissions in our Dialysis
reporting segment in response to the consolidation of the dialysis industry,
partially offset by the initial cost of $806,000 to develop our endoscope
reprocessing direct field sales and service organization.
General
and administrative expenses increased by $10,031,000, or 49.7%, to $30,225,000
in fiscal 2006 from $20,194,000 in fiscal 2005 principally due to the inclusion
of $7,779,000 of our Healthcare Disposables segments general and
administrative expenses (which expenses include $2,960,000 of amortization
associated with intangible assets); the recording of $845,000 of stock-based
compensation expense in fiscal 2006; $345,000 in incentive compensation during
the three months ended October 31, 2005 directly related to the Crosstex acquisition;
the translation of Canadian expenses in our Water Purification and Filtration
and Specialty Packaging segments using a stronger Canadian dollar against the
United States dollar which resulted in an additional $191,000 of general and
administrative expenses; $160,000 in debt financing costs during the three
months ended October 31, 2005 related to our amended and restated credit
facilities; and the inclusion of $135,000 of Fluid Solutions general and
administrative expenses for the three month period subsequent to the May 1,
2006 acquisition.
General and
administrative expenses as a percentage of net sales were 15.7% in fiscal 2006
compared with 14.7% in fiscal 2005. The increase in general and administrative
expenses as a percentage of net sales was primarily attributable to the
aforementioned factors.
Research and development
expenses (which include continuing engineering costs) increased by $1,018,000
to $5,117,000 in fiscal 2006 from $4,099,000 in fiscal 2005. The majority of
our research and development expenses related to our Dyped endoscope
reprocessor and specialty filtration products. The increase in research and
development expenses in fiscal 2006 compared with fiscal 2005 was primarily due
to ongoing research and development on those products.
Interest
In fiscal 2006, interest
expense increased by $2,786,000 to $4,232,000 from $1,446,000 in fiscal 2005
primarily due to the significant increase in average outstanding borrowings as
a result of financing a portion of the purchase price of the August 1, 2005
acquisition of Crosstex.
Interest income increased
by $333,000 to $839,000 in fiscal 2006 from $506,000 in fiscal 2005 primarily
due to an increase in average interest rates in fiscal 2006 and a higher
average cash balance.
Income
from continuing operations before taxes
Income
from continuing operations before income taxes decreased by $1,431,000 to
$11,951,000 in fiscal 2006 from $13,382,000 in fiscal 2005.
35
Income taxes
The consolidated
effective tax rate was 44.3% and 41.0% for fiscal 2006 and 2005, respectively.
We have provided income
tax expense for our United States operations at the statutory tax rate;
however, actual payment of U.S. Federal income taxes reflects the benefits of
the utilization of the remaining Federal net operating loss carryforwards (NOLs)
accumulated in the United States. Our NOLs were fully utilized during the three
months ended October 31, 2005.
Our results of continuing
operations for fiscal 2006 and 2005 also reflect income tax expense for our
international subsidiaries at their respective statutory rates. Such
international subsidiaries include our subsidiaries in Canada and Japan, which
had effective tax rates in fiscal 2006 of approximately 49.2% and 47.9%,
respectively. A partial income tax benefit was recorded in fiscal 2006 on the
losses from operations at our Netherlands subsidiary.
The higher overall
effective tax rate for fiscal 2006 compared with fiscal 2005 is principally due
to the geographic mix of pretax income, an increase in the statutory United
States tax rate to 35% from 34%, an increase in our overall state income tax
rate to approximately 8% from 6% due to the Crosstex acquisition, losses
related to our Netherlands operation for which only a partial income tax
benefit was recorded and stock-based compensation during fiscal 2006 for which
only a partial income tax benefit was recorded (including our Canadian
operations in which no tax benefit was recorded), partially offset by the domestic
production deduction resulting from the American Jobs Creation Act of 2004.
Liquidity
and Capital Resources
Working capital
At
July 31, 2007, our working capital was $40,760,000, compared with $43,351,000
at July 31, 2006.
Cash flows from operating activities
Net
cash provided by operating activities was $5,967,000, $22,061,000 and
$24,773,000 for fiscal 2007, 2006 and 2005, respectively. With respect to
continuing operations only, net cash provided by operating activities was
$10,834,000, $15,500,000 and $18,042,000, respectively.
In
fiscal 2007, the net cash provided by operating activities was primarily due to
net income after adjusting for depreciation, amortization and stock-based
compensation expense, and an increase in accounts payable and accrued expenses
(due to increased purchases in July to meet product demand and additional
compensation as a result of more personnel, including the additional sales and
service personnel of our Endoscope Reprocessing operating segment). These items
were partially offset by increases in (i) accounts receivable (due to strong
sales in the months of July and June, including sales related to the GE Water
Acquisition, and increases in customer prices in our Endoscope Reprocessing
operating segment as a result of the direct sales effort) and (ii) inventories
(due to planned increases in stock levels of certain products) and decreases in
(i) net liabilities of discontinued operations (due to the wind-down of Carsens
operations including substantial tax payments that were payable in fiscal 2007)
and (ii) income taxes payable (due to timing associated with payments).
In
fiscal 2006, the net cash provided by operating activities was primarily due to
net income (after adjusting for depreciation and amortization, stock-based
compensation expense, gain on disposal of discontinued operations and deferred
income taxes), and decreases in accounts receivable (due to a decrease in net
sales primarily in our Dialysis segment), partially offset by an increase in
inventories (due to timing of sales) and changes in assets and liabilities of
discontinued operations (due to the sale of substantially all of Carsens
assets on July 31, 2006).
In
fiscal 2005, the net cash provided by operating activities was primarily due to
net income (after adjusting for depreciation and amortization, and deferred
income taxes) and an increase in accounts payable, deferred revenue and accrued
expenses (due primarily to increased incentive compensation payable as a result
of improved operating results), partially offset by increases in accounts
receivable (due to an increase in sales) and net assets of discontinued
operations (due to strong operating results at Carsen).
36
Cash flows from investing activities
Net
cash used in investing activities was $41,535,000, $45,950,000 and $3,626,000
in fiscal 2007, 2006 and 2005, respectively. In fiscal 2007, the net cash used
in investing activities was primarily due to the acquisitions of GE Water and
Twist, the earnout payment to the Crosstex sellers and capital expenditures. In
fiscal 2006, the net cash used in investing activities was primarily due to the
acquisition of Crosstex and capital expenditures, partially offset by the
proceeds received from the sale of our discontinued operations. In fiscal 2005,
the net cash used in investing activities was primarily for capital
expenditures.
Cash flows from financing activities
Net
cash provided by financing activities was $21,082,000 in fiscal 2007, compared
with net cash provided by financing activities of $20,127,000 in fiscal 2006
and net cash used in financing activities of $6,519,000 in fiscal 2005. In
fiscal 2007, net cash provided by financing activities was primarily
attributable to borrowings under our revolving credit facility related to the
acquisition of GE Water, net of debt issuance costs, and proceeds from the
exercises of stock options, partially offset by repayments under our credit
facilities and purchases of treasury stock. In fiscal 2006, net cash provided
by financing activities was primarily attributable to borrowings under our
credit facilities related to the acquisition of Crosstex, net of debt issuance
costs, and proceeds from the exercises of stock options, partially offset by
repayments under our credit facilities and purchases of treasury stock. In
fiscal 2005, the net cash used in financing activities was primarily
attributable to repayments under our credit facilities, partially offset by
proceeds from the exercises of stock options.
Repurchase
of shares
On
April 13, 2006, our Board of Directors approved the repurchase of up to 500,000
shares of our outstanding Common Stock. Under the repurchase program we
repurchased shares from time-to-time at prevailing prices and as permitted by
applicable securities laws (including SEC Rule 10b-18) and New York Stock
Exchange requirements, and subject to market conditions. The repurchase program
had a one-year term that expired on April 12, 2007. We repurchased 464,800
shares under the repurchase program at a total average price per share of
$14.02. Of the 464,800 shares, 161,800 shares were repurchased in fiscal 2007.
Discontinued
Operations -Termination of Carsens Operations
On
July 31, 2006, Carsen closed the sale of substantially all of its assets to
Olympus under an Asset Purchase Agreement dated as of May 16, 2006 among
Carsen, Cantel and Olympus. Olympus purchased substantially all of Carsens
assets other than those related to Carsens Medivators business and certain
other smaller product lines. Following the closing, Olympus hired substantially
all of Carsens employees and took over Carsens Olympus-related operations (as
well as the operations related to the other acquired product lines). The
transaction resulted in an after-tax gain of $6,776,000 and was recorded
separately on the Consolidated Statements of Income for the year ended July 31,
2006 as gain on disposal of discontinued operations, net of tax. In connection
with the transaction, Carsens Medivators-related assets as well as certain of
its other assets that were not acquired by Olympus were sold to our new
Canadian distributor of Medivators products.
The purchase price for
the net assets sold to Olympus was approximately $31,200,000, comprised of a
fixed sum of $10,000,000 plus an additional formula-based sum of $21,200,000.
In addition, Olympus paid Carsen 20% of Olympus revenues attributable to
Carsens unfilled customer orders (backlog) as of July 31, 2006 that were
assumed by Olympus at the closing. Such payments to Carsen were made following
Olympus receipt of customer payments for such orders. In fiscal 2007,
approximately $368,000 related to such backlog has been recorded as income and
has been reported in income from discontinued operations, net of tax, in the
Consolidated Statements of Income.
The
$10,000,000 fixed portion of the purchase price was in consideration for (i)
Carsens customer lists, sales records, and certain other assets related to the
sale and servicing of Olympus products and certain non-Olympus products
distributed by Carsen, (ii) the release of Olympus contractual restriction on
hiring Carsen personnel, (iii) real property leases (which were assumed or
replaced by Olympus) and leasehold improvements, computer and software systems,
equipment and machinery, telephone systems, and records related to the acquired
assets, and (iv) assisting Olympus in effecting a smooth transition of Carsens
business of distributing and servicing Olympus and certain non-Olympus products
in Canada. Cantel has also agreed (on behalf of itself and its affiliates) not
to manufacture, distribute, sell or represent for sale in Canada through July
31, 2007 any products that are competitive with the Olympus products formerly
sold by Carsen under its Olympus Distribution Agreements.
37
Net proceeds from Carsens
sale of net assets and the termination of Carsens operations were
approximately $21,100,000 (excluding the backlog payments) after satisfaction
of remaining liabilities and taxes.
As a
result of the foregoing transaction, which coincided with the expiration of
Carsens exclusive distribution agreements with Olympus on July 31, 2006,
Carsen no longer has any remaining product lines or active business operations.
Cash flows attributable
to discontinued operations comprise the following:
|
|
Year ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net cash (used
in) provided by operating activities
|
|
$
|
(4,867,000
|
)
|
$
|
6,561,000
|
|
$
|
6,731,000
|
|
Net cash
provided by (used in) investing activities
|
|
$
|
|
|
$
|
30,774,000
|
|
$
|
(649,000
|
)
|
In
fiscal 2007, net cash used in operating activities was primarily due to the
payment of Carsens remaining operating costs relating to fiscal 2006, income
tax payments and various wind-down costs, partially offset by the collection of
the remaining receivables. At July 31, 2007, approximately $97,000 in liabilities remain, which primarily relate to
various taxes expected to be paid in early fiscal 2008 as well as the repayment
to Olympus of an uncollected account receivable.
In
fiscal 2006, net cash provided by investing activities was due to proceeds from
disposal of the discontinued operations. In fiscal 2005, net cash used in
investing activities was due to capital expenditures.
Financing
activities of our discontinued operations did not result in any net cash in
fiscal 2007, 2006 and 2005.
Direct Sale of Medivators Systems in the United States
On August 2, 2006, we
commenced the sale and service of our Medivators brand endoscope reprocessing
equipment, high-level disinfectants, cleaners and consumables through our own
United States field sales and service organization. Our direct sale of these
products is the result of our decision that it is in our best long-term
interests to control and develop our own direct-hospital based United States
distribution network and, as such, not to renew Olympus exclusive United
States distribution agreement when it expired on August 1, 2006.
Throughout the former
distribution arrangement with Olympus, we employed our own personnel to provide
clinical sales support activities as well as an internal technical and customer
service function, depot maintenance and service and all logistics and
distribution services for the Medivators/Olympus customer base. This existing
and fully developed infrastructure will continue to be a critical factor in our
new direct sales and service strategy.
During the seven-year
period following the expiration of the distribution agreement with Olympus on
August 1, 2006, Olympus will have the option to provide certain ongoing support
functions to its existing customer base of Medivators products, subject to the
terms and conditions of the agreement. In addition, Olympus may continue to
purchase from Minntech for resale in connection with such support functions,
Medivators accessories, consumables, and replacement and repair parts, as well
as Rapicide
Ò
disinfectant. During fiscal 2007, Olympus continued to purchase such items from
us, although we have been gradually converting the sale of such items over to
our direct sales and service force.
38
Long-term contractual obligations
Aggregate
annual required payments over the next five years and thereafter under our
contractual obligations that have long-term components are as follows:
|
|
Year Ended July 31,
(Amounts in thousands)
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of
the credit facilities (2)
|
|
$
|
6,000
|
|
$
|
8,000
|
|
$
|
10,000
|
|
$
|
33,000
|
|
$
|
|
|
$
|
|
|
$
|
57,000
|
|
Expected
interest payments under the credit facilities (1)
|
|
3,726
|
|
3,246
|
|
2,627
|
|
380
|
|
|
|
|
|
9,979
|
|
Minimum
commitments under noncancelable operating leases
|
|
3,281
|
|
2,868
|
|
2,218
|
|
1,398
|
|
745
|
|
1,617
|
|
12,127
|
|
Minimum
commitments under noncancelable capital leases
|
|
32
|
|
32
|
|
32
|
|
13
|
|
|
|
|
|
109
|
|
Minimum
commitments under license agreement
|
|
48
|
|
73
|
|
109
|
|
162
|
|
187
|
|
2,701
|
|
3,280
|
|
Note payable -
Dyped
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
Deferred
compensation and other
|
|
180
|
|
108
|
|
34
|
|
406
|
|
406
|
|
606
|
|
1,740
|
|
Employment
agreements
|
|
4,092
|
|
1,209
|
|
140
|
|
116
|
|
122
|
|
|
|
5,679
|
|
Total
contractual obligations
|
|
$
|
18,044
|
|
$
|
15,536
|
|
$
|
15,160
|
|
$
|
35,475
|
|
$
|
1,460
|
|
$
|
4,924
|
|
$
|
90,599
|
|
(1)
The expected interest
payments under the term and revolving credit facilities reflect interest rates
of 6.94% and 6.77%, respectively, which were our interest rates on outstanding
borrowings at July 31, 2007.
(2)
The maturities of the
credit facilities as well as the expected interest payments under the credit
facilities do not reflect the additional borrowings of $11,550,000 occurring
subsequent to July 31, 2007, which borrowings were principally related to the
acquisitions of DSI, Verimetrix and Strong Dental.
Credit facilities
In conjunction with the
acquisition of Crosstex, we entered into amended and restated credit facilities
dated as of August 1, 2005 (the 2005 U.S. Credit Facilities) with a
consortium of lenders to fund the cash consideration paid in the acquisition
and costs associated with the acquisition, as well as to modify our existing
United States credit facilities. In addition, we agreed to repay the July 31,
2005 outstanding borrowings of $15,750,000 under our original term loan
facility within ninety (90) days from the closing. In October 2005, such amount
was repaid primarily through the repatriation of funds from our foreign
subsidiaries. Amounts we repay under the term loan facility may not be
re-borrowed. Additionally, we incurred debt issuance costs of approximately
$1,426,000, of which $160,000 of third-party costs was recorded in general and
administrative expenses during the three months ended October 31, 2005 in
accordance with applicable accounting rules. The remaining $1,266,000 of costs
was recorded in other assets and is being amortized over the life of the credit
facilities.
On March 29, 2007, we
amended the 2005 U.S. Credit Facilities primarily to allow for the GE Water
Acquisition. Additionally, on May 17, 2007 we amended the 2005 U.S. Credit
Facilities principally to increase the borrowing capacity under the existing
senior secured revolving credit facility as well as to obtain improved terms on
interest margins applicable to our outstanding borrowings. The 2005 U.S. Credit
Facilities, as amended, include (i) a six-year $40.0 million senior
secured amortizing term loan facility and (ii) a five-year $50.0 million
senior secured revolving credit facility.
At
September 28, 2007, borrowings under the 2005 U.S. Credit Facilities bear
interest at rates ranging from 0% to 0.50% above the lenders base rate, or at
rates ranging from 0.625% to 1.75% above the London Interbank Offered Rate (LIBOR),
depending upon our consolidated ratio of debt to earnings before interest,
taxes, depreciation and amortization, and as further adjusted under the terms
of the 2005 U.S. Credit Facilities (EBITDA). At September 28, 2007, the
lenders base rate was 7.75% and the LIBOR rates ranged from 5.23% to 5.67%.
The margins applicable to our outstanding borrowings at September 28, 2007 were
0.25% above the lenders base rate and 1.50% above LIBOR. Substantially all of
our outstanding borrowings were under LIBOR contracts at September 28, 2007.
The 2005 U.S. Credit Facilities also provide for fees on the unused portion of
our revolving credit facility at rates ranging from 0.15% to 0.30%, depending
upon our consolidated ratio of debt to EBITDA; such rate was 0.30% at September
28, 2007.
39
The
2005 U.S. Credit Facilities require us to meet certain financial covenants and
are secured by (i) substantially all of our U.S.-based assets (including
assets of Cantel, Minntech, Mar Cor and Crosstex) and (ii) our pledge of
all of the outstanding shares of Minntech, Mar Cor and Crosstex and 65% of the
outstanding shares of our foreign-based subsidiaries. Additionally, we are not
permitted to pay cash dividends on our Common Stock without the consent of our
United States lenders. As of July 31, 2007, we are in compliance with all
financial and other covenants under the 2005 U.S. Credit Facilities, as
amended.
On
July 31, 2007, we had $57,000,000 of outstanding borrowings under the 2005 U.S.
Credit Facilities which consisted of $34,000,000 and $23,000,000 under the term
loan facility and the revolving credit facility, respectively. Subsequent to
July 31, 2007, we borrowed an additional $11,550,000 under the revolving credit
facility and repaid $1,500,000 under the term loan facility; therefore, at
September 28, 2007, we had $67,050,000 of outstanding borrowings under the 2005
U.S. Credit Facilities, including $32,500,000 and $34,550,000 under the term
loan facility and the revolving credit facility, respectively.
Operating leases
Minimum
commitments under operating leases include minimum rental commitments for our
leased manufacturing facilities, warehouses, office space and equipment.
Rent
expense related to operating leases for fiscal 2007 was recorded on a
straight-line basis and aggregated $3,531,000 compared with $2,881,000 and
$2,071,000 for fiscal 2006 and 2005, respectively, which excludes rent expense
related to our discontinued operations.
Dyped note payable and other long-term liabilities
In
conjunction with the Dyped acquisition on September 12, 2003, we issued a note
with a face value of 1,350,000 ($1,505,000 using the exchange rate on the date
of the acquisition). At July 31, 2007, approximately $685,000 of this note was
outstanding using the exchange rate on July 31, 2007 and is payable on July 31,
2008. Such note is non-interest bearing and has been recorded in accrued
expenses at its present value of $651,000 at July 31, 2007.
Also
included in other long-term liabilities are deferred compensation arrangements
for certain former Minntech directors and officers.
License
agreement
On January 1, 2007, we
entered into a license agreement with a third-party which allows us to
manufacture, use, import, sell and distribute certain thermal control products
relating to our Specialty Packaging segment. In consideration, we agreed to pay
a minimum annual royalty payable each calendar year over the license agreement
term of 20 years. At July 31, 2007, we had minimum future royalty obligations
of approximately $3,280,000 relating to this license agreement.
Financing
needs
At
July 31, 2007, we had a cash balance of $15,860,000, of which $9,543,000 was
held by foreign subsidiaries. We believe that our current cash position,
anticipated cash flows from operations, and the funds available under our revolving
credit facility will be sufficient to satisfy our cash operating requirements
for the foreseeable future based upon our existing operations. At September 28,
2007, $15,450,000 was available under our United States revolving credit
facility, as amended.
Foreign currency
During fiscal 2007,
compared with fiscal 2006, the average value of the Canadian dollar increased
by approximately 2.5% relative to the
value of the United States dollar. Changes in the value of the Canadian dollar against
the United States dollar affect our results of operations because a portion of
our Canadian subsidiaries inventories and operating costs (which are reported
in the Water Purification and Filtration and Specialty Packaging segments) are
purchased in the United States and a significant amount of their sales are to
customers in the United States. Additionally, the financial statements of our
Canadian subsidiaries are translated using the accounting policies described in
Note 2 to the Consolidated Financial Statements. Fluctuations in the rates of
currency exchange between the United States and Canada had an overall adverse
impact in fiscal 2007, compared with fiscal 2006, upon our continuing results
of operations of approximately $150,000, net of tax. As of September 28, 2007
compared with July 31, 2007, the value of the Canadian dollar has further
increased by approximately 7.5% relative to the value of the United States
dollar.
40
During fiscal 2007,
compared with fiscal 2006, the value of the euro increased by approximately
7.5% relative to the value of the United States dollar. Changes in the value of
the euro against the United States dollar affect our results of operations
because a portion of the net assets of our Netherlands subsidiary (which are
reported in our Dialysis, Endoscope Reprocessing and Water Purification and
Filtration segments) are denominated and ultimately settled in United States
dollars but must be converted into its functional euro currency. Additionally,
financial statements of our Netherlands subsidiary are translated using the
accounting policies described in Note 2 to the Consolidated Financial
Statements. Fluctuations in the rates of currency exchange between the Euro and
the United States dollar had an overall adverse impact in fiscal 2007, compared
with fiscal 2006, upon our results of operations of approximately $150,000, net
of tax. As of September 28, 2007 compared with July 31, 2007, the value of the
Euro has further increased by approximately 3.9% relative to the value of the
United States dollar.
In order to hedge against
the impact of fluctuations in the value of the euro relative to the United
States dollar on the conversion of such dollar denominated net assets into
functional currency, we enter into short-term contracts to purchase euros
forward, which contracts are generally one month in duration. These short-term
contracts are designated as fair value hedges. There was one foreign currency
forward contract amounting to 1,258,000 at August 31, 2007 which covers
certain assets and liabilities of Minntechs Netherlands subsidiary which are
denominated in United States dollars. Such contract expired on September 30,
2007. Under our credit facilities, such contracts to purchase euros may not
exceed $12,000,000 in an aggregate notional amount at any time. During fiscal
2007, such forward contracts were effective in offsetting the impact of the
strengthening of the euro on certain assets and liabilities of Minntechs
Netherlands subsidiary that are denominated in United States dollars. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 133,
as amended,
Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), such foreign
currency forward contracts are designated as hedges. Gains and losses related
to these hedging contracts to buy euros forward are immediately realized within
general and administrative expenses due to the short-term nature of such
contracts.
For purposes of
translating the balance sheet at July 31, 2007 compared with July 31, 2006, the
value of the Canadian dollar increased by approximately 6.0% and the value of
the euro increased by approximately 7.3% compared with the value of the United
States dollar. The total of these currency movements resulted in a foreign
currency translation gain of $1,779,000 in fiscal 2007, thereby increasing
stockholders equity.
Changes in the value of
the Japanese yen relative to the United States dollar during fiscal 2007,
compared with fiscal 2006, did not have a significant impact upon either our
results of operations or the translation of our balance sheet, primarily due to
the fact that our Japanese subsidiary accounts for a relatively small portion
of consolidated net sales, net income and net assets.
Inflation
During
fiscal 2007 we experienced higher materials, labor, and distribution costs
compared with fiscal 2006, which cost increases were in excess of the general
rate of inflation. We implemented price increases for certain of our products
which partially offset these cost increases; however, some of our businesses
(primarily the Dialysis and Water Purification and Filtration segments) were
unable to obtain higher selling prices as more fully described in Results of
Operations.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are based upon our Consolidated Financial Statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we continually evaluate our estimates. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Consolidated Financial
Statements.
