UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended July 31,
2010
or
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission
File No. 001-31337
CANTEL MEDICAL CORP.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
22-1760285
|
(State or other jurisdiction of
|
|
(I.R.S. employer
|
incorporation or organization)
|
|
identification no.)
|
|
|
|
150 Clove Road, Little Falls, New Jersey
|
|
07424
|
(Address of principal executive offices)
|
|
(Zip code)
|
Registrants telephone number, including area
code:
(973) 890-7220
Securities registered pursuant to Section 12(b) of the Act:
|
|
Name of each exchange
|
Title of each class
|
|
on which registered
|
Common Stock, $.10 par value
|
|
New York Stock Exchange
|
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
o
No
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large
accelerated filer, accelerated filer and small reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
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: $257,683,273.
Indicate
the number of shares outstanding of each of the registrants classes of common
stock as of the close of business on September 17, 2010: 16,866,284
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 2010 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
·
our continuing loss of dialysate concentrate business
·
our dependence
on a concentrated number of customers in three of our largest segments
·
severity of flu outbreaks 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
and services 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 prevention and control products used principally in the dental market
including face masks, sterilization pouches, towels and bibs, tray covers,
saliva ejectors, germicidal wipes, plastic cups and disinfectants.
·
Endoscope Reprocessing
: Medical
device reprocessing systems, disinfectants, enzymatic detergents and other
supplies used to high-level disinfect flexible endoscopes.
·
Dialysis
: Medical
device reprocessing systems, sterilants/disinfectants, dialysate concentrates
and other supplies for renal dialysis.
·
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).
·
Chemistries
: Sterilants,
disinfectants, detergents and decontamination services used in various
applications for infection prevention and control. (Included in All Other
reporting segment).
Most
of our equipment, consumables and supplies are used to help prevent 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.
Recent
Acquisition Subsequent to July 31, 2010
Acquisition of Gambro Renal Products, Inc. Water Business
On October 6, 2010, our Mar Cor Purification subsidiary (Mar Cor)
acquired from Gambro Renal Products, Inc. (GRP) and a Swedish-based
affiliate of GRP (collectively, Gambro) certain net assets and the exclusive
rights in the United States to manufacture and sell Gambros water treatment
products used in the production of water for hemodialysis (Gambro Water or
the Gambro Acquisition). Immediately following the acquisition, we commenced
sales and service of all Gambro water products, components, parts and
consumables solely intended for the United States market. The manufacturing of
these products will be transitioned into our own manufacturing facility in
Plymouth, Minnesota over the next few months. With an installed base of over
1,200 water equipment customers in the United States and annual pre-acquisition
revenues of approximately $14 million (approximately 80% of such revenues are
from one customer), the Gambro Acquisition is anticipated to expand our Water
Purification and Filtrations annual business by approximately 19% in terms of
sales, particularly with respect to product and service sales volumes in both
existing and new dialysis clinics across the United States. Total consideration
for the transaction, excluding transaction costs, was approximately
$23,750,000, of which $3,100,000 will be paid in six quarterly payments ending April 2012.
The Gambro Acquisition will be included in our Water Purification and
Filtration operating segment.
See Reporting
Segments-Water Purification and Filtration and Note 3 to the Consolidated
Financial Statements.
The reasons for the acquisition were as follows: (i) the expansion
of our water purification product line, particularly in the area of cost
effective heat sanitizing water purification equipment, (ii) the
opportunity to add an installed equipment base of
3
business
into which we can (a) increase sales and service revenue while improving
the density and efficiency of the Mar Cor service network and (b) increase
consumable sales per clinic; (iii) the potential revenue and cost savings
synergies and efficiencies that could be realized through optimizing and
combining the acquired assets (including Gambro employees) into Mar Cor; and (iv) the
expectation that the acquisition will be accretive to our future earnings per
share.
Since the acquisition was completed on October 6, 2010, the
results of operations of Gambro Water are not included in our results of
operations for any period presented herein.
Fiscal 2010 Acquisition
Acquisition of Purity Water Company of San
Antonio, Inc.
On
June 1, 2010, Mar Cor acquired all of the issued and outstanding capital
stock of Purity Water Company of San
Antonio, Inc. (Purity), a private company with pre-acquisition
annual revenues of approximately $2,300,000 based in San Antonio, Texas that
designs, installs and services high quality, high purity water systems for use
in laboratory, industrial, medical, pharmaceutical and semiconductor
environments. Total consideration for the transaction was $2,014,000. The results of operations of Purity
are included in our results of operations in fiscal 2010 subsequent to June 1,
2010 and are not included in any prior periods. Purity is included in the Water
Purification and Filtration segment. Following the acquisition, Purity was
merged with and into Mar Cor.
The primary reason for the acquisition was to add a base of business
and expand the Mar Cor service network in the southwest United States.
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 $3,500,000. The
results of operations of G.E.M. are included in our results of operations for
the entire fiscal 2010 and are not included for any prior period, but the
assets of G.E.M. are included in our Consolidated Balance Sheets as of both July 31,
2010 and 2009 (since the acquisition occurred on the final day of fiscal 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. are included in our
Water Purification and Filtration segment.
Reporting Segments
The following table gives information as to the percentage of
consolidated net sales from operations accounted for by each of our reporting
segments:
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
%
|
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
27.2
|
|
26.5
|
|
26.6
|
|
Healthcare Disposables
|
|
25.5
|
|
24.7
|
|
23.5
|
|
Endoscope Reprocessing
|
|
23.9
|
|
20.1
|
|
18.8
|
|
Dialysis
|
|
16.3
|
|
21.7
|
|
24.1
|
|
All Other
|
|
7.1
|
|
7.0
|
|
7.0
|
|
|
|
100.0
|
|
100.0
|
|
100.0
|
|
For
a presentation of net sales, operating income and total assets by reporting
segment, see Note 17 to the Consolidated Financial Statements.
During
fiscal 2010, we changed our internal reporting processes to include a new
operating segment called Chemistries to reflect the way the Company, through
its executive management, manages, allocates resources and measures the
performance of its businesses. This new operating segment is the combination of
a small portion of our existing sterilant
4
business,
comprised of products sold on an OEM basis and previously recorded in our Water
Purification and Filtration segment, and a new business operation that was
created to capitalize on our chemistry expertise and expand our product
offerings in existing and new markets within the infection prevention and
control arena. This new Chemistries operating segment has been combined for
reporting purposes with our Therapeutic Filtration and Specialty Packaging
operating segments into the All Other reporting segment. All periods presented
have been restated to reflect this change.
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 a public water source 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 other 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 a RO membrane; (iv) deionization, which is
an ion exchange platform that requires resin regeneration (see Service &
Maintenance; 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.
We
are 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 in North America. During fiscal 2010 approximately 60% of our
sales in this segment were derived from sales and service to U.S. dialysis
clinics. This portion of our business will continue to grow during fiscal 2011
due to the Gambro Acquisition.
Our
growth in the Water Purification and Filtration segment, particularly in the
medical/dialysis arena, over the past several years has been driven principally
from acquisitions. Since May 2006 we have acquired six water purification
businesses, the most significant of which were the water dialysis business of
GE Water & Process Technologies (GE Water) in March 2007 and
the recent acquisition of Gambro Water in October 2010.
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.
Our
Biolab
equipment line includes systems that utilize
either chemical or heat disinfection to sanitize the equipment. Our HX product
line 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 gaining increased acceptance in
the dialysis market.
Our
standard line of equipment includes the Biolab equipment line of reverse
osmosis (RO) machines 2200, 3300, 4400, 8400, RODI
®
combination
RO and electro-deionization system, and various heat disinfecting
configurations, as well as the 23G, Zyzatech V and Z series, and the
Millenium, the leading medical portable reverse osmosis unit. Commencing in
(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.
5
October 2010,
these product lines are now complemented in the United States by the product
lines exclusively licensed in the Gambro Acquisition, including the WRO 300,
WRO 300H, CWP 100, WRO 101-104 and 106H, a leading heat disinfecting system.
Our extensive product offerings 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 all of our dialysis
water purification systems and bicarbonate mix and distribution systems to the
extent required by law.
Service & Maintenance; Resin Regeneration
We
provide service and maintenance for water purification systems in the United
States and Canada through twenty regional offices (eighteen 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. Seven of the offices (Toronto,
Montreal, Philadelphia, Boston, San Antonio, 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 that is 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
one of our regeneration plants and the resin is regenerated for use by the same
or another customer. Customers are charged 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 other contaminants 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 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.
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
6
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.
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, sterilization pouches, towels and
bibs, tray covers, saliva ejectors and evacuators, germicidal wipes, plastic
cups, 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.
We
have certain exclusive and non-exclusive license rights from a third party for
BIOSAFE
®
antimicrobial, a patented
chemistry applied to products, such as face masks, that reduces microorganisms
such as Influenza A, MRSA, VRE and Staph immediately upon contact. The BIOSAFE
treatment chemically binds to a products 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. Because an
anticipated revision to the FDA Guidance Document pertaining to antimicrobial
treatments of medical devices has not been released by the FDA, we will be
considering the submission of a 510(k) application in advance of the FDAs
publication of such revision.
We
have also experienced continued and improved market acceptance of our
Sure-Check Sterilization Pouches and Comfort Plus
®
Saliva
Ejectors. The Sure-Check Sterilization Pouches are self-sealing pouches with a
patented, multi-variable (parameter) Class 4 chemical indictor ink printed
on the pouch both internally and externally. This multi-variable chemical
indicator provides the user with a reliable indication that the conditions for
sterilization occurred without having to insert a separate chemical indicator
into the pouch itself. The chemical indicator on the pouch reacts to all three
key sterilization parameters - time, temperature and presence of steam. 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.
During
fiscal 2011, the Company will be introducing an innovative earloop face mask
under the SecureFit name. This patent pending product incorporates an
aluminum strip on the bottom of the mask, allowing the wearer to adjust the fit
of the mask to the contour of their face, minimizing the gapping that can occur
while wearing traditional earloop face masks. This feature will be made
available in the Companys three ASTM product classifications Low (Isofluid),
Moderate (Procedural) and High (Ultra).
We
believe that the concern generated over the novel H1N1 flu outbreak during
fiscals 2010 and 2009 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 and the first and second quarters of fiscal 2010. We are now
expanding our manufacturing capability of face masks and are well positioned to
increase production of face masks should the need arise due to a recurrence of
the H1N1 flu or other outbreak of infectious disease.
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, but with a significant majority in the United
States. 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.
7
Endoscope Reprocessing
General
We
design, develop, manufacture and sell endoscope reprocessing systems,
sterilants, detergents 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 offering 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 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. All of the automated disinfection
machines can be used on a broad variety of endoscopes and are programmable by
the user. Certain models of the dual-basin systems can disinfect up to four
endoscopes at a time. In fiscal 2009, the FDA and Health Canada cleared our
first and most advanced 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 degrees Celsius, giving it superior material compatibility.
In
April 2010, Medivators received clearance from the FDA to market the newly
developed DSD-Edge, a single-use chemistry version of the DSD-201, which had
received clearance from Health Canada several months earlier. 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. 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 device that
minimizes the risk of worker repetitive motion injury associated with manual
flushing 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
(2)
The CE marking (an acronym for the French
conformité
européenne
) 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.
8
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.
