UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the
fiscal year ended July 31, 2009
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or
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period from
to
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Commission File No. 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
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange
on which registered
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Common Stock, $.10 par
value
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New York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
o
No
x
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
Indicate by check mark
whether the 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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of
this chapter)
is not
contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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 and small reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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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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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
State the aggregate
market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business
day of the Registrants most recently completed second fiscal quarter, as
quoted by the New York Stock Exchange on that date: $188,916,077.
Indicate the number of
shares outstanding of each of the registrants classes of common stock as of
the close of business on September 18, 2009: 16,656,144
Documents incorporated by
reference: Definitive proxy statement to
be filed pursuant to Regulation 14A promulgated under the Securities Exchange
Act of 1934 in connection with the 2009 Annual Meeting of Stockholders of
Registrant.
Forward Looking Statements
This Annual Report on Form 10-K
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 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 increasing
market share of single-use dialyzers relative to reuse dialyzers in the United
States
·
further
industry consolidation resulting in greater buying power by some of our
customers
·
our dependence on a concentrated number
of customers in three of our largest segments
·
novel H1N1 flu
severity and level of urgency developed by customers with respect to pandemic
preparedness
·
the volatility
of
fuel and oil
prices on our raw materials and distribution costs
·
the
acquisition of new businesses and successfully integrating and operating such
businesses
·
the adverse impact of increased
competition on selling prices and our ability to compete effectively
·
foreign
currency exchange rate fluctuations and trade barriers
·
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 below
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.
2
PART I
Item 1.
BUSINESS
.
General
We are 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.
·
Healthcare Disposables
: Single-use, infection control products used principally in the dental market including face masks, towels
and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups,
sterilization pouches and disinfectants.
·
Dialysis
: Medical device reprocessing systems,
sterilants/disinfectants, dialysate concentrates and other supplies for renal
dialysis.
·
Endoscope Reprocessing
: Medical device reprocessing systems,
disinfectants, enzymatic detergents and other supplies used to clean and high-level
disinfect flexible endoscopes.
·
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 or control the occurrence or
spread of infections.
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.
Fiscal
2009 Acquisition
Acquisition of G.E.M. Water Systems Intl, LLC
On July 31, 2009, we
purchased substantially all of the assets of G.E.M. Water Systems Intl, LLC (G.E.M.), including the building
housing its operations, for $4,468,000, including transaction costs. G.E.M, based in Buena Park,
California, designs, installs and
services high quality water and bicarbonate systems for use in dialysis
clinics, hospitals and other healthcare facilities. The acquired business had
pre-acquisition revenues of approximately $3.5 million. The results of
operations of G.E.M. are not included in our results of operations for fiscal
2009 because the acquisition occurred on the final day of our fiscal year, but
the assets of G.E.M. are included in our Consolidated Balance Sheet as of July 31,
2009. The principal reason for the acquisition was the strengthening of our sales and service presence and base of business
in California with a significant concentration of dialysis clinics and
healthcare institutions. The operating results of G.E.M. will be included in
our Water Purification and Filtration segment.
3
Reporting
Segments
The following
table gives information as to the percentage of consolidated net sales from
continuing operations accounted for by each of our reporting segments:
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Year Ended July 31,
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2009
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2008
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2007
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%
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%
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%
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Water
Purification and Filtration
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27.4
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27.5
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22.4
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Healthcare
Disposables
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24.7
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23.5
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26.3
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Dialysis
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21.7
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24.1
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26.8
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Endoscope
Reprocessing
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20.1
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18.8
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17.8
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All Other
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6.1
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6.1
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6.7
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100.0
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100.0
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100.0
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For a presentation of net
sales, operating income and total assets by reporting segment, see Note 17 to
the Consolidated Financial Statements.
Water Purification and Filtration
General
We design, develop,
manufacture, sell, install and service water purification systems and
accessories for dialysis and other specific healthcare applications, research
laboratories and pharmaceutical, beverage and commercial industrial customers.
These systems always start with potable city water and provide total
purification solutions specific to our customers needs and site conditions, ranging
from low-volume, reverse osmosis and deionization systems, to high-volume,
complete turnkey purification systems. We generally sell the equipment directly
to our customers in the United States, Puerto Rico, and Canada and through
various third-party distributors in international markets.
Purification systems can
include combinations of proven treatment methods such as (i) carbon
filtration, which removes chlorine and dissolved organic contamination by
adsorption; (ii) reverse osmosis (RO), which is a filtration process that
forces liquid through non-porous or semi-porous membranes to remove particles,
microorganisms and dissolved minerals and organics; (iii) ultra-filtration,
which removes bacteria, viruses and other ultrafine impurities from water using
a membrane similar in design to an RO membrane; (iv) deionization, which
is an ion exchange platform that requires resin regeneration (see Resin
Regeneration below); and (v) electro-deionization, which is a form of
deionization that is based on the conductance of electrical charges. We have
significant expertise in packaging these technologies to meet specific
requirements of customers requiring high purity water that is free of
biological contamination.
Our fiscal 2007
acquisition of GE Waters dialysis business established us as the market leader
in the supply of United States Food and Drug Administration (FDA) 510(k)
(1)
cleared water purification systems to the
dialysis industry worldwide. During fiscal 2009 over 60% of our sales in this
segment were derived from sales and service to U.S. dialysis clinics.
Water
Purification Equipment
Our product line of water
purification systems has been designed to produce biologically pure water
targeted for use in the healthcare, life sciences, food and beverage, and
commercial industrial markets. We have significant expertise in the design and
manufacture of water treatment systems engineered to meet specific water
requirements of the healthcare, life sciences and beverage industries. Such
expertise includes water for hemodialysis and all grades of US Pharmacopeia
(USP) water (i.e., water meeting the FDA enforced standards of the United
States Pharmacopeia) including USP Purified Water which is an FDA requirement
for the labeling of purified bottled water. We also package these same
technologies and expertise in industrial designs to meet the requirements for
high purity water in the commercial industrial markets such as boiler feedwater
production or high quality rinsewater production.
(1)
Most
medical devices sold by the Company require the submission of a Premarket
Notification 510(k) to the FDA and clearance of the submission by the FDA
prior to commercial distribution.
4
Our Biolab
equipment line
includes systems that utilize either chemical or heat disinfection to sanitize
the equipment. Our HX product line, introduced in 2007, provides total heat
disinfection of the entire water purification system and water distribution
loop. Heat disinfection is especially attractive to the life science
marketplace, which requires the highest levels of biological purity. Heat
sanitization is environmentally friendly and prevents the formation of
dangerous biofilms. Heat disinfection has been used in the pharmaceutical
industry for years and has been recently introduced in the dialysis market.
The Biolab equipment line
of reverse osmosis (RO) machines includes various designs and sizes to meet our
customers specific requirements. Our standard line of equipment includes the
2200, 3300, 4400, 8400, RODI
®
combination RO and electro-deionization
system, and various heat disinfecting configurations. These product lines are
now complemented by the product lines acquired with the GE medical business including
the 23G, Zyzatech V and Z series, and the Millenium, the leading medical
portable reverse osmosis unit. The combined businesses have a wide product
offering that can be configured to serve all of our target markets.
We also offer
pretreatment equipment, lab water equipment, a full range of service
deionization tanks and specific equipment designed to support the life sciences
and industrial markets including peripheral equipment such as carts,
bicarbonate and acid delivery systems with central and single mix distribution
units, and concentrate systems with central concentrate holding tanks.
Our systems meet
water quality and good manufacturing practice standards of the Association for
the Advancement of Medical Instrumentation (AAMI). We have received 510(k) clearances
from the FDA for our Biolab purification equipment and the acquired GE product
lines for healthcare applications, our dialysis water purification systems and
bicarbonate mix and distribution systems.
Service &
Maintenance; Resin Regeneration
We provide service and
maintenance for water purification systems in the United States and Canada
through eighteen regional offices (sixteen in the United States and two in
Canada). These service centers are staffed with sales and service personnel to
support both scheduled and emergency customer requirements. Each office
provides 24-hour emergency service for our customers through a fleet of stocked
service vehicles. Six of the offices (Toronto, Montreal, Philadelphia, Boston,
Chicago and Atlanta) are equipped with resin regeneration plants (described
below).
Resin regeneration (also
known as service deionization and carbon exchange) is the process in which
cylinders (pressure vessels with an inlet connection and an outlet connection)
are assembled, sanitized, and filled with ion exchange resin, which is
processed using hydrochloric acid and caustic soda. These cylinders are
connected to a customers water supply. As the water passes through the ion
exchange resin beads, minerals are removed. When the electrical charge placed
on the resin beads during the regeneration process is exhausted, the cylinders
are exchanged for identical cylinders with regenerated resin. The cylinders
with exhausted resin are returned by service personnel to our regeneration
plants and the resin is regenerated for use by the same or another customer.
Customers are invoiced for each cylinder replacement.
Filtration
We
offer a full line of filters utilizing
hollow fiber membrane technology. The filters, sold
under the FiberFlo
®
Capsule Filters and FiberFlo Cartridge Filters
names, are utilized to remove impurities from liquid streams for a wide range
of applications. Such applications include the filtering of ultrapure water to
remove bacteria and endotoxins in medical environments to provide protection
for patients undergoing treatments that use ultrapure water. Our cartridge
filters are validated to remove endotoxins in dialysis water, which is included
in our registration of the filters as Medical Devices under FDA 510(k) regulations.
The filters are also used in medical device reprocessing systems to help meet
reprocessing water quality guidelines outlined by the AAMI. In industrial
applications, the filters are used to protect systems from contamination from
particulates and microorganisms.
Our FiberFlo filters are
also being used in a variety of industries including pharmaceutical
manufacturing, food and beverage processing, cosmetic manufacturing and
electronics manufacturing. The filters are being used increasingly for the
removal of bacteria, pyrogens and other contaminants from aqueous solutions.
These filters are engineered for point-of-use applications that require very
fine filtration. Their hollow fiber design provides a surface area that is up
to four times larger than traditional pleated filters that are used in the same
markets. The large surface area provides greater capacity and longer filter
life for the customer. FiberFlo Capsule Filters and Cartridge Filters are
available in a variety of styles, sizes and configurations to meet a
comprehensive range of customer needs and applications.
5
Other products include
microfiber and flat sheet membrane prefiltration products designed to protect
the FiberFlo filter products and prolong their life in their intended
applications.
FiberFlo filter products
are sold directly and through various third-party distributors in the United
States, Puerto Rico, Canada and other international markets.
Sterilants
Minncare
®
Cold Sterilant
is a liquid sterilant product used to sanitize and disinfect high-purity water
systems. Minncare Cold Sterilant is based on our proprietary peracetic acid
sterilant technology, and is engineered to clean and disinfect RO membranes and
associated water distribution systems. Minncare Cold Sterilant is widely used
in the dialysis, medical, pharmaceutical and other industries to disinfect
ultrapure water systems as part of overall procedures to control the
contamination of systems by microorganisms and spores. Actril
®
Cold Sterilant
is a ready-to-use formulation of our proprietary peracetic acid based sterilant
technology. It is used for surface disinfection in a variety of industries,
including the medical and pharmaceutical industries. We also have private label
agreements for both Minncare and Actril sterilants with companies in the
infection control industry.
Healthcare
Disposables
We are a leading
manufacturer and reseller of single-use, infection control products used
principally in the dental office market. We offer a broad selection of core
disposable dental products, comprising over 60 categories of dental
merchandise, including face masks, towels and bibs, tray
covers, saliva ejectors and evacuators, germicidal
wipes, plastic cups, sterilization pouches, surface barriers,
eyewear, disinfectants and cleaners, hand care products, gloves, prophy angles,
cotton products, needles and syringes, scalpels and blades, prophy pastes, and
fluoride foams and gels. We believe that we maintain a leading market position
in the United States for face masks, towels and bibs, tray covers, saliva
ejectors, germicidal wipes, sterilization pouches and plastic cups used in the
dental market. Part of our strategy is to continue developing, licensing
and/or acquiring branded products with a differentiated feature set, ideally
patent protected.
During fiscal 2009, we
focused on the development of a face mask treated with BIOSAFE
®
antimicrobial, a patented chemistry licensed from a
third party. By the end of October 2009, we expect to launch these face
masks in specific markets outside the United States. The face masks treated
with BIOSAFE antimicrobial begin to reduce microorganisms such as Influenza A,
MRSA, VRE, and Staph immediately upon contact. They further enhance the
functionality of the mask in three ways: (1) actually killing the harmful
microorganisms, (2) reducing the cross-contamination risk from touching
the mask itself, and (3) creating a safer environment upon disposal of the
mask. The BIOSAFE treatment chemically binds to the outer mask surface creating
a long-lasting shield against microbial contamination. Because it mechanically
kills the cell, it will not cause development of more resistant superbugs.
Within the United States, the sale of face masks treated with BIOSAFE antimicrobial
for medical applications is subject to a 510(k) clearance by the FDA. At
this time the Company is awaiting publication of the latest revision of the FDA
Guidance Document pertaining to antimicrobial treatments of medical devices
prior to the filing of its application.
However, the Company will continue discussions and will be submitting an
application with the U.S. Environmental Protection Agency covering the sale of
treated face masks in the United States for non-medical applications.
Other noteworthy
technology innovations to our product line, introduced during fiscal 2008, are
Sure-Check Sterilization Pouches and Comfort Plus
®
Saliva Ejectors. The Sure-Check Sterilization
Pouches are self-sealing pouches with a patented, multi-perameter printed ink
both inside and outside of the pouch. This multi-parameter sterilization
indicator provides the user with a reliable signal that sterilization was
properly achieved without having to insert a separate measurement device into
the pouch itself. The printed indicator on the pouch uniquely provides
confirmation when all three key sterilization parameters, time, temperature and
presence of steam, have been achieved. The Comfort Plus Saliva Ejector uses a
patented design featuring rounded edges, smooth surfaces and strategically
placed suction ports that help to enhance patient comfort while protecting
delicate mucosal tissue.
We believe that the
increasing concern over the outbreak of the novel H1N1 flu has significantly
increased awareness of the prevention and control of infectious diseases. We
believe that we are well qualified to address the global need for face masks,
disinfectants and other products relating to infection prevention and control,
including flu preparedness. The outbreak and spread of the novel H1N1 flu in
the United States resulted in significantly increased sales of our face masks
during our fourth quarter of fiscal 2009. Our increased production and sale of
face masks due to the novel H1N1 flu is continuing at the present time and we
are in the process of expanding our manufacturing capability.
6
We manufacture products
accounting for approximately two-thirds of our net sales in this segment. We
source the balance of our products from third-party suppliers and contract
manufacturers, certain of which are sold under exclusive distributorship
agreements. Overall, approximately 90% of our net sales in this segment relate
to products manufactured in the United States. The majority of our healthcare
disposable products are sold under the Crosstex
®
brand name. For certain of our customers, we
also produce private label products.
Our healthcare disposable
products are sold to approximately 350 wholesale customers in over 90
countries, comprising a significant number of ship-to locations in the United
States and, to a lesser extent, in Europe, Japan and elsewhere. The wholesalers
generally include major healthcare distributors, group purchasing organizations
and co-operatives that sell our products to dental practices as well as
medical, veterinary and educational institutions.
Dialysis
General
We design, develop,
manufacture and sell reprocessing systems and sterilants for dialyzers (a
device serving as an artificial kidney), as well as dialysate concentrates and
supplies utilized for renal dialysis. Our products are sold in the United
States and, to a significantly lesser extent, throughout the world. Our
customer base is comprised of large and small dialysis chains as well as
independent dialysis clinics. We sell the products in the United States
primarily through our own direct distribution network, and in many
international markets either directly or under various third-party distribution
agreements.
Dialyzer
Reprocessing Products and Services
During
dialysis, a dialyzer is used to filter fluids and wastes from a dialysis
patients blood. Our dialyzer reprocessing products are limited to use by
centers that choose to clean, disinfect and reuse dialyzers, known as dialyzer
reuse, rather than discard the dialyzers after a single-use. Our products meet
rigorous sterility assurance standards and regulations, thereby providing for
the safe and effective reuse of dialyzers used in dialysis clinics.
Dialysis centers in the
United States that reuse dialyzers derive an economic benefit since the
per-procedure cost is less when utilizing the dialyzer multiple times for the
same patient rather than the wasteful and less environmentally friendly
practice of using a dialyzer only one time. Dialysis clinics generally receive
a capitated payment for providing hemodialysis treatment. Additionally,
dialyzer reuse significantly reduces the negative environmental consequences of
single-use dialyzers by dramatically decreasing the amount of bio-hazardous medical
waste in landfills. Although public information is not available to accurately
quantify the number of dialysis centers currently employing dialyzer reuse
versus single-use, it is apparent that, despite the cost effectiveness and
environmental advantages of dialyzer reuse, there has been a significant market
shift to single-use dialyzers over the past six years.
Today, we believe that
approximately one-third of all dialysis procedures in the United States reuse
dialyzers. The shift from reusable to single-use dialyzers is principally due
to the ease of using a dialyzer one time and the commitment of Fresenius
Medical Care (Fresenius), the largest dialysis provider chain in the United
States and a manufacturer of single-use dialyzers, to convert all of its
dialysis clinics performing reuse (including newly acquired clinics) to
single-use facilities.
Sales to our principal
dialysis customer, DaVita, Inc. (DaVita), the second largest dialysis
chain in the United States and a proponent of reuse, have increased during
fiscal 2009. However, a continued decrease in dialyzer reuse in the United
States in favor of single-use dialyzers would have an adverse effect on our
business. See Risk Factors and Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Our dialyzer reprocessing
products include the Renatron
®
II Automated Dialyzer Reprocessing System (Renatron
System), the Renalog
®
RM
Data Management System and Renalin
®
Cold 100 Sterilant, a peracetic acid based
sterilant.
The Renatron System
provides an automated method of rinsing, cleaning, sterilizing and testing
dialyzers for reuse. The Renatron System includes a bar-code reader, a computer
and the Renalog RM Data Management System, a software accessory that provides dialysis
centers with automated record keeping and data analysis capabilities. We
believe our Renatron Systems are faster, easier to use and more efficient than
competitive automated systems. We also believe that the Renatron Systems are
the top selling automated dialyzer reprocessing systems in the world.
Our Renalin 100 sterilant
is a proprietary peracetic acid-based formula that, when used with our Renatron
System, effectively cleans, disinfects and sterilizes dialyzers without the
hazardous fumes and potential disposal issues related to
7
glutaraldehyde and
formaldehyde reprocessing solutions. Renalin cold sterilant is the leading
dialyzer reprocessing solution in the United States.
We also manufacture a
comprehensive product line of test strips to measure concentration levels of
the peracetic acid chemistries we produce. These test strips ensure that the
appropriate concentration of sterilant is maintained throughout the required
contact period, in addition to verifying that all sterilant has been removed
from the dialyzer prior to patient use. We also sell a variety of dialysis
supplies manufactured by third parties.
Our Dialysis segment
offers various preventative maintenance programs and repair services to support
the effective operation of reprocessing systems over their lifetime. Our field
service personnel, dialysis center technicians and international third-party
distributors install, maintain, upgrade, repair and troubleshoot equipment.
Dialysate Concentrates
Our renal dialysis
treatment products include a line of acid and bicarbonate concentrates,
referred to as dialysate concentrates, used by kidney dialysis centers to
prepare dialysate, a chemical solution that draws waste products from the patients
blood through a dialyzer membrane during the hemodialysis treatment. Dialysate
concentrates are used in the dialysis process, whether single-use or reuse
dialyzers are being utilized. These concentrates are freight sensitive and due
to the competitive landscape carry overall lower gross margins in our product
portfolio.
Endoscope Reprocessing
General
We design, develop,
manufacture and sell endoscope reprocessing systems, sterilants and related
supplies. Although endoscopes generally can be manually disinfected, there are
many problems associated with such methods including the lack of uniform
disinfection procedures, personnel exposure to disinfectant fumes and
incomplete rinsing that could result in disinfectant residue remaining in or on
the endoscope. We
believe our
endoscope reprocessing equipment offers several advantages over manual
immersion in disinfectants. Our products, which meet rigorous high-level
disinfection assurance standards and regulations, allow the safe and effective
use of endoscopes in healthcare facilities throughout the world.
Our automated endoscope
reprocessing equipment is designed to pre-rinse the device, then continuously
pump disinfectant around the endoscope and through all of its internal working
channels, resulting in thorough and consistent high- level disinfection. After
the disinfection phase, all internal channels and external surfaces are
thoroughly rinsed to completely remove any disinfectant residue. This automated
process inhibits the buildup of biofilms in the working channels and renders
the endoscope safe for the next patient use. In addition, the entire high-level
disinfection process can be completed with minimal participation by the
operator, freeing the operator for other tasks, reducing the exposure of
personnel to the chemicals used in the disinfection process and reducing the
risk of transmission of infectious diseases. Our reprocessing equipment also
reduces the risks associated with inconsistent manual disinfecting.
Endoscope
Reprocessing Products and Services
Our Medivators
®
product
portfolio represents the most comprehensive offerings of capital equipment,
chemistries, consumables and services that are used to pre-clean, leak test,
clean and disinfect flexible endoscopes from the point of removal from a
patient through to utilization in the next patient procedure.
Our Medivators line of
endoscope reprocessing systems includes several automated systems, such as the
Advantage
®
, Advantage Plus
and DSD-201
systems, which are microprocessor-controlled, dual-basin, asynchronous
endoscope disinfection systems, and the SSD-102, which is a single-basin
version of the DSD-201 system. Our Advantage and Advantage Plus endoscope
reprocessing systems represent technologically advanced automated systems
designed to be compliant with all North American and European standards and to
compete against the other sophisticated systems currently available both in
Europe and North America. We commenced sales of the Advantage platform in
Europe in 2004, and in North America in August 2007 following FDA
clearance. All of the automated disinfection machines can be used on a broad
variety of endoscopes and are programmable by the user. The dual-basin systems
can disinfect up to four endoscopes at a time. Recently, the FDA and Health
Canada have cleared our newest singleuse chemistry reprocessor, the Advantage
Plus System. This new reprocessor was cleared for use exclusively with our new
single-use chemistry, Rapicide
®
PA, a peracetic acid based, high-level
disinfectant with a five-minute contact time used at 30°C giving it superior
material compatibility.
8
Medivators also recently
received clearance from Health Canada to market the newly developed DSD-Edge, a
single-use chemistry version of the DSD-201. The DSD-Edge is CE
(2)
marked for sale in European and Asian markets.
We also have clearance to sell the DSD Edge in Australia. FDA clearance to
market in the U.S. is pending. We also manufacture the Medivators CER series of
countertop semi-automated endoscope reprocessors. These products are more
compact, less expensive single and dual endoscope disinfection units.
Our Medivators equipment
product line also includes a state-of-the-art endoscope leak detection device
that provides customers with superior accuracy, complete automation, and
comprehensive electronic record keeping, and the Scope Buddy
®
Endoscope
Flushing Aid, a machine that minimizes the risk of worker repetitive motion
injury associated with manual cleaning of endoscopes, while increasing the
consistency of cleaning results through standardization of the pre-cleaning
process.
In connection with our
endoscope reprocessing business, we manufacture Rapicide glutaraldehyde-based
high-level disinfectant and sterilant, which has FDA 510(k) clearance for
a high-level disinfection claim of five minutes at 35 degrees Celsius. This
disinfection contact time is currently one of the fastest available of any
high-level disinfectant product sold in the United States. Rapicide has
superior rinsibility which gives us a competitive market advantage. We also
sell Adaspor
®
peracetic-acid based high-level disinfectant,
manufactured by a third party in Europe, for the European and Asian markets
that can be utilized in a wide variety of automated endoscope reprocessing
systems. As stated above, we now also have clearances to market our new
single-use chemistry Rapicide PA.
Our product offerings
also include Intercept
®
Detergent and Wipes which are formulated
especially for the cleaning and removal of biological and organic soils from
medical device surfaces, including flexible endoscopes. When used regularly,
Intercept and Intercept Wipes progressively remove built up layers of biofilm
from endoscope channels and exterior surfaces. Biofilms are an acknowledged
concern in health care as potential sources of nosocomial infection agents
(environmentally sourced microorganisms that can be transmitted to patients
during procedures or treatment).
Our Endoscope
Reprocessing segment offers various preventative maintenance programs, repair
services and user training programs to support the effective operation of
reprocessing systems over their lifetime. Medivators field service personnel
and international third-party distributors install, maintain, upgrade, repair
and troubleshoot equipment.
Marketing
and Sales
We sell and service our
endoscope reprocessing equipment, high-level disinfectants, cleaners and
consumables through our own United States field sales and service organization.
Outside of the United States, we sell primarily through independent
distribution partners in Europe, Canada, Asia, Australia and Latin America as
well as our own Netherlands sales and service organization.
All Other
We also operate other
businesses, including the Specialty Packaging operating segment, which includes
specialty packaging products and compliance training services for the transport
of infectious and biological specimens, and the Therapeutic Filtration
operating segment, which includes hemofilters, hemoconcentrators and other
hollow fiber filters manufactured and sold for medical applications. Due to the
relatively small size of these businesses, they are combined in the All Other
reporting segment.
Specialty Packaging
We provide specialty
packaging and thermal control products for the transport of infectious and
biological specimens as well as thermally sensitive pharmaceutical and medical
products. Additionally, we provide compliance training services for the safe
and proper transport of infectious and biological specimens, as defined by
various international and national regulatory organizations.
We believe that the
increasing concern over the potential spread of infectious agents, such as H1N1
flu, avian flu, E. coli and mad cow disease, as well as potential acts of bio-terrorism
using agents such as anthrax, have significantly increased
(2)
The
CE marking (an acronym for the French Conformite Europeenne) certifies that a
product has met European Union (EU) health, safety, and environmental
requirements. Many of our medical
devices must meet CE marking requirements prior to commercial sale in Europe.
9
awareness of the proper
shipping of diagnostic substances such as blood and tissues. We believe that we
are particularly well qualified to meet the global need for compliant, secure,
cost-effective packaging solutions for the shipping of infectious and
biological specimens.
Throughout fiscal 2009,
we continued the development, production and sales of the Saf-T-Temp
®
brand line of
phase change materials (PCM) using licensed proprietary thermal technology for
temperature-controlled shipments. These phase change materials help maintain
thermally sensitive specimens and products, such as vaccines, pharmaceuticals
and diagnostic reagents, within a discrete temperature range during shipment.
The discipline of Cold Chain Management continues to grow as manufacturers of
thermally sensitive pharmaceuticals and medical products, as well as clinical
laboratories, search for more efficient and cost-effective methods to ensure
the viability of their products and/or specimens in accordance with quality
control standards.
In addition, to meet
regulatory requirements that require shippers of infectious and biological
substances to be trained and certified at least every two years or as often as
regulations change, we offer a variety of training options allowing the
customer to choose the method that best meets its needs. We provide open
enrollment symposium-style training seminars in various cities, private seminar
training at customers on-site locations, as well as self-paced internet, CD
and network software.
Our
customer base consists of medical research companies, diagnostic, clinical and
university laboratories, pharmaceutical and biotechnology companies, United
States and Canadian government agencies, hospitals and state public health
departments. Our packaging, thermal and training products are distributed
worldwide both directly and through
third-party distributors.
Therapeutic
Filtration
Our therapeutic
filtration products are extracorporeal filters utilizing our proprietary hollow
fiber technology. These filters include hemoconcentrators, hemofilters and
specialty filters utilized for therapeutic medical applications.
We manufacture,
market and sell a comprehensive line of hemoconcentrators. A hemoconcentrator
is a device used by a perfusionist (a health care professional who operates
heart-lung bypass equipment) to concentrate red blood cells and remove excess
fluid from the bloodstream during open-heart surgery. Because the entire blood
volume of the patient passes through the hemoconcentrator during an open-heart
procedure, the biocompatibility of the blood-contact components of the device
is critical.
Our
hemoconcentrators are designed to meet the clinical requirements of neonatal
through adult patients. Our principal products are the Hemocor HPH®
hemoconcentrators, which contain our proprietary polysulfone hollow fiber and
also feature a unique no-rinse design that allows it to be quickly and
efficiently inserted into the bypass circuit at any time during an open-heart
procedure.
We also manufacture, market and sell a line of
Renaflo® II hemofilters. A hemofilter is
a device that performs hemofiltration in a slow, continuous blood filtration
therapy used to control fluid overload and acute renal failure in unstable,
critically ill patients who cannot tolerate the rapid filtration rates of
conventional hemodialysis. The hemofilter removes water, waste products and
toxins from the circulating blood of patients while conserving the cellular and
protein content of the patients blood. Our hemofilter line features no-rinse,
polysulfone hollow fiber filters that requires minimal set-up time for
healthcare professionals. The hemofilter is available in six different models
to meet the clinical needs of neonatal through adult patients.
Our proprietary hollow
fiber membranes and therapeutic products are sold to biotechnology
manufacturers that integrate the filters into their own proprietary systems and
through third-party distributors. Historically, one of our most successful
specialty filters has been sold on a private label basis to a manufacturer of a
respiratory therapy device that incorporates our filter in their product,
particularly for pediatric applications.
Government
Regulation
Many of our
products are subject to regulation by the FDA, which regulates the testing,
manufacturing, packaging, distribution and marketing of our medical devices and
water purification devices in the United States. Delays in FDA review can
significantly delay new product introduction and may result in a product
becoming dated or losing its market opportunity before it can be introduced.
Certain of our products may also be regulated by other governmental or private
10
agencies, including the
Environmental Protection Agency, Underwriters Lab, Inc. (UL), and
comparable agencies in certain foreign countries. The FDA and other agency
clearances generally are required before we can market such new or
significantly changed existing products in the United States or
internationally. The FDA and certain other international governmental agencies
also have the authority to require a recall or modification of products in the
event of a defect.
The Food, Drug and
Cosmetic Act of 1938 and Safe Medical Device Act of 1990 require compliance
with specific manufacturing and quality assurance standards for certain of our
products. The regulations also require manufacturers to establish a quality
assurance program to monitor the design and manufacturing process and maintain
records that show compliance with FDA regulations and the manufacturers
written specifications and procedures relating to its medical devices. The FDA
inspects medical device manufacturers for compliance with the current Quality
Systems Regulations (QSRs). Manufacturers that fail to meet the QSRs may be
issued reports or citations for non-compliance.
In addition, many of our
infection prevention and control products sold in Canada, Europe and Japan are
subject to comparable regulations and requirements as those described above.
International regulatory bodies often establish varying regulations governing
product standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. For example, as
a result of our sales in Europe, we were required to be certified as having a
Quality System that meets the ISO 13485-2003 standard.
Many of our
products must also meet the requirements of the European Medical Device
Directive (MDD) for their sale into the European Union. This certification
allows us, upon completion of a comprehensive technical file, to affix the CE
mark to our products and to freely distribute such products throughout the
European Union. Failure to maintain CE mark certification could have a material
adverse effect on our business.
Our endoscope and
dialyzer reprocessing products, as well as our Canadian water purification
equipment manufacturing facility and many of our products manufactured in Canada,
are subject to regulation by Health Canada Therapeutic Products Directorate (TPD),
which regulates the distribution and marketing of medical devices in Canada.
Certain of such products may be regulated by other governmental or private
agencies, including Canadian Standards Agency (CSA). TPD and other agency
clearances generally are required before we can market new medical products in
Canada. The Health Products and Food Branch Inspectorate (HPFBI) governs
problem reporting, modification and recalls. HPFBI also has the authority to
require a recall or modification in the event of defect. In order to market our
medical products in Canada, we are required to hold a Medical Device
Establishment License, as well as certain medical device licenses by product,
as provided by HPFBI.