Revenue
Recognition
Revenue on product sales
is recognized as products are shipped to customers and title passes. The
passing of title is determined based upon the FOB terms specified for each
shipment. With respect to dialysis, therapeutic, specialty packaging
41
and endoscope
reprocessing products, shipment terms are generally FOB origin for common
carrier and FOB destination when our distribution fleet is utilized (except for
one large customer in dialysis whereby all products are shipped FOB
destination). With respect to water purification and filtration and healthcare
disposable products, shipment terms may be either FOB origin or destination.
Customer acceptance for the majority of our product sales occurs at the time of
delivery. In certain instances, primarily with respect to some of our water
purification and filtration equipment, endoscope reprocessing equipment and an
insignificant amount of our sales of dialysis equipment, post-delivery
obligations such as installation, in-servicing or training are contractually
specified; in such instances, revenue recognition is deferred until all of such
conditions have been substantially fulfilled such that the products are deemed
functional by the end-user. With respect to a portion of water purification and
filtration product sales, equipment is sold as part of a system for which the
equipment is functionally interdependent or the customers purchase order
specifies ship-complete as a condition of delivery; revenue recognition on
such sales is deferred until all equipment has been delivered.
A portion of our water
purification and filtration sales relating to our acquisition of GE Water are
recognized as multiple element arrangements, whereby revenue is allocated to
the equipment and installation components based upon vendor specific objective
evidence which principally includes comparable historical transactions of
similar equipment and installation sold as stand alone components, as well as
an evaluation of unrelated third party competitor pricing of similar
installation.
Revenue on service sales
is recognized when repairs are completed at the customers location or when
repairs are completed at our facilities and the products are shipped to
customers. All shipping and handling fees invoiced to customers, such as
freight, are recorded as revenue (and related costs are included within cost of
sales) at the time the sale is recognized. With respect to certain service
contracts in our Endoscope Reprocessing and Water Purification and Filtration
operating segments, service revenue is recognized on a straight-line basis over
the contractual term of the arrangement.
None of our sales contain
right-of-return provisions except certain sales of a small portion of our
endoscope reprocessing equipment which contain a 15 day right-of-return trial
period. Such sales are not recognized as revenue until the 15 day trial period
has elapsed. Customer claims for credit or return due to damage, defect,
shortage or other reason must be pre-approved by us before credit is issued or
such product is accepted for return. No cash discounts for early payment are
offered except with respect to a portion of our sales of dialysis and
healthcare disposable products and certain prepaid packaging products. We do
not offer price protection, although advance pricing contracts or required
notice periods prior to implementation of price increases exist for certain
customers with respect to many of our products. With respect to certain of our
dialysis and dental customers, volume rebates are provided; such volume rebates
are provided for as a reduction of sales at the time of revenue recognition and
amounted to $1,449,000, $1,216,000 and $749,000 in fiscal 2007, 2006 and 2005,
respectively. Included in volume rebates for fiscal 2007 and 2006 are
approximately $994,000 and $1,157,000 as a result of the addition of healthcare
disposable products, offset by cancellation or non-renewal of certain volume
rebate programs as a result of consolidation in the dialysis industry. Such
allowances are determined based on estimated projections of sales volume for
the entire rebate agreement periods. If it becomes known that sales volume to
customers will deviate from original projections, the volume rebate provisions
originally established would be adjusted accordingly.
The majority of our
dialysis products are sold to end-users; the majority of therapeutic filtration
products and healthcare disposable products are sold to third party
distributors; water purification and filtration products and services are sold
directly and through third-party distributors to hospitals, dialysis clinics,
pharmaceutical and biotechnology companies and other end-users; and specialty
packaging products are sold to third-party distributors, medical research
companies, laboratories, pharmaceutical companies, hospitals, government
agencies and other end-users. Sales to all of these customers follow our
revenue recognition policies. Due to the direct distribution of our endoscope
reprocessing products in the United States which commenced on August 2, 2006, a
significant portion of our endoscope reprocessing products and services are
sold directly to hospitals and other end-users. Previously, the majority of our
endoscope reprocessing products and services were sold to third party
distributors.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts
receivable consist of amounts due to us from normal business activities.
Allowances for doubtful accounts are reserves for the estimated loss from the
inability of customers to make required payments. We use historical experience
as well as current market information in determining the estimate. While actual
losses have historically been within managements expectations and provisions
established, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Alternatively, if certain customers paid their
delinquent receivables, reductions in allowances may be required.
42
Inventories
Inventories
consist of products which are sold in the ordinary course of our business and are
stated at the lower of cost (first-in, first-out) or market. In assessing the
value of inventories, we must make estimates and judgments regarding reserves
required for product obsolescence, aging of inventories and other issues
potentially affecting the saleable condition of products. In performing such
evaluations, we use historical experience as well as current market
information. With few exceptions, the saleable value of our inventories has
historically been within managements expectation and provisions established,
however, rapid changes in the market due to competition, technology and various
other factors could have an adverse effect on the saleable value of our
inventories, resulting in the need for additional reserves.
Goodwill and Intangible Assets
Certain
of our identifiable intangible assets, including customer relationships,
technology, brand names, non-compete agreements and patents, are amortized on
the straight-line method over their estimated useful lives which range from 1
to 20 years. Additionally, we have recorded goodwill and trademarks and trade
names, all of which have indefinite useful lives and are therefore not
amortized. All of our intangible assets and goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, and goodwill and intangible
assets with indefinite lives are reviewed for impairment at least annually
.
Our management is primarily responsible
for determining if impairment exists and considers a number of factors,
including third-party valuations, when making these determinations. In
performing a review for goodwill impairment, management uses a two-step process
that begins with an estimation of the fair value of the related operating
segments. The first step is a review for potential impairment, and the second
step measures the amount of impairment, if any. In performing our annual review
for indefinite lived intangibles, management compares the current fair value of
such assets to their carrying values. With respect to amortizable intangible
assets when impairment indicators are present, management would determine
whether non-discounted cash flows would be sufficient to recover the carrying
value of the assets; if not, the carrying value of the assets would be adjusted
to their fair value. On July 31, 2007, management concluded that none of our
intangible assets or goodwill was impaired. While the results of these annual
reviews have historically not indicated impairment, impairment reviews are
highly dependent on managements projections of our future operating results
which management believes to be reasonable.
Long-lived
assets
We evaluate the carrying
value of long-lived assets including property, equipment and other assets whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. An assessment is made to determine if the sum of the expected
future non-discounted cash flows from the use of the assets and eventual
disposition is less than the carrying value. If the sum of the expected
non-discounted cash flows is less than the carrying value, an impairment loss
is recognized based on fair value. With few exceptions, our historical
assessments of our long-lived assets have not differed significantly from the
actual amounts realized. However, the determination of fair value requires us
to make certain assumptions and estimates and is highly subjective, and
accordingly, actual amounts realized may differ significantly from our
estimates.
Warranties
We provide for estimated
costs that may be incurred to remedy deficiencies of quality or performance of
our products at the time of revenue recognition. Most of our products have a
one year warranty, although a majority of our endoscope reprocessing equipment
in the United States carry a warranty period of up to fifteen months. We record
provisions for product warranties as a component of cost of sales based upon an
estimate of the amounts necessary to settle existing and future claims on products
sold. The historical relationship of warranty costs to products sold is the
primary basis for the estimate. A significant increase in third party service
repair rates, the cost and availability of parts or the frequency of claims
could have a material adverse impact on our results for the period or periods
in which such claims or additional costs materialize. Management reviews its
warranty exposure periodically and believes that the warranty reserves are
adequate; however, actual claims incurred could differ from original estimates,
requiring adjustments to the reserves.
43
Stock-Based Compensation
On
August 1, 2005, we adopted SFAS No. 123R using the modified prospective method
for the transition. Under the modified prospective method, stock compensation
expense will be recognized for any option grant or stock award granted on or
after August 1, 2005, as well as the unvested portion of stock options granted
prior to August 1, 2005, based upon the awards fair value. For fiscal 2005 and
earlier periods, we accounted for stock options using the intrinsic value
method under which stock compensation expense is not recognized because we
granted stock options with exercise prices equal to the market value of the
shares at the date of grant.
Most
of our stock option and nonvested stock awards are subject to graded vesting in
which portions of the award vest at different times during the vesting period,
as opposed to awards that vest at the end of the vesting period. We recognize
compensation expense for awards subject to graded vesting using the
straight-line basis, reduced by estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures are estimated
based on historical experience.
The
stock-based compensation expense recorded in our Consolidated Financial
Statements may not be representative of the effect of stock-based compensation
expense in future periods due to the level of awards issued in past years
(which level may not be similar in the future), assumptions used in determining
fair value, and estimated forfeitures. We determine the fair value of each
unvested stock award using the closing market price of our Common Stock on the
date of grant. We estimate the fair value of each option grant on the date of
grant using the Black-Scholes option valuation model. The determination of fair
value using an option-pricing model is affected by our stock price as well as
assumptions regarding a number of subjective variables. These variables
include, but are not limited to, the expected stock price volatility over the
term of the expected option life (which is determined by using the historical
closing prices of our Common Stock), the expected dividend yield (which is
expected to be 0%), and the expected option life (which is based on historical
exercise behavior). If factors change and we employ different assumptions in
the application of SFAS 123R in future periods, the compensation expense that
we would record under SFAS 123R may differ significantly from what we have
recorded in the current period. With respect to stock options granted during
fiscal 2007, we reassessed both the expected option life and stock price
volatility assumptions by evaluating more recent historical exercise behavior
and stock price activity; such reevaluation resulted in reductions in both the
expected option lives and volatility.
Legal
Proceedings
In the
normal course of business, we are subject to pending and threatened legal
actions. We record legal fees and other expenses related to litigation as
incurred. Additionally, we assess, in consultation with our counsel, the need
to record a liability for litigation and contingencies on a case by case basis.
Amounts are accrued when we, in consultation with counsel, determine that it is
probable that a liability has been incurred and an amount of anticipated
exposure can be reasonably estimated.
Income
Taxes
We
recognize deferred tax assets and liabilities based on differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities. Deferred tax assets and liabilities also include items recorded in
conjunction with the purchase accounting for business acquisitions. We
regularly review our deferred tax assets for recoverability and establish a
valuation allowance, if necessary, based on historical taxable income,
projected future taxable income, and the expected timing of the reversals of
existing temporary differences. Although realization is not assured, management
believes it is more likely than not that the recorded deferred tax assets, as
adjusted for valuation allowances, will be realized. Additionally, deferred tax
liabilities are regularly reviewed to confirm that such amounts are
appropriately stated. Such a review considers known future changes in various
effective tax rates, principally in the United States. If the effective tax
rate were to change in the future, particularly in the United States, our items
of deferred tax could be materially affected. All of such evaluations require
significant management judgments.
It is
our policy to establish reserves for exposures as a result of an examination by
tax authorities. We establish the reserves based primarily upon managements
assessment of exposure associated with acquired companies and permanent tax
differences. The tax reserves are analyzed periodically (at least annually) and
adjustments are made, as events occur to warrant adjustment to the reserves.
The majority of our income tax reserves originated from acquisitions.
44
Business Combinations
Acquisitions
require significant estimates and judgments related to the fair value of assets
acquired and liabilities assumed.
Certain
liabilities and reserves are subjective in nature. We reflect such liabilities
and reserves based upon the most recent information available. In conjunction
with our acquisitions, such subjective liabilities and reserves principally
include certain income tax and sales and use tax exposures, including tax
liabilities related to our foreign subsidiaries, as well as reserves for
accounts receivable, inventories and warranties. The ultimate settlement of
such liabilities may be for amounts which are different from the amounts
recorded.
Costs Associated with Exit or Disposal Activities
We
recognize costs associated with exit or disposal activities, such as costs to
terminate a contract, the exit or disposal of a business, or the early
termination of a leased property, by recognizing the liability at fair value
when incurred, except for certain one-time termination benefits, such as
severance costs, for which the period of recognition begins when a severance
plan is communicated to employees.
Inherent
in the calculation of liabilities relating to exit and disposal activities are
significant management judgments and estimates, including estimates of
termination costs, employee attrition, and the interest rate used to discount
certain expected net cash payments. Such judgments and estimates are reviewed
by us on a regular basis. The cumulative effect of a change to a liability
resulting from a revision to either timing or the amount of estimated cash
flows is recognized by us as an adjustment to the liability in the period of
the change.
Although
we have historically recorded minimal charges associated with exit or disposal
activities, we recorded approximately $1,329,000 of severance costs in income
from discontinued operations in fiscal 2006 related to the sale of
substantially all of Carsens assets.
Other Matters
We do
not have any off balance sheet financial arrangements, other than future
commitments under operating leases and employment and license agreements.
Item 7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
.
Foreign
Currency and Market Risk
A
portion of our products are imported from the Far East and Western Europe. All
of our operating segments sell a portion of their products outside of the
United States and our Netherlands subsidiary sells a portion of its products
outside of the European Union. Consequently, our business could be materially
affected by the imposition of trade barriers, fluctuations in the rates of
exchange of various currencies, tariff increases and import and export
restrictions, affecting the United States, Canada and the Netherlands.
A
portion of our Canadian subsidiaries inventories and operating costs (which
are reported in the Water Purification and Filtration and Specialty Packaging
segments) are purchased in the United States and a significant amount of their
sales are to customers in the United States. The businesses of our Canadian
subsidiaries could be materially and adversely affected by the imposition of
trade barriers, fluctuations in the rate of currency exchange, tariff increases
and import and export restrictions between the United States and Canada.
Additionally, the financial statements of our Canadian subsidiaries are
translated using the accounting policies described in Note 2 to the
Consolidated Financial Statements. Fluctuations in the rates of currency
exchange between the United States and Canada had an overall adverse impact in
fiscal 2007, compared with fiscal 2006, upon our continuing results of
operations and a positive impact on stockholders equity, as described in our
MD&A.
Changes
in the value of the euro against the United States dollar affect our results of
operations because a portion of the net assets of Our Netherlands subsidiary
(which are reported in our Dialysis, Endoscope Reprocessing and Water
Purification and Filtration segments) are denominated and ultimately settled in
United States dollars but must be converted into its functional euro currency.
Additionally, financial statements of the Netherlands subsidiary are translated
using the accounting policies described in Note 2 to the Consolidated Financial
Statements. Fluctuations in the rates of currency
45
exchange between the Euro
and the United States dollar had an overall adverse impact in fiscal 2007,
compared with fiscal 2006, upon our continuing results of operations and had a
positive impact upon stockholders equity, as described in our MD&A.
In order to hedge against
the impact of fluctuations in the value of the euro relative to the United
States dollar on the conversion of such dollar denominated net assets into
functional currency, we enter into short-term contracts to purchase euros
forward, which contracts are generally one month in duration. These short-term
contracts are designated as fair value hedges. There was one foreign currency
forward contract amounting to 1,190,000 at July 31, 2007 which covered certain
assets and liabilities of Minntechs Netherlands subsidiary which are
denominated in United States dollars. Such contract expired on August 31, 2007.
Under our credit facilities, such contracts to purchase euros may not exceed
$12,000,000 in an aggregate notional amount at any time. During fiscal 2007,
such forward contracts were effective in offsetting the impact on operations of
the strengthening of the euro.
The
functional currency of Minntechs Japan subsidiary is the Japanese yen. Changes
in the value of the Japanese yen relative to the United States dollar during
fiscal 2007 and 2006 did not have a significant impact upon either our results
of operations or the translation of the balance sheet, primarily due to the
fact that our Japanese subsidiary accounts for a relatively small portion of
consolidated net sales, net income and net assets.
Interest
Rate Market Risk
We
have a United States credit facility 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.
Market
Risk Sensitive Transactions
We are
exposed to market risks arising principally from adverse changes in interest rates
and foreign currency.
With
respect to interest rate risk, our outstanding debt is under our United States
credit facilities, described elsewhere in Liquidity and Capital Resources. Such
credit facilities consist of outstanding debt with fixed repayment amounts at
prevailing market rates of interest, principally under LIBOR contracts ranging
from one to twelve months. Therefore, our market risk with respect to such debt
is the increase in interest expense which would result from higher interest
rates associated with LIBOR. Such outstanding debt under our United States
credit facilities was $57,000,000 and $38,000,000 at July 31, 2007 and 2006,
respectively, and the average outstanding balance during fiscal 2007 and 2006
was approximately $46,000,000 and $63,596,000, respectively. A 100 basis-point
increase in average LIBOR interest rates would have resulted in incremental
interest expense of approximately $460,000 and $636,000 during fiscal 2007 and
2006, respectively. Presently, we do not utilize any interest rate derivatives.
Our other long-term liabilities would not be materially affected by an increase
in interest rates. We also maintained a cash balance of $15,860,000 at July 31,
2007 which is invested in low risk cash equivalents at prevailing market rates
of interest principally in the United States and Canada. An increase in
interest rates would generate additional interest income for us which would
partially offset the adverse impact of the additional interest expense.
With
respect to foreign currency exchange rates, we are principally impacted by
changes in the Canadian dollar and the Euro as these currencies relate to the
United States dollar. We use a sensitivity analysis to assess the market risk
associated with our foreign currency transactions. Market risk is defined here
as the potential change in fair value resulting from an adverse movement in
foreign currency exchange rates.
Our
Canadian subsidiaries and Netherlands subsidiary have net assets in currencies
(principally United States dollars) other than their functional Canadian and
Euro currency which must be converted into its functional currency, thereby
giving rise to realized foreign exchange gains and losses. Therefore, our
Canadian subsidiaries and Netherlands subsidiary are exposed to risk if the
value of the Canadian dollar or Euro appreciates relative to the United States
dollar. A 10% increase in both the Canadian dollar and Euro relative to the
United States dollar subsequent to July 31, 2007 could result in aggregate
realized losses of approximately $196,000 (after tax). However, since our
Netherlands subsidiary uses foreign currency forward contracts to hedge against
the impact of fluctuations of the euro relative to the United States dollar on
certain United States denominated assets and liabilities, the realized losses
relating to the fluctuation of the euro would be partially offset by gains on
the foreign currency forward contracts.
In
addition to the above, adverse changes in foreign currency exchange rates
impact the translation of our financial statements. For fiscal 2007 and 2006, a
uniform 10% adverse movement in foreign currency rates would have resulted in
realized losses (after tax) of approximately $470,000 and $231,000,
respectively, due to the translation of the results of
46
operations of foreign
subsidiaries (adverse changes would be caused by appreciation of either the
Canadian dollar or the Euro relative to the United States dollar). However,
such a change in foreign currency rates would have resulted in an unrealized
gain on our net investment in foreign subsidiaries of $2,610,000 and $3,216,000
in fiscal 2007 and 2006, respectively. Such an unrealized gain would be
recorded in accumulated other comprehensive income in our stockholders equity.
Conversely, if the Canadian dollar or the Euro depreciated by 10% relative to
the dollar, we would have recognized realized gains (after tax) of
approximately $470,000 and $231,000 in fiscal 2007 and 2006, respectively, and
unrealized losses of $2,610,000 and $3,216,000 in fiscal 2007 and 2006,
respectively, on our net investment in foreign subsidiaries. However, since we
view these investments as long-term, we would not expect such unrealized losses
to be realized in the near term.
Item 8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
.
See
Index to Consolidated Financial Statements, which is Item 15(a), and the
Consolidated Financial Statements and schedule included in this Report.
Item 9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
.
Not
applicable.
Item 9A.
CONTROLS AND
PROCEDURES
.
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified by the SEC and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures.
Managements
Report on Internal Control over Financial Reporting
The
management of Cantel Medical Corp. is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company.
The Companys internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
United States generally accepted accounting principles. The Companys internal
control over financial reporting includes those policies and procedures that:
(i)
pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company,
(ii)
provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with authorizations of management and
directors of the Company, and
(iii)
provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Companys assets that could have a material effect on
the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in condition, or that the degree of
compliance with the policies and procedures included in such controls may
deteriorate.
We,
under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer, carried out an evaluation of the effectiveness
of our internal controls over financial reporting based on the framework and
criteria established in Internal Control Integrated Framework, issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer
each concluded that our internal control over financial reporting was effective
as of July 31, 2007. However, the fiscal 2007 acquisition of GE Water was
excluded from that evaluation since the acquisition occurred during fiscal 2007
and was not required to be included.
Our
assessment of the effectiveness of our internal control over financial
reporting, as of July 31, 2007, has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their attestation
report which is included below.
47
Changes
in Internal Control
We
have evaluated our internal controls over financial reporting and determined
that no changes occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, except as described below.
On
August 1, 2005, which was the first day of fiscal 2006, we acquired Crosstex,
as more fully described in Note 3 to the Consolidated Financial Statements. For
fiscal 2007 and 2006, Crosstex represented a material portion of our sales, net
income and net assets. In conjunction with the due diligence performed by us in
connection with this acquisition, we determined that the overall internal
control environment of Crosstex contained a number of significant deficiencies,
some of which rose to the level of material weaknesses. Some of the more
significant internal control weaknesses included the lack of segregation of
duties, the need to hire a principal financial and accounting officer, numerous
limitations with respect to the management information systems, lack of
application of GAAP in certain aspects of financial reporting, and substandard
monthly closing procedures.
We have remedied the
significant internal control weaknesses at Crosstex. In order to achieve these
objectives, we took a number of steps during fiscal 2007 and 2006 including
hiring a principal financial and accounting officer at Crosstex in October 2005
and a Controller in December 2006, formalizing the monthly closing procedures
and timing, and ensuring consistent and complete application of GAAP. Such
additional personnel and monthly closing procedures also addressed internal
control weaknesses related to segregation of duties. Additionally, we have
implemented a number of additional internal control procedures designed to
ensure the completeness and accuracy of reported financial information,
including periodic physical inventories, monthly account analyses and
quarter-end field reviews by representatives of Cantels financial and
accounting staff. We are relying extensively on detect controls with respect to
reported month-end financial information until such time that appropriate
prevent controls can be implemented. We have evaluated the management
information system at Crosstex and have selected a replacement of the existing
system. The implementation process of this new system commenced during fiscal
2007 and is expected to be completed during the second quarter of fiscal 2008.
During fiscal 2007, numerous temporary control improvements have been made to
the existing management information system for the interim period before the
new system is fully implemented.
On March 30, 2007, we
acquired GE Water as more fully described in Note 3 to the Consolidated
Financial Statements. During the initial transition period following this
acquisition, we have enhanced our internal control process at our Mar Cor
Purification subsidiary to ensure that all financial information related to
this acquisition is properly reflected in our Consolidated Financial
Statements. During the first quarter of our fiscal 2008, we expect that all
aspects of this acquisition will be fully integrated into Mar Cors existing
internal control structure.
48
Attestation
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting
Firm
The Board of Directors
and Stockholders
Cantel Medical Corp.
We have audited Cantel
Medical Corp.s internal control over financial reporting as of July 31, 2007,
based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cantel
Medical Corp.s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As indicated in the
accompanying Managements Report on Internal Control over Financial Reporting,
managements assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal controls of the
GE Water & Process Technologies acquisition, which was acquired on March
30, 2007, which is included in the 2007 consolidated financial statements of
Cantel Medical Corp. and constituted approximately 3% of both consolidated net
sales and consolidated net income for the year ended July 31, 2007 and
approximately 12% and 20% of consolidated total assets and consolidated net
assets, respectively, at July 31, 2007. Our audit of internal control over
financial reporting of Cantel Medical Corp. also did not include an evaluation
of the internal control over financial reporting of GE Water & Process
Technologies.
In our opinion, Cantel
Medical Corp. maintained, in all material respects, effective internal control
over financial reporting as of July 31, 2007, based on the COSO criteria.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Cantel Medical Corp. as of
July 31, 2007 and 2006 and the related consolidated statements of income,
changes in stockholders equity and comprehensive income and cash flows for
each of the three years in the period ending July 31, 2007 of Cantel Medical
Corp. and our report dated October 10, 2007 expressed an unqualified opinion
thereon.
MetroPark, New Jersey
October
10, 2007
49
Item 9B.
OTHER INFORMATION
.
None.