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 for the same
patient, 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.
We
believe that dialysis centers in the United States that reuse dialyzers
generally 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 per 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 during the past decade.
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
dialysis clinics performing reuse to single-use facilities. 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, testing and
sterilizing dialyzers for reuse. The Renatron System includes a bar-code
reader, a computer and the Renalog RM Data Management System, a software
9
accessory
that provides dialysis centers with automated record keeping and data analysis
capabilities. We believe our Renatron Systems are more dependable, 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
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.
All Other
We
also operate other businesses, including the Specialty Packaging, Therapeutic
Filtration and Chemistries operating segments. 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 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.
Our
products include the Saf-T-Temp
®
brand line of
phase change materials (PCM) using both proprietary and 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 and CD software. During fiscal 2010, we added Spanish as an additional
language option to our already existing English and French language options for
our CD software and internet training programs.
10
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. In fiscal 2010, in
addition to providing filters and filter technologies to biotech manufactures,
we have also signed agreements with certain customers to distribute their
finished products in specific international markets.
Chemistries
During
fiscal 2010, we changed our internal reporting processes to include a new
operating segment called Chemistries to reflect the way the Company, through
its executive management, manages, allocates resources and measures the
performance of its businesses. This new operating segment is the combination of
a small portion of our existing sterilant business, comprised of products sold
on an OEM basis and previously recorded in our Water Purification and
Filtration segment, and a new business operation that was created to capitalize
on our chemistry expertise and expand our product offerings in existing and new
markets within the infection prevention and control arena.
Our
new Chemistries segment provides research and development and coordination of
marketing strategies that capitalize on our portfolio of proprietary
chemistries. The group supports and drives the pipeline of new chemistry-based
products for existing Cantel companies, manages and grows the existing OEM chemistry
related businesses and is responsible for building new business revenues
specific to the Chemistries Group. Substantial investment is being made in
research and development to effectively leverage this business across a broad
range of infection prevention and control opportunities.
We
understand the increasing concern and costs associated with the spread of MRSA,
C-Diff, Norovirus and other critical infectious agents, and have developed
products and services to address these issues. One such service is our Area
Decontamination System which utilizes an EPA approved chemical sterilant and
proprietary dry fog technology to disinfect rooms ranging from sports
facilities, commercial and residential properties and bio safety labs to
hospital operating rooms. As part of this service we also offer a unique
antimicrobial agent that provides a protective layer on surfaces and other
materials that assists in preventing recontamination of the area and transfer
of infectious agents to humans.
11
Our
detergents and disinfectants are based upon a wide variety of chemicals and
provide cleaning and disinfection in many healthcare environments. Peracetic
acid represents one of the most effective chemistries in our portfolio and we
have recently launched a sterilization service business based upon a variation
of this product. This service provides medical device, pharmaceutical and
consumer product companies the capability to sterilize their products at room
temperature with a rapid turnaround time. Our REVOX
sm
sterilization
service offers a valuable resource for companies attempting to avoid
compatibility issues associated with eliminating toxic residues or maintaining
functionality with their heat sensitive devices.
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 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 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.
12
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.
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 17, 2010, we held 49 United States patents and 41
foreign patents, and had 11 United States patents and 22 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 sterilants and Rapicide disinfectant (see Reporting
Segments-Endoscope Reprocessing), water purification equipment using Gambro
technology (see Acquisition of Gambro Renal Products, Inc. Water
Business), phase change material products (see Reporting Segments-All
Other-Specialty Packaging), products utilizing BIOSAFE antimicrobial (see Reporting
Segments-Healthcare Disposables) and therapeutic filters utilizing a certain
additive designed to enhance the safety and effectiveness of the filters (seeReporting
Segments-All Other-Therapeutic Filtration). 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 17,
2010, we had a total of 404 trademark registrations in the United States and in
various foreign countries in which we conduct business, as well as 47 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 during fiscal 2010. However, Fresenius and DaVita each accounted for
approximately 7% of our consolidated net sales. In addition, as a result of the
Gambro Acquisition, DaVita (the largest customer of Gambro Water) would have
accounted for approximately 11% of our consolidated net sales during fiscal
2010.
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 24% 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.
13
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 during fiscal 2010.
Henry Schein accounted for approximately 23% 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 2010, one customer, DaVita, accounted for approximately
33% of the Dialysis segment net sales. The loss of a significant amount of
business from this customer would have a material adverse effect on our
Dialysis segment.
Backlog
On September 17, 2010, our consolidated backlog was approximately
$14,765,000 compared with approximately $14,954,000 on September 18, 2009.
All of the backlog is expected to be recognized as revenue within one year of
such date.
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:
We
believe that the ability of our Water Purification and Filtration segment to
successfully compete in the water purification, filtration and disinfectant
market derives from our expertise in an FDA regulated environment, our broad
product offerings and the high value and quality of our products and services.
We are the market leader in the supply of FDA 510(k) cleared water
purification systems to the dialysis industry in North America. Our
acquisitions of the GE Water business and the Gambro Water business as well as
four smaller geographically oriented acquisitions since May 2006 have
given us a competitive advantage due to our expanded product offerings and our
national service coverage. 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.
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, Amcor 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 Endoscope Reprocessing segment, our principal competitors are
Steris, Custom Ultrasonics, Olympus, ASP division of Johnson &
Johnson, Metrex, Ruhof and Ecolab. We believe that our principal competitive
advantages include our
14
comprehensive product line of automated endoscope reprocessors, the
advanced features and product innovation of our automated endoscope
reprocessors, our reputation for providing high-quality and reliable products,
and our highly responsive sales, clinical support and service teams focused on
endoscope reprocessing.
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.
All or substantially all Fresenius dialysis clinics exclusively use single-use
dialyzers and therefore have no need for dialyzer reprocessing equipment. See Reporting
SegmentsDialysis, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations.
Research
and Development
Research
and development expenses (which include continuing engineering costs) were
$5,169,000 and $4,632,000 in fiscals 2010 and 2009, respectively. The majority
of our research and development expenses related to our endoscope reprocessing
products, chemistry products, water purification systems and specialty
filtration filters. The increase in research and development expenses is
primarily due to development work on certain new products in our newly created Chemistries
operating segment. In fiscal 2011, we intend to further invest in research and
development to leverage our new Chemistry group across various infection
prevention and control opportunities.
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 17, 2010, we employed 883 persons of whom 769 are
located in the United States, 74 are located in Canada, 18 are located in
Europe, Africa and the Middle East, and 22 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,
2010, 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 items, foreign currency exchange rate
fluctuations, changes in local economic conditions and tax regulations,
unsettled political, regulatory or business conditions, and
government-sponsored boycotts and tariffs on our 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 2010 was adversely 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.
15
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 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 decade relative to reuse dialyzers. We believe that approximately
one-third of all dialysis procedures in the United States currently reuse
dialyzers.
All
or substantially all dialysis clinics owned by Fresenius, the largest dialysis
chain in the United States and a manufacturer of single-use dialyzers, are
single-use facilities. We believe that dialysis clinics owned by DaVita, the
second largest dialysis chain in the United States, performed approximately
fifty to sixty percent of its dialysis procedures using reuse.
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.
Net
sales of our Dialysis segment accounted for 16.3% of our total net sales in
fiscal 2010 compared with 21.7% of net sales in fiscal 2009 and 24.1% of net
sales in fiscal 2008. We believe this downward trend is likely to continue
during fiscal 2011. Our Dialysis segment accounted for 24.5%, 29.6% and 32.9%
of our total reporting segments operating income (before general corporate
expenses and interest expense) in fiscals 2010, 2009 and 2008, respectively.
Industry consolidation and the highly competitive
market has resulted in the loss of dialysate concentrate sales.
The
downward trend of sales of our dialysate concentrate business continued during
fiscal 2010. Fresenius manufactures dialysate concentrate itself and therefore
provides dialysate concentrate to its own dialysis clinics. DaVita and certain
international customers have also continued their reduction of dialysate
concentrate purchases from us 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, accounted for approximately 24% of our fiscal 2010 net sales.
Additionally, as a result of the Gambro Acquisition, on a pro forma basis two
customers (Fresenius and DaVita) would have collectively accounted for
approximately 44% of our annual net sales in our Water Purification and
Filtration segment. The loss of a significant amount of business from either of
these two customers could have a material adverse effect on our Water
Purification and Filtration segment.
During fiscal 2010, DaVita accounted for approximately 33% of the
Dialysis segment net sales. We are highly dependent on DaVita as a customer and
any shift by this customer away from reuse would have a material adverse effect
on our Dialysis segment net sales.
16
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 2010, the top four
customers of our Healthcare Disposables segment accounted for approximately 55%
of its net sales. 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 primarily sold through third-party distributors and not directly to end
users, we cannot control the amount and timing of resources that our
distributors devote to our products.
There
is no assurance that there will not be a 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 flu outbreaks, such as 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, and first four months of fiscal 2010, due to the outbreak of the
novel H1N1 flu (swine flu).
Although the outbreak of the novel H1N1 flu
resulted in strong sales volume of high margin face masks and other healthcare
disposables products, such sales volume has returned to a sales level that is
similar to that which existed prior to the outbreak of the novel H1N1 flu given
that the elevated level of reported cases of influenza viruses has subsided.
Atypical demand for face masks is highly dependent upon the severity and timing
of any pandemic flu outbreak such as the recent 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. Accordingly, we cannot provide assurance
that a similar high level of sales as those that occurred in our fourth quarter of fiscal 2009 and
first four months of fiscal 2010 will occur in any future period.
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.
Although
the cost of certain raw materials and distribution costs decreased during
fiscal 2009 and a portion of fiscal 2010, due in large part to the decreasing
price of fuel and oil, certain raw material costs have risen in recent months.
If costs materially increase in the future, we may not be able to implement
price increases to our customers, which would adversely impact our gross
margins.
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;
17
·
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 and profits 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 Accounting Standards Codification (ASC) 805,
Business Combinations,
(ASC 805), 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. Additionally,
the new provisions of ASC 805 relating to contingent future consideration, or earn-outs,
require us to record the fair value of such estimated amounts at the date of
acquisition and continually remeasure the liability at each balance sheet date,
which has the potential for creating significant earnings volatility should
earnouts be used in our future acquisitions.
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, 2010, the average fair
value of all of our reporting units exceeded book value by substantial amounts,
except our Specialty Packaging segment, which had an average fair value that
exceeded book value by approximately 16%.
Competition from manufacturing facilities located in China and
Southeast Asia 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 and
Southeast Asia due to lower overall costs in certain parts of that region of
the world. 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. In our
Healthcare Disposables segment, we expect to experience significant pricing
pressure that will adversely affect our gross profit in fiscal 2011 in our
Healthcare Disposables segment as a result of low cost competition in China and
Southeast Asia.
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.
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.
18
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.
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 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.
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.
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 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 2010 consolidated net sales and are primarily
included in our Water Purification and Filtration, Dialysis and Endoscope
Reprocessing segments.
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.
19
The markets for many of our products are subject to changing
technology.
The
markets for many products we sell, such as endoscope reprocessing and water
purification 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.
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. Although none of our key executives has an employment agreement
with the Company, during fiscal 2010, we adopted short and long term incentive
plans for our key executives, including our division CEOs, and entered into
severance agreements with these executives. Such short and long term incentive
plans are designed in part to have a retentive effect on the executives.
