UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
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Quarterly
Report pursuant to Section 13 or 15(d)
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of the
Securities Exchange Act of 1934
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For the quarterly period ended
January 31, 2009.
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or
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o
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Transition
Report pursuant to Section 13 or 15(d)
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of the
Securities Exchange Act of 1934
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For the transition period from
to
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Commission
file number: 001-31337
CANTEL MEDICAL CORP.
(Exact name of registrant as specified in its charter)
Delaware
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22-1760285
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation
or organization)
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identification
no.)
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150
Clove Road, Little Falls, New Jersey
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07424
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(Address of principal
executive offices)
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(Zip code)
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Registrants
telephone number, including area code
(973)
890-7220
Indicate by check mark whether registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Smaller
reporting company
o
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(Do
not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Number of shares of Common Stock outstanding as of February 28,
2009: 16,593,791.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CANTEL MEDICAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
(Unaudited)
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January 31,
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July 31,
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2009
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2008
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Assets
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Current assets:
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Cash and cash equivalents
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$
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20,052
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$
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18,318
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Accounts receivable, net of allowance for
doubtful accounts of $1,105 at January 31 and $1,021 at July 31
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28,249
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30,316
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Inventories:
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Raw materials
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13,381
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12,615
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Work-in-process
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3,842
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3,544
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Finished goods
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15,502
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15,643
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Total inventories
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32,725
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31,802
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Deferred income taxes
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1,402
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1,565
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Prepaid expenses and other current assets
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3,300
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2,560
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Total current assets
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85,728
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84,561
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Property and equipment, net
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36,248
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37,920
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Intangible assets, net
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37,972
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41,254
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Goodwill
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111,860
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113,958
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Other assets
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1,084
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1,497
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$
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272,892
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$
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279,190
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Liabilities and stockholders equity
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Current liabilities:
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Current portion of long-term debt
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$
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9,000
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$
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8,000
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Accounts payable
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10,283
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9,723
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Compensation payable
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6,083
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7,175
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Earnouts payable
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4,295
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Accrued expenses
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7,052
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6,739
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Deferred revenue
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3,130
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2,920
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Income taxes payable
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890
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70
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Total current liabilities
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36,438
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38,922
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Long-term debt
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45,300
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50,300
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Deferred income taxes
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16,667
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18,503
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Other long-term liabilities
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2,649
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2,753
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Stockholders equity:
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Preferred Stock, par value $1.00 per share;
authorized 1,000,000 shares; none issued
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Common Stock, par value $.10 per share;
authorized 30,000,000 shares; January 31 - 17,727,819 shares issued and
16,492,791 shares outstanding; July 31 - 17,519,581 shares issued and
16,370,844 shares outstanding
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1,773
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1,752
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Additional paid-in capital
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84,101
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81,475
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Retained earnings
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93,641
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86,534
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Accumulated other comprehensive income
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4,468
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10,291
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Treasury Stock, at cost; January 31 -
1,235,028 shares; July 31 - 1,148,737 shares
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(12,145
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)
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(11,340
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)
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Total stockholders equity
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171,838
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168,712
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$
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272,892
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$
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279,190
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See accompanying notes.
1
CANTEL MEDICAL CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
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Three Months Ended
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Six Months Ended
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January 31,
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January 31,
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2009
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2008
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2009
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2008
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Net sales
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$
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62,420
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$
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60,910
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$
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126,826
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$
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120,915
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Cost of sales
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38,809
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39,424
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79,592
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78,223
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Gross profit
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23,611
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21,486
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47,234
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42,692
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Expenses:
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Selling
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6,992
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6,836
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14,342
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13,625
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General and administrative
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9,037
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8,967
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18,061
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17,924
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Research and development
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983
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961
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2,048
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1,951
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Total operating expenses
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17,012
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16,764
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34,451
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33,500
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Income before interest and income taxes
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6,599
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4,722
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12,783
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9,192
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Interest expense
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674
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1,255
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1,425
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2,477
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Interest income
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(38
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)
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(150
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)
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(108
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)
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(297
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)
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Income before income taxes
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5,963
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3,617
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11,466
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7,012
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Income taxes
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2,189
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1,460
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4,359
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2,916
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Net income
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$
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3,774
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$
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2,157
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$
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7,107
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$
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4,096
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Earnings per common share:
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Basic
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$
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0.23
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$
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0.13
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$
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0.44
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$
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0.26
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Diluted
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$
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0.23
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$
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0.13
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$
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0.43
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$
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0.25
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See accompanying notes.
2
CANTEL
MEDICAL CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar
Amounts in Thousands)
(Unaudited)
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Six Months Ended
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January 31,
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2009
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2008
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Cash flows from operating activities
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Net income
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$
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7,107
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$
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4,096
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Adjustments to reconcile net income to net cash
provided by operating activities:
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Depreciation
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3,075
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2,975
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Amortization
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2,606
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2,859
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Stock-based compensation expense
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1,045
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994
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Amortization of debt issuance costs
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197
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186
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Loss on disposal of fixed assets
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22
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49
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Deferred income taxes
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(965
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)
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(467
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)
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Excess tax benefits from stock-based
compensation
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(197
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)
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(554
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)
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Changes in assets and liabilities:
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Accounts receivable
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1,353
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(1,729
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)
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Inventories
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(1,705
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)
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(3,644
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)
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Prepaid expenses and other current assets
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(793
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)
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(784
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)
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Accounts payable, deferred revenue and
accrued expenses
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332
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(1,800
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)
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Income taxes payable
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1,131
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706
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Net cash provided by operating activities
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13,208
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2,887
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Cash flows from investing activities
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Capital expenditures
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(2,062
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)
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(2,507
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)
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Proceeds from disposal of fixed assets
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3
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4
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Earnout paid to Crosstex sellers
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(3,666
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)
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(3,667
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)
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Earnout paid to Twist seller
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(629
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)
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Acquisition of DSI
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(1,250
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)
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Acquisition of Strong Dental, net of cash
acquired
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(3,711
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)
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Acquisition of Verimetrix
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(4,956
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)
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Other, net
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48
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(24
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)
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Net cash used in investing activities
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(6,306
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)
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(16,111
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)
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Cash flows from financing activities
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Borrowings under revolving credit facility
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3,500
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15,050
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Repayments under term loan facility
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(4,000
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)
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(3,000
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)
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Repayments under revolving credit facility
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(3,500
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)
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(2,250
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)
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Proceeds from exercises of stock options
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874
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630
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Excess tax benefits from stock-based
compensation
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197
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554
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Purchases of treasury stock
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(404
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)
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Net cash (used in) provided by financing
activities
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(3,333
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)
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10,984
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Effect of exchange rate changes on cash and
cash equivalents
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(1,835
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)
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588
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Increase (decrease) in cash and cash
equivalents
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1,734
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(1,652
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)
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Cash and cash equivalents at beginning of
period
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18,318
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15,860
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Cash and cash equivalents at end of period
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$
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20,052
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$
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14,208
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See accompanying notes.
3
CANTEL
MEDICAL
CORP
.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis
of Presentation
The unaudited Condensed
Consolidated Financial Statements have been prepared in accordance with
generally accepted accounting principles for interim financial reporting and
the requirements of Form 10-Q and Rule 10.01 of Regulation S-X.
Accordingly, they do not include certain information and note disclosures
required by generally accepted accounting principles for annual financial
reporting and should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in the Annual Report of Cantel Medical
Corp. (Cantel) on Form 10-K for the fiscal year ended July 31, 2008
(the 2008 Form 10-K), and Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
The unaudited interim financial
statements reflect all adjustments (of a normal and recurring nature) which
management considers necessary for a fair presentation of the results of
operations for these periods. The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
The Condensed Consolidated Balance Sheet at July 31,
2008 was derived from the audited Consolidated Balance Sheet of Cantel at that
date.
Certain items in previously presented financial statements have been
reclassified to conform to the presentation of the January 31, 2009
financial statements. These reclassifications relate to income taxes payable
and accrued expenses in the Condensed Consolidated Balance Sheets.
Cantel had five principal
operating companies at each of January 31, 2009 and July 31, 2008,
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: Water Purification and Filtration
(through Mar Cor, Biolab and Minntech), Dialysis (through Minntech), Healthcare
Disposables (through Crosstex), 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.
We acquired certain net assets
of Dialysis Services, Inc. (DSI) on August 1, 2007, and Verimetrix,
LLC (Verimetrix) on September 17, 2007, and all of the issued and
outstanding stock of Strong Dental Products, Inc. (Strong Dental) on September 26,
2007, as more fully described in Note 3 to the Condensed Consolidated Financial
Statements. The acquisitions of DSI, Verimetrix and Strong Dental had an insignificant effect on our
results of operations for the three and six months ended January 31, 2009,
and the three and six months ended January 31, 2008 subsequent to their
respective acquisition dates, due to the small size of these businesses. DSI,
Verimetrix and Strong Dental are included in the Water Purification
4
and Filtration, Endoscope Reprocessing and
Healthcare Disposables segments, respectively.
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.
Note 2.
Stock-Based
Compensation
The following table shows the income statement components of
stock-based compensation expense recognized in the Condensed Consolidated
Statements of Income:
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Three Months Ended
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Six Months Ended
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January 31,
|
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January 31,
|
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2009
|
|
2008
|
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2009
|
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2008
|
|
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Cost of sales
|
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$
|
18,000
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$
|
8,000
|
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$
|
36,000
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|
$
|
21,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling
|
|
53,000
|
|
23,000
|
|
106,000
|
|
52,000
|
|
General and administrative
|
|
453,000
|
|
428,000
|
|
896,000
|
|
913,000
|
|
Research and development
|
|
1,000
|
|
3,000
|
|
7,000
|
|
8,000
|
|
Total operating expenses
|
|
507,000
|
|
454,000
|
|
1,009,000
|
|
973,000
|
|
Stock-based compensation before income
taxes
|
|
525,000
|
|
462,000
|
|
1,045,000
|
|
994,000
|
|
Income tax benefits
|
|
(199,000
|
)
|
(184,000
|
)
|
(446,000
|
)
|
(388,000
|
)
|
Total stock-based compensation expense, net
of tax
|
|
$
|
326,000
|
|
$
|
278,000
|
|
$
|
599,000
|
|
$
|
606,000
|
|
For the three and six months ended January 31, 2009 and 2008, the
above stock-based compensation expense before income taxes was recorded in the
Condensed Consolidated Financial Statements as stock-based compensation expense
and an increase to additional paid-in 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. Stock-based compensation expense, net of
tax, decreased both basic and diluted earnings per share by $0.02 and $0.04 for
both the three and six months ended January 31, 2009 and 2008,
respectively.
Most of our stock options and stock awards (which consist only of
restricted shares) 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 January 31, 2009, total unrecognized stock-based
compensation expense, net of tax, related to total nonvested stock options and
stock awards was $1,804,000 with a remaining weighted average period of 22
months over which such expense is expected to be recognized.
On February 3, 2009, the Company granted 64,500 stock options and
101,000 shares of restricted stock to certain employees. As a result of these grants, total
unrecognized stock-based compensation expense, net of tax, at February 28,
2009 related to total nonvested stock options and stock awards increased to
approximately $2,634,000 with a remaining weighted average period of 24 months
over which such expense is expected to be recognized.
5
We determine the fair value of each stock award using the closing
market price of our Common Stock on the date of grant. Stock awards were not
granted prior to February 1, 2007.
Such 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. At July 31, 2008, there were
207,165 nonvested stock awards with a weighted average fair value of
$12.81. Such stock awards remain
nonvested and outstanding at January 31, 2009.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumptions for options granted during the three and six months ended January 31,
2009 and 2008:
Weighted-Average
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Black-Scholes Option
|
|
January 31,
|
|
January 31,
|
|
Valuation Assumptions
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Expected volatility (1)
|
|
0.432
|
|
0.351
|
|
0.395
|
|
0.353
|
|
Risk-free interest rate (2)
|
|
1.52
|
%
|
3.49
|
%
|
2.29
|
%
|
4.11
|
%
|
Expected lives (in years) (3)
|
|
5.00
|
|
5.00
|
|
4.80
|
|
4.57
|
|
(1) Volatility
was based on historical closing prices of our Common Stock.
(2) The
U.S. Treasury rate on the expected life at the date of grant.
(3) Based on historical exercise behavior.
Additionally, all options were considered to be deductible for tax
purposes in the valuation model, except for certain options granted 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. For the three
and six months ended January 31, 2009, the weighted average fair value of
all options granted was approximately $5.92 and $4.37, respectively. For the three and six months ended January 31,
2008, the weighted average fair value of all options granted was approximately
$4.24 and $5.73, respectively. The
aggregate intrinsic value (i.e. the excess market price over the exercise price)
of all options exercised was approximately $84,000 and $899,000 for the three
and six months ended January 31, 2009, respectively, and $215,000 and
$2,089,000 for the three and six months ended January 31, 2008,
respectively.