PART
III
Item 10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
.
Incorporated
by reference to the Registrants definitive proxy statement to be filed with
the SEC pursuant to Regulation 14A promulgated under the Exchange Act in
connection with the 2007 Annual Meeting of Stockholders of the Registrant,
except for the following:
We
have adopted a Code of Ethics for the Chief Executive Officer, the Chief
Financial Officer and other officers and management personnel that is posted on
our website, www.cantelmedical.com. We intend to satisfy the disclosure
requirement regarding any amendment to, or a waiver of, a provision of the Code
of Ethics for the Chief Executive Officer, Chief Financial Officer and other
officers and management personnel by posting such information on our website.
Item 11.
EXECUTIVE
COMPENSATION
.
Incorporated
by reference to the Registrants definitive proxy statement to be filed with
the SEC pursuant to Regulation 14A promulgated under the Exchange Act in
connection with the 2007 Annual Meeting of Stockholders of the Registrant.
Item 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
.
Incorporated
by reference to the Registrants definitive proxy statement to be filed with
the SEC pursuant to Regulation 14A promulgated under the Exchange Act in
connection with the 2007 Annual Meeting of Stockholders of the Registrant,
except for the following:
The
following table shows, as of July 31, 2007, the number of options or other
awards currently outstanding, as well as the number of shares remaining
available for grant under our existing option plans. No further grants may be
made from the 1997 Employee Stock Option Plan, 1998 Directors Stock Option
Plan or the 1991 Directors Stock Option Plan. For these plans, therefore, the
table shows only the number of options outstanding:
Plan
|
|
Outstanding
Options
|
|
Nonvested
Restricted Shares
|
|
Available
for Grant
|
|
|
|
|
|
|
|
|
|
2006 Incentive
Equity Plan - Options
|
|
88,000
|
|
|
|
412,000
|
|
2006 Incentive
Equity Plan - Restricted Shares
|
|
|
|
175,000
|
|
325,000
|
|
1997 Employee
Stock Option Plan
|
|
1,272,971
|
|
|
|
|
|
1998 Directors Stock
Option Plan
|
|
224,625
|
|
|
|
|
|
1991 Directors
Stock Option Plan
|
|
31,500
|
|
|
|
|
|
Non-Plan Options
|
|
231,750
|
|
|
|
|
|
|
|
1,848,846
|
|
175,000
|
|
737,000
|
|
Item 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
.
Incorporated
by reference to the Registrants definitive proxy statement to be filed with
the SEC pursuant to Regulation 14A promulgated under the Exchange Act in
connection with the 2007 Annual Meeting of Stockholders of the Registrant.
50
Item 14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
.
Incorporated
by reference to the Registrants definitive proxy statement to be filed with
the SEC pursuant to Regulation 14A promulgated under the Exchange Act in
connection with the 2007 Annual Meeting of Stockholders of the Registrant.
PART IV
Item 15.
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
.
(a)
The following documents
are filed as part of this Annual Report on Form 10-K for the fiscal year ended
July 31, 2007.
1.
Consolidated
Financial Statements
:
(i)
Report
of Independent Registered Public Accounting Firm.
(ii)
Consolidated
Balance Sheets as of July 31, 2007 and 2006.
(iii)
Consolidated Statements of Income for the
years ended July 31, 2007, 2006 and 2005.
(iv)
Consolidated
Statements of Changes in Stockholders Equity and Comprehensive Income for the
years ended July 31, 2007, 2006 and 2005.
(v)
Consolidated
Statements of Cash Flows for the years ended July 31, 2007, 2006 and 2005.
(vi)
Notes
to Consolidated Financial Statements.
2.
Consolidated
Financial Statement Schedules
:
(i)
Schedule
II - Valuation and Qualifying Accounts for the years ended July 31, 2007, 2006
and 2005.
All
other financial statement schedules are omitted since they are not required,
not applicable, or the information has been included in the Consolidated
Financial Statements or Notes thereto.
3.
Exhibits
:
2(a) -
Stock Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Arlene Fisher. (Incorporated by reference to Exhibit
2.1 to Registrants Current Report on Form 8-K filed on August 5, 2005 [the August
5, 2005 8-K].)
2(b) -
Stock Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Frank Richard Orofino, Jr. (Incorporated by reference
to Exhibit 2.2 to Registrants August 5, 2005 8-K.)
2(c) -
Stock Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Richard Allen Orofino. (Incorporated by reference to
Exhibit 2.3 to Registrants August 5, 2005 8-K.)
2(d) -
Stock Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Gary Steinberg. (Incorporated by reference to Exhibit
2.4 to Registrants August 5, 2005 8-K.)
2(e) -
Stock Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Mitchell Steinberg. (Incorporated by reference to
Exhibit 2.5 to Registrants August 5, 2005 8-K.)
2(f) -
Asset Purchase Agreement dated as of March 30, 2007 between GE Osmonics, Inc.
and Mar Cor Purification, Inc. (Incorporated by reference to Exhibit 2.1 to
Registrants Current Report on Form 8-K
dated April 4, 2007 [the April 2007 8-K].)
51
3(a) -
Registrants Restated Certificate of Incorporation dated July 20, 1978.
(Incorporated herein by reference to Exhibit 3(a) to Registrants 1981 Annual
Report on Form 10-K.)
3(b) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on February 16, 1982. (Incorporated herein by reference to Exhibit 3(b) to
Registrants 1982 Annual Report on Form 10-K.)
3(c) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on May 4, 1984. (Incorporated herein by reference to Exhibit 3(c) to Registrants
Quarterly Report on Form 10-Q for the quarter ended April 30, 1984.)
3(d) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on August 19, 1986. (Incorporated herein by reference to Exhibit 3(d) of
Registrants 1986 Annual Report on Form 10-K.)
3(e) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on December 12, 1986. (Incorporated herein by reference to Exhibit 3(e) of
Registrants 1987 Annual Report on Form 10-K [the 1987 10-K].)
3(f) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on April 3, 1987. (Incorporated herein by reference to Exhibit 3(f) of
Registrants 1987 10-K.)
3(g) -
Certificate of Change of Registrant, filed on July 12, 1988. (Incorporated
herein by reference to Exhibit 3(g) of Registrants 1988 Annual Report on Form
10-K.)
3(h) -
Certificate of Amendment of Certificate of Incorporation of Registrant filed on
April 17, 1989. (Incorporated herein by reference to Exhibit 3(h) to Registrants
1989 Annual Report on Form 10-K.)
3(i)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on May 10, 1999. (Incorporated herein by reference to Exhibit 3(i) to
Registrants 2000 Annual Report on Form 10-K [the 2000 10-K].)
3(j)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on April 5, 2000. (Incorporated herein by reference to Exhibit 3(j) to
Registrants 2000 10-K.)
3(k)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on September 6, 2001. (Incorporated herein by reference to Exhibit 3(k) to
Registrants 2001 Annual Report on Form 10-K.)
3(l)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on June 7, 2002. (Incorporated herein by reference to Exhibit 3(l) to
Registrants 2002 Annual Report on Form 10-K [the 2002 10-K].)
3(m)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on December 22, 2005. (Incorporated herein by reference to Exhibit 3(m) to
Registrants 2007 Annual Report on Form 10-K.)
3(n) -
Registrants By-Laws adopted April 24, 2002. (Incorporated herein by reference
to Exhibit 3(m) to Registrants 2002 10-K.)
10(a)
- Registrants 1991 Directors Stock Option Plan, as amended. (Incorporated
herein by reference to Exhibit 10(a) to Registrants 1991 Annual Report on Form
10-K [the 1991 10-K].)
10(b)
- Form of Stock Option Agreement under the Registrants 1991 Directors Stock
Option Plan. (Incorporated herein by reference to Exhibit 10(d) to Registrants
1991 10-K.)
10(c)
- Registrants 1997 Employee Stock Option Plan. (Incorporated herein by
reference to Annex B to Registrants 2004 Definitive Proxy Statement on
Schedule 14A.)
10(d)
- Form of Incentive Stock Option Agreement under Registrants 1997 Employee
Stock Option Plan. (Incorporated herein by reference to Exhibit 10(t) to
Registrants 1997 Annual Report on Form 10-K.)
10(e)
- Registrants 1998 Directors Stock Option Plan, as amended. (Incorporated
herein by reference to Exhibit 10(ee) to Registrants 2005 Annual Report on Form 10-K [the 2005
10-K].)
52
10(f)
- Form of Quarterly Stock Option Agreement under the Registrants 1998
Directors Stock Option Plan. (Incorporated herein by reference to Exhibit
10(hh) to Registrants 2000 10-K.)
10(g)
- Form of Annual Stock Option Agreement under the Registrants 1998 Directors
Stock Option Plan. (Incorporated herein by reference to Exhibit 10(ii) to
Registrants 2000 10-K.)
10(h)
- Stock Option Agreement, dated as of October 16, 1997, between the Registrant
and Charles M. Diker. (Incorporated herein by reference to Exhibit 10(x) to
Registrants 1998 Annual Report on Form 10-K [the 1998 10-K].)
10(i)
- Stock Option Agreement, dated as of October 30, 1998, between the Registrant
and Charles M. Diker. (Incorporated herein by reference to Exhibit 10(ff) to
Registrants 1999 Annual Report on Form 10-K.)
10(j)
- Form of Non-Plan Stock Option Agreement between the Registrant and Darwin C.
Dornbush. (Incorporated herein by reference to Exhibit 10(y) to Registrants
1998 10-K.)
10(k)
- Stock Option Agreement, dated as of November 14, 2002, between the Registrant
and Seth R. Segel (Incorporated by reference to Exhibit 10(b) to Registrants
October 31, 2002 Quarterly Report on Form 10-Q.)
10(l)
- 2007 Equity Incentive Plan.
(Incorporated herein by reference to Annex B to Registrants 2006 Definitive
Proxy Statement on Schedule 14A.).
10(m)
- Form of Stock Option Agreement under Registrants 2007 Equity Incentive Plan.
10(n)
- Form of Restricted Stock Agreement under the Registrants 2007 Equity
Incentive Plan.
10(o)
- Minntech Emeritus Director Consulting Plan. (Incorporated herein by reference
to Exhibit 10 to Minntechs Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.)
10(p)
- Amendment to Emeritus Director Consulting Plan effective September 26, 1996
(Incorporated herein by reference to Exhibit 10(b) to Minntechs Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.)
10(q)
- Minntech Amended and Restated Supplemental Executive Retirement Plan
effective April 1, 2000 (Incorporated herein by reference to Exhibit 10(m) to
Minntechs Quarterly Report on Form 10-Q for the quarter ended July 1, 2000.)
10(r)
- Employment Agreement, dated as of August 30, 2004, between the Registrant and
Andrew A. Krakauer. (Incorporated by reference to Exhibit 99.1 to Registrants
Current Report on Form 8-K dated August 30, 2004.)
10(s)
- Employment Agreement, dated as of November 1, 2004, between the Registrant
and Craig A. Sheldon. (Incorporated herein by reference to Exhibit 1 to
Registrants Current Report on Form 8-K dated January 21, 2005 [the January
21, 2005 8-K].)
10(t)
- Employment Agreement, dated as of November 1, 2004, between the Registrant
and Seth R. Segel. (Incorporated by reference to Exhibit 2 to Registrants
January 21, 2005 8-K.)
10(u)
- Employment Agreement, dated as of November 1, 2004, between the Registrant and
Steven C. Anaya. (Incorporated by reference to Exhibit 3 to Registrants
January 21, 2005 8-K.)
10(v)
- Employment Agreement, dated as of January 1, 2005, between the Registrant and
Eric W. Nodiff. (Incorporated herein by reference to Exhibit 1 to Registrants
Current Report on Form 8-K dated January 7, 2005.)
10(w)
- Employment Agreement, dated as of November 1, 2004, between Minntech
Corporation and Roy K. Malkin. (Incorporated herein by reference to Exhibit 4
to Registrants January 21, 2005 8-K.)
10(x)
- Employment Agreement, dated as of August 1, 2005, between the Registrant and
James P. Reilly. (Incorporated by reference to Exhibit 10.2 to Registrants
August 5, 2005 8-K.)
53
10(y)
- Employment Agreement, dated as of August 1, 2005, between Crosstex
International, Inc. and Richard Allen Orofino. (Incorporated herein by
reference to Exhibit 10(x) to Registrants
2005 10-K.)
10(z)
- Employment Agreement, dated as of August 28, 2006, between Mar Cor Purification,
Inc. and Curtis Weitnauer.
10(aa)
- Agreement, dated as of July 25, 2005, among Registrant, Carsen, Olympus
America Inc. and Olympus Surgical & Industrial America, Inc. (Incorporated
by reference to Exhibit 99.1 to Registrants Current Report on Form 8-K dated
July 28, 2005.)
10(bb)
- Agreement, dated as of May 16, 2006
among Registrant, Carsen, Olympus America Inc., Olympus Surgical &
Industrial America, Inc., and Olympus
Canada Inc. (Incorporated by reference to Exhibit 99.1 to Registrants Current
Report on Form 8-K dated May 22, 2006.)
10(cc)
- Distributor Agreement between Olympus America Inc. and Minntech Corporation
dated as of August 1, 2003. (Incorporated by reference to Exhibit 10(a) to
Registrants January 31, 2004 Quarterly Report on Form 10-Q.)
10(dd)
- Amended and Restated Credit
Agreement dated as of August 1, 2005 among Registrant, Bank of America N.A.,
PNC Bank, National Association, and Wells Fargo Bank, National Association (and
Banc of America Securities LLC, as sole lead arranger and sole book manager).
(Incorporated by reference to Exhibit 10.1 to Registrants August 5, 2005 8-K.)
10(ee)
- First Amendment to Credit Agreement dated April 19, 2006 among Registrant,
Bank of America N.A., PNC Bank, National Association, and Wells Fargo Bank,
National Association (and Banc of America Securities LLC, as sole lead arranger
and sole book manager.)
10(ff)
- Second Amendment to Credit Agreement dated November 17, 2006 among
Registrant, Bank of America N.A., PNC Bank, National Association, and Wells
Fargo Bank, National Association (and Banc of America Securities LLC, as sole
lead arranger and sole book manager.) . (Incorporated by reference to Exhibit
10(b) to Registrants April 30, 2007 Quarterly Report on Form 10-Q[the April 2007 10-Q].)
10(gg)
- Third Amendment to Credit Agreement dated March 29, 2007 among Registrant,
Bank of America N.A., PNC Bank, National Association, and Wells Fargo Bank,
National Association (and Banc of America Securities LLC, as sole lead arranger
and sole book manager.) (Incorporated by reference to Exhibit 10(c) to the April 2007 10-Q.)
10(hh)
- Fourth Amendment to Credit Agreement dated May 17, 2007 among Registrant,
Bank of America N.A., PNC Bank, National Association, and Wells Fargo Bank,
National Association (and Banc of America Securities LLC, as sole lead arranger
and sole book manager.) (Incorporated by reference to Exhibit 10(d) to the April 2007 10-Q.)
10(ii)
- Employment Agreement dated as of December 18, 2006 between the Company and R.
Scott Jones. (Incorporated by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K dated December 22,
2006 [the December 2006 8-K].)
10(jj)
- Letter Agreement dated as of December 18, 2006 between the Company and Andrew
A. Krakauer. (Incorporated by reference to Exhibit 10.2 to Registrants December 2006 8-K.)
10(kk)
- Letter Agreement dated as of December 18, 2006 between the Company and
Eric W. Nodiff. (Incorporated by reference to Exhibit 10.3 to Registrants
December 2006 8-K.)
10(ll)
- Letter Agreement dated as of December 18, 2006 between the Company and
Seth R. Segel. (Incorporated by reference to Exhibit 10.4 to Registrants December 2006 8-K.)
10(mm)
- Letter Agreement dated as of December 18, 2006 between the Company and
Craig A. Sheldon. (Incorporated by reference to Exhibit 10.5 to Registrants
December 2006 8-K.)
10(nn)
- Letter Agreement dated as of December 18, 2006 between the Company and
Steven C. Anaya. (Incorporated by reference to Exhibit 10.6 to Registrants
December 2006 8-K.)
54
10(oo)
- Letter Agreement dated as of December 18, 2006 between Minntech
Corporation and Roy K. Malkin. (Incorporated by reference to Exhibit 10.7
to Registrants December 2006 8-K.)
10(pp) -
Product Supply Agreement dated as of
March 30, 2007 between GE Osmonics, Inc. and Mar Cor Purification, Inc.
(Incorporated by reference to Exhibit 10.1 to Registrants April 2007 8-K.)
21 -
Subsidiaries of Registrant.
23 -
Consent of Ernst & Young LLP.
31.1 -
Certification of Principal Executive Officer.
31.2 -
Certification of Principal Financial Officer.
32 -
Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
55
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
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|
|
Date: October
12, 2007
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By:
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/s/ R. Scott Jones
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R. Scott Jones, President and Chief
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Executive Officer
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(Principal Executive Officer)
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By:
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/s/ Craig A. Sheldon
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Craig A. Sheldon, Senior Vice President and
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Chief Financial Officer
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(Principal Financial and Accounting Officer)
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By:
|
/s/ Steven C. Anaya
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Steven C. Anaya, Vice President and
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Controller
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
/s/ Charles M. Diker
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Date:
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October 12, 2007
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Charles M. Diker, a Director
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and Chairman of the Board
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/s/ Alan J. Hirschfield
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Date:
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October 12, 2007
|
Alan J. Hirschfield, a Director
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and Vice Chairman of the Board
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/s/ Robert L. Barbanell
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Date:
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October 12, 2007
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Robert L. Barbanell, a Director
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/s/ Alan R. Batkin
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Date:
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October 12, 2007
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Alan R. Batkin, a Director
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/s/ Joseph M. Cohen
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Date:
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October 12, 2007
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Joseph M. Cohen, a Director
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/s/ Darwin C. Dornbush
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Date:
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|
October 12, 2007
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Darwin C. Dornbush, a Director
|
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|
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|
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/s/ R. Scott Jones
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Date:
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October 12, 2007
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R. Scott Jones, a Director and President & CEO
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/s/ Elizabeth McCaughey, Ph.D., a Director
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Date:
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October 12, 2007
|
Elizabeth McCaughey, Ph. D., a Director
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/s/ Bruce Slovin
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Date:
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October 12, 2007
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Bruce Slovin, a Director
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56
CANTEL MEDICAL CORP.
CONSOLIDATED
FINANCIAL STATEMENTS
JULY 31, 2007
CONTENTS
Report of Independent Registered
Public Accounting Firm
The Board of Directors
and Stockholders
Cantel Medical Corp.
We have audited the
accompanying consolidated balance sheets of Cantel Medical Corp. (and subsidiaries)
as of July 31, 2007 and 2006, and the related consolidated statements of
income, changes in stockholders equity and comprehensive income, and cash
flows for each of the three years in the period ended July 31, 2007. Our audits
also included the financial statement schedule included in the Index at Item
15(a). These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Cantel Medical Corp. (and subsidiaries)
at July 31, 2007 and 2006, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended July 31, 2007,
in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2
to the financial statements, effective August 1, 2005, the Company changed its
method of accounting for stock-based compensation.
We also have audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Cantel Medical Corp.s internal
control over financial reporting as of July 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated
October 10, 2007 expressed an unqualified opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
|
|
MetroPark,
New Jersey
|
|
October
10, 2007
|
|
1
CANTEL MEDICAL CORP.
CONSOLIDATED
BALANCE SHEETS
(Dollar Amounts in Thousands, Except
Share Data)
|
|
July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,860
|
|
$
|
29,898
|
|
Accounts receivable, net of
allowance for doubtful accounts of $927 in 2007 and $929 in 2006
|
|
30,441
|
|
23,718
|
|
Inventories
|
|
27,320
|
|
23,942
|
|
Deferred income taxes
|
|
1,531
|
|
1,481
|
|
Prepaid expenses and other
current assets
|
|
1,579
|
|
1,288
|
|
Assets of discontinued
operations
|
|
|
|
2,121
|
|
Total current assets
|
|
76,731
|
|
82,448
|
|
|
|
|
|
|
|
Property and equipment, at
cost:
|
|
|
|
|
|
Land, buildings and
improvements
|
|
19,893
|
|
19,334
|
|
Furniture and equipment
|
|
37,127
|
|
31,886
|
|
Leasehold improvements
|
|
1,050
|
|
807
|
|
|
|
58,070
|
|
52,027
|
|
Less accumulated depreciation
and amortization
|
|
(19,493
|
)
|
(13,923
|
)
|
|
|
38,577
|
|
38,104
|
|
Intangible assets, net
|
|
44,615
|
|
43,219
|
|
Goodwill
|
|
102,073
|
|
72,571
|
|
Other assets
|
|
1,675
|
|
1,885
|
|
|
|
$
|
263,671
|
|
$
|
238,227
|
|
|
|
|
|
|
|
Liabilities and stockholders
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of long-term
debt
|
|
$
|
6,000
|
|
$
|
4,000
|
|
Accounts payable
|
|
9,630
|
|
8,062
|
|
Compensation payable
|
|
5,946
|
|
4,120
|
|
Earnout payable
|
|
3,667
|
|
3,667
|
|
Accrued expenses
|
|
8,925
|
|
7,633
|
|
Deferred revenue
|
|
1,706
|
|
1,859
|
|
Income taxes payable
|
|
|
|
2,377
|
|
Liabilities of discontinued
operations
|
|
97
|
|
7,379
|
|
Total current liabilities
|
|
35,971
|
|
39,097
|
|
|
|
|
|
|
|
Long-term debt
|
|
51,000
|
|
34,000
|
|
Deferred income taxes
|
|
19,732
|
|
22,021
|
|
Other long-term liabilities
|
|
1,898
|
|
2,304
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred Stock, par value
$1.00 per share; authorized 1,000,000 shares; none issued
|
|
|
|
|
|
Common Stock, par value $.10
per share; authorized 30,000,000 shares; issued
2007 - 17,129,199 shares, outstanding 2007 - 16,116,487 shares; issued 2006-
16,149,489 shares, outstanding 2006 - 15,399,102 shares
|
|
1,713
|
|
1,615
|
|
Additional capital
|
|
76,843
|
|
69,171
|
|
Retained earnings
|
|
77,841
|
|
69,395
|
|
Accumulated other
comprehensive income
|
|
8,494
|
|
6,715
|
|
Treasury Stock, 2007 -
1,012,712 shares at cost; 2006 - 750,387 shares at cost
|
|
(9,821
|
)
|
(6,091
|
)
|
Total stockholders equity
|
|
155,070
|
|
140,805
|
|
|
|
$
|
263,671
|
|
$
|
238,227
|
|
See accompanying notes.
2
CANTEL MEDICAL CORP.
CONSOLIDATED
STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except
Per Share Data)
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
194,767
|
|
$
|
175,353
|
|
$
|
122,681
|
|
Product service
|
|
24,277
|
|
16,826
|
|
14,476
|
|
Total net sales
|
|
219,044
|
|
192,179
|
|
137,157
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
Product sales
|
|
120,412
|
|
110,417
|
|
73,020
|
|
Product service
|
|
19,620
|
|
12,546
|
|
10,256
|
|
Total cost of sales
|
|
140,032
|
|
122,963
|
|
83,276
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
79,012
|
|
69,216
|
|
53,881
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling
|
|
23,818
|
|
18,530
|
|
15,266
|
|
General and administrative
|
|
33,507
|
|
30,225
|
|
20,194
|
|
Research and development
|
|
4,848
|
|
5,117
|
|
4,099
|
|
Total operating expenses
|
|
62,173
|
|
53,872
|
|
39,559
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before interest and income taxes
|
|
16,839
|
|
15,344
|
|
14,322
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
3,508
|
|
4,232
|
|
1,446
|
|
Interest income
|
|
(771
|
)
|
(839
|
)
|
(506
|
)
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes
|
|
14,102
|
|
11,951
|
|
13,382
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
5,998
|
|
5,298
|
|
5,487
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
8,104
|
|
6,653
|
|
7,895
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations, net of tax
|
|
342
|
|
10,268
|
|
7,610
|
|
|
|
|
|
|
|
|
|
Gain on disposal of
discontinued operations, net of tax
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,446
|
|
$
|
23,697
|
|
$
|
15,505
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.52
|
|
$
|
0.43
|
|
$
|
0.53
|
|
Discontinued operations
|
|
0.02
|
|
0.66
|
|
0.52
|
|
Gain on disposal of
discontinued operations
|
|
|
|
0.44
|
|
|
|
Net income
|
|
$
|
0.54
|
|
$
|
1.53
|
|
$
|
1.05
|
|
Diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.50
|
|
$
|
0.41
|
|
$
|
0.49
|
|
Discontinued operations
|
|
0.02
|
|
0.63
|
|
0.47
|
|
Gain on disposal of
discontinued operations
|
|
|
|
0.42
|
|
|
|
Net income
|
|
$
|
0.52
|
|
$
|
1.46
|
|
$
|
0.96
|
|
See accompanying notes.