However, there can be no assurance that the terms of the new plans or the
severance agreements will have such an effect. 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.
Modifications to our revolving credit facility in fiscal 2011 may
result in less favorable terms.
Our
United States credit facilities have a termination date of August 1,
2011. Although we may repay a portion of our outstanding borrowings under
the revolver throughout fiscal 2011, 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 its
expiration. However, no
20
assurance
can be made that we will be successful in modifying the facilities before its
expiration or on similar terms as currently in effect.
We may face significant uncertainty in the industry due to government
healthcare reform.
The
healthcare industry in the United States is subject to fundamental changes due
to the ongoing healthcare reform and the related political, economic and
regulatory influences. In March 2010, comprehensive healthcare reform
legislation was signed into law in the United States through the passage of the
Patient Protection and Affordable Health Care Act and the Health Care and
Education Reconciliation Act. Among other initiatives, the legislation provides
for a 2.3% annual excise tax on the sales of certain medical devices in the
United States commencing in January 2013. We manufacture and sell devices
that will likely be subject to this tax, which could adversely affect our
operating expenses and results of operations. In addition, various healthcare
reform proposals have also emerged at the state level. We cannot predict with
certainty what healthcare initiatives, if any, will be implemented at the state
level, or what the ultimate effect of federal healthcare reform or any future
legislation or regulation may have on us or on our customers purchasing
decisions regarding our products and services.
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 for manufacturing, warehousing and administrative and sales staff. These
facilities are used for our Dialysis, Endoscope Reprocessing, Therapeutic
Filtration and Chemistries 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.
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
|
|
46,000
|
|
Healthcare
Disposables
|
Sharon,
PA
|
|
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 (1)
|
|
Sales
and service offices, warehouse and distribution hub
|
|
21,000
|
|
Various
|
21
Lowell,
MA (2)
|
|
Sales
and administrative offices, manufacturing, warehousing and regeneration plant
|
|
26,000
|
|
Water
Purification and Filtration
|
San
Antonio, TX
|
|
Sales,
service, storage and regeneration plant
|
|
8,900
|
|
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) 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 is being 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.
(2) The
facility in Lowell is leased from a company that is affiliated with an employee
of Mar Cor.
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, Specialty Packaging and Chemistries. 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; Mount Jackson,
Virginia; Goshen, New York; Orion Township, Michigan; North Royalton, Ohio;
Durham, North Carolina; Smyrna, Tennessee; Carrollton, 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.
Net rentals for leased space for fiscal 2010 aggregated approximately
$2,995,000 compared with $2,815,000 in fiscal 2009.
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.
RESERVED
.
22
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, 2010
|
|
|
|
|
|
First Quarter
|
|
$
|
17.97
|
|
$
|
13.26
|
|
Second Quarter
|
|
21.27
|
|
16.14
|
|
Third Quarter
|
|
21.48
|
|
18.45
|
|
Fourth Quarter
|
|
20.61
|
|
15.20
|
|
|
|
|
|
|
|
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
|
|
In December 2009, we announced that we intend to pay, for the
first time, a semiannual cash dividend of $0.05 per outstanding share, or $0.10
per share annually, of the Companys Common Stock. The first cash dividend of
$0.05 per share of outstanding Common Stock, which totaled $840,000, was paid
on January 29, 2010 to shareholders of record at the close of business on January 15,
2010. The second cash dividend of $0.05 per share of outstanding Common Stock,
which totaled $843,000, was paid on July 30, 2010 to shareholders of
record at the close of business on July 15, 2010. Future declaration of
dividends and the establishment of future record and payment dates are subject
to the final determination of the Companys Board of Directors. We are not
permitted to pay cash dividends on our Common Stock in excess of $3,000,000
without the consent of our lenders.
On September 17, 2010, the closing price of our Common Stock was
$15.56 and we had 334 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.
The following table represents information with respect to purchases of
Common Stock made by the Company during the fourth quarter of fiscal 2010:
|
|
|
|
|
|
Total number of shares
|
|
Maximum number of
|
|
Month
|
|
|
|
|
|
purchased as part of
|
|
shares that may yet
|
|
of
|
|
Total number of
|
|
Average price
|
|
publicly announced
|
|
be purchased under
|
|
Purchase
|
|
shares purchased
|
|
paid per share
|
|
plans or programs
|
|
the program
|
|
|
|
|
|
|
|
|
|
|
|
May
|
|
7,334
|
|
$
|
18.59
|
|
|
|
|
|
June
|
|
|
|
|
|
|
|
|
|
July
|
|
|
|
|
|
|
|
|
|
Total
|
|
7,334
|
|
$
|
18.59
|
|
|
|
|
|
The Company does not currently have a publicly announced stock
repurchase program. All of the shares purchased during the fourth quarter of
fiscal 2010 represent shares surrendered to the Company to pay employee
withholding taxes due upon the vesting of restricted stock or the exercise of
stock options that do not qualify as incentive stock options.
23
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 of 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, 2005, and where
applicable, the reinvestment of all dividends).
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cantel Medical Corp., the Russell 2000 Index
and the Dow Jones US Health Care Equipment & Services Index
*$100
invested on 7/31/05 in stock or index, including reinvestment of dividends.
Fiscal
year ending July 31.
Copyright©
2010 Dow Jones & Co. All rights reserved.
The stock price
performance
included in
this
graph is not necessarily
indicative of future stock price performance.
24
Item 6.
SELECTED
CONSOLIDATED FINANCIAL DATA
.
The financial data in the following table are 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.
Gambro Water was acquired during fiscal 2011 and therefore is excluded for all
periods presented. Purity is reflected in the Consolidated Statements of Income
Data for the portion of fiscal 2010 subsequent to its acquisition on June 1,
2010. G.E.M. was acquired on the last day of fiscal 2009 and therefore is
included in the Consolidated Statements of Income Data for fiscal 2010 (but the
net assets of G.E.M. are included in the Consolidated Balance Sheet Data as of July 31,
2009.) The acquired operations of Dialysis Services, Inc. (DSI),
Verimetrix, LLC (Verimetrix) and
Strong Dental Products, Inc. (Strong Dental) are reflected in the
Consolidated Statements of Income Data for fiscals 2010 and 2009 and the
portion of fiscal 2008 subsequent to their acquisitions on August 1, 2007,
September 17, 2007 and September 26, 2007, respectively. The acquired
operations of GE Water and Twist 2 It Inc. (Twist) are reflected in the Consolidated Statements
of Income Data for fiscals 2010, 2009 and 2008 and the portion of fiscal 2007
subsequent to their acquisitions on March 30, 2007 and July 9, 2007,
respectively. Purity, G.E.M., DSI, Verimetrix, Strong Dental, GE Water and
Twist, are not reflected in the results of operations for all other periods
presented. Since the Olympus distribution agreements with Carsen Group Inc. (Carsen),
as well as Carsens active business operations, terminated on July 31,
2006, 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,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
273,952
|
|
$
|
260,050
|
|
$
|
249,374
|
|
$
|
219,044
|
|
$
|
192,179
|
|
Cost
of sales
|
|
162,981
|
|
160,571
|
|
161,748
|
|
140,032
|
|
122,963
|
|
Gross
profit
|
|
110,971
|
|
99,479
|
|
87,626
|
|
79,012
|
|
69,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before interest expense and income taxes
|
|
32,665
|
|
27,451
|
|
17,967
|
|
16,839
|
|
15,344
|
|
Interest
expense, net
|
|
1,110
|
|
2,495
|
|
4,116
|
|
2,737
|
|
3,393
|
|
Income
from continuing operations before income taxes
|
|
31,555
|
|
24,956
|
|
13,851
|
|
14,102
|
|
11,951
|
|
Income
taxes
|
|
11,614
|
|
9,387
|
|
5,158
|
|
5,998
|
|
5,298
|
|
Income
from continuing operations
|
|
19,941
|
|
15,569
|
|
8,693
|
|
8,104
|
|
6,653
|
|
Income
from discontinued operations, net of tax
|
|
|
|
|
|
|
|
342
|
|
10,268
|
|
Gain
on disposal of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
6,776
|
|
Net
income
|
|
$
|
19,941
|
|
$
|
15,569
|
|
$
|
8,693
|
|
$
|
8,446
|
|
$
|
23,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.19
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.52
|
|
$
|
0.43
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
0.02
|
|
0.66
|
|
Gain
on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
0.44
|
|
Net
income
|
|
$
|
1.19
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.54
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
1.18
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.50
|
|
$
|
0.41
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
0.02
|
|
0.63
|
|
Gain
on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
0.42
|
|
Net
income
|
|
$
|
1.18
|
|
$
|
0.94
|
|
$
|
0.53
|
|
$
|
0.52
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.10
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares and common stock equivalents attributable to both
common stock and participating securities: (1)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
16,777
|
|
16,519
|
|
16,276
|
|
15,711
|
|
15,471
|
|
Diluted
|
|
16,968
|
|
16,576
|
|
16,440
|
|
16,173
|
|
16,276
|
|
25
Consolidated
Balance Sheets Data
(Amounts in thousands, except per share data)
|
|
July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
280,665
|
|
$277,871
|
|
$
|
279,190
|
|
$
|
263,671
|
|
$
|
238,227
|
|
Current assets
|
|
94,731
|
|
88,910
|
|
84,561
|
|
76,731
|
|
82,448
|
|
Current liabilities
|
|
40,984
|
|
39,113
|
|
38,922
|
|
35,971
|
|
39,097
|
|
Working capital
|
|
53,747
|
|
49,797
|
|
45,639
|
|
40,760
|
|
43,351
|
|
Long-term debt
|
|
11,000
|
|
33,300
|
|
50,300
|
|
51,000
|
|
34,000
|
|
Stockholders equity
|
|
209,405
|
|
187,116
|
|
168,712
|
|
155,070
|
|
140,805
|
|
Book value per outstanding common share
|
|
$
|
12.42
|
|
$11.24
|
|
$
|
10.31
|
|
$
|
9.62
|
|
$
|
9.14
|
|
Common shares outstanding
|
|
16,866
|
|
16,644
|
|
16,371
|
|
16,116
|
|
15,399
|
|
(1)
Per share and share amounts
have been adjusted retrospectively to conform to the provisions of ASC
260-10-45,
Earnings Per Share Other
Presentation Matters,
(ASC
260-10-45). In June 2008,
the Financial Accounting Standards Board (FASB) issued ASC 260-10-45, which provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share (EPS) pursuant to
the two-class method, a change that reduces both basic and diluted
EPS. Our participating securities consist solely of unvested restricted
stock awards, which have contractual participation rights equivalent to those
of stockholders of unrestricted common stock. The two-class method of computing
earnings per share is an allocation method that calculates earnings per share
for common stock and participating securities. Previously, we excluded unvested
restricted stock awards in the calculation of basic EPS and included such
awards in diluted EPS under the treasury stock method. ASC 260-10-45 was
effective for fiscal years beginning after December 15, 2008 and therefore
was adopted on August 1, 2009. All prior period EPS data presented have
been adjusted retrospectively to conform to the provisions of ASC
260-10-45. In fiscals 2009 and 2008, such retrospective application caused
an insignificant increase in the denominator of our weighted average shares
calculation, which decreased previously reported basic EPS in fiscals 2009 and
2008 from $0.96 to $0.94 and $0.54 to $0.53, respectively, but had no impact on
previously reported diluted EPS.