A summary of stock option activity follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
Outstanding at July 31, 2008
|
|
1,754,417
|
|
$
|
14.94
|
|
Granted
|
|
14,750
|
|
11.61
|
|
Canceled
|
|
(41,278
|
)
|
12.17
|
|
Exercised
|
|
(208,238
|
)
|
6.12
|
|
Outstanding at January 31, 2009
|
|
1,519,651
|
|
$
|
16.19
|
|
|
|
|
|
|
|
Exercisable at July 31, 2008
|
|
1,137,624
|
|
$
|
16.28
|
|
|
|
|
|
|
|
Exercisable at January 31, 2009
|
|
992,524
|
|
$
|
18.37
|
|
Upon exercise of stock options
or grant of stock awards, we typically issue new shares of our Common Stock (as
opposed to using treasury shares).
6
If certain criteria are met when options are
exercised or restricted stock becomes vested, 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 paid-in capital and as a
reduction of income taxes payable. For the six months ended January 31,
2009 and 2008, options exercised and the vesting of restricted stock resulted
in income tax deductions that reduced income taxes payable by $379,000 and
$836,000, respectively.
We
classify the cash flows resulting from excess tax benefits as financing cash
flows on our Condensed Consolidated Statements of 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 past pro
forma disclosures relating to fiscal years prior to August 1, 2005) which
was determined based upon the awards fair value.
Note 3.
Acquisitions
Strong Dental Products, Inc.
On September 26, 2007, we expanded our product offerings in 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 transactions costs and
assumption of debt, was $4,017,000. Under the 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. As of January 31,
2009, none of the additional consideration had been earned.
The purchase price was allocated to the assets acquired and assumed
liabilities based on estimated fair values as follows:
|
|
Final
|
|
Net Assets
|
|
Allocation
|
|
Cash and cash equivalents
|
|
$
|
306,000
|
|
Other current assets
|
|
140,000
|
|
Amortizable intangible assets:
|
|
|
|
Patents (17-year life)
|
|
144,000
|
|
Customer relationships (10-year life)
|
|
650,000
|
|
Branded products (5-year life)
|
|
69,000
|
|
Non-compete agreements (6-year life)
|
|
30,000
|
|
Current liabilities
|
|
(147,000
|
)
|
Noncurrent deferred income tax liabilities
|
|
(342,000
|
)
|
Net assets acquired
|
|
$
|
850,000
|
|
There were no in-process research and development projects acquired in
connection with the acquisition. The excess purchase price of $3,167,000 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.
7
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 product offerings in 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 transaction costs, was $4,906,000. 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. As of January 31, 2009, none of the additional
consideration had been earned.
The purchase price was allocated to the assets acquired and assumed
liabilities based on estimated fair values as follows:
|
|
Final
|
|
Net Assets
|
|
Allocation
|
|
Current assets
|
|
$
|
948,000
|
|
Property and equipment
|
|
146,000
|
|
Amortizable intangible assets:
|
|
|
|
Customer relationships (1-year life)
|
|
165,000
|
|
Branded products (3-year life)
|
|
281,000
|
|
Technology (17-year life)
|
|
532,000
|
|
Other assets
|
|
166,000
|
|
Current liabilities
|
|
(415,000
|
)
|
Noncurrent liabilities
|
|
(65,000
|
)
|
Net assets acquired
|
|
$
|
1,758,000
|
|
There were no in-process research and development projects acquired in
connection with the acquisition. The excess purchase price of $3,148,000 was
assigned to goodwill. Such goodwill, all of which is deductible for income tax
purposes, has been included in our Endoscope Reprocessing reporting segment.
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.
8
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 transaction costs, was $1,250,000.
The purchase price was allocated to the assets acquired and assumed
liabilities based on estimated fair values as follows:
|
|
Final
|
|
Net Assets
|
|
Allocation
|
|
Current assets
|
|
$
|
122,000
|
|
Amortizable intangible assets:
|
|
|
|
Customer relationships (4-year life)
|
|
182,000
|
|
Non-compete agreements (5-year life)
|
|
34,000
|
|
Property and equipment
|
|
73,000
|
|
Current liabilities
|
|
(18,000
|
)
|
Net assets acquired
|
|
$
|
393,000
|
|
There were no in-process research and development projects acquired in
connection with the acquisition. The excess purchase price of $857,000 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 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 acquisitions of DSI, Verimetrix and Strong Dental are included in our results of operations
for the three and six months ended January 31, 2009 and the portion of the
three and six months ended January 31, 2008 subsequent to the respective
acquisition dates, and had an insignificant effect on our results of
operations due to the small size of these businesses.
We have not made any
acquisitions subsequent to the acquisition of Strong Dental on September 26,
2007.
Note 4.
Recent
Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 162,
The Hierarchy of Generally Accepted Accounting Principles
(SFAS 162), which identifies a consistent framework, or hierarchy, for
selecting accounting principles. SFAS 162 is effective 60 days following the
Securities and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411,
The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles.
We are currently in the process of evaluating the effect of SFAS 162.
9
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133
(SFAS 161), which
requires enhanced disclosures about (i) how and why an entity uses
derivative instruments, (ii) how derivative instruments and related hedged
items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,
as amended
(SFAS 133) and its
related interpretations, and (iii) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and
cash flows. SFAS No. 161 also requires that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation and requires cross-referencing within the footnotes. This statement
also suggests disclosing the fair values of derivative instruments and their
gains and losses in a tabular format. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008 and therefore is effective for our third quarter in fiscal 2009. We are
currently in the process of evaluating the effect of SFAS 161.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations
(SFAS 141R),
which establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired. SFAS 141R also establishes disclosure requirements that will
enable users to evaluate the nature and financial effects of the business
combinations. SFAS 141R is effective for business combinations that occur
during or after fiscal years beginning after December 15, 2008 and
therefore is effective for our fiscal year 2010. We are currently in the
process of evaluating the effect of SFAS 141R.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which provides
enhanced guidance for using fair value to measure assets and liabilities. SFAS
157 establishes a definition of fair value, provides a framework for measuring
fair value and expands the disclosure requirements about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007
and therefore was adopted on August 1, 2008 with respect to recorded
financial assets and financial liabilities. The adoption of SFAS No. 157
did not have a material impact on our fair value measurements of financial
assets and financial liabilities. In February 2008, FASB Staff Position No. 157-2,
Effective Date of Statement 157,
was
issued which delays the effective date to fiscal years beginning after November 15,
2008 for certain nonfinancial assets and liabilities. We will adopt the
provisions of SFAS No. 157 for nonfinancial assets and liabilities in
fiscal 2010 and are currently in the process of evaluating the effect of SFAS
157 for nonfinancial assets and nonfinancial liabilities.
10
Note 5.
Accumulated
Other Comprehensive Income
The Companys comprehensive
income for the three and six months ended January 31, 2009 and 2008 is set
forth in the following table:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,774,000
|
|
$
|
2,157,000
|
|
$
|
7,107,000
|
|
$
|
4,096,000
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
Unrealized loss on interest cap, net of tax
|
|
(27,000
|
)
|
|
|
(94,000
|
)
|
|
|
Foreign currency translation, net of tax
|
|
(623,000
|
)
|
(1,663,000
|
)
|
(5,729,000
|
)
|
2,172,000
|
|
Comprehensive income
|
|
$
|
3,124,000
|
|
$
|
494,000
|
|
$
|
1,284,000
|
|
$
|
6,268,000
|
|
Note 6.
Financial
Instruments
We account for derivative
instruments and hedging activities in accordance with SFAS 133, which 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 recognized immediately in earnings. As of January 31, 2009, all of our
derivatives were designated as hedges.
Changes in the value of the euro against the United States dollar and
British pound 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 or British pounds
but must be converted into its functional euro currency. Furthermore, as part of
the restructuring of our Netherlands subsidiary, as further described in Note
16 to the Condensed Consolidated Financial Statements, a portion of the net
assets of our United States subsidiaries, Minntech and Mar Cor, are now
denominated and ultimately settled in euros or British pounds but must be
converted into our functional United States currency.
In order to hedge against the impact of fluctuations in the value of
the euro relative to the United States dollar and British pound and the value
of the British pound relative to the United States dollar on the conversion of
such net assets into the functional currencies, we enter into short-term
contracts to purchase euros and British pounds forward, which contracts are
generally one month in duration. These short-term contracts are designated as
fair value hedge instruments. There were four foreign currency forward
contracts with an aggregate value of $1,425,000 at January 31, 2009, which
covered certain assets and liabilities of Minntech and its Netherlands
subsidiary that were denominated in currencies other than their functional
currencies. Such contracts expired on February 28, 2009. These foreign
currency forward contracts are continually replaced with new one-month
contracts as long as we have significant net assets at Minntech and its
Netherlands subsidiary that are denominated and ultimately settled in
currencies other than their functional currencies. Under our credit facilities,
such contracts to purchase euros and British pounds may not exceed $12,000,000
in an aggregate notional amount at any time. For the
11
three and six months ended January 31, 2009, such forward
contracts were partially effective in offsetting a portion of the impact on
operations relating to certain assets and liabilities of Minntech and its
Netherlands subsidiary that were denominated in currencies other than their
functional currencies. Despite the use of these forward contracts, the
functional currency conversion loss recognized in net income was approximately
$131,000 and $173,000, net of tax, during the three and six months ended January 31,
2009, respectively, primarily due to the weakening of the euro and British
pound relative to the United States dollar as well as the timing of our cash
repatriation from the Netherlands. Gains and losses related to the hedging
contracts to buy euros and British pounds forward were 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.
The interest rate on outstanding borrowings under our credit facilities
is variable and is affected by the general level of interest rates in the
United States as well as LIBOR interest rates, as more fully described in Note
9 to the Condensed Consolidated Financial Statements. In order to protect our
interest rate exposure in future years, we entered into an interest rate cap
agreement on July 21, 2008 for the two-year period beginning June 30,
2009 and ending June 30, 2011 initially covering $20,000,000 of borrowings
under the term loan facility (and thereafter reducing in quarterly $2,500,000
increments consistent with the mandatory repayment schedule of our term loan
facility), which caps three-month LIBOR on this portion of outstanding
borrowings at 4.25%. This interest rate cap agreement has been designated as a
cash flow hedge instrument. The cost of the interest rate cap, which is
included in other assets, was approximately $149,000 and will be amortized to
interest expense over the two-year life of the agreement. The difference
between its amortized cost and its fair value was recorded as an unrealized
loss and included in accumulated other comprehensive loss.
On August 1, 2008, we
adopted SFAS No. 157 for our financial assets and liabilities. SFAS No. 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date. SFAS No. 157 establishes a three level fair value
hierarchy to prioritize the inputs used in valuations, as defined below:
Level 1: Observable inputs that reflect unadjusted quoted prices for
identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or indirectly.
Level 3: Unobservable inputs for the asset or liability.
As of January 31, 2009,
the fair values of the Companys assets measured on a recurring basis were
categorized as follows:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Cap Agreement
|
|
$
|
|
|
$
|
4,000
|
|
$
|
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The interest rate cap agreement
was valued based on an observable market price applied to the specific terms of
the interest rate cap agreement as calculated by a banking institution, and is
classified within Level 2 of the fair value hierarchy.
12
Note 7.
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 using the straight-line method over the estimated useful lives of the
assets ranging from 3-20 years and have a weighted average amortization period
of 10 years. Amortization expense
related to intangible assets was $1,268,000 and $2,606,000 for the three and
six months ended January 31, 2009, respectively, and $1,460,000 and
$2,859,000 for the three and six months ended January 31, 2008,
respectively. Our intangible assets that have indefinite useful lives and
therefore are not amortized consist of trademarks and trade names.