Certain of our specialty packaging products have been independently
tested by a third-party laboratory and certified by Transport Canada. These
certified packaging products as well as our other specialty packaging products
have been designed to meet all applicable national and international standards
for the safe transport of infectious and biological substances. Such standards
include those issued by Canadian General Standards Board, Transport of
Dangerous Goods Regulations Canada, International Civil Aviation Organization,
International Air Transport Association, and the United States Code of Federal
Regulations Title 49.
Federal, state and
foreign regulations regarding the manufacture and sale of our products are
subject to change. We cannot predict what impact, if any, such changes might
have on our business.
Sources and Availability of Raw Materials
We purchase raw
materials, sub-assemblies, components and other supplies essential to our
operations from numerous suppliers in the United States and abroad. The
principal raw materials that we use to conduct operations include chemicals,
paper pulp, resin, stainless steel and plastic components. These raw materials
are obtainable from several sources and are generally available within the lead
times specified to vendors.
From time to time we experience price increases for raw
materials, with no guarantee that such increases can be passed along to our
customers. For example, during fiscal 2008 we experienced unprecedented price
increases in certain raw materials, including chemicals, paper pulp and
plastics (resins and bottles). In addition, we experienced significant
difficulty in obtaining certain chemicals in fiscal 2008 due to apparent
shortages by certain suppliers. Although prices of raw materials have decreased
and we do not currently foresee extraordinary difficulty in obtaining the
materials, sub-assemblies, components, or other supplies necessary for our
business operations, we cannot predict if similar difficulties as those
experienced in fiscal 2008 will occur in the future that may adversely affect
our business.
11
Intellectual
Property
We protect our technology and
products by, among other means, filing United States and foreign patent
applications. There can be no assurance, however, that any patent will provide
adequate protection for the technology, system, product, service or process it
covers. In addition, the process of obtaining and protecting patents can be
long and expensive. We also rely upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain our proprietary
position.
As of September 18, 2009, we
held 50 United States patents and 43 foreign patents, and had 10 United States
patents and 30 foreign patents pending. The majority of our United States and
foreign patents, for individual products, are effective for twenty years from
the filing date. The actual protection afforded by a patent, which can vary from
country to country, depends upon the type of patent, the scope of its coverage
and the availability of legal remedies in the country. We believe that the
patents in each of our segments are important. In addition, we license from
independent third parties under certain patents, trade secrets and other
intellectual property, the right to manufacture and sell our Rapicide
disinfectant and sterilant (see Reporting Segments-Endoscope Reprocessing),
our phase change material products (see Reporting Segments-All
Other-Specialty Packaging) and products utilizing BIOSAFE antimicrobial (see Reporting
Segments-Healthcare Disposables). These licenses, each of which are long-term,
are critical to our commercialization of those products.
Our products and services are sold around the world under
various trade names, trademarks and brand names. We consider our trade names,
trademarks and brand names to be valuable in the marketing of our products in
each segment. As of September 18, 2009, we had a total of 390 trademark
registrations in the United States and in various foreign countries in which we
conduct business, as well as 66 trademark applications pending worldwide.
Seasonality
Our
businesses generally are not seasonal in nature.
Principal
Customers
None of our
customers accounted for 10% or more of our consolidated net sales from
continuing operations during fiscal 2009. However, Fresenius and DaVita each
accounted for approximately 8% of our consolidated net sales.
Except as
described below, none of our segments are reliant upon a single customer, or a
few customers, the loss of any one or more of which could have a material
adverse effect on the segment.
In our Water
Purification and Filtration segment, one customer, Fresenius, accounted for
approximately 25% of our segment net sales. The loss of a significant amount of
business from this customer could have a material adverse effect on our Water
Purification and Filtration segment.
Our Healthcare
Disposables segment is reliant on four customers who collectively accounted for
approximately 55% of our Healthcare Disposables segment net sales and 14% of
our consolidated net sales from continuing operations during fiscal 2009. Henry
Schein accounted for approximately 22% of our segment net sales. The loss of a
significant amount of business from any of these four customers or a further
consolidation of such customers could have a material adverse effect on our
Healthcare Disposables segment.
During fiscal
2009, three of our customers collectively accounted for approximately 50% of
the Dialysis segment net sales including DaVita, which accounted for
approximately 30% of this segments net sales. The loss of a significant amount
of business from any of these three customers could have a material adverse effect
on our Dialysis segment.
Backlog
On September 18,
2009, our consolidated backlog was approximately $14,954,000 compared with
approximately $13,147,000 on September 19, 2008. All of the backlog is
expected to be recognized as revenue within one year of such date.
12
Competition
General
The markets in which our
business is conducted are highly competitive. Competition is intense in all of
our business segments and includes many large and small competitors. Important
competitive factors generally include product design and quality, safety, ease
of use, product service and price. We believe that the long-term competitive
position for all of our segments depends principally on our success in
developing, manufacturing and marketing innovative, cost-effective products and
services.
Many of our
competitors have greater financial, technical and human resources than us, are
well-established with reputations for success in the sale and service of their
products and may have certain other competitive advantages over us. However, we
believe that the worldwide reputation for the quality and innovation of our
products among customers and our reputation for providing quality product
service give us a competitive advantage with respect to many of our products.
In addition, certain
companies have developed or may be expected to develop new technologies or
products that directly or indirectly compete with our products. We anticipate
that we may face increased competition in the future as new infection
prevention and control products and services enter the market. Numerous
organizations are believed to be working with a variety of technologies and
sterilizing agents. In addition, a number of companies have developed or are
developing disposable medical instruments and other devices designed to address
the risks of infection and contamination. There can be no assurance that new
products or services developed by our competitors will not be more commercially
successful than those provided or developed by us in the future.
Segments
Information with respect
to competition within our most significant individual segments is as follows:
The Water Purification
and Filtration segment has been experiencing increased competition due to a
consolidation of suppliers during the past few years. This consolidation has
resulted principally from the acquisition by large industrial manufacturers of
many of the leading manufacturers of water purification equipment and
filtration products. The resulting entities such as GE Water & Process
Technologies and Siemens Water Technologies, which are the market leaders in
this industry, are significantly larger and have greater financial and other
resources available than the smaller companies in the industry such as our Mar
Cor Purification business. It remains difficult to assess the long term impact
of such consolidation on our business and to project such impact in the future.
In addition, this segment has experienced increased pricing pressures in its
resin regeneration business. We believe that our ability to successfully
compete in the water purification, filtration and disinfectant market derives
from our expertise in an FDA regulated environment, our broad product offerings
especially after our acquisition of the dialysis water business from GE Water
and the high value and quality of our products and services. We believe that by
focusing our efforts principally on the dialysis, pharmaceutical,
biotechnology, medical and commercial industrial markets, providing a high
level of customer service and making selective acquisitions, we can continue to
grow this segment, despite the continued industry consolidation and pricing
pressures.
In our Healthcare
Disposables segment, our principal competitors vary by product type, but
principally encompass bigger companies that serve larger, non-dental channels
such as hospitals and physician offices. Such competitors include Kimberly-Clark,
3M ESPE, Danaher/Sybron, Dentsply/Sultan Healthcare, Alcan, Tidi Products and
more generically less expensive imported products from Asia. We believe that
our long-standing brand reputation in dentistry, product quality, superior
customer service and breadth of product line are competitive advantages and are
the basis for our success in this segment.
In our Dialysis
segment, our most significant competition comes from manufacturers of
single-use dialyzers, particularly Fresenius, the largest dialysis chain in the
United States and a manufacturer of single-use dialyzers. In connection with
its acquisition of Renal Care Group in March 2006, Fresenius has converted
substantially all of its dialysis clinics (including newly acquired clinics) to
single-use, which
has adversely affected sales of our dialysis products and reprocessing
equipment. See Reporting SegmentsDialysis, Risk Factors and Managements Discussion and Analysis of Financial
Condition and Results of Operations.
13
In our Endoscope
Reprocessing segment, our principal competitors are Steris, Custom Ultrasonics,
Olympus, ASP division of Johnson & Johnson, Metrex, Ruhoff and Ecolab.
During the past two years, ASP and Steris introduced new model endoscope
reprocessors that directly compete with our reprocessors and may adversely
impact our ability to maintain our current market share.
Research
and Development
Research and development
expenses (which include continuing engineering costs) were $4,632,000 and
$4,010,000 in fiscals 2009 and 2008, respectively. The majority of our research
and development expenses related to our MDS endoscope reprocessor, specialty
filtration products and water purification systems.
Environmental
Matters
We anticipate that our compliance with federal, state and local laws and
regulations relating to the discharge of materials into the environment or
otherwise relating to the protection of the environment, will not have any
material effect on our capital expenditures, earnings or competitive position.
Employees
As of September 18,
2009, we employed 874 persons of whom 762 are located in the United States, 79
are located in Canada, 15 are located in Europe, Africa and the Middle East,
and 18 are located in the Far East. None of our employees are represented by
labor unions. We consider our relations with our employees to be satisfactory.
Financial
Information about Geographic Areas
We
have
operations in
Canada, Europe, Asia and other areas outside of the United States. These
operations involve the same business segments as our domestic operations. For a
geographic presentation of revenues and other financial data for the three
years ended July 31, 2009, see Note 17 to the Consolidated Financial
Statements.
Our foreign operations are subject, in varying
degrees, to a number of inherent risks. These risks include, among other
things, foreign currency exchange rate fluctuations, exchange controls and
currency restrictions, changes in local economic conditions and tax
regulations, unsettled political, regulatory or business conditions, and government-sponsored
boycotts and tariffs on the Companys products or services.
Depending on the
direction of change relative to the U.S. dollar, foreign currency exchange rate
fluctuations can increase or reduce the reported dollar amounts of the Companys
net assets and results of operations. Overall, net income during fiscal 2009
was favorably impacted as a result of foreign currency movements relative to
the U.S. dollar. See Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations.
We cannot predict future changes in foreign currency exchange rates or the
effect they will have on our operations.
Available Information
We make available
to the public, free of charge, on or through the Investor Relations section of
our internet website, copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with the SEC. Our filings are available to the public from
commercial document retrieval services, our website and at the SECs website at
www.sec.gov. Our website address is www.cantelmedical.com. Also available on
our website are our Corporate Governance Guidelines, Charters of the Nominating
and Governance Committee, Compensation Committee and Audit Committee, and Code
of Business Conduct and Ethics. Information contained on our website is not
incorporated by reference into this Report.
Item 1A.
RISK
FACTORS
.
We are
subject to various risks and uncertainties relating to or arising out of the
nature of our businesses and general business, economic, financing, legal and
other factors or conditions that may affect us. We provide the following
cautionary discussion of risks and uncertainties relevant to our businesses,
which we believe are factors that, individually or in the aggregate, could have
a material and adverse impact on our business, results of operations and
financial condition, or could cause our actual results to differ materially
from expected or historical results. We note these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995. You should
understand that it is not possible to predict or
14
identify
all such factors. Consequently, you should not consider the following to be a
complete discussion of all potential risks or uncertainties.
Our
market for dialysis reprocessing products is limited to dialysis centers that
reuse dialyzers, which market has been decreasing in the United States.
Our dialyzer reprocessing
products are limited to use by centers that choose to clean, sterilize and
reuse dialyzers, rather than discard the dialyzers after a single use. Dialysis
centers in the United States that reuse dialyzers derive an economic benefit
since the per-procedure cost is less when utilizing dialyzer reuse compared
with single-use and such dialysis clinics generally receive a capitated payment
for providing hemodialysis treatment. Although current public information is
not available to accurately quantify the number of dialysis centers currently
employing dialyzer reuse versus single-use, it is apparent that the market
share of single-use dialyzers has been increasing during the past six years
relative to reuse dialyzers. We believe that approximately one-third of all
dialysis procedures in the United States currently reuse dialyzers.
The shift from reuse to
single-use dialyzers is due in large part to the commitment of Fresenius, the
largest dialysis chain in the United States and a manufacturer of single-use
dialyzers, to convert all of its reuse dialysis clinics (including newly
acquired clinics) to single-use facilities. On March 31, 2006, Fresenius
acquired Renal Care Group, previously a significant customer of our dialysis
reuse products.
The Company believes that
if the per procedure cost of single-use relative to reuse decreases to a level
that makes it more economical to switch from reuse to single use, then all or a
substantial number of our customers may elect to make such switch. The loss of
any of our major customers due to such economics or any other reason would have
a material adverse effect on our business. See Business - Principal Customers,
Business - Competition and Managements Discussion and Analysis of Financial
Condition and Results of OperationsResults of Operations.
The
consolidation of dialysis providers has resulted in greater buying power by
certain of our customers, which over time has caused us to reduce the average
selling prices of our dialysis products, thereby reducing net sales and profit
margins. Such industry consolidation and the highly competitive market has also
resulted in the loss of dialysate concentrate sales.
Since 2005, there has
been an increasing consolidation in the dialysis industry, marked by the
acquisition by certain major dialysis chains of other major chains, as well as
small chains and independents. Such consolidation of dialysis providers has
resulted in greater buying power by certain of our customers, which has caused
us to reduce or maintain the average selling prices of our dialysis products,
thereby reducing net sales and profit margins. In addition, the decrease in
sales of low margin dialysate concentrate business continued during fiscal 2009
since Fresenius manufactures dialysate concentrate itself and therefore
provides dialysate concentrate to dialysis centers that it acquired including
Renal Care Group dialysis centers, our former customer. DaVita and certain
international customers have also continued their reduction of dialysate
concentrate purchases from us due to competitive pricing. Sales in our Dialysis
segment were adversely impacted during fiscal 2009 and our fourth quarter of
fiscal 2008, and will continue to be adversely impacted during fiscal 2010, due
to the loss of some low margin dialysate concentrate business primarily as a
result of the highly competitive and price sensitive market for such product.
Because a significant
portion of our Water Purification and Filtration, Dialysis and Healthcare
Disposables segments net sales comes from a few large customers, any
significant decrease in sales to these customers, due to industry consolidation
or otherwise, could harm our operating results.
In our Water
Purification and Filtration segment, one customer, Fresenius, accounts for
approximately 25% of our net sales. The loss of a significant amount of
business from this customer could have a material adverse effect on our Water
Purification and Filtration segment.
During fiscal
2009, DaVita accounted for approximately 30% of the Dialysis segment net sales.
We are highly dependent on DaVita as a customer and any shift by this customer
away from reuse could have a material adverse effect on our Dialysis segment
net sales.
The distribution network in the United States dental industry
is concentrated, with relatively few distributors of consumables accounting for
a significant share of the sales volume to dentists. Accordingly, net sales and
profitability of our Healthcare Disposables segment are highly dependent on our
relationships with a limited number of large distributors. During fiscal 2009,
the top four customers of our Healthcare Disposables segment accounted for
approximately 55% of its net sales.
15
Further
customer consolidation and concentration in this segment may occur. Although we
do not anticipate that any customers of the Healthcare Disposables segment will
account for more than 10% of our net sales on a consolidated basis, the loss or
a significant reduction of business from any of the major customers of the
Healthcare Disposables segment could adversely affect our results of
operations. In addition, because our Healthcare Disposables segment products
are sold through third-party distributors and not directly to end users, we may
not be able to control the amount and timing of resources that our distributors
devote to our products.
There is no assurance that there will not be a further or
continued loss or reduction in business from one or more of our major
customers. In addition, we cannot assure that net sales from customers that
have accounted for significant net sales in the past, either individually or as
a group, will reach or exceed historical levels in any future period.
Demand for some
of our healthcare disposables products can be significantly affected by the
severity of the novel H1N1 flu and the level of urgency our customers and the
general public develop and maintain with respect to epidemic and pandemic
preparedness.
Net
sales of high margin face masks, disinfectants and other healthcare disposables
products were strong in our fourth quarter of fiscal 2009 due to the outbreak
of the novel H1N1 flu (swine flu). However, we cannot provide assurances that
such increased sales levels can be sustained in fiscal 2010 since such demand
is highly dependent upon the severity and timing of the novel H1N1 flu, the
ability of our Company to educate existing customers and potential additional
customers on the benefits of our face masks, disinfectants and other products
and the level of urgency our customers and the general public develop and
maintain with respect to epidemic and pandemic preparedness.
The
consolidation of distributors in the dental industry could result in a
reduction in our net sales due to reduced average selling prices of our
healthcare disposable products and the loss of private label business.
In
recent years, there has been an increasing consolidation of distributors that
sell products in the dental industry. Such consolidation of distributors may
result in greater buying power by certain of our customers, which could cause
us to reduce the average selling prices of our healthcare disposable products,
thereby reducing net sales and profit margins. Additionally, depending on which
distributors are acquired by whom, such distributor consolidations may result
in the consolidated entity no longer purchasing certain products from us such
as private label products manufactured by us but associated with the acquired
distributor.
Our
businesses are adversely impacted by rising fuel and oil prices and are heavily
reliant on certain raw materials.
We purchase raw materials, sub-assemblies, components
and other supplies essential to our operations from numerous suppliers in the
United States and abroad. The principal raw materials that we use to conduct
operations include chemicals, paper pulp, resin, stainless steel and plastic
components.
From time to time we experience price increases for raw
materials, with no guarantee that such increases can be passed along to our
customers. During fiscal 2008, we experienced unprecedented price increases in
certain raw materials due in large part to the rising price of fuel and oil,
including chemicals, paper pulp and plastics (resins and bottles) which had a
significant adverse impact on our gross margins. In addition, we experienced
significant difficulty in obtaining certain chemicals in fiscal 2008 due to
apparent shortages by certain suppliers. Although prices and raw material
availability normalized during fiscal 2009 and we do not currently foresee
extraordinary difficulty in obtaining the materials, sub-assemblies, components
or other supplies necessary for our business operations, we cannot predict if
similar difficulties will occur in the future, including further price
increases, that may adversely affect our business.
In addition, rising fuel
and oil prices can also have a significant adverse impact on transportation costs
related to both the purchasing and delivery of products.
During fiscal 2009, the
cost of certain raw materials and distribution costs decreased due in large
part to the decreasing price of fuel and oil. Such decreases, coupled with
selling price increases, favorably impacted our gross margins in fiscal 2009.
If costs increase again in the future, we may not be able to implement further
price increases to our customers, which would adversely impact our gross
margins.
16
The
acquisition of new businesses and product lines, which has inherent risks, is
an important part of our growth strategy.
We intend to grow, in
part, by acquiring businesses. The success of this strategy depends upon
several factors, including our ability to:
·
identify and acquire businesses;
·
obtain financing for acquisitions on
terms that are favorable or acceptable;
·
integrate acquired operations, personnel,
products and technologies into our organization effectively;
·
retain and motivate key personnel and retain the
customers of acquired companies; and
·
successfully promote and increase sales of acquired
product lines.
In addition, even if
acceptable financing is obtained, such financing may result in significant
charges associated with the potential write-off of existing deferred financing
costs.
On August 1, 2009,
we adopted Statement of Financial Accounting Standards (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, contingent future consideration, any
non-controlling interest in the acquiree and the goodwill acquired. The provisions
of this new accounting pronouncement may make it more difficult for us to
identify acquisitions that meet all of our financial strategic objectives.
In addition, we have
occasionally used our stock as partial consideration for acquisitions. Our
common stock may not remain at a price at which it can be used as consideration
for acquisitions without diluting our existing stockholders, and potential
acquisition candidates may not view our stock attractively. We also may not be
able to sustain the rates of growth that we have experienced in the past,
whether by acquiring businesses or otherwise.
We have a significant
amount of goodwill and intangible assets on our balance sheet related to
acquisitions. If future operating results of the acquired business are
significantly less than the results anticipated at the time of the acquisition,
we may be required to incur impairment charges.
At July 31,
2009, our reporting units that are potentially at risk for impairment are
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.
Competition from
manufacturing facilities located in China could result in a reduction in our
net sales of healthcare disposable products due to reduced average selling
prices or our customers no longer purchasing certain products from us.
Despite
expensive shipping costs, some of our competitors manufacture certain healthcare
disposable products in China due to the very low labor costs in that country.
Although we believe the quality of our healthcare disposable products, which
are produced in the United States, are superior, our sales in the future may be
adversely affected by either loss of sales or reductions in the price of our
products as a result of this low cost competition.
We are subject
to extensive government regulation. Government regulation may delay or prevent
new product introduction.
Many of our products are
subject to regulation by governmental and private agencies in the United States
and abroad, which regulate the testing, manufacturing, storage, packaging,
labeling, distribution and marketing of medical supplies and devices. Certain
international regulatory bodies also impose import restrictions, tariff
regulations, duties and tax requirements. Delays in agency review can
significantly delay new product introduction and may result in a product
becoming dated or losing its market opportunity before it can be introduced.
The FDA and other agency clearances generally are required before we can market
new products in the United States or make significant changes to existing
products. The FDA also has the authority to require a recall or modification of
products in the event of a defect. The process of obtaining marketing
clearances and approvals from regulatory agencies for new products can be time
consuming and expensive. There is no assurance that clearances or approvals
will be granted or that agency review will not involve delays that would
adversely affect our ability to commercialize our products.
17
During the past several
years, the FDA, in accordance with its standard practice, has conducted a
number of inspections of our manufacturing facilities to ensure compliance with
regulatory standards relating to our testing, manufacturing, storage and
packaging of products. On occasion, following an inspection, the FDA has called
our attention to certain Good Manufacturing Practices compliance
deficiencies. Failure to adequately correct violations or otherwise comply with
requests made by the FDA can result in regulatory action being initiated by the
FDA including seizure, injunction and civil monetary penalties.
Federal, state and
foreign regulations regarding the manufacture and sale of our products are
subject to change. We cannot predict what impact, if any, such changes might
have on our business. In addition, there can be no assurance that regulation of
our products will not become more restrictive in the future and that any such
development would not have a material adverse effect on our business. For a
more detailed discussion on government regulation and related risks, see Business
- Government Regulation.
Customer
acceptance of our products is dependent on our ability to meet changing
requirements.
Customer acceptance of
our products is significantly dependent on our ability to offer products that
meet the changing requirements of our customers, including hospitals,
industrial laboratories, doctors, dentists, clinics, government agencies and
industrial corporations. Any decrease in the level of customer acceptance of
our products could have a material adverse effect on our business.
We distribute
our products in highly competitive markets.
We distribute
substantially all of our products in highly competitive markets that contain
many products available from nationally and internationally recognized
competitors. Many of these competitors have significantly greater financial,
technical and human resources than us and are well-established. In addition,
some companies have developed or may be expected to develop technologies or
products that could compete with the products we manufacture and distribute or
that would render our products obsolete or noncompetitive. In addition, our
competitors may achieve patent protection, regulatory approval or product
commercialization that would limit our ability to compete with them. Although
we believe that we compete effectively with all of our present competitors in
our principal product groups, there can be no assurance that we will continue
to do so. These and other competitive pressures could have a material adverse
effect on our business. See Business Competition.
Currency
fluctuations and trade barriers could adversely affect our results of
operations.
A portion of our products
in all of our business segments are exported to and imported from a variety of
geographic locations, and our business could be materially and adversely
affected by the imposition of trade barriers, fluctuations in the rates of
exchange of various currencies, tariff increases and import and export
restrictions, affecting all of such geographies including but not limited to
the United States, Canada, the European Union, the United Kingdom and the Far
East.
Our Canadian subsidiaries
purchase a portion of their inventories and incur expenses in United States
dollars and sell a significant amount of their products in United States dollars.
Our United States subsidiaries also sell a portion of their products in euros
and British pounds. Therefore, we are exposed to foreign exchange gains and
losses upon settlement of such items. Similarly, our foreign subsidiaries
United States denominated assets and liabilities must be converted into their
functional currency when preparing their financial statements, which results in
foreign exchange gains and losses. Additionally, the results of operations of
our foreign subsidiaries are translated from their functional currency to
United States dollars for purposes of preparing our Consolidated Financial
Statements. Therefore, the results of our continuing operations could be
materially and adversely affected by fluctuations in the value of the Canadian
dollar, euro and British pound against the United States dollar.
Recent
deterioration in the economy and credit markets may adversely affect our future
results of operations.
Our
business has been and may continue to be adversely affected by the recent
deterioration in the general economy and credit markets by potentially causing
our customers to slow spending on our products, especially capital equipment.
Sales of capital equipment represented approximately 25% of our fiscal 2009
consolidated net sales and are primarily included in our Water Purification and
Filtration, Dialysis and Endoscope Reprocessing segments.
18
Because we
operate in international markets, we are subject to political and economic risks
that we do not face in the United States.
We operate in a global
market. Global operations are subject to risks, including political and
economic instability, general economic conditions, imposition of government
controls, the need to comply with a wide variety of foreign and United States
export laws, trade restrictions and the greater difficulty of administering
business overseas.
The markets for
many of our products are subject to changing technology.
The markets for many
products we sell, particularly endoscope reprocessing equipment, are subject to
changing technology, new product introductions and product enhancements, and
evolving industry standards. The introduction or enhancement of products
embodying new technology or the emergence of new industry standards could
render existing products obsolete or result in short product life cycles.
Accordingly, our ability to compete is in part dependent on our ability to
continually offer enhanced and improved products.
We may be
exposed to product liability claims resulting from the use of products we sell
and distribute.
We may be exposed to
product liability claims resulting from the products we sell and distribute. We
maintain general liability insurance that includes product liability coverage,
which we believe is adequate for our businesses. However, there can be no
assurance that insurance coverage for these risks will continue to be available
or, if available, that it will be sufficient to cover potential claims or that
the present level of coverage will continue to be available at a reasonable
cost. A partially or completely uninsured successful claim against us could
have a material adverse effect on us.
We
use chemicals and other regulated substances in the manufacturing of our
products.
In the ordinary course of
certain of our manufacturing processes, we use various chemicals and other
regulated substances. Although we are not aware of any material claims
involving violation of environmental or occupational health and safety laws or
regulations, there can be no assurance that such a claim may not arise in the
future, which could have a material adverse effect on us.
We
rely on intellectual property and proprietary rights to maintain our
competitive position.
We rely heavily on
proprietary technology that we protect primarily through licensing
arrangements, patents, trade secrets and proprietary know-how. There can be no
assurance that any pending or future patent applications will be granted or
that any current or future patents, regardless of whether we are an owner or a
licensee of the patent, will not be challenged, rendered unenforceable,
invalidated or circumvented or that the rights will provide a competitive
advantage to us. There can also be no assurance that our trade secrets or non-disclosure
agreements will provide meaningful protection of our proprietary information.
There can also be no assurance that others will not independently develop
similar technologies or duplicate any technology developed by us or that our
technology will not infringe upon patents or other rights owned by others.
Modifications
to our revolving credit facility will likely result in higher average interest
rates in fiscal 2010.
The revolving portion of
our credit facilities has a termination date of August 1, 2010. We
are in discussions with our bank syndicate regarding modifications to such
facility, including an extension of the termination date, and expect to
formally modify the facility before its expiration. The margins applicable to
our outstanding borrowings at July 31, 2009 were 0.00% above the lenders
base rate and 0.75% above the London Interbank Offered Rate (LIBOR). However,
due to current market conditions, a modification of our credit facilities will
likely result in an increase of our margins above the lenders base rate and
LIBOR, which may adversely affect our fiscal 2010 results of operations. In addition, depending upon the structure of
the modification, we may be required to write-off certain deferred financing
costs that are recorded in other assets and are currently being amortized over
the life of the credit facilities.
If we are unable
to retain key personnel, our business could be adversely affected.
Our success is dependent
to a significant degree upon the efforts of key members of our management. We
have previously entered into various employment agreements with executives of
the Company, including our Corporate executive staff and our subsidiary
presidents. The majority of such contracts have expired or will expire in early
fiscal 2010. The Compensation Committee of the Board of Directors is actively
working on new agreements and has retained a third party consulting firm to
provide advice on executive compensation and to assist with this process. In
the interim, the Compensation Committee has agreed that in the event the
employment of
19
of these executives is
terminated by the Company without cause, the executive will continue to receive
their base salary through July 31, 2010. However, there can be no
assurance that the terms of any offered agreements will be successfully
negotiated or accepted by such personnel. We believe the loss or unavailability
of any of such individuals could have a material adverse effect on our business.
In addition, our success depends in large part on our ability to attract and
retain highly qualified scientific, technical, sales, marketing and other
personnel. Competition for such personnel is intense and there can be no
assurance that we will be able to attract and retain the personnel necessary
for the development and operation of our businesses.
Our
stock price has been volatile and may experience continued significant price
and volume fluctuations in the future that could reduce the value of outstanding
shares.
The market for our
common stock has, from time to time, experienced significant price and volume
fluctuations that may have been unrelated to our operating performance. Factors
such as announcements of our quarterly financial results and new business
developments could also cause the market price of our common stock to fluctuate
significantly.
Item 1B.
UNRESOLVED
STAFF COMMENTS.
None
Item 2.
PROPERTIES
.
Owned Facilities
We own three
buildings located on adjacent sites, comprising a total of 16.5 acres of land
in Plymouth, a suburb of Minneapolis, Minnesota. The principal facility is a
110,000 square-foot building used for executive, administrative and sales
staff, research operations, manufacturing and warehousing. The second facility is
a 65,000 square-foot building used for manufacturing and warehousing. The third
facility is a 43,000 square-foot building used primarily for manufacturing and
warehouse operations. These facilities are used for our Dialysis, Endoscope
Reprocessing and Therapeutic Filtration operating segments, as well as a
portion of our Water Purification and Filtration operating segment.
We own a 63,000
square-foot building in Hauppauge, New York, the headquarters for our Crosstex
subsidiary, which is used for executive, administrative and sales staff,
manufacturing and warehousing for our Healthcare Disposables operating segment.
As a result of the
acquisition of G.E.M. on July 31, 2009, we own a 13,825 square-foot
building in Buena Park, California, which serves as our west coast warehouse
and regeneration plant for our Water Purification and Filtration segment.
20
Leased
Facilities
Our principal
leased facilities include the following:
Location
|
|
Purpose
|
|
Square Footage
|
|
Principal Operating
Segment
|
Middletown, PA
|
|
Warehouse and distribution hub
|
|
31,000
|
|
Dialysis
|
Plymouth, MN
|
|
Warehousing
|
|
44,000
|
|
Various
|
Hauppauge, NY
|
|
Warehousing
|
|
40,000
|
|
Healthcare Disposables
|
Sharon, PA (1)
|
|
Manufacturing and warehousing
|
|
52,000
|
|
Healthcare Disposables
|
Santa Fe Springs, CA
|
|
Manufacturing and warehousing
|
|
35,000
|
|
Healthcare Disposables
|
Lawrenceville, GA
|
|
Manufacturing and warehousing
|
|
40,000
|
|
Healthcare Disposables
|
Burlington, Ontario
|
|
Sales and administrative offices, research and
engineering, manufacturing and warehousing
|
|
21,600
|
|
Water Purification and Filtration
|
Skippack, PA
|
|
Sales and administrative offices, manufacturing,
warehousing and regeneration plant
|
|
22,500
|
|
Water Purification and Filtration
|
Heerlan, the Netherlands (2)
|
|
Sales and service offices, warehouse and
distribution hub
|
|
21,000
|
|
Various
|
Lowell, MA (3)
|
|
Sales and administrative offices, manufacturing, warehousing
and regeneration plant
|
|
26,000
|
|
Water Purification and Filtration
|
Edmonton, Alberta
|
|
Executive, sales and administrative offices,
manufacturing and warehousing
|
|
11,700
|
|
Specialty Packaging (Included in All Other reporting
segment)
|
Little Falls, NJ
|
|
Corporate executive offices
|
|
8,900
|
|
Cantel Medical Corp.
|
(1) The facility in
Sharon was owned by an entity controlled by three of the former owners of
Crosstex, two of whom currently serve as officers of Crosstex. During fiscal
2009, the entity sold the building to a third party in a transaction under
which the buyer made substantial improvements, including the addition of 17,000
square-feet to the existing 35,000 square-feet, in consideration for Crosstex
agreeing to enter into a new lease agreement that provides for increased rental
charges.