26
Item 7.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
.
The
following Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is intended to help you understand Cantel
Medical Corp. (Cantel). The MD&A is provided as a supplement to and
should be read in conjunction with our financial statements and the
accompanying notes. Our MD&A includes the following sections:
Overview
provides a
brief description of our business and a summary of significant activity that
has affected or may affect our results of operations and financial condition.
Results
of Operations
provides a discussion of the consolidated results
of operations for fiscal 2010 compared with fiscal 2009, and fiscal 2009
compared with fiscal 2008.
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 and services 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 prevention and control products used principally in the dental market
including face masks, sterilization pouches, towels and bibs, tray covers,
saliva ejectors, germicidal wipes, plastic cups and disinfectants.
·
Endoscope Reprocessing
: Medical
device reprocessing systems, disinfectants, enzymatic detergents and other
supplies used to high-level disinfect flexible endoscopes.
·
Dialysis
: Medical
device reprocessing systems, sterilants/disinfectants, dialysate concentrates
and other supplies for renal dialysis.
·
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.)
·
Chemistries:
Sterilants, disinfectants, detergents and
decontamination services used in various applications for infection prevention
and control. (Included in All Other reporting segment.)
Most
of our equipment, consumables and supplies are used to help prevent the
occurrence or spread of infections.
27
Significant Activity
(i)
Net income
increased by 28% in fiscal 2010 compared with fiscal 2009. 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 net sales are
attributable to consumable products and service. The primary factors that
contributed to this financial performance, as further described elsewhere in
this MD&A, were as follows:
·
An increase in
net income of approximately $1,250,000 due to an increase in demand during the
first four months of fiscal 2010, partially offset by a high level of demand
during our fourth quarter of fiscal 2009, for healthcare disposables products
in both periods as a result of the outbreak of the novel H1N1 (swine flu) in April 2009,
·
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,
·
higher selling
prices including those attributable to converting the sale of high-level
disinfectants in our Endoscope Reprocessing segment from our former equipment
distributor to our direct sales and service force at higher selling prices,
·
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, and
·
favorable
interest costs due to both reduced average interest rates as well as lower
outstanding borrowings.
The above favorable factors were partially offset by (i) decreases
in net sales and profitability in our Dialysis segment, (ii) increased
selling costs in our Endoscope Reprocessing segment and (iii) decreases in
net sales of capital equipment in our Water Purification and Filtration
segment, as further explained elsewhere in this MD&A. Additionally,
although the outbreak of the novel H1N1 flu resulted in strong sales volume of
high margin face masks and other healthcare disposables products during the
first four months of fiscal 2010, such sales volume has returned to a sales
level that is similar to that which existed prior to the outbreak of the novel
H1N1 flu given that the elevated level of reported cases of influenza viruses
has subsided.
(ii)
We sell our
dialysis products to a concentrated number of customers. Sales in our Dialysis
segment were adversely impacted by the continued loss of some lower margin
dialysate concentrate business from both domestic and international customers
as a result of the highly competitive and price sensitive market for such
product, as well as the decrease in demand for our Renatron reprocessing
equipment, as more fully described elsewhere in this MD&A. This reduction
in dialysis sales has reduced overall profitability in this segment. Our market
for dialysis reprocessing products is limited to dialysis centers that reuse
dialyzers, which market has been decreasing in the United States despite the
environmental advantages and our belief that the per-procedure cost of reuse
dialyzers is more economical than single-use dialyzers. A further decrease in
the market for dialysis reprocessing products is likely to result in continued
loss of net sales and a lower level of operating income in this segment in the
future. See Risk Factors elsewhere in this Form 10-K.
(iii)
While overall
sales and operating income have increased in our Water Purification and
Filtration segment in fiscal 2010 compared with fiscal 2009, our net sales of
capital equipment used for dialysis as well as commercial and industrial
applications have decreased primarily due to the slow growth of the overall
economy and the deterioration in the credit markets in recent years, as more
fully described elsewhere in this MD&A.
28
(iv)
Fluctuations in
the rates of currency exchange had an overall adverse impact on our net income
in fiscal 2010, compared with fiscal 2009, as more fully described elsewhere in
this MD&A.
(v)
We declared our
first cash semiannual dividends of $0.05 per share of outstanding common stock,
which were paid on January 29, 2010 and July 30, 2010, as more fully
described elsewhere in this MD&A.
(vi)
We amended our
credit facilities on May 28, 2010 primarily to extend the termination date
of the revolving credit facility from its August 1, 2010 expiration date
to August 1, 2011, as well as to expand our acquisition financing
capabilities, as more fully described elsewhere in this MD&A.
(vii)
Post-fiscal
2010 acquisition: We acquired the United
States water purification business of Gambro Renal Products Inc. (Gambro Water
or the Gambro Acquisition) on October 6, 2010, as more fully described in Business Recent
Acquisition Subsequent to July 31, 2010 and Note 3 to the Consolidated
Financial Statements.
(viii)
Fiscal 2010
acquisition: We acquired the business of
Purity Water Company of San Antonio, Inc. (Purity) on June 1, 2010,
as more fully described in Business
Fiscal 2010 Acquisition and Note 3 to the Consolidated Financial Statements.
(ix)
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.
(x)
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.
(xi)
We created a
new operating segment named Chemistries, as more fully described elsewhere in
this MD&A.
(xii)
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.
(xiii)
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 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.
Results
of Operations
The
results of operations described below reflect the operating results of Cantel
and its wholly-owned subsidiaries.
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 fiscals
2010 and 2009 and the portion of fiscal 2008 subsequent to their respective
acquisition dates. The acquisitions of DSI, Verimetrix and Strong Dental had an
overall insignificant effect on our results of operations for fiscals 2010 and
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 included in our results of operations for fiscal
2010, but are not reflected in our results of operations for fiscals 2009 and
2008.
29
The
June 1, 2010 Purity acquisition had an insignificant effect on our results
of operations for fiscal 2010 due to both the small size of this business as
well as its inclusion for only two months in fiscal 2010, and its results of
operations are excluded for all prior periods.
Since
the Gambro Acquisition was consummated after the end of fiscal 2010, its
results of operations are not included in our results of operations for any of
the periods presented.
During
fiscal 2010, we changed our internal reporting processes to include a new
operating segment called Chemistries to reflect the way the Company, through
its executive management, manages, allocates resources and measures the
performance of its businesses. This new operating segment is the combination of
a small portion of our existing sterilant business, comprised of products sold
on an OEM basis and previously recorded in our Water Purification and
Filtration segment, and a new business operation that was created to capitalize
on our chemistry expertise and expand our product offerings in existing and new
markets within the infection prevention and control arena. This new Chemistries
operating segment has been combined for reporting purposes with our Therapeutic
Filtration and Specialty Packaging operating segments into the All Other
reporting segment. All periods presented have been restated to reflect this
change.
The
following table gives information as to the net sales from operations and the
percentage to the total net sales from operations for each of our reporting
segments.
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
(Dollar Amounts in thousands)
|
|
|
|
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Purification and Filtration
|
|
$
|
74,527
|
|
27.2
|
|
$
|
68,941
|
|
26.5
|
|
$
|
66,323
|
|
26.6
|
|
Healthcare Disposables
|
|
69,729
|
|
25.5
|
|
64,085
|
|
24.7
|
|
58,657
|
|
23.5
|
|
Endoscope Reprocessing
|
|
65,577
|
|
23.9
|
|
52,333
|
|
20.1
|
|
46,924
|
|
18.8
|
|
Dialysis
|
|
44,667
|
|
16.3
|
|
56,414
|
|
21.7
|
|
60,075
|
|
24.1
|
|
All Other
|
|
19,452
|
|
7.1
|
|
18,277
|
|
7.0
|
|
17,395
|
|
7.0
|
|
|
|
$
|
273,952
|
|
100.0
|
|
$
|
260,050
|
|
100.0
|
|
$
|
249,374
|
|
100.0
|
|
Fiscal 2010 compared with Fiscal 2009
Net sales
Net
sales increased by $13,902,000, or 5.3%, to $273,952,000 in fiscal 2010 from
$260,050,000 in fiscal 2009.
The
increase in net sales in fiscal 2010 was principally attributable to increases
in sales of endoscope reprocessing products and services, water purification
and filtration products and services and healthcare disposables products,
partially offset by a decrease in dialysis products.
Net
sales of endoscope reprocessing products and services increased by 25.3% in
fiscal 2010 compared with fiscal 2009 primarily due to increases in both
domestic and international demand for (i) our endoscope reprocessing
equipment as a result of a more aggressive sales commission plan designed to
gain market share and expand into new markets and (ii) our disinfectants,
equipment accessories and service due to the increased field population of
equipment. Additionally, the increase was due to higher selling prices of our
disinfectants in the United States as a result of converting such prior period
sales from our former equipment distributor to our direct sales and service
force.
Net
sales of water purification and filtration products and services increased by
8.1% in fiscal 2010 compared with fiscal 2009 primarily due to (i) approximately
$3,705,000 of net sales due to the acquisition of G.E.M. on July 31, 2009
and Purity on June 1, 2010, (ii) an increase in demand for our
sterilants and filters within our installed equipment base of business, and (iii) the
translation of Canadian dollar net sales using a stronger Canadian dollar
against the United States dollar, which favorably impacted net sales by
approximately $720,000. Partially offsetting these increases was a decrease in
demand for our water purification equipment used for dialysis (including a
decrease in demand for capital equipment by our largest customer) as well as
commercial and industrial applications primarily due to the slow growth of the
overall economy and the deterioration in the credit markets in recent years,
which may continue to adversely affect capital equipment sales. Increases in
selling prices of our water purification and filtration products and services
did not have a significant effect on net sales in fiscal 2010 compared with
fiscal 2009.
30
Net
sales of healthcare disposables products increased by 8.8% in fiscal 2010
compared with fiscal 2009 despite nominal growth in the overall dental market
primarily due to (i) increased sales volume of high margin face masks,
disinfectants and other healthcare disposables products during the first four
months of fiscal 2010, partially offset by a high level of demand during the
fourth quarter of fiscal 2009, due to the outbreak of the novel H1N1 flu (swine
flu) in April 2009, (ii) increased demand for our sterilization pouch
and barrier cover products as a result of favorable sales and marketing
initiatives and (iii) approximately $725,000 in higher net sales as a
result of increases in selling prices that were implemented to offset
corresponding supplier cost increases. Although the outbreak of the novel H1N1
flu resulted in strong sales volume of high margin face masks and other
healthcare disposables products during the first four months of fiscal 2010,
such sales volume has returned to a sales level that is similar to that which
existed prior to the outbreak of the novel H1N1 flu given that the elevated
level of reported cases of influenza viruses has subsided. Atypical demand for
face masks is highly dependent upon the severity and timing of any pandemic flu
outbreak such as the recent 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 dialysis products and services decreased by 20.8% in fiscal 2010
compared with fiscal 2009 primarily due to (i) the continuing adverse
impact of 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 and international customers as a result of the highly
competitive and price sensitive market for this lower margin commodity product,
as well as various global economic factors with respect to international
demand, and (ii) a decrease in demand in the United States (including a
decrease from our largest dialysis customer) and internationally for our
Renatron dialyzer reprocessing equipment. Due to sales price decreases by some
of our competitors, we expect a continued decrease in net sales of our lower
margin dialysate concentrate product in the future 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 decreasing their purchases of
that product from us and may continue to do so in the future. Our market for
dialysis reprocessing products is limited to dialysis centers that reuse
dialyzers, which market has been decreasing in the United States despite the
environmental advantages and our belief that the per procedure cost of reuse
dialyzers is more economical than single-use dialyzers. A further decrease in
the market for dialysis reprocessing products is likely to result in continued
loss of net sales and a lower level of operating income in this segment in the
future. Increases in selling prices of our dialysis products did not have a
significant effect on net sales in fiscal 2010 compared with fiscal 2009.