The Companys intangible assets
consist of the following:
|
|
January 31, 2009
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
25,807,000
|
|
$
|
(9,034,000
|
)
|
$
|
16,773,000
|
|
Technology
|
|
8,972,000
|
|
(4,649,000
|
)
|
4,323,000
|
|
Brand names
|
|
9,546,000
|
|
(3,283,000
|
)
|
6,263,000
|
|
Non-compete agreements
|
|
2,032,000
|
|
(1,236,000
|
)
|
796,000
|
|
Patents and other registrations
|
|
1,135,000
|
|
(187,000
|
)
|
948,000
|
|
|
|
47,492,000
|
|
(18,389,000
|
)
|
29,103,000
|
|
Trademarks and tradenames
|
|
8,869,000
|
|
|
|
8,869,000
|
|
Total intangible assets
|
|
$
|
56,361,000
|
|
$
|
(18,389,000
|
)
|
$
|
37,972,000
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2008
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
28,669,000
|
|
$
|
(10,341,000
|
)
|
$
|
18,328,000
|
|
Technology
|
|
9,622,000
|
|
(4,602,000
|
)
|
5,020,000
|
|
Brand names
|
|
9,546,000
|
|
(2,768,000
|
)
|
6,778,000
|
|
Non-compete agreements
|
|
2,032,000
|
|
(1,080,000
|
)
|
952,000
|
|
Patents and other registrations
|
|
1,134,000
|
|
(148,000
|
)
|
986,000
|
|
|
|
51,003,000
|
|
(18,939,000
|
)
|
32,064,000
|
|
Trademarks and tradenames
|
|
9,190,000
|
|
|
|
9,190,000
|
|
Total intangible assets
|
|
$
|
60,193,000
|
|
$
|
(18,939,000
|
)
|
$
|
41,254,000
|
|
Estimated amortization expense
of our intangible assets for the remainder of fiscal 2009 and the next five
years is as follows:
Six month period ending July 31, 2009
|
|
$
|
2,533,000
|
|
Fiscal 2010
|
|
4,884,000
|
|
Fiscal 2011
|
|
4,593,000
|
|
Fiscal 2012
|
|
4,130,000
|
|
Fiscal 2013
|
|
4,056,000
|
|
Fiscal 2014
|
|
3,887,000
|
|
13
Goodwill changed during fiscal 2008 and the six months ended January 31,
2009 as follows:
|
|
|
|
|
|
|
|
Water
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
Endoscope
|
|
Purification
|
|
|
|
Total
|
|
|
|
Dialysis
|
|
Disposables
|
|
Reprocessing
|
|
and Filtration
|
|
All Other
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2007
|
|
$
|
8,155,000
|
|
$
|
43,011,000
|
|
$
|
6,500,000
|
|
$
|
36,641,000
|
|
$
|
7,766,000
|
|
$
|
102,073,000
|
|
Acquisitions
|
|
|
|
3,167,000
|
|
3,148,000
|
|
857,000
|
|
|
|
7,172,000
|
|
Earnouts on acquisition
|
|
|
|
4,295,000
|
|
|
|
|
|
|
|
4,295,000
|
|
Adjustments
primarily relating to income tax exposure of acquired businesses
|
|
(22,000
|
)
|
|
|
|
|
(61,000
|
)
|
(3,000
|
)
|
(86,000
|
)
|
Foreign curreny
translation
|
|
|
|
|
|
|
|
225,000
|
|
279,000
|
|
504,000
|
|
Balance, July 31,
2008
|
|
8,133,000
|
|
50,473,000
|
|
9,648,000
|
|
37,662,000
|
|
8,042,000
|
|
113,958,000
|
|
Foreign curreny
translation
|
|
|
|
|
|
|
|
(934,000
|
)
|
(1,164,000
|
)
|
(2,098,000
|
)
|
Balance,
January 31, 2009
|
|
$
|
8,133,000
|
|
$
|
50,473,000
|
|
$
|
9,648,000
|
|
$
|
36,728,000
|
|
$
|
6,878,000
|
|
$
|
111,860,000
|
|
On July 31, 2008, we performed impairment studies of the Companys
goodwill and trademarks and trade names and concluded that such assets were not
impaired.
Note 8.
Warranty
A summary of activity in the
Companys warranty reserves follows:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
882,000
|
|
$
|
1,058,000
|
|
$
|
916,000
|
|
$
|
1,033,000
|
|
Acquisitions
|
|
|
|
|
|
|
|
28,000
|
|
Provisions
|
|
297,000
|
|
348,000
|
|
599,000
|
|
629,000
|
|
Charges
|
|
(267,000
|
)
|
(397,000
|
)
|
(555,000
|
)
|
(705,000
|
)
|
Foreign currency translation
|
|
|
|
4,000
|
|
(48,000
|
)
|
28,000
|
|
Ending balance
|
|
$
|
912,000
|
|
$
|
1,013,000
|
|
$
|
912,000
|
|
$
|
1,013,000
|
|
The warranty provisions and
charges during the three and six months ended January 31, 2009 and 2008
relate principally to the Companys endoscope reprocessing and water
purification products. Warranty reserves are included in accrued expenses in
the Condensed Consolidated Balance Sheets.
Note 9.
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.
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. Amounts we repay under
the term loan facility may not be re-borrowed. Debt issuance costs relating to
the 2005 U.S. Credit Facilities were recorded in other assets and are being
amortized over the life of the credit facilities. Such unamortized debt
issuance costs amounted to approximately $776,000 at January 31, 2009.
14
At January 31, 2009, 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 January 31, 2009, the lenders base rate
was 3.25% and the LIBOR rates ranged from 0.33% to 3.35%. The margins
applicable to our outstanding borrowings at January 31, 2009 were 0.00%
above the lenders base rate and 1.00% above LIBOR. All of our outstanding
borrowings were under LIBOR contracts at January 31, 2009. The majority of
such contracts were twelve month LIBOR contracts; therefore, we are
substantially protected throughout most of fiscal 2009 from any exposure
associated with increasing LIBOR rates. In order to protect our interest rate
exposure in future years, we entered into an interest rate cap agreement in July 2008
for the two year period beginning June 30, 2009 and ending June 30,
2011 initially covering $20,000,000 of borrowings under the term loan facility
(and thereafter reducing in quarterly $2,500,000 increments consistent with the
mandatory repayment schedule of our term loan facility), which caps three-month
LIBOR on this portion of outstanding borrowings at 4.25%. The 2005 U.S. Credit
Facilities also provide for fees on the unused portion of our facilities at
rates ranging from 0.15% to 0.30%, depending upon our consolidated ratio of
debt to EBITDA; such rate was 0.25% at January 31, 2009.
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,
Crosstex, and Strong Dental) and (ii) our pledge of all of the outstanding
shares of Minntech, Mar Cor, Crosstex and Strong Dental 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 January 31, 2009, we were in compliance with
all financial and other covenants under the 2005 U.S. Credit Facilities.
On January 31, 2009, we had $54,300,000 of outstanding borrowings
under the 2005 U.S. Credit Facilities, which consisted of $24,000,000 and
$30,300,000 under the term loan facility and the revolving credit facility,
respectively. The maturities of our credit facilities are described in Note 12
to the Condensed Consolidated Financial Statements.
15
Note 10.
Earnings Per Common Share
Basic
earnings per common share are computed based upon the weighted average number
of common shares outstanding during the period.
Diluted earnings per common share are computed based upon the weighted
average number of common shares outstanding during the period plus the dilutive
effect of Common Stock equivalents using the treasury stock method and the
average market price of our Common Stock for the period.
The following table sets forth the computation of basic and diluted
earnings per common share:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Numerator for basic and diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,774,000
|
|
$
|
2,157,000
|
|
$
|
7,107,000
|
|
$
|
4,096,000
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share - weighted
average number of shares outstanding
|
|
16,263,703
|
|
16,103,015
|
|
16,227,013
|
|
16,042,600
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of equity awards using the
treasury stock method and the average market price for the period
|
|
151,696
|
|
283,332
|
|
154,578
|
|
316,242
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
- weighted average number of shares and common stock equivalents
|
|
16,415,399
|
|
16,386,347
|
|
16,381,591
|
|
16,358,842
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.23
|
|
$
|
0.13
|
|
$
|
0.44
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
$
|
0.13
|
|
$
|
0.43
|
|
$
|
0.25
|
|
Note 11.
Income Taxes
The consolidated effective tax rate was 38.0% and 41.6% for the six months
ended January 31, 2009 and 2008, respectively. The decrease in the
consolidated effective tax rate was affected principally by the geographic mix
of pre-tax income and the impact of various tax rate reductions, as described
below.
The majority of our income before income taxes was generated from our
United States operations, which had an overall effective tax rate for each of
the six months ended January 31, 2009 and 2008 of 38.5%. Our United States
effective tax rate for the six months ended January 31, 2009 was favorably
impacted by New York state tax rate reductions enacted in 2008, which primarily
relate to our Healthcare Disposables segment, and recently enacted Federal tax
legislation that enabled us to claim the research and experimentation tax
credit, offset by additional taxes related to the repatriation of earnings from
our Netherlands subsidiary.
Approximately 5% of our income before income taxes was generated from
our Canadian operations, which had an overall effective tax rate for the six
months ended January 31, 2009 of 10.5%. This low overall effective tax
rate was attributable to the impact of a lower overall
16
effective rate in our Specialty Packaging segment as applied to
existing deferred income tax liabilities.
Due to the uncertainty of our Netherlands subsidiary utilizing tax
benefits in the future, a tax benefit was not recorded on the losses from
operations at our Netherlands subsidiary for the six months ended January 31,
2009 and 2008, thereby adversely affecting our overall consolidated effective
tax rate. The overall loss from our Netherlands operation for the six months
ended January 31, 2009 decreased compared with the six months ended January 31,
2008.
The results of operations for our subsidiaries in Japan and Singapore
did not have a significant impact on our overall effective tax rate for the six
months ended January 31, 2009 and 2008 due to the size of these operations
relative to our United States, Canada and Netherlands operations.
We record liabilities for an unrecognized tax benefit when a tax
benefit for an uncertain tax position is taken or expected to be taken on a tax
return, but is not recognized in our Condensed Consolidated Financial
Statements because it does not meet the more-likely-than-not recognition
threshold that the uncertain tax position would be sustained upon examination
by the applicable taxing authority. The majority of our unrecognized tax
benefits originated from acquisitions. Accordingly, any adjustments upon
resolution of income tax uncertainties that predate or result from acquisitions
are recorded as an increase or decrease to goodwill. Therefore, if the
unrecognized tax benefits are recognized in our financial statements in future
periods, there would not be a significant impact to our effective tax rate. We
do not expect such unrecognized tax benefits to significantly decrease or
increase in the next twelve months.
A reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits is as follows:
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
|
|
|
Unrecognized tax benefits on August 1,
2007
|
|
$
|
484,000
|
|
Lapse of statute of limitations
|
|
(57,000
|
)
|
Unrecognized tax benefits on July 31,
2008
|
|
427,000
|
|
Activity during the six months ended
January 31, 2009
|
|
|
|
Unrecognized tax benefits on
January 31, 2009
|
|
$
|
427,000
|
|
Generally, the
Company is no longer subject to federal, state or foreign income tax
examinations for fiscal years ended prior to July 31, 2002.
Our policy is to record
potential interest and penalties related to income tax positions in interest
expense and general and administrative expense, respectively, in our Condensed
Consolidated Financial Statements. However, such amounts have been relatively
insignificant due to the amount of our unrecognized tax benefits relating to
uncertain tax positions.
17
12.
Commitments
and Contingencies
Long-term contractual obligations
As of January 31, 2009, aggregate annual
required payments over the remaining fiscal year, the next four years and
thereafter under our contractual obligations that have long-term components
were as follows:
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
Year Ending July 31,
|
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Maturities of the credit facilities
|
|
$
|
4,000
|
|
$
|
10,000
|
|
$
|
40,300
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
54,300
|
|
Expected interest payments under the credit
facilities (1)
|
|
1,009
|
|
1,732
|
|
226
|
|
|
|
|
|
|
|
2,967
|
|
Minimum commitments under noncancelable
operating leases
|
|
1,725
|
|
2,836
|
|
1,873
|
|
1,058
|
|
629
|
|
1,174
|
|
9,295
|
|
Minimum commitments under noncancelable
capital leases
|
|
25
|
|
52
|
|
14
|
|
|
|
|
|
|
|
91
|
|
Minimum commitments under license agreement
|
|
36
|
|
94
|
|
141
|
|
163
|
|
163
|
|
2,182
|
|
2,779
|
|
Deferred compensation and other
|
|
227
|
|
494
|
|
424
|
|
281
|
|
32
|
|
199
|
|
1,657
|
|
Employment agreements
|
|
1,785
|
|
3,340
|
|
148
|
|
138
|
|
|
|
|
|
5,411
|
|
Total contractual obligations
|
|
$
|
8,807
|
|
$
|
18,548
|
|
$
|
43,126
|
|
$
|
1,640
|
|
$
|
824
|
|
$
|
3,555
|
|
$
|
76,500
|
|
(1) The expected interest payments under
the term and revolving credit facilities reflect interest rates of 4.12% and
3.62%, respectively, which were our weighted average interest rates on
outstanding borrowings at January 31, 2009.
Operating leases
Minimum commitments under operating leases include minimum rental
commitments for our leased manufacturing facilities, warehouses, office space
and equipment.
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 in Canadian
dollars each calendar year over the license agreement term of 20 years. At January 31,
2009, we had minimum future royalty obligations related to this license
agreement of approximately $2,779,000 through December 31, 2026 using the
exchange rate on January 31, 2009.