(2) As part of the
restructuring plan of our Netherlands subsidiary as further described in Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Note 18 to the Consolidated Financial Statements, we sold our building and land
in Heerlan, the Netherlands on May 19, 2009 and entered into a lease for
2.5 years with the new owner so we can continue to use the facility as our
European sales and service headquarters as well as for warehouse and
distribution activity. The sale of the building and land resulted in a gain of
$146,000, which will be amortized over the life of the lease and is recorded in
deferred revenue and other long-term liabilities. The rent for the full 2.5 year
lease of $325,000 was paid from the sale proceeds and recorded as a prepaid
expense in the Consolidated Financial Statements.
(3) The facility in
Lowell is leased from a company that is affiliated with an officer of Mar Cor
Purification.
In addition, we
lease office and sales space in Tokyo, Japan; Singapore; and Beijing, China
that is used for all of our operating segments other than Healthcare
Disposables and Specialty Packaging. We lease office, sales and warehouse space
in Lienden, the Netherlands for our Healthcare Disposables segment.
We lease
additional space
for our Water Purification and Filtration segment
in Downers Grove, Illinois; Norcross,
Georgia; Royal, Virginia; Florida, New York; Orion Township, Michigan;
Cleveland, Ohio; Raleigh, North Carolina; Homewood, Alabama; Smyrna, Tennessee;
Addison, Texas; Auburn, Washington; Lakeland, Florida; Pittsburgh,
Pennsylvania; Concord, California; Toronto, Ontario; and Montreal, Quebec. The
Downers Grove, Norcross, Toronto and Montreal facilities serve as warehouses
and regeneration plants, while the other locations are small storage facilities
supporting local service operations.
We also lease
additional space for our Specialty Packaging segment in Glen Burnie, Maryland
that is used for sales and marketing, warehousing and as a distribution hub.
21
Net rentals for
leased space for fiscal 2009 aggregated approximately $2,815,000 compared with
$2,849,000 in fiscal 2008.
Item
3.
|
|
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.
Item
4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
.
|
There was no
submission of matters to a vote during the three months ended July 31,
2009.
PART II
Item
5.
|
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
.
|
Our Common Stock
trades on the New York Stock Exchange under the symbol CMN.
The following
table sets forth, for the periods indicated, the high and low closing prices
for the Common Stock as reported by the New York Stock Exchange.
|
|
HIGH
|
|
LOW
|
|
|
|
|
|
|
|
Year
Ended July 31, 2009
|
|
|
|
|
|
First Quarter
|
|
$
|
10.75
|
|
$
|
8.18
|
|
Second Quarter
|
|
15.33
|
|
7.57
|
|
Third Quarter
|
|
15.44
|
|
11.53
|
|
Fourth Quarter
|
|
16.84
|
|
12.51
|
|
|
|
|
|
|
|
Year
Ended July 31, 2008
|
|
|
|
|
|
First Quarter
|
|
$
|
18.00
|
|
$
|
13.70
|
|
Second Quarter
|
|
19.10
|
|
11.27
|
|
Third Quarter
|
|
11.92
|
|
9.55
|
|
Fourth Quarter
|
|
13.05
|
|
9.14
|
|
We have not paid
any cash dividends on our Common Stock. The Board of Directors intends to
periodically review its dividend policy and could change such policy at
anytime. We are not permitted to pay cash dividends on our Common Stock without
the consent of our lenders.
On September 18,
2009, the closing price of our Common Stock was $14.68 and we had 348 record
holders of Common Stock. A number of such holders of record are brokers and
other institutions holding shares of Common Stock in street name for more
than one beneficial owner.
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 repurchased shares from time-to-time at
prevailing prices and as permitted by applicable securities laws (including SEC
Rule 10b-18) and New York Stock Exchange requirements. The repurchase
program had a one-year term that expired 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 were made subsequent to the end
of our first quarter ended October 31, 2008. Therefore, at the conclusion
of the repurchase program on June 8, 2009, we had repurchased 134,547
shares under the repurchase program at a total average price per share of
$9.34.
22
Stock
Performance Graph
The following
graph compares the cumulative total stockholder return on our Common Stock for
the last five fiscal years with the cumulative total returns on the Russell
2000 index and the Dow Jones US Health Care Equipment & Services index
over the same period (assuming an investment of $100 in our common stock and in
each of the indexes on July 31, 2004, and where applicable, the
reinvestment of all dividends).
*$100 invested on
7/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending
July 31.
Copyright© 2009
Dow Jones & Co. All rights reserved.
23
Item
6.
|
|
SELECTED
CONSOLIDATED FINANCIAL DATA
.
|
The financial data
in the following table is qualified in its entirety by, and should be read in
conjunction with, the financial statements and notes thereto and other
information incorporated by reference in this Form 10-K. G.E.M. was
acquired on the last day of fiscal 2009 and therefore is excluded from the
Consolidated Statements of Income Data for all years presented, but the net assets
of G.E.M. are included in the Consolidated Balance Sheet Data as of July 31,
2009. Crosstex is reflected in the Consolidated Statements of Income Data for
fiscals 2009, 2008, 2007 and 2006. GE Water and Twist are reflected in the
Consolidated Statements of Income Data for fiscals 2009 and 2008 and the
portion of fiscal 2007 subsequent to their acquisitions on March 30, 2007
and July 9, 2007, respectively. DSI, Verimetrix and Strong Dental are
reflected in the Consolidated Statements of Income Data for fiscal 2009 and the
portion of fiscal 2008 subsequent to their acquisitions on August 1, 2007,
September 17, 2007 and September 26, 2007, respectively. DSI,
Verimetrix, Strong Dental, GE Water, Twist and Crosstex are not reflected in
the results of operations for all other periods presented. Carsen is reflected
as a discontinued operation for all years presented.
Consolidated Statements of Income
Data
(Amounts in
thousands, except per share data)
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
260,050
|
|
$
|
249,374
|
|
$
|
219,044
|
|
$
|
192,179
|
|
$
|
137,157
|
|
Cost of sales
|
|
160,571
|
|
161,748
|
|
140,032
|
|
122,963
|
|
83,276
|
|
Gross profit
|
|
99,479
|
|
87,626
|
|
79,012
|
|
69,216
|
|
53,881
|
|
Income from
continuing operations before interest expense and income taxes
|
|
27,451
|
|
17,967
|
|
16,839
|
|
15,344
|
|
14,322
|
|
Interest
expense, net
|
|
2,495
|
|
4,116
|
|
2,737
|
|
3,393
|
|
940
|
|
Income from
continuing operations before income taxes
|
|
24,956
|
|
13,851
|
|
14,102
|
|
11,951
|
|
13,382
|
|
Income taxes
|
|
9,387
|
|
5,158
|
|
5,998
|
|
5,298
|
|
5,487
|
|
Income from
continuing operations
|
|
15,569
|
|
8,693
|
|
8,104
|
|
6,653
|
|
7,895
|
|
Income from
discontinued operations, net of tax
|
|
|
|
|
|
342
|
|
10,268
|
|
7,610
|
|
Gain on disposal
of discontinued operations, net of tax
|
|
|
|
|
|
|
|
6,776
|
|
|
|
Net income
|
|
$
|
15,569
|
|
$
|
8,693
|
|
$
|
8,446
|
|
$
|
23,697
|
|
$
|
15,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic: (1)
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.96
|
|
$
|
0.54
|
|
$
|
0.52
|
|
$
|
0.43
|
|
$
|
0.53
|
|
Discontinued
operations
|
|
|
|
|
|
0.02
|
|
0.66
|
|
0.52
|
|
Gain on disposal
of discontinued operations
|
|
|
|
|
|
|
|
0.44
|
|
|
|
Net income
|
|
$
|
0.96
|
|
$
|
0.54
|
|
$
|
0.54
|
|
$
|
1.53
|
|
$
|
1.05
|
|
Diluted: (1)
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.50
|
|
$
|
0.41
|
|
$
|
0.49
|
|
Discontinued
operations
|
|
|
|
|
|
0.02
|
|
0.63
|
|
0.47
|
|
Gain on disposal
of discontinued operations
|
|
|
|
|
|
|
|
0.42
|
|
|
|
Net income
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.52
|
|
$
|
1.46
|
|
$
|
0.96
|
|
Weighted average
number of common and common equivalent shares: (1)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
16,287
|
|
16,116
|
|
15,631
|
|
15,471
|
|
14,830
|
|
Diluted
|
|
16,481
|
|
16,371
|
|
16,153
|
|
16,276
|
|
16,208
|
|
24
Consolidated Balance Sheets Data
(Amounts in
thousands, except per share data)
|
|
July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
277,871
|
|
$
|
279,190
|
|
$
|
263,671
|
|
$
|
238,227
|
|
$
|
165,279
|
|
Current assets
|
|
88,910
|
|
84,561
|
|
76,731
|
|
82,448
|
|
94,490
|
|
Current
liabilities
|
|
39,113
|
|
38,922
|
|
35,971
|
|
39,097
|
|
43,475
|
|
Working capital
|
|
49,797
|
|
45,639
|
|
40,760
|
|
43,351
|
|
51,015
|
|
Long-term debt
|
|
33,300
|
|
50,300
|
|
51,000
|
|
34,000
|
|
|
|
Stockholders
equity
|
|
187,116
|
|
168,712
|
|
155,070
|
|
140,805
|
|
108,626
|
|
Book value per
outstanding common share (1)
|
|
$
|
11.24
|
|
$
|
10.31
|
|
$
|
9.62
|
|
$
|
9.14
|
|
$
|
7.24
|
|
Common shares
outstanding (1)
|
|
16,644
|
|
16,371
|
|
16,116
|
|
15,399
|
|
15,005
|
|
(1)
|
|
Per share and share
amounts have been adjusted to reflect a three-for-two stock split effected in
the form of a 50% stock dividend paid in January 2005.
|
25
Item
7.
|
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
.
|
The following Managements
Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
is intended to help you understand Cantel Medical Corp. (Cantel). The
MD&A is provided as a supplement to and should be read in conjunction with
our financial statements and the accompanying notes. Our MD&A includes the
following sections:
Overview
provides a brief description of our
business and a summary of significant activity that has affected or may affect
our results of continuing operations and financial condition.
Results of Operations
provides a discussion of the
consolidated results of continuing operations for fiscal 2009 compared with
fiscal 2008, and fiscal 2008 compared with fiscal 2007.
Liquidity and Capital Resources
provides an overview of our working
capital, cash flows, contractual obligations, financing and foreign currency
activities.
Critical Accounting Policies
provides a discussion of our accounting
policies that require critical judgments, assumptions and estimates.
Overview
Cantel is a leading
provider of infection prevention and control products in the healthcare market,
specializing in the following operating segments:
·
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.
·
Healthcare Disposables
: Single-use, infection control products used principally in the dental market including face masks, towels
and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups,
sterilization pouches and disinfectants.
·
Dialysis
: Medical device reprocessing systems,
sterilants/disinfectants, dialysate concentrates and other supplies for renal
dialysis.
·
Endoscope Reprocessing
: Medical device reprocessing systems,
disinfectants, enzymatic detergents and other supplies used to high-level
disinfect flexible endoscopes.
·
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 or control the occurrence or
spread of infections.
26
Significant Activity
(i)
|
|
Net income increased by 79% in fiscal 2009 compared
with fiscal 2008 despite sales growth of only 4%. We continue to benefit from
having a broad portfolio of infection prevention and control products sold
into diverse business segments and we have proactively developed our overall
business to where approximately 75% of our consolidated net sales are
consumable products and service. Our four largest business segments, which
include Water Purification and Filtration, Healthcare Disposables, Dialysis
and Endoscope Reprocessing each performed extremely well and contributed the
vast majority of the increase to net income in fiscal 2009. The primary
factors that contributed to this financial performance, as further described
elsewhere in this MD&A, were as follows:
|
|
|
|
|
|
·
|
improved gross margins as a result of numerous
profit improvement and sales and marketing initiatives and the continued
shift in sales mix to higher margin disposables,
|
|
|
|
|
|
|
·
|
realization of price increases,
|
|
|
|
|
|
|
·
|
reductions in manufacturing, raw material and
distribution costs,
|
|
|
|
|
|
|
·
|
general company-wide efforts to control operating
expenses while still investing in sales, marketing and research and
development activities,
|
|
|
|
|
|
|
·
|
an increase in demand for healthcare disposables
products principally in our fourth quarter as a result of the outbreak of the
novel H1N1 flu (swine flu), and
|
|
|
|
|
|
|
·
|
favorable interest costs due to both reduced average
interest rates as well as lower outstanding borrowings.
|
|
|
|
|
|
|
However, we cannot provide assurances that this
level of growth can continue to be achieved, especially given the economic
downturn, uncertainty surrounding the severity of the novel H1N1 flu outbreak
and other potential risks or uncertainties. See Risk Factors elsewhere in
this Form 10-K.
|
|
|
|
(ii)
|
|
We sell our dialysis products to a concentrated
number of customers. Sales in our Dialysis segment were adversely impacted by
continued loss of 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.
Additionally, although international concentrate sales were very strong in
fiscal 2009, we cannot provide assurances that the current level of concentrate
sales to international customers will be sustained.
|
|
|
|
(iii)
|
|
The deterioration in the economy and credit markets
adversely impacted our sales in fiscal 2009 compared with fiscal 2008 by
causing some of our customers to delay spending on certain products,
especially capital equipment in our Endoscope Reprocessing and Water
Purification and Filtration segments, as more fully described elsewhere in
this MD&A. Sales of capital equipment represent approximately 25% of our
overall consolidated net sales and are included in our Water Purification and
Filtration, Dialysis and Endoscope Reprocessing segments.
|
|
|
|
(iv)
|
|
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 $345,000 and $365,000 of restructuring costs were recorded in
fiscals 2009 and 2008, respectively, which decreased both basic and diluted
earnings per share from continuing operations by $0.02 in each of fiscals
2009 and 2008, as more fully described in Note 18 to the Consolidated
Financial Statements and elsewhere in this MD&A.
|
27
(v)
|
|
Fluctuations in the rates of currency exchange had
an overall favorable impact on our net income in fiscal 2009, compared with
fiscal 2008, despite the adverse impact on net sales, as more fully described
elsewhere in this MD&A.
|
|
|
|
(vi)
|
|
In July 2009, we extended the life of certain
out-of-the-money stock options previously awarded to certain executive
officers. As a result, approximately $703,000 of additional stock-based
compensation expense was recorded in fiscal 2009, which decreased both basic
and diluted earnings per share from continuing operations by $0.03, as more
fully described in Note 11 to the Consolidated Financial Statements and
elsewhere in this MD&A.
|
|
|
|
(vii)
|
|
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, a charge of approximately $720,000 primarily relating to
separation benefits was recorded, which decreased both basic and diluted
earnings per share from continuing operations by approximately $0.03 in
fiscal 2008, as more fully described elsewhere in this MD&A.
|
|
|
|
(viii)
|
|
Fiscal 2009 acquisition: We acquired the business of
G.E.M. Water Systems Intl, LLC (G.E.M.)
on July 31, 2009, as more fully described in Business Fiscal
2009 Acquisition and Note 3 to the Consolidated Financial Statements.
|
|
|
|
(ix)
|
|
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 Consolidated Financial Statements.
|
|
|
|
(x)
|
|
Fiscal 2007 acquisitions: We acquired GE
Water & Process Technologies water dialysis business (the GE Water
Acquisition or GE Water) on March 30, 2007 and the business of Twist
2 It Inc. (Twist) on July 9, 2007, as more fully described in Note 3
to the Consolidated Financial Statements.
|
Results of Operations
The results of operations
reflect the continuing operating results of Cantel and its wholly-owned
subsidiaries, but exclude the operating results of Carsen Group Inc. (Carsen),
which is reported as a discontinued operation for all years presented. The
Olympus distribution agreements with Carsen, as well as Carsens active
business operations, terminated on July 31, 2006, as more fully described
elsewhere in this MD&A and Note 19 to the Consolidated Financial
Statements.
Since the GE Water and
Twist acquisitions were completed on March 30, 2007 and July 9, 2007,
respectively, their results of operations are included in our results of
operations for fiscals 2009 and 2008 and the portion of fiscal 2007 subsequent
to their respective acquisition dates.
Since the DSI, Verimetrix
and Strong Dental acquisitions were completed on August 1, 2007, September 17,
2007 and September 26, 2007, respectively, their results of operations are
included in our results of operations for fiscal 2009 and the portion of fiscal
2008 subsequent to their respective acquisition dates and are not reflected in
our results of operations for fiscal 2007. The acquisitions of DSI, Verimetrix
and Strong Dental had an overall insignificant effect on our results of operations
for fiscal 2009 and the portion of fiscal 2008 subsequent to their respective
acquisition dates due to the small size of these businesses.
Since the G.E.M.
acquisition was completed on the last day of fiscal 2009, its results of
operations are not reflected in our results of operations for any years
presented.
For fiscal 2008 compared
with fiscal 2007, discussion herein of our pre-existing business refers to all
of our reporting segments with the exception of the operating results of the GE
Water Acquisition included in our Water Purification and Filtration reporting
segment.
28
The following table gives
information as to the net sales from continuing operations and the percentage
to the total net sales from continuing operations for each of our reporting
segments.
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(Dollar Amounts in thousands)
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
71,340
|
|
27.4
|
|
$
|
68,589
|
|
27.5
|
|
$
|
49,032
|
|
22.4
|
|
Healthcare
Disposables
|
|
64,085
|
|
24.7
|
|
58,657
|
|
23.5
|
|
57,610
|
|
26.3
|
|
Dialysis
|
|
56,414
|
|
21.7
|
|
60,075
|
|
24.1
|
|
58,696
|
|
26.8
|
|
Endoscope
Reprocessing
|
|
52,333
|
|
20.1
|
|
46,924
|
|
18.8
|
|
38,941
|
|
17.8
|
|
All Other
|
|
15,878
|
|
6.1
|
|
15,129
|
|
6.1
|
|
14,765
|
|
6.7
|
|
|
|
$
|
260,050
|
|
100.0
|
|
$
|
249,374
|
|
100.0
|
|
$
|
219,044
|
|
100.0
|
|
Fiscal 2009 compared with Fiscal 2008
Net sales
Net sales increased by
$10,676,000, or 4.3%, to $260,050,000 in fiscal 2009 from $249,374,000 in
fiscal 2008.
Net sales were adversely
impacted in fiscal 2009 compared with fiscal 2008 by approximately $950,000 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
in fiscal 2009 was principally attributable to increases in sales of healthcare
disposables products, endoscope reprocessing products and services, water
purification and filtration products and services and therapeutic filtration
products (included in All Other), partially offset by a decrease in dialysis
products.
Net sales of healthcare
disposables products increased by 9.3% in fiscal 2009 compared with fiscal 2008
despite negative growth in the overall dental market, primarily due to (i) increased
sales volume of high margin face masks, disinfectants and other healthcare
disposables products due to the outbreak of the novel H1N1 flu (swine flu) in April 2009,
(ii) approximately $2,700,000 in higher net sales due to an increase in
selling prices, which were implemented to offset corresponding supplier cost
increases, (iii) the adverse impact on the first quarter of 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 and (iv) approximately $194,000 in incremental net
sales in the first quarter of fiscal 2009 due to the acquisition of Strong
Dental during the first quarter of fiscal 2008. Although the outbreak of the
novel H1N1 flu has resulted in strong sales volume during our fourth quarter of
high margin face masks and other healthcare disposables products, we cannot
provide assurances that such increased sales levels can be sustained throughout
fiscal 2010 since such demand is highly dependent upon the severity and timing
of the novel H1N1 flu, the ability of our Company to educate existing customers
and potential new customers on the benefits of our face masks, disinfectants
and other products and the level of urgency our customers and the general
public develop and maintain with respect to epidemic and pandemic preparedness.
Net sales of endoscope
reprocessing products and services increased by 11.5% in fiscal 2009 compared
with fiscal 2008 primarily due to (i) 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 continued to purchase
high-level disinfectants, cleaners and consumables from us and provide product
service to our customers) to our direct sales and service force at higher
selling prices, (ii) higher selling prices, most of which relates to the
direct sale of disinfectants, consumables and product service, which resulted
in approximately $2,250,000 in incremental net sales in fiscal 2009 compared
with fiscal 2008, and (iii) approximately $184,000 in incremental net
sales in the first quarter of our fiscal 2009 due to the acquisition of
Verimetrix during the first quarter of fiscal 2008. Partially offsetting these
increases was a decrease in sales of endoscope reprocessing equipment in fiscal
2009 as a result of delayed spending on such investments due to the recent
deterioration in the general economy and credit markets, which may continue to
adversely affect future equipment sales.
29
Net sales of water
purification and filtration products and services increased by 4.0% in fiscal
2009 compared with fiscal 2008, primarily due to (i) 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 consumable products in their ordering
system utilized by their dialysis clinics and (ii) higher selling prices,
which offset increased manufacturing costs and favorably impacted net sales in
fiscal 2009 by approximately $2,150,000. Partially offsetting these increases
were delayed investments during fiscal 2009 by customers of our water
purification equipment used for dialysis as well as for commercial and
industrial (large capital) applications as a result of the deterioration in the
general economy and credit markets, which may continue to adversely affect
capital equipment sales, and an $880,000 decrease in sales due to the
translation of Canadian dollar net sales using a weaker Canadian dollar against
the United States dollar.
Net sales contributed by
the Therapeutic Filtration operating segment were $9,523,000, an increase of
14.8%, in fiscal 2009 compared with fiscal 2008. The increase in sales was
primarily due to increases in both international and 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 hemofilter products (filtration devices that perform a slow, continuous
blood filtration therapy used to control fluid overload and acute renal failure
in unstable, critically ill patients who cannot tolerate the rapid filtration
rates of conventional hemodialysis). Increases in selling prices of our
therapeutic filtration products did not have a significant effect on net sales
in fiscal 2009 compared with fiscal 2008.
Net sales of dialysis
products and services decreased by 6.1% in fiscal 2009 compared with fiscal
2008, primarily due to (i) the continuing adverse impact of previously
losing some dialysate concentrate business (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
domestic customers as a result of the highly competitive and price sensitive
market for this low margin commodity product, and (ii) a decrease in net
sales of low margin dialysis reuse supplies. Due to sales price decreases by
some of our competitors, we expect a continued decrease in net sales of our low
margin dialysate concentrate product in fiscal 2010 as we elect not to pursue
unprofitable concentrate sales. Furthermore, Fresenius Medical Care (Fresenius),
the largest dialysis provider chain in the United States, manufactures dialysate
concentrate themselves and has been gradually decreasing their purchases of
that product from us and may continue to do so in fiscal 2010. Additionally, we
cannot provide assurances that the level of concentrate sales to international
customers will be sustained. Partially offsetting these decreases were higher
selling prices, which favorably impacted net sales in fiscal 2009 by
approximately $950,000, 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).
Net sales contributed by
the Specialty Packaging operating segment were $6,355,000 in fiscal 2009, a
decrease of 7.0% compared with fiscal 2008. This decrease in sales was primarily
due to decreased customer demand in the United States for our specialty
packaging products due to changes in regulatory requirements, increased
competition and a decrease in clinical trials by our customers primarily due to
the deterioration in the general economy. Increases in selling prices of our
specialty packaging products did not have a significant effect on net sales in
fiscal 2009 compared with fiscal 2008.
Gross
profit
Gross profit increased by
$11,853,000, or 13.5%, to $99,479,000 in fiscal 2009 from $87,626,000 in fiscal
2008. Gross profit as a percentage of net sales in fiscals 2009 and 2008 was
38.3% and 35.1%, respectively.
The gross profit
percentage in fiscal 2009 increased compared with fiscal 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,
face masks and sterilization accessories in our Healthcare Disposables segment,
and sterilants and filters in our Water Purification and Filtration segment, as
well as decreased sales of our low margin dialysate concentrate product in our
Dialysis 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 to our direct sales and service force at higher selling
prices, (iii) a decrease in raw material and distribution costs in all our
segments due to the lower price of fuel and oil, (iv) improved
efficiencies in our manufacturing, distribution and service functions and (v) 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. However, we cannot
provide assurances that this gross profit percentage can be sustained,
especially if raw materials and distribution costs increase and we are unable
to implement price increases or we experience a significant change in sales mix
away from higher margin products.
30
Operating
expenses
Selling expenses
increased by $1,762,000, or 6.2%, to $30,398,000 in fiscal 2009 from
$28,636,000 in fiscal 2008, primarily due to (i) higher compensation
expense relating to annual salary increases and incentive compensation in all
of our reporting segments and additional sales personnel primarily in our Water
Purification and Filtration and Healthcare Disposables segments and (ii) an
increase of approximately $285,000 in advertising and marketing expense
primarily related to our Healthcare Disposables segment. This increase was
partially offset by a decrease of approximately $280,000 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 11.7% in fiscal 2009 compared with 11.5% in
fiscal 2008.
General and
administrative expenses were $36,998,000 and $37,013,000 in fiscals 2009 and
2008, respectively. General and
administrative expenses decreased principally due to (i) the prior year
inclusion of approximately $720,000 in separation benefits and other costs
related to the resignation of our former President and Chief Executive Officer
on April 22, 2008, (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, (iii) a decrease of approximately
$580,000 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 against the United
States dollar, and (iv) a decrease of $522,000 in amortization expense of
intangible assets. These decreases were offset by an increase in compensation
expense primarily related to annual salary increases and incentive compensation
in all of our locations and an increase of approximately $1,106,000 in
stock-based compensation expense including a $703,000 charge in July 2009
to extend the life of certain out-of-the-money stock options previously
awarded to certain executive officers, as more fully described elsewhere in
this MD&A.
General and
administrative expenses as a percentage of net sales were 14.2% in fiscal 2009
compared with 14.8% in fiscal 2008.
Research and development
expenses (which include continuing engineering costs) were $4,632,000 and
$4,010,000 in fiscals 2009 and 2008, respectively. The increase in research and
development expenses in fiscal 2009, compared with fiscal 2008, is primarily
due to increased development work on certain new products as well as continuing
engineering on existing products primarily in our Water Purification and
Filtration, Endoscope Reprocessing and Therapeutic Filtration segments.
Interest
Interest expense decreased by $1,992,000 to $2,639,000
in fiscal 2009, from $4,631,000 in fiscal 2008, primarily due to decreases in
average outstanding borrowings and average interest rates, partially offset by
a $148,000 charge relating to the ineffective portion of the change in fair
value of an interest rate cap agreement, as more fully described elsewhere in
this MD&A and Note 5 to the Consolidated Financial Statements.
Interest income decreased by $371,000 to $144,000 in
fiscal 2009, from $515,000 in fiscal 2008, primarily due to a decrease in
average interest rates.
Income
from continuing operations before taxes
Income from continuing
operations before income taxes increased by $11,105,000 to $24,956,000 in
fiscal 2009 from $13,851,000 in fiscal 2008. The increase was primarily
attributable to the improved gross profit percentage on increased sales as well
as lower interest expense, as further explained above.
31
Income
taxes
The consolidated effective tax rate was 37.6% and
37.2% in fiscals 2009 and 2008, respectively. The consolidated effective tax
rate for fiscal 2009 was affected principally by the geographic mix of pre-tax
income, repatriation of cash from our foreign subsidiaries and the impact of
various tax rate changes, as described below.
The majority of our income from continuing operations
before income taxes was generated from our United States operations, which had
an overall effective tax rate of 38.6% and 34.4% in fiscals 2009 and 2008,
respectively. The increase in our United States effective tax rate in fiscal
2009, compared with fiscal 2008, was due to an increase in our Federal tax rate
to 35.0% and additional taxes relating to the repatriation of approximately $11,400,000
in earnings from our subsidiaries in Canada and the Netherlands, partially
offset by recently enacted Federal tax legislation that enabled us to claim the
research and experimentation tax credit as well as New York state tax rate
reductions enacted in 2008, which primarily relate to our Healthcare
Disposables segment. Such New York state tax rate reductions had a significant
favorable effect on our fiscal 2008 effective tax rate in the year of
enactment.
Approximately 5% of our fiscal 2009 income from
continuing operations before income taxes was generated from our Canadian
operations, which had an overall effective tax rate in fiscals 2009 and 2008 of
16.8% and 22.5%, respectively. Overall statutory tax rates in Canada are
significantly below comparable rates in the United States. Additionally, the
low overall effective tax rate in fiscal 2009 was attributable to the impact of
a lower overall effective rate in our Specialty Packaging segment due to
recently enacted rate reductions 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 in fiscals 2009 and 2008,
thereby adversely affecting our overall consolidated effective tax rate. The
overall loss from our Netherlands operation in fiscal 2009 decreased compared
with fiscal 2008 as a result of the restructuring of its operations, as more
fully described elsewhere in this MD&A and Note 18 to the Consolidated
Financial Statements.
The results of operations for our subsidiaries in
Japan and Singapore did not have a significant impact on our overall effective
tax rate in fiscals 2009 and 2008 due to the size of these operations relative
to our United States, Canada and Netherlands operations. However, during fiscal
2008, we decided to place a full valuation allowance against the NOLs of our
Japanese subsidiary, which resulted in the recording of tax expense on the past
losses of our subsidiary in Japan.
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 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
have been recorded as an increase or decrease to goodwill. On August 1, 2009,
we adopted Statement of Financial Accounting Standard (SFAS) No. 141 (Revised 2007),
Business
Combinations
(SFAS 141R), which requires the resolution of income
tax uncertainties that predate or result from acquisitions to be recognized in
our results of operations beginning with fiscal 2010. However, if our
unrecognized tax benefits are recognized in our financial statements in future
periods, there would not be a significant impact to our effective tax rate due
to the size of the unrecognized tax benefits in relation to our income from
continuing operations before income taxes. 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
|
|
Lapse of statute
of limitations
|
|
(47,000
|
)
|
Unrecognized tax
benefits on July 31, 2009
|
|
$
|
380,000
|
|
32
Generally,
the Company is no longer subject to federal, state or foreign income tax
examinations for fiscal years ended prior to July 31, 2003.
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
Consolidated Financial Statements. However, such amounts have been relatively
insignificant due to the amount of our unrecognized tax benefits relating to
uncertain tax positions.
Stock-Based
Compensation
The following table shows
the income statement components of stock-based compensation expense recognized
in the Consolidated Statements of Income:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
70,000
|
|
$
|
43,000
|
|
$
|
43,000
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
|
|
216,000
|
|
123,000
|
|
159,000
|
|
General and
administrative
|
|
2,884,000
|
|
1,778,000
|
|
1,258,000
|
|
Research and
development
|
|
17,000
|
|
17,000
|
|
22,000
|
|
Total operating
expenses
|
|
3,117,000
|
|
1,918,000
|
|
1,439,000
|
|
Stock-based
compensation before income taxes
|
|
3,187,000
|
|
1,961,000
|
|
1,482,000
|
|
Income tax
benefits
|
|
(1,226,000
|
)
|
(758,000
|
)
|
(490,000
|
)
|
Total
stock-based compensation expense, net of tax
|
|
$
|
1,961,000
|
|
$
|
1,203,000
|
|
$
|
992,000
|
|
The
above stock-based compensation expense before income taxes was recorded in the
Consolidated Financial Statements as stock-based compensation expense (which
decreased both basic and diluted earnings per share from continuing operations
by $0.12, $0.07 and $0.06 in fiscals 2009, 2008 and 2007, respectively) 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.
On July 31, 2009, we
extended the life of 456,001 fully vested out-of-the-money stock options
previously awarded to certain executive officers (seven individuals in total)
under our 1997 Employee Stock Option Plan. Such options were scheduled to
expire within six months after July 31, 2009 and had exercise prices ranging
from $17.14 to $22.93, which were greater than the closing price of $15.48 on
July 31, 2009, the date the Compensation Committee of our Board of Directors
authorized the modification. The sole modification was to extend the options
expiration dates to January 31, 2011. All other terms and conditions of the
stock options remain the same. As a result of this modification, approximately
$703,000 in additional stock-based compensation expense was recorded in our
Consolidated Financial Statements on July 31, 2009, which decreased both basic
and diluted earnings per share by $0.03.