Net
sales in the All Other reporting segment increased by 6.4% in fiscal 2010
compared with fiscal 2009 primarily due to a $795,000, or 33.1%, increase in
net sales in our Chemistries operating segment primarily as a result of
increased domestic and international demand of our sterilants sold on an OEM
basis. Increases in selling prices of our therapeutic filtration, specialty
packaging and chemistries products did not have a significant effect on net
sales in the All Other segment in fiscal 2010 compared with fiscal 2009.
Gross profit
Gross
profit increased by $11,492,000, or 11.6%, to $110,971,000 in fiscal 2010 from
$99,479,000 in fiscal 2009. Gross profit as a percentage of net sales in
fiscals 2010 and 2009 was 40.5% and 38.3%, respectively.
The
gross profit percentage in fiscal 2010 increased compared with fiscal 2009
primarily due to (i) favorable sales mix due to the increased sales volume
of certain higher margin products such as sterilants and filters in our Water
Purification and Filtration segment, sterilization pouches, barrier covers,
face masks and disinfectants in our Healthcare Disposables segment and
disinfectants and equipment accessories in our Endoscope Reprocessing segment,
as well as decreased sales of our lower margin dialysate concentrate product in
our Dialysis segment, (ii) higher selling prices including those
attributable to converting the sale of high-level disinfectants 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 costs due to the lower price of oil and (iv) improved
efficiencies in our manufacturing, distribution and service functions. However,
we cannot provide assurances that our gross profit percentage will not be
adversely affected in the future (i) by price competition in certain of
our segments such as Dialysis and Healthcare Disposables, (ii) by
uncertainties associated with our product mix and (iii) if raw materials
and distribution costs increase and we are unable to implement price increases.
Additionally, despite expensive
shipping costs, some of our competitors manufacture certain healthcare
disposable products in China and Southeast Asia due to lower overall costs in
certain parts of that region of the world. Although we believe the quality of
our healthcare disposable products, which are generally produced in the United
States, are superior to similar products produced in China and Southeast Asia,
we expect to experience significant pricing pressure that will adversely affect
our gross profit in fiscal 2011 in our Healthcare Disposables segment as a
result of low cost competition in China and Southeast Asia.
31
Operating expenses
Selling
expenses increased by $5,694,000, or 18.7%, to $36,092,000 in fiscal 2010 from
$30,398,000 in fiscal 2009 primarily due to (i) additional sales personnel
and higher compensation expense principally in our Endoscope Reprocessing
segment relating to incentive compensation, including commissions expense from
a more aggressive commission plan designed to gain market share and expand into
new markets, (ii) an increase in advertising and marketing expense
primarily related to our Healthcare Disposables segment and (iii) increased
sales support services principally in our Water Purification and Filtration and
Endoscope Reprocessing segments during the first six months of fiscal 2010.
Selling expenses as a percentage of net sales were 13.2% and 11.7% in
fiscals 2010 and 2009, respectively. The increase in our selling expense as a
percentage of net sales was due to our strategic decision to invest in selling
initiatives designed to gain or maintain market share as well as to expand into
new markets.
General and administrative expenses increased by $47,000 to $37,045,000
in fiscal 2010 from $36,998,000 in fiscal 2009 primarily due to (i) higher
compensation expense of approximately $940,000 relating to annual salary
increases and incentive compensation in all our locations and additional
personnel principally in our Water Purification and Filtration segment and (ii) an
increase of approximately $345,000 relating to foreign currency primarily as a
result of the inclusion of foreign exchange gains during the prior year 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
against the United States dollar. These increases were substantially offset by (i) approximately
$400,000 in lower bad debt expense primarily in our Water Purification and
Filtration segment, (ii) a $324,000 decrease in stock-based compensation
expense due to 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 and (iii) a decrease in overhead and restructuring
costs at our Netherlands operation due to the completion of restructuring
activities, as more fully described elsewhere in this MD&A.
General and administrative expenses as a percentage of net sales were
13.5% in fiscal 2010 compared with 14.2% in fiscal 2009.
Research and development expenses (which include continuing engineering
costs) increased by $537,000 to $5,169,000 in fiscal 2010 from $4,632,000 in
fiscal 2009. This increase is primarily due to development work on certain new
products in our newly created Chemistries operating segment. In fiscal 2011, we
intend to further invest in research and development to leverage our new
Chemistry group across various infection prevention and control opportunities.
Interest
Interest
expense decreased by $1,470,000 to $1,169,000 in fiscal 2010 from $2,639,000 in
fiscal 2009 primarily due to decreases in average outstanding borrowings and
average interest rates as well as a $148,000 charge in the prior year 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 12 to
the Consolidated Financial Statements.
Interest
income decreased by $85,000 to $59,000 in fiscal 2010, from $144,000 in fiscal
2009, primarily due to a decrease in average interest rates.
Income from operations before taxes
Income
before income taxes increased by $6,599,000 to $31,555,000 in fiscal 2010 from
$24,956,000 in fiscal 2009. The increase was primarily attributable to the
improved gross profit percentage on increased sales as well as lower interest
expense, partially offset by higher selling expenses, as further explained
above.
Income taxes
The
consolidated effective tax rate was 36.8% and 37.6% in fiscals 2010 and 2009,
respectively. The decrease in the consolidated effective tax rate was
principally due to a lower level of cash repatriations from our foreign
subsidiaries and the geographic mix of pre-tax income, as described below.
The
majority of our income before income taxes was generated from our United States
operations, which had an overall effective tax rate of 37.6% and 38.6% in
fiscals 2010 and 2009, respectively. The decrease in our United States
effective tax rate in fiscal 2010, compared with fiscal 2009, was primarily due
to less income taxes related to foreign
32
repatriations.
In fiscal 2010, we provided for income
taxes on the repatriation of $6,000,000 in earnings from one of our Canadian
subsidiaries as compared with fiscal 2009 in which approximately $11,400,000 in
earnings was repatriated from our subsidiaries in Canada and the Netherlands.
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 fiscal 2009, thereby adversely affecting our overall
consolidated effective tax rate in the prior year period. In fiscal 2010, our
Netherlands operation became slightly profitable as a result of the prior year
restructuring of its operations, as more fully described elsewhere in this
MD&A and Note 18 to the Consolidated Financial Statements.
Our
Canadian operations had an overall effective tax rate of 22.6% and 16.8% in
fiscals 2010 and 2009, respectively. Approximately 3% and 5% of our income
before income taxes was generated from our Canadian operations in fiscals 2010
and 2009, 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 enacted rate
deductions as applied to existing deferred income tax liabilities.
In
fiscals 2010 and 2009, approximately 2% of our income before income taxes was
generated from our operations in Singapore, a country with a low corporate tax
structure. The overall effective tax rate for our Singapore operation was 11.8%
and 13.1% in fiscals 2010 and 2009, respectively.
The
results of operations for our subsidiary in Japan did not have a significant
impact on our overall effective tax rate in fiscals 2010 and 2009 due to the
size of income before income taxes generated from this operation.
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 tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon settlement with the tax
authorities. The majority of our unrecognized tax benefits originated from
acquisitions. Previously, any adjustments upon resolution of income tax
uncertainties that predate or result from acquisitions were recorded as an
increase or decrease to goodwill. On August 1, 2009, we adopted Accounting
Standards Codification (ASC) 805,
Business
Combinations
(ASC 805), 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 overall effective tax
rate due to the size of the unrecognized tax benefits in relation to our income
before income taxes. Except for decreases due to the lapse of applicable
statutes of limitation, 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 July 31, 2008
|
|
$
|
427,000
|
|
Lapse
of statute of limitations
|
|
(47,000
|
)
|
Unrecognized
tax benefits on July 31, 2009
|
|
380,000
|
|
Lapse
of statute of limitations
|
|
(172,000
|
)
|
Unrecognized
tax benefits on July 31, 2010
|
|
$
|
208,000
|
|
Generally,
the Company is no longer subject to federal, state or foreign income tax
examinations for fiscal years ended prior to July 31, 2004.
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.
33
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,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
130,000
|
|
$
|
70,000
|
|
$
|
43,000
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
|
|
410,000
|
|
216,000
|
|
123,000
|
|
General
and administrative
|
|
2,560,000
|
|
2,884,000
|
|
1,778,000
|
|
Research
and development
|
|
30,000
|
|
17,000
|
|
17,000
|
|
Total
operating expenses
|
|
3,000,000
|
|
3,117,000
|
|
1,918,000
|
|
Stock-based
compensation before income taxes
|
|
3,130,000
|
|
3,187,000
|
|
1,961,000
|
|
Income
tax benefits
|
|
(1,137,000
|
)
|
(1,226,000
|
)
|
(758,000
|
)
|
Total
stock-based compensation expense, net of tax
|
|
$
|
1,993,000
|
|
$
|
1,961,000
|
|
$
|
1,203,000
|
|
|
|
|
|
|
|
|
|
Decrease
in earnings per common share due to stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.07
|
|
The
above stock-based compensation expense before income taxes was recorded in the
Consolidated Financial Statements as stock-based compensation expense and an
increase to additional paid-in capital. The related income tax benefits (which
pertain only to stock awards and options that do not qualify as incentive stock
options) were recorded as an increase to long-term deferred income tax assets
(which are netted with long-term deferred income tax liabilities) 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), 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 historically
was 0% and is now approximately 0.6% as we began paying dividends in fiscal
2010), and the expected option life (which is based on historical exercise
behavior). If factors change and we employ different assumptions in the
application of ASC Topic 718, Compensation-Stock Compensation, (ASC 718),
in future periods, the compensation expense that we would record may differ
significantly from what we have recorded in the current period.
All of our stock options and stock awards (which consist only of
restricted shares) are subject to graded vesting in which portions of the award
vest at different times during the vesting period, as opposed to awards that
vest at the end of the vesting period. We recognize compensation expense for
awards subject to graded vesting using the straight-line basis over the vesting
period, reduced by estimated forfeitures. At July 31, 2010, total
unrecognized stock-based compensation expense, before income taxes, related to
total nonvested stock options and stock awards which are expected to vest was
$3,812,000 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 or a reduction of deferred income tax
assets (which are netted with long-term deferred income tax liabilities) and as
34
a
reduction of income taxes payable. In fiscals 2010 and 2009, such income tax
deductions reduced income taxes payable by $1,287,000 and $745,000,
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 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.
Net
sales of water purification and filtration products and services increased by
3.9% 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.
35
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.
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. These increases were
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.
36
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 12 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 before taxes
Income
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.
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 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 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.
37
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 ASC 805, 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 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.