Deferred compensation
Included in other long-term liabilities are
deferred compensation arrangements for certain former Minntech directors and
officers.
18
Employment agreements
We have previously entered into various employment agreements with
several executives of the Company, including the former President and Chief
Executive Officer. Effective April 22, 2008, our former President and Chief
Executive Officer resigned and our Chief Operating Officer and Executive Vice
President was promoted to President. As a result of this resignation, estimated
separation benefits and other related costs of approximately $720,000 were
recorded in general and administrative expenses during fiscal 2008.
Approximately $156,000 of such amount remains payable as of January 31,
2009, and accordingly, has been reflected in the table above as a required
payment during fiscal 2009.
Note 13.
Operating Segments
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.
The Companys segments are as follows:
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.
One customer accounted for approximately 23% of our Water Purification
and Filtration segment net sales and approximately 8% of our consolidated net
sales during the six months ended January 31, 2009.
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.
Three customers collectively accounted for approximately 52% of our
Dialysis segment net sales and approximately 20% of our consolidated net sales,
including one customer that accounted for approximately 30% of our Dialysis
segment net sales and approximately 9% of our consolidated net sales, during
the six months ended January 31, 2009.
19
Healthcare Disposables
, which includes
single-use infection prevention and 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, germicidal
wipes, hand care products, gloves, sponges, cotton products, cups, needles and
syringes, scalpels and blades, and saliva evacuators and ejectors.
Four customers collectively accounted for approximately 55% of our
Healthcare Disposables segment net sales and approximately 13% of our
consolidated net sales during the six months ended January 31, 2009.
Endoscope Reprocessing
, which includes
endoscope disinfection equipment and related accessories, disinfectants 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 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
Condensed Consolidated Financial Statements as described in Note 2 to the 2008 Form 10-K.
20
Information as to operating segments is summarized below:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
16,799,000
|
|
$
|
18,069,000
|
|
$
|
35,269,000
|
|
$
|
34,022,000
|
|
Dialysis
|
|
15,250,000
|
|
14,692,000
|
|
29,480,000
|
|
30,147,000
|
|
Healthcare Disposables
|
|
14,371,000
|
|
13,985,000
|
|
30,120,000
|
|
27,951,000
|
|
Endoscope Reprocessing
|
|
11,941,000
|
|
10,799,000
|
|
24,364,000
|
|
21,944,000
|
|
All Other
|
|
4,059,000
|
|
3,365,000
|
|
7,593,000
|
|
6,851,000
|
|
Total
|
|
$
|
62,420,000
|
|
$
|
60,910,000
|
|
$
|
126,826,000
|
|
$
|
120,915,000
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
1,448,000
|
|
$
|
1,516,000
|
|
$
|
3,200,000
|
|
$
|
2,805,000
|
|
Dialysis
|
|
2,896,000
|
|
2,189,000
|
|
5,135,000
|
|
4,461,000
|
|
Healthcare Disposables
|
|
1,546,000
|
|
1,975,000
|
|
3,523,000
|
|
3,810,000
|
|
Endoscope Reprocessing
|
|
1,568,000
|
|
240,000
|
|
3,103,000
|
|
589,000
|
|
All Other
|
|
1,021,000
|
|
756,000
|
|
1,686,000
|
|
1,356,000
|
|
|
|
8,479,000
|
|
6,676,000
|
|
16,647,000
|
|
13,021,000
|
|
General corporate expenses
|
|
(1,880,000
|
)
|
(1,954,000
|
)
|
(3,864,000
|
)
|
(3,829,000
|
)
|
Interest expense, net
|
|
(636,000
|
)
|
(1,105,000
|
)
|
(1,317,000
|
)
|
(2,180,000
|
)
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
5,963,000
|
|
$
|
3,617,000
|
|
$
|
11,466,000
|
|
$
|
7,012,000
|
|
Note 14.
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. We do not believe
that any of these pending claims or legal actions will have a material effect
on our business, financial condition, results of operations or cash flows.
Note 15.
Repurchase of Shares
In May 2008, our Board of Directors
approved the repurchase of up to 500,000 shares of our outstanding Common Stock
under a repurchase program commencing on June 9, 2008. Under the
repurchase program we repurchase 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 has a one-year term ending on June 8, 2009.
The first repurchase under our repurchase
program occurred on July 11, 2008. Through July 31, 2008, we
completed the repurchase of 90,700 shares under the program at a total average
price per share of $9.42. We repurchased an additional 43,847 shares through October 31,
2008 at a total average price per share of $9.17. No additional repurchases
have been made since our first quarter ended October 31, 2008. Therefore,
at January 31, 2009, we had repurchased 134,547 shares under the
repurchase program at a total average price per share of $9.34 and the maximum
number of remaining shares that may be repurchased under the program is 365,453
shares.
21
Note 16.
Restructuring
Activities
During the fourth quarter of fiscal 2008, our
management approved and initiated plans to restructure our Netherlands
subsidiary by relocating all of our manufacturing operations from the
Netherlands to the United States. This action is part of our continuing effort
to reduce operating costs and improve efficiencies by leveraging the existing
infrastructure of our Minntech operations in Minnesota. The elimination of
manufacturing operations in the Netherlands has led to the end of onsite
material management, quality assurance, finance and accounting, human resources
and some customer service functions. However, we continue to maintain a strong
marketing, sales, service and technical support presence based in the Netherlands
to serve customers throughout Europe, the Middle East and Africa.
During the three and six months ended January 31,
2009, we recorded $74,000 and $345,000, respectively, in restructuring
expenses, which decreased both basic and diluted earnings per share from
operations by approximately $0.02 for the six months ended January 31,
2009. Including restructuring costs incurred during the three months ended July 31,
2008, the cumulative amount of such costs incurred as of January 31, 2009
was $710,000. We expect to incur approximately $25,000 in additional
restructuring costs in the three months ending April 30, 2009. The
decrease in the total expected restructuring expense estimated at July 31,
2008 compared to actual costs incurred during the six months ended January 31,
2009 was primarily due to the significant decrease in the value of the euro in
relation to the United States dollar. The majority of the restructuring costs
are included in our Endoscope Reprocessing segment.
22
The restructuring costs recorded and expected
to be recorded are as follows:
|
|
Cost of Sales
|
|
General and Administrative Expenses
|
|
|
|
|
|
Unsalable
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Inventory
|
|
Severance
|
|
Total
|
|
Severance
|
|
Other
|
|
Total
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
$
|
211,000
|
|
$
|
64,000
|
|
$
|
275,000
|
|
$
|
90,000
|
|
$
|
|
|
$
|
90,000
|
|
$
|
365,000
|
|
Inventory disposal
|
|
(96,000
|
)
|
|
|
(96,000
|
)
|
|
|
|
|
|
|
(96,000
|
)
|
Accrued balance at July 31, 2008
|
|
115,000
|
|
64,000
|
|
179,000
|
|
90,000
|
|
|
|
90,000
|
|
269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
10,000
|
|
129,000
|
|
139,000
|
|
132,000
|
|
|
|
132,000
|
|
271,000
|
|
Paid
|
|
|
|
|
|
|
|
(88,000
|
)
|
|
|
(88,000
|
)
|
(88,000
|
)
|
Foreign currency translation
|
|
(35,000
|
)
|
(16,000
|
)
|
(51,000
|
)
|
(12,000
|
)
|
|
|
(12,000
|
)
|
(63,000
|
)
|
Accrued balance at October 31, 2008
|
|
90,000
|
|
177,000
|
|
267,000
|
|
122,000
|
|
|
|
122,000
|
|
389,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
37,000
|
|
37,000
|
|
25,000
|
|
12,000
|
|
37,000
|
|
74,000
|
|
Paid
|
|
|
|
(226,000
|
)
|
(226,000
|
)
|
(150,000
|
)
|
(12,000
|
)
|
(162,000
|
)
|
(388,000
|
)
|
Foreign currency translation
|
|
5,000
|
|
12,000
|
|
17,000
|
|
3,000
|
|
|
|
3,000
|
|
20,000
|
|
Accrued balance at January 31, 2009
|
|
95,000
|
|
|
|
95,000
|
|
|
|
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ending April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected expense
|
|
|
|
|
|
|
|
|
|
25,000
|
|
25,000
|
|
25,000
|
|
Expected to be paid
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
(25,000
|
)
|
(25,000
|
)
|
Accrued balance at April 30, 2009
|
|
$
|
95,000
|
|
$
|
|
|
$
|
95,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses incurred and
expected to be incurred
|
|
$
|
221,000
|
|
$
|
230,000
|
|
$
|
451,000
|
|
$
|
247,000
|
|
$
|
37,000
|
|
$
|
284,000
|
|
$
|
735,000
|
|
Since the above costs were recorded in our
Netherlands subsidiary, which has been experiencing losses from its operations,
tax benefits on the above costs were not recorded. The unsalable inventory was
recorded in inventories as part of our inventory reserve and the accrued
severance was recorded in compensation payable in our Condensed Consolidated
Balance Sheets.
As part of the restructuring plan, we intend
to sell our Netherlands building and land. Based on a recent offer currently
being discussed, we will likely sell the property and lease it back from the
new owner so that we can continue to use the facility as our European sales and
service headquarters as well as for warehouse and distribution activity. At January 31,
2009, these assets had a book value of $1,388,000, net of accumulated
depreciation, and were included in property and equipment in our Condensed
Consolidated Balance Sheets. The primary reason for the decrease in the book
value of the Netherlands building and land since July 31, 2008 was the
decrease in the value of the euro relative to the United States dollar. Based
on the recent price offered to us, a gain of approximately $200,000 may be
generated when the building and land are sold. However, due to the
deteriorating real estate and credit markets and other factors, no assurances
can be given as to the timing of the sale and whether a gain or loss on the
sale of the facility will ultimately be realized.
23
ITEM 2.
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 operations for the three and six months ended January 31,
2009 compared with the three and six months ended January 31, 2008.
Liquidity and Capital Resources
provides an
overview of our working capital, cash flows, contractual obligations and
financing and foreign currency activities.
Critical Accounting Policies
provides a
discussion of our accounting policies that require critical judgments,
assumptions and estimates.
Forward-Looking Statements
provides a
discussion of cautionary factors that may affect future results.
Overview
Cantel is a
leading provider of infection prevention and control products in the healthcare
market, specializing in the following operating segments:
·
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.
·
Dialysis
:
Medical device reprocessing systems, sterilants/disinfectants, dialysate
concentrates and other supplies for renal dialysis.
·
Healthcare
Disposables
: Single-use, infection prevention and 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.
·
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.
24
See our Annual Report on Form 10-K for the fiscal year ended July 31,
2008 (the 2008 Form 10-K) and our Condensed Consolidated Financial
Statements for additional financial information regarding our reporting
segments.
Significant
Activity
(i)
The
deterioration in the economy and credit markets adversely impacted our results
of operations for the three and six months ended January 31, 2009,
compared with the three and six months ended January 31, 2008, by causing
some of our customers to delay spending on certain products, especially capital
equipment in our Water Purification and Filtration segment, as more fully
described elsewhere in this MD&A. Sales of capital equipment represent
approximately 30% of our overall consolidated net sales and are primarily
included in our Water Purification and Filtration, Dialysis and Endoscope
Reprocessing segments.
(ii)
We
sell our dialysis products to a concentrated number of customers. Sales in our
Dialysis segment were favorably impacted by large shipments of low margin
dialysate concentrate to an international customer during the three months
ended January 31, 2009, partially offset by the continuing adverse impact
of losing some low margin dialysate concentrate business from domestic
customers as a result of the highly competitive and price sensitive market for
such product, as more fully described elsewhere in this MD&A.
(iii)
In
June 2008, we announced and began executing our plan to restructure our
Netherlands manufacturing operations as part of our continuing effort to reduce
operating costs and leverage our existing United States infrastructure. As a
result of this restructuring, approximately $74,000 and $345,000 of
restructuring costs were recorded in the three and six months ended January 31,
2009, respectively, which decreased both basic and diluted earnings per share
by $0.02 during the six months ended January 31, 2009, as more fully
described in Note 16 to the Condensed Consolidated Financial Statements and
elsewhere in this MD&A.
(iv)
Fluctuations
in the rates of currency exchange had an overall favorable impact on our
results of operations for the three and six months ended January 31, 2009,
compared with the three and six months ended January 31, 2008, as more
fully described elsewhere in this MD&A.
(v)
Fiscal
2008 acquisitions: We acquired the businesses of Dialysis Services, Inc. (DSI)
on August 1, 2007, Verimetrix, LLC (Verimetrix) on September 17,
2007, and Strong Dental Products, Inc. (Strong Dental) on September 26,
2007, as more fully described in Note 3 to the Condensed Consolidated Financial
Statements.