The stock-based
compensation expense recorded in our Consolidated Financial Statements may not
be representative of the effect of stock-based compensation expense in future
periods due to the level of awards issued in past years (which level may not be
similar in the future), assumptions used in determining fair value, expected
lives 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.
33
Most of our stock
option 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 July 31, 2009,
total unrecognized stock-based compensation expense, net of tax, related to
total nonvested stock options and stock awards which are expected to vest was
$2,157,000 with a remaining weighted average period of 20 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. In fiscals 2009 and 2008, options exercised and the vesting of
restricted stock resulted in income tax deductions that reduced income taxes
payable by $745,000 and $895,000, respectively.
We classify the cash flows resulting from excess tax benefits as
financing cash flows on our 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.
Fiscal 2008 compared with Fiscal 2007
Net sales
Net sales increased by
$30,330,000, or 13.8%, to $249,374,000 in fiscal 2008 from $219,044,000 in
fiscal 2007. Net sales of our pre-existing business increased by $13,154,000,
or 6.2%, to $225,249,000 in fiscal 2008 compared with $212,095,000 in fiscal
2007. Net sales contributed by the GE Water Acquisition in fiscal 2008 and 2007
were $24,125,000 and $6,949,000, respectively.
Net sales were positively
impacted in fiscal 2008 compared with fiscal 2007 by approximately $1,040,000
due to the translation of euro net sales primarily of our Endoscope
Reprocessing and Dialysis operating segments using a stronger euro against the
United States dollar.
In addition, net sales
were positively impacted in fiscal 2008 compared with fiscal 2007 by
approximately $815,000 due to the translation of Canadian dollar net sales primarily
of our Water Purification and Filtration operating segment using a stronger
Canadian dollar against the United States dollar.
Although
net sales in all of our reporting segments increased in fiscal 2008, the
increase in net sales of our pre-existing business in fiscal 2008 was
principally attributable to increases in sales of endoscope reprocessing
products and services and water purification and filtration products and
services.
Net sales of endoscope reprocessing products and
services increased by 20.5% in fiscal 2008, compared with fiscal 2007,
primarily due to (i) an increase in demand for our endoscope disinfection
equipment and disinfectants both internationally and in the United States and
product service in the United States, (ii) approximately $1,950,000 in
incremental net sales in fiscal 2008 due to the acquisition of Verimetrix on
September 17, 2007 and (iii) approximately $1,670,000 in higher net sales due
to an increase in selling prices of our Medivators endoscope reprocessing equipment
and related products and service in the United States as a result of selling
directly to our customers and not through a distributor. Beginning in our
second quarter of fiscal 2007, we commenced the sale of equipment directly to
our customers in the United States. Although this distributor continued to
purchase high-level disinfectants, cleaners and consumables from us and provide
product service to our customers during fiscals 2008 and 2007, we have been
gradually converting the sale of such items to our direct sales and service
force at higher selling prices. The increase in demand for our disinfectants
and product service is also attributable to the increased field population of
equipment and our ability to convert users of competitive disinfectants to our
products.
Net sales of water purification and filtration
products and services from our pre-existing business increased by 5.7% in
fiscal 2008 compared with fiscal 2007, primarily due to an increase in demand
for our water purification equipment from dialysis customers as well as an
increase in service revenue from the improved density and efficiency of our
pre-existing service delivery network partially due to recent acquisitions.
This increase was partially offset in fiscal 2008 by a decrease in commercial
and industrial (large capital) equipment sales as a result of (i) our decision
made in early fiscal 2007 to refocus our efforts on selling large capital
equipment with standardized designs instead of customized designs that have
historically
34
provided lower profitability and (ii) delayed investments in capital
equipment by customers due to the softening of the United States economy.
Increases in selling prices of our water purification products and services did
not have a significant effect on net sales in fiscal 2008 compared with fiscal
2007.
With respect to GE Water, which is excluded from the
above discussion of our pre-existing business, average quarterly sales of water
purification and filtration products and services in fiscal 2008 were
approximately 15% higher when compared with the post-acquisition period ended
July 31, 2007, due to improved sales opportunities within the installed
equipment base of business as a result of combining GE Water with our
pre-existing water purification and filtration business.
Net sales of dialysis
products and services increased by 2.3% in fiscal 2008, compared with fiscal
2007, primarily due to (i) increased demand during the first nine months of
fiscal 2008 from customers, both in the United States and internationally, for
dialysate concentrate (a concentrated acid or bicarbonate used to prepare
dialysate, a chemical solution that draws waste products from a patients blood
through a dialyzer membrane during hemodialysis treatment) and (ii) higher
selling prices primarily on dialysate concentrate, including freight invoiced
to customers (related costs of a similar amount are included within cost of
sales), to partially offset increased manufacturing and shipping costs. This
increase in net sales was partially offset by a decrease of approximately
$2,600,000, or 27%, in net sales of dialysate concentrate during the three
months ended July 31, 2008, compared with the three months ended July 31, 2007,
due to the loss of some dialysate concentrate business as a result of the
highly competitive and price sensitive market for this low margin commodity
product.
Net sales of healthcare disposable products increased
by 1.8% in fiscal 2008, compared with fiscal 2007, primarily due to (i) an
increase in demand during the second half of fiscal 2008 for our instrument
sterilization pouches, cups, towels and face mask products, (ii) approximately
$2,032,000 in incremental net sales in fiscal 2008 due to the acquisitions of
Strong Dental on September 26, 2007 and Twist on July 9, 2007 and (iii)
approximately $1,639,000 in higher net sales due to an increase in selling
prices. Such selling price increases were implemented to offset corresponding
supplier cost increases and therefore did not have a significant impact on
gross profit. Partially offsetting these increases in 2008 net sales were (i) a
high level of demand during the first three months of fiscal 2007 for face mask
products due to a heightened awareness of avian flu prevention and (ii)
distributors of our dental products had undergone consolidation during 2007,
which has adversely impacted sales of our Healthcare Disposables segment in
fiscal 2008 due to the loss of some private label business, and with respect to
the first three months of fiscal 2008 and our fourth quarter of fiscal 2007,
rationalization of duplicate inventories in the consolidated companies.
Net sales contributed by the
Therapeutic Filtration operating segment were $8,294,000, an increase of 6.5%,
in fiscal 2008 compared with fiscal 2007. The increase in sales in fiscal 2008
was primarily due to
the recommencement in February 2007 of sales of
filters manufactured by us on an OEM basis for a single customers hydration
system. This customer had previously experienced a voluntary recall of the
system (unrelated to our product) and was not purchasing filters until their
sales of hydration systems recommenced.
Increases in selling prices of
our therapeutic filtration products did not have a significant effect on net
sales in fiscal 2008 compared with fiscal 2007.
Net
sales contributed by the Specialty Packaging operating segment were $6,835,000,
a decrease of 2.1%, in fiscal 2008 compared with fiscal 2007. This decrease in
sales was primarily due to decreased customer demand in the United States for
our compliance training products due to the timing of orders relating to the
government mandated two-year compliance certification period, partially offset
by increases in selling prices of approximately $240,000.
Gross
profit
Gross profit increased by
$8,614,000, or 10.9%, to $87,626,000 in
fiscal 2008 from $79,012,000 in fiscal 2007. Gross profit of our pre-existing
business increased by $4,197,000, or 5.5%, to $81,205,000 in fiscal 2008 from $77,008,000 in fiscal 2007. Gross profit
contributed by the GE Water Acquisition in fiscal 2008 and for the four month
period ended July 31, 2007
(since the date of the acquisition)
was $6,421,000 and $2,004,000, respectively.
Gross profit as a percentage of net sales in fiscals
2008 and 2007 was 35.1% and 36.1%, respectively. Gross profit as a percentage
of net sales of our pre-existing business in fiscals 2008 and 2007 was 36.1%
and 36.3%, respectively. Gross profit as a percentage of net sales for the GE
Water Acquisition in fiscal 2008
and for
the four month period ended July 31, 2007
(since the date of the
acquisition)
was 26.6% and 28.8%,
respectively.
The gross profit percentage of our pre-existing
business in fiscal 2008 decreased compared with fiscal 2007 primarily due to
(i) a change in sales mix, including increases in sales of Renalin sterilant to
large national chains that
35
typically receive more favorable pricing, and lower margin water
purification services, and with respect to the first six months of fiscal 2008
a decrease in sales of certain higher margin healthcare disposables products
such as face masks, (ii) an increase in raw material, manufacturing and
shipping costs in all of our operating segments, (iii) unabsorbed manufacturing
overhead due to the decrease in commercial and industrial (large capital)
equipment sales in our Water Purification and Filtration segment, (iv)
inefficiencies in our Water Purification and Filtration segment as a result of
the integration of the GE Water Acquisition into our pre-existing business,
which is now complete, and (v) approximately $275,000 in restructuring charges
recorded primarily in our Endoscope Reprocessing segment in our fourth quarter
of fiscal 2008 relating to the relocation of our Netherlands manufacturing
operations, as more fully described elsewhere in this MD&A. Partially
offsetting these decreases was an increase in gross profit percentage in our
Endoscope Reprocessing segment as a result of selling our Medivators brand
endoscope reprocessing equipment and related products and service directly to
customers through our own United States field sales and service organization
instead of through a distributor as was done during a significant portion of the
first three months of fiscal 2007. Additionally, although this distributor
continued to purchase high-level disinfectants, cleaners and consumables from
us and provide product service to our customers during fiscals 2008 and 2007,
we have been gradually converting the sale of such high margin items to our
direct sales and service force resulting in an increase in gross profit
percentage.
With respect to GE Water, which is excluded from the
above discussion of our pre-existing business, the gross profit percentage of
water purification and filtration products and services decreased to
approximately 26.6% in fiscal 2008 from 28.8% for the four months ended July
31, 2007 (since the date of the acquisition) due to increased manufacturing
costs.
With respect to the increase in the amount of gross
profit (as opposed to the discussion of gross profit percentage), increases in
net sales as explained above constitute the most significant factor in the
increase in gross profit.
Operating
expenses
Selling expenses increased by
$4,818,000, or 20.2%, to $28,636,000 in fiscal 2008 from $23,818,000 in fiscal
2007 principally due to higher compensation expense of approximately $3,900,000
(including travel costs) primarily relating to increased commissions on increased
sales by our endoscope reprocessing direct sales network and additional
headcount resulting from the GE Water Acquisition; an increase of approximately
$340,000 in advertising and marketing expense primarily related to our
Healthcare Disposables segment; and
an increase of approximately $280,000 as a result of
translating selling expenses of our international subsidiaries using a
significantly stronger Canadian dollar and euro against the United States
dollar.
Selling expenses as a
percentage of net sales were 11.5% in fiscal 2008 compared with 10.9% in fiscal
2007. Increases in selling expenses as explained above constitute the most
significant factor in the higher selling expense as a percentage of net sales.
General and administrative expenses increased by $3,506,000, or 10.5%,
to $37,013,000 in fiscal 2008 from $33,507,000 in fiscal 2007 principally
due to an increase of approximately
$1,200,000 in compensation expense due to additional headcount in our Water
Purification and Filtration segment, annual salary increases, severance expense
related to the relocation of our Medivators manufacturing operations from the
Netherlands to the United States and incentive compensation relating to the
DSI, Verimetrix and Strong Dental acquisitions; an increase of $782,000 in
amortization expense of intangible assets primarily relating to our
acquisitions of GE Water,
Twist, DSI,
Verimetrix and Strong Dental
; the inclusion of approximately $720,000 in
estimated separation benefits and other costs related to the resignation of our
former President and Chief Executive Officer on April 22, 2008, as more fully
described elsewhere in this MD&A; an increase in stock-based compensation
expense of $520,000; and an increase of approximately $565,000 as a result of
foreign exchange losses associated with translating certain foreign denominated
assets into functional currencies as well as the translation of general and
administrative expenses of our international subsidiaries using a significantly
stronger Canadian dollar and euro against the United States dollar. Partially
offsetting these increases was the non-reoccurrence of $137,000 in incentive
compensation directly related to the GE Water Acquisition, which was incurred
during the three months ended April 30, 2007.
General
and administrative expenses as a percentage of net sales were 14.8% in fiscal
2008, compared with 15.3% in fiscal 2007.
Research and development
expenses (which include continuing engineering costs) were $4,010,000 and
$4,848,000 in fiscals 2008 and 2007, respectively.
The majority of our research and development expenses
related to our MDS endoscope reprocessor and specialty filtration products. The
decrease in research and development expense in fiscal 2008, compared with
fiscal 2007, is due to less development work on the European version of our MDS
endoscope reprocessor.
36
Interest
Interest expense
increased by $1,123,000 to $4,631,000 in fiscal 2008 from $3,508,000 in fiscal
2007 primarily due to the increase in average outstanding borrowings as a
result of financing the purchase prices of the acquisitions of GE Water, DSI,
Verimetrix and Strong Dental.
Interest income decreased
by $256,000 to $515,000 in fiscal 2008 from $771,000 in fiscal 2007 primarily
due to a lower average balance of cash and cash equivalents and a decrease in
average interest rates.
Income
from continuing operations before taxes
Income from continuing
operations before income taxes decreased by $251,000 to $13,851,000 in fiscal
2008 from $14,102,000 in fiscal 2007.
Income
taxes
The consolidated
effective tax rate was 37.2% and 42.5% for fiscals 2008 and 2007, respectively.
The decrease in the consolidated effective tax rate was affected principally by
the geographic mix of pre-tax income and statutory tax rate reductions as
described below.
The majority of our
income from continuing operations before income taxes is generated from our
United States operations, which had an overall effective tax rate in fiscal
2008 of 34.4%. This low overall effective rate is principally caused by (i) our
combined federal and state statutory tax rate of approximately 37.5% as applied
to current operations and (ii) recently enacted New York state tax rate
reductions as applied to existing deferred income tax liabilities in our
Healthcare Disposables segment.
Our Canadian operations
had an overall effective tax rate in fiscal 2008 of 22.5%, which overall rate
was favorably impacted by recently enacted Canadian federal tax rate reductions
as applied to existing deferred income tax liabilities in the Canadian portion
of our Water Purification and Filtration business.
A tax benefit was not
recorded on the losses from operations at our Netherlands subsidiary for
fiscals 2008 and 2007, thereby causing our overall consolidated effective tax
rate to exceed the effective tax rates in our United States and Canadian
operations. Although we continued to incur an overall loss from our Netherlands
operation in fiscal 2008, such loss decreased significantly compared to fiscal
2007. In fiscal 2009, we completed the restructuring of our Netherlands
operation as described in Note 18 to the Consolidated Financial Statements and
elsewhere in this MD&A.
Additionally, during
fiscal 2008 we decided to place a full valuation allowance against the NOLs of
our Japanese subsidiary, which resulted in the recording of tax expense on the
past losses of our subsidiary in Japan. The results of continuing operations
for our subsidiary in Singapore did not have a significant impact on our
overall effective tax rate for fiscal 2008 due to the size of the operation
relative to our United States, Canada and Netherlands operations.
In July 2006, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48), which
clarifies the accounting and reporting for uncertainties in income tax law. FIN
48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN 48 is effective for fiscal
years beginning after December 15, 2006 and therefore was adopted on August 1,
2007. The adoption of FIN 48 did not have a material effect on our financial
position or results of operations since, after the completion of our evaluation,
we did not record an increase or decrease to our income taxes payable or
deferred tax liabilities related to unrecognized income tax benefits for
uncertain tax positions.
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
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 on continuing operations. We do not expect such
37
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
|
|
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 Consolidated Financial Statements.
However, such amounts have been relatively insignificant due to the amount of
our unrecognized tax benefits relating to uncertain tax positions.
Stock-Based
Compensation
The following table shows
the income statement components of stock-based compensation expense recognized
in the Consolidated Statements of Income:
|
|
Year
Ended July 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
43,000
|
|
$
|
43,000
|
|
$
|
50,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling
|
|
123,000
|
|
159,000
|
|
141,000
|
|
General and
administrative
|
|
1,778,000
|
|
1,258,000
|
|
845,000
|
|
Research and
development
|
|
17,000
|
|
22,000
|
|
20,000
|
|
Total operating
expenses
|
|
1,918,000
|
|
1,439,000
|
|
1,006,000
|
|
Discontinued operations
|
|
|
|
|
|
122,000
|
|
Stock-based
compensation before income taxes
|
|
1,961,000
|
|
1,482,000
|
|
1,178,000
|
|
Income tax benefits
|
|
(758,000
|
)
|
(490,000
|
)
|
(248,000
|
)
|
Total stock-based
compensation expense, net of tax
|
|
$
|
1,203,000
|
|
$
|
992,000
|
|
$
|
930,000
|
|
The above stock-based
compensation expense before income taxes was recorded in the Consolidated
Financial Statements as stock-based compensation expense (which decreased both
basic and diluted earnings per share from net income by $0.07, $0.06 and $0.05
in fiscals 2008, 2007 and 2006, respectively) and an increase to additional
capital. The related income tax benefits (which pertain only to stock awards
and options that do not qualify as incentive stock options) were recorded as an
increase to long-term deferred income tax assets (which are netted with
long-term deferred income tax liabilities) or a reduction to income taxes
payable, depending on the timing of the deduction, and a reduction to income
tax expense.
The stock-based
compensation expense recorded in our Consolidated Financial Statements may not
be representative of the effect of stock-based compensation expense in future
periods due to the level of awards issued in past years (which level may not be
similar in the future), assumptions used in determining fair value and
estimated forfeitures. We determine the fair value of each 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
38
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
option 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 July 31,
2008, total unrecognized stock-based compensation expense, net of tax, related
to total nonvested stock options and stock awards was $2,262,000 with a
remaining weighted average period of 27 months over which such expense is
expected to be recognized.
If certain
criteria are met when options are exercised, or with respect to incentive stock
options the underlying shares are sold, the Company is allowed a deduction on
its income tax return. Accordingly, we account for the income tax effect on
such income tax deductions as additional capital (assuming deferred tax assets
do not exist pertaining to the exercised stock options) and as a reduction of
income taxes payable. In fiscals 2008 and 2007, options exercised resulted in
income tax deductions that reduced income taxes payable by $895,000 and
$1,137,000, respectively.
We classify the cash flows resulting from excess tax benefits as
financing cash flows on our 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 July 31, 2009,
our working capital was $49,797,000, compared with $45,639,000 at July 31,
2008.
Cash
flows from operating activities
Net cash provided by
operating activities was $30,992,000, $18,557,000 and $5,967,000 for fiscals
2009, 2008 and 2007, respectively. With respect to continuing operations only,
net cash provided by operating activities was $30,992,000, $18,650,000 and
$10,834,000 for fiscals 2009, 2008 and 2007, respectively.
In fiscal 2009,
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) and a decrease in inventories (due to strong
July sales in our Healthcare Disposables and Endoscope Reprocessing segments
as well as a decrease in the cost of certain raw materials), partially offset
by an increase in prepaid expenses and other current assets (due to an increase
in prepaid commissions relating to service contracts in our Endoscope
Reprocessing segment, as well as the timing of certain insurance premium
payments).
In fiscal 2008, 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 timing associated
with payments), partially offset by increases in inventories (due to planned
increases in stock levels of certain products primarily in our Endoscope
Reprocessing and Healthcare Disposables segments) and prepaid expenses (due to
the prepayment of certain operating expenses primarily relating to
commissions).
In fiscal 2007, 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) and an increase in accounts payable and accrued expenses
(due to increased purchases in July to meet product demand and additional
compensation as a result of more personnel, including the additional sales and
service personnel of our Endoscope Reprocessing operating segment). These items
were partially offset by increases in (i) accounts receivable (due to
strong sales in the months of July and June, including sales related to
the GE Water Acquisition, and increases in customer prices in our Endoscope
Reprocessing operating segment as a result of the direct sales effort) and (ii) inventories
(due to planned increases in stock levels of certain products) and decreases in
(i) net liabilities of discontinued operations (due to the wind-down of
Carsens
39
operations including substantial tax payments that were payable in
fiscal 2007) and (ii) income taxes payable (due to timing associated with
payments).
Cash
flows from investing activities
Net cash used in
investing activities was $11,450,000, $18,466,000 and $41,535,000 in fiscals
2009, 2008 and 2007, respectively. In fiscal 2009, net cash used in investing
activities was primarily for the acquisition of G.E.M, a payment for an
acquisition earnout to the former owners of Crosstex and capital expenditures,
partially offset by proceeds from the disposal of our building in the Netherlands.
In fiscal 2008, 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. In fiscal
2007, net cash used in investing activities was primarily due to the
acquisitions of GE Water and Twist, an earnout payment to the former owners of
Crosstex and capital expenditures.
Cash
flows from financing activities
Net cash used in
financing activities was $13,820,000 in fiscal 2009, compared with net cash
provided by financing activities of $1,882,000 and $21,082,000 in fiscals 2008
and 2007, respectively. In fiscal 2009, 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. In
fiscal 2008, 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 and proceeds
from the exercises of stock options, partially offset by repayments under our
credit facilities and purchases of treasury stock. In fiscal 2007, net cash
provided by financing activities was primarily attributable to borrowings under
our revolving credit facility related to the acquisition of GE Water, net of
debt issuance costs and proceeds from the exercises of stock options, partially
offset by repayments under our credit facilities and purchases of treasury
stock.
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 repurchased shares from time-to-time at
prevailing prices and as permitted by applicable securities laws (including SEC
Rule 10b-18) and New York Stock Exchange requirements. The repurchase
program had a one-year term that expired 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 were made subsequent to the end
of our first quarter ended October 31, 2008. Therefore, at the conclusion
of the repurchase program on June 8, 2009, we had repurchased 134,547
shares under the repurchase program at a total average price per share of
$9.34.
In April 2006,
our Board of Directors approved the repurchase of up to 500,000 shares of our
outstanding Common Stock under a repurchase program that expired on April 12,
2007. We repurchased 464,800 shares under that repurchase program at a total
average price per share of $14.02. Of the 464,800 shares, 161,800 and 303,000
shares were repurchased during fiscals 2007 and 2006, respectively.
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.
In fiscals 2009
and 2008, we recorded $345,000 and $365,000, respectively, in restructuring
expenses, which decreased both basic and diluted earnings per share from
continuing operations by approximately $0.02 in both years. The cumulative
amount of such costs incurred as of July 31, 2009 was $710,000. The
restructuring plan has been completed and
40
therefore we do not
expect to incur any additional restructuring costs. The decrease in the total
expected restructuring expense estimated at July 31, 2008 compared to
actual costs incurred in fiscal 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 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 ended
April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
13,000
|
|
13,000
|
|
13,000
|
|
Foreign currency
translation
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
5,000
|
|
Accrued balance at
April 30, 2009
|
|
100,000
|
|
|
|
100,000
|
|
|
|
13,000
|
|
13,000
|
|
113,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
July 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
(13,000
|
)
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
(13,000
|
)
|
Paid
|
|
|
|
|
|
|
|
|
|
(13,000
|
)
|
(13,000
|
)
|
(13,000
|
)
|
Inventory disposal
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
(40,000
|
)
|
Foreign currency
translation
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
6,000
|
|
Accrued balance at
July 31, 2009
|
|
$
|
53,000
|
|
$
|
|
|
$
|
53,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring
expenses incurred
|
|
$
|
208,000
|
|
$
|
230,000
|
|
$
|
438,000
|
|
$
|
247,000
|
|
$
|
25,000
|
|
$
|
272,000
|
|
$
|
710,000
|
|
Since the above costs
were recorded in our Netherlands subsidiary, which had 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
Consolidated Balance Sheets.
As part of the
restructuring plan, we sold our Netherlands building and land on May 19,
2009 and entered into a lease for 2.5 years with the new owner so we can
continue to use the facility as our European sales and service headquarters as
well as for warehouse and distribution activity. At July 31, 2008, these
assets had a book value of $1,808,000, net of accumulated depreciation, and
were included in property and equipment in our Consolidated Balance Sheet. The
sale of the building and land resulted in a gain of $146,000, which will be
amortized over the life of the lease and is recorded in deferred revenue and
other long-term liabilities. The rent for the full 2.5 year lease of $325,000
was paid from the sale proceeds and recorded as a prepaid expense in the
Consolidated Financial Statements.
41
Discontinued
Operations -Termination of Carsens Operations
On July 31,
2006, Carsen closed the sale of substantially all of its assets to Olympus
under an Asset Purchase Agreement dated as of May 16, 2006 among Carsen,
Cantel and Olympus. Olympus purchased substantially all of Carsens assets
other than those related to Carsens Medivators business and certain other
smaller product lines. Following the closing, Olympus hired substantially all
of Carsens employees and took over Carsens Olympus-related operations (as
well as the operations related to the other acquired product lines). The
transaction resulted in an after-tax gain of $6,776,000 and was recorded
separately on the Consolidated Statement of Income for the year ended July 31,
2006 as gain on disposal of discontinued operations, net of tax. In connection
with the transaction, Carsens Medivators-related assets as well as certain of
its other assets that were not acquired by Olympus were sold to our new Canadian
distributor of Medivators products.
The purchase price for
the net assets sold to Olympus was approximately $31,200,000, comprised of a
fixed sum of $10,000,000 plus an additional formula-based sum of $21,200,000.
In addition, Olympus paid Carsen 20% of Olympus revenues attributable to
Carsens unfilled customer orders (backlog) as of July 31, 2006 that
were assumed by Olympus at the closing. Such payments to Carsen were made
following Olympus receipt of customer payments for such orders and totaled
$368,000. In fiscal 2007, the entire $368,000 related to such backlog was
recorded as income and reported in income from discontinued operations, net of
tax, in the Consolidated Statements of Income.
The $10,000,000
fixed portion of the purchase price was in consideration for (i) Carsens
customer lists, sales records, and certain other assets related to the sale and
servicing of Olympus products and certain non-Olympus products distributed by
Carsen, (ii) the release of Olympus contractual restriction on hiring
Carsen personnel, (iii) real property leases (which were assumed or
replaced by Olympus) and leasehold improvements, computer and software systems,
equipment and machinery, telephone systems, and records related to the acquired
assets, and (iv) assisting Olympus in effecting a smooth transition of
Carsens business of distributing and servicing Olympus and certain non-Olympus
products in Canada. Cantel has also agreed (on behalf of itself and its
affiliates) not to manufacture, distribute, sell or represent for sale in
Canada through July 31, 2008 any products that are competitive with the
Olympus products formerly sold by Carsen under its Olympus Distribution
Agreements.
The $21,200,000
formula-based portion of the purchase price was based on the book value of
Carsens inventories of Olympus and certain non-Olympus products and the net
book amount of Carsens accounts receivable and certain other assets, all at July 31,
2006, subject to offsets, particularly for accounts payable of Carsen due to
Olympus.
Net proceeds from
Carsens sale of net assets and the termination of Carsens operations were
approximately $21,100,000 (excluding the backlog payments) after satisfaction
of remaining liabilities and taxes.
As a result of the
foregoing transaction, which coincided with the expiration of Carsens
exclusive distribution agreements with Olympus on July 31, 2006, Carsen no
longer has any remaining product lines or active business operations.
Cash flows
attributable to discontinued operations consist solely of net cash used in
operating activities of $93,000 and $4,867,000 in fiscals 2008 and 2007,
respectively. In fiscal 2008, net cash used in operating activities was due to
the payment of Carsens remaining liabilities that existed at July 31, 2007,
which primarily related to various
taxes. In fiscal 2007, net cash used in operating activities was
primarily due to the payment of Carsens remaining operating costs relating to
fiscal 2006, income tax payments and various wind-down costs, partially offset
by the collection of the remaining receivables.
42
Long-term
contractual obligations
As of July 31, 2009,
aggregate annual required payments over the next five years and thereafter
under our contractual obligations that have long-term components are as
follows:
|
|
Year
Ended July 31,
|
|
|
|
(Amounts
in thousands)
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of the credit
facilities
|
|
$
|
10,000
|
|
$
|
33,300
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
43,300
|
|
Expected interest
payments under the credit facilities (1)
|
|
1,195
|
|
119
|
|
|
|
|
|
|
|
|
|
1,314
|
|
Minimum commitments
under noncancelable operating leases
|
|
3,206
|
|
2,162
|
|
1,256
|
|
799
|
|
660
|
|
2,977
|
|
11,060
|
|
Minimum commitments
under noncancelable capital leases
|
|
53
|
|
14
|
|
|
|
|
|
|
|
|
|
67
|
|
Deferred compensation
and other
|
|
405
|
|
406
|
|
250
|
|
32
|
|
33
|
|
166
|
|
1,292
|
|
Employment agreements
|
|
3,301
|
|
148
|
|
138
|
|
|
|
|
|
|
|
3,587
|
|
Total contractual
obligations
|
|
$
|
18,160
|
|
$
|
36,149
|
|
$
|
1,644
|
|
$
|
831
|
|
$
|
693
|
|
$
|
3,143
|
|
$
|
60,620
|
|
(1)
The expected interest payments under the term and
revolving credit facilities reflect interest rates of 2.15% and 3.70%,
respectively, which were our interest rates on outstanding borrowings at
July 31, 2009. Since we expect to modify our credit facilities before the
expiration date of our revolving credit facility, as further explained below,
the margin applicable to our interest rates on outstanding borrowings may
increase during fiscal 2010.
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 are recorded in other assets and are being amortized over the life
of the credit facilities. Such unamortized debt issuance costs amounted to
approximately $587,000 at July 31, 2009.
At September 18,
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 September 18, 2009, the
lenders base rate was 3.25% and the LIBOR rates applicable to our outstanding
borrowings ranged from 0.33% to 3.35%. The margins applicable to our
outstanding borrowings at September 18, 2009 were 0.00% above the lenders
base rate and 0.75% above LIBOR. Substantially all of our outstanding
borrowings were under LIBOR contracts at September 18, 2009. The majority
of such contracts were twelve month LIBOR contracts; therefore, we are
substantially protected throughout most of fiscal 2010 from any exposure
associated with increasing LIBOR rates. 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 0.20% at September 18, 2009.
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 was
previously included in other assets, was $148,000. During fiscal 2009, the
difference between the interest rate cap agreements amortized cost and its
fair value was recorded as an unrealized loss and included in accumulated other
comprehensive income. In July 2009, the interest rate cap agreement was
determined to be ineffective since the interest
43
rates on substantially all of our outstanding borrowings under our term
loan facility were protected under LIBOR contracts substantially below 4.25%.
Accordingly, we reclassified the $148,000 change in fair value of the interest
rate cap agreement from an unrealized loss in accumulated other comprehensive
income into a recognized loss in interest expense in the Consolidated
Statements of Income. No further gains or losses relating to this interest rate
cap agreement will occur in the future.
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 July 31, 2009, we were in compliance with all
financial and other covenants under the 2005 U.S. Credit Facilities.
On July 31,
2009, we had $43,300,000 of outstanding borrowings under the 2005 U.S. Credit
Facilities, which consisted of $20,000,000 and $23,300,000 under the term loan
facility and the revolving credit facility, respectively. In September 2009,
we repaid $2,800,000 under the revolving credit facility and $2,500,000 under
our term loan facility reducing our total outstanding borrowings to
$38,000,000.
The revolving
portion of our credit facilities has a termination date of August 1,
2010. Although we may repay a portion of our outstanding borrowings under
the revolver throughout fiscal 2010, we do not presently anticipate paying off
the revolver in full by its termination date. We are in discussions with
our bank syndicate regarding modifications to such facility, including an
extension of the termination date, and expect to formally modify the facility
before the expiration date. However, since any modification will not be
completed until later in fiscal 2010, subsequent to July 31, 2009 we will
be required to reclassify the entire outstanding balance of the revolver from
long-term to current.