3
CANTEL MEDICAL CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollar amounts in
Thousands, Except Share Data)
Years Ended July 31,
2007, 2006 and 2005
|
|
Common Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
Total
|
|
Total
|
|
|
|
Number of
|
|
|
|
|
|
|
|
Other
|
|
Treasury
|
|
Stock-
|
|
Compre-
|
|
|
|
Shares
|
|
|
|
Additional
|
|
Retained
|
|
Comprehensive
|
|
Stock,
|
|
holders
|
|
hensive
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
|
|
at Cost
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2004
|
|
14,611,731
|
|
$
|
1,505
|
|
$
|
53,315
|
|
$
|
30,193
|
|
$
|
3,145
|
|
$
|
(1,647
|
)
|
$
|
86,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises of options
|
|
393,778
|
|
40
|
|
2,773
|
|
|
|
|
|
(82
|
)
|
2,731
|
|
|
|
Income tax benefit from exercises of stock options
|
|
|
|
|
|
1,405
|
|
|
|
|
|
|
|
1,405
|
|
|
|
Fractional share adjustment for stock split
|
|
(127
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
Unrealized gain on interest rate cap, net of $2 in tax
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
$
|
5
|
|
Unrealized gain on currency hedging, net of $44 in tax
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
76
|
|
76
|
|
Translation adjustment, net of $999 in tax
|
|
|
|
|
|
|
|
|
|
2,395
|
|
|
|
2,395
|
|
2,395
|
|
Net income
|
|
|
|
|
|
|
|
15,505
|
|
|
|
|
|
15,505
|
|
15,505
|
|
Total comprehensive income for fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,981
|
|
Balance, July 31, 2005
|
|
15,005,382
|
|
1,545
|
|
57,491
|
|
45,698
|
|
5,621
|
|
(1,729
|
)
|
108,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance for Crosstex acquisition
|
|
384,821
|
|
38
|
|
6,699
|
|
|
|
|
|
|
|
6,737
|
|
|
|
Exercises of options
|
|
311,899
|
|
32
|
|
2,645
|
|
|
|
|
|
(65
|
)
|
2,612
|
|
|
|
Repurchases of shares
|
|
(303,000
|
)
|
|
|
|
|
|
|
|
|
(4,297
|
)
|
(4,297
|
)
|
|
|
Stock-based compensation
|
|
|
|
|
|
1,178
|
|
|
|
|
|
|
|
1,178
|
|
|
|
Income tax benefit from exercises of stock options
|
|
|
|
|
|
1,158
|
|
|
|
|
|
|
|
1,158
|
|
|
|
Unrealized gain on currency hedging, net of $49 in tax
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
90
|
|
$
|
90
|
|
Translation adjustment, net of $476 in tax
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
1,004
|
|
1,004
|
|
Net income
|
|
|
|
|
|
|
|
23,697
|
|
|
|
|
|
23,697
|
|
23,697
|
|
Total comprehensive income for fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,791
|
|
Balance, July 31, 2006
|
|
15,399,102
|
|
1,615
|
|
69,171
|
|
69,395
|
|
6,715
|
|
(6,091
|
)
|
140,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises of options
|
|
704,185
|
|
80
|
|
5,071
|
|
|
|
|
|
(1,515
|
)
|
3,636
|
|
|
|
Repurchases of shares
|
|
(161,800
|
)
|
|
|
|
|
|
|
|
|
(2,215
|
)
|
(2,215
|
)
|
|
|
Stock-based compensation
|
|
|
|
|
|
1,482
|
|
|
|
|
|
|
|
1,482
|
|
|
|
Issuance of restricted stock
|
|
175,000
|
|
18
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from exercises of stock options
|
|
|
|
|
|
1,137
|
|
|
|
|
|
|
|
1,137
|
|
|
|
Translation adjustment, net of $313 in tax
|
|
|
|
|
|
|
|
|
|
1,779
|
|
|
|
1,779
|
|
$
|
1,779
|
|
Net income
|
|
|
|
|
|
|
|
8,446
|
|
|
|
|
|
8,446
|
|
8,446
|
|
Total comprehensive income for fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,225
|
|
Balance, July 31, 2007
|
|
16,116,487
|
|
$
|
1,713
|
|
$
|
76,843
|
|
$
|
77,841
|
|
$
|
8,494
|
|
$
|
(9,821
|
)
|
$
|
155,070
|
|
|
|
See accompanying notes.
4
CANTEL MEDICAL CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,446
|
|
$
|
23,697
|
|
$
|
15,505
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
10,239
|
|
10,183
|
|
4,566
|
|
Stock-based compensation
expense
|
|
1,482
|
|
1,178
|
|
|
|
Amortization of debt issuance
costs
|
|
350
|
|
357
|
|
553
|
|
Loss on disposal of fixed
assets
|
|
25
|
|
168
|
|
108
|
|
Impairment of long-lived
assets
|
|
|
|
|
|
393
|
|
Deferred income taxes
|
|
(2,369
|
)
|
(3,136
|
)
|
3,761
|
|
Excess tax benefits from
stock-based compensation
|
|
(706
|
)
|
(787
|
)
|
|
|
Gain on disposal of
discontinued operations
|
|
|
|
(6,776
|
)
|
|
|
Changes in assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(6,334
|
)
|
2,982
|
|
(1,676
|
)
|
Inventories
|
|
(1,347
|
)
|
(3,114
|
)
|
458
|
|
Prepaid expenses and other
current assets
|
|
(117
|
)
|
285
|
|
171
|
|
Assets of discontinued
operations
|
|
2,137
|
|
(2,956
|
)
|
(1,733
|
)
|
Accounts payable, deferred
revenue and accrued expenses
|
|
2,623
|
|
984
|
|
2,485
|
|
Income taxes payable
|
|
(1,118
|
)
|
134
|
|
(114
|
)
|
Liabilities of discontinued
operations
|
|
(7,344
|
)
|
(1,138
|
)
|
296
|
|
Net cash provided by operating
activities
|
|
5,967
|
|
22,061
|
|
24,773
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(5,529
|
)
|
(6,069
|
)
|
(3,353
|
)
|
Proceeds from disposal of
fixed assets
|
|
61
|
|
147
|
|
8
|
|
Acquisition of Crosstex, net
of cash acquired
|
|
(3,667
|
)
|
(68,231
|
)
|
|
|
Acquisition of Fluid Solutions,
net of cash acquired
|
|
|
|
(2,903
|
)
|
|
|
Acquisition of GE Water
|
|
(30,506
|
)
|
|
|
|
|
Acquisition of Twist
|
|
(1,900
|
)
|
|
|
|
|
Proceeds from disposal of
discontinued operations
|
|
|
|
30,774
|
|
|
|
Other, net
|
|
6
|
|
332
|
|
(281
|
)
|
Net cash used in investing
activities
|
|
(41,535
|
)
|
(45,950
|
)
|
(3,626
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
Borrowings under term loan
facility, net of debt issuance costs
|
|
|
|
39,399
|
|
|
|
Borrowings under revolving
credit facilities, net of debt issuance costs
|
|
30,500
|
|
27,635
|
|
|
|
Repayments under term loan
facility
|
|
(4,000
|
)
|
(17,750
|
)
|
(6,250
|
)
|
Repayments under revolving
credit facilities
|
|
(7,500
|
)
|
(28,300
|
)
|
(3,000
|
)
|
Proceeds from exercises of
stock options
|
|
3,636
|
|
2,612
|
|
2,731
|
|
Excess tax benefits from stock-based
compensation
|
|
706
|
|
787
|
|
|
|
Purchases of treasury stock
|
|
(2,260
|
)
|
(4,256
|
)
|
|
|
Net cash provided by (used in)
financing activities
|
|
21,082
|
|
20,127
|
|
(6,519
|
)
|
|
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
448
|
|
325
|
|
845
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash
and cash equivalents
|
|
(14,038
|
)
|
(3,437
|
)
|
15,473
|
|
Cash and cash equivalents at
beginning of year
|
|
29,898
|
|
33,335
|
|
17,862
|
|
Cash and cash equivalents at
end of year
|
|
$
|
15,860
|
|
$
|
29,898
|
|
$
|
33,335
|
|
See accompanying notes.
5
CANTEL MEDICAL CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2007, 2006 and
2005
1.
Business
Description
Cantel Medical Corp. (Cantel)
is a leading provider of infection prevention and control products in the
healthcare market, specializing in the following operating
segments:
Dialysis
: Medical device reprocessing systems,
sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.
Healthcare Disposables (formerly known as Dental)
: Single-use,
infection control products used principally in the dental
market including face masks, towels and bibs, tray covers, saliva ejectors,
germicidal wipes, plastic cups, sterilization pouches and disinfectants.
Water Purification and Filtration
: Water purification
equipment and services, filtration and separation products, and disinfectants
for the medical, pharmaceutical, biotech, beverage and commercial industrial
markets.
Endoscope Reprocessing
: Medical device
reprocessing systems and sterilants/disinfectants for endoscopy.
Therapeutic Filtration
: Hollow fiber
membrane filtration and separation technologies for medical applications.
(Included in All Other reporting segment).
Specialty Packaging
: Specialty packaging and thermal control
products, as well as related compliance training, for the transport of
infectious and biological specimens and thermally sensitive pharmaceutical,
medical and other products. (Included in All Other reporting segment).
Most of our equipment,
consumables and supplies are used to help prevent the occurrence or spread of
infections.
Cantel had five
principal operating companies during fiscal 2007. Minntech Corporation (Minntech),
Crosstex International Inc. (Crosstex), Mar Cor Purification, Inc. (Mar Cor),
Biolab Equipment Ltd. (Biolab) and Saf-T-Pak, Inc. (Saf-T-Pak), all of
which are wholly-owned operating subsidiaries. In addition, Minntech has three
foreign subsidiaries, Minntech B.V., Minntech Asia/Pacific Ltd. and Minntech
Japan K.K., which serve as Minntechs bases in Europe, Asia/Pacific and Japan,
respectively.
We currently operate
our business through six operating segments: Dialysis (through Minntech),
Healthcare Disposables (formerly known as Dental) (through Crosstex), Water
Purification and Filtration (through Mar Cor, Biolab and Minntech), Endoscope
Reprocessing (through Minntech), Therapeutic Filtration (through Minntech) and
Specialty Packaging (through Saf-T-Pak). The Therapeutic Filtration and
Specialty Packaging operating segments are combined in the All Other reporting
segment for financial reporting purposes.
To be more consistent
with our strategy to expand our product offerings outside the dental market, we
have renamed our Dental operating segment to the Healthcare Disposables
operating segment. This change in segment description has no impact upon any
reported financial information of this segment.
On March 30, 2007, we
purchased certain net assets of GE Water & Process Technologies water
dialysis business (the GE Water Acquisition or GE Water), as more fully
described in Note 3 to the Consolidated Financial Statements. Since the GE
Water Acquisition was completed on March 30, 2007, its results of operations
are included in our results of operations for the portion of fiscal 2007
subsequent to March 30, 2007 and are excluded from our results of operations
for all prior periods. GE Water is included in our Water Purification and
Filtration operating segment.
On July 9, 2007, we
acquired the net assets of Twist 2 It Inc. (Twist), as more fully described
in Note 3 to the Consolidated Financial Statements. The Twist acquisition had
an insignificant affect on our results of operations for fiscal 2007 due to both
the small size of this business as well as its inclusion for only a portion of
one month, and its results of operations are excluded for all prior periods.
Twist is included in our Healthcare Disposables operating segment.
6
We acquired certain
net assets of Dialysis Services, Inc. (DSI) on August 1, 2007, Verimetrix,
LLC (Verimetrix) on September 17, 2007, and all of the issued and outstanding
stock of Strong Dental Inc. (Strong Dental) on September 26, 2007, as more
fully described in Note 3 to the Consolidated Financial Statements. Since the
acquisitions of DSI, Verimetrix and Strong Dental were consummated after the end of fiscal 2007, the results of
operations of those acquisitions are not included in our results of operations
for any of the periods presented.
Throughout this document, references to Cantel,
us, we, our, and the Company are references to Cantel Medical Corp. and
its subsidiaries, except where the context makes it clear the reference is to
Cantel itself and not its subsidiaries.
2.
Summary
of Significant Accounting Policies
The following is a
summary of our significant accounting policies used to prepare our Consolidated
Financial Statements.
Principles of Consolidation
The Consolidated
Financial Statements include the accounts of Cantel and its wholly-owned
subsidiaries. All intercompany transactions and balances have been eliminated
in consolidation.
Revenue Recognition
Revenue on product
sales is recognized as products are shipped to customers and title passes. The
passing of title is determined based upon the FOB terms specified for each
shipment. With respect to dialysis, therapeutic, specialty packaging and
endoscope reprocessing products, shipment terms are generally FOB origin for
common carrier and FOB destination when our distribution fleet is utilized
(except for one large customer in dialysis whereby all products are shipped FOB
destination). With respect to water purification and filtration and healthcare disposable
products, shipment terms may be either FOB origin or destination. Customer
acceptance for the majority of our product sales occurs at the time of
delivery. In certain instances, primarily with respect to some of our water
purification and filtration equipment, endoscope reprocessing equipment and an
insignificant amount of our sales of dialysis equipment, post-delivery
obligations such as installation, in-servicing or training are contractually
specified; in such instances, revenue recognition is deferred until all of such
conditions have been substantially fulfilled such that the products are deemed
functional by the end-user. With respect to a portion of water purification and
filtration product sales, equipment is sold as part of a system for which the
equipment is functionally interdependent or the customers purchase order
specifies ship-complete as a condition of delivery; revenue recognition on
such sales is deferred until all equipment has been delivered.
A portion of our water
purification and filtration sales relating to our acquisition of GE Water are
recognized as multiple element arrangements, whereby revenue is allocated to
the equipment and installation components based upon vendor specific objective
evidence which principally includes comparable historical transactions of
similar equipment and installation sold as stand alone components, as well as
an evaluation of unrelated third party competitor pricing of similar
installation.
Revenue on service
sales is recognized when repairs are completed at the customers location or
when repairs are completed at our facilities and the products are shipped to
customers. All shipping and handling fees invoiced to customers, such as
freight, are recorded as revenue (and related costs are included within cost of
sales) at the time the sale is recognized. With respect to certain service
contracts in our Endoscope Reprocessing and Water Purification and Filtration
operating segments, service revenue is recognized on a straight-line basis over
the contractual term of the arrangement.
None of our sales
contain right-of-return provisions except certain sales of a small portion of
our endoscope reprocessing equipment which contain a 15 day right-of-return
trial period. Such sales are not recognized as revenue until the 15 day trial
period has elapsed. Customer claims for credit or return due to damage, defect,
shortage or other reason must be pre-approved by us before credit is issued or
such product is accepted for return. No cash discounts for early payment are
offered except with respect to a portion of our sales of dialysis and
healthcare disposable products and certain prepaid packaging products. We do
not offer price protection, although advance pricing contracts or required
notice periods prior to implementation of price increases exist for certain
customers with respect to many of our
7
products. With respect
to certain of our dialysis and healthcare disposable customers, volume rebates
are provided; such volume rebates are provided for as a reduction of sales at
the time of revenue recognition and amounted to $1,449,000, $1,216,000 and
$749,000 in fiscal 2007, 2006 and 2005, respectively. Included in volume
rebates for fiscal 2007 and 2006 are approximately $994,000 and $1,157,000 as a
result of the addition of healthcare disposable products, offset by
cancellation or non-renewal of certain volume rebate programs as a result of
consolidation in the dialysis industry. Such allowances are determined based on
estimated projections of sales volume for the entire rebate agreement periods.
If it becomes known that sales volume to customers will deviate from original
projections, the volume rebate provisions originally established would be
adjusted accordingly.
The majority of our
dialysis products are sold to end-users; the majority of therapeutic filtration
products and healthcare disposable products are sold to third party
distributors; water purification and filtration products and services are sold
directly and through third-party distributors to hospitals, dialysis clinics,
pharmaceutical and biotechnology companies and other end-users; and specialty
packaging products are sold to third-party distributors, medical research
companies, laboratories, pharmaceutical companies, hospitals, government
agencies and other end-users. Sales to all of these customers follow our
revenue recognition policies. Due to the direct distribution of our endoscope
reprocessing products in the United States which commenced on August 2, 2006, a
significant portion of our endoscope reprocessing products and services are
sold directly to hospitals and other end-users. Previously, the majority of our
endoscope reprocessing products and services were sold to third party distributors.
Translation of Foreign Currency Financial
Statements
Assets and liabilities
of our foreign subsidiaries are translated into United States dollars at
year-end exchange rates; sales and expenses are translated using average
exchange rates during the year. The cumulative effect of the translation of the
accounts of the foreign subsidiaries is presented as a component of accumulated
other comprehensive income or loss. Foreign exchange gains and losses related
to the purchase of inventories denominated in foreign currencies are included
in cost of sales and foreign exchange gains and losses related to the
incurrence of operating costs denominated in foreign currencies are included in
general and administrative expenses. Additionally, foreign exchange gains and
losses related to the conversion of foreign assets and liabilities into
functional currencies are included in general and administrative expenses.
Cash
and Cash Equivalents
We consider all highly
liquid investments with maturities of three months or less when purchased to be
cash equivalents.
Accounts Receivable and Allowance for
Doubtful Accounts
Accounts receivable
consist of amounts due to us from normal business activities. Allowances for
doubtful accounts are reserves for the estimated loss from the inability of
customers to make required payments. We use historical experience as well as
current market information in determining the estimate. While actual losses
have historically been within managements expectations and provisions
established, if the financial conditions of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Alternatively, if certain customers paid their
delinquent receivables, reductions in allowances may be required.
Inventories
Inventories consist of
products which are sold in the ordinary course of our business and are stated
at the lower of cost (first-in, first-out) or market. In assessing the value of
inventories, we must make estimates and judgments regarding reserves required
for product obsolescence, aging of inventories and other issues potentially
affecting the saleable condition of products. In performing such evaluations,
we use historical experience as well as current market information.
Property and Equipment
Property and equipment
are stated at cost. Additions and improvements are capitalized, while
maintenance and repair costs are expensed. When assets are retired or otherwise
disposed, the cost and related accumulated depreciation or amortization is
removed from the respective accounts and any resulting gain or loss is included
in income. Depreciation and amortization is provided on the straight-line
method over the estimated useful lives of the assets which generally range from
3-10 years for furniture and equipment, 5-32 years for buildings and
improvements and the life of the lease
8
for leasehold
improvements. The depreciation and amortization expense related to property and
equipment for fiscal 2007, 2006 and 2005 was $5,347,000, $4,570,000 and
$2,807,000, respectively. Fiscal 2007 and 2006 includes depreciation and
amortization expense attributable to our Healthcare Disposables segment of
approximately $2,023,000 and $1,726,000, respectively.
Goodwill and Intangible Assets
Certain of our
identifiable intangible assets, including customer relationships, technology,
brand names, non-compete agreements and patents, are amortized on the
straight-line method over their estimated useful lives which range from 1 to 20
years. Additionally, we have recorded goodwill and trademarks and trade names,
all of which have indefinite useful lives and are therefore not amortized. All
of our intangible assets and goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable, and goodwill and intangible assets with
indefinite lives are reviewed for impairment at least annually
.
Our management is primarily responsible
for determining if impairment exists and considers a number of factors,
including third-party valuations, when making these determinations. In
performing a review for goodwill impairment, management uses a two-step process
that begins with an estimation of the fair value of the related operating
segments. The first step is a review for potential impairment, and the second
step measures the amount of impairment, if any. In performing our annual review
for indefinite lived intangibles, management compares the current fair value of
such assets to their carrying values. With respect to amortizable intangible
assets when impairment indicators are present, management would determine
whether non-discounted cash flows would be sufficient to recover the carrying
value of the assets; if not, the carrying value of the assets would be adjusted
to their fair value. On July 31, 2007, management concluded that none of our
intangible assets or goodwill was impaired. While the results of these annual
reviews have historically not indicated impairment, impairment reviews are
highly dependent on managements projections of our future operating results
which management believes to be reasonable.
Long-lived assets
We evaluate the
carrying value of long-lived assets including property, equipment and other
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. An assessment is made to determine if the sum of
the expected future non-discounted cash flows from the use of the assets and
eventual disposition is less than the carrying value. If the sum of the
expected non-discounted cash flows is less than the carrying value, an
impairment loss is recognized based on fair value. With few exceptions, our
historical assessments of our long-lived assets have not differed significantly
from the actual amounts realized. However, the determination of fair value
requires us to make certain assumptions and estimates and is highly subjective,
and accordingly, actual amounts realized may differ significantly from our
estimates.
Other Assets
Debt issuance costs
associated with the credit facilities are amortized to interest expense over
the life of the credit facilities. In conjunction with the amended and restated
credit facilities dated August 1, 2005, as more fully described in Note 8 to
the Consolidated Financial Statements, we incurred debt issuance costs of
approximately $1,426,000, of which $160,000 of third-party costs was recorded
in general and administrative expenses during the first three months of fiscal
2006 in accordance with applicable accounting rules. The remaining $1,266,000
of costs is being amortized over the life of the credit facilities. As of July
31, 2007 and 2006, such debt issuance costs, net of related amortization, were
included in other assets and amounted to $1,313,000 and $1,607,000,
respectively.
Warranties
We provide for
estimated costs that may be incurred to remedy deficiencies of quality or
performance of our products at the time of revenue recognition. Most of our
products have a one year warranty, although a majority of our endoscope
reprocessing equipment in the United States carry a warranty period of up to
fifteen months. We record provisions for product warranties as a component of
cost of sales based upon an estimate of the amounts necessary to settle
existing and future claims on products sold. The historical relationship of
warranty costs to products sold is the primary basis for the estimate. A
significant increase in third party service repair rates, the cost and
availability of parts or the frequency of claims could have a material adverse
impact on our results for the period or periods in which such claims or
additional costs materialize. Management reviews its warranty exposure
periodically and believes that the warranty reserves are adequate; however,
actual claims incurred could differ from original estimates, requiring
adjustments to the reserves.
9
Stock-Based Compensation
On August 1, 2005, we
adopted Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment (Revised 2004)
(SFAS 123R) using the
modified prospective method for the transition. Under the modified prospective
method, stock compensation expense will be recognized for any option grant or
stock award granted on or after August 1, 2005, as well as the unvested portion
of stock options granted prior to August 1, 2005, based upon the awards fair
value. For fiscal 2005 and earlier periods, we accounted for stock options
using the intrinsic value method under which stock compensation expense is not
recognized because we granted stock options with exercise prices equal to the
market value of the shares at the date of grant.
Most of our stock
option and nonvested stock awards are subject to graded vesting in which
portions of the award vest at different times during the vesting period, as
opposed to awards that vest at the end of the vesting period. We recognize compensation
expense for awards subject to graded vesting using the straight-line basis,
reduced by estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Forfeitures are estimated based on historical
experience.