25
Results of Operations
The results of operations described below reflect the operating results
of Cantel and its wholly-owned subsidiaries and includes the results of
operations of DSI, Verimetrix and Strong Dental for the three and six months
ended January 31, 2009 and the portion of the three and six months ended January 31,
2008 subsequent to their respective acquisition dates.
The following discussion should also be read in conjunction with our
2008 Form 10-K.
The following table gives information as to the net sales and the
percentage to the total net sales for each of our reporting segments:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
16,799
|
|
26.9
|
|
$
|
18,069
|
|
29.7
|
|
$
|
35,269
|
|
27.8
|
|
$
|
34,022
|
|
28.1
|
|
Dialysis
|
|
15,250
|
|
24.5
|
|
14,692
|
|
24.1
|
|
29,480
|
|
23.3
|
|
30,147
|
|
24.9
|
|
Healthcare Disposables
|
|
14,371
|
|
23.0
|
|
13,985
|
|
23.0
|
|
30,120
|
|
23.7
|
|
27,951
|
|
23.1
|
|
Endoscope Reprocessing
|
|
11,941
|
|
19.1
|
|
10,799
|
|
17.7
|
|
24,364
|
|
19.2
|
|
21,944
|
|
18.2
|
|
All Other
|
|
4,059
|
|
6.5
|
|
3,365
|
|
5.5
|
|
7,593
|
|
6.0
|
|
6,851
|
|
5.7
|
|
|
|
$
|
62,420
|
|
100.0
|
|
$
|
60,910
|
|
100.0
|
|
$
|
126,826
|
|
100.0
|
|
$
|
120,915
|
|
100.0
|
|
Net Sales
Net sales increased by $1,510,000, or 2.5%, to $62,420,000 for the
three months ended January 31, 2009 from $60,910,000 for the three months
ended January 31, 2008.
Net sales increased by $5,911,000, or 4.9%, to $126,826,000 for the six
months ended January 31, 2009 from $120,915,000 for the six months ended January 31,
2008.
Net sales were adversely impacted for the three and six months ended January 31,
2009 compared with the three and six months ended January 31, 2008 by
approximately $278,000 and $380,000, respectively, due to the translation of Canadian
dollar net sales primarily of our Water Purification and Filtration operating
segment using a weaker Canadian dollar against the United States dollar.
The increase in net sales for the three and six months ended January 31,
2009 was principally attributable to increases in sales of endoscope
reprocessing products and services, therapeutic filtration products (included
in All Other) and healthcare disposables products. Additionally, with respect
to the three months ended January 31, 2009, net sales was impacted by an
increase in dialysis products partially offset by a decrease in water
purification and filtration products.
Net sales of endoscope reprocessing products and services increased by
10.6% and 11.0% for the three and six months ended January 31, 2009,
respectively, compared with the three and six months ended January 31,
2008, primarily due to the increase in demand in the United States for our
disinfectants and product service due to the increased field population of
equipment as well as our ability to gradually convert the sale of such items
from our former equipment distributor (who continues to purchase high-level
disinfectants, cleaners, and consumables from
26
us and provide product service to our customers) to our direct sales
and service force at higher selling prices. Higher selling prices, most of
which relates to the direct sale of disinfectants, consumables and product
service, resulted in approximately $720,000 and $1,480,000 in incremental net
sales for the three and six months ended January 31, 2009, respectively,
compared with the three and six months ended January 31, 2008. The
increase in net sales was also due to approximately $184,000 in incremental net
sales in the first quarter of our fiscal 2009 due to the acquisition of
Verimetrix on September 17, 2007. Although endoscope reprocessing
equipment sales were comparable during the three and six months ended January 31,
2009 and January 31, 2008, future sales may be adversely affected by the
recent deterioration in the general economy and credit markets by potentially
causing our customers to delay spending on such capital equipment.
Net sales contributed by the Therapeutic Filtration operating segment
were $2,626,000 and $4,752,000 for the three and six months ended January 31,
2009, an increase of 66.9% and 35.5% compared with three and six months ended January 31,
2008, respectively. The increase in sales was primarily due to an increase in
domestic demand for our hemoconcentrator products (filtration devices used to
concentrate red blood cells and remove excess fluid from the bloodstream during
open-heart surgery) and other specialty blood filter devices manufactured by us
on an OEM basis for a customers hydration system and another customers new
external artificial liver machine. Increases in selling prices of our
therapeutic filtration products did not have a significant effect on net sales
for the three and six months ended January 31, 2009 compared with the
three and six months ended January 31, 2008.
Net sales of healthcare disposable products increased by 2.8% and 7.8%
for the three and six months ended January 31, 2009, compared with the
three and six months ended January 31, 2008, primarily due to (i) the
adverse impact on the first quarter of our fiscal 2008 due to the consolidation
of certain distributors of our dental products during 2007 resulting in the
rationalization of duplicate inventories of the consolidated companies, (ii) approximately
$194,000 in incremental net sales in the first quarter of our fiscal 2009 due
to the acquisition of Strong Dental on September 26, 2007 and (iii) approximately
$690,000 and $1,090,000, respectively, in higher net sales due to an increase
in selling prices. Such selling price increases were implemented to offset
corresponding supplier cost increases.
Net sales of dialysis products and services increased by 3.8% for the
three months ended January 31, 2009 and decreased by 2.2%, for the six
months ended January 31, 2009, compared with the three and six months
ended January 31, 2008. The increase for the three months ended January 31,
2009 was primarily due to a large amount of low margin dialysate concentrate
orders (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) from an international customer,
partially offset by the continuing adverse impact of previously losing some
dialysate concentrate business from domestic customers as a result of the
highly competitive and price sensitive market for this low margin commodity
product. Due to sales price decreases by some of our competitors, we expect a
decrease in net sales of our low margin dialysate concentrate product to
domestic customers throughout fiscal 2009 as we elect not to pursue
unprofitable concentrate sales. Additionally, we can not provide assurances
that the level of concentrate sales to this international customer will be
sustained. Higher selling prices to partially offset higher manufacturing and
shipping costs, including freight invoiced to customers (related costs of a
similar amount are included within cost of sales), favorably impacted net sales
for the three and six months ended January 31, 2009 and 2008 by
approximately $220,000 and $520,000, respectively.
27
Net sales of water purification and filtration products and services
decreased by 7.0% for the three months ended January 31, 2009 and
increased by 3.7% for the six months ended January 31, 2009, compared with
the three and six months ended January 31, 2008, respectively. The
decrease for the three months ended January 31, 2009 was primarily due to (i) delayed
investments by our customers in our water purification equipment used for
dialysis as well as for commercial and industrial (large capital) applications
as a result of the continuing deterioration in the general economy and credit
markets, which may continue to adversely effect such sales during the remainder
of fiscal 2009, and (ii) the favorable impact on the second quarter of
fiscal 2008 due to some unusually large commercial and industrial equipment
sales as well as the sales fulfillment delays of capital equipment that
occurred during the first quarter of fiscal 2008 as a result of the integration
of the acquired GE Water & Process Technologies water dialysis
business into our facilities. Partially offsetting these decreases for the
three months ended January 31, 2009 was an increase in demand during
fiscal 2009 for our sterilants and filters by pharmaceutical companies and
within our installed equipment base of business, including one of our largest
customers who standardized on our consumables products in their ordering system
utilized by their dialysis clinics. Higher selling prices, which offset
increased manufacturing costs, favorably impacted net sales for the three and
six months ended January 31, 2009 and 2008 by approximately $655,000 and
$940,000, respectively.
Gross profit
Gross profit increased by $2,125,000, or 9.9%, to $23,611,000 for the
three months ended January 31, 2009 from $21,486,000 for the three months
ended January 31, 2008. Gross profit as a percentage of net sales for the
three months ended January 31, 2009 and 2008 was 37.8% and 35.3%,
respectively.
Gross profit increased by $4,542,000, or 10.6%, to $47,234,000 for the
six months ended January 31, 2009 from $42,692,000 for the six months
ended January 31, 2008. Gross profit as a percentage of net sales for the
six months ended January 31, 2009 and 2008 was 37.2% and 35.3%,
respectively.
The gross profit percentage for the three and six months ended January 31,
2009 increased compared with the three and six months ended January 31,
2008 primarily due to (i) favorable sales mix due to the increased sales
volume of certain high margin products such as disinfectants and consumables in
our Endoscope Reprocessing segment, sterilants and filters in our Water
Purification and Filtration segment and hemoconcentrators and other specialty
filters in our Therapeutic Filtration segment, (ii) higher selling prices
including those attributable to our ability to gradually convert the sale of
high-level disinfectants, cleaners, and consumables in our Endoscope Reprocessing
segment from our former equipment distributor (who continues to purchase such
items from us) to our direct sales and service force at higher selling prices, (iii) improved
efficiencies in our manufacturing, transportation and service functions and (iv) inefficiencies
in our Water Purification and Filtration segment during the three months ended October 31,
2007 as a result of the integration of the acquired GE Water & Process
Technologies water dialysis business into our facilities. Partially offsetting
this increase was a decrease in gross profit percentage attributable to
restructuring charges of approximately $37,000 and $176,000 recorded primarily
in our Endoscope Reprocessing segment during the three and six months ended January 31,
2009, respectively, relating to the relocation of our Netherlands manufacturing
operations, as more fully described elsewhere in this MD&A.
28
Operating Expenses
Selling expenses increased by $156,000, or 2.3%, to $6,992,000 for the
three months ended January 31, 2009, from $6,836,000 for the three months
ended January 31, 2008, primarily due to higher compensation expense of
approximately $250,000 relating to annual salary increases in all of our
reporting segments and incentive compensation, and an increase of approximately
$90,000 in advertising and marketing expense primarily related to our
Healthcare Disposables segment. This increase was partially offset by a
decrease of approximately $90,000 as a result of translating selling expenses
of our international subsidiaries using a weaker Canadian dollar and euro
against the United States dollar.
Selling expenses increased by $717,000, or 5.3%, to $14,342,000 for the
six months ended January 31, 2009, from $13,625,000 for the six months
ended January 31, 2008, primarily due to (i) higher compensation
expense of approximately $680,000 relating to annual salary increases in all of
our reporting segments, additional sales personnel primarily in our Water
Purification and Filtration and Healthcare Disposables segments and incentive
compensation and (ii) an increase of approximately $190,000 in advertising
and marketing expense primarily related to our Healthcare Disposables segment.
This increase was partially offset by a decrease of approximately $110,000 as a
result of translating selling expenses of our international subsidiaries using
a weaker Canadian dollar and euro against the United States dollar.
Selling expenses as a percentage of net sales
were 11.2% for the three months ended January 31, 2009 and 2008, and 11.3%
for the six months ended January 31, 2009 and 2008.
General and administrative expenses increased
by $70,000, or 0.8%, to $9,037,000 for the three months ended January 31,
2009, from $8,967,000 for the three months ended January 31, 2008,
primarily due to higher compensation expense relating to annual salary
increases in all our reporting segments and approximately $37,000 of
restructuring expense related to the relocation of our Medivators manufacturing
operations from the Netherlands to the United States, partially offset by a
decrease in overhead at our Netherlands operation due to the completion of
restructuring activities, as more fully described elsewhere in this MD&A,
and a decrease of $192,000 in amortization expense of intangible assets.
General and administrative expenses increased
by $137,000, or 0.8%, to $18,061,000 for the six months ended January 31,
2009, from $17,924,000 for the six months ended January 31, 2008,
principally due to increases in compensation expense primarily related to
incentive compensation and annual salary increases and approximately $169,000
of restructuring expense related to the relocation of our Medivators
manufacturing operations from the Netherlands to the United States. These
increases were partially offset by (i) a decrease of approximately
$465,000 as a result of foreign exchange gains associated with translating
certain foreign denominated assets into functional currencies and the
translation of general and administrative expenses of our international
subsidiaries using a significantly weaker Canadian dollar and euro against the
United States dollar, (ii) a decrease in overhead at our Netherlands
operation due to the completion of restructuring activities, as more fully
described elsewhere in this MD&A, and (iii) a decrease of $253,000 in
amortization expense of intangible assets.
General and administrative expenses as a
percentage of net sales were 14.5% and 14.7% for the three months ended January 31,
2009 and 2008, respectively, and 14.2% and 14.8% for the six months ended January 31,
2009 and 2008, respectively.
29
Research and development expenses (which
include continuing engineering costs) were $983,000 and $961,000 for the three
months ended January 31, 2009 and 2008, respectively. For the six months
ended January 31, 2009 and 2008, research and development expenses were
$2,048,000, from $1,951,000, respectively. The majority of our research and
development expenses related to our endoscope reprocessing and filtration
products.