Operating
leases
Minimum commitments under
operating leases include minimum rental commitments for our leased
manufacturing facilities, warehouses, office space and equipment.
Rent expense related to
operating leases for fiscal 2009 was recorded on a straight-line basis and
aggregated $3,679,000, compared with $3,466,000 and $3,531,000 for fiscals 2008
and 2007, respectively.
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. In fiscal 2009, the license agreement was modified to reduce the royalty
rate and remove the minimum royalty obligation.
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 executives of the Company,
including our Corporate executive staff and our subsidiary presidents. The
majority of such contracts have expired or will expire in early fiscal 2010.
The Compensation Committee of the Board of Directors is actively working on new
agreements and has retained a third party consulting firm to provide advice on
executive compensation and to assist with this process. In the interim, the
Compensation Committee has agreed that in the event the employment of any of
these executives is terminated by the Company without cause, the executive will
continue to receive his base salary through July 31, 2010.
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, all of which was paid in fiscal 2009.
44
Convertible
note receivable
In February 2009, we
invested an initial $200,000 in a senior subordinated convertible promissory
note (the Note) issued by BIOSAFE, Inc. (BIOSAFE), in connection with
BIOSAFEs grant to us of certain exclusive and non-exclusive license rights to
BIOSAFEs antimicrobial additive. BIOSAFE is the owner of a patented and
proprietary antimicrobial agent that is built into the manufacturing of
end-products to achieve long-lasting microbial protection on such end-products
surface. As a result of BIOSAFEs successful raising of a minimum incremental
amount of cash following our investment, we are obligated to invest an
additional $300,000 in notes of BIOSAFE, which is expected to occur in the
first half of fiscal 2010.
The Note accrues interest
at a per annum rate of 8% until the maturity date of June 30, 2011 or
earlier exercise. The Note is convertible into a newly-created series of
preferred stock of BIOSAFE. Interest is payable in shares of BIOSAFE stock, or
if a next round of financing does not occur by the maturity date, in cash. If
not paid by the maturity date, interest will accrue thereafter at a rate of 12%
per annum. In connection with our
investment, we entered into a license agreement with BIOSAFE under which we
will pay BIOSAFE a fixed royalty percentage of sales of our products containing
BIOSAFEs antimicrobial formulation. This investment, together with the accrued
interest of $7,000, is included within other assets in our Consolidated Balance
Sheet at July 31, 2009.
Financing
needs
At July 31, 2009, we
had a cash balance of $23,368,000, of which $8,275,000 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 September 18,
2009, $26,700,000 was available under our United States revolving credit
facility, which expires on August 1, 2010.
Notwithstanding
our cash position and revolving credit borrowing availability, under the terms
of our credit facilities we are limited to the amount of aggregate purchase
price we pay for acquisitions during the duration of the credit agreement
without obtaining prior bank approval. As of July 31, 2009, the remaining
purchase price available for future acquisitions without obtaining prior bank
approval is approximately $2,500,000.
Foreign
currency
In fiscal 2009,
compared with fiscal 2008, the average value of the Canadian dollar decreased
by approximately 13.5% relative to the value of the United States dollar.
Additionally, at July 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 4.4%. The financial statements of our Canadian
subsidiaries are translated using the accounting policies described in Note 2
of the Consolidated Financial Statements 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.
In fiscal 2009,
compared with fiscal 2008, the average value of the euro decreased by
approximately 8.9% relative to the value of the United States dollar.
Additionally, at July 31, 2009 compared with July 31, 2008, the value
of the euro relative to the United States dollar decreased by approximately
9.3%. The financial statements of our Netherlands subsidiary are translated
using the accounting policies described in Note 2 of the Consolidated Financial
Statements and therefore are impacted by changes in the euro exchange rate
relative to the United States dollar. 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 18 to the 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.
45
In order to hedge
against the impact of fluctuations in the value of (i) the Canadian dollar
relative to the United States dollar, (ii) the euro relative to the United
States dollar and British pound and (iii) 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 Canadian dollars,
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
$2,962,000 at September 18, 2009, which cover certain assets and
liabilities that were denominated in currencies other than our subsidiaries
functional currencies. Such contracts expired on September 30, 2009. These
foreign currency forward contracts are continually replaced with new one-month
contracts as long as we have significant net assets at our subsidiaries that
are denominated and ultimately settled in currencies other than their functional
currencies. Under our credit facilities, such contracts to purchase Canadian
dollars, 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 Canadian dollars, euros and British pounds forward are immediately
realized within general and administrative expenses due to the short-term
nature of such contracts. In fiscal 2009, such forward contracts partially
offset the impact on operations related to certain assets and liabilities that
are denominated in currencies other than our subsidiaries functional
currencies.
Changes in the
value of the Japanese yen relative to the United States dollar in fiscal 2009,
compared with fiscal 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 in fiscal
2009, compared with fiscal 2008, upon
our net income of approximately $860,000 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 July 31, 2009 compared with July 31,
2008, the total of the foreign currency movements resulted in a foreign
currency translation loss of $2,010,000 in fiscal 2009, thereby decreasing
stockholders equity.
Inflation
During fiscal 2008, we
experienced unprecedented price increases in certain raw materials due in large
part to the rising price of fuel and oil, including chemicals, paper pulp and
plastics (resins and bottles), which had a significant adverse impact on our
gross margins. Rising fuel and oil prices also had a significant adverse impact
on distribution costs related to both the purchasing and delivery of products,
which also impacted our gross margins. We implemented price increases for
certain of our products, which partially offset these cost increases; however,
some of our businesses (primarily the Water Purification and Filtration and
Healthcare Disposables segments) were unable to obtain higher selling prices
necessary to offset the full impact of such higher costs, which resulted in the
loss of gross margin. In fiscal 2009, the cost of certain raw materials and
distribution costs decreased compared with fiscal 2008 resulting in improved
gross margins, as more fully described in Results of Operations.
Critical Accounting Policies
Our discussion and
analysis of our financial condition and results of operations are based upon
our Consolidated Financial Statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we continually evaluate our estimates. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
We believe the
following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our Consolidated Financial Statements.
46
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 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 $2,461,000, $1,757,000 and
$1,449,000 in fiscals 2009, 2008 and 2007, respectively. The increase in volume
rebates in fiscal 2009 compared with fiscal 2008 is primarily due to new terms
in a recently renewed rebate arrangement 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 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,
47
resulting in an
impairment of their ability to make payments, additional allowances may be
required. Alternatively, if certain customers paid their delinquent
receivables, reductions in allowances may be required.
Inventories
Inventories
consist of raw materials and finished 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, 2009, management
concluded that none of our intangible assets or goodwill was impaired.
While the results
of these annual reviews have historically not indicated impairment, impairment reviews
are highly dependent on managements projections of our future operating
results 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, 2009, 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 approximately 6% and 11%,
respectively. With respect to Healthcare Disposables, such average fair value
was determined using future operating and cash flow assumptions that management
believes to be conservative, especially in light of more recent market
conditions such as the outbreak of the
novel H1N1 flu (swine flu), which could have a positive impact on future
results of this segment. For all of our remaining reporting units,
average fair value exceeded book value by substantial amounts.
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.
48
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 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), modifications to existing awards and assumptions used
in determining fair value, expected lives 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,
49
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. A
review of our deferred tax items 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, an increase in our Federal tax rate to 35% as well as recently enacted
Canadian federal and New York State statutory tax rate reductions were applied
to existing overall deferred income tax liabilities, which resulted in
virtually no change in 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 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 have been recorded as an
increase or decrease to goodwill. Subsequent to our August 1, 2009
adoption of SFAS 141R, the resolution of
income tax uncertainties that predate or result from acquisitions will be
recognized in our results of operations. Unrecognized tax benefits are analyzed
periodically and adjustments are made, as events occur to warrant adjustment to
the related liability.
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 $345,000 and $365,000 in charges
associated with exit or disposal activities in fiscals 2009 and 2008,
respectively, 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.
50
Item 7A.
QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
.
Foreign
Currency and Market Risk
A portion of our
products in all of our business segments are exported to and imported from a
variety of geographic locations, and our business could be materially and
adversely affected by the imposition of trade barriers, fluctuations in the
rates of exchange of various currencies, tariff increases and import and export
restrictions, affecting all of such geographies included but not limited to the
United States, Canada, the European Union, the United Kingdom and the Far East.
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. Changes in the value
of the Canadian dollar against the United States dollar also affect our results
of operations because the net assets of our Canadian subsidiaries are
denominated and ultimately settled in United States dollars but must be
converted into their functional currency. Additionally, the financial
statements of our Canadian subsidiaries are translated using the accounting
policies described in Note 2 to the Consolidated Financial Statements.
Fluctuations in the rates of currency exchange between the United States and
Canada had an overall favorable impact in fiscal 2009, compared with fiscal
2008, upon our net income, despite an unfavorable impact on sales, 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 18 to the 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 Consolidated Financial Statements. Fluctuations in the rates
of currency exchange between the euro, the United States dollar and British
pound had an overall favorable impact in fiscal 2009, compared with fiscal 2008,
upon our net income, 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 (i) the Canadian dollar
relative to the United States dollar, (ii) the euro relative to the United
States dollar and British pound and (iii) 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 Canadian dollars,
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
$3,736,000 at July 31, 2009, which covered certain assets and liabilities
that were denominated in currencies other than our subsidiaries functional
currencies. Such contracts expired on August 31, 2009. These foreign
currency forward contracts are continually replaced with new one-month contracts
as long as we have significant net assets at our subsidiaries that are
denominated and ultimately settled in currencies other than their functional
currencies. Under our credit facilities, such contracts to purchase Canadian
dollars, euros and British pounds may not exceed $12,000,000 in an aggregate
notional amount at any time. In fiscal 2009, such forward contracts were
partially effective in offsetting a portion of the impact on operations related
to certain assets and liabilities that are denominated in currencies other than
our subsidiaries 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 in fiscal 2009,
compared with fiscal 2008, did not have a significant impact upon either our
results of operations or the translation of the balance sheet, primarily due to
the fact that our Japanese subsidiary accounts for a relatively small portion
of consolidated net sales, net income and net assets.
51
Overall,
fluctuations in the rates of currency exchange had a favorable impact on our
net income in fiscal 2009, compared with fiscal 2008, primarily due to the
decrease in the value of the Canadian dollar relative to the United States
dollar, and an adverse impact upon stockholders equity.
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
We are exposed to market
risks arising principally from adverse changes in interest rates and foreign
currency.
With respect to interest
rate risk, our outstanding debt is under our United States credit facilities,
described elsewhere in Liquidity and Capital Resources. Such credit facilities
consist of outstanding debt with fixed repayment amounts at prevailing market
rates of interest, principally under LIBOR contracts ranging from one to twelve
months. Therefore, our market risk with respect to such debt is the increase in
interest expense which would result from higher interest rates associated with
LIBOR. Such outstanding debt under our United States credit facilities was
$43,300,000 and $58,300,000 at July 31, 2009 and 2008, respectively, and
the average outstanding balance during fiscal 2009 and 2008 was approximately
$53,000,000 and $64,000,000, respectively. During fiscals 2009 and 2008, the
weighted average interest rate on outstanding debt was 3.94% and 6.48%,
respectively. A 100 basis-point increase in average LIBOR interest rates would
have resulted in incremental interest expense of approximately $526,000 and
$644,000 during fiscals 2009 and 2008, respectively.
However, the weighted
average interest rate on our outstanding debt at July 31, 2009 has
decreased to 2.52% due to decreases in LIBOR rates as well as the margin
applicable to our outstanding borrowings. All of our outstanding borrowings
were under LIBOR contracts at July 31, 2009. The majority of such contracts
were twelve-month LIBOR contracts entered into in recent months; therefore, we
are substantially protected throughout most of fiscal 2010 from any exposure
associated with increasing LIBOR rates.
We are in discussions
with our bank syndicate regarding modifications to our revolving credit
facility, including an extension of the termination date, and expect to
formally modify the facility before its expiration. Due to current market
conditions, a modification of our credit facilities will likely result in an
increase of our margins above the lenders base rate and LIBOR, which may
adversely affect our fiscal 2010 results of operations. In addition, depending upon the structure of the modification, we may be
required to write-off certain deferred financing costs that are recorded in
other assets and are currently being amortized over the life of the credit
facilities.
Our other long-term
liabilities would not be materially affected by an increase in interest rates.
We also maintained a cash balance of $23,368,000 at July 31, 2009 which is
either maintained in cash or invested in low risk and low return cash
equivalents such as short-term guaranteed investment certificates issued by
various Canadian banks, Canadian Treasury bills and United States money market
funds with leading banking institutions. An increase in interest rates would
generate additional interest income for us from these low risk cash
equivalents, which would partially offset the adverse impact of the additional
interest expense.
With respect to foreign
currency exchange rates, we are principally impacted by changes in the Canadian
dollar, euro and British pound as these currencies relate to the United States
dollar. We use a sensitivity analysis to assess the market risk associated with
our foreign currency transactions. Market risk is defined here as the potential
change in fair value resulting from an adverse movement in foreign currency
exchange rates.
Our Canadian
subsidiaries and Netherlands subsidiary have net assets in currencies
(principally United States dollars) other than their functional Canadian and
Euro currency, which must be converted into its functional currency, thereby
giving rise to realized foreign exchange gains and losses. Similarly, our
United States subsidiaries have net assets in currencies (principally euros and
British pounds) other than their functional United States currency, which must
be converted into its functional currency, thereby giving rise to realized
foreign exchange gains and losses. Therefore, our Canadian subsidiaries,
Netherlands subsidiary and United States subsidiaries are exposed to risk if
the value of the Canadian dollar, euro and British pound appreciates relative
to the United States dollar. For fiscals 2009 and 2008, a uniform 15% increase
in the Canadian dollar, euro and British pound relative to the United States
dollar would have resulted in aggregate realized losses (after tax) of
approximately $350,000 and $250,000, respectively. However, since certain of
our subsidiaries use
52
foreign currency forward contracts to hedge against the impact of
fluctuations of the Canadian dollar, euro and British pound relative to the
United States dollar, realized losses relating to the fluctuation of those
currencies would be partially offset by gains on the foreign currency forward
contracts.
In addition to the above,
adverse changes in foreign currency exchange rates impact the translation of
our financial statements. For fiscals 2009 and 2008, a uniform 15% adverse
movement in foreign currency rates would have resulted in realized losses
(after tax) of approximately $880,000 and $630,000, respectively, due to the
translation of the results of operations of foreign subsidiaries (adverse
changes would be caused by appreciation of either the Canadian dollar or the
euro relative to the United States dollar). However, such a change in foreign
currency rates would have resulted in an unrealized gain on our net investment
in foreign subsidiaries of $2,648,000 and $4,762,000 in fiscals 2009 and 2008,
respectively. Such an unrealized gain would be recorded in accumulated other
comprehensive income in our stockholders equity. Conversely, if the Canadian
dollar and the euro depreciated by 15% relative to the United States dollar, we
would have recognized realized gains (after tax) of approximately $880,000 and
$630,000 in fiscals 2009 and 2008, respectively, and unrealized losses of
$2,648,000 and $4,762,000 in fiscals 2009 and 2008, respectively, on our net
investment in foreign subsidiaries. However, since we view these investments as
long-term, we would not expect such unrealized losses to be realized in the
near term.
The aggregate adverse
impact, net of tax, to our results of operations of a uniform 15% increase in
foreign currency exchange rates, as described above, due to both financial
statement translation and functional currency conversion would have been
$1,230,000 and $880,000 for fiscals 2009 and 2008, respectively, partially
offset by the affect of our foreign currency forward contracts.
Item 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
.
See Index to Consolidated
Financial Statements, which is Item 15(a), and the Consolidated Financial
Statements and schedule included in this Report.
Item 9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
.
Not applicable.
Item 9A.
CONTROLS AND PROCEDURES
.
Under the
supervision and with the participation of our Chief Executive Officer and our
Chief Financial Officer, we conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of July 31, 2009. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer each
concluded that the design and operation of these disclosure controls and
procedures were, as of the end of the period covered by this report, effective
and designed to ensure that material information relating to the Company,
including 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 to
the Companys management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
Managements
Report on Internal Control over Financial Reporting
The management of
Cantel Medical Corp. is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. The Companys
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with United States
generally accepted accounting principles. The Companys internal control over
financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company,
(ii)
provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company, and
(iii)
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or
53
disposition of the Companys assets that could have a
material effect on the financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in condition, or that the degree of
compliance with the policies and procedures included in such controls may
deteriorate.
We, under the supervision
and with the participation of our Chief Executive Officer and our Chief
Financial Officer, carried out an evaluation of the effectiveness of our
internal controls over financial reporting based on the framework and criteria
established in Internal Control Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer each
concluded that our internal control over financial reporting was effective as
of July 31, 2009.
Our independent auditors,
Ernst & Young LLP, have issued an attestation report on our internal
control over financial reporting, which is included below.
Changes in Internal Control
We have evaluated
our internal controls over financial reporting and determined that no changes
occurred during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
54
Attestation
Report of Independent Registered Public Accounting Firm
Report of
Independent Registered Public Accounting Firm
The Board of Directors
and Stockholders
Cantel Medical Corp.
We have audited Cantel Medical Corp.s
internal control over financial reporting as of July 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cantel
Medical Corp.s management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Cantel
Medical Corp. maintained, in all material respects, effective internal control
over financial reporting as of July 31, 2009, based on the COSO criteria.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Cantel Medical Corp. as of July 31,
2009 and 2008 and the related consolidated statements of income, changes in
stockholders equity and comprehensive income and cash flows for each of the
three years in the period ending July 31, 2009 of Cantel Medical Corp. and
our report dated October 14, 2009 expressed an unqualified opinion
thereon.
MetroPark, New Jersey
October 14,
2009
55
Item
9B.
OTHER INFORMATION
.
None.
PART III
Item
10.
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
.
Incorporated by reference
to the Registrants definitive proxy statement to be filed with the SEC
pursuant to Regulation 14A promulgated under the Exchange Act in connection
with the 2009 Annual Meeting of Stockholders of the Registrant, except for the
following:
We have adopted a Code of
Ethics for the Chief Executive Officer, the Chief Financial Officer and other
officers and management personnel that is posted on our website,
www.cantelmedical.com. We intend to satisfy the disclosure requirement
regarding any amendment to, or a waiver of, a provision of the Code of Ethics
for the Chief Executive Officer, Chief Financial Officer and other officers and
management personnel by posting such information on our website.
Item
11.
EXECUTIVE COMPENSATION
.
Incorporated by reference
to the Registrants definitive proxy statement to be filed with the SEC
pursuant to Regulation 14A promulgated under the Exchange Act in connection
with the 2009 Annual Meeting of Stockholders of the Registrant.
Item 12.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
.
Incorporated by
reference to the Registrants definitive proxy statement to be filed with the
SEC pursuant to Regulation 14A promulgated under the Exchange Act in connection
with the 2009 Annual Meeting of Stockholders of the Registrant, except for the
following:
The following table
shows, as of July 31, 2009, the number of options or other awards
currently outstanding, as well as the number of shares remaining available for
grant under our existing option plans. No further grants may be made from the
1997 Employee Stock Option Plan or 1998 Directors Stock Option Plan. For these
plans, therefore, the table shows only the number of options outstanding:
|
|
Outstanding
|
|
Nonvested
|
|
Available
|
|
Plan
|
|
Options
|
|
Restricted
Shares
|
|
for
Grant
|
|
|
|
|
|
|
|
|
|
2006 Equity Incentive
Plan - Options
|
|
528,821
|
|
|
|
641,750
|
|
2006 Equity Incentive
Plan - Restricted Shares
|
|
|
|
226,328
|
|
124,921
|
|
1997 Employee Stock
Option Plan
|
|
893,276
|
|
|
|
|
|
1998 Directors Stock
Option Plan
|
|
83,625
|
|
|
|
|
|
|
|
1,505,722
|
|
226,328
|
|
766,671
|
|
Item
13.
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
.
Incorporated by
reference to the Registrants definitive proxy statement to be filed with the
SEC pursuant to Regulation 14A promulgated under the Exchange Act in connection
with the 2009 Annual Meeting of Stockholders of the Registrant.
Item
14.
PRINCIPAL ACCOUNTING
FEES AND SERVICES
.
Incorporated by
reference to the Registrants definitive proxy statement to be filed with the
SEC pursuant to Regulation 14A promulgated under the Exchange Act in connection
with the 2009 Annual Meeting of Stockholders of the Registrant.
56
PART IV
Item 15.
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
.
(a)
The following documents are filed as part
of this Annual Report on Form 10-K for the fiscal year ended July 31,
2009.
1.
Consolidated Financial Statements
:
(i)
Report of Independent Registered Public
Accounting Firm.
(ii)
Consolidated Balance Sheets as of July 31,
2009 and 2008.
(iii)
Consolidated Statements of Income for the
years ended July 31, 2009, 2008 and 2007.
(iv)
Consolidated Statements of Changes in
Stockholders Equity and Comprehensive Income for the years ended July 31,
2009, 2008 and 2007.
(v)
Consolidated Statements of Cash Flows for
the years ended July 31, 2009, 2008 and 2007.
(vi)
Notes to Consolidated Financial
Statements.
2.
Consolidated Financial Statement
Schedules
:
(i)
Schedule II - Valuation and Qualifying
Accounts for the years ended July 31, 2009, 2008 and 2007.
All other
financial statement schedules are omitted since they are not required, not
applicable, or the information has been included in the Consolidated Financial
Statements or Notes thereto.
3.
Exhibits
:
2(a) - Stock
Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Frank Richard Orofino, Jr. (Incorporated
herein by reference to Exhibit 2.2 to Registrants Current Report on Form 8-K
filed on August 5, 2005 8-K [the August 5, 2005 8-K].)
2(b) - Stock
Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Richard Allen Orofino. (Incorporated herein by
reference to Exhibit 2.3 to Registrants August 5, 2005 8-K.)
2(c) - Stock
Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Gary Steinberg. (Incorporated herein by reference
to Exhibit 2.4 to Registrants August 5, 2005 8-K.)
2(d) - Stock
Purchase Agreement dated as of August 1, 2005 among Registrant, Crosstex
International, Inc. and Mitchell Steinberg. (Incorporated herein by
reference to Exhibit 2.5 to Registrants August 5, 2005 8-K.)
2(e) - Asset
Purchase Agreement dated as of March 30, 2007 between GE Osmonics, Inc.
and Mar Cor Purification, Inc. (Incorporated herein by reference to Exhibit 2.1
to Registrants Current Report on Form 8-K
dated April 4, 2007 [the April 2007 8-K].)
3(a) -
Registrants Restated Certificate of Incorporation dated July 20, 1978.
(Incorporated herein by reference to Exhibit 3(a) to Registrants
1981 Annual Report on Form 10-K.)
3(b) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on February 16, 1982. (Incorporated herein by reference to Exhibit 3(b) to
Registrants 1982 Annual Report on Form 10-K.)
57
3(c) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on May 4, 1984. (Incorporated herein by reference to Exhibit 3(c) to
Registrants Quarterly Report on Form 10-Q for the quarter ended April 30,
1984.)
3(d) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on August 19, 1986. (Incorporated herein by reference to Exhibit 3(d) to
Registrants 1986 Annual Report on Form 10-K.)
3(e) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on December 12, 1986. (Incorporated herein by reference to Exhibit 3(e) to
Registrants 1987 Annual Report on Form 10-K [the 1987 10-K].)
3(f) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on April 3, 1987. (Incorporated herein by reference to Exhibit 3(f) to
Registrants 1987 10-K.)
3(g) -
Certificate of Change of Registrant, filed on July 12, 1988. (Incorporated
herein by reference to Exhibit 3(g) to Registrants 1988 Annual
Report on Form 10-K.)
3(h) -
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on April 17, 1989. (Incorporated herein by reference to Exhibit 3(h) to
Registrants 1989 Annual Report on Form 10-K.)
3(i)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on May 10, 1999. (Incorporated herein by reference to Exhibit 3(i) to
Registrants 2000 Annual Report on Form 10-K [the 2000 10-K].)
3(j)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on April 5, 2000. (Incorporated herein by reference to Exhibit 3(j) to
Registrants 2000 10-K.)
3(k)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on September 6, 2001. (Incorporated herein by reference to Exhibit 3(k) to
Registrants 2001 Annual Report on Form 10-K.)
3(l)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on June 7, 2002. (Incorporated herein by reference to Exhibit 3(l) to
Registrants 2002 Annual Report on Form 10-K [the 2002 10-K].)
3(m)
Certificate of Amendment of Certificate of Incorporation of Registrant, filed
on December 22, 2005. (Incorporated herein by reference to Exhibit 3(m) to
Registrants 2007 Annual Report on Form 10-K [the 2007 10-K].)
3(n) -
Registrants By-Laws adopted April 24, 2002. (Incorporated herein by
reference to Exhibit 3(m) to Registrants 2002 10-K.)
10(a) -
Registrants 1997 Employee Stock Option Plan. (Incorporated herein by reference
to Annex B to Registrants 2004 Definitive Proxy Statement on Schedule 14A.)
10(b) - Form of
Incentive Stock Option Agreement under Registrants 1997 Employee Stock Option
Plan. (Incorporated herein by reference to Exhibit 10(t) to
Registrants 1997 Annual Report on Form 10-K.)
10(c) - Registrants
1998 Directors Stock Option Plan, as amended. (Incorporated herein by
reference to Exhibit 10(ee) to Registrants 2005 Annual Report on Form 10-K.)
10(d) - Form of
Quarterly Stock Option Agreement under the Registrants 1998 Directors Stock
Option Plan. (Incorporated herein by reference to Exhibit 10(hh) to
Registrants 2000 10-K.)
10(e) - Form of
Annual Stock Option Agreement under the Registrants 1998 Directors Stock
Option Plan. (Incorporated herein by reference to Exhibit 10(ii) to
Registrants 2000 10-K.)
10(f) 2006 Equity Incentive Plan, as amended.
(Incorporated herein by reference to Exhibit 10(j) to Registrants
2008 Annual Report on Form 10-K [the 2008 10-K].)
10(g) - Form of
Stock Option Agreement under Registrants 2006 Equity Incentive Plan.
(Incorporated herein by reference to Exhibit 10(k) to Registrants
2008 10-K.)
58
10(h) - Form of
Restricted Stock Agreement under the Registrants 2006 Equity Incentive Plan.
(Incorporated herein by reference to Exhibit 10(l) to Registrants
2008 10-K.)
10(i) -
Employment Agreement, dated as of August 30, 2004, between the Registrant
and Andrew A. Krakauer. (Incorporated herein by reference to Exhibit 99.1
to Registrants Current Report on Form 8-K dated August 30, 2004.)
10(j) -
Employment Agreement, dated as of November 1, 2004, between the Registrant
and Craig A. Sheldon. (Incorporated herein by reference to Exhibit 1 to
Registrants Current Report on Form 8-K dated January 21, 2005 [the January 21,
2005 8-K].)
10(k) -
Employment Agreement, dated as of November 1, 2004, between the Registrant
and Seth R. Segel. (Incorporated herein by reference to Exhibit 2 to
Registrants January 21, 2005 8-K.)
10(l) -
Employment Agreement, dated as of November 1, 2004, between the Registrant
and Steven C. Anaya. (Incorporated herein by reference to Exhibit 3 to
Registrants January 21, 2005 8-K.)
10(m) -
Employment Agreement, dated as of January 1, 2005, between the Registrant
and Eric W. Nodiff. (Incorporated herein by reference to Exhibit 1 to
Registrants Current Report on Form 8-K dated January 7, 2005.)
10(n) -
Employment Agreement, dated as of November 1, 2004, between Minntech
Corporation and Roy K. Malkin. (Incorporated herein by reference to Exhibit 4
to Registrants January 21, 2005 8-K.)
10(o) -
Employment Agreement, dated as of August 28, 2006, between Mar Cor
Purification, Inc. and Curtis Weitnauer. (Incorporated herein by reference
to Exhibit 10(z) to the Registrants 2007 10-K.)
10(p) -
Employment Agreement, dated as of August 1, 2008, between Crosstex
International, Inc. and Gary Steinberg. (Incorporated herein by reference
to Exhibit 10(t) to Registrants 2008 10-K.)
10(q) -
Letter from Chairman of Compensation Committee to President regarding
compensation of executive officers. (Incorporated herein by reference to Exhibit 10(u) to
Registrants 2008 10-K.)
10(r)
-
Amended and Restated Credit Agreement dated as of August 1, 2005 among
Registrant, Bank of America N.A., PNC Bank, National Association, and Wells
Fargo Bank, National Association (and Banc of America Securities LLC, as sole
lead arranger and sole book manager). (Incorporated herein by reference to Exhibit 10.1
to Registrants August 5, 2005 8-K.)
10(s) - First
Amendment to Credit Agreement dated April 19, 2006 among Registrant, Bank
of America N.A., PNC Bank, National Association, and Wells Fargo Bank, National
Association (and Banc of America Securities LLC, as sole lead arranger and sole
book manager). (Incorporated herein by reference to Exhibit 10(m) to
Registrants 2007 10-K.)
10(t) -
Second Amendment to Credit Agreement dated November 17, 2006 among
Registrant, Bank of America N.A., PNC Bank, National Association, and Wells
Fargo Bank, National Association (and Banc of America Securities LLC, as sole
lead arranger and sole book manager).
(Incorporated herein by reference to Exhibit 10(b) to
Registrants April 30, 2007 Quarterly Report on Form 10-Q [the April 2007 10-Q].)
10(u) - Third
Amendment to Credit Agreement dated March 29, 2007 among Registrant, Bank
of America N.A., PNC Bank, National Association, and Wells Fargo Bank, National
Association (and Banc of America Securities LLC, as sole lead arranger and sole
book manager). (Incorporated herein by
reference to Exhibit 10(c) to the
Registrants April 2007 10-Q.)
10(v) -
Fourth Amendment to Credit Agreement dated May 17, 2007 among Registrant,
Bank of America N.A., PNC Bank, National Association, and Wells Fargo Bank,
National Association (and Banc of America Securities LLC, as sole lead arranger
and sole book manager). (Incorporated
herein by reference to Exhibit 10(d) to the Registrants April 2007 10-Q.)
59
10(w) -
Letter Agreement dated as of December 18, 2006 between the Company and
Andrew A. Krakauer. (Incorporated herein by reference to Exhibit 10.2 to
Registrants Current Report on Form 8-K
dated December 22, 2006 [the December 2006 8-K].)
10(x) -
Letter Agreement dated as of December 18, 2006 between the Company and
Eric W. Nodiff. (Incorporated herein by reference to Exhibit 10.3 to
Registrants December 2006 8-K.)
10(y) -
Letter Agreement dated as of December 18, 2006 between the Company and
Seth R. Segel. (Incorporated herein by reference to Exhibit 10.4 to
Registrants December 2006 8-K.)
10(z) -
Letter Agreement dated as of December 18, 2006 between the Company and
Craig A. Sheldon. (Incorporated herein by reference to Exhibit 10.5
to Registrants December 2006
8-K.)
10(aa) - Letter
Agreement dated as of December 18, 2006 between the Company and
Steven C. Anaya. (Incorporated herein by reference to Exhibit 10.6 to
Registrants December 2006 8-K.)
10(bb) - Letter
Agreement dated as of December 18, 2006 between Minntech Corporation and
Roy K. Malkin. (Incorporated herein by reference to Exhibit 10.7 to
Registrants December 2006 8-K.)
10(cc) -
Product
Supply Agreement dated as of March 30, 2007 between GE Osmonics, Inc.
and Mar Cor Purification, Inc. (Incorporated herein by reference to Exhibit 10.1
to Registrants April 2007 8-K.)
21 - Subsidiaries
of Registrant.
23 - Consent of
Ernst & Young LLP.
31.1 -
Certification of Principal Executive Officer.
31.2 -
Certification of Principal Financial Officer.