The stock-based
compensation expense recorded in our Consolidated Financial Statements may not
be representative of the effect of stock-based compensation expense in future
periods due to the level of awards issued in past years (which level may not be
similar in the future), assumptions used in determining fair value, and
estimated forfeitures. We determine the fair value of each unvested stock award
using the closing market price of our Common Stock on the date of grant. We
estimate the fair value of each option grant on the date of grant using the
Black-Scholes option valuation model. The determination of fair value using an
option-pricing model is affected by our stock price as well as assumptions
regarding a number of subjective variables. These variables include, but are
not limited to, the expected stock price volatility over the term of the
expected option life (which is determined by using the historical closing
prices of our Common Stock), the expected dividend yield (which is expected to
be 0%), and the expected option life (which is based on historical exercise
behavior). If factors change and we employ different assumptions in the
application of SFAS 123R in future periods, the compensation expense that we
would record under SFAS 123R may differ significantly from what we have
recorded in the current period. With respect to stock options granted during
the last nine months of fiscal 2007, we reassessed both the expected option life
and stock price volatility assumptions by evaluating more recent historical
exercise behavior and stock price activity; such reevaluation resulted in
reductions in both the expected option lives and volatility.
If we had elected to
recognize compensation expense prior to August 1, 2005 based on the fair value
of the options granted at the grant date over the vesting period as prescribed
by SFAS 123, income from continuing operations, income from discontinued
operations, net income and earnings per share for fiscal 2005 would have been
as follows:
|
|
Year Ended July 31, 2005
|
|
|
|
Stock-based compensation
|
|
|
|
expense determined
|
|
|
|
under fair value based
|
|
|
|
As reported
|
|
model, net of tax
|
|
Pro forma
|
|
Income from continuing
operations
|
|
$
|
7,895,000
|
|
$
|
(6,316,000
|
)
|
$
|
1,579,000
|
|
Income from discontinued
operations, net of tax
|
|
7,610,000
|
|
(215,000
|
)
|
7,395,000
|
|
Net income
|
|
$
|
15,505,000
|
|
$
|
(6,531,000
|
)
|
$
|
8,974,000
|
|
|
|
|
|
|
|
|
|
Earnings per common share -
basic:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.53
|
|
$
|
(0.42
|
)
|
$
|
0.11
|
|
Discontinued operations
|
|
0.52
|
|
(0.02
|
)
|
0.50
|
|
Net income
|
|
$
|
1.05
|
|
$
|
(0.44
|
)
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
Earnings per common share -
diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.49
|
|
$
|
(0.39
|
)
|
$
|
0.10
|
|
Discontinued operations
|
|
0.47
|
|
(0.02
|
)
|
0.45
|
|
Net income
|
|
$
|
0.96
|
|
$
|
(0.41
|
)
|
$
|
0.55
|
|
The pro forma effect
on net income for fiscal 2005 may not be representative of the effect of
stock-based compensation expense in future periods due to the level of options
issued in past years (which level may not be similar in the future),
10
assumptions used in
determining fair value (including the volatility of Cantel stock), the
estimated forfeiture rate and the accelerated vesting of certain options in
fiscal 2005.
In fiscal 2005, we
accelerated the vesting of certain unvested and out-of-the-money stock
options previously awarded to certain executive officers and other employees
(67 individuals in total) under our 1997 Employee Stock Option Plan. Such
options had exercise prices greater than $16.85, the closing price on June 24,
2005, the date that our Board of Directors authorized such acceleration.
Options to purchase 759,650 shares of common stock (of which approximately
577,500 shares are subject to options held by executive officers) were subject
to this acceleration. All other terms and conditions of the options remain in
effect. Options held by non-employee directors were not included in the
acceleration. Because these options had exercise prices in excess of the market
value of Cantel common stock on June 24, 2005, and therefore were not fully
achieving our original objectives of incentive compensation and employee
retention, we believe the acceleration may have had a positive effect on employee
morale, retention and perception of option value. The acceleration eliminated
any future compensation expense we would otherwise recognize in our income
statement with respect to these options with the August 1, 2005 implementation
of SFAS 123R. The compensation expense, after tax, related to this acceleration
totaled approximately $3,400,000. If such acceleration did not occur, we would
have recognized additional compensation expense, net of tax, of approximately
$1,300,000, $1,300,000, $600,000 and $200,000 in fiscal 2006, 2007, 2008 and
2009, respectively, based on the fair value of the options granted at grant
date over the original vesting period.
Costs Associated with Exit or Disposal
Activities
We recognize costs
associated with exit or disposal activities, such as costs to terminate a
contract, the exit or disposal of a business, or the early termination of a
leased property, by recognizing the liability at fair value when incurred,
except for certain one-time termination benefits, such as severance costs, for
which the period of recognition begins when a severance plan is communicated to
employees.
Inherent in the
calculation of liabilities relating to exit and disposal activities are
significant management judgments and estimates, including estimates of
termination costs, employee attrition, and the interest rate used to discount
certain expected net cash payments. Such judgments and estimates are reviewed
by us on a regular basis. The cumulative effect of a change to a liability
resulting from a revision to either timing or the amount of estimated cash
flows is recognized by us as an adjustment to the liability in the period of
the change.
Although we have
historically recorded minimal charges associated with exit or disposal
activities, we recorded approximately $1,329,000 of severance costs in income
from discontinued operations in fiscal 2006 related to the sale of
substantially all of Carsens assets.
Legal Proceedings
In the normal course
of business, we are subject to pending and threatened legal actions. We record
legal fees and other expenses related to litigation as incurred. Additionally,
we assess, in consultation with our counsel, the need to record a liability for
litigation and contingencies on a case by case basis. Amounts are accrued when
we, in consultation with counsel, determine that it is probable that a
liability has been incurred and an amount of anticipated exposure can be
reasonably estimated.
Earnings Per Common Share
Basic earnings per
common share are computed based upon the weighted average number of common
shares outstanding during the year.
Diluted earnings per
common share are computed based upon the weighted average number of common
shares outstanding during the year plus the dilutive effect of options using
the treasury stock method and the average market price of our Common Stock for
the year.
Advertising Costs
Our policy is to
expense advertising costs as they are incurred. Advertising costs charged to
expense were $1,032,000, $697,000 and $267,000 for fiscal 2007, 2006 and 2005,
respectively. Fiscal 2007 and 2006 includes expense attributable to our
Healthcare Disposables segment of approximately $685,000 and $338,000,
respectively.
11
Income
Taxes
We recognize deferred
tax assets and liabilities based on differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. Deferred tax
assets and liabilities also include items recorded in conjunction with the
purchase accounting for business acquisitions. We regularly review our deferred
tax assets for recoverability and establish a valuation allowance, if
necessary, based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.
Although realization is not assured, management believes it is more likely than
not that the recorded deferred tax assets, as adjusted for valuation
allowances, will be realized. Additionally, deferred tax liabilities are
regularly reviewed to confirm that such amounts are appropriately stated. Such
a review considers known future changes in various effective tax rates,
principally in the United States. If the effective tax rate were to change in
the future, particularly in the United States, our items of deferred tax could
be materially affected. All of such evaluations require significant management
judgments.
It is our policy to
establish reserves for exposures as a result of an examination by tax
authorities. We establish the reserves based primarily upon managements
assessment of exposure associated with acquired companies and permanent tax
differences. The tax reserves are analyzed periodically and adjustments are
made, as events occur to warrant adjustment to the reserves. The majority of
our income tax reserves originated from acquisitions.
Use of Estimates
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. On an ongoing basis,
we evaluate the adequacy of our reserves and the estimates used in calculations
of reserves as well as other judgmental financial statement items, including,
but not limited to: collectability of accounts receivable; volume rebates and
trade-in allowances; inventory values and obsolescence reserves; warranty
reserves; depreciation and amortization periods; deferred income taxes;
goodwill and intangible assets; impairment of long-lived assets; reserves for
tax exposures; reserves for legal exposure; stock-based compensation; and
expense accruals.
Acquisitions require
significant estimates and judgments related to the fair value of assets
acquired and liabilities assumed. Certain liabilities and reserves are
subjective in nature. We reflect such liabilities and reserves based upon the
most recent information available. In conjunction with our acquisitions, such
subjective liabilities and reserves principally include certain income tax and
sales and use tax exposures, including tax liabilities related to our foreign
subsidiaries, as well as reserves for accounts receivable, inventories and warranties.
The ultimate settlement of such liabilities may be for amounts which are
different from the amounts recorded.
Recent
Accounting Pronouncements
In July 2006, the
Financial Accounting Standards Board (FASB) issued FIN No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109
(FIN No. 48). FIN No. 48 clarifies the
accounting and reporting for uncertainties in income tax law. FIN No. 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN No. 48 is effective for fiscal
years beginning after December 15, 2006 and therefore is effective for our
fiscal year 2008. We are assessing the impact of the adoption of FIN 48 and
currently do not believe that the adoption will have a material effect on our
financial position or results of operations.
3.
Acquisitions
Post-Fiscal 2007
Strong Dental Products, Inc.
On September 26, 2007,
we expanded our Healthcare Disposables segment by purchasing all of the issued
and outstanding stock of Strong Dental, a private company with pre-acquisition
annual revenues of approximately $1,000,000 that designs, markets and sells
comfort cushioning and infection control covers for x-ray film and digital
x-ray sensors. The total consideration for the transaction, including estimated
transactions costs and assumption of debt, was approximately $4,100,000. Of
this purchase price, $75,000 is being held in escrow for a period of twelve
months from the closing date as security for the sellers indemnification
obligations under the purchase agreement. Under the
12
terms of the purchase
agreement, we agreed to pay additional purchase price up to $700,000 contingent
upon the achievement of a specified revenue target over a three year period.
The principal reasons for the acquisition were to (i) leverage the sales and
marketing infrastructure of Crosstex by adding a branded, technologically
differentiated, and patent-protected product line, (ii) expand into the rapidly
growing area of digital radiography as dentists convert from film to digital
x-rays, and (iii) add a new product line that focuses on the dental hygienist
community, which product will aid in cross-selling the recently launched
Patients Choice line of Crosstex products.
Verimetrix, LLC
On September 17, 2007,
we expanded our Endoscope Reprocessing (Medivators) segment by purchasing
certain net assets from Verimetrix, a private company with pre-acquisition
annual revenues of $2,000,000 that designs, markets and sells the Veriscan
System, an endoscope leak and fluid detection device. The total consideration
for the transaction, including estimated transaction costs, was approximately
$4,800,000. Of this purchase price, $150,000 is being held in escrow for a
period of thirteen months from the closing date as security for the sellers
indemnification obligations under the purchase agreement. Under the terms of
the purchase agreement, we agreed to pay additional purchase price up to
$4,025,000 contingent upon the achievement of a specified cumulative revenue
target over a six year period. The principal reasons for the acquisition were
to (i) add a technologically advanced product that fits squarely in our
existing customer call pattern for Medivators products; (ii) leverage our
national, direct hospital field sales force and their in-depth knowledge of the
endoscopy market; and (iii) equip our sales force with a broad and
comprehensive product line ranging from pre-cleaning detergents, flushing aids
and leak testing equipment, to automated disinfection equipment and
chemistries.
Dialysis Services, Inc.
On August 1, 2007, we
purchased the water-related assets of DSI, a company with pre-acquisition
annual revenues of approximately $1,200,000 based in Springfield, Tennessee
that designs, installs and services high quality water and bicarbonate systems
for use in dialysis clinics, hospitals
and university settings. The total consideration for the transaction, including
estimated transaction costs, was approximately $1,250,000. Of this
purchase price, $75,000 is being held in escrow for a period of twelve months
from the closing date as security for the sellers indemnification obligations
under the purchase agreement. The principal reason for the acquisition was the strengthening of our sales and service
presence and base of business in a region with a significant concentration of
dialysis clinics and healthcare institutions. The operating results of DSI will
be included in our Water Purification and Filtration segment.
Since the acquisitions
of Strong Dental, Verimetrix and DSI
were consummated after the end of fiscal 2007, the results of operations
of these acquisitions are not included in our results of operations for any of
the periods presented. Pro forma consolidated statement of income data for
fiscal 2007, 2006 and 2005 have not been presented due to the insignificant
impact of these acquisitions individually and in the aggregate.
Fiscal 2007
Twist 2 It Inc.
On July 9, 2007, we
expanded our Healthcare Disposables segment by purchasing certain assets of
Twist, the owner of a unique, patented, disposable prophy angle for the
cleaning and polishing of teeth that eliminates the splatter of saliva, blood
and other potential infectious matter. The acquired business had
pre-acquisition annual revenues of approximately $1,300,000 and was purchased
for approximately $1,915,000, including transaction costs (transaction costs
and a portion of the purchase price aggregating $15,000 were paid subsequent to
July 31, 2007). Under the terms of the purchase agreement, we agreed to pay
additional purchase price up to $2,043,000 contingent upon the achievement of
specified revenue targets over a two year period. Since the acquisition
occurred during the last month of our fiscal year, it had virtually no impact
on our results of operations for fiscal 2007 and is not included in our results
of operations for any prior period. Pro forma consolidated statement of income
data for fiscal 2007, 2006 and 2005 have not been presented due to the
insignificant impact of this acquisition.
13
The purchase price was
allocated to the assets acquired and assumed liabilities based on estimated
fair values as follows:
|
|
Preliminary
|
|
|
|
Allocation
|
|
Net Assets
|
|
|
|
Inventories
|
|
$
|
32,000
|
|
Amortizable intangible assets:
|
|
|
|
Patents (12-year life)
|
|
627,000
|
|
Customer relationships (1-year
life)
|
|
25,000
|
|
Branded products (12-year
life)
|
|
97,000
|
|
Net assets acquired
|
|
$
|
781,000
|
|
There were no
in-process research and development projects acquired in connection with the
acquisition. The excess purchase price of $1,134,000 was assigned to goodwill.
Such goodwill, all of which is deductible for income tax purposes, has been
included in our Healthcare Disposables reporting segment.
The principal reasons
for the acquisition were to (i) enter into a sizeable dental disposable niche
with a branded, technologically differentiated, and patent-protected product,
(ii) expand Crosstex recently launched Patients Choice product line, and
(iii) leverage Crosstex sophisticated sales and marketing infrastructure in
the dental arena.
GE Water & Process Technologies
Dialysis Water Business
On March 30, 2007, Mar
Cor purchased certain net assets from GE Water & Process Technologies, a
unit of General Electric Company, relating to water dialysis. With an installed
base of approximately 1,800 water equipment installations in North America and
annual pre-acquisition revenues of approximately $20,000,000 (approximately 70%
of such revenues are from one customer, Fresenius Medical Care), the GE Water
Acquisition expands our Water Purification and Filtrations annual business by
approximately 50% in terms of sales. Total consideration for the transaction,
including transaction costs, was $30,506,000. Of this purchase price,
$1,000,000 is being held in escrow for a period of twelve months from the
closing date as security for the sellers indemnification obligations under the
purchase agreement.
The purchase price was
allocated to the assets acquired and assumed liabilities based on estimated
fair values as follows:
|
|
Final
|
|
|
|
Allocation
|
|
Net Assets
|
|
|
|
Current assets
|
|
$
|
2,030,000
|
|
Property and equipment
|
|
150,000
|
|
Amortizable intangible assets:
|
|
|
|
Customer relationships (9-year
life)
|
|
4,700,000
|
|
Branded products (9-year life)
|
|
400,000
|
|
Current liabilities
|
|
(900,000
|
)
|
Net assets acquired
|
|
$
|
6,380,000
|
|
There were no
in-process research and development projects acquired in connection with the
acquisition. The excess purchase price of $24,126,000 was assigned to goodwill.
Such goodwill, all of which is deductible for income tax purposes, has been
included in our Water Purification and Filtration reporting segment and,
collectively with the other acquired assets, is the primary reason for the
increase in our total assets at July 31, 2007, as compared with our total
assets at July 31, 2006.
The reasons for the
acquisition were as follows: (i) the opportunity to add an installed equipment
base of business into which we can (a) increase service revenue while improving
the density and efficiency of the Mar Cor service network and (b) increase
consumable sales per clinic; (ii) the potential revenue and cost savings
synergies and efficiencies that could be realized through optimizing and
combining the acquired assets (including GE Water employees) into Mar Cor; and
(iii) the expectation that the acquisition will be accretive to our future
earnings per share.
For the four months
ended July 31, 2007 since its acquisition, GE Water contributed $6,949,000 to
our net sales and $1,123,000 to operating income (inclusive of $56,000 of
amortization included within cost of sales related to the step-up in the value
of inventories), and approximately $270,000 in net income after reflecting net
interest expense associated with
14
the borrowings related
to the acquisition and income taxes, but excluding an acquisition cost of
$137,000 related to incentive compensation. Such operating performance may not
necessarily be indicative of future operating performance. Since the
acquisition was completed on March 30, 2007, the results of operations of the
GE Water Acquisition are included in our results of operations for the portion
of the fiscal year ended July 31, 2007 subsequent to the acquisition date and
are excluded from our results of operations for fiscal 2006 and 2005. Pro forma
consolidated statement of income data has not been presented due to the
unavailability of pre-acquisition GE Water financial statements, since GE did
not maintain separate financial statements related to these purchased assets,
and the insignificant impact of this acquisition on our consolidated net
income.
Fiscal 2006
Crosstex
On August 1, 2005, we
acquired Crosstex, a privately held company founded in 1953 and headquartered
in Hauppauge, New York. Crosstex is a leading manufacturer and reseller of
single-use infection control products used principally in the dental market.
Crosstex products include face masks, patient towels and bibs, self-sealing
sterilization pouches, tray covers, sterilization packaging accessories,
surface barriers including eyewear, aprons and gowns, disinfectants and
deodorizers, germicidal wipes, hand care products, gloves, sponges, cotton
products, cups, needles and syringes, scalpels and blades, and saliva
evacuators and ejectors.
Under the terms of Stock Purchase Agreements
with the five stockholders of Crosstex, pursuant to which we acquired all of
the issued and outstanding capital stock of Crosstex, we paid an aggregate
purchase price (excluding any earnout) of approximately $77,863,000, comprised
of approximately $69,843,000 in cash consideration and 384,821 shares of Cantel
common stock (valued at $6,737,000) to the former Crosstex shareholders, and
transaction costs of $1,283,000. The purchase price included the retirement of
bank debt and certain other liabilities of Crosstex. In addition to this
purchase price, there is a further $12,000,000 potential earnout payable to the
sellers of Crosstex over three years based on the achievement by Crosstex of
certain targets of (i) earnings before interest and taxes and (ii) gross profit
percentage. For the post-acquisition years ended July 31, 2007 and 2006, the
full potential earnouts for years one and two of $3,667,000 annually, or
$7,334,000 in the aggregate, was earned by the sellers of Crosstex and
therefore represented additional purchase price, bringing the aggregate earned
purchase price to $85,197,000. The additional earnout purchase price for fiscal
2007 and 2006 was reflected in the accompanying Consolidated Balance Sheets as
additional goodwill and as a separate item within current liabilities at July
31, 2007 and 2006. The fiscal 2006 earnout was paid in October 2006 and the fiscal
2007 earnout is not required to be paid until October 2007. For the fiscal year
ended July 31, 2008, an additional earnout of $4,666,000 is available to the
sellers of Crosstex if the specified targets of earnings before interest and
taxes, and gross profit percentage, are achieved. Such additional earnout, if
achieved, would represent additional purchase price and therefore be recorded
as additional goodwill when earned. As of July 31, 2007, none of the fiscal
year 2008 earnout had been earned.
Since the acquisition
was completed on the first day of fiscal 2006, the results of operations of
Crosstex are included in our results of operations for fiscal 2007 and 2006 and
are excluded from our results of operations for fiscal 2005. As a result of the
acquisition, we added a new reporting segment known as Healthcare Disposables,
as more fully described in Note 17 to the Consolidated Financial Statements.
Operating income added
by Crosstex excludes interest expense associated with the Companys borrowings
related to the acquisition. The segment operating income for fiscal 2006 also
excludes non-recurring charges directly related to the acquisition which were
incurred by us upon the closing of the acquisition. Such non-recurring charges
include (i) debt issuance costs relating to the term loan facility of
approximately $160,000 and (ii) incentive compensation for an officer of Cantel
of approximately $345,000. The aggregate amount of such charges was
approximately $505,000 (or $318,000, net of tax) and has been included within
general corporate expenses in our segment presentation in Note 17 to our
Consolidated Financial Statements. However, included within our Healthcare
Disposables segment operating income for the first three months of fiscal 2006
was amortization related to the step-up in the value of inventories of $658,000
(included within cost of sales).
The reasons for the
acquisition of Crosstex were as follows: (i) the complementary nature of the
companies infection prevention and control products; (ii) the addition of a
market leading company in a distinct niche in infection prevention and control;
(iii) the increase in the percentage of our net sales derived from recurring
consumables; (iv) the opportunity to utilize Crosstex as a sizeable platform to
acquire additional companies in the healthcare consumables industry; (v) the
expectation that the acquisition will be accretive to our earnings per share;
and (vi) the opportunity for us to further expand our business into the design,
manufacture and distribution of proprietary products. Such reasons constitute
the
15
significant factors
which contributed to a purchase price that resulted in recognition of goodwill.
The purchase price
(including the fiscal 2007 and 2006 earnouts) was allocated to the assets
acquired and assumed liabilities based on estimated fair values as follows:
|
|
Final
|
|
|
|
Allocation
|
|
Net Assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,264,000
|
|
Accounts receivable
|
|
4,387,000
|
|
Inventories
|
|
7,291,000
|
|
Other current assets
|
|
731,000
|
|
Total current assets
|
|
16,673,000
|
|
Property and equipment
|
|
13,809,000
|
|
Non-amortizable intangible
assets - trade names (indefinite life)
|
|
5,200,000
|
|
Amortizable intangible assets:
|
|
|
|
Non-compete agreements (6-year
life)
|
|
1,800,000
|
|
Customer relationships
(10-year life)
|
|
17,900,000
|
|
Branded products (10-year
life)
|
|
8,700,000
|
|
Total amortizable intangible
assets (9-year weighted average life)
|
|
28,400,000
|
|
Other assets
|
|
50,000
|
|
Current liabilities
|
|
(4,571,000
|
)
|
Noncurrent deferred income tax
liabilities
|
|
(16,241,000
|
)
|
Net assets acquired
|
|
$
|
43,320,000
|
|
There were no
in-process research and development projects acquired in connection with the
acquisition. The excess purchase price of $41,877,000 was assigned to goodwill.
Such goodwill, all of which is non-deductible for income tax purposes, has been
included in our Healthcare Disposables reporting segment. Included in cash and
cash equivalents was $1,370,000 funded by the selling stockholders and utilized
for the payment in August 2005 of current liabilities (included above and
reflected within cash flows from investing activities in our Consolidated
Statements of Cash Flows for fiscal 2006) directly resulting from the
acquisition.
Selected consolidated
statements of income data for fiscal 2007 and 2006 and comparable unaudited pro
forma consolidated statement of income data for fiscal 2005 (assuming that
Crosstex was included in our results of continuing operations as of the
beginning of fiscal 2005) are as follows:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
219,044,000
|
|
$
|
192,179,000
|
|
$
|
184,545,000
|
|
Income from continuing
operations
|
|
$
|
8,104,000
|
|
$
|
6,653,000
|
|
$
|
8,633,000
|
|
Earnings per share from
continuing operations:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
$
|
0.43
|
|
$
|
0.57
|
|
Diluted
|
|
$
|
0.50
|
|
$
|
0.41
|
|
$
|
0.52
|
|
Weighted average common
shares:
|
|
|
|
|
|
|
|
Basic
|
|
15,631,000
|
|
15,471,000
|
|
15,215,000
|
|
Diluted
|
|
16,153,000
|
|
16,276,000
|
|
16,593,000
|
|
This pro forma information
for fiscal 2005 is provided for illustrative purposes only, and does not
necessarily indicate what the operating results of the combined company might
have been had the acquisition actually occurred at the beginning of fiscal
2005, nor does it necessarily indicate the combined companys future operating
results.