Interest
Interest expense decreased by $581,000 to $674,000 for the three months
ended January 31, 2009, from $1,255,000 for the three months ended January 31,
2008. For the six months ended January 31, 2009, interest expense
decreased by $1,052,000 to $1,425,000, from $2,477,000 for the six months ended
January 31, 2008. For the three and six months ended January 31,
2009, interest expense decreased primarily due to decreases in average
outstanding borrowings and average interest rates.
Interest income decreased by $112,000 to $38,000 for the three months
ended January 31, 2009, from $150,000 for the three months ended January 31,
2008. For the six months ended January 31, 2009, interest income decreased
by $189,000 to $108,000, from $297,000 for the six months ended January 31,
2008. For the three and six months ended January 31, 2009, interest income
decreased primarily due to a decrease in average interest rates.
Income taxes
The consolidated effective tax rate was 38.0% and 41.6% for the six
months ended January 31, 2009 and 2008, respectively. The decrease in the
consolidated effective tax rate was affected principally by the geographic mix
of pre-tax income and the impact of various tax rate reductions, as described
below.
The majority of our income before income taxes was generated from our
United States operations, which had an overall effective tax rate for each of
the six months ended January 31, 2009 and 2008 of 38.5%. Our United States
effective tax rate for the six months ended January 31, 2009 was favorably
impacted by New York state tax rate reductions enacted in 2008, which primarily
relate to our Healthcare Disposables segment, and recently enacted Federal tax
legislation that enabled us to claim the research and experimentation tax
credit, offset by additional taxes related to the repatriation of earnings from
our Netherlands subsidiary.
Approximately 5% of our income before income taxes was generated from
our Canadian operations, which had an overall effective tax rate for the six
months ended January 31, 2009 of 10.5%. This low overall effective tax
rate was attributable to the impact of a lower overall effective rate in our
Specialty Packaging segment as applied to existing deferred income tax
liabilities.
Due to the uncertainty of our Netherlands subsidiary utilizing tax
benefits in the future, a tax benefit was not recorded on the losses from
operations at our Netherlands subsidiary for the six months ended January 31,
2009 and 2008, thereby adversely affecting our overall consolidated effective
tax rate. The overall loss from our Netherlands operation for the six months
ended January 31, 2009 decreased compared with the six months ended January 31,
2008.
30
The results of operations for our subsidiaries in Japan and Singapore
did not have a significant impact on our overall effective tax rate for the six
months ended January 31, 2009 and 2008 due to the size of these operations
relative to our United States, Canada and Netherlands operations.
We record liabilities for an unrecognized tax benefit when a tax
benefit for an uncertain tax position is taken or expected to be taken on a tax
return, but is not recognized in our Condensed Consolidated Financial
Statements because it does not meet the more-likely-than-not recognition
threshold that the uncertain tax position would be sustained upon examination
by the applicable taxing authority. The majority of our unrecognized tax
benefits originated from acquisitions. Accordingly, any adjustments upon
resolution of income tax uncertainties that predate or result from acquisitions
are recorded as an increase or decrease to goodwill. Therefore, if the
unrecognized tax benefits are recognized in our financial statements in future
periods, there would not be a significant impact to our effective tax rate. We
do not expect such unrecognized tax benefits to significantly decrease or
increase in the next twelve months.
A reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits is as follows:
|
|
Unrecognized
|
|
|
|
Tax Benefits
|
|
|
|
|
|
Unrecognized tax benefits on August 1,
2007
|
|
$
|
484,000
|
|
Lapse of statute of limitations
|
|
(57,000
|
)
|
Unrecognized tax benefits on July 31,
2008
|
|
427,000
|
|
Activity during the six months ended
January 31, 2009
|
|
|
|
Unrecognized tax benefits on
January 31, 2009
|
|
$
|
427,000
|
|
Generally, the
Company is no longer subject to federal, state or foreign income tax
examinations for fiscal years ended prior to July 31, 2002.
Our policy is to
record potential interest and penalties related to income tax positions in
interest expense and general and administrative expense, respectively, in our
Condensed Consolidated Financial Statements. However, such amounts have been
relatively insignificant due to the amount of our unrecognized tax benefits
relating to uncertain tax positions.
31
Stock-Based Compensation
The following table shows the income statement components of
stock-based compensation expense recognized in the Condensed Consolidated
Statements of Income:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
January 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
18,000
|
|
$
|
8,000
|
|
$
|
36,000
|
|
$
|
21,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling
|
|
53,000
|
|
23,000
|
|
106,000
|
|
52,000
|
|
General and administrative
|
|
453,000
|
|
428,000
|
|
896,000
|
|
913,000
|
|
Research and development
|
|
1,000
|
|
3,000
|
|
7,000
|
|
8,000
|
|
Total operating expenses
|
|
507,000
|
|
454,000
|
|
1,009,000
|
|
973,000
|
|
Stock-based compensation before income
taxes
|
|
525,000
|
|
462,000
|
|
1,045,000
|
|
994,000
|
|
Income tax benefits
|
|
(199,000
|
)
|
(184,000
|
)
|
(446,000
|
)
|
(388,000
|
)
|
Total stock-based compensation expense, net
of tax
|
|
$
|
326,000
|
|
$
|
278,000
|
|
$
|
599,000
|
|
$
|
606,000
|
|
For the three and six months ended January 31, 2009 and 2008, the
above stock-based compensation expense before income taxes was recorded in the
Condensed Consolidated Financial Statements as stock-based compensation expense
and an increase to additional paid-in 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. Stock-based compensation
expense, net of tax, decreased both basic and diluted earnings per share by
$0.02 and $0.04 for both the three and six months ended January 31, 2009
and 2008, respectively.
The stock-based compensation expense recorded in the Condensed
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 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.
Most of our stock options and stock awards (which consist only of
restricted shares) 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
32
by estimated forfeitures. At January 31, 2009, total unrecognized
stock-based compensation expense, net of tax, related to total nonvested stock
options and stock awards was $1,804,000 with a remaining weighted average
period of 22 months over which such expense is expected to be recognized.
On February 3, 2009, the Company granted 64,500 stock options and
101,000 shares of restricted stock to certain employees. As a result of these grants, total
unrecognized stock-based compensation expense, net of tax, at February 28,
2009 related to total nonvested stock options and stock awards increased to
approximately $2,634,000 with a remaining weighted average period of 24 months
over which such expense is expected to be recognized.
If certain criteria are met when options are
exercised or restricted stock becomes vested, 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 paid-in capital and as a
reduction of income taxes payable. For the six months ended January 31,
2009 and 2008, options exercised and the vesting of restricted stock resulted
in income tax deductions that reduced income taxes payable by $379,000 and
$836,000, respectively.
We classify the cash flows
resulting from excess tax benefits as financing cash flows on our Condensed
Consolidated Statements of 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 past pro forma disclosures
relating to fiscal years prior to August 1, 2005) which was determined
based upon the awards fair value.
Liquidity and Capital Resources
Working capital
At January 31, 2009, the Companys
working capital was $49,290,000, compared with $45,639,000 at July 31,
2008.
Cash flows from operating activities
Net cash provided by operating activities was
$13,208,000 and $2,887,000 for the six months ended January 31, 2009 and
2008, respectively. For the six months ended January 31, 2009, the net
cash provided by operating activities was primarily due to net income after
adjusting for depreciation, amortization, stock-based compensation expense and
deferred income taxes, a decrease in accounts receivable (due to improved
collections) and an increase in income taxes payable (due to the timing
associated with tax payments). These items were partially offset by increases
in inventories (due to planned increases in stock levels of certain products
primarily in our Healthcare Disposables segment) and prepaid expenses (due to
the prepayment of certain operating expenses).
For the six months ended January 31,
2008, the net cash provided by operating activities was primarily due to net
income after adjusting for depreciation, amortization, stock-based compensation
expense and deferred income taxes, partially offset by increases in accounts
receivable (due to an increase in sales) and inventories (due to planned
increases in stock levels of certain products primarily in our Endoscope
Reprocessing segment) and a decrease in compensation payable (due to the
payment of prior year incentive compensation).
33
Cash flows from investing activities
Net cash used in investing activities was
$6,306,000 and $16,111,000 for the six months ended January 31, 2009 and
2008, respectively. For the six months ended January 31, 2009, the net
cash used in investing activities was primarily for acquisition earnout
payments to the former owners of Crosstex and Twist and capital expenditures.
For the six months ended January 31, 2008, the net cash used in investing
activities was primarily for the acquisitions of DSI, Verimetrix and Strong
Dental, a payment for an acquisition earnout to the former owners of Crosstex
and capital expenditures.
Cash flows from financing activities
Net cash used in financing activities was
$3,333,000 for the six months ended January 31, 2009, compared with net
cash provided by financing activities of $10,984,000 for the six months ended January 31,
2008. For the six months ended January 31, 2009, the net cash used in
financing activities was primarily attributable to repayments under our credit
facilities and purchases of treasury stock, partially offset by a borrowing
under our revolving credit facility and proceeds from the exercises of stock
options. For the six months ended January 31, 2008, the net cash provided
by financing activities was primarily attributable to borrowings under our
revolving credit facility primarily related to the acquisitions of DSI,
Verimetrix and Strong Dental, partially offset by repayments under the credit
facilities.
Repurchase of shares
In May 2008, our Board of Directors
approved the repurchase of up to 500,000 shares of our outstanding Common Stock
under a repurchase program commencing on June 9, 2008. Under the
repurchase program we repurchase 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 has a one-year term ending on June 8, 2009.
The first repurchase under our repurchase
program occurred on July 11, 2008. Through July 31, 2008, we
completed the repurchase of 90,700 shares under the program at a total average
price per share of $9.42. We repurchased an additional 43,847 shares through October 31,
2008 at a total average price per share of $9.17. No additional repurchases
have been made since our first quarter ended October 31, 2008. Therefore,
at January 31, 2009, we had repurchased 134,547 shares under the
repurchase program at a total average price per share of $9.34 and the maximum
number of remaining shares that may be repurchased under the program is 365,453
shares.
Restructuring activities
During the fourth quarter of fiscal 2008, our
management approved and initiated plans to restructure our Netherlands
subsidiary by relocating all of our manufacturing operations from the
Netherlands to the United States. This action is part of our continuing effort
to reduce operating costs and improve efficiencies by leveraging the existing
infrastructure of our Minntech operations in Minnesota. The elimination of
manufacturing operations in the Netherlands has led to the end of onsite
material management, quality assurance, finance and accounting, human resources
and some customer service functions. However, we continue to maintain a strong
34
marketing, sales, service and technical support presence based in the
Netherlands to serve customers throughout Europe, the Middle East and Africa.
During the three and six months ended January 31,
2009, we recorded $74,000 and $345,000, respectively, in restructuring
expenses, which decreased both basic and diluted earnings per share from
operations by approximately $0.02 for the six months ended January 31,
2009. Including restructuring costs incurred during the three months ended July 31,
2008, the cumulative amount of such costs incurred as of January 31, 2009
was $710,000. We expect to incur approximately $25,000 in additional
restructuring costs in the three months ending April 30, 2009. The
decrease in the total expected restructuring expense estimated at July 31,
2008 compared to actual costs incurred during the six months ended January 31,
2009 was primarily due to the significant decrease in the value of the euro in
relation to the United States dollar. The majority of the restructuring costs
are included in our Endoscope Reprocessing segment.