32 - Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
60
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
CANTEL MEDICAL CORP.
|
|
|
|
Date: October 14, 2009
|
By:
|
/s/ Andrew A. Krakauer
|
|
Andrew A. Krakauer,
President and Chief
|
|
Executive Officer
(Principal Executive Officer)
|
|
|
|
|
By:
|
/s/ Craig A. Sheldon
|
|
Craig A. Sheldon,
Senior Vice President,
|
|
Chief Financial Officer
and Treasurer
|
|
(Principal Financial
and Accounting Officer)
|
|
|
|
|
By:
|
/s/ Steven C. Anaya
|
|
Steven C. Anaya, Vice
President and
|
|
Controller
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/ Charles M. Diker
|
|
Date:
|
October 14, 2009
|
Charles M. Diker, a Director and Chairman of the
Board
|
|
|
|
|
|
|
|
/s/ George L. Fotiades
|
|
Date:
|
October 14, 2009
|
George L. Fotiades, a Director
|
|
|
|
and Vice Chairman of the Board
|
|
|
|
|
|
|
|
/s/ Robert L. Barbanell
|
|
Date:
|
October 14, 2009
|
Robert L. Barbanell, a Director
|
|
|
|
|
|
|
|
/s/ Alan R. Batkin
|
|
Date:
|
October 14, 2009
|
Alan R. Batkin, a Director
|
|
|
|
|
|
|
|
/s/ Joseph M. Cohen
|
|
Date:
|
October 14, 2009
|
Joseph M. Cohen, a Director
|
|
|
|
|
|
|
|
/s/ Mark N. Diker
|
|
Date:
|
October 14, 2009
|
Mark N. Diker, a Director
|
|
|
|
|
|
|
|
/s/ Alan J. Hirschfield
|
|
Date:
|
October 14, 2009
|
Alan J. Hirschfield, a Director
|
|
|
|
|
|
|
|
/s/ Andrew A. Krakauer
|
|
Date:
|
October 14, 2009
|
Andrew A. Krakauer, a Director and
President & CEO
|
|
|
|
|
|
|
|
/s/ Bruce Slovin
|
|
Date:
|
October 14, 2009
|
Bruce Slovin, a Director
|
|
|
|
61
CANTEL
MEDICAL CORP.
CONSOLIDATED
FINANCIAL STATEMENTS
JULY 31,
2009
Report of Independent Registered Public Accounting
Firm
The Board of Directors
and Stockholders
Cantel Medical Corp.
We have audited the
accompanying consolidated balance sheets of Cantel Medical Corp. (and
subsidiaries) as of July 31, 2009 and 2008, and the related consolidated
statements of income, changes in stockholders equity and comprehensive income,
and cash flows for each of the three years in the period ended July 31,
2009. Our audits also included the financial statement schedule included in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Cantel Medical Corp. (and
subsidiaries) at July 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended July 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), Cantel Medical Corp.s internal control over financial
reporting as of July 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated October 14,
2009 expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
MetroPark, New Jersey
October 14, 2009
1
CANTEL
MEDICAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollar
Amounts in Thousands, Except Share Data)
|
|
July 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
23,368
|
|
$
|
18,318
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,080 in 2009 and
$1,021 in 2008
|
|
30,450
|
|
30,316
|
|
Inventories
|
|
29,200
|
|
31,802
|
|
Deferred
income taxes
|
|
1,898
|
|
1,565
|
|
Prepaid
expenses and other current assets
|
|
3,994
|
|
2,560
|
|
Total
current assets
|
|
88,910
|
|
84,561
|
|
|
|
|
|
|
|
Property
and equipment, at cost:
|
|
|
|
|
|
Land,
buildings and improvements
|
|
19,846
|
|
20,645
|
|
Furniture
and equipment
|
|
43,100
|
|
41,138
|
|
Leasehold
improvements
|
|
1,690
|
|
1,443
|
|
|
|
64,636
|
|
63,226
|
|
Less
accumulated depreciation and amortization
|
|
(28,668
|
)
|
(25,306
|
)
|
|
|
35,968
|
|
37,920
|
|
Intangible
assets, net
|
|
37,042
|
|
41,254
|
|
Goodwill
|
|
114,995
|
|
113,958
|
|
Other
assets
|
|
956
|
|
1,497
|
|
|
|
$
|
277,871
|
|
$
|
279,190
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
10,000
|
|
$
|
8,000
|
|
Accounts
payable
|
|
8,948
|
|
9,723
|
|
Compensation
payable
|
|
10,431
|
|
7,175
|
|
Earnout
payable
|
|
157
|
|
4,295
|
|
Accrued
expenses
|
|
6,583
|
|
6,739
|
|
Deferred
revenue
|
|
2,819
|
|
2,920
|
|
Income
taxes payable
|
|
175
|
|
70
|
|
Total
current liabilities
|
|
39,113
|
|
38,922
|
|
|
|
|
|
|
|
Long-term
debt
|
|
33,300
|
|
50,300
|
|
Deferred
income taxes
|
|
16,378
|
|
18,503
|
|
Other
long-term liabilities
|
|
1,964
|
|
2,753
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Preferred
Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued
|
|
|
|
|
|
Common
Stock, par value $.10 per share; authorized 30,000,000 shares; issued 2009 -
17,883,873 shares, outstanding 2009 - 16,643,727 shares; issued
2008-17,519,581 shares, outstanding 2008 - 16,370,844 shares
|
|
1,788
|
|
1,752
|
|
Additional
paid-in capital
|
|
87,169
|
|
81,475
|
|
Retained
earnings
|
|
102,103
|
|
86,534
|
|
Accumulated
other comprehensive income
|
|
8,281
|
|
10,291
|
|
Treasury
Stock, 2009 - 1,240,146 shares at cost; 2008 -1,148,737 shares at cost
|
|
(12,225
|
)
|
(11,340
|
)
|
Total
stockholders equity
|
|
187,116
|
|
168,712
|
|
|
|
$
|
277,871
|
|
$
|
279,190
|
|
See accompanying
notes.
2
CANTEL
MEDICAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar
Amounts in Thousands, Except Per Share Data)
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
260,050
|
|
$
|
249,374
|
|
$
|
219,044
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
160,571
|
|
161,748
|
|
140,032
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
99,479
|
|
87,626
|
|
79,012
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling
|
|
30,398
|
|
28,636
|
|
23,818
|
|
General
and administrative
|
|
36,998
|
|
37,013
|
|
33,507
|
|
Research
and development
|
|
4,632
|
|
4,010
|
|
4,848
|
|
Total
operating expenses
|
|
72,028
|
|
69,659
|
|
62,173
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before interest and income taxes
|
|
27,451
|
|
17,967
|
|
16,839
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
2,639
|
|
4,631
|
|
3,508
|
|
Interest
income
|
|
(144
|
)
|
(515
|
)
|
(771
|
)
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
24,956
|
|
13,851
|
|
14,102
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
9,387
|
|
5,158
|
|
5,998
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
15,569
|
|
8,693
|
|
8,104
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations, net of tax
|
|
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,569
|
|
$
|
8,693
|
|
$
|
8,446
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.96
|
|
$
|
0.54
|
|
$
|
0.52
|
|
Discontinued
operations
|
|
|
|
|
|
0.02
|
|
Net
income
|
|
$
|
0.96
|
|
$
|
0.54
|
|
$
|
0.54
|
|
Diluted:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.50
|
|
Discontinued
operations
|
|
|
|
|
|
0.02
|
|
Net
income
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.52
|
|
See accompanying
notes.
3
CANTEL MEDICAL CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollar amounts in Thousands, Except Share Data)
Years Ended July 31, 2009, 2008 and 2007
|
|
Common
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
Additional
|
|
|
|
Other
|
|
Treasury
|
|
Total
|
|
Total
|
|
|
|
Shares
|
|
|
|
Paid-in
|
|
Retained
|
|
Comprehensive
|
|
Stock,
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Income
|
|
at
Cost
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2006
|
|
15,399,102
|
|
$
|
1,615
|
|
$
|
69,171
|
|
$
|
69,395
|
|
$
|
6,715
|
|
$
|
(6,091
|
)
|
$
|
140,805
|
|
|
|
Exercises
of options
|
|
704,185
|
|
80
|
|
5,071
|
|
|
|
|
|
(1,515
|
)
|
3,636
|
|
|
|
Repurchases
of shares
|
|
(161,800
|
)
|
|
|
|
|
|
|
|
|
(2,215
|
)
|
(2,215
|
)
|
|
|
Stock-based
compensation
|
|
|
|
|
|
1,482
|
|
|
|
|
|
|
|
1,482
|
|
|
|
Issuance
of restricted stock
|
|
175,000
|
|
18
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit from exercises of stock options
|
|
|
|
|
|
1,137
|
|
|
|
|
|
|
|
1,137
|
|
|
|
Translation
adjustment, net of $313 in tax
|
|
|
|
|
|
|
|
|
|
1,779
|
|
|
|
1,779
|
|
$
|
1,779
|
|
Net
income
|
|
|
|
|
|
|
|
8,446
|
|
|
|
|
|
8,446
|
|
8,446
|
|
Total
comprehensive income for fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,225
|
|
Balance,
July 31, 2007
|
|
16,116,487
|
|
1,713
|
|
76,843
|
|
77,841
|
|
8,494
|
|
(9,821
|
)
|
155,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises
of options
|
|
245,978
|
|
29
|
|
1,786
|
|
|
|
|
|
(664
|
)
|
1,151
|
|
|
|
Repurchases
of shares
|
|
(90,700
|
)
|
|
|
|
|
|
|
|
|
(855
|
)
|
(855
|
)
|
|
|
Stock-based
compensation
|
|
|
|
|
|
1,961
|
|
|
|
|
|
|
|
1,961
|
|
|
|
Issuance
of restricted stock
|
|
130,500
|
|
13
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of restricted stock
|
|
(31,421
|
)
|
(3
|
)
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit from exercises of stock options and vesting of restricted stock
|
|
|
|
|
|
895
|
|
|
|
|
|
|
|
895
|
|
|
|
Translation
adjustment, net of $363 in tax
|
|
|
|
|
|
|
|
|
|
1,797
|
|
|
|
1,797
|
|
$
|
1,797
|
|
Net
income
|
|
|
|
|
|
|
|
8,693
|
|
|
|
|
|
8,693
|
|
8,693
|
|
Total
comprehensive income for fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,490
|
|
Balance,
July 31, 2008
|
|
16,370,844
|
|
1,752
|
|
81,475
|
|
86,534
|
|
10,291
|
|
(11,340
|
)
|
168,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises
of options
|
|
215,730
|
|
26
|
|
1,772
|
|
|
|
|
|
(483
|
)
|
1,315
|
|
|
|
Repurchases
of shares
|
|
(43,847
|
)
|
|
|
|
|
|
|
|
|
(402
|
)
|
(402
|
)
|
|
|
Stock-based
compensation
|
|
|
|
|
|
3,187
|
|
|
|
|
|
|
|
3,187
|
|
|
|
Issuance
of restricted stock
|
|
101,000
|
|
10
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit from exercises of stock options and vesting of restricted stock
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
745
|
|
|
|
Translation
adjustment, net of $352 in tax
|
|
|
|
|
|
|
|
|
|
(2,010
|
)
|
|
|
(2,010
|
)
|
$
|
(2,010
|
)
|
Net
income
|
|
|
|
|
|
|
|
15,569
|
|
|
|
|
|
15,569
|
|
15,569
|
|
Total
comprehensive income for fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,559
|
|
Balance,
July 31, 2009
|
|
16,643,727
|
|
$
|
1,788
|
|
$
|
87,169
|
|
$
|
102,103
|
|
$
|
8,281
|
|
$
|
(12,225
|
)
|
$
|
187,116
|
|
|
|
See accompanying
notes.
4
CANTEL
MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar
Amounts in Thousands)
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
15,569
|
|
$
|
8,693
|
|
$
|
8,446
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
6,217
|
|
6,058
|
|
5,347
|
|
Amortization
|
|
5,152
|
|
5,674
|
|
4,892
|
|
Stock-based
compensation expense
|
|
3,187
|
|
1,961
|
|
1,482
|
|
Amortization
of debt issuance costs
|
|
549
|
|
377
|
|
350
|
|
Loss
on disposal of fixed assets
|
|
52
|
|
126
|
|
25
|
|
Deferred
income taxes
|
|
(1,955
|
)
|
(1,977
|
)
|
(2,369
|
)
|
Excess
tax benefits from stock-based compensation
|
|
(267
|
)
|
(434
|
)
|
(706
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
(185
|
)
|
1,189
|
|
(6,334
|
)
|
Inventories
|
|
2,298
|
|
(3,343
|
)
|
(1,347
|
)
|
Prepaid
expenses and other current assets
|
|
(1,405
|
)
|
(1,052
|
)
|
(117
|
)
|
Assets
of discontinued operations
|
|
|
|
|
|
2,137
|
|
Accounts
payable, deferred revenue and accrued expenses
|
|
953
|
|
(378
|
)
|
2,623
|
|
Income
taxes payable
|
|
827
|
|
1,756
|
|
(1,118
|
)
|
Liabilities
of discontinued operations
|
|
|
|
(93
|
)
|
(7,344
|
)
|
Net
cash provided by operating activities
|
|
30,992
|
|
18,557
|
|
5,967
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(4,215
|
)
|
(4,983
|
)
|
(5,529
|
)
|
Proceeds
from disposal of fixed assets
|
|
1,669
|
|
23
|
|
61
|
|
Earnout
paid to Crosstex sellers
|
|
(3,666
|
)
|
(3,667
|
)
|
(3,667
|
)
|
Acquisition
of GE Water
|
|
|
|
|
|
(30,506
|
)
|
Acquisition
of Twist
|
|
(629
|
)
|
(15
|
)
|
(1,900
|
)
|
Acquisition
of DSI
|
|
|
|
(1,250
|
)
|
|
|
Acquisition
of Strong Dental, net of cash acquired
|
|
|
|
(3,711
|
)
|
|
|
Acquisition
of Verimetrix
|
|
|
|
(4,906
|
)
|
|
|
Acquisition
of G.E.M.
|
|
(4,414
|
)
|
|
|
|
|
Purchase
of convertible note receivable
|
|
(200
|
)
|
|
|
|
|
Other,
net
|
|
5
|
|
43
|
|
6
|
|
Net
cash used in investing activities
|
|
(11,450
|
)
|
(18,466
|
)
|
(41,535
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Borrowings
under revolving credit facilities, net of debt issuance costs
|
|
3,500
|
|
15,050
|
|
30,500
|
|
Repayments
under term loan facility
|
|
(8,000
|
)
|
(6,000
|
)
|
(4,000
|
)
|
Repayments
under revolving credit facility
|
|
(10,500
|
)
|
(7,750
|
)
|
(7,500
|
)
|
Proceeds
from exercises of stock options
|
|
1,315
|
|
1,151
|
|
3,636
|
|
Excess
tax benefits from stock-based compensation
|
|
267
|
|
434
|
|
706
|
|
Purchase
of interest rate cap
|
|
|
|
(148
|
)
|
|
|
Purchases
of treasury stock
|
|
(402
|
)
|
(855
|
)
|
(2,260
|
)
|
Net
cash (used in) provided by financing activities
|
|
(13,820
|
)
|
1,882
|
|
21,082
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
(672
|
)
|
485
|
|
448
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
5,050
|
|
2,458
|
|
(14,038
|
)
|
Cash
and cash equivalents at beginning of year
|
|
18,318
|
|
15,860
|
|
29,898
|
|
Cash
and cash equivalents at end of year
|
|
$
|
23,368
|
|
$
|
18,318
|
|
$
|
15,860
|
|
See accompanying
notes.
5
CANTEL MEDICAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Years Ended July 31, 2009, 2008
and 2007
1. Business Description
Cantel Medical Corp. (Cantel)
is a leading provider of infection prevention and control products in the
healthcare market, specializing in the following operating
segments:
·
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.
·
Healthcare Disposables
: Single-use, infection control products used principally in the dental market including face masks, towels
and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups,
sterilization pouches and disinfectants.
·
Dialysis
: Medical device reprocessing systems,
sterilants/disinfectants, dialysate concentrates and other supplies for renal
dialysis.
·
Endoscope Reprocessing
: Medical device reprocessing systems,
disinfectants, enzymatic detergents and other supplies used to clean and
high-level disinfect flexible endoscopes.
·
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 or control the occurrence or
spread of infections.
Cantel had five principal
operating companies during fiscals 2009, 2008 and 2007, Minntech Corporation (Minntech),
Crosstex International Inc. (Crosstex), Mar Cor Purification, Inc. (Mar
Cor), Biolab Equipment Ltd. (Biolab) and Saf-T-Pak Inc. (Saf-T-Pak), all
of which are wholly-owned operating subsidiaries. In addition, Minntech has
three foreign subsidiaries, Minntech B.V., Minntech Asia/Pacific Ltd. and
Minntech Japan K.K., which serve as Minntechs bases in Europe, Asia/Pacific
and Japan, respectively.
We
currently operate our business through six operating segments: Water
Purification and Filtration (through Mar Cor, Biolab and Minntech), Healthcare
Disposables (through Crosstex), Dialysis (through Minntech), Endoscope
Reprocessing (through Minntech), Therapeutic Filtration (through Minntech) and
Specialty Packaging (through Saf-T-Pak). The Therapeutic Filtration and
Specialty Packaging operating segments are combined in the All Other reporting
segment for financial reporting purposes.
On March 30,
2007, we purchased certain net assets of GE Water & Process
Technologies water dialysis business (the GE Water Acquisition or GE Water),
as more fully described in Note 3 to the Consolidated Financial Statements.
Since the GE Water Acquisition was completed on March 30, 2007, its
results of operations are included in our results of operations in fiscals 2009
and 2008 and for the portion of fiscal 2007 subsequent to March 30, 2007.
GE Water is included in our Water Purification and Filtration operating
segment.
On July 9,
2007, we acquired the net assets of Twist 2 It Inc. (Twist), as more fully
described in Note 3 to the Consolidated Financial Statements. The Twist
acquisition had an insignificant affect on our results of operations in fiscals
2009 and 2008 due to the small size of this business and with respect to fiscal
2007, its inclusion for only a
6
portion
of one month. Twist is included in our Healthcare Disposables operating
segment.
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
Consolidated Financial Statements. The acquisitions of DSI, Verimetrix and
Strong Dental had an overall insignificant affect on our results of operations
in fiscal 2009 and the portion of fiscal 2008 subsequent to their respective
acquisition dates due to the small size of these businesses. Their results of
operations are not reflected in fiscal 2007. DSI, Verimetrix and Strong Dental
are included in the Water Purification and Filtration, Endoscope Reprocessing
and Healthcare Disposables segments, respectively.
On July 31,
2009, we acquired certain net assets of G.E.M.
Water Systems Intl, LLC (G.E.M.), as more fully described in Note 3 to the
Consolidated Financial Statements. Its results of operations are not included
in our results of operations for any of the periods presented, but its net
assets are included in our Consolidated Balance Sheet at July 31, 2009.
G.E.M. will be included in our Water Purification and Filtration segment.
Certain items in
previously presented financial statements have been reclassified to conform to
the presentation of the July 31, 2009 financial statements. These
reclassifications relate to income taxes payable and accrued expenses in the
Consolidated Balance Sheets.
Throughout this
document, references to Cantel, us, we, our, and the Company are
references to Cantel Medical Corp. and its subsidiaries, except where the
context makes it clear the reference is to Cantel itself and not its
subsidiaries.
2. Summary of Significant Accounting
Policies
The following is a
summary of our significant accounting policies used to prepare our Consolidated
Financial Statements.
Principles of Consolidation
The Consolidated
Financial Statements include the accounts of Cantel and its wholly-owned
subsidiaries. All intercompany transactions and balances have been eliminated
in consolidation.
Revenue Recognition
Revenue on product sales
is recognized as products are shipped to customers and title passes. The
passing of title is determined based upon the FOB terms specified for each
shipment. With respect to dialysis, therapeutic, specialty packaging and
endoscope reprocessing products, shipment terms are generally FOB origin for
common carrier and FOB destination when our distribution fleet is utilized
(except for one large customer in dialysis whereby all products are shipped FOB
destination). With respect to water purification and filtration and healthcare
disposable products, shipment terms may be either FOB origin or destination.
Customer acceptance for the majority of our product sales occurs at the time of
delivery. In certain instances, primarily with respect to some of our water
purification and filtration equipment, endoscope reprocessing equipment and an
insignificant amount of our sales of dialysis equipment, post-delivery
obligations such as installation, in-servicing or training are contractually
specified; in such instances, revenue recognition is deferred until all of such
conditions have been substantially fulfilled such that the products are deemed
functional by the end-user. With respect to a portion of water purification and
filtration product sales, equipment is sold as part of a system for which the
equipment is functionally interdependent or the customers purchase order
specifies ship-complete as a condition of delivery; revenue recognition on
such sales is deferred until all equipment has been delivered.
A portion of our water
purification and filtration 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
7
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 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 $2,461,000, $1,757,000
and $1,449,000 in fiscals 2009, 2008 and 2007, respectively. The increase in
volume rebates in fiscal 2009, compared with fiscal 2008, is primarily due to
new terms in a recently renewed rebate arrangement 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
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.
Translation of Foreign Currency Financial Statements
Assets and liabilities of
our foreign subsidiaries are translated into United States dollars at year-end
exchange rates; sales and expenses are translated using average exchange rates
during the year. The cumulative effect of the translation of the accounts of
the foreign subsidiaries is presented as a component of accumulated other
comprehensive income or loss. Foreign exchange gains and losses related to the
purchase of inventories denominated in foreign currencies are included in cost
of sales and foreign exchange gains and losses related to the incurrence of
operating costs denominated in foreign currencies are included in general and
administrative expenses. Additionally, foreign exchange gains and losses
related to the conversion of foreign assets and liabilities into functional
currencies are included in general and administrative expenses.
Cash and Cash Equivalents
We consider all highly
liquid investments with maturities of three months or less when purchased to be
cash equivalents.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts receivable consist
of amounts due to us from normal business activities. Allowances for doubtful
accounts are reserves for the estimated loss from the inability of customers to
make required payments. We use historical experience as well as current market
information in determining the estimate. While actual losses have historically
been within managements expectations and provisions established, if the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Alternatively, if
8
certain customers paid
their delinquent receivables, reductions in allowances may be required.
Inventories
Inventories consist of
raw materials and finished products which are sold in the ordinary course of
our business and are stated at the lower of cost (first-in, first-out) or
market. In assessing the value of inventories, we must make estimates and
judgments regarding reserves required for product obsolescence, aging of
inventories and other issues potentially affecting the saleable condition of
products. In performing such evaluations, we use historical experience as well
as current market information.
Property and Equipment
Property and equipment
are stated at cost. Additions and improvements are capitalized, while
maintenance and repair costs are expensed. When assets are retired or otherwise
disposed, the cost and related accumulated depreciation or amortization is
removed from the respective accounts and any resulting gain or loss is included
in income. Depreciation and amortization is provided on the straight-line
method over the estimated useful lives of the assets which generally range from
2-15 years for furniture and equipment, 5-32 years for buildings and
improvements and the shorter of the life of the asset or the life of the lease
for leasehold improvements. The depreciation and amortization expense related
to property and equipment for fiscals 2009, 2008 and 2007 was $6,217,000, $6,058,000
and $5,347,000, respectively.
Goodwill and Intangible Assets
Certain of our
identifiable intangible assets, including customer relationships, technology,
brand names, non-compete agreements and patents, are amortized 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,
2009, management concluded that none of our intangible assets or goodwill was
impaired.
While the results
of these annual reviews have historically not indicated impairment, impairment
reviews are highly dependent on managements projections of our future
operating results 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.
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
9
differed significantly
from the actual amounts realized. However, the determination of fair value
requires us to make certain assumptions and estimates and is highly subjective,
and accordingly, actual amounts realized may differ significantly from our
estimates.
Other Assets
Debt issuance costs
associated with the credit facilities are amortized to interest expense over
the life of the credit facilities. In conjunction with the amended and restated
credit facilities dated August 1, 2005, as more fully described in Note 8
to the Consolidated Financial Statements, we incurred additional debt issuance
costs of approximately $1,426,000, of which $160,000 of third-party costs was
recorded in general and administrative expenses during the first three months
of fiscal 2006 in accordance with applicable accounting rules. The remaining
$1,266,000 of costs is being amortized over the life of the credit facilities.
As of July 31, 2009 and 2008, such debt issuance costs, net of related amortization,
were included in other assets and amounted to $587,000 and $960,000,
respectively.
Warranties
We provide for
estimated costs that may be incurred to remedy deficiencies of quality or
performance of our products at the time of revenue recognition. Most of our
products have a one year warranty, although a majority of our endoscope
reprocessing equipment in the United States 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 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), modifications of existing awards and assumptions used
in determining fair value, expected lives 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.
10
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 $345,000 and $365,000 in charges
associated with exit or disposal activities in fiscals 2009 and 2008,
respectively, relating to our restructuring plan for our Netherlands
manufacturing operations.
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.
Earnings Per Common Share
Basic earnings per common
share are computed based upon the weighted average number of common shares
outstanding during the year.
Diluted earnings per
common share are computed based upon the weighted average number of common
shares outstanding during the year plus the dilutive effect of options and
nonvested shares using the treasury stock method and the average market price
of our Common Stock for the year.
Advertising Costs
Our policy is to expense
advertising costs as they are incurred. Advertising costs charged to expense
were $1,483,000, $1,186,000 and $1,032,000 for fiscals 2009, 2008 and 2007,
respectively.
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. A
review of our deferred tax items 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, an increase in our Federal tax rate to 35% as well as recently enacted
Canadian federal and New York State statutory tax rate reductions were applied
to existing overall deferred income tax liabilities, which resulted in
virtually no change in our overall effective tax rates.
11
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
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 have been recorded as an increase or
decrease to goodwill. Subsequent to our August 1, 2009 adoption of SFAS 141R, the resolution of income tax
uncertainties that predate or result from acquisitions will be recognized in
our results of operations. Unrecognized tax benefits are analyzed periodically
and adjustments are made, as events occur to warrant adjustment to the related
liability.
Use of Estimates
The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. On an ongoing basis,
we evaluate the adequacy of our reserves and the estimates used in calculations
of reserves as well as other judgmental financial statement items, including,
but not limited to: collectability of accounts receivable; volume rebates and
trade-in allowances; inventory values and obsolescence reserves; warranty
reserves; depreciation and amortization periods; deferred income taxes;
goodwill and intangible assets; impairment of long-lived assets; unrecognized
tax benefits for uncertain tax positions; reserves for legal exposure;
stock-based compensation; and expense accruals.
Acquisitions require
significant estimates and judgments related to the fair value of assets
acquired and liabilities assumed. Certain liabilities and reserves are
subjective in nature. We reflect such liabilities and reserves based upon the
most recent information available. In conjunction with our acquisitions, such
subjective liabilities and reserves principally include certain income tax and
sales and use tax exposures, including tax liabilities related to our foreign
subsidiaries, as well as reserves for accounts receivable, inventories and
warranties. The ultimate settlement of such liabilities may be for amounts
which are different from the amounts recorded.
Recent
Accounting Pronouncements
In June 2009, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168,
The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162,
(SFAS
168). SFAS 168 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. The FASB Accounting Standards Codification (the
Codification) will become the source of authoritative GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification supersedes all existing non-SEC accounting and
reporting standards. With limited exceptions, non-SEC accounting literature not
included in the Codification will become non-authoritative. SFAS 168 is effective
for financial statements issued for interim and annual periods ending after September 15,
2009 and therefore was adopted by us on August 1, 2009. The adoption of
SFAS 168 had no impact on our financial position or results of operations.
In May 2009, the
FASB issued SFAS No. 165,
Subsequent Events,
(SFAS 165). SFAS No. 165 was issued in order to establish principles and
requirements for reviewing and reporting subsequent events and requires
disclosures of the date through which subsequent events are evaluated and
whether the date corresponds with the time at which the financial statements
were available for issue (as defined) or were issued. SFAS 165 is effective for
interim reporting periods ending after June 15, 2009. The adoption of SFAS
165 did not effect on our financial position or results of operation. In
accordance with SFAS 165, the Company performed a review of events subsequent
to July 31, 2009 through October 14, 2009, the date the financial
statements were issued. Based upon that review, no subsequent events occurred
that required updating to our Consolidated Financial Statements or disclosures.
In April 2009, the
FASB issued FASB Staff Position (FSP) No. 107-1 and Accounting
Principles Board (APB) 28-
12
1,
Interim
Disclosures about Fair Value of Financial Instruments
(FSP 107-1
and APB 28-1). FSP 107-1 and APB 28-1 amend SFAS No. 107,
Disclosures about Fair Value of Financial Instruments,
and
require disclosures about fair value of financial instruments for interim
reporting periods as well as for annual financial statements. Additionally, the
guidance amends APB Opinion No. 28,
Interim Financial
Reporting,
and requires those disclosures in summarized financial
information at interim reporting periods. The provisions of FSP 107-1 and APB
28-1 are effective for interim reporting periods ending after June 15,
2009 and therefore were adopted on May 1, 2009. As FSP 107-1 and APB 28-1
relate specifically to disclosures, these standards had no impact on our
financial position or results of operations.
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 was adopted on February 1, 2009. As SFAS 161 relates
specifically to disclosures, this standard had no impact on our financial
position or results of operations, but did increase certain disclosures of our
hedging activities, as indicated in Note 5 to the Consolidated Financial
Statements.
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 was adopted on August 1, 2009.
The adoption of SFAS 141R did not have a material effect on our financial
position or results of operations.
In June 2008, the
FASB issued FSP No. EITF 03-6-1,
Determining
Whether Instruments Granted in Shared-Based Payment Transactions are
Participating Securities
(FSP EITF 03-6-1), which states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and are included in the computation of earnings per share pursuant
to the two-class method. FSP EITF 03-6-1 is effective for fiscal years
beginning after December 15, 2008 and therefore is effective for our first
quarter in fiscal 2010. We are currently in the process of evaluating the
impact of FSP EITF 03-6-1 on our earnings per share calculation.
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. 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 adopted the provisions of SFAS No. 157 for
nonfinancial assets and liabilities on August 1, 2009. The adoption of
SFAS No. 157 did not have a material impact on our our financial position
or results of operations.
13
3. Acquisitions
Fiscal 2009
G.E.M. Water Systems Intl, LLC
On July 31, 2009, we
purchased substantially all of the assets, including the building housing its operations, of G.E.M., a private company with
pre-acquisition annual revenues of approximately $3,500,000 based in Buena
Park, California that designs, installs
and services high quality water and bicarbonate systems for use in dialysis
clinics, hospitals and other healthcare facilities. The total consideration for
the transaction, including transaction costs, was $4,468,000. Such
consideration may be adjusted to reflect the final net asset value of the
assets purchased, which adjustment is expected to be insignificant.
The purchase price was
allocated to the assets acquired and assumed liabilities based on estimated
fair values as follows:
|
|
Preliminary
|
|
Net Assets
|
|
Allocation
|
|
Current assets
|
|
$
|
681,000
|
|
Property, plant and equipment
|
|
1,975,000
|
|
Amortizable intangible assets - customer
relationships (9-year life)
|
|
951,000
|
|
Non-amortizable intangible assets - trade names
(indefinite life)
|
|
203,000
|
|
Current liabilities
|
|
(808,000
|
)
|
Net assets acquired
|
|
$
|
3,002,000
|
|
There were no in-process
research and development projects acquired in connection with the acquisition.
The excess purchase price of $1,466,000 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 California with a
significant concentration of dialysis clinics and healthcare institutions.
Since the acquisition of
G.E.M. occurred on the last day of our fiscal 2009, its results of operations
are excluded from fiscals 2009, 2008
and 2007, but its net assets are included in our Consolidated Balance Sheet at July 31,
2009. Pro forma consolidated statements of income data have not been
presented due to the insignificant impact of this acquisition.