In order to effect the
unaudited pro forma consolidated statement of income data for fiscal 2005, the
operating results of Cantel for fiscal 2005 were consolidated with the
operating results of Crosstex for their fiscal year ended April 30, 2005. The
results presented in the selected unaudited pro forma consolidated statement of
income data for fiscal 2005 have been prepared using the following assumptions:
(i) cost of sales during fiscal 2005 reflects a step-up in the cost basis of
Crosstex inventories based upon the appraised value of such inventories; (ii)
amortization of intangible assets and
16
depreciation and
amortization of property and equipment is based upon the appraised fair values
and useful lives of such assets; (iii) interest expense includes interest on
the senior bank debt at an effective interest rate of 6% per annum,
amortization of a portion of the new debt issuance costs over the life of the
credit facilities in accordance with applicable accounting rules and
elimination of the historical interest expense of Crosstex; (iv) compensation
for former owners has been decreased to be consistent with the terms of their
new employment contracts; and (v) calculation of the income tax effects of the
pro forma adjustments. All other operating results reflect actual performance.
The unaudited pro
forma consolidated statement of income data for fiscal 2005 does not reflect
non-recurring charges directly related to the acquisition which were incurred
by us upon the closing of the acquisition. Such non-recurring charges include
(i) debt issuance costs relating to the term loan facility of approximately
$160,000 and (ii) incentive compensation for an officer of Cantel of
approximately $345,000. The aggregate amount of such charges was approximately
$318,000, net of tax. If such charges had been included in the unaudited pro
forma consolidated statement of income data, pro forma consolidated basic and
diluted earnings per share from continuing operations would have been $0.55 and
$0.50, respectively, for fiscal 2005.
Fluid Solutions
On May 1, 2006, Mar
Cor purchased certain net assets of Fluid Solutions, Inc. (Fluid Solutions),
a company with pre-acquisition annual revenues of approximately $5,000,000
based in Lowell, Massachusetts that designs, manufactures, installs and
services high quality, high purity water systems for use in biotech,
pharmaceutical, research, hospitals, and semiconductor environments. Total
consideration for the transaction was $2,959,000.
The purchase price was
allocated to the assets acquired and assumed liabilities based on estimated
fair values as follows:
|
|
Final
|
|
|
|
Allocation
|
|
Net Assets
|
|
|
|
Current assets
|
|
$
|
1,486,000
|
|
Property and equipment
|
|
887,000
|
|
Non-amortizable intangible
assets - trade names (indefinite life)
|
|
214,000
|
|
Amortizable intangible assets
- customer relationships (4-year weighted average life)
|
|
220,000
|
|
Current liabilities
|
|
(430,000
|
)
|
Net assets acquired
|
|
$
|
2,377,000
|
|
The excess purchase
price of $582,000 was assigned to goodwill. Such goodwill, all of which is
deductible for income tax purposes, has been included in our Water Purification
and Filtration reporting segment.
The reasons for the
acquisition were as follows: (i) the opportunity to add a base of business and
expand the Mar Cor service network in a region that has a concentration of life
science companies as well as healthcare and research institutions; (ii) further
develop the Fluid Solutions water business to serve the New England dialysis
market; (iii) the potential revenue and cost savings synergies and efficiencies
that could be realized through optimizing and combining the acquired assets
(including Fluid Solution employees) into Mar Cor; and (iv) the expectation
that the acquisition will be accretive to our future earnings per share.
Since the acquisition
was completed on May 1, 2006, the results of operations of Fluid Solutions are
included in our results of operations for fiscal 2007 and the portion of fiscal
2006 subsequent to the date of the acquisition and are excluded from our
results of operations for fiscal 2005. Pro forma consolidated statement of
income data for fiscal 2006 and 2005 have not been presented due to the
insignificant impact of this acquisition.
17
4.
Inventories
A summary of
inventories is as follows:
|
|
July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Raw materials and parts
|
|
$
|
11,773,000
|
|
$
|
9,692,000
|
|
Work-in-process
|
|
3,691,000
|
|
3,717,000
|
|
Finished goods
|
|
11,856,000
|
|
10,533,000
|
|
Total
|
|
$
|
27,320,000
|
|
$
|
23,942,000
|
|
5.
Financial Instruments
We account for
derivative instruments and hedging activities in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
(SFAS 133), as amended. SFAS 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 derivative 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.
Changes in the value
of the euro against the United States dollar affect our results of operations
because a portion of the net assets of our Netherlands subsidiary (which are
reported in our Dialysis, Endoscope Reprocessing and Water Purification and
Filtration segments) are denominated and ultimately settled in United States
dollars but must be converted into its functional euro currency. In order to
hedge against the impact of fluctuations in the value of the euro relative to
the United States dollar, we enter into short-term contracts to purchase euros
forward, which contracts are generally one month in duration. These short-term
contracts are designated as fair value hedge instruments. There was one foreign
currency forward contract amounting to 1,190,000 at July 31, 2007 which
covered certain assets and liabilities of Minntechs Netherlands subsidiary
which are denominated in United States dollars. Such contract expired on August
31, 2007. Under our credit facilities, such contracts to purchase euros may not
exceed $12,000,000 in an aggregate notional amount at any time. For fiscal
2007, such forward contracts were effective in offsetting the impact on
operations of the strengthening of the euro. Gains and losses related to the
hedging contracts to buy euros forward are immediately realized within general
and administrative expenses due to the short-term nature of such contracts. We
do not hold any derivative financial instruments for speculative or trading
purposes.
During fiscal 2006 and
2005, Carsen purchased and paid for a substantial portion of its products in
United States dollars and sold its products in Canadian dollars, and was
therefore exposed to fluctuations in the rates of exchange between the United States
dollar and the Canadian dollar. In order to hedge against the impact of such
currency fluctuations on the purchases of inventories, Carsen entered into
foreign currency forward contracts on firm purchases of such inventories in
United States dollars. These foreign currency forward contracts were designated
as cash flow hedge instruments. Recognition of losses related to the Canadian
foreign currency forward contracts was deferred within other comprehensive
income for fiscal 2006 and 2005 until settlement of the underlying commitments,
and realized gains and losses were recorded within cost of sales (which is
included within income from discontinued operations) upon settlement. All
outstanding Canadian foreign currency forward contracts were settled before the
sale of substantially all of Carsens assets to Olympus on July 31, 2006;
therefore Carsen no longer has any such foreign currency forward contracts.
As of July 31, 2007
and 2006, the carrying amounts for cash and cash equivalents, accounts receivable
and accounts payable approximate fair value due to the short maturity of these
instruments. We believe that as of July 31, 2007, the fair value of our
outstanding borrowings under our credit facilities approximates the carrying
value of those obligations based on the borrowing rates which are comparable to
market interest rates.
18
6.
Intangibles
and Goodwill
Our intangible assets
with definite lives consist primarily of customer relationships, technology,
brand names, non-compete agreements and patents. These intangible assets are
being amortized on the straight-line method over the estimated useful lives of
the assets ranging from 1-20 years and have a weighted average amortization
period of 10 years. Amortization expense related to intangible assets was
$4,836,000, $4,726,000 and $1,590,000 for fiscal 2007, 2006 and 2005,
respectively. Our intangible assets that have indefinite useful lives and
therefore are not amortized consist of trademarks and tradenames. The increase
in gross intangible assets at July 31, 2007, compared with July 31, 2006 is
primarily due to the GE Water and Twist acquisitions as further explained in
Note 3 to the Consolidated Financial Statements.
The Companys
intangible assets consist of the following:
|
|
July 31, 2007
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible assets with finite
lives:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
28,273,000
|
|
$
|
(7,677,000
|
)
|
$
|
20,596,000
|
|
Technology
|
|
9,263,000
|
|
(3,914,000
|
)
|
5,349,000
|
|
Brand names
|
|
9,197,000
|
|
(1,755,000
|
)
|
7,442,000
|
|
Non-compete agreements
|
|
1,969,000
|
|
(769,000
|
)
|
1,200,000
|
|
Patents and other
registrations
|
|
986,000
|
|
(71,000
|
)
|
915,000
|
|
|
|
49,688,000
|
|
(14,186,000
|
)
|
35,502,000
|
|
Trademarks and tradenames
|
|
9,113,000
|
|
|
|
9,113,000
|
|
Total intangible assets
|
|
$
|
58,801,000
|
|
$
|
(14,186,000
|
)
|
$
|
44,615,000
|
|
|
|
July 31, 2006
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible assets with finite
lives:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
23,411,000
|
|
$
|
(4,778,000
|
)
|
$
|
18,633,000
|
|
Technology
|
|
8,880,000
|
|
(2,929,000
|
)
|
5,951,000
|
|
Brand names
|
|
8,700,000
|
|
(870,000
|
)
|
7,830,000
|
|
Non-compete agreements
|
|
1,969,000
|
|
(469,000
|
)
|
1,500,000
|
|
Patents and other
registrations
|
|
343,000
|
|
(46,000
|
)
|
297,000
|
|
|
|
43,303,000
|
|
(9,092,000
|
)
|
34,211,000
|
|
Trademarks and tradenames
|
|
9,008,000
|
|
|
|
9,008,000
|
|
Total intangible assets
|
|
$
|
52,311,000
|
|
$
|
(9,092,000
|
)
|
$
|
43,219,000
|
|
Estimated annual
amortization expense of our intangible assets for the next five years is as
follows:
Year Ending July 31,
|
|
2008
|
|
$
|
5,247,000
|
|
2009
|
|
4,905,000
|
|
2010
|
|
4,671,000
|
|
2011
|
|
4,443,000
|
|
2012
|
|
4,040,000
|
|
|
|
|
|
|
19
Goodwill changed during fiscal 2007 and 2006
as follows:
|
|
|
|
|
|
|
|
Water
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
Endoscope
|
|
Purification
|
|
|
|
Total
|
|
|
|
Dialysis
|
|
Disposables
|
|
Reprocessing
|
|
and Filtration
|
|
All Other
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2005
|
|
$
|
8,415,000
|
|
$
|
|
|
$
|
6,258,000
|
|
$
|
11,437,000
|
|
$
|
7,009,000
|
|
$
|
33,119,000
|
|
Acquisitions
|
|
|
|
34,543,000
|
|
|
|
582,000
|
|
|
|
35,125,000
|
|
Earnout on acquisition
|
|
|
|
3,667,000
|
|
|
|
|
|
|
|
3,667,000
|
|
Adjustments primarily relating to income
tax exposure of acquisitions
|
|
(153,000
|
)
|
|
|
|
|
(66,000
|
)
|
(87,000
|
)
|
(306,000
|
)
|
Foreign currency translation
|
|
|
|
|
|
94,000
|
|
396,000
|
|
476,000
|
|
966,000
|
|
Balance, July 31, 2006
|
|
8,262,000
|
|
38,210,000
|
|
6,352,000
|
|
12,349,000
|
|
7,398,000
|
|
72,571,000
|
|
Acquisitions
|
|
|
|
1,134,000
|
|
|
|
24,126,000
|
|
|
|
25,260,000
|
|
Earnout on acquisition
|
|
|
|
3,667,000
|
|
|
|
|
|
|
|
3,667,000
|
|
Adjustments primarily relating to income
tax exposure of acquisitions
|
|
(107,000
|
)
|
|
|
|
|
(152,000
|
)
|
(14,000
|
)
|
(273,000
|
)
|
Foreign currency translation
|
|
|
|
|
|
148,000
|
|
318,000
|
|
382,000
|
|
848,000
|
|
Balance, July 31, 2007
|
|
$
|
8,155,000
|
|
$
|
43,011,000
|
|
$
|
6,500,000
|
|
$
|
36,641,000
|
|
$
|
7,766,000
|
|
$
|
102,073,000
|
|
On July 31, 2007 and 2006, we performed
impairment studies of the Companys goodwill and trademark and tradenames and
concluded that such assets were not impaired.
7.
Warranties
A
summary of activity in the warranty reserves follows:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
619,000
|
|
$
|
581,000
|
|
Acquisitions
|
|
200,000
|
|
31,000
|
|
Provisions
|
|
1,091,000
|
|
848,000
|
|
Charges
|
|
(884,000
|
)
|
(845,000
|
)
|
Foreign currency translation
|
|
7,000
|
|
4,000
|
|
Ending Balance
|
|
$
|
1,033,000
|
|
$
|
619,000
|
|
The
warranty provisions and charges during fiscal 2007 and 2006 relate principally
to the Companys endoscope reprocessing and water purification products.
Warranty reserves are included in accrued expenses in the Consolidated Balance
Sheets.
8.
Financing Arrangements
In conjunction with the acquisition of
Crosstex, we entered into amended and restated credit facilities dated as of
August 1, 2005 (the 2005 U.S. Credit Facilities) with a consortium of
lenders to fund the cash consideration paid in the acquisition and costs
associated with the acquisition, as well as to modify our existing United
States credit facilities. In addition, we agreed to repay the July 31, 2005
outstanding borrowings of $15,750,000 under our original term loan facility
within ninety (90) days from the closing. In October 2005, such amount was repaid
primarily through the repatriation of funds from our foreign subsidiaries.
Amounts we repay under the term loan facility may not be re-borrowed.
Additionally, we incurred debt issuance costs of approximately $1,426,000, of
which $160,000 of third-party costs was recorded in general and administrative
expenses during the three months ended October 31, 2005 in accordance with
applicable accounting rules. The remaining $1,266,000 of costs was recorded in
other assets and is being amortized over the life of the credit facilities.
On March 29, 2007, we amended the 2005 U.S.
Credit Facilities primarily to allow for the GE Water Acquisition.
Additionally, on May 17, 2007 we amended the 2005 U.S. Credit Facilities
principally to increase the borrowing
20
capacity under the existing senior secured
revolving credit facility as well as to obtain improved terms on interest
margins applicable to our outstanding borrowings. The 2005 U.S. Credit
Facilities, as amended, include (i) a six-year $40.0 million senior
secured amortizing term loan facility and (ii) a five-year $50.0 million
senior secured revolving credit facility.
At
July 31, 2007, borrowings under the 2005 U.S. Credit Facilities bear interest
at rates ranging from 0% to 0.50% above the lenders base rate, or at rates
ranging from .625% to 1.75% above the London Interbank Offered Rate (LIBOR),
depending upon our consolidated ratio of debt to earnings before interest,
taxes, depreciation and amortization, and as further adjusted under the terms
of the 2005 U.S. Credit Facilities (EBITDA). At July 31, 2007, the
lenders base rate was 8.25% and the LIBOR rates ranged from 5.23% to 5.46%.
The margins applicable to our outstanding borrowings at July 31, 2007 were
0.25% above the lenders base rate and 1.50% above LIBOR. All of our
outstanding borrowings were under LIBOR contracts at July 31, 2007. The 2005
U.S. Credit Facilities also provide for fees on the unused portion of our
revolving credit facility at rates ranging from 0.15% to 0.30%, depending upon
our consolidated ratio of debt to EBITDA; such rate was 0.30% at July 31, 2007.
The
2005 U.S. Credit Facilities require us to meet certain financial covenants and
are secured by (i) substantially all of our U.S.-based assets (including
assets of Cantel, Minntech, Mar Cor and Crosstex) and (ii) our pledge of
all of the outstanding shares of Minntech, Mar Cor and Crosstex and 65% of the
outstanding shares of our foreign-based subsidiaries. Additionally, we are not
permitted to pay cash dividends on our Common Stock without the consent of our
United States lenders. As of July 31, 2007, we are in compliance with all
financial and other covenants under the 2005 U.S. Credit Facilities, as
amended.
On
July 31, 2007, we had $57,000,000 of outstanding borrowings under the 2005 U.S.
Credit Facilities which consisted of $34,000,000 and $23,000,000 under the term
loan facility and the revolving credit facility, respectively. Subsequent to
July 31, 2007, we borrowed an additional $11,550,000 under the revolving credit
facility and repaid $1,500,000 under the term loan facility; therefore, at
September 28, 2007, we had $67,050,000 of outstanding borrowings under the 2005
U.S. Credit Facilities, including $32,500,000 and $34,550,000 under the term
loan facility and the revolving credit facility, respectively. The maturities
of our credit facilities are described in Note 10 to the Consolidated Financial
Statements.
9.
Income Taxes
The consolidated effective tax rate from continuing
operations was 42.5%, 44.3% and 41.0% for fiscal 2007, 2006, and 2005,
respectively, and reflects income tax expense for our United States and
international operations at their respective statutory rates.
The
provision for income taxes from continuing operations consists of the
following:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Currrent
|
|
Deferred
|
|
Currrent
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,117,000
|
|
$
|
(1,503,000
|
)
|
$
|
5,554,000
|
|
$
|
(1,337,000
|
)
|
$
|
1,269,000
|
|
$
|
2,765,000
|
|
State
|
|
1,422,000
|
|
(421,000
|
)
|
1,398,000
|
|
(297,000
|
)
|
778,000
|
|
11,000
|
|
Canada
|
|
937,000
|
|
(274,000
|
)
|
367,000
|
|
(177,000
|
)
|
781,000
|
|
(267,000
|
)
|
Netherlands
|
|
(66,000
|
)
|
(96,000
|
)
|
(119,000
|
)
|
(25,000
|
)
|
|
|
(24,000
|
)
|
Japan
|
|
|
|
(118,000
|
)
|
|
|
(66,000
|
)
|
174,000
|
|
|
|
Total
|
|
$
|
8,410,000
|
|
$
|
(2,412,000
|
)
|
$
|
7,200,000
|
|
$
|
(1,902,000
|
)
|
$
|
3,002,000
|
|
$
|
2,485,000
|
|
21
The
geographic components of income from continuing operations before income taxes
are as follows:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,745,000
|
|
$
|
14,126,000
|
|
$
|
12,936,000
|
|
Canada
|
|
1,969,000
|
|
386,000
|
|
1,456,000
|
|
Netherlands
|
|
(2,169,000
|
)
|
(2,423,000
|
)
|
(1,397,000
|
)
|
Japan
|
|
(238,000
|
)
|
(138,000
|
)
|
387,000
|
|
Singapore
|
|
(205,000
|
)
|
|
|
|
|
Total
|
|
$
|
14,102,000
|
|
$
|
11,951,000
|
|
$
|
13,382,000
|
|
The
effective tax rate from continuing operations differs from the United States
statutory tax rate (34.3% in 2007, 35.0% in 2006 and 34.0% in 2005) due to the
following:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Expected statutory tax
|
|
$
|
4,841,000
|
|
$
|
4,183,000
|
|
$
|
4,550,000
|
|
Differential attributable to foreign
operations:
|
|
|
|
|
|
|
|
Canada
|
|
(13,000
|
)
|
54,000
|
|
18,000
|
|
Netherlands
|
|
582,000
|
|
704,000
|
|
451,000
|
|
Japan
|
|
(37,000
|
)
|
(18,000
|
)
|
43,000
|
|
Singapore
|
|
70,000
|
|
|
|
|
|
State and local taxes
|
|
642,000
|
|
694,000
|
|
521,000
|
|
Extraterritorial income exclusion
|
|
(56,000
|
)
|
(117,000
|
)
|
(85,000
|
)
|
Stock option expense
|
|
(27,000
|
)
|
35,000
|
|
|
|
Tax reserve provision
|
|
(101,000
|
)
|
(84,000
|
)
|
(30,000
|
)
|
Domestic production deduction
|
|
(86,000
|
)
|
(241,000
|
)
|
|
|
Change in our Federal tax rate
|
|
136,000
|
|
39,000
|
|
|
|
Other
|
|
47,000
|
|
49,000
|
|
19,000
|
|
Total
|
|
$
|
5,998,000
|
|
$
|
5,298,000
|
|
$
|
5,487,000
|
|
22
Deferred
income tax assets and liabilities from continuing operations are comprised of
the following:
|
|
July 31,
|
|
|
|
2007
|
|
2006
|
|
Current deferred tax assets:
|
|
|
|
|
|
Accrued expenses
|
|
$
|
1,330,000
|
|
$
|
1,108,000
|
|
Inventories
|
|
755,000
|
|
873,000
|
|
Accounts receivable
|
|
191,000
|
|
171,000
|
|
Subtotal
|
|
2,276,000
|
|
2,152,000
|
|
Valuation allowance
|
|
(745,000
|
)
|
(671,000
|
)
|
|
|
$
|
1,531,000
|
|
$
|
1,481,000
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
Goodwill
|
|
$
|
96,000
|
|
$
|
165,000
|
|
Other long-term liabilities
|
|
690,000
|
|
672,000
|
|
Stock-based compensation
|
|
693,000
|
|
240,000
|
|
Foreign tax credit
|
|
2,024,000
|
|
1,424,000
|
|
Foreign NOLs
|
|
1,940,000
|
|
321,000
|
|
Capitalized R&D costs
|
|
|
|
1,070,000
|
|
Other
|
|
3,000
|
|
94,000
|
|
Subtotal
|
|
5,446,000
|
|
3,986,000
|
|
Valuation allowance
|
|
(3,042,000
|
)
|
(2,172,000
|
)
|
|
|
2,404,000
|
|
1,814,000
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
|
(5,615,000
|
)
|
(5,966,000
|
)
|
Intangible assets
|
|
(14,245,000
|
)
|
(15,906,000
|
)
|
Cumulative translation adjustment
|
|
(1,756,000
|
)
|
(1,443,000
|
)
|
Tax on unremitted foreign earnings
|
|
(520,000
|
)
|
(520,000
|
)
|
|
|
(22,136,000
|
)
|
(23,835,000
|
)
|
Net non-current deferred tax liabilities
|
|
$
|
(19,732,000
|
)
|
$
|
(22,021,000
|
)
|
Deferred
tax assets and liabilities have been adjusted for changes in statutory tax
rates as appropriate. Such changes only have a significant impact in the United
States where substantially all of our deferred tax items exist. Such deferred
tax items reflect a combined U.S. Federal and state effective rate of
approximately 38.3% and 39.0% for fiscal 2007 and 2006, respectively.
For
domestic tax reporting purposes, our net operating loss carryforwards (NOLs)
were fully utilized during the first three months of fiscal 2006. For foreign
tax reporting purposes, our NOLs at July 31, 2007 are approximately $7,131,000.
Of this amount, the NOLs from our Japanese subsidiary total approximately
$384,000 and will begin to expire on July 31, 2013. NOLs from our Netherlands
subsidiary total approximately $6,542,000, of which $4,776,000 will expire on
July 31, 2016 and $1,766,000 has an indefinite life. NOLs from our Singapore
subsidiary total approximately $205,000 and expire on July 31, 2012. Full
valuation allowances have been established for the Netherlands and Singapore
NOLs as we currently believe it is more likely than not that we will not
utilize such NOLs.
On January 1, 2006, a favorable tax ruling in
the Netherlands expired. This favorable ruling generated no effective tax rate
for the Netherlands. The expiration of the ruling generated an effective tax
rate which gave rise to deferred tax assets amounting to approximately
$1,419,000 as of July 31, 2006. A valuation allowance was established in fiscal
2006 to reduce substantially all the net deferred tax assets of our Netherlands
subsidiary.
During fiscal 2006, we repatriated dividends
of approximately $2,000,000 and $44,872,000 of foreign earnings from continuing
operations and discontinued operations, respectively, for which we have
provided U.S. Federal and state income taxes and foreign withholding taxes. During
fiscal 2007, no dividends were repatriated from our foreign subsidiaries.
Canadian income taxes related to income from
discontinued operations have an effective tax rate of approximately 19.9% and
35.4% in fiscal 2007 and 2006, respectively. During fiscal 2007, the low
overall effective tax rate was due to a state refund related to our
discontinued operations. During fiscal 2006, we also recorded a gain on
disposal of
23
discontinued operations of $6,776,000, which
is net of $4,621,000 in taxes. Such income taxes related to the gain on
disposal of discontinued operations include Canadian income and foreign
withholding taxes of $2,617,000 and U.S. income taxes of $2,004,000. Such U.S.
income taxes and foreign withholding taxes related exclusively to the
aforementioned dividend repatriation. See Note 18 to the Consolidated Financial
Statements for additional information related to discontinued operations.
We have a deferred tax asset of $1,954,000
related to a foreign tax credit that resulted from the dividend repatriation
during fiscal 2006. This foreign tax credit carryover expires on July 31, 2016.
Additionally, we have a deferred tax asset of $70,000 related to a foreign tax
credit in our Specialty Packaging segment which expires on July 31, 2016. Full
valuation allowances have been established for both of these foreign tax
credits as we believe that it is more likely than not that we will not utilize
such foreign tax credits.