Stock-Based Compensation
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 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
38
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 ASC 718 in future periods, the compensation expense that we
would record under ASC 718 may differ significantly from what we have recorded
in the current period.
All of our stock options and stock awards (which consist only of
restricted shares) are subject to graded vesting in which portions of the award
vest at different times during the vesting period, as opposed to awards that
vest at the end of the vesting period. We recognize compensation expense for
awards subject to graded vesting using the straight-line basis over the vesting
period, 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.
Liquidity and Capital Resources
Working capital
At
July 31, 2010, our working capital was $53,747,000, compared with
$49,797,000 at July 31, 2009.
Cash flows from operating activities
Net
cash provided by operating activities was $29,033,000, $30,992,000 and
$18,557,000 for fiscals 2010, 2009 and 2008, respectively. In fiscal 2010, the
net cash provided by operating activities was primarily due to net income
(after adjusting for depreciation, amortization, stock-based compensation
expense and deferred income taxes) and increases in accounts payable, deferred
revenue and accrued expenses (due to an increase in customer deposits relating
to capital equipment sales in our Water Purification and Filtration segment)
and income taxes payable (due to timing of payments), partially offset by
increases in inventories (due to planned strategic increases in stock levels of
certain products primarily in our Healthcare Disposables and Endoscope
Reprocessing segments) and accounts receivable (due to strong July sales
in our Endoscope Reprocessing segment).
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).
39
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).
Cash flows from investing activities
Net
cash used in investing activities was $8,240,000, $11,450,000 and $18,466,000
in fiscals 2010, 2009 and 2008, respectively. In fiscal 2010, net cash used in
investing activities was primarily for capital expenditures and the acquisition
of Purity. 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.
Cash flows from financing activities
Net
cash used in financing activities was $21,846,000 and $13,820,000 in fiscals 2010 and 2009,
respectively, compared with net cash provided by financing activities of
$1,882,000 in fiscal 2008. In fiscal 2010, net cash used in financing
activities was primarily attributable to repayments under our credit facilities
and the payment of dividends to our shareholders, partially offset by proceeds
from the exercises of stock options. In fiscal 2009, net cash used in financing
activities was primarily attributable to repayments under our credit
facilities, 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.
Dividends
In December 2009, we announced that we intend to pay, for the
first time, semiannual cash dividends of $0.05 per outstanding share, or $0.10
per share annually, of the Companys Common Stock. The first cash dividend of
$0.05 per share of outstanding Common Stock, which totaled $840,000, was paid
on January 29, 2010 to shareholders of record at the close of business on January 15,
2010. The second cash dividend of $0.05 per share of outstanding Common Stock,
which totaled $843,000, was paid on July 30, 2010 to shareholders of record
at the close of business on July 15, 2010. Future declaration of dividends
and the establishment of future record and payment dates are subject to the
final determination of the Companys Board of Directors.
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 costs, which decreased both basic and diluted
earnings per share by approximately $0.02 in both years. In fiscal 2009,
$163,000 was recorded in cost of sales and $182,000 was recorded in general and
administrative expenses. In fiscal 2008, $275,000 was recorded in cost of sales
and $90,000 was recorded in general and administrative expenses. The
restructuring plan was completed by July 31, 2009 and we have not incurred
any additional restructuring costs since that date. The majority of the
restructuring costs were included in our Endoscope Reprocessing segment. 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.
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. The sale of
the building and land resulted in a gain of $146,000, which is
40
being
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 in prepaid expenses and other
assets.
Long-term contractual obligations
As
of July 31, 2010, 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)
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of the credit facilities (1)
|
|
$
|
10,000
|
|
$
|
11,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
21,000
|
|
Expected
interest payments under the credit facilities (2)
|
|
340
|
|
1
|
|
|
|
|
|
|
|
|
|
341
|
|
Minimum
commitments under noncancelable operating leases
|
|
3,181
|
|
2,375
|
|
1,705
|
|
1,370
|
|
1,005
|
|
5,574
|
|
15,210
|
|
Minimum
commitments under noncancelable capital leases
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Deferred
compensation and other
|
|
406
|
|
264
|
|
38
|
|
33
|
|
34
|
|
132
|
|
907
|
|
Employment
agreements
|
|
3,073
|
|
356
|
|
|
|
|
|
|
|
|
|
3,429
|
|
Total
contractual obligations
|
|
$
|
17,014
|
|
$
|
13,996
|
|
$
|
1,743
|
|
$
|
1,403
|
|
$
|
1,039
|
|
$
|
5,706
|
|
$
|
40,901
|
|
(1)
As of July 31, 2010,
annual required payments during the year ending July 31, 2012 represent
the outstanding balance on the revolving credit facility since the May 28,
2010 amendment to our revolving credit facility extended the expiration date
from August 1, 2010 to August 1, 2011. In September 2010, we
repaid $6,000,000 under the revolving credit facility and $2,500,000 under our
term loan facility reducing our total outstanding borrowings to $12,500,000 at
the end of September. In October, we borrowed $20,500,000 under our revolving
credit facility to fund a portion of the purchase price of the Gambro
Acquisition thereby increasing total outstanding borrowings to $33,000,000. The
remaining purchase price of $3,100,000 is payable in six equal quarterly
payments ending April 2012.
(2)
The expected
interest payments under the term and revolving credit facilities reflect interest
rates of 2.37% and 1.93%, respectively, which were our interest rates on
outstanding borrowings at July 31, 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 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 U.S. Credit Facilities,
as amended, include (i) a six-year $40.0 million senior secured amortizing
term loan facility expiring August 1, 2011 and (ii) a five-year $50.0
million senior secured revolving credit facility that was scheduled to expire
on August 1, 2010. Amounts we repay under the term loan facility may not
be re-borrowed. On May 28, 2010, we amended the U.S. Credit Facilities,
which amendment included the extension of the termination date for the
revolving credit facility to August 1, 2011. Debt issuance costs relating
to the U.S. Credit Facilities were recorded in other assets and are being
amortized over the life of the credit facilities. Such unamortized debt
issuance costs amounted to approximately $297,000 at July 31, 2010.
At
September 17, 2010, borrowings under the U.S. Credit Facilities bear
interest at rates ranging from 0.50% to 1.50% above the lenders base rate, or
at rates ranging from 1.50% to 2.50% 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 U.S. Credit Facilities (EBITDA). At September 17, 2010, the
lenders base rate was 3.25% and the LIBOR rates applicable to our outstanding borrowings
ranged from 0.53% to 1.21%. The margins applicable to our outstanding
borrowings at September 17, 2010 were 0.50% above the lenders base rate
and 1.50% above LIBOR. The majority of our outstanding borrowings were under
LIBOR contracts at September 17, 2010. The U.S. Credit Facilities also
provide for fees on the unused portion of our facilities at rates ranging from
0.20% to 0.40%, depending upon our consolidated ratio of debt to EBITDA; such
rate was 0.20% at September 17, 2010.
41
The
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 in excess of $3,000,000 without the consent of
our United States lenders. As of July 31, 2010, we were in compliance with
all financial and other covenants under the U.S. Credit Facilities.
On July 31, 2010, we had $21,000,000 of outstanding borrowings
under the U.S. Credit Facilities, which consisted of $10,000,000 and
$11,000,000 under the term loan facility and the revolving credit facility,
respectively. In September 2010, we repaid $6,000,000 under the revolving
credit facility and $2,500,000 under our term loan facility reducing our total
outstanding borrowings to $12,500,000 at the end of September. In October, we
borrowed $20,500,000 under our revolving credit facility to fund a portion of
the purchase price of the Gambro Acquisition.
The U.S. Credit Facilities have a termination date of August 1,
2011. Although we may repay a portion of our outstanding borrowings throughout
fiscal 2011, we do not presently anticipate paying off the revolving credit
facility in full by its termination date. We are in discussions with our bank
syndicate regarding modifications to such facility and expect to formally
modify the facility before the expiration date. However, since any modification
will not be completed until later in fiscal 2011, we will be required to
reclassify the entire outstanding balance of the revolver from long-term to
current in periods subsequent to July 31, 2010.
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 2010 was recorded on a
straight-line basis and aggregated $3,875,000, compared with $3,679,000 and
$3,466,000 for fiscals 2009 and 2008, respectively.
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 officers and our subsidiary
Chief Executive Officers. The majority of such contracts expired and were
replaced effective January 1, 2010 with severance contracts that defined
certain compensation arrangements relating to various employment termination
scenarios.
Convertible note receivable
In
February 2009, we invested an initial $200,000 in a senior subordinated
convertible promissory 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 invested an
additional $300,000 in notes of BIOSAFE in January 2010 bringing the
aggregate investment in BIOSAFE notes to $500,000, as obligated under our
agreement with BIOSAFE. We are not obligated to invest any additional funds.
The
notes are convertible into a newly-created series of preferred stock of
BIOSAFE. Interest is payable in shares of BIOSAFE stock or in cash. The notes
accrue interest at a per annum rate of 8% until the maturity date of June 30,
2011 or earlier exercise. 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, is included
within other assets in our Consolidated Balance Sheets at July 31, 2010
and 2009. The carrying value of this investment approximates fair value due to
the short maturity of the notes and the relative consistent underlying value of
BIOSAFE.
42
Financing needs
Although most of our operating segments generate significant cash from
operations, our Healthcare Disposables,
Dialysis, Water Purification and Filtration and Endoscope Reprocessing
segments are the largest generators of cash. At July 31, 2010, we had a
cash balance of $22,612,000, of which $8,692,000 was held by foreign
subsidiaries. On September 28, 2010, we repatriated $5,500,000 in earnings
from one of the foreign subsidiaries thereby reducing their cash balance.
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 October 14,
2010, $24,500,000 was available under our United States revolving credit
facility, which expires on August 1, 2011.
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 a result of the May 28,
2010 amendment to our U.S. Credit Facilities, the aggregate purchase price
permitted for future acquisitions without obtaining prior bank approval was
reset to $50,000,000, of which $2,014,000 and $23,750,000 was used for the
acquisitions of Purity and Gambro Water, respectively.
Foreign currency
In fiscal 2010, compared with fiscal 2009, the average value of the
Canadian dollar increased by approximately 10.3% relative to the value of the
United States dollar. Additionally, at July 31, 2010 compared with July 31,
2009, the value of the Canadian dollar relative to the value of the United
States dollar increased by approximately 4.7%. 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 2010, compared with fiscal 2009 the average value of the euro
increased by approximately 1.7% relative to the value of the United States
dollar. Additionally, at July 31, 2010 compared with July 31, 2009,
the value of the euro relative to the United States dollar decreased by
approximately 7.2%. 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 affect our results of
operations because a portion of the net assets of our Netherlands subsidiary
(which are reported in our Dialysis, Endoscope Reprocessing and Water
Purification and Filtration segments) are denominated and ultimately settled in
United States dollars but must be converted into its functional euro currency.
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, certain cash bank accounts, accounts receivable and liabilities 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 (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 $3,281,000 at September 17, 2010, which cover certain assets and
liabilities that were denominated in currencies other than our subsidiaries
functional currencies. Such contracts expired on September 30, 2010. 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 ASC 815,
Derivatives and Hedging
(ASC 815), 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 2010, 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.