Fiscal
2008
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 July 31,
2009, none of the additional consideration had been earned.
14
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.
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 July 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
15
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.
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 in fiscal 2009 and the portion of fiscal
2008 subsequent to the respective acquisition dates and excluded from fiscal
2007. These acquisitions had an insignificant effect on our results of
operations due to the small size of these businesses. Pro forma consolidated
statements of income data for fiscals 2008 and 2007 have not been presented due
to the insignificant impact of these acquisitions individually and in the
aggregate.
Fiscal
2007
Twist 2 It Inc.
On July 9, 2007, we
expanded our product offerings in our Healthcare Disposables segment by
purchasing certain assets of Twist, the owner of a unique, patented, disposable
prophy angle for the cleaning and polishing of teeth that eliminates the
splatter of saliva, blood and other potential infectious matter. The acquired
business had pre-acquisition annual revenues of approximately $1,300,000 and
was purchased for $1,915,000, including transaction costs. Under the terms of
the purchase agreement, we agreed to pay additional purchase price up to $2,043,000
contingent upon the achievement of specified revenue targets over a two year
period. For the post acquisition periods ended July 31, 2009 and 2008,
additional purchase price of approximately $157,000 and $629,000, respectively,
were earned by the sellers bringing the
aggregate earned purchase price to $2,701,000. The additional earnout purchase
price for fiscals 2009 and 2008 was reflected in the accompanying Consolidated
Balance Sheets as additional goodwill and earnout payable at July
16
31, 2009 and 2008.
Additional earnout purchase price is no longer available to the sellers.
Due to the small size of
this acquisition, it had an insignificant impact on our results of operations
in fiscals 2009 and 2008 and virtually no impact on our results of operations
for fiscal 2007 since the acquisition occurred during the last month of fiscal
2007. Pro forma consolidated statement of income data for fiscal 2007 has not
been presented due to the insignificant impact of this acquisition.
The purchase price was
allocated to the assets acquired and assumed liabilities based on estimated
fair values as follows:
|
|
Final
|
|
Net Assets
|
|
Allocation
|
|
Inventories
|
|
$
|
32,000
|
|
Amortizable intangible assets:
|
|
|
|
Patents (12-year life)
|
|
627,000
|
|
Customer relationships (1-year life)
|
|
25,000
|
|
Branded products (12-year life)
|
|
97,000
|
|
Net assets acquired
|
|
$
|
781,000
|
|
There were no in-process
research and development projects acquired in connection with the acquisition.
The excess purchase price of $1,920,000 was assigned to goodwill. Such
goodwill, all of which is deductible for income tax purposes, has been included
in our Healthcare Disposables reporting segment.
The principal reasons for
the acquisition were to (i) enter into a sizeable dental disposable niche
with a branded, technologically differentiated, and patent-protected product, (ii) expand
Crosstex recently launched Patients Choice product line, and (iii) leverage
Crosstex sophisticated sales and marketing infrastructure in the dental arena.
GE
Water & Process Technologies Dialysis Water Business
On March 30, 2007,
Mar Cor purchased certain net assets from GE Water & Process
Technologies, a unit of General Electric Company, relating to water dialysis.
With an installed base of approximately 1,800 water equipment installations in
North America and annual pre-acquisition revenues of approximately $20,000,000
(approximately 70% of such revenues were from one customer, Fresenius Medical
Care), the GE Water Acquisition expanded our Water Purification and Filtrations
annual business by approximately 50% in terms of sales. Total consideration for
the transaction, including transaction costs, was $30,506,000.
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
|
|
$
|
2,030,000
|
|
Property and equipment
|
|
150,000
|
|
Amortizable intangible assets:
|
|
|
|
Customer relationships (9-year life)
|
|
4,700,000
|
|
Branded products (9-year life)
|
|
400,000
|
|
Current liabilities
|
|
(900,000
|
)
|
Net assets acquired
|
|
$
|
6,380,000
|
|
There were no in-process
research and development projects acquired in connection with the acquisition.
The excess purchase price of $24,126,000 was assigned to goodwill. Such
goodwill, all of which is deductible for income tax purposes, has been included
in our Water Purification and Filtration reporting segment.
The reasons for the
acquisition were as follows: (i) the opportunity to add an installed
equipment base of business into which we can (a) increase service revenue
while improving the density and efficiency of the Mar Cor service network and
17
(b) increase
consumable sales per clinic; (ii) the potential revenue and cost savings
synergies and efficiencies that could be realized through optimizing and
combining the acquired assets (including GE Water employees) into Mar Cor; and (iii) the
expectation that the acquisition will be accretive to our future earnings per
share.
For the four months ended
July 31, 2007 since its acquisition on March 30, 2007, GE Water
contributed $6,949,000 to our net sales and $2,004,000 to gross profit
(inclusive of $56,000 of amortization included within cost of sales related to
the step-up in the value of inventories.) Pro forma consolidated statements of
income data for fiscal 2007 have not been presented due to the unavailability
of pre-acquisition GE Water financial statements, since GE did not maintain
separate financial statements related to these purchased assets.
4. Inventories
A summary of inventories
is as follows:
|
|
July 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Raw materials and parts
|
|
$
|
10,980,000
|
|
$
|
12,615,000
|
|
Work-in-process
|
|
3,074,000
|
|
3,544,000
|
|
Finished goods
|
|
15,146,000
|
|
15,643,000
|
|
Total
|
|
$
|
29,200,000
|
|
$
|
31,802,000
|
|
5.
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 July 31, 2009, all of our
derivatives were designated as hedges in accordance with SFAS 133.
Changes in the value of (i) the
Canadian dollar against the United States dollar, (ii) the euro against
the United States dollar and British pound and (iii) the British pound
relative to the United States dollar affect our results of operations because a
portion of the net assets of our Canadian subsidiaries (which are reported in
our Specialty Packaging and Water Purification and Filtration segments) and
Minntechs 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 Canadian dollar or euro currency. Furthermore, as
part of the restructuring of our Netherlands subsidiary, as further described
in Note 18 to the 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 (i) the Canadian dollar
relative to the United States dollar, (ii) the euro relative to the United
States dollar and British pound and (iii) 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 Canadian
dollars, 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 three foreign currency forward contracts with an
aggregate value of $3,736,000 at July 31, 2009, which covered certain
assets and liabilities that were denominated in currencies other than our
subsidiaries functional currencies. Such contracts expired on August 31,
2009. These foreign currency forward contracts are continually replaced with
new one-month contracts as long as we have significant net assets at our
subsidiaries that are denominated and ultimately settled in currencies other
than their
18
functional currencies.
Under our credit facilities, such contracts to purchase Canadian dollars, euros
and British pounds may not exceed $12,000,000 in an aggregate notional amount
at any time. In fiscal 2009, such forward contracts partially offset the impact
on operations relating to certain assets and liabilities that were denominated
in currencies other than our subsidiaries functional currencies. Despite the
use of these forward contracts, the functional currency conversion loss
recognized in net income relating to these hedging contracts was approximately
$200,000, net of tax, in fiscal 2009 and was primarily due to the timing of our
cash repatriation from the Netherlands and the weakening of the euro and
British pound relative to the United States dollar. Gains and losses related to
the hedging contracts to buy Canadian dollars, 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 8 to the 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 was previously included in other assets, was
$148,000. During fiscal 2009, the difference between the interest rate cap
agreements amortized cost and its fair value was recorded as an unrealized
loss and included in accumulated other comprehensive income. In July 2009,
the interest rate cap agreement was determined to be ineffective since the
interest rates on substantially all of our outstanding borrowings under our
term loan facility were protected under LIBOR contracts substantially below
4.25%. Accordingly, we reclassified the $148,000 change in fair value of the
interest rate cap agreement from an unrealized loss in accumulated other comprehensive
income into a recognized loss in interest expense in the Consolidated
Statements of Income. No further gains or losses relating to this interest rate
cap agreement will occur in the future.
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 July 31, 2009,
the fair value of the interest rate cap agreement referred to above was zero
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.
As of July 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
|
|
Cash and cash equilavents:
|
|
|
|
|
|
|
|
|
|
Bank deposits and certificates of deposit
|
|
$
|
11,821,000
|
|
$
|
|
|
$
|
|
|
$
|
11,821,000
|
|
Money markets
|
|
11,547,000
|
|
|
|
|
|
11,547,000
|
|
Total cash and cash equilavents
|
|
$
|
23,368,000
|
|
$
|
|
|
$
|
|
|
$
|
23,368,000
|
|
Interest rate cap agreement
|
|
|
|
|
|
|
|
|
|
Total assets measured on a reoccuring basis
|
|
$
|
23,368,000
|
|
$
|
|
|
$
|
|
|
$
|
23,368,000
|
|
19
As of July 31, 2009
and 2008, the carrying amounts for cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short
maturity of these instruments. We believe that as of July 31, 2009, the
fair value of our outstanding borrowings under our credit facilities
approximates the carrying value of those obligations since the borrowing rates
are comparable to market interest rates.
6. Intangibles and Goodwill
Our intangible assets
with definite lives consist primarily of customer relationships, technology,
brand names, non-compete agreements and patents. These intangible assets are
being amortized on the straight-line method over the estimated useful lives of
the assets ranging from 3-20 years and have a weighted average amortization
period of 10 years. Amortization expense related to intangible assets was
$5,152,000, $5,674,000 and $4,892,000 for fiscals 2009, 2008 and 2007,
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:
|
|
July 31, 2009
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
26,977,000
|
|
$
|
(10,592,000
|
)
|
$
|
16,385,000
|
|
Technology
|
|
9,345,000
|
|
(5,304,000
|
)
|
4,041,000
|
|
Brand names
|
|
9,546,000
|
|
(3,798,000
|
)
|
5,748,000
|
|
Non-compete agreements
|
|
1,863,000
|
|
(1,223,000
|
)
|
640,000
|
|
Patents and other registrations
|
|
1,140,000
|
|
(221,000
|
)
|
919,000
|
|
|
|
48,871,000
|
|
(21,138,000
|
)
|
27,733,000
|
|
Trademarks and tradenames
|
|
9,309,000
|
|
|
|
9,309,000
|
|
Total intangible assets
|
|
$
|
58,180,000
|
|
$
|
(21,138,000
|
)
|
$
|
37,042,000
|
|
|
|
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 annual
amortization expense of our intangible assets for the next five years is as
follows:
Year Ending July 31,
|
|
2010
|
|
$
|
5,045,000
|
|
2011
|
|
4,740,000
|
|
2012
|
|
4,275,000
|
|
2013
|
|
4,202,000
|
|
2014
|
|
4,016,000
|
|
|
|
|
|
|
20
Goodwill changed during
fiscals 2009 and 2008 as follows:
|
|
Water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purification
|
|
Healthcare
|
|
|
|
Endoscope
|
|
|
|
Total
|
|
|
|
and Filtration
|
|
Disposables
|
|
Dialysis
|
|
Reprocessing
|
|
All Other
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2007
|
|
$
|
36,641,000
|
|
$
|
43,011,000
|
|
$
|
8,155,000
|
|
$
|
6,500,000
|
|
$
|
7,766,000
|
|
$
|
102,073,000
|
|
Acquisitions
|
|
857,000
|
|
3,167,000
|
|
|
|
3,148,000
|
|
|
|
7,172,000
|
|
Earnout on acquisitions
|
|
|
|
4,295,000
|
|
|
|
|
|
|
|
4,295,000
|
|
Adjustments
primarily relating to income tax exposure of acquisitions
|
|
(61,000
|
)
|
|
|
(22,000
|
)
|
|
|
(3,000
|
)
|
(86,000
|
)
|
Foreign currency translation
|
|
225,000
|
|
|
|
|
|
|
|
279,000
|
|
504,000
|
|
Balance, July 31, 2008
|
|
37,662,000
|
|
50,473,000
|
|
8,133,000
|
|
9,648,000
|
|
8,042,000
|
|
113,958,000
|
|
Acquisitions
|
|
1,466,000
|
|
|
|
|
|
|
|
|
|
1,466,000
|
|
Earnout on acquisitions
|
|
|
|
157,000
|
|
|
|
|
|
|
|
157,000
|
|
Adjustments
primarily relating to income tax exposure of acquisitions
|
|
(38,000
|
)
|
|
|
|
|
|
|
|
|
(38,000
|
)
|
Foreign currency translation
|
|
(244,000
|
)
|
|
|
|
|
|
|
(304,000
|
)
|
(548,000
|
)
|
Balance, July 31, 2009
|
|
$
|
38,846,000
|
|
$
|
50,630,000
|
|
$
|
8,133,000
|
|
$
|
9,648,000
|
|
$
|
7,738,000
|
|
$
|
114,995,000
|
|
On July 31, 2009 and
2008, we performed impairment studies of the Companys goodwill, trademarks and
trade names and concluded that such assets were not impaired.
7. Warranties
A summary of activity in
the warranty reserves follows:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
916,000
|
|
$
|
1,033,000
|
|
Acquisitions
|
|
10,000
|
|
28,000
|
|
Provisions
|
|
1,345,000
|
|
1,319,000
|
|
Charges
|
|
(1,281,000
|
)
|
(1,505,000
|
)
|
Foreign currency translation
|
|
(41,000
|
)
|
41,000
|
|
Ending Balance
|
|
$
|
949,000
|
|
$
|
916,000
|
|
The warranty provisions
and charges during fiscals 2009 and 2008 relate principally to the Companys
endoscope reprocessing and water purification products. Warranty reserves are
included in accrued expenses in the Consolidated Balance Sheets.
8. Financing Arrangements
In conjunction
with the acquisition of Crosstex, we entered into amended and restated credit
facilities dated as of August 1, 2005 (the 2005 U.S. Credit Facilities)
with a consortium of lenders to fund the cash consideration paid in the
acquisition and costs associated with the acquisition, as well as to modify our
existing United States credit facilities. 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 are recorded in other assets and are being amortized over the life of
the credit facilities. Such unamortized debt issuance costs amounted to
approximately $587,000 at July 31, 2009.
21
At July 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 July 31, 2009, the lenders
base rate was 3.25% and the LIBOR rates applicable to our outstanding
borrowings ranged from 0.63% to 3.35%. The margins applicable to our
outstanding borrowings at July 31, 2009 were 0.00% above the lenders base
rate and 0.75% above LIBOR. All of our outstanding borrowings were under LIBOR
contracts at July 31, 2009. The majority of such contracts were twelve
month LIBOR contracts; therefore, we are substantially protected throughout
most of fiscal 2010 from any exposure associated with increasing LIBOR rates.
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 0.20% at July 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 July 31,
2009, we were in compliance with all financial and other covenants under the
2005 U.S. Credit Facilities.
On July 31, 2009, we
had $43,300,000 of outstanding borrowings under the 2005 U.S. Credit
Facilities, which consisted of $20,000,000 and $23,300,000 under the term loan
facility and the revolving credit facility, respectively. In September 2009,
we repaid $2,800,000 under the revolving credit facility and $2,500,000 under
our term loan facility reducing our total outstanding borrowings to
$38,000,000. The maturities of our credit facilities are described in Note 10
to the Consolidated Financial Statements.
The revolving portion of
our credit facilities has a termination date of August 1,
2010. Although we may repay a portion of our outstanding borrowings under
the revolver throughout fiscal 2010, we do not presently anticipate paying off
the revolver in full by its termination date. We are in discussions with
our bank syndicate regarding modifications to such facility, including an
extension of the termination date, and expect to formally modify the facility
before the expiration date. However, since any modification will not be
completed until later in fiscal 2010, subsequent to July 31, 2009 we will
be required to reclassify the entire outstanding balance of the revolver from
long-term to current.
9. Income Taxes
The
consolidated effective tax rate from continuing operations was 37.6%, 37.2% and
42.5% for fiscals 2009, 2008, and 2007, respectively, and reflects income tax
expense for our United States and international operations at their respective
statutory rates.
The provision for income
taxes from continuing operations consists of the following:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,165,000
|
|
$
|
(1,282,000
|
)
|
$
|
5,336,000
|
|
$
|
(1,418,000
|
)
|
$
|
6,117,000
|
|
$
|
(1,503,000
|
)
|
State
|
|
1,610,000
|
|
(402,000
|
)
|
1,081,000
|
|
(408,000
|
)
|
1,422,000
|
|
(421,000
|
)
|
Canada
|
|
545,000
|
|
(327,000
|
)
|
657,000
|
|
(306,000
|
)
|
937,000
|
|
(274,000
|
)
|
Singapore
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
Netherlands
|
|
|
|
|
|
26,000
|
|
|
|
(66,000
|
)
|
(96,000
|
)
|
Japan
|
|
2,000
|
|
|
|
|
|
190,000
|
|
|
|
(118,000
|
)
|
Total
|
|
$
|
11,398,000
|
|
$
|
(2,011,000
|
)
|
$
|
7,100,000
|
|
$
|
(1,942,000
|
)
|
$
|
8,410,000
|
|
$
|
(2,412,000
|
)
|
22
The geographic components
of income from continuing operations before income taxes are as follows:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
23,566,000
|
|
$
|
13,330,000
|
|
$
|
14,745,000
|
|
Canada
|
|
1,296,000
|
|
1,563,000
|
|
1,969,000
|
|
Netherlands
|
|
(285,000
|
)
|
(925,000
|
)
|
(2,169,000
|
)
|
Japan
|
|
(201,000
|
)
|
(133,000
|
)
|
(238,000
|
)
|
Singapore
|
|
580,000
|
|
16,000
|
|
(205,000
|
)
|
Total
|
|
$
|
24,956,000
|
|
$
|
13,851,000
|
|
$
|
14,102,000
|
|
The effective tax rate
from continuing operations differs from the United States statutory tax rate
(35.0% in 2009, 34.2% in 2008 and 34.3% in 2007) due to the following:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Expected statutory tax
|
|
$
|
8,735,000
|
|
$
|
4,737,000
|
|
$
|
4,841,000
|
|
Differential
attributable to foreign operations:
|
|
|
|
|
|
|
|
Canada
|
|
(235,000
|
)
|
(186,000
|
)
|
(13,000
|
)
|
Netherlands
|
|
100,000
|
|
342,000
|
|
582,000
|
|
Japan
|
|
72,000
|
|
236,000
|
|
(37,000
|
)
|
Singapore
|
|
(127,000
|
)
|
(6,000
|
)
|
70,000
|
|
State and local taxes
|
|
785,000
|
|
443,000
|
|
642,000
|
|
Extraterritorial income exclusion
|
|
|
|
(20,000
|
)
|
(56,000
|
)
|
Stock option expense
|
|
(193,000
|
)
|
(101,000
|
)
|
(27,000
|
)
|
Tax reserve provision
|
|
|
|
(58,000
|
)
|
(101,000
|
)
|
Domestic production deduction
|
|
(449,000
|
)
|
(219,000
|
)
|
(86,000
|
)
|
Foreign taxes
|
|
250,000
|
|
|
|
|
|
R&E tax credit
|
|
(197,000
|
)
|
|
|
|
|
US taxes paid on foreign dividends
|
|
243,000
|
|
|
|
|
|
Change in our U.S. Federal tax rate
|
|
287,000
|
|
(41,000
|
)
|
136,000
|
|
Other
|
|
116,000
|
|
31,000
|
|
47,000
|
|
Total income tax expense
|
|
$
|
9,387,000
|
|
$
|
5,158,000
|
|
$
|
5,998,000
|
|
23
Deferred income tax
assets and liabilities from continuing operations are comprised of the
following:
|
|
July 31,
|
|
|
|
2009
|
|
2008
|
|
Current deferred tax assets:
|
|
|
|
|
|
Accrued expenses
|
|
$
|
957,000
|
|
$
|
1,050,000
|
|
Inventories
|
|
929,000
|
|
950,000
|
|
Accounts receivable
|
|
385,000
|
|
268,000
|
|
Subtotal
|
|
2,271,000
|
|
2,268,000
|
|
Valuation allowance
|
|
(373,000
|
)
|
(703,000
|
)
|
|
|
$
|
1,898,000
|
|
$
|
1,565,000
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
Other long-term liabilities
|
|
$
|
597,000
|
|
$
|
716,000
|
|
Stock-based compensation
|
|
2,595,000
|
|
1,419,000
|
|
Foreign tax credit
|
|
1,058,000
|
|
1,964,000
|
|
Foreign NOLs
|
|
1,705,000
|
|
2,207,000
|
|
Subtotal
|
|
5,955,000
|
|
6,306,000
|
|
Valuation allowance
|
|
(2,466,000
|
)
|
(3,494,000
|
)
|
|
|
3,489,000
|
|
2,812,000
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
|
(5,841,000
|
)
|
(5,389,000
|
)
|
Intangible assets
|
|
(10,669,000
|
)
|
(12,529,000
|
)
|
Goodwill
|
|
(1,565,000
|
)
|
(758,000
|
)
|
Cumulative translation adjustment
|
|
(1,767,000
|
)
|
(2,119,000
|
)
|
Tax on unremitted foreign earnings
|
|
(25,000
|
)
|
(520,000
|
)
|
|
|
(19,867,000
|
)
|
(21,315,000
|
)
|
Net non-current deferred tax liabilities
|
|
$
|
(16,378,000
|
)
|
$
|
(18,503,000
|
)
|
Deferred tax assets and
liabilities have been adjusted for changes in statutory tax rates as
appropriate. Such changes only have a significant impact in the United States,
and to a lesser extent in Canada, where substantially all of our deferred tax
items exist. Such deferred tax items existing in the United States reflect a
combined U.S. Federal and state effective rate of approximately 38.1% and 37.7%
for fiscals 2009 and 2008, respectively.
At July 31, 2009, we
have no net operating loss carryforwards (NOLs) for domestic tax reporting
purposes. For foreign tax reporting purposes, our NOLs at July 31, 2009
are approximately $7,864,000. Of this amount NOLs from our Japanese subsidiary
total approximately $639,000 and will begin to expire on July 31, 2013 and
NOLs from our Netherlands subsidiary total approximately $7,225,000 and will
begin to expire on July 31, 2012. During fiscal 2008, we decided to place
a full valuation allowance against the NOLs of our Japanese subsidiary. Full
valuation allowances have been established for all of the foreign NOLs as we
currently believe it is more likely than not that we will not utilize such
NOLs.
During fiscal 2009, we
repatriated dividends of approximately $11,400,000 from our foreign
subsidiaries for which we have provided U.S. Federal and state income taxes and
foreign withholding taxes. During fiscals 2008 and 2007, no dividends were
repatriated from our foreign subsidiaries.
In fiscal 2007, Canadian
income taxes related to income from discontinued operations had an effective
tax rate of approximately 19.9%. This low overall effective tax rate was due to
a state refund related to our discontinued operations.
We have a deferred tax
asset of $1,058,000 related to a foreign tax credit that resulted from a
dividend repatriation during fiscal 2006. This foreign tax credit carryover
expires on July 31, 2016. A
valuation allowance was established against the foreign tax credit in fiscal
2006. The valuation allowance decreased
by approximately $896,000 from fiscal
24
2008. The decrease was mainly attributable to
additional foreign source income generated during fiscal 2009 due to the
foreign dividend repatriation. As we currently do not expect significant future
additional foreign source income, a valuation allowance has been established
for this foreign tax credit as we currently believe that it is more likely than
not that we will not utilize such foreign tax credits.
We
decreased our overall valuation allowances during fiscal 2009 by $1,358,000,
from $4,197,000 at July 31, 2008 to $2,839,000 at July 31, 2009,
primarily due to the decrease in the foreign tax credit valuation allowance.
A portion of the
undistributed earnings of our foreign subsidiaries, which relate to our
Canadian operations, amounting to approximately $10,385,000 was considered to
be indefinitely reinvested at July 31, 2009. Accordingly, no provision has
been made for United States income taxes that might result from repatriation of
these earnings.
On August 1, 2007, we adopted FIN 48, which clarifies the
accounting for income taxes by prescribing the minimum threshold a tax position
is required to meet before being recognized in the financial statements as well
as guidance on de-recognition, measurement, classification and disclosure of
tax positions. The adoption of FIN 48 did not have a material impact on
our financial position or results of operation and resulted in no cumulative
effect of accounting change being recorded as of August 1, 2007. Also, we did not record an increase or
decrease to our income taxes payable or deferred tax liabilities related to
unrecognized income tax benefits for uncertain tax positions on adoption of FIN
48.
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
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 have been recorded as an increase or
decrease to goodwill. On August 1, 2009, we adopted SFAS 141R, which
requires the resolution of income tax uncertainties that predate or result from
acquisitions to be recognized in our results of operations. However, if our
unrecognized tax benefits are recognized in our financial statements in future
periods, there would not be a significant impact to our effective tax rate due
to the size of the unrecognized tax benefits in relation to our income from
continuing operations before income taxes. 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
|
|
Lapse of statute of limitations
|
|
(47,000
|
)
|
Unrecognized tax benefits on July 31, 2009
|
|
$
|
380,000
|
|
Generally, the Company is no longer subject to
federal, state or foreign income tax examinations for fiscal years ended prior
to July 31, 2003.
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 Consolidated Financial Statements.
However, such amounts have been relatively insignificant due to the amount of
our unrecognized tax benefits relating to uncertain tax positions.
25
10. Commitments and Contingencies
Long-term
contractual obligations
As of July 31, 2009,
aggregate annual required payments over the next five years and thereafter
under our contractual obligations that have long-term components are as
follows:
|
|
Year Ended July 31,
(Amounts in thousands)
|
|
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of the credit facilities
|
|
$
|
10,000
|
|
$
|
33,300
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
43,300
|
|
Expected
interest payments under the credit facilities (1)
|
|
1,195
|
|
119
|
|
|
|
|
|
|
|
|
|
1,314
|
|
Minimum
commitments under noncancelable operating leases
|
|
3,206
|
|
2,162
|
|
1,256
|
|
799
|
|
660
|
|
2,977
|
|
11,060
|
|
Minimum
commitments under noncancelable capital leases
|
|
53
|
|
14
|
|
|
|
|
|
|
|
|
|
67
|
|
Deferred compensation and other
|
|
405
|
|
406
|
|
250
|
|
32
|
|
33
|
|
166
|
|
1,292
|
|
Employment agreements
|
|
3,301
|
|
148
|
|
138
|
|
|
|
|
|
|
|
3,587
|
|
Total contractual obligations
|
|
$
|
18,160
|
|
$
|
36,149
|
|
$
|
1,644
|
|
$
|
831
|
|
$
|
693
|
|
$
|
3,143
|
|
$
|
60,620
|
|
(1)
The expected interest payments under the
term and revolving credit facilities reflect interest rates of 2.15% and 3.70%,
respectively, which were our interest rates on outstanding borrowings at July 31,
2009. Since we expect to modify our credit facilities before the expiration
date of our revolving credit facility, as further explained in Note 8 to the
Consolidated Financial Statements, the margin applicable to our interest rates
on outstanding borrowings may increase during fiscal 2010.
Operating
leases
Minimum commitments under
operating leases include minimum rental commitments for our leased
manufacturing facilities, warehouses, office space and equipment.
Six of the more
significant leases that contain escalation clauses are two building leases for
our Water Purification and Filtration business, two building leases for our Healthcare
Disposables business and two building leases for our Specialty Packaging
business. The two Water Purification and Filtration building leases are for the
United States headquarters in suburban Philadelphia, Pennsylvania and the
Canadian headquarters in suburban Toronto, Ontario. The lease for the
Philadelphia building provides for monthly base rent of approximately $16,000
during fiscal 2010 and escalates annually to approximately $18,200 in fiscal
2017 when it expires. The Toronto building lease provides for monthly base rent
of approximately $14,500 through fiscal 2010 and escalates to approximately
$15,400 in fiscal 2015 when it expires. Both the Philadelphia and Toronto
building leases are guaranteed by Cantel. The Healthcare Disposables segment
has two significant building leases with escalation clauses that are used for
manufacturing and warehousing. One building in Sharon, Pennsylvania was owned
by an entity controlled by three of the former owners of Crosstex, two of whom
also serve as officers of Crosstex. During fiscal 2009, the entity sold the
building to a third party in a transaction under which the buyer made
substantial improvements, including the addition of 17,000 square feet to the
existing 35,000 square feet, in consideration for Crosstex agreeing to enter
into a new lease agreement that provides for increased rental charges. This new
lease provides for monthly base rent of approximately $17,900 during fiscal
2010 and escalates annually to approximately $20,600 in fiscal 2024 when it
expires. The second building lease in Santa Fe Springs, California provides for
monthly base rent of approximately $19,900, and was recently amended to
decrease the base rent to approximately $17,700 in fiscal 2010, escalating
annually thereafter to approximately $19,300 in fiscal 2015 when it expires.
Additionally, our Specialty Packaging segment has two significant building
leases with escalation clauses that are used for manufacturing and warehousing.
One building lease in Edmonton, Alberta provides for monthly base rent of
approximately $7,300 during fiscal 2010 and escalates annually to approximately
$7,400 in fiscal 2011
26
when it expires. The
second building lease in Glen Burnie, Maryland provides for monthly base rent
of $6,200 during fiscal 2010 and escalates annually to approximately $6,600 in
fiscal 2013 when it expires.
Rent expense related to
operating leases for fiscal 2009 was recorded on a straight-line basis and
aggregated $3,679,000 compared with $3,466,000 and $3,531,000 for fiscals 2008
and 2007.
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. In fiscal 2009, the license agreement was modified to reduce the royalty
rate and remove the minimum royalty obligation.
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 executives of the Company,
including our Corporate executive staff and our subsidiary presidents. The
majority of such contracts have expired or will expire in early fiscal 2010.
The Compensation Committee of the Board of Directors is actively working on new
agreements and has retained a third party consulting firm to provide advice on
executive compensation and to assist with this process. In the interim, the
Compensation Committee has agreed that in the event the employment of any of
these executives is terminated by the Company without cause, the executive will
continue to receive his base salary through July 31, 2010.
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, all of which was paid in fiscal 2009.
11. Stock-Based Compensation
The following table shows
the income statement components of stock-based compensation expense recognized
in the Consolidated Statements of Income:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
70,000
|
|
$
|
43,000
|
|
$
|
43,000
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Selling
|
|
216,000
|
|
123,000
|
|
159,000
|
|
General and administrative
|
|
2,884,000
|
|
1,778,000
|
|
1,258,000
|
|
Research and development
|
|
17,000
|
|
17,000
|
|
22,000
|
|
Total operating expenses
|
|
3,117,000
|
|
1,918,000
|
|
1,439,000
|
|
Stock-based compensation before income taxes
|
|
3,187,000
|
|
1,961,000
|
|
1,482,000
|
|
Income tax benefits
|
|
(1,226,000
|
)
|
(758,000
|
)
|
(490,000
|
)
|
Total stock-based compensation expense, net of tax
|
|
$
|
1,961,000
|
|
$
|
1,203,000
|
|
$
|
992,000
|
|
The above stock-based
compensation expense before income taxes was recorded in the Consolidated
Financial Statements as stock-based compensation expense (which decreased both
basic and diluted earnings per share from continuing operations by $0.12, $0.07
and $0.06 in fiscals 2009, 2008 and 2007, respectively) and an increase to
additional paid-in
27
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.
On July 31, 2009, we
extended the life of 456,001 fully vested out-of-the-money stock options
previously awarded to certain executive officers (seven individuals in total)
under our 1997 Employee Stock Option Plan. Such options were scheduled to
expire within six months after July 31, 2009 and had exercise prices
ranging from $17.14 to $22.93, which were greater than the closing price of
$15.48 on July 31, 2009, the date the Compensation Committee of our Board
of Directors authorized the modification. The sole modification was to extend
the options expiration dates to January 31, 2011. All other terms and
conditions of the stock options remain the same. As a result of this
modification, approximately $703,000 in additional stock-based compensation
expense was recorded in our Consolidated Financial Statements on July 31,
2009, which decreased both basic and diluted earnings per share by $0.03.