We increased our federal and foreign valuation
allowances during fiscal 2007 by $944,000, from $2,843,000 at July 31, 2006 to
$3,787,000 at July 31, 2007 due to the increase in our deferred tax assets
related to the foreign tax credits and the foreign NOLs.
A portion of the undistributed earnings of
our foreign subsidiaries, which relate to our Canadian operations, amounting to
approximately $13,100,000 was considered to be indefinitely reinvested at July
31, 2007. Accordingly, no provision has been made for United States income
taxes that might result from repatriation of these earnings.
We had income tax reserves totaling $697,000 and
$1,088,000 at July 31, 2007 and 2006, respectively. At July 31, 2007, such
amount was included in prepaid expenses and other current assets since we were
in an overall income tax receivable position. At July 31, 2006, such amount was
recorded in income taxes payable.
10.
Commitments and Contingencies
Long-term contractual obligations
Aggregate
annual required payments over the next five years and thereafter under our
contractual obligations that have long-term components are as follows:
|
|
Year Ended July 31,
|
|
|
|
(Amounts in thousands)
|
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of the credit facilities
|
|
$
|
6,000
|
|
$
|
8,000
|
|
$
|
10,000
|
|
$
|
33,000
|
|
$
|
|
|
$
|
|
|
$
|
57,000
|
|
Expected interest payments under the credit
facilities (1)
|
|
3,726
|
|
3,246
|
|
2,627
|
|
380
|
|
|
|
|
|
9,979
|
|
Minimum commitments under noncancelable
operating leases
|
|
3,281
|
|
2,868
|
|
2,218
|
|
1,398
|
|
745
|
|
1,617
|
|
12,127
|
|
Minimum commitments under noncancelable
capital leases
|
|
32
|
|
32
|
|
32
|
|
13
|
|
|
|
|
|
109
|
|
Minimum commitments under license agreement
|
|
48
|
|
73
|
|
109
|
|
162
|
|
187
|
|
2,701
|
|
3,280
|
|
Note payable - Dyped
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
Deferred compensation and other
|
|
180
|
|
108
|
|
34
|
|
406
|
|
406
|
|
606
|
|
1,740
|
|
Employment agreements
|
|
4,092
|
|
1,209
|
|
140
|
|
116
|
|
122
|
|
|
|
5,679
|
|
Total contractual obligations
|
|
$
|
18,044
|
|
$
|
15,536
|
|
$
|
15,160
|
|
$
|
35,475
|
|
$
|
1,460
|
|
$
|
4,924
|
|
$
|
90,599
|
|
(1)
The expected interest payments under the term and revolving credit
facilities reflect interest rates of 6.94% and 6.77%, respectively, which were
our interest rates on outstanding borrowings at July 31, 2007.
Operating leases
Minimum commitments under operating leases
include minimum rental commitments for our leased manufacturing facilities,
warehouses, office space and equipment.
24
Seven of the more significant leases that
contain escalation clauses are two building leases for our Water Purification
and Filtration business, three building leases for our Healthcare Disposables
business and two building leases for our Specialty Packaging business. The two
Water Purification and Filtration building leases are for the United States
headquarters in suburban Philadelphia, Pennsylvania and the Canadian
headquarters in suburban Toronto, Ontario. The lease for the Philadelphia building
provides for monthly base rent of approximately $15,200 during fiscal 2008 and
escalates annually to approximately $18,200 in fiscal 2017 when it expires. The
Toronto building lease provides for monthly base rent of approximately $10,500
during fiscal 2008 through fiscal 2009 and escalates to approximately $11,100
in fiscal 2010. The Toronto building lease expires in fiscal 2015. Both the
Philadelphia and Toronto building leases are guaranteed by Cantel. The
Healthcare Disposables segment has three significant building leases with
escalation clauses that are used for manufacturing and warehousing. One
building lease in Sharon, Pennsylvania provides for monthly base rent of
approximately $8,100 during fiscal 2008 and escalates annually to approximately
$9,700 in fiscal 2015 when it expires. This facility is owned by an entity
controlled by three of the former owners of Crosstex who also currently serve
as officers of Crosstex. The second building lease in Lawrenceville, Georgia
provides for monthly base rent of approximately $11,000 during fiscal 2008 and
escalates annually to approximately $11,800 in fiscal 2011 when it expires. The
third building lease in Santa Fe Springs, California provides for monthly base
rent of approximately $18,500 during fiscal 2008 and escalates annually to
approximately $19,900 in fiscal 2011 when it expires. Additionally, our
Specialty Packaging segment has two significant building leases with escalation
clauses that are used for manufacturing and warehousing. One building lease in
Edmonton, Alberta provides for monthly base rent of approximately $6,400 during
fiscal 2008 and escalates annually to approximately $7,100 in fiscal 2011 when
it expires. The second building lease in Glen Burnie, Maryland provides for
monthly base rent of $5,900 during fiscal 2008 and escalates annually to
approximately $6,600 in fiscal 2013 when it expires.
Rent
expense related to operating leases for fiscal 2007 was recorded on a
straight-line basis and aggregated $3,531,000 compared with $2,881,000 and
$2,071,000 for fiscal 2006 and 2005, respectively, which excludes rent expense
related to our discontinued operations.
License agreement
On January 1, 2007, we entered into a license
agreement with a third-party which allows us to manufacture, use, import, sell
and distribute certain thermal control products relating to our Specialty
Packaging segment. In consideration, we agreed to pay a minimum annual royalty
payable each calendar year over the license agreement term of 20 years. At July
31, 2007, we had minimum future royalty obligations of approximately $3,280,000
relating to this license agreement.
Dyped note payable and other long-term liabilities
In
conjunction with the Dyped acquisition on September 12, 2003, we issued a note
with a face value of 1,350,000 ($1,505,000 using the exchange rate on the date
of the acquisition). At July 31, 2007, approximately $685,000 of this note was
outstanding using the exchange rate on July 31, 2007 and is payable on July 31,
2008. Such note is non-interest bearing and has been recorded in accrued
expenses at its present value of $651,000 at July 31, 2007.
Also
included in other long-term liabilities are deferred compensation arrangements
for certain former Minntech directors and officers.
11.
Stock-Based Compensation
On
August 1, 2005, we adopted SFAS No. 123R using the modified prospective method
for the transition. Under the modified prospective method, stock compensation
expense will be recognized for any option grant or stock award granted on or
after August 1, 2005, as well as the unvested portion of stock options granted
prior to August 1, 2005, based upon the awards fair value. For fiscal 2005 and
earlier periods, we have accounted for stock options using the intrinsic value
method under which stock compensation expense is not recognized because we
granted stock options with exercise prices equal to the market value of the
shares at the date of grant.
25
The
following table shows the income statement components of stock-based
compensation expense relating to continuing operations recognized in the
Consolidated Statement of Income:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
43,000
|
|
$
|
50,000
|
|
Operating expenses:
|
|
|
|
|
|
Selling
|
|
159,000
|
|
141,000
|
|
General and administrative
|
|
1,258,000
|
|
845,000
|
|
Research and development
|
|
22,000
|
|
20,000
|
|
Total operating expenses
|
|
1,439,000
|
|
1,006,000
|
|
Discontinued operations
|
|
|
|
122,000
|
|
Stock-based compensation before income
taxes
|
|
1,482,000
|
|
1,178,000
|
|
Income tax benefits
|
|
(490,000
|
)
|
(248,000
|
)
|
Total stock-based compensation expense, net
of tax
|
|
$
|
992,000
|
|
$
|
930,000
|
|
In
fiscal 2007 and 2006, the above stock-based compensation expense before income
taxes was recorded in the Consolidated Financial Statements as stock-based
compensation expense (which decreased both basic and diluted earnings per share
from net income by $0.06 and $0.05 in fiscal 2007 and 2006, respectively) and
an increase to additional capital. The related income tax benefits (which
pertain only to stock awards and options that do not qualify as incentive stock
options) were recorded as an increase to long-term deferred income tax assets
(which are netted with long-term deferred income tax liabilities) or a reduction
to income taxes payable, depending on the timing of the deduction, and a
reduction to income tax expense.
Most
of our stock option and nonvested stock awards are subject to graded vesting in
which portions of the award vest at different times during the vesting period,
as opposed to awards that vest at the end of the vesting period. We recognize
compensation expense for awards subject to graded vesting using the
straight-line basis, reduced by estimated forfeitures. At July 31, 2007, total
unrecognized stock-based compensation expense, net of tax, related to total
nonvested stock options and stock awards was $2,659,000 with a remaining
weighted average period of 30 months over which such expense is expected to be
recognized. Such unrecognized stock-based compensation expense increased in
fiscal 2007, compared with fiscal 2006, due to additional employee stock option
and nonvested stock grants.
We
determine the fair value of each nonvested stock award using the closing market
price of our Common Stock on the date of grant. In fiscal 2007, 175,000
nonvested stock awards were granted with a weighted average fair value of
$16.57. Such stock awards remain nonvested and outstanding at July 31, 2007.
Nonvested stock awards were not granted prior to February 1, 2007. Such
nonvested stock awards are deductible for tax purposes and were tax-effected
using the Companys estimated U.S. effective tax rate at the time of grant.
The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option valuation model with the following assumptions for options
granted during fiscal 2007, 2006 and 2005:
Weighted-Average
|
|
|
|
Black-Scholes Option
|
|
Year Ended July 31,
|
|
Valuation Assumptions
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Expected volatility (1)
|
|
0.368
|
|
0.515
|
|
0.446
|
|
Risk-free interest rate (2)
|
|
4.63
|
%
|
4.65
|
%
|
3.67
|
%
|
Expected lives (in years) (3)
|
|
4.04
|
|
4.80
|
|
3.49
|
|
(1) Volatility was based on historical closing prices of our Common
Stock.
(2) The U.S. Treasury rate based on the expected life at the date of
grant.
(3) Based on historical exercise behavior.
With respect to stock options granted during
the last 9 months of fiscal 2007, we reassessed both the expected option life
and stock price volatility assumptions by evaluating more recent historical
exercise behavior and stock price activity; such reevaluation resulted in
reductions in both expected option lives and volatility.
26
Additionally, all options were considered to
be non-deductible for tax purposes in the valuation model, except for options
granted during fiscal 2007 under the 2006 Incentive Equity Plan, the 1998
Directors Plan and certain options under the 1997 Employee Plan. Such non-qualified
options were tax-effected using the Companys estimated U.S. effective tax rate
at the time of grant. In fiscal 2007, 2006 and 2005, the weighted average fair
value of all options granted was $5.47, $8.15 and $7.38, respectively. The
aggregate intrinsic value (i.e. the excess market price over the exercise
price) of all options exercised was approximately $7,032,000, $2,714,000 and
$5,545,000 in fiscal 2007, 2006 and 2005, respectively.
A
summary of stock option activity follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
Outstanding at July 31, 2004
|
|
2,245,650
|
|
$
|
7.03
|
|
Granted
|
|
897,525
|
|
20.30
|
|
Canceled
|
|
(37,221
|
)
|
12.63
|
|
Exercised
|
|
(397,461
|
)
|
7.08
|
|
|
|
|
|
|
|
Outstanding at July 31, 2005
|
|
2,708,493
|
|
11.35
|
|
Granted
|
|
69,375
|
|
16.93
|
|
Canceled
|
|
(88,442
|
)
|
8.96
|
|
Exercised
|
|
(315,727
|
)
|
8.48
|
|
|
|
|
|
|
|
Outstanding at July 31, 2006
|
|
2,373,699
|
|
11.98
|
|
Granted
|
|
544,000
|
|
15.34
|
|
Canceled
|
|
(264,143
|
)
|
17.89
|
|
Exercised
|
|
(804,710
|
)
|
6.40
|
|
|
|
|
|
|
|
Outstanding at July 31, 2007
|
|
1,848,846
|
|
$
|
14.55
|
|
|
|
|
|
|
|
Exercisable at July 31, 2005
|
|
2,065,895
|
|
$
|
11.81
|
|
|
|
|
|
|
|
Exercisable at July 31, 2006
|
|
2,125,735
|
|
$
|
12.07
|
|
|
|
|
|
|
|
Exercisable at July 31, 2007
|
|
1,252,427
|
|
$
|
14.46
|
|
Upon
exercise of stock options, we typically issue new shares of our Common Stock
(as opposed to using treasury shares).
If
certain criteria are met when options are exercised or the underlying shares
are sold, the Company is allowed a deduction on its income tax return.
Accordingly, we account for the income tax effect on such income tax deductions
as additional capital (assuming deferred tax assets do not exist pertaining to
the exercised stock options) and as a reduction of income taxes payable. In
fiscal 2007 and 2006, options exercised resulted in income tax deductions that
reduced income taxes payable by $1,137,000 and $1,166,000, respectively.
At July 31, 2005 (prior to the adoption of SFAS
123R), we presented all tax benefits of deductions resulting from the exercise
of stock options as operating cash flows in the consolidated statements of cash
flows. Beginning August 1, 2005, we changed our cash flow presentation in
accordance with SFAS 123R, which requires the cash flows resulting from excess
tax benefits to be classified as financing cash flows. Excess tax benefits
arise when the ultimate tax effect of the deduction for tax purposes is greater
than the tax benefit on stock compensation expense (including tax benefits on
stock compensation expense that has only been reflected in the pro forma
disclosures) which was determined based upon the awards fair value.
27
The
following table summarizes additional information related to stock options
outstanding at July 31, 2007:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Number
|
|
Contractual
|
|
Average
|
|
Number
|
|
Contractual
|
|
Average
|
|
Range of Exercise
|
|
Outstanding
|
|
Life
|
|
Exercise
|
|
Exercisable
|
|
Life
|
|
Exercise
|
|
Prices
|
|
at July 31, 2007
|
|
(Months)
|
|
Price
|
|
At July 31, 2007
|
|
(Months)
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 2.27 - $3.88
|
|
272,250
|
|
10
|
|
$ 3.23
|
|
272,250
|
|
10
|
|
$ 3.23
|
|
$ 7.62 - $14.83
|
|
640,995
|
|
35
|
|
$ 11.99
|
|
262,201
|
|
18
|
|
$ 9.90
|
|
$ 16.24 - $29.49
|
|
935,601
|
|
35
|
|
$ 19.60
|
|
717,976
|
|
30
|
|
$ 20.37
|
|
$ 2.27 - $29.49
|
|
1,848,846
|
|
31
|
|
$ 14.55
|
|
1,252,427
|
|
23
|
|
$ 14.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intrinsic Value
|
|
$
|
4,659,819
|
|
|
|
|
|
$
|
4,265,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of our stock award plans follows:
2006 Incentive Equity Plan
On
January 10, 2007, the Company terminated our existing stock option plans and
adopted the Cantel Medical Corp. 2006 Incentive Equity Plan (the 2006 Plan).
The 2006 Plan provides for the granting of stock options (including incentive
stock options), restricted stock awards, stock appreciation rights and
performance-based awards (collectively equity awards) to our employees and
non-employee Directors. The 2006 Plan does not permit the granting of
discounted options or discounted stock appreciation rights. The maximum number
of shares as to which stock options and stock awards may be granted under the
2006 Plan is 1,000,000 shares, of which 500,000 shares are authorized for
issuance pursuant to stock options and stock appreciation rights and 500,000
shares are authorized for issuance pursuant to restricted stock and other stock
awards.
Options
outstanding under this plan:
were granted at the closing market price at
the time of the grant,
were granted as stock options that do not qualify as incentive stock options,
are usually exercisable in three or four equal annual installments contingent
upon being employed by the Company during that period,
were granted quarterly on the last day of each of our fiscal quarters to each
non-employee director who attended that quarters regularly scheduled Board of
Directors meeting to purchase 750 shares (100% are exercisable immediately),
were granted annually on the last day of our fiscal year to each member of our
Board of Directors to purchase 1,500 shares (assuming the individual was still
a member of the Board of Directors, 50% are exercisable on the first
anniversary of the grant of such options and 50% are exercisable on the second
anniversary of the grant of such options), and
expire five years from the date of the
grant.
Restricted
stock shares outstanding under this plan are restricted solely due to an
employment length-of-service restriction which lapses in three equal periods
based upon being employed by the Company during that period. At July 31, 2007,
options to purchase 88,000 shares of Common Stock were outstanding, and 175,000
nonvested restricted stock shares were issued, under the 2006 Incentive Equity
Plan. The 2006 Plan expires on November 13, 2016.
28
1997 Employee Plan
A
total of 3,750,000 shares of Common Stock was originally reserved for issuance
or available for grant under our 1997 Employee Stock Option Plan, as amended,
which was terminated on January 10, 2007 in conjunction with the adoption of
the 2006 Plan. Options outstanding under this plan:
were granted at the closing market price at
the time of the grant,
were granted either as incentive stock options or stock options that do not
qualify as incentive stock options,
are usually exercisable in three or four equal annual installments contingent
upon being employed by the Company during that period, and
typically expire five years from the date of
the grant.
At
July 31, 2007, options to purchase 1,272,971 shares of Common Stock were
outstanding under the 1997 Employee Plan. No additional options will be granted
under this plan.
1991 Directors Plan
A
total of 450,000 shares of Common Stock was originally reserved for issuance or
available for grant under our 1991 Directors Stock Option Plan, which expired
in fiscal 2001. All options outstanding at July 31, 2007 under this plan do not
qualify as incentive stock options, have a term of ten years and are fully
exercisable. At July 31, 2007, options to purchase 31,500 shares of Common
Stock were outstanding. No additional options will be granted under this plan.
1998 Directors Plan
A
total of 450,000 shares of Common Stock was originally reserved for issuance or
available for grant under our 1998 Directors Stock Option Plan, as amended,
which was terminated on January 10, 2007 in conjunction with the adoption of
the 2006 Plan. Options outstanding under this plan:
were granted to directors at the closing
market price at the time of grant,
were granted automatically to each newly appointed or elected director to
purchase 15,000 shares,
were granted annually on the last day of our fiscal year to each member of our
Board of Directors to purchase 1,500 shares (assuming the individual was still
a member of the Board of Directors, 50% are exercisable on the first
anniversary of the grant of such options and 50% are exercisable on the second
anniversary of the grant of such options),
were granted quarterly on the last day of each of our fiscal quarters to each
non-employee director who attended that quarters regularly scheduled Board of
Directors meeting to purchase 750 shares (100% are exercisable immediately),
have a term of ten years if granted prior to July 31, 2000 or five years if
granted on or after July 31, 2000, and
do not qualify as incentive stock options.
At
July 31, 2007, options to purchase 224,625 shares of Common Stock were
outstanding under the 1998 Directors Plan and. No additional options will be
granted under this plan.
Non-plan options
We
also have 231,750 non-plan options outstanding at July 31, 2007 which have been
granted at the closing market price at the time of grant and expire up to a
maximum of ten years from the date of grant. These non-plan options do not
qualify as incentive stock options.
12.
Accumulated Other Comprehensive Income
Our
accumulated other comprehensive income consists solely of the accumulated
translation adjustment, net of tax. For purposes of translating the balance
sheet at July 31, 2007 compared with July 31, 2006, the value of the Canadian
dollar increased by approximately 6.0% and the value of the euro increased by
approximately 7.3% compared with the value of the United States dollar. The
total of these currency movements increased the accumulated translation
adjustment, net of tax, by $1,779,000 during fiscal 2007 to $8,494,000 at July
31, 2007, from $6,715,000 at July 31, 2006.
29
13. Earnings
Per Common Share
Basic earnings per common share are computed based upon the weighted
average number of common shares outstanding during the year.
Diluted
earnings per common share are computed based upon the weighted average number
of common shares outstanding during the year plus the dilutive effect of common
stock equivalents using the treasury stock method and the average market price
of our Common Stock for the year.
The
following table sets forth the computation of basic and diluted earnings per
common share:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings
per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
8,104,000
|
|
$
|
6,653,000
|
|
$
|
7,895,000
|
|
Income from discontinued operations
|
|
342,000
|
|
10,268,000
|
|
7,610,000
|
|
Gain from discontinued operations
|
|
|
|
6,776,000
|
|
|
|
Net income
|
|
$
|
8,446,000
|
|
$
|
23,697,000
|
|
$
|
15,505,000
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings
per share:
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted
average number of shares outstanding
|
|
15,631,143
|
|
15,470,990
|
|
14,830,318
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock awards using the treasury
stock method and the average market price for the year
|
|
522,054
|
|
804,698
|
|
1,377,423
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
- weighted average number of shares and common stock equivalents
|
|
16,153,197
|
|
16,275,688
|
|
16,207,741
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.52
|
|
$
|
0.43
|
|
$
|
0.53
|
|
Discontinued operations
|
|
0.02
|
|
0.66
|
|
0.52
|
|
Gain from discontinued operations
|
|
|
|
0.44
|
|
|
|
Net income
|
|
$
|
0.54
|
|
$
|
1.53
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.50
|
|
$
|
0.41
|
|
$
|
0.49
|
|
Discontinued operations
|
|
0.02
|
|
0.63
|
|
0.47
|
|
Gain from discontinued operations
|
|
|
|
0.42
|
|
|
|
Net income
|
|
$
|
0.52
|
|
$
|
1.46
|
|
$
|
0.96
|
|
14.
Repurchase of shares
On
April 13, 2006, our Board of Directors approved the repurchase of up to 500,000
shares of our outstanding Common Stock. Under the repurchase program we
repurchased shares from time-to-time at prevailing prices and as permitted by
applicable securities laws (including SEC Rule 10b-18) and New York Stock
Exchange requirements, and subject to market conditions. The repurchase program
had a one-year term that expired on April 12, 2007. We repurchased 464,800
shares under the repurchase program at a total average price per share of
$14.02. Of the 464,800 shares, 161,800 shares were repurchased during fiscal
2007.
30
The
following table summarizes the repurchase of Common Stock under the repurchase
program during fiscal 2007 and 2006:
|
|
|
|
|
|
Total aggregate number
|
|
Maximum number of
|
|
|
|
|
|
|
|
of shares purchased as
|
|
shares that may yet
|
|
|
|
Total number of
|
|
Average price
|
|
part of publicly announced
|
|
be purchased under
|
|
Period
|
|
shares purchased
|
|
paid per share
|
|
plans or programs
|
|
the program
|
|
|
|
|
|
|
|
|
|
|
|
4/19/06 through 4/30/06
|
|
123,300
|
|
$
|
14.63
|
|
123,300
|
|
376,700
|
|
|
|
|
|
|
|
|
|
|
|
5/1/06 through 7/31/06
|
|
179,700
|
|
$
|
13.88
|
|
303,000
|
|
197,000
|
|
|
|
|
|
|
|
|
|
|
|
8/1/06 through 10/31/06
|
|
89,000
|
|
$
|
13.56
|
|
392,000
|
|
108,000
|
|
|
|
|
|
|
|
|
|
|
|
11/1/06 through 1/31/07
|
|
72,800
|
|
$
|
13.89
|
|
464,800
|
|
35,200
|
|
|
|
|
|
|
|
|
|
|
|
2/1/07 through 7/31/07
|
|
|
|
|
|
|
|
|
|
15. Retirement
Plans
We
have 401(k) Savings and Retirement Plans for the benefit of eligible United
States employees. Additionally, Crosstex maintains a profit sharing plan for
the benefit of eligible employees. Contributions by the Company are both
discretionary and non-discretionary and are limited in any year to the amount
allowable by the Internal Revenue Service.
Aggregate
employer contributions under these plans were $1,200,000, $898,000 and
$1,054,000 for fiscal 2007, 2006 and 2005, respectively. In fiscal 2007 and
2006, the Healthcare Disposables segment contributed $431,000 and $399,000,
respectively. Excluding the impact of the Healthcare Disposables segment, the
high employer contributions in fiscal 2005, compared with fiscal 2007 and 2006,
was primarily due to the Company providing discretionary contributions in
fiscal 2005 to eligible United States employees primarily in our Dialysis,
Endoscope Reprocessing and Therapeutic reporting segments. No such
discretionary contributions were given in fiscal 2007 and 2006.
16. Supplemental
Cash Flow Information
Interest
paid was $3,306,000, $3,299,000 and $966,000 for fiscal 2007, 2006 and 2005,
respectively.