43
Changes in the value of the Japanese yen relative to the United States
dollar in fiscal 2010, compared with fiscal 2009, 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 an adverse
impact in fiscal 2010, compared with fiscal
2009, upon our net income of approximately $258,000 primarily due to the
increase in the value of the Canadian dollar relative to the United States
dollar.
For purposes of translating the balance sheet at July 31, 2010
compared with July 31, 2009, the total of the foreign currency movements
resulted in a foreign currency translation gain of $1,067,000 in fiscal 2010,
but was reduced to an overall loss of $236,000 due to a tax adjustment relating
to foreign repatriations, thereby decreasing stockholders equity.
Inflation
In
fiscal 2010, inflation did not have a significant impact on our operations. However,
our businesses can be adversely impacted by rising fuel and oil prices and are
heavily reliant on certain raw materials, such as chemicals, paper pulp, resin,
stainless steel and plastic components. From time to time, we experience price
increases for raw materials. If we are unable to implement price increases to
our customers, our gross margins could be adversely affected.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we continually evaluate our estimates. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our Consolidated
Financial Statements.
Revenue
Recognition
Revenue on product sales is recognized as products are shipped to
customers and title passes. The passing of title is determined based upon the
FOB terms specified for each shipment. With respect to dialysis, therapeutic,
specialty packaging, chemistries 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 includes comparable
historical transactions of similar equipment and installation sold as stand
alone components.
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
44
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
$2,909,000, $2,461,000 and $1,757,000 in fiscals 2010, 2009 and 2008,
respectively. The increase in volume rebates in fiscal 2010 compared with
fiscal 2009 is primarily due to increased sales volume primarily in our
Healthcare Disposables and Endoscope Reprocessing segments. The increase in
volume rebates in fiscal 2009 compared with fiscal 2008 is primarily due to new
terms in a 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; specialty packaging products are sold to third-party
distributors, medical research companies, laboratories, pharmaceutical
companies, hospitals, government agencies and other end-users; and chemistries
products and services are sold to medical products and service companies,
laboratories, pharmaceutical companies, hospitals and other end-users. Sales to
all of these customers follow our revenue recognition policies.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable consist of amounts due to us from normal business
activities. Allowances for doubtful accounts are reserves for the estimated
loss from the inability of customers to make required payments. We use
historical experience as well as current market information in determining the
estimate. While actual losses have historically been within managements
expectations and provisions established, if the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. Alternatively, if certain
customers paid their delinquent receivables, reductions in allowances may be
required.
Inventories
Inventories consist of raw materials, work-in-process 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 average fair value results of the market multiple and
45
discounted cash flow methodologies, as well as the comparable
transaction methodology when applicable. 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, 2010, 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, 2010, the average fair value
of all of our reporting units exceeded book value by substantial amounts,
except our Specialty Packaging segment, which had an average fair value that
exceeded book value by approximately 16%.
Long-Lived Assets
We
evaluate the carrying value of long-lived assets including property, equipment
and other assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. An assessment is made to determine if
the sum of the expected future non-discounted cash flows from the use of the
assets and eventual disposition is less than the carrying value. If the sum of
the expected non-discounted cash flows is less than the carrying value, an
impairment loss is recognized based on fair value. With few exceptions, our
historical assessments of our long-lived assets have not differed significantly
from the actual amounts realized. However, the determination of fair value
requires us to make certain assumptions and estimates and is highly subjective,
and accordingly, actual amounts realized may differ significantly from our
estimates.
Warranties
We provide for estimated costs that may be incurred to remedy
deficiencies of quality or performance of our products at the time of revenue
recognition. Most of our products have a one year warranty, although a majority
of our endoscope reprocessing equipment in the United States carries a warranty
period of up to fifteen months. We record provisions for product warranties as
a component of cost of sales based upon an estimate of the amounts necessary to
settle existing and future claims on products sold. The historical relationship
of warranty costs to products sold is the primary basis for the estimate. A
significant increase in third party service repair rates, the cost and
availability of parts or the frequency of claims could have a material adverse
impact on our results for the period or periods in which such claims or
additional costs materialize. Management reviews its warranty exposure
periodically and believes that the warranty reserves are adequate; however,
actual claims incurred could differ from original estimates, requiring
adjustments to the reserves.
Stock-Based Compensation
For
fiscal 2005 and earlier periods, we accounted for stock options using the
intrinsic value method under which stock compensation expense was not
recognized because we granted stock options with exercise prices equal to the
market value of the shares at the date of grant. Beginning August 1, 2005,
we accounted for stock options under ASC 718 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.
Most of our stock options 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
46
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 historically has been 0% and is now
approximately 0.6% as we began paying dividends in January 2010), and the
expected option life (which is based on historical exercise behavior). If
factors change and we employ different assumptions in future periods, the
compensation expense that we would record 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 adverse
effect on our business, financial condition, results of operations or cash
flows.
Income
Taxes
We recognize deferred tax assets and liabilities based on differences
between the financial statement carrying amounts and the tax basis of assets
and liabilities. Deferred tax assets and liabilities also include items
recorded in conjunction with the purchase accounting for business acquisitions.
We regularly review our deferred tax assets for recoverability and establish a
valuation allowance, if necessary, based on historical taxable income,
projected future taxable income, and the expected timing of the reversals of
existing temporary differences. Although realization is not assured, management
believes it is more likely than not that the recorded deferred tax assets, as
adjusted for valuation allowances, will be realized. Additionally, deferred tax
liabilities are regularly reviewed to confirm that such amounts are
appropriately stated. 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.
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. Previously, any adjustments upon
resolution of income tax uncertainties that predate or result from acquisitions
were recorded as an increase or decrease to goodwill. On August 1, 2009,
we adopted ASC 805, 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. 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.
47
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 charges associated with exit or disposal activities in
fiscals 2009 and 2008 relating to our restructuring plan for our Netherlands
manufacturing operations, as further described in our MD&A and Note 18 to
the Consolidated Financial Statements.
Other Matters
We
do not have any off balance sheet financial arrangements, other than future
commitments under operating leases and employment and license agreements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
.
Foreign Currency and Market Risk
A portion of our products 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.
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 certain 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 dollar and the Canadian dollar had an overall adverse impact in fiscal
2010, compared with fiscal 2009, upon our net income and stockholders equity,
as described in our MD&A.
Changes in the value of the euro against the United States dollar
affect our results of operations because a portion of the net assets of our Netherlands
subsidiary (which are reported in our Dialysis and Endoscope Reprocessing
segments) are denominated and ultimately settled in United States dollars 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, certain cash bank
accounts, accounts receivable and liabilities 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 United States dollar and the euro or British pound did not
have a significant overall impact in fiscal 2010, compared with fiscal 2009,
upon our net income and stockholders equity.
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 (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 $4,254,000 at July 31, 2010, which covered certain assets and
liabilities that were denominated in currencies other than our subsidiaries functional
currencies. Such contracts expired on August 31, 2010. 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
48
fiscal
2010, 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.
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 2010, compared with fiscal 2009, 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.
Overall, fluctuations in the rates of currency exchange had an adverse
impact on our net income in fiscal 2010, compared with fiscal 2009, primarily
due to the increase in the value of the Canadian dollar relative to the United
States dollar, and a favorable impact upon stockholders equity, as described
in our MD&A.
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.
Additionally,
we amended our U.S. Credit facilities on May 28, 2010. Due to current
market conditions, the modification of our credit facilities resulted in an
increase of our margins above the lenders base rate and LIBOR, which would
adversely affect our results of operations in the future if levels of
outstanding borrowings increase significantly.
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 $21,000,000 and $43,300,000 at July 31, 2010 and
2009, respectively, and the average outstanding balance during fiscal 2010 and
2009 was approximately $32,000,000 and $53,000,000, respectively. During
fiscals 2010 and 2009, the weighted average interest rate on outstanding debt
was 2.55% and 3.94%, respectively. A 100 basis-point increase in average LIBOR
interest rates would have resulted in incremental interest expense of
approximately $317,000 and $526,000 during fiscals 2010 and 2009, respectively.
However, substantially all of our outstanding borrowings were under LIBOR
contracts at July 31, 2010 that have expiration dates ranging from 3 to 12
months; therefore, we are substantially protected throughout most of fiscal
2011 from any exposure associated with increasing LIBOR rates, assuming debt
levels remain constant.
Our
other long-term liabilities would not be materially affected by an increase in
interest rates. We also maintained a cash balance of $22,612,000 at July 31,
2010 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 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 2010 and 2009, 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 $420,000 and $350,000, respectively. However,
since certain of our subsidiaries use
49
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 2010 and 2009,
a uniform 15% adverse movement in foreign currency rates would have resulted in
realized losses (after tax) of approximately $620,000 and $880,000,
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 $3,867,000 and $2,648,000
in fiscals 2010 and 2009, 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 $620,000 and $880,000 in fiscals 2010 and 2009, respectively,
and unrealized losses of $3,867,000 and $2,648,000 in fiscals 2010 and 2009,
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 $1,040,000 and $1,230,000 for fiscals 2010 and 2009, 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, 2010. 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 disposition of the Companys assets that could have a
material effect on the financial statements.
50
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, 2010.
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, except as described below.
On
June 1, 2010, we acquired Purity as more fully described in Note 3 to the
Consolidated Financial Statements. During the initial transition period
following this acquisition, we have enhanced our internal control process at
our Mar Cor Purification subsidiary to ensure that all financial information
related to this acquisition is properly reflected in our Consolidated Financial
Statements. During the first quarter of our fiscal 2011, we expect that all
aspects of this acquisition will be fully integrated into Mar Cors existing
internal control structure.
51
Attestation
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Cantel
Medical Corp.
We
have audited Cantel Medical Corp.s internal control over financial reporting
as of July 31, 2010, 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, 2010,
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, 2010 and 2009 and the related
consolidated statements of income, shareholders equity and cash flows for each
of the three years in the period ended July 31, 2010 of Cantel Medical
Corp. and our report dated October 14, 2010 expressed an unqualified
opinion thereon.
|
/s/
Ernst & Young LLP
|
|
|
|
|
MetroPark,
New Jersey
|
|
October 14,
2010
|
|
52
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 2010 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 2010 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 2010 Annual Meeting of Stockholders of
the Registrant, except for the following:
The following table shows, as of July 31, 2010, the number of options
or nonvested restricted shares currently outstanding, as well as the number of
shares remaining available for grant under our existing equity 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
|
|
922,362
|
|
|
|
193,583
|
|
2006
Equity Incentive Plan - Restricted Shares
|
|
|
|
158,652
|
|
462,096
|
|
1997
Employee Stock Option Plan
|
|
477,751
|
|
|
|
|
|
1998
Directors Stock Option Plan
|
|
27,750
|
|
|
|
|
|
|
|
1,427,863
|
|
158,652
|
|
655,679
|
|
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 2010 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 2010 Annual Meeting of Stockholders of
the Registrant.
53
PART IV
Item 15.
EXHIBITS, 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, 2010.
1.
Consolidated
Financial Statements
:
(i)
Report of
Independent Registered Public Accounting Firm.
(ii)
Consolidated
Balance Sheets as of July 31, 2010 and 2009.
(iii)
Consolidated
Statements of Income for the years ended July 31, 2010, 2009 and 2008.
(iv)
Consolidated
Statements of Changes in Stockholders Equity and Comprehensive Income for the
years ended July 31, 2010, 2009 and 2008.