Most of our stock option
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 July 31,
2009, total unrecognized stock-based compensation expense, net of tax, related
to total nonvested stock options and stock awards which are expected to vest
was $2,157,000 with a remaining weighted average period of 20 months over which
such expense is expected to be recognized.
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.
A summary of nonvested
stock award activity follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
Nonvested stock awards at July 31, 2007
|
|
175,000
|
|
$
|
16.57
|
|
Granted
|
|
130,500
|
|
10.50
|
|
Canceled
|
|
(31,421
|
)
|
16.25
|
|
Vested
|
|
(66,914
|
)
|
16.53
|
|
Nonvested stock awards at July 31, 2008
|
|
207,165
|
|
12.81
|
|
Granted
|
|
101,000
|
|
14.59
|
|
Vested
|
|
(81,837
|
)
|
13.42
|
|
Nonvested stock awards at July 31, 2009
|
|
226,328
|
|
$
|
13.38
|
|
28
The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
valuation model with the following assumptions for options granted during
fiscals 2009, 2008 and 2007:
Weighted-Average
|
|
|
|
|
|
|
|
Black-Scholes Option
|
|
Year Ended July 31,
|
|
Valuation Assumptions
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Expected volatility (1)
|
|
0.428
|
|
0.340
|
|
0.368
|
|
Risk-free interest rate (2)
|
|
1.74
|
%
|
2.91
|
%
|
4.63
|
%
|
Expected lives (in years) (3)
|
|
4.06
|
|
3.87
|
|
4.04
|
|
(1) Volatility
was based on historical closing prices of our Common Stock.
|
(2) The
U.S. Treasury rate based on the expected life at the date of grant.
|
(3) Based
on historical exercise behavior.
|
Additionally, all options
were considered to be deductible for tax purposes in the valuation model,
except for certain incentive options granted under the 1997 Employee Plan and
to employees residing outside of the United States. Such non-qualified options
were tax-effected using the Companys estimated U.S. effective tax rate at the
time of grant. In fiscals 2009, 2008 and 2007, the weighted average fair value
of all options granted was $5.12, $3.35 and $5.47, respectively. The aggregate
intrinsic value (i.e. the excess market price over the exercise price) of all
options exercised was approximately $1,241,000, $2,361,000 and $7,032,000 in fiscals
2009, 2008 and 2007, respectively. The aggregate fair value of all options
vested was approximately $1,036,000, $1,475,000 and $648,000 in fiscals 2009,
2008 and 2007, respectively.
A summary of stock option
activity follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
Outstanding at July 31, 2006
|
|
2,373,699
|
|
$
|
11.98
|
|
Granted
|
|
544,000
|
|
15.34
|
|
Canceled
|
|
(264,143
|
)
|
17.89
|
|
Exercised
|
|
(804,710
|
)
|
6.40
|
|
|
|
|
|
|
|
Outstanding at July 31, 2007
|
|
1,848,846
|
|
14.55
|
|
Granted
|
|
383,250
|
|
10.95
|
|
Canceled
|
|
(186,376
|
)
|
16.54
|
|
Exercised
|
|
(291,303
|
)
|
6.23
|
|
|
|
|
|
|
|
Outstanding at July 31, 2008
|
|
1,754,417
|
|
14.94
|
|
Granted
|
|
106,250
|
|
14.33
|
|
Canceled
|
|
(91,653
|
)
|
14.82
|
|
Exercised
|
|
(263,292
|
)
|
6.83
|
|
|
|
|
|
|
|
Outstanding at July 31, 2009
|
|
1,505,722
|
|
$
|
16.32
|
|
|
|
|
|
|
|
Exercisable at July 31, 2007
|
|
1,252,427
|
|
$
|
14.46
|
|
|
|
|
|
|
|
Exercisable at July 31, 2008
|
|
1,137,624
|
|
$
|
16.28
|
|
|
|
|
|
|
|
Exercisable at July 31, 2009
|
|
1,049,657
|
|
$
|
17.86
|
|
As of July 31, 2009,
1,417,373 of the outstanding options had vested or were expected to vest in
future periods and had a weighted average exercise price of $16.57.
29
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).
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. In fiscals 2009 and 2008,
options exercised resulted in income tax deductions that reduced income taxes
payable by $745,000 and $895,000, respectively.
We
classify the cash flows resulting from excess tax benefits as financing cash
flows on our 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.
The following table
summarizes additional information related to stock options outstanding at July 31,
2009:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Number
|
|
Contractual
|
|
Average
|
|
Number
|
|
Contractual
|
|
Average
|
|
Range of Exercise
|
|
Outstanding
|
|
Life
|
|
Exercise
|
|
Exercisable
|
|
Life
|
|
Exercise
|
|
Prices
|
|
at July 31, 2009
|
|
(Months)
|
|
Price
|
|
At July 31, 2009
|
|
(Months)
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.27 -
$3.44
|
|
7,875
|
|
6
|
|
$
|
2.46
|
|
7,875
|
|
6
|
|
$
|
2.46
|
|
$8.23 -
$15.86
|
|
750,196
|
|
39
|
|
$
|
12.70
|
|
320,797
|
|
33
|
|
$
|
13.00
|
|
$16.24 - $29.49
|
|
747,651
|
|
18
|
|
$
|
20.10
|
|
720,985
|
|
17
|
|
$
|
20.20
|
|
$2.27 -
$29.49
|
|
1,505,722
|
|
28
|
|
$
|
16.32
|
|
1,049,657
|
|
22
|
|
$
|
17.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Intrinsic Value
|
|
$
|
2,189,220
|
|
|
|
|
|
$
|
899,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of our stock award plans follows:
2006
Equity Incentive Plan
On January 10, 2007,
the Company terminated our existing stock option plans and adopted the Cantel
Medical Corp. 2006 Equity Incentive Plan (the 2006 Plan). The 2006 Plan
provides for the granting of stock options (including incentive stock options),
restricted stock awards, stock appreciation rights and performance-based awards
(collectively equity awards) to our employees and non-employee Directors. The
2006 Plan does not permit the granting of discounted options or discounted
stock appreciation rights. On January 8, 2009, our stockholders approved
the Amendment to the Companys 2006 Equity Incentive Plan that increased the
number of shares of Common Stock available for issuance under the 2006 Plan by
700,000. The maximum number of shares as
to which stock options and stock awards may be granted under the 2006 Plan is
1,700,000 shares, of which 1,200,000 shares are authorized for issuance
pursuant to stock options and stock appreciation rights and 500,000 shares are
authorized for issuance pursuant to restricted stock and other stock awards. Options outstanding under this plan:
·
were granted at the closing market price
at the time of the grant,
·
were granted as stock options that do not
qualify as incentive stock options,
·
are usually exercisable in three or four
equal annual installments contingent upon being employed by the Company during
that period,
·
were granted quarterly on the last day of
each of our fiscal quarters to each non-employee director who attended that
quarters regularly scheduled Board of Directors meeting to purchase 750 shares
(100% are
30
exercisable
on the first anniversary of the grant of such options),
·
were granted annually on the last day of
our fiscal year to each member of our Board of Directors to purchase 1,500
shares (assuming the individual was still a member of the Board of Directors,
50% are exercisable on the first anniversary of the grant of such options and
50% are exercisable on the second anniversary of the grant of such options),
·
were granted automatically to each newly
appointed or elected director to purchase 15,000 shares, and
·
expire five years from the date of the
grant.
Restricted stock shares
outstanding under this plan are restricted solely due to an employment
length-of-service restriction which lapses in three equal periods based upon
being employed by the Company during that period. At July 31, 2009,
options to purchase 528,821 shares of Common Stock were outstanding, and
226,328 nonvested restricted stock shares were issued, under the 2006 Plan. At July 31,
2009, 641,750 shares are available for issuance pursuant to stock options and
stock appreciation rights and 124,921 shares are available for issuance
pursuant to restricted stock and other stock awards. The 2006 Plan expires on November 13,
2016.
1997
Employee Plan
A total of 3,750,000
shares of Common Stock was originally reserved for issuance or available for
grant under our 1997 Employee Stock Option Plan, as amended, which was
terminated on January 10, 2007 in conjunction with the adoption of the
2006 Plan. Options outstanding under this plan:
·
were granted at the closing market price
at the time of the grant,
·
were granted either as incentive stock
options or stock options that do not qualify as incentive stock options,
·
are usually exercisable in three or four
equal annual installments contingent upon being employed by the Company during
that period, and
·
typically expire five years from the date
of the grant.
At July 31,
2009, options to purchase 893,276 shares of Common Stock were outstanding under
the 1997 Employee Plan. No additional options will be granted under this plan.
1998
Directors Plan
A total of 450,000 shares
of Common Stock was originally reserved for issuance or available for grant
under our 1998 Directors Stock Option Plan, as amended, which was terminated
on January 10, 2007 in conjunction with the adoption of the 2006 Plan.
Options outstanding under this plan:
·
were granted to directors at the closing
market price at the time of grant,
·
were granted automatically to each newly
appointed or elected director to purchase 15,000 shares,
·
were granted annually on the last day of
our fiscal year to each member of our Board of Directors to purchase 1,500
shares (assuming the individual was still a member of the Board of Directors,
50% are exercisable on the first anniversary of the grant of such options and
50% are exercisable on the second anniversary of the grant of such options),
·
were granted quarterly on the last day of
each of our fiscal quarters to each non-employee director who attended that
quarters regularly scheduled Board of Directors meeting to purchase 750 shares
(100% are exercisable immediately),
·
have a term of ten years if granted prior
to July 31, 2000 or five years if granted on or after July 31, 2000,
and
·
do not qualify as incentive stock
options.
At July 31, 2009,
options to purchase 83,625 shares of Common Stock were outstanding under the
1998 Directors Plan. No additional options will be granted under this plan.
Non-plan
options
There were no non-plan
options outstanding at July 31, 2009.
31
12. Accumulated Other Comprehensive Income
The Companys
comprehensive income for fiscals 2009 and 2008 is set forth in the following
table:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,569,000
|
|
$
|
8,693,000
|
|
$
|
8,446,000
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
Unrealized loss on interest cap, net of tax
|
|
(93,000
|
)
|
|
|
|
|
Realized loss on interest cap, net of tax
|
|
93,000
|
|
|
|
|
|
Foreign currency translation, net of tax
|
|
(2,010,000
|
)
|
1,797,000
|
|
1,779,000
|
|
Comprehensive income
|
|
$
|
13,559,000
|
|
$
|
10,490,000
|
|
$
|
10,225,000
|
|
We purchased an interest
rate cap agreement at the end of our fiscal 2008. During fiscal 2009, the
difference between the interest rate cap agreements amortized cost and its
fair value was recorded as a $93,000 unrealized loss, net of tax, and included
in accumulated other comprehensive income. In July 2009, this interest cap
agreement was determined to be ineffective, as further described in Note 5 to
the Consolidated Financial Statements. Accordingly, we reclassified the
ineffective portion of the change in fair value of the interest rate cap
agreement from an unrealized loss in accumulated other comprehensive income
into a recognized loss in interest expense in the Consolidated Statements of
Income.
For purposes of
translating the balance sheet at July 31, 2009 compared with July 31,
2008, the value of the Canadian dollar and euro decreased by approximately 4.4%
and 9.3%, respectively, compared with the value of the United States dollar.
The total of these currency movements decreased the accumulated translation
adjustment, net of tax, by $2,010,000 during fiscal 2009 to $8,281,000 at July 31,
2009, from $10,291,000 at July 31, 2008.
32
13. Earnings Per Common Share
Basic earnings per common share are computed based upon the
weighted average number of common shares outstanding during the year.
Diluted earnings per
common share are computed based upon the weighted average number of common
shares outstanding during the year plus the dilutive effect of Common Stock
equivalents using the treasury stock method and the average market price of our
Common Stock for the year.
The following table sets
forth the computation of basic and diluted earnings per common share:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
15,569,000
|
|
$
|
8,693,000
|
|
$
|
8,104,000
|
|
Income from discontinued operations
|
|
|
|
|
|
342,000
|
|
Net income
|
|
$
|
15,569,000
|
|
$
|
8,693,000
|
|
$
|
8,446,000
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted earnings per
share:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share - weighted average number of shares outstanding
|
|
16,287,446
|
|
16,116,360
|
|
15,631,143
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of equity awards using the treasury stock method and the average
market price for the year
|
|
193,852
|
|
255,066
|
|
522,054
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - weighted average number of shares and Common
Stock equivalents
|
|
16,481,298
|
|
16,371,426
|
|
16,153,197
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.96
|
|
$
|
0.54
|
|
$
|
0.52
|
|
Discontinued operations
|
|
|
|
|
|
0.02
|
|
Net income
|
|
$
|
0.96
|
|
$
|
0.54
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.50
|
|
Discontinued operations
|
|
|
|
|
|
0.02
|
|
Net income
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
Stock options excluded from weighted average
dilutive common shares outstanding because their inclusion would have been
antidilutive
|
|
1,308,140
|
|
1,324,351
|
|
1,174,795
|
|
33
14.
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 repurchased shares from time-to-time at
prevailing prices and as permitted by applicable securities laws (including SEC
Rule 10b-18) and New York Stock Exchange requirements, and subject to
market conditions. The repurchase program had a one-year term that expired on 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 were made subsequent to the end of our first quarter
ended October 31, 2008. Therefore, at the conclusion of the repurchase
program on June 8, 2009, we had repurchased 134,547 shares under the
repurchase program at a total average price per share of $9.34.
15. Retirement Plans
We have 401(k) Savings
and Retirement Plans for the benefit of eligible United States employees.
Additionally, our Canadian subsidiaries maintain profit sharing plans for the
benefit of eligible employees. Contributions by the Company are both
discretionary and non-discretionary and are limited in any year to the amount
allowable by tax authorities in the United States or Canada.
Aggregate employer
contributions recognized under these plans were $1,745,000, $1,315,000 and
$1,236,000 for fiscals 2009, 2008 and 2007, respectively.
16. Supplemental Cash Flow Information
Interest paid was
$2,256,000, $4,332,000 and $3,306,000 for fiscals 2009, 2008 and 2007,
respectively.
Income tax payments were
$10,602,000, $5,774,000 and $10,137,000 for fiscals 2009, 2008 and 2007,
respectively. Income tax payments in fiscal 2007 include tax payments relating
to the sale of substantially all of Carsens assets in fiscal 2006, as further
described in Note 19 of the Consolidated Financial Statements.
17.
Information as to Operating Segments
and Foreign and Domestic Operations
We are a leading provider
of infection prevention and control products in the healthcare market. Our
products include specialized medical device reprocessing systems for renal
dialysis and endoscopy, dialysate concentrates and other dialysis supplies,
water purification equipment, sterilants, disinfectants and cleaners, hollow
fiber membrane filtration and separation products for medical and non-medical
applications, and specialty packaging for infectious and biological specimens.
We also provide technical maintenance for our products and offer compliance
training services for the transport of infectious and biological specimens.
In accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise
and Related Information
(SFAS 131), we have determined our
reportable business segments based upon an assessment of product types,
organizational structure, customers and internally prepared financial
statements. The primary factors used by us in analyzing segment performance are
net sales and operating income.
Since the GE Water
Acquisition was completed on March 30, 2007, the results of operations of
GE Water are included in the accompanying Water Purification and Filtration
segment information for fiscals 2009, 2008 and the portion of fiscal year 2007
subsequent to the acquisition date.
34
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 25% of our Water Purification and Filtration segment net
sales and approximately 8% of our consolidated net sales in fiscal 2009.
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 14% of our consolidated net sales in fiscal
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 50% of our Dialysis segment net sales
and approximately 19% of our consolidated net sales, including one customer
that accounted for approximately 30% of our Dialysis segment net sales and
approximately 8% of our consolidated net sales, in fiscal 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 Consolidated Financial
Statements as described in Note 2.
35
Information as to
operating segments is summarized below:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
71,340,000
|
|
$
|
68,589,000
|
|
$
|
49,032,000
|
|
Healthcare Disposables
|
|
64,085,000
|
|
58,657,000
|
|
57,610,000
|
|
Dialysis
|
|
56,414,000
|
|
60,075,000
|
|
58,696,000
|
|
Endoscope Reprocessing
|
|
52,333,000
|
|
46,924,000
|
|
38,941,000
|
|
All Other
|
|
15,878,000
|
|
15,129,000
|
|
14,765,000
|
|
Total
|
|
$
|
260,050,000
|
|
$
|
249,374,000
|
|
$
|
219,044,000
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
6,374,000
|
|
$
|
5,482,000
|
|
$
|
4,414,000
|
|
Healthcare Disposables
|
|
9,489,000
|
|
7,357,000
|
|
8,753,000
|
|
Dialysis
|
|
10,679,000
|
|
8,620,000
|
|
8,117,000
|
|
Endoscope Reprocessing
|
|
5,927,000
|
|
1,281,000
|
|
(509,000
|
)
|
All Other
|
|
3,569,000
|
|
3,443,000
|
|
3,293,000
|
|
|
|
36,038,000
|
|
26,183,000
|
|
24,068,000
|
|
General corporate expenses
|
|
(8,587,000
|
)
|
(8,216,000
|
)
|
(7,229,000
|
)
|
Interest expense, net
|
|
(2,495,000
|
)
|
(4,116,000
|
)
|
(2,737,000
|
)
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
$
|
24,956,000
|
|
$
|
13,851,000
|
|
$
|
14,102,000
|
|
36
|
|
July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
73,665,000
|
|
$
|
72,598,000
|
|
$
|
71,638,000
|
|
Healthcare Disposables
|
|
100,279,000
|
|
104,377,000
|
|
98,933,000
|
|
Dialysis
|
|
29,622,000
|
|
32,536,000
|
|
32,545,000
|
|
Endoscope Reprocessing
|
|
33,379,000
|
|
31,546,000
|
|
25,744,000
|
|
All Other
|
|
16,545,000
|
|
18,359,000
|
|
17,950,000
|
|
General
corporate, including cash and cash equivalents
|
|
24,381,000
|
|
19,774,000
|
|
16,861,000
|
|
Total
|
|
$
|
277,871,000
|
|
$
|
279,190,000
|
|
$
|
263,671,000
|
|
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
1,301,000
|
|
$
|
1,507,000
|
|
$
|
2,530,000
|
|
Healthcare Disposables
|
|
1,071,000
|
|
952,000
|
|
1,437,000
|
|
Dialysis
|
|
853,000
|
|
1,429,000
|
|
708,000
|
|
Endoscope Reprocessing
|
|
801,000
|
|
869,000
|
|
575,000
|
|
All Other
|
|
187,000
|
|
201,000
|
|
269,000
|
|
General corporate
|
|
2,000
|
|
25,000
|
|
10,000
|
|
Total
|
|
$
|
4,215,000
|
|
$
|
4,983,000
|
|
$
|
5,529,000
|
|
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
2,366,000
|
|
$
|
2,346,000
|
|
$
|
1,680,000
|
|
Healthcare Disposables
|
|
5,490,000
|
|
5,375,000
|
|
4,990,000
|
|
Dialysis
|
|
1,482,000
|
|
1,617,000
|
|
1,711,000
|
|
Endoscope Reprocessing
|
|
1,188,000
|
|
1,458,000
|
|
839,000
|
|
All Other
|
|
806,000
|
|
899,000
|
|
979,000
|
|
General corporate
|
|
37,000
|
|
37,000
|
|
40,000
|
|
Total
|
|
$
|
11,369,000
|
|
$
|
11,732,000
|
|
$
|
10,239,000
|
|
37
Information as to
geographic areas (including net sales which represent the geographic area from
which the Company derives its net sales from external customers) is summarized
below:
|
|
Year Ended July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
United States
|
|
$
|
214,909,000
|
|
$
|
203,087,000
|
|
$
|
179,540,000
|
|
Canada
|
|
10,476,000
|
|
11,217,000
|
|
10,246,000
|
|
Asia/Pacific
|
|
11,103,000
|
|
10,247,000
|
|
8,691,000
|
|
Europe/Africa/Middle East
|
|
13,366,000
|
|
15,905,000
|
|
12,604,000
|
|
Latin America/South America
|
|
10,196,000
|
|
8,918,000
|
|
7,963,000
|
|
Total
|
|
$
|
260,050,000
|
|
$
|
249,374,000
|
|
$
|
219,044,000
|
|
|
|
July 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Total long-lived assets:
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,398,000
|
|
$
|
35,698,000
|
|
$
|
36,504,000
|
|
Canada
|
|
1,219,000
|
|
1,435,000
|
|
1,524,000
|
|
Asia/Pacific
|
|
170,000
|
|
122,000
|
|
120,000
|
|
Europe
|
|
137,000
|
|
2,162,000
|
|
2,104,000
|
|
Total
|
|
36,924,000
|
|
39,417,000
|
|
40,252,000
|
|
Goodwill and intangible assets
|
|
152,037,000
|
|
155,212,000
|
|
146,688,000
|
|
Total
|
|
$
|
188,961,000
|
|
$
|
194,629,000
|
|
$
|
186,940,000
|
|
18.
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.
In fiscals 2009 and 2008,
we recorded $345,000 and $365,000, respectively, in restructuring expenses,
which decreased both basic and diluted earnings per share from continuing
operations by approximately $0.02 in both years. The cumulative amount of such
costs incurred as of July 31, 2009 was $710,000. The restructuring plan
has been completed and therefore we do not expect to incur any additional
restructuring costs. The decrease in the total expected restructuring expense
estimated at July 31, 2008 compared to actual costs incurred in fiscal
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.
38
The restructuring costs
recorded are as follows:
|
|
Cost of Sales
|
|
General and Administrative
Expenses
|
|
|
|
|
|
Unsalable
Inventory
|
|
Severance
|
|
Total
|
|
Severance
|
|
Other
|
|
Total
|
|
Aggregate
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 ended April 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
13,000
|
|
13,000
|
|
13,000
|
|
Foreign currency translation
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
5,000
|
|
Accrued balance at April 30, 2009
|
|
100,000
|
|
|
|
100,000
|
|
|
|
13,000
|
|
13,000
|
|
113,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended July 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
(13,000
|
)
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
(13,000
|
)
|
Paid
|
|
|
|
|
|
|
|
|
|
(13,000
|
)
|
(13,000
|
)
|
(13,000
|
)
|
Inventory disposal
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
(40,000
|
)
|
Foreign currency translation
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
6,000
|
|
Accrued balance at July 31, 2009
|
|
$
|
53,000
|
|
$
|
|
|
$
|
53,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring expenses incurred
|
|
$
|
208,000
|
|
$
|
230,000
|
|
$
|
438,000
|
|
$
|
247,000
|
|
$
|
25,000
|
|
$
|
272,000
|
|
$
|
710,000
|
|
Since the above costs
were recorded in our Netherlands subsidiary, which had 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
Consolidated Balance Sheets.
As part of the
restructuring plan, we sold our Netherlands building and land on May 19,
2009 and entered into a lease for 2.5 years with the new owner so we can
continue to use the facility as our European sales and service headquarters as
well as for warehouse and distribution activity. At July 31, 2008, these
assets had a book value of $1,808,000, net of accumulated depreciation, and
were included in property and equipment in our Consolidated Balance Sheet. The
sale of the building and land resulted in a gain of $146,000, which will be
amortized over the life of the lease and is recorded in deferred revenue and
other long-term liabilities. The rent for the full 2.5 year lease of $325,000
was paid from the sale proceeds and recorded as a prepaid expense in the
Consolidated Financial Statements.
39
19. Discontinued Operations
On July 31,
2006, Carsen closed the sale of substantially all of its assets to Olympus
under an Asset Purchase Agreement dated as of May 16, 2006 among Carsen,
Cantel and Olympus. Olympus purchased substantially all of Carsens assets other
than those related to Carsens Medivators business and certain other smaller
product lines. Following the closing, Olympus hired substantially all of Carsens
employees and took over Carsens Olympus-related operations (as well as the
operations related to the other acquired product lines). The transaction
resulted in an after-tax gain of $6,776,000 and was recorded separately on the
Consolidated Statement of Income for the year ended July 31, 2006 as gain
on disposal of discontinued operations, net of tax. In connection with the
transaction, Carsens Medivators-related assets as well as certain of its other
assets that were not acquired by Olympus were sold to our new Canadian
distributor of Medivators products.
The purchase price for
the net assets sold to Olympus was approximately $31,200,000, comprised of a
fixed sum of $10,000,000 plus an additional formula-based sum of $21,200,000.
In addition, Olympus paid Carsen 20% of Olympus revenues attributable to
Carsens unfilled customer orders (backlog) as of July 31, 2006 that
were assumed by Olympus at the closing. Such payments to Carsen were made
following Olympus receipt of customer payments for such orders and totaled
$368,000. In fiscal 2007, the entire $368,000 related to such backlog was
recorded as income and reported in income from discontinued operations, net of
tax, in the Consolidated Statements of Income.
The $10,000,000 fixed
portion of the purchase price was in consideration for (i) Carsens
customer lists, sales records, and certain other assets related to the sale and
servicing of Olympus products and certain non-Olympus products distributed by
Carsen, (ii) the release of Olympus contractual restriction on hiring
Carsen personnel, (iii) real property leases (which were assumed or replaced
by Olympus) and leasehold improvements, computer and software systems,
equipment and machinery, telephone systems, and records related to the acquired
assets, and (iv) assisting Olympus in effecting a smooth transition of
Carsens business of distributing and servicing Olympus and certain non-Olympus
products in Canada. Cantel has also agreed (on behalf of itself and its
affiliates) not to manufacture, distribute, sell or represent for sale in
Canada through July 31, 2008 any products that are competitive with the
Olympus products formerly sold by Carsen under its Olympus Distribution
Agreements.
The $21,200,000
formula-based portion of the purchase price was based on the book value of
Carsens inventories of Olympus and certain non-Olympus products and the net
book amount of Carsens accounts receivable and certain other assets, all at July 31,
2006, subject to offsets, particularly for accounts payable of Carsen due to
Olympus.
Net proceeds from Carsens
sale of net assets and the termination of Carsens operations were
approximately $21,100,000 (excluding the backlog payments) after satisfaction
of remaining liabilities and taxes.
As a result of the
foregoing transaction, which coincided with the expiration of Carsens
exclusive distribution agreements with Olympus on July 31, 2006, Carsen no
longer has any remaining product lines or active business operations.
The net sales and
operating income attributable to Carsens business (inclusive of both Olympus
and non-Olympus business, but exclusive of the sale of Medivators reprocessors)
constituted the entire Endoscopy and Surgical reporting segment and Scientific
operating segment, which historically was included within the All Other
reporting segment; as such, we no longer have any operations in these two
segments.
40
Operating segment
information and net income attributable to Carsens business is summarized
below:
|
|
Year Ended July 31,
2007
|
|
|
|
|
|
Net sales
|
|
$
|
1,428,000
|
|
|
|
|
|
Operating income
|
|
$
|
427,000
|
|
Interest expense
|
|
|
|
Income before income taxes
|
|
427,000
|
|
Income taxes
|
|
85,000
|
|
Income
from discontinued operations, net of tax
|
|
$
|
342,000
|
|
Cash flows attributable
to discontinued operations consist solely of net cash used in operating
activities of $93,000 and $4,867,000 in fiscals 2008 and 2007, respectively. In
fiscal 2008, net cash used in operating activities was due to the payment of
Carsens remaining liabilities that existed at July 31, 2007, which
primarily related to various taxes. In
fiscal 2007, net cash used in operating activities was primarily due to the
payment of Carsens remaining operating costs relating to fiscal 2006, income
tax payments and various wind-down costs, partially offset by the collection of
the remaining receivables.
20. Quarterly Results of Operations
(unaudited)
The following is a
summary of the quarterly results of operations for the years ended July 31,
2009 and 2008:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
64,406,000
|
|
$
|
62,420,000
|
|
$
|
66,431,000
|
|
$
|
66,793,000
|
|
Cost of sales
|
|
40,783,000
|
|
38,809,000
|
|
40,908,000
|
|
40,071,000
|
|
Gross profit
|
|
23,623,000
|
|
23,611,000
|
|
25,523,000
|
|
26,722,000
|
|
Gross profit percentage
|
|
36.7
|
%
|
37.8
|
%
|
38.4
|
%
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,333,000
|
|
$
|
3,774,000
|
|
$
|
4,183,000
|
|
$
|
4,279,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
$
|
0.23
|
|
$
|
0.26
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.20
|
|
$
|
0.23
|
|
$
|
0.25
|
|
$
|
0.26
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
60,005,000
|
|
$
|
60,910,000
|
|
$
|
64,178,000
|
|
$
|
64,281,000
|
|
Cost of sales
|
|
38,799,000
|
|
39,424,000
|
|
41,897,000
|
|
41,628,000
|
|
Gross profit
|
|
21,206,000
|
|
21,486,000
|
|
22,281,000
|
|
22,653,000
|
|
Gross profit percentage
|
|
35.3
|
%
|
35.3
|
%
|
34.7
|
%
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,939,000
|
|
$
|
2,157,000
|
|
$
|
2,001,000
|
|
$
|
2,596,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (1)
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
$
|
0.13
|
|
$
|
0.12
|
|
$
|
0.16
|
|
Diluted
|
|
$
|
0.12
|
|
$
|
0.13
|
|
$
|
0.12
|
|
$
|
0.16
|
|
(1) The summation of quarterly
earnings per share does not necessarily equal the fiscal year earnings per
share due to rounding.
41
21. Legal
Proceedings
In the normal course of
business, we are subject to pending and threatened legal actions. It is our
policy to accrue for amounts related to these legal matters if it is probable
that a liability has been incurred and an amount of anticipated exposure can be
reasonably estimated. 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.
22. Convertible Note Receivable
In February 2009, we
invested an initial $200,000 in a senior subordinated convertible promissory note
(the Note) issued by BIOSAFE, Inc. (BIOSAFE), in connection with
BIOSAFEs grant to us of certain exclusive and non-exclusive license rights to
BIOSAFEs antimicrobial additive. BIOSAFE is the owner of a patented and
proprietary antimicrobial agent that is built into the manufacturing of
end-products to achieve long-lasting microbial protection on such end-products
surface. As a result of BIOSAFEs successful raising of a minimum incremental
amount of cash following our investment, we are obligated to invest an
additional $300,000 in notes of BIOSAFE, which is expected to occur in the
first half of fiscal 2010.
The Note accrues interest
at a per annum rate of 8% until the maturity date of June 30, 2011 or
earlier exercise. The Note is convertible into a newly-created series of
preferred stock of BIOSAFE. Interest is payable in shares of BIOSAFE stock, or
if a next round of financing does not occur by the maturity date, in cash. If
not paid by the maturity date, interest will accrue thereafter at a rate of 12%
per annum. In connection with our investment, we entered into a license
agreement with BIOSAFE under which we will pay BIOSAFE a fixed royalty
percentage of sales of our products containing BIOSAFEs antimicrobial
formulation. This investment, together with the accrued interest of $7,000, is
included within other assets in our Consolidated Balance Sheet at July 31,
2009.
42
CANTEL MEDICAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
|
|
Balance at
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
Translation
|
|
at End
|
|
|
|
of Period
|
|
Additions
|
|
(Deductions)
|
|
Adjustments
|
|
of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended July 31, 2009
|
|
$
|
1,021,000
|
|
$
|
309,000
|
|
$
|
(207,000
|
)
|
$
|
(43,000
|
)
|
$
|
1,080,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended July 31, 2008
|
|
$
|
927,000
|
|
$
|
404,000
|
|
$
|
(351,000
|
)
|
$
|
41,000
|
|
$
|
1,021,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended July 31, 2007
|
|
$
|
929,000
|
|
$
|
162,000
|
|
$
|
(198,000
|
)
|
$
|
34,000
|
|
$
|
927,000
|
|
43
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