Income
tax payments were $10,137,000, $7,470,000 and $2,137,000 for fiscal 2007, 2006
and 2005, respectively. The increase in income tax payments in fiscal 2007 and
2006 as compared to fiscal 2005 is due to the full utilization of our remaining
United States Federal net operating loss carry forwards in fiscal 2006.
As
part of the purchase price for the Crosstex acquisition, as more fully
described in Note 3 to the Consolidated Financial Statements, 384,821 shares of
Cantel common stock (valued at $6,737,000) were issued to the former Crosstex
shareholders during fiscal 2006.
31
17.
Information as to Operating
Segments and Foreign and Domestic Operations
We
are a leading provider of infection prevention and control products in the healthcare
market. Our products include specialized medical device reprocessing systems
for renal dialysis and endoscopy, dialysate concentrates and other dialysis
supplies, water purification equipment, sterilants, disinfectants and cleaners,
hollow fiber membrane filtration and separation products for medical and
non-medical applications, and specialty packaging for infectious and biological
specimens. We also provide technical maintenance for our products and offer
compliance training services for the transport of infectious and biological
specimens.
In
accordance with SFAS No. 131,
Disclosures
about Segments of an Enterprise and Related Information
(SFAS 131),
we have determined our reportable business segments based upon an assessment of
product types, organizational structure, customers and internally prepared
financial statements. The primary factors used by us in analyzing segment
performance are net sales and operating income.
Since
the GE Water Acquisition was completed on March 30, 2007, the results of
operations of GE Water are included in the accompanying Water Purification and
Filtration segment information for the portion of the fiscal year ended July
31, 2007 subsequent to the acquisition date and are excluded from the
accompanying segment information for fiscal 2006 and 2005.
Since the acquisition of Crosstex was
completed on the first day of fiscal 2006, the results of operations of
Crosstex are included in the accompanying segment information for fiscal 2007
and 2006 and are excluded from the accompanying segment information for fiscal
2005. The Crosstex acquisition added a new reporting segment known as
Healthcare Disposables as more fully described below.
The
Companys segments are as follows:
Dialysis
, which includes disinfection/sterilization
reprocessing equipment, sterilants, supplies and concentrates related to
hemodialysis treatment of patients with acute kidney failure or chronic kidney
failure associated with end-stage renal disease. Additionally, this segment
includes technical maintenance service on its products.
Healthcare
Disposables
, which
includes single-use infection control products used principally in the dental
market such as face masks, patient towels and bibs, self-sealing sterilization
pouches, tray covers, sterilization packaging accessories, surface barriers
including eyewear, aprons and gowns, disinfectants and deodorizers, germicidal
wipes, hand care products, gloves, sponges, cotton products, cups, needles and
syringes, scalpels and blades, and saliva evacuators and ejectors.
Our
Healthcare Disposables segment is reliant on five customers who collectively
accounted for 63% of Healthcare Disposables segment net sales and 18% of our
consolidated net sales from continuing operations during fiscal 2007. Four of
such customers, Henry Schein, National Distributing and Contracting, Benco
Dental and Patterson Dental each accounted for 10% or more of this segments
net sales during that period.
Water
Purification and Filtration
, which includes water purification equipment design and manufacturing,
project management, installation, maintenance, deionization and mixing systems,
as well as hollow fiber filter devices and ancillary products for high-purity
fluid and separation applications for healthcare (with a large concentration in
dialysis), pharmaceutical, biotechnology, research, beverage, semiconductor and
other commercial industries. Additionally, this segment includes cold sterilant
products used to disinfect high-purity water systems.
Endoscope
Reprocessing
, which includes
endoscope disinfection equipment and related accessories and supplies that are
sold to hospitals, clinics and physicians. Additionally, this segment includes
technical maintenance service on its products.
All Other
In
accordance with quantitative thresholds established by SFAS 131, we have
combined the Therapeutic Filtration and Specialty Packaging operating segments
into the All Other reporting segment.
Therapeutic Filtration
, which includes hollow fiber filter devices and ancillary products for
use in medical
32
applications that are sold to biotech manufacturers and third-party
distributors.
Specialty Packaging
, which includes specialty packaging and thermal control products, as
well as related compliance training, for the safe transport of infectious and
biological specimens and thermally sensitive pharmaceutical, medical and other
products.
The
operating segments follow the same accounting policies used for our
Consolidated Financial Statements as described in Note 2.
Information
as to operating segments is summarized below:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
Dialysis
|
|
$
|
58,696,000
|
|
$
|
58,908,000
|
|
$
|
65,457,000
|
|
Healthcare Disposables
|
|
57,610,000
|
|
54,293,000
|
|
|
|
Water Purification and Filtration
|
|
49,032,000
|
|
36,356,000
|
|
29,123,000
|
|
Endoscope Reprocessing
|
|
38,941,000
|
|
30,403,000
|
|
28,677,000
|
|
All Other
|
|
14,765,000
|
|
12,219,000
|
|
13,900,000
|
|
Total
|
|
$
|
219,044,000
|
|
$
|
192,179,000
|
|
$
|
137,157,000
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
Dialysis
|
|
$
|
8,117,000
|
|
$
|
6,915,000
|
|
$
|
8,081,000
|
|
Healthcare Disposables
|
|
8,753,000
|
|
7,917,000
|
|
|
|
Water Purification and Filtration
|
|
4,414,000
|
|
2,758,000
|
|
2,711,000
|
|
Endoscope Reprocessing
|
|
(509,000
|
)
|
2,451,000
|
|
4,428,000
|
|
All Other
|
|
3,293,000
|
|
1,722,000
|
|
3,973,000
|
|
|
|
24,068,000
|
|
21,763,000
|
|
19,193,000
|
|
General corporate expenses
|
|
(7,229,000
|
)
|
(6,419,000
|
)
|
(4,871,000
|
)
|
Interest expense, net
|
|
(2,737,000
|
)
|
(3,393,000
|
)
|
(940,000
|
)
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes
|
|
$
|
14,102,000
|
|
$
|
11,951,000
|
|
$
|
13,382,000
|
|
33
|
|
July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
Dialysis
|
|
$
|
32,545,000
|
|
$
|
32,856,000
|
|
$
|
36,585,000
|
|
Healthcare Disposables
|
|
98,933,000
|
|
97,351,000
|
|
|
|
Water Purification and Filtration
|
|
71,638,000
|
|
35,858,000
|
|
31,308,000
|
|
Endoscope Reprocessing
|
|
25,744,000
|
|
21,602,000
|
|
21,634,000
|
|
All Other
|
|
17,950,000
|
|
17,220,000
|
|
17,713,000
|
|
General corporate, including cash and cash
equivalents
|
|
16,861,000
|
|
31,219,000
|
|
33,947,000
|
|
Total - continuing operations
|
|
263,671,000
|
|
236,106,000
|
|
141,187,000
|
|
Discontinued operations
|
|
|
|
2,121,000
|
|
24,092,000
|
|
Total
|
|
$
|
263,671,000
|
|
$
|
238,227,000
|
|
$
|
165,279,000
|
|
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Dialysis
|
|
$
|
708,000
|
|
$
|
544,000
|
|
$
|
870,000
|
|
Healthcare Disposables
|
|
1,437,000
|
|
3,471,000
|
|
|
|
Water Purification and Filtration
|
|
2,530,000
|
|
948,000
|
|
1,187,000
|
|
Endoscope Reprocessing
|
|
575,000
|
|
861,000
|
|
390,000
|
|
All Other
|
|
269,000
|
|
134,000
|
|
217,000
|
|
General corporate
|
|
10,000
|
|
111,000
|
|
40,000
|
|
Total - continuing operations
|
|
5,529,000
|
|
6,069,000
|
|
2,704,000
|
|
Discontinued operations
|
|
|
|
|
|
649,000
|
|
Total
|
|
$
|
5,529,000
|
|
$
|
6,069,000
|
|
$
|
3,353,000
|
|
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Dialysis
|
|
$
|
1,711,000
|
|
$
|
1,797,000
|
|
$
|
1,841,000
|
|
Healthcare Disposables
|
|
4,990,000
|
|
5,344,000
|
|
|
|
Water Purification and Filtration
|
|
1,680,000
|
|
1,301,000
|
|
1,027,000
|
|
Endoscope Reprocessing
|
|
839,000
|
|
626,000
|
|
643,000
|
|
All Other
|
|
979,000
|
|
865,000
|
|
853,000
|
|
General corporate
|
|
40,000
|
|
27,000
|
|
33,000
|
|
Total - continuing operations
|
|
10,239,000
|
|
9,960,000
|
|
4,397,000
|
|
Discontinued operations
|
|
|
|
223,000
|
|
169,000
|
|
Total
|
|
$
|
10,239,000
|
|
$
|
10,183,000
|
|
$
|
4,566,000
|
|
34
Information
as to geographic areas (including net sales which represent the geographic area
from which the Company derives its net sales from external customers) is
summarized below:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
United States
|
|
$
|
179,540,000
|
|
$
|
162,030,000
|
|
$
|
104,849,000
|
|
Canada
|
|
10,246,000
|
|
7,960,000
|
|
8,761,000
|
|
Asia/Pacific
|
|
8,691,000
|
|
7,996,000
|
|
9,647,000
|
|
Europe/Africa/Middle East
|
|
12,604,000
|
|
9,893,000
|
|
7,940,000
|
|
Latin America/South America
|
|
7,963,000
|
|
4,300,000
|
|
5,960,000
|
|
Total
|
|
$
|
219,044,000
|
|
$
|
192,179,000
|
|
$
|
137,157,000
|
|
|
|
July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Total long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
36,504,000
|
|
$
|
36,582,000
|
|
$
|
20,231,000
|
|
Canada
|
|
1,524,000
|
|
1,244,000
|
|
961,000
|
|
Asia/Pacific
|
|
120,000
|
|
28,000
|
|
27,000
|
|
Europe
|
|
2,104,000
|
|
2,135,000
|
|
2,168,000
|
|
Total
|
|
|
40,252,000
|
|
|
39,989,000
|
|
|
23,387,000
|
|
Goodwill and intangible assets
|
|
146,688,000
|
|
115,790,000
|
|
46,334,000
|
|
Assets from discontinued operations
|
|
|
|
|
|
1,068,000
|
|
Total
|
|
$
|
186,940,000
|
|
$
|
155,779,000
|
|
$
|
70,789,000
|
|
18. Discontinued
Operations
On
July 31, 2006, Carsen closed the sale of substantially all of its assets to
Olympus under an Asset Purchase Agreement dated as of May 16, 2006 among
Carsen, Cantel and Olympus. Olympus purchased substantially all of Carsens
assets other than those related to Carsens Medivators business and certain
other smaller product lines. Following the closing, Olympus hired substantially
all of Carsens employees and took over Carsens Olympus-related operations (as
well as the operations related to the other acquired product lines). The
transaction resulted in an after-tax gain of $6,776,000 and was recorded
separately on the Consolidated Statements of Income for the year ended July 31,
2006 as gain on disposal of discontinued operations, net of tax. In connection
with the transaction, Carsens Medivators-related assets as well as certain of
its other assets that were not acquired by Olympus were sold to our new
Canadian distributor of Medivators products.
The purchase price for the net assets sold to
Olympus was approximately $31,200,000, comprised of a fixed sum of $10,000,000
plus an additional formula-based sum of $21,200,000. In addition, Olympus paid
Carsen 20% of Olympus revenues attributable to Carsens unfilled customer
orders (backlog) as of July 31, 2006 that were assumed by Olympus at the
closing. Such payments to Carsen were made following Olympus receipt of
customer payments for such orders. In fiscal 2007, approximately $368,000
related to such backlog has been recorded as income and has been reported in
income from discontinued operations, net of tax, in the Consolidated Statements
of Income.
The
$10,000,000 fixed portion of the purchase price was in consideration for (i)
Carsens customer lists, sales records, and certain other assets related to the
sale and servicing of Olympus products and certain non-Olympus products
distributed by Carsen, (ii) the release of Olympus contractual restriction on
hiring Carsen personnel, (iii) real property leases (which were assumed or
replaced by Olympus) and leasehold improvements, computer and software systems,
equipment and machinery, telephone systems, and records related to the acquired
assets, and (iv) assisting Olympus in effecting a smooth transition of Carsens
business of distributing and servicing Olympus and certain non-Olympus products
in Canada. Cantel has also agreed (on behalf of itself and its affiliates) not
to manufacture, distribute, sell or represent for sale in Canada through July
31, 2007 any products that are competitive with the Olympus products formerly
sold by Carsen under its Olympus Distribution Agreements.
The $21,200,000 formula-based portion of the
purchase price was based on the book value of Carsens
35
inventories of Olympus and certain
non-Olympus products and the net book amount of Carsens accounts receivable
and certain other assets, all at July 31, 2006, subject to offsets, particularly
for accounts payable of Carsen due to Olympus.
Net proceeds from Carsens sale of net assets
and the termination of Carsens operations were approximately $21,100,000
(excluding the backlog payments) after satisfaction of remaining liabilities
and taxes.
As
a result of the foregoing transaction, which coincided with the expiration of
Carsens exclusive distribution agreements with Olympus on July 31, 2006,
Carsen no longer has any remaining product lines or active business operations.
The net sales and operating income
attributable to Carsens business (inclusive of both Olympus and non-Olympus
business, but exclusive of the sale of Medivators reprocessors) constituted the
entire Endoscopy and Surgical reporting segment and Scientific operating segment,
which historically was included within the All Other reporting segment; as
such, we no longer have any operations in these two segments.
Operating
segment information and net income attributable to Carsens business is
summarized below:
|
|
Year Ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,428,000
|
|
$
|
64,921,000
|
|
$
|
60,245,000
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
427,000
|
|
$
|
15,964,000
|
|
$
|
11,867,000
|
|
Interest expense
|
|
|
|
57,000
|
|
118,000
|
|
Income before income taxes
|
|
427,000
|
|
15,907,000
|
|
11,749,000
|
|
Income taxes
|
|
85,000
|
|
5,639,000
|
|
4,139,000
|
|
Income from discontinued operations, net of
tax
|
|
$
|
342,000
|
|
$
|
10,268,000
|
|
$
|
7,610,000
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
$
|
|
|
$
|
11,397,000
|
|
$
|
|
|
Income taxes
|
|
|
|
4,621,000
|
|
|
|
Gain on disposal of discontinued operations,
net of tax
|
|
$
|
|
|
$
|
6,776,000
|
|
$
|
|
|
Prior
to being reported as discontinued operations, fiscal 2006 net sales and
operating income of Carsen accounted for approximately 25.3% and 53.3% of our
fiscal 2006 consolidated net sales and operating income, respectively.
Cash flows attributable to discontinued
operations comprise the following:
|
|
Year ended July 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating
activities
|
|
$
|
(4,867,000
|
)
|
$
|
6,561,000
|
|
$
|
6,731,000
|
|
Net cash provided by (used in) investing
activities
|
|
$
|
|
|
$
|
30,774,000
|
|
$
|
(649,000
|
)
|
In
fiscal 2007, net cash used in operating activities was primarily due to the
payment of Carsens remaining operating costs relating to fiscal 2006, income
tax payments and various wind-down costs, partially offset by the collection of
the remaining receivables.
In
fiscal 2006, net cash provided by investing activities was due to proceeds from
disposal of the discontinued operations. In fiscal 2005, net cash used in
investing activities was due to capital expenditures.
Financing
activities of our discontinued operations did not result in any net cash in
fiscal 2007, 2006 and 2005.
36
At July 31, 2007 and 2006, the components of assets
and liabilities of discontinued operations in the Consolidated Balance Sheets
and the activity during fiscal 2007 are as follows:
|
|
July 31,
|
|
Recorded as
|
|
Amounts
|
|
July 31,
|
|
|
|
2006
|
|
Income (Expense)
|
|
Settled
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
655,000
|
|
$
|
368,000
|
|
$
|
(1,023,000
|
)
|
$
|
|
|
Inventories
|
|
695,000
|
|
(695,000
|
)
|
|
|
|
|
Prepaids and other current assets
|
|
771,000
|
|
(21,000
|
)
|
(750,000
|
)
|
|
|
Assets of discontinued operations
|
|
$
|
2,121,000
|
|
$
|
(348,000
|
)
|
$
|
(1,773,000
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
(3,098,000
|
)
|
$
|
(246,000
|
)
|
$
|
3,285,000
|
|
$
|
(59,000
|
)
|
Compensation payable
|
|
(1,195,000
|
)
|
(42,000
|
)
|
1,237,000
|
|
|
|
Deferred revenue
|
|
(1,063,000
|
)
|
1,063,000
|
|
|
|
|
|
Income taxes payable
|
|
(2,023,000
|
)
|
(85,000
|
)
|
2,070,000
|
|
(38,000
|
)
|
Liabilities of discontinued operations
|
|
$
|
(7,379,000
|
)
|
$
|
690,000
|
|
$
|
6,592,000
|
|
$
|
(97,000
|
)
|
All of the assets that existed at July 31, 2006
(which primarily related to the finalization of the Olympus transaction) have
been converted to cash and the majority of the liabilities have been paid; the
remaining liabilities relate to various taxes and the repayment to Olympus of
an uncollected accounts receivable. Such amounts will be substantially settled
prior to October 31, 2007.
19. Direct Sale of Medivators Systems in
the United States
On August 2, 2006, we commenced the sale and
service of our Medivators brand endoscope reprocessing equipment, high-level
disinfectants, cleaners and consumables through our own United States field
sales and service organization. Our direct sale of these products is the result
of our decision that it is in our best long-term interests to control and
develop our own direct-hospital based United States distribution network and,
as such, not to renew Olympus exclusive United States distribution agreement
when it expired on August 1, 2006. Net sales to Olympus accounted for 5.2%,
9.8% and 11.8% of our net sales from continuing operations in fiscal 2007, 2006
and 2005, respectively.
Throughout the former distribution
arrangement with Olympus, we employed our own personnel to provide clinical
sales support activities as well as an internal technical and customer service
function, depot maintenance and service and all logistics and distribution
services for the Medivators/Olympus customer base. This existing and fully
developed infrastructure will continue to be a critical factor in our new
direct sales and service strategy.
During the seven-year period following the
expiration of the distribution agreement with Olympus on August 1, 2006,
Olympus will have the option to provide certain ongoing support functions to
its existing customer base of Medivators products, subject to the terms and
conditions of the agreement. In addition, Olympus may continue to purchase from
Minntech for resale in connection with such support functions, Medivators
accessories, consumables, and replacement and repair parts, as well as Rapicide
Ò
disinfectant. During fiscal 2007, Olympus
continued to purchase such items from us, although we have been gradually
converting the sale of such items over to our direct sales and service force.
37
20. Quarterly Results of Operations
(unaudited)
The following is a summary of the quarterly
results of operations for the years ended July 31, 2007 and 2006:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
50,484,000
|
|
$
|
51,635,000
|
|
$
|
54,412,000
|
|
$
|
62,513,000
|
|
Cost of sales
|
|
32,315,000
|
|
32,114,000
|
|
34,203,000
|
|
41,400,000
|
|
Gross profit
|
|
18,169,000
|
|
19,521,000
|
|
20,209,000
|
|
21,113,000
|
|
Gross profit percentage
|
|
36.0
|
%
|
37.8
|
%
|
37.1
|
%
|
33.8
|
%
|
Income from continuing operations, net of
tax
|
|
1,723,000
|
|
2,252,000
|
|
2,230,000
|
|
1,899,000
|
|
Income from discontinued operations, net of
tax
|
|
245,000
|
|
18,000
|
|
18,000
|
|
61,000
|
|
Net income
|
|
$
|
1,968,000
|
|
$
|
2,270,000
|
|
$
|
2,248,000
|
|
$
|
1,960,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (1)
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.11
|
|
$
|
0.15
|
|
$
|
0.14
|
|
$
|
0.12
|
|
Discontinued operations
|
|
0.02
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.13
|
|
$
|
0.15
|
|
$
|
0.14
|
|
$
|
0.12
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.11
|
|
$
|
0.14
|
|
$
|
0.14
|
|
$
|
0.12
|
|
Discontinued operations
|
|
0.01
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.12
|
|
$
|
0.14
|
|
$
|
0.14
|
|
$
|
0.12
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
47,812,000
|
|
$
|
47,340,000
|
|
$
|
46,887,000
|
|
$
|
50,140,000
|
|
Cost of sales
|
|
29,851,000
|
|
30,502,000
|
|
29,841,000
|
|
32,769,000
|
|
Gross profit
|
|
17,961,000
|
|
16,838,000
|
|
17,046,000
|
|
17,371,000
|
|
Gross profit percentage
|
|
37.6
|
%
|
35.6
|
%
|
36.4
|
%
|
34.6
|
%
|
Income from continuing operations, net of
tax
|
|
2,218,000
|
|
1,874,000
|
|
1,639,000
|
|
922,000
|
|
Income from discontinued operations, net of
tax
|
|
1,660,000
|
|
2,191,000
|
|
3,141,000
|
|
3,276,000
|
|
Gain (loss) on disposal of discontinued
operations
|
|
(132,000
|
)
|
(136,000
|
)
|
(197,000
|
)
|
7,241,000
|
|
Net income
|
|
$
|
3,746,000
|
|
$
|
3,929,000
|
|
$
|
4,583,000
|
|
$
|
11,439,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (1)
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.14
|
|
$
|
0.12
|
|
$
|
0.10
|
|
$
|
0.06
|
|
Discontinued operations
|
|
0.11
|
|
0.14
|
|
0.20
|
|
0.21
|
|
Gain (loss) on disposal
|
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
0.47
|
|
Net income
|
|
$
|
0.24
|
|
$
|
0.25
|
|
$
|
0.29
|
|
$
|
0.74
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.13
|
|
$
|
0.11
|
|
$
|
0.10
|
|
$
|
0.06
|
|
Discontinued operations
|
|
0.10
|
|
0.14
|
|
0.19
|
|
0.20
|
|
Gain (loss) on disposal
|
|
|
|
(0.01
|
)
|
(0.01
|
)
|
0.45
|
|
Net income
|
|
$
|
0.23
|
|
$
|
0.24
|
|
$
|
0.28
|
|
$
|
0.71
|
|
(1)
The summation of quarterly earnings per share does not necessarily equal
the fiscal year earnings per share due to rounding.
38
21. Legal
Proceedings
In
the normal course of business, we are subject to pending and threatened legal
actions. It is our policy to accrue for amounts related to these legal matters
if it is probable that a liability has been incurred and an amount of
anticipated exposure can be reasonably estimated.
In May 2007, James H. Devlin, a former member
and 25% owner of an affiliate (Crosstex Medical LLC (CML)) of our Crosstex
subsidiary that was liquidated prior to our acquisition of Crosstex, filed a
complaint against Crosstex and three of the former shareholders of Crosstex in
the United States District Court, Eastern District of New York (Civil Action
No. 07 1902). In July 2007, the claim was dismissed against Crosstex without
prejudice.
39
CANTEL MEDICAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
|
|
Balance at
Beginning
of Period
|
|
Additions
|
|
(Deductions)
|
|
Translation
Adjustments
|
|
Balance
at End
of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2007
|
|
$
|
929,000
|
|
$
|
162,000
|
|
$
|
(198,000
|
)
|
$
|
34,000
|
|
$
|
927,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2006
|
|
$
|
737,000
|
|
$
|
230,000
|
(3)
|
$
|
(66,000
|
)
|
$
|
28,000
|
|
$
|
929,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2005
|
|
$
|
1,337,000
|
|
$
|
17,000
|
(1)
|
$
|
(665,000
|
)(2)
|
$
|
48,000
|
|
$
|
737,000
|
|
(1) The significantly lower amount
of additions in fiscal 2005, as compared with fiscal 2007 and 2006, was
primarily due to the collection of several large delinquent receivables, which
had been reserved in past fiscal years.
(2)
Includes the write-off of a $400,000 receivable that existed at the date
of the Minntech acquisition on September 7, 2001.
(3)
Includes $100,000 recorded in connection with the purchase accounting
for the Crosstex and Fluid Solutions acquisitions, and $130,000 charged to
expenses during fiscal 2006.
40
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