The restructuring costs recorded and expected
to be recorded are as follows:
|
|
Cost of Sales
|
|
General and Administrative Expenses
|
|
|
|
|
|
Unsalable
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Inventory
|
|
Severance
|
|
Total
|
|
Severance
|
|
Other
|
|
Total
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
$
|
211,000
|
|
$
|
64,000
|
|
$
|
275,000
|
|
$
|
90,000
|
|
$
|
|
|
$
|
90,000
|
|
$
|
365,000
|
|
Inventory disposal
|
|
(96,000
|
)
|
|
|
(96,000
|
)
|
|
|
|
|
|
|
(96,000
|
)
|
Accrued balance at July 31, 2008
|
|
115,000
|
|
64,000
|
|
179,000
|
|
90,000
|
|
|
|
90,000
|
|
269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
10,000
|
|
129,000
|
|
139,000
|
|
132,000
|
|
|
|
132,000
|
|
271,000
|
|
Paid
|
|
|
|
|
|
|
|
(88,000
|
)
|
|
|
(88,000
|
)
|
(88,000
|
)
|
Foreign currency translation
|
|
(35,000
|
)
|
(16,000
|
)
|
(51,000
|
)
|
(12,000
|
)
|
|
|
(12,000
|
)
|
(63,000
|
)
|
Accrued balance at October 31, 2008
|
|
90,000
|
|
177,000
|
|
267,000
|
|
122,000
|
|
|
|
122,000
|
|
389,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
37,000
|
|
37,000
|
|
25,000
|
|
12,000
|
|
37,000
|
|
74,000
|
|
Paid
|
|
|
|
(226,000
|
)
|
(226,000
|
)
|
(150,000
|
)
|
(12,000
|
)
|
(162,000
|
)
|
(388,000
|
)
|
Foreign currency translation
|
|
5,000
|
|
12,000
|
|
17,000
|
|
3,000
|
|
|
|
3,000
|
|
20,000
|
|
Accrued balance at January 31, 2009
|
|
95,000
|
|
|
|
95,000
|
|
|
|
|
|
|
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ending April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected expense
|
|
|
|
|
|
|
|
|
|
25,000
|
|
25,000
|
|
25,000
|
|
Expected to be paid
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
(25,000
|
)
|
(25,000
|
)
|
Accrued balance at April 30, 2009
|
|
$
|
95,000
|
|
$
|
|
|
$
|
95,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
95,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses incurred and
expected to be incurred
|
|
$
|
221,000
|
|
$
|
230,000
|
|
$
|
451,000
|
|
$
|
247,000
|
|
$
|
37,000
|
|
$
|
284,000
|
|
$
|
735,000
|
|
Since the above costs were recorded in our Netherlands subsidiary,
which has been experiencing losses from its operations, tax benefits on the
above costs were not recorded. The unsalable inventory was recorded in
inventories as part of our inventory reserve and the accrued severance was
recorded in compensation payable in our Condensed Consolidated Balance Sheets.
As part of the restructuring plan, we intend to sell our Netherlands
building and land. Based on a recent offer currently being discussed, we will
likely sell the property and lease it
35
back from the new owner so that we can continue to use the facility as
our European sales and service headquarters as well as for warehouse and
distribution activity. At January 31, 2009, these assets had a book value
of $1,388,000, net of accumulated depreciation, and were included in property
and equipment in our Condensed Consolidated Balance Sheets. The primary reason
for the decrease in the book value of the Netherlands building and land since July 31,
2008 was the decrease in the value of the euro relative to the United States
dollar. Based on the recent price offered to us, a gain of approximately
$200,000 may be generated when the building and land are sold. However, due to
the deteriorating real estate and credit markets and other factors, no
assurances can be given as to the timing of the sale and whether a gain or loss
on the sale of the facility will ultimately be realized.
Long-term contractual obligations
As of January 31, 2009, aggregate annual required payments over
the remaining fiscal year, the next four years and thereafter under our
contractual obligations that have long-term components were as follows:
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
Year Ending July 31,
|
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Maturities of the credit facilities
|
|
$
|
4,000
|
|
$
|
10,000
|
|
$
|
40,300
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
54,300
|
|
Expected interest payments under the credit
facilities (1)
|
|
1,009
|
|
1,732
|
|
226
|
|
|
|
|
|
|
|
2,967
|
|
Minimum commitments under noncancelable
operating leases
|
|
1,725
|
|
2,836
|
|
1,873
|
|
1,058
|
|
629
|
|
1,174
|
|
9,295
|
|
Minimum commitments under noncancelable
capital leases
|
|
25
|
|
52
|
|
14
|
|
|
|
|
|
|
|
91
|
|
Minimum commitments under license agreement
|
|
36
|
|
94
|
|
141
|
|
163
|
|
163
|
|
2,182
|
|
2,779
|
|
Deferred compensation and other
|
|
227
|
|
494
|
|
424
|
|
281
|
|
32
|
|
199
|
|
1,657
|
|
Employment agreements
|
|
1,785
|
|
3,340
|
|
148
|
|
138
|
|
|
|
|
|
5,411
|
|
Total contractual obligations
|
|
$
|
8,807
|
|
$
|
18,548
|
|
$
|
43,126
|
|
$
|
1,640
|
|
$
|
824
|
|
$
|
3,555
|
|
$
|
76,500
|
|
(1) The expected interest payments under
the term and revolving credit facilities reflect interest rates of 4.12% and
3.62%, respectively, which were our weighted average interest rates on
outstanding borrowings at January 31, 2009.
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. 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. Amounts we repay under the term loan facility may
not be re-borrowed. Debt issuance costs relating to the 2005 U.S. Credit
Facilities were recorded in other assets and are being amortized over the life
of the credit facilities. Such unamortized debt issuance costs amounted to
approximately $776,000 at January 31, 2009.
36
At February 28, 2009, 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 February 28, 2009, the lenders base rate
was 3.25% and the LIBOR rates ranged from 0.47% to 3.35%. The margins
applicable to our outstanding borrowings at February 28, 2009 were 0.00%
above the lenders base rate and 1.00% above LIBOR. All of our outstanding
borrowings were under LIBOR contracts at February 28, 2009. The majority
of such contracts were twelve month LIBOR contracts; therefore, we are
substantially protected throughout most of fiscal 2009 from any exposure
associated with increasing LIBOR rates. In order to protect our interest rate
exposure in future years, we entered into an interest rate cap agreement in July 2008
for the two-year period beginning June 30, 2009 and ending June 30,
2011 initially covering $20,000,000 of borrowings under the term loan facility
(and thereafter reducing in quarterly $2,500,000 increments consistent with the
mandatory repayment schedule of our term loan facility), which caps three-month
LIBOR on this portion of outstanding borrowings at 4.25%. The 2005 U.S. Credit
Facilities also provide for fees on the unused portion of our facilities at
rates ranging from 0.15% to 0.30%, depending upon our consolidated ratio of
debt to EBITDA; such rate was 0.25% at February 28, 2009.
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,
Crosstex and Strong Dental) and (ii) our pledge of all of the outstanding
shares of Minntech, Mar Cor, Crosstex and Strong Dental 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 January 31, 2009, we were in compliance with
all financial and other covenants under the 2005 U.S. Credit Facilities.
On January 31, 2009, we had $54,300,000 of outstanding borrowings
under the 2005 U.S. Credit Facilities, which consisted of $24,000,000 and
$30,300,000 under the term loan facility and the revolving credit facility,
respectively. Subsequent to January 31,
2009, we repaid $2,000,000 under the revolving credit facility reducing our
total outstanding borrowings to $52,300,000.
Operating leases
Minimum commitments under operating leases include minimum rental
commitments for our leased manufacturing facilities, warehouses, office space
and equipment.
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 in Canadian
dollars each calendar year over the license agreement term of 20 years. At January 31,
2009, we had minimum future royalty obligations relating to this license
agreement of approximately $2,779,000 through December 31, 2026 using the
exchange rate on January 31, 2009.
37
Deferred compensation
Included in other long-term liabilities are deferred compensation
arrangements for certain former Minntech directors and officers.
Employment agreements
We have previously entered into various employment agreements with
several executives of the Company, including the former President and Chief
Executive Officer. Effective April 22, 2008, our former President and
Chief Executive Officer resigned and our Chief Operating Officer and Executive
Vice President was promoted to President. As a result of this resignation,
estimated separations benefits and other related costs of approximately
$720,000 were recorded in general and administrative expenses during fiscal 2008.
Approximately $156,000 of such amount remains payable as of January 31,
2009, and accordingly, has been reflected in the table above as a required
payment during fiscal 2009.
Financing needs
At January 31, 2009, we had a cash
balance of $20,052,000, of which $10,234,000 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, particularly given that we
historically have not needed to borrow for working capital purposes. At February 28,
2009, $21,700,000 was available under our United States revolving credit facility,
as amended.
Foreign currency
During the three and six months ended January 31,
2009, compared with the three and six months ended January 31, 2008, the
average value of the Canadian dollar decreased by approximately 19.1% and
12.5%, respectively, relative to the value of the United States dollar.
Additionally, at January 31, 2009 compared with July 31, 2008, the
value of the Canadian dollar relative to the value of the United States dollar
decreased by approximately 16.7%. The financial statements of our Canadian
subsidiaries are translated using the accounting policies described in Note 2
to the 2008 Form 10-K and therefore are impacted by changes in the
Canadian dollar exchange rate. Additionally, changes in the value of the
Canadian dollar against the United States dollar affected 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.
For the three and six months ended January 31,
2009, compared with the three and six months ended January 31, 2008, the
average value of the euro decreased by approximately 10.4% and 4.3%,
respectively, relative to the value of the United States dollar. Additionally,
at January 31, 2009 compared with July 31, 2008, the value of the
euro relative to the United States dollar decreased by approximately 17.7% and
the value of the British pound relative to the euro decreased by approximately
14.4%. The financial statements of our Netherlands subsidiary are translated
using the accounting policies described in Note 2 to the 2008 Form 10-K
and therefore are impacted by changes in the euro exchange rate relative to the
United States dollar.
38
Additionally, changes in the value of the euro against the United
States dollar and British pound 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 or
British pounds but must be converted into its functional euro currency.
Furthermore, as part of the restructuring of our Netherlands subsidiary, as
described in Note 16 to the Condensed Consolidated Financials and elsewhere in
this MD&A, a portion of the net assets of our United States subsidiaries,
Minntech and Mar Cor, are now denominated and ultimately settled in euros or
British pounds but must be converted into our functional United States
currency.
In order to hedge against the
impact of fluctuations in the value of the euro relative to the United States
dollar and British pound and the value of the British pound relative to the
United States dollar on the conversion of such net assets into the functional
currencies, we enter into short-term contracts to purchase euros and British
pounds forward, which contracts are generally one month in duration. These
short-term contracts are designated as fair value hedges. There were three
foreign currency forward contracts with an aggregate value of $1,250,000 at February 28,
2009, which cover certain assets and liabilities of Minntech and its
Netherlands subsidiary that were denominated in currencies other than their
functional currencies. Such contracts expire on March 31, 2009. These
foreign currency forward contracts are continually replaced with new one-month
contracts as long as we have significant net assets at Minntech and its
Netherlands subsidiary that are denominated and ultimately settled in
currencies other than their functional currencies. Under our credit facilities,
such contracts to purchase euros and British pounds may not exceed $12,000,000
in an aggregate notional amount at any time. 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 and British pounds forward are immediately realized within general
and administrative expenses due to the short-term nature of such contracts. For
the three and six months ended January 31, 2009, such forward contracts
were partially effective in offsetting the impact on operations related to
certain assets and liabilities of Minntech and its Netherlands subsidiary that
are denominated in currencies other than their functional currencies.
Changes in the value of the
Japanese yen relative to the United States dollar during the three and six
months ended January 31, 2009, compared with the three and six months
ended January 31, 2008, 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.
Overall, fluctuations in the
rates of currency exchange had a favorable impact for the three and six months
ended January 31, 2009, compared with the three and six months ended January 31,
2008, upon our results of operations of approximately $178,000 and $470,000,
net of tax, primarily due to the decrease in the value of the Canadian dollar
relative to the United States dollar.
For purposes of translating the balance sheet
at January 31, 2009 compared with July 31, 2008, the total of the
foreign currency movements resulted in a foreign currency translation loss of
$5,729,000 for the six months ended January 31, 2009, thereby decreasing
stockholders equity.
39
Critical Accounting Policies
Our discussion and analysis of
our financial condition and results of operations are based upon our Condensed
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 Condensed 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 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 and endoscope reprocessing sales are recognized as
multiple element arrangements, whereby revenue is allocated to the equipment,
installation and service 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. 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. All shipping and handling fees invoiced to
40
customers, such as freight, are recorded as revenue (and related costs
are included within cost of sales) at the time the sale is recognized.
None of our sales contain right-of-return provisions. 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 small portion of our sales of dialysis, healthcare disposable and water
purification and filtration 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, dental, water purification and filtration and endoscope reprocessing
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
$441,000 and $1,166,000 for the three and six months ended January 31,
2009, respectively, and $595,000 and $854,000 for the three and six months
ended January 31, 2008, respectively. The increase in volume rebates for
the six months ended January 31, 2009 compared with the six months ended January 31,
2008 is primarily due to new terms in a recently renewed rebate agreement with
a major dental distributor in our Healthcare Disposables segment. 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; our endoscope reprocessing products and services are sold
primarily to distributors internationally and directly to hospitals and other
end-users in the United States; 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.
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.
41
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 using the
straight-line method over their estimated useful lives which range from 3 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 by using the average fair value results of the market multiple and
discounted cash flow methodologies. 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 expected future 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,
2008, management concluded that none of our intangible assets or goodwill was
impaired. On January 31, 2009, management concluded that no events or
changes in circumstances have occurred during the six months ended January 31,
2009 that would indicate that the carrying amount of our intangible assets and
goodwill may not be recoverable.
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 and cash flows (which management believes to be
reasonable), discount rates based on the Companys weighted-average cost of capital
and appropriate benchmark peer companies. Assumptions used in determining
future operating results and cash flows include current and expected market
conditions and future sales forecasts. Subsequent changes in these assumptions
and estimates could result in future impairment. Although we consistently use
the same methods in developing the assumptions and estimates underlying the
fair value calculations, such estimates are uncertain by nature and can vary
from actual results. At July 31, 2008, our reporting units that were
potentially at risk for impairment were Healthcare Disposables and Specialty
Packaging, which had average fair values that exceeded book value by modest
amounts. For all of our remaining reporting units, average fair value exceeded book
value by substantial amounts.
42
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 carries 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.
Stock-Based Compensation
On August 1, 2005, we adopted 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 is 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
stock awards (which consist only of restricted stock) 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 Condensed Consolidated Financial Statements may not be representative of
the effect of stock-based compensation
43
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 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.
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. We do not believe that any of these
pending claims or legal actions will have a material effect on our business,
financial condition, results of operations or cash flows.
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 and to a lesser extent Canada,
our items of deferred tax could be materially affected. All of such evaluations
require significant management judgments. In fiscal 2009 and 2008, recently
enacted Canadian federal and New York state statutory tax rate reductions were
applied to existing deferred income tax liabilities which decreased our overall
effective tax rates.
We record liabilities for an
unrecognized tax benefit when a tax benefit for an uncertain tax position is
taken or expected to be taken on a tax return, but is not recognized in our
Condensed Consolidated Financial Statements because it does not meet the
more-likely-than-not recognition threshold that the uncertain tax position
would be sustained upon examination by the applicable taxing authority. The
majority of such unrecognized tax benefits originated from acquisitions and are
based primarily upon managements assessment of exposure associated with
acquired companies. Accordingly, any adjustments upon resolution of income tax
uncertainties that predate or result from acquisitions are recorded as an
increase or decrease to goodwill. Unrecognized tax benefits are analyzed
periodically and adjustments are made, as events occur to warrant adjustment to
the related liability.
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 $365,000 and $345,000 in
charges associated with exit or disposal activities in fiscal 2008 and the six
months ended January 31, 2009, respectively, and expect additional charges
of approximately $25,000 during the three months ended April 30, 2009,
relating to our restructuring plan for our Netherlands manufacturing
operations.
Other Matters
We do not have any off balance sheet financial arrangements, other than
future commitments under operating leases and employment and license agreements.
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking
statements as that term is defined under the Private Securities Litigation
Reform Act of 1995 and releases issued by the Securities and Exchange
Commission (the SEC) and within the meaning of
Section 27A
of the Securities Act of 1933, as amended (the Securities Act) and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements are based on current
expectations, estimates, or forecasts about our businesses, the industries in
which we operate, and the beliefs and assumptions of management; they do not
relate strictly to historical or current facts. We have tried, wherever
possible, to identify such statements by using words such as expect, anticipate,
goal, project, intend, plan, believe, seek, may, could, and variations of such words
and similar expressions. In addition, any statements that refer to
45
predictions
or projections of our future financial performance, anticipated growth and
trends in our businesses, and other characterizations of future events or
circumstances are forward-looking statements. Readers are cautioned that these
forward-looking statements are only predictions about future events, activities
or developments and are subject to numerous risks, uncertainties, and
assumptions that are difficult to predict including, among other things, the
following
:
·
the continuing deterioration in the economy and credit markets may
continue to adversely affect our results of operations, particularly with
respect to capital equipment. The magnitude of such adverse impact may grow
based on the length and severity of the economic decline.
·
the adverse impact of consolidation
of dialysis providers and our dependence on a concentrated number of dialysis
customers
·
the adverse impact of consolidation
of dental product distributors and our dependence on a concentrated number of
such distributors
·
the adverse impact of rising fuel and oil prices on our raw
materials and transportation costs
·
the acquisition of new businesses and successfully integrating and
operating such businesses
·
the increasing market share of single-use dialyzers relative to reuse
dialyzers in the United States
·
the adverse impact of increased
competition on selling prices and our ability to compete effectively
·
foreign currency exchange rate and interest rate fluctuations
·
the impact of significant government regulation on our businesses
You should understand that it is not possible
to predict or identify all such factors. Consequently, you should not consider
the foregoing items to be a complete list of all potential risks or
uncertainties. See Risk Factors in our 2008 Form 10-K for a discussion
of the above risk factors and certain additional risk factors that you should
consider before investing in the shares of our Common Stock.
All forward-looking
statements herein speak only as of the date of this Report. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
For these statements, we claim the protection
of the safe harbor for forward-looking statements contained in Section 27A
of the Securities Act and Section 21E of the Exchange Act.
ITEM 3. 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. 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.
46
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 2008 Form 10-K. Fluctuations
in the rates of currency exchange between the United States and Canada had an
overall favorable impact for the three and six months ended January 31,
2009, compared with the three and six months ended January 31, 2008, upon
our results of operations and an adverse impact upon stockholders equity, as
described in our MD&A.
Changes in the value of the
euro against the United States dollar and British pound 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 or British pounds but must be converted into its
functional euro currency. Furthermore, as part of the restructuring of our
Netherlands subsidiary, as described in Note 16 to the Condensed Consolidated
Financials and elsewhere in this MD&A, a portion of the net assets of our
United States subsidiaries, Minntech and Mar Cor, are now denominated and
ultimately settled in euros or British pounds but must be converted into our
functional United States currency. Additionally, the financial statements of
our Netherlands subsidiary are translated using the accounting policies
described in Note 2 to the 2008 Form 10-K. Fluctuations in the rates of
currency exchange between the euro, the United States dollar and British pound
had an overall adverse impact for the three and six months ended January 31,
2009, compared with the three and six months ended January 31, 2008, upon
our results of operations, and had an adverse 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 and British pound and the value
of the British pound relative to the United States dollar on the conversion of
such net assets into functional currencies, we enter into short-term contracts
to purchase euros and British pounds forward, which contracts are generally one
month in duration. These short-term contracts are designated as fair value
hedges. There were four foreign currency forward contracts with an aggregate
value of $1,425,000 at January 31, 2009, which covered certain assets and
liabilities of Minntech and its Netherlands subsidiary that were denominated in
currencies other than their functional currencies. Such contracts expired on February 28,
2009. These foreign currency forward contracts are continually replaced with
new one-month contracts as long as we have significant net assets at Minntech
and its Netherlands subsidiary that are denominated and ultimately settled in
currencies other than their functional currencies. Under our credit facilities,
such contracts to purchase euros and British pounds may not exceed $12,000,000
in an aggregate notional amount at any time. For the three and six months ended
January 31, 2009, such forward contracts were partially effective in
offsetting a portion of the impact on operations related to certain assets and
liabilities of Minntech and its Netherlands subsidiary that are denominated in
currencies other than their functional currencies.
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 the three and six
months ended January 31, 2009, compared with the three and six months
ended January 31, 2008, did not
47
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.
Substantially all of our outstanding borrowings are under LIBOR contracts.
Therefore, interest expense is affected by the general level of interest rates
in the United States as well as LIBOR interest rates.
Market Risk Sensitive Transactions
Additional information related
to market risk sensitive transactions is contained in Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk, in our 2008 Form 10-K.
ITEM 4. 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 President and our
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures.
Under the
supervision and with the participation of our President and our Chief Financial
Officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report on Form 10-Q. Based on this evaluation, our
President and Chief Financial Officer concluded that the design and operation
of these disclosure controls and procedures were effective and designed to
ensure that material information relating to the Company, included our
consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded,
processed, summarized and reported within the time periods specified by the SEC
and (ii) accumulated and communicated by the Companys management,
including the President and Chief Financial Officer, as appropriate to allow
timely decisions regarding disclosure.
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 controls
over financial reporting.
48
PART II
- OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
None.
ITEM 1A. RISK
FACTORS
There have been no material
changes in our risk factors from those disclosed in Part I, Item 1A
to our 2008 Form 10-K. The risk factors disclosed in Part I,
Item 1A to our 2008 Form 10-K, in addition to the other information
set forth in this report, could materially affect our business, financial
condition, or results of operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
Repurchase program
In May 2008, our Board of
Directors approved the repurchase of up to 500,000 shares of our outstanding
Common Stock under a repurchase program commencing on June 9, 2008. Under
the repurchase program we repurchase 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 has a one-year term ending on June 8, 2009.
The first repurchase under our
repurchase program occurred on July 11, 2008. Through July 31, 2008,
we completed the repurchase of 90,700 shares under the program at a total
average price per share of $9.42. We repurchased an additional 43,847 shares
through October 31, 2008 at a total average price per share of $9.17. No
additional repurchases have been made since our first quarter ended October 31,
2008. Therefore, at January 31, 2009, we had repurchased 134,547 shares
under the repurchase program at a total average price per share of $9.34 and
the maximum number of remaining shares that may be repurchased under the
program is 365,453 shares.
The following table summarizes
the repurchase of Common Stock under the repurchase program by quarter during
fiscal years 2009 and 2008:
|
|
|
|
|
|
Purchased as part of
|
|
Shares that may yet
|
|
|
|
Total number of
|
|
Average price
|
|
publicly announced
|
|
be purchased under
|
|
Period
|
|
shares purchased
|
|
paid per share
|
|
plans or programs
|
|
the program
|
|
|
|
|
|
|
|
|
|
|
|
7/11/2008 through 7/31/08
|
|
90,700
|
|
$
|
9.42
|
|
90,700
|
|
409,300
|
|
|
|
|
|
|
|
|
|
|
|
8/1/2008 through 10/31/08
|
|
43,847
|
|
$
|
9.17
|
|
134,547
|
|
365,453
|
|
|
|
|
|
|
|
|
|
|
|
11/1/2008 through 1/31/09
|
|
|
|
|
|
134,547
|
|
365,453
|
|
49
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 8, 2009, the
Company held its Annual Meeting of Stockholders for the fiscal year ended July 31,
2008. At the meeting, stockholders voted for (i) the election of nine
members of the Companys Board of Directors to serve until the next annual
meeting and until their successors are duly elected and qualified, (ii) the
approval of an amendment to the Companys 2006 Equity Incentive Plan that
increased by 700,000 the number of shares of Common stock available for
issuance under the Plan and (iii) the ratification of Ernst &
Young LLP to serve as the Companys independent registered public accounting
firm for the fiscal year ending July 31, 2009.
A tabulation of the
number of votes cast for, against and withhold, as well as the number of
abstentions as to each matter voted on, is set forth below. There were no
broker non-votes.
1. Election of Directors
|
|
Votes
For
|
|
Votes
Withheld
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert L. Barbanell
|
|
16,070,055
|
|
152,122
|
|
|
|
|
Alan R. Batkin
|
|
15,842,343
|
|
379,834
|
|
|
|
|
Joseph M. Cohen
|
|
16,054,913
|
|
167,264
|
|
|
|
|
Charles M. Diker
|
|
16,068,356
|
|
153,821
|
|
|
|
|
Mark N. Diker
|
|
16,120,212
|
|
101,965
|
|
|
|
|
Alan J. Hirschfield
|
|
16,101,370
|
|
120,807
|
|
|
|
|
George L. Fotiades
|
|
16,149,963
|
|
72,214
|
|
|
|
|
Elizabeth McCaughey
|
|
15,877,215
|
|
344,962
|
|
|
|
|
Bruce Slovin
|
|
16,138,983
|
|
83,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Approval of the 2006 Equity
Incentive Plan Amendment
|
|
For
|
|
Against
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
|
11,839,456
|
|
694,417
|
|
99,064
|
|
|
|
|
|
|
|
|
|
3. Ratification of Independent
Registered Public Accounting Firm
|
|
For
|
|
Against
|
|
Abstain
|
|
|
|
|
|
|
|
|
|
|
|
16,175,777
|
|
26,805
|
|
19,593
|
|
50
ITEM 5.
|
OTHER INFORMATION
|
None.
ITEM 6.
|
EXHIBITS
|
|
|
|
|
|
31.1
|
-
|
Certification of Principal Executive Officer.
|
|
|
|
|
|
31.2
|
-
|
Certification of Principal Financial Officer.
|
|
|
|
|
|
32
|
-
|
Certification of President 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.
|
51
SIGNATURES
Pursuant to the requirements of
the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CANTEL MEDICAL CORP.
|
|
|
|
Date: March 12, 2009
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Andrew A. Krakauer
|
|
|
Andrew A. Krakauer,
|
|
|
President
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
By:
|
/s/ Craig A. Sheldon
|
|
|
Craig A. Sheldon,
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
By:
|
/s/ Steven C. Anaya
|
|
|
Steven C. Anaya,
|
|
|
Vice President and Controller
|
52
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