(v)
Consolidated
Statements of Cash Flows for the years ended July 31, 2010, 2009 and 2008.
(vi)
Notes to
Consolidated Financial Statements.
2.
Consolidated
Financial Statement Schedules
:
(i)
Schedule II -
Valuation and Qualifying Accounts for the years ended July 31, 2010, 2009 and
2008.
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
:
3(a) - Registrants Restated Certificate of Incorporation dated July
20, 1978. (Incorporated herein by reference to Exhibit 3(a) to Registrants
1981 Annual Report on Form 10-K.)
3(b) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on February 16, 1982. (Incorporated herein by reference to
Exhibit 3(b) to Registrants 1982 Annual Report on Form 10-K.)
3(c) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on May 4, 1984. (Incorporated herein by reference to Exhibit
3(c) to Registrants Quarterly Report on Form 10-Q for the quarter ended April
30, 1984.)
3(d) - Certificate of Amendment of Certificate of Incorporation of
Registrant, filed on August 19, 1986. (Incorporated herein by reference to
Exhibit 3(d) 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].)
54
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, as amended.
(Incorporated herein by reference to Exhibit 10(c) to Registrants Quarterly
Report on Form 10-Q for the quarter ended April 30, 2010 [the April 2010 10-Q].)
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(b) to Registrants April 2010 10-Q.)
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 Annex C to
Registrants 2009 Definitive Proxy Statement on Schedule 14A.)
10(g) - Form of Stock Option Agreement for option grants to directors,
as amended, under Registrants 2006 Equity Incentive Plan.
10(h) Form of Stock Option Agreement for option grants to executive
officers, as amended, under Registrants 2006 Equity Incentive Plan.
10(i) - Form of Restricted Stock Agreement, as amended, under the
Registrants 2006 Equity Incentive Plan.
10(j)
- 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
Current Report on Form 8-K filed on August 5, 2005.)
10(k) - 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(l) - 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(m) - 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
55
sole lead arranger and sole book manager). (Incorporated herein by reference to Exhibit
10(c) to the Registrants April 2007
10-Q.)
10(n) - 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.)
10(o) - Fifth Amendment to Credit Agreement and Consent dated December
17, 2009 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(a) to the Registrants Quarterly Report on
Form 10-Q for the quarter ended January 31, 2010.)
10(p) - Sixth Amendment to Credit Agreement and Consent dated May 28,
2010 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(a) to the Registrants April 2010 10-Q.)
10(q) -
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 Current
Report on Form 8-K dated April 4,
2007.)
10(r) - Executive Severance Agreement dated as of February 12, 2010
between Registrant and Andrew A. Krakauer (Incorporated herein by reference to
Exhibit 10.1 of the Registrants Current Report on Form 8-K filed February 12,
2010 [the February 2010 8-K].)
10(s) - Executive Severance Agreement dated as of February 12, 2010
between Registrant and Seth R. Segel (Incorporated herein by reference to
Exhibit 10.2 of the Registrants February 2010 8-K.)
10(t) - Executive Severance Agreement dated as of February 12, 2010
between Registrant and Craig A. Sheldon (Incorporated herein by reference to
Exhibit 10.3 of the Registrants February 2010 8-K.)
10(u) - Executive Severance Agreement dated as of February 12, 2010
between Registrant and Eric W. Nodiff (Incorporated herein by reference to
Exhibit 10.4 of the Registrants February 2010 8-K.)
10(v) - Executive Severance Agreement dated as of February 12, 2010
between Registrant and Roy K. Malkin (Incorporated herein by reference to
Exhibit 10.5 of the Registrants February 2010 8-K.)
10(w) - Confidentiality and Non-Competition Agreement dated as of
February 12, 2010 between Registrant and Andrew A. Krakauer (Incorporated
herein by reference to Exhibit 10.6 of the Registrants February 2010 8-K.)
10(x) - Confidentiality and Non-Competition Agreement dated as of
February 12, 2010 between Registrant and Seth R. Segel (Incorporated herein by
reference to Exhibit 10.7 of the Registrants February 2010 8-K.)
10(y) - Confidentiality and Non-Competition Agreement dated as of
February 12, 2010 between Registrant and Craig A. Sheldon (Incorporated herein
by reference to Exhibit 10.8 of the Registrants February 2010 8-K.)
10(z) - Confidentiality and Non-Competition Agreement dated as of
February 12, 2010 between Registrant and Eric W. Nodiff (Incorporated herein by
reference to Exhibit 10.9 of the Registrants February 2010 8-K.)
10(aa) - Confidentiality and Non-Competition Agreement dated as of
February 12, 2010 between Registrant and Roy K. Malkin (Incorporated herein by
reference to Exhibit 10.10 of the Registrants February 2010 8-K.)
10(bb) Cantel Medical Corp. Annual Incentive Compensation Plan
(Incorporated herein by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K filed December 23, 2009 [the December 2009 8-K].)
10(cc) Cantel Medical Corp. Long Term Incentive Compensation Plan
(Incorporated herein by reference to Exhibit 10.2 of the Registrants December
2009 8-K.)
21 - Subsidiaries of Registrant.
56
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.
57
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, 2010
|
|
|
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, 2010
|
Charles
M. Diker, a Director and Chairman of the Board
|
|
|
|
|
|
|
|
|
|
/s/
George L. Fotiades
|
|
Date:
|
|
October
14, 2010
|
George
L. Fotiades, a Director
|
|
|
|
|
and
Vice Chairman of the Board
|
|
|
|
|
|
|
|
|
|
/s/
Robert L. Barbanell
|
|
Date:
|
|
October
14, 2010
|
Robert
L. Barbanell, a Director
|
|
|
|
|
|
|
|
|
|
/s/
Alan R. Batkin
|
|
Date:
|
|
October
14, 2010
|
Alan
R. Batkin, a Director
|
|
|
|
|
|
|
|
|
|
/s/
Joseph M. Cohen
|
|
Date:
|
|
October
14, 2010
|
Joseph
M. Cohen, a Director
|
|
|
|
|
|
|
|
|
|
/s/
Mark N. Diker
|
|
Date:
|
|
October
14, 2010
|
Mark
N. Diker, a Director
|
|
|
|
|
|
|
|
|
|
/s/
Alan J. Hirschfield
|
|
Date:
|
|
October
14, 2010
|
Alan
J. Hirschfield, a Director
|
|
|
|
|
|
|
|
|
|
/s/
Andrew A. Krakauer
|
|
Date:
|
|
October
14, 2010
|
Andrew
A. Krakauer, a Director and President & CEO
|
|
|
|
|
|
|
|
|
|
/s/
Bruce Slovin
|
|
Date:
|
|
October
14, 2010
|
Bruce
Slovin, a Director
|
|
|
|
|
58
CANTEL MEDICAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2010
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,
2010 and 2009, and the related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period ended July 31,
2010. 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, 2010 and 2009, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended July 31, 2010, 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, 2010, 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, 2010
expressed an unqualified opinion thereon.
MetroPark, New Jersey
October 14, 2010
1
CANTEL
MEDICAL CORP.
CONSOLIDATED
BALANCE SHEETS
(Dollar
Amounts in Thousands, Except Share Data)
|
|
July 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,612
|
|
$
|
23,368
|
|
Accounts receivable, net of allowance for doubtful
accounts of $870 in 2010 and $1,080 in 2009
|
|
31,870
|
|
30,450
|
|
Inventories
|
|
34,622
|
|
29,200
|
|
Deferred income taxes
|
|
2,420
|
|
1,898
|
|
Prepaid expenses and other current assets
|
|
3,207
|
|
3,994
|
|
Total current assets
|
|
94,731
|
|
88,910
|
|
|
|
|
|
|
|
Property and equipment, at cost:
|
|
|
|
|
|
Land, buildings and improvements
|
|
19,913
|
|
19,846
|
|
Furniture and equipment
|
|
47,639
|
|
43,100
|
|
Leasehold improvements
|
|
2,113
|
|
1,690
|
|
|
|
69,665
|
|
64,636
|
|
Less accumulated depreciation and amortization
|
|
(34,422
|
)
|
(28,668
|
)
|
|
|
35,243
|
|
35,968
|
|
Intangible assets, net
|
|
32,717
|
|
37,042
|
|
Goodwill
|
|
116,783
|
|
114,995
|
|
Other assets
|
|
1,191
|
|
956
|
|
|
|
$
|
280,665
|
|
$
|
277,871
|
|
|
|
|
|
|
|
Liabilities and stockholders
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
10,000
|
|
$
|
10,000
|
|
Accounts payable
|
|
9,640
|
|
8,948
|
|
Compensation payable
|
|
10,675
|
|
10,431
|
|
Earnout payable
|
|
|
|
157
|
|
Accrued expenses
|
|
6,370
|
|
6,583
|
|
Deferred revenue
|
|
4,233
|
|
2,819
|
|
Income taxes payable
|
|
66
|
|
175
|
|
Total current liabilities
|
|
40,984
|
|
39,113
|
|
|
|
|
|
|
|
Long-term debt
|
|
11,000
|
|
33,300
|
|
Deferred income taxes
|
|
17,868
|
|
16,378
|
|
Other long-term liabilities
|
|
1,408
|
|
1,964
|
|
|
|
|
|
|
|
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 2010 - 18,272,574 shares, outstanding 2010 -
16,866,284 shares; issued 2009- 17,883,873 shares, outstanding 2009 -
16,643,727 shares
|
|
1,827
|
|
1,788
|
|
Additional paid-in capital
|
|
94,714
|
|
87,169
|
|
Retained earnings
|
|
120,363
|
|
102,103
|
|
Accumulated other comprehensive income
|
|
8,045
|
|
8,281
|
|
Treasury Stock, 2010 - 1,406,290 shares at cost; 2009-1,240,146
shares at cost
|
|
(15,544
|
)
|
(12,225
|
)
|
Total stockholders equity
|
|
209,405
|
|
187,116
|
|
|
|
$
|
280,665
|
|
$
|
277,871
|
|
See accompanying notes.
2
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
273,952
|
|
$
|
260,050
|
|
$
|
249,374
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
162,981
|
|
160,571
|
|
161,748
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
110,971
|
|
99,479
|
|
87,626
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Selling
|
|
36,092
|
|
30,398
|
|
28,636
|
|
General and administrative
|
|
37,045
|
|
36,998
|
|
37,013
|
|
Research and development
|
|
5,169
|
|
4,632
|
|
4,010
|
|
Total operating expenses
|
|
78,306
|
|
72,028
|
|
69,659
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes
|
|
32,665
|
|
27,451
|
|
17,967
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
1,169
|
|
2,639
|
|
4,631
|
|
Interest income
|
|
(59
|
)
|
(144
|
)
|
(515
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
31,555
|
|
24,956
|
|
13,851
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
11,614
|
|
9,387
|
|
5,158
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,941
|
|
$
|
15,569
|
|
$
|
8,693
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.19
|
|
$
|
0.94
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.18
|
|
$
|
0.94
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
Dividends per common share:
|
|
$
|
0.10
|
|
$
|
|
|
$
|
|
|
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, 2010, 2009 and 2008
|
|
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercises
of options
|
|
196,950
|
|
34
|
|
4,998
|
|
|
|
|
|
(2,893
|
)
|
2,139
|
|
|
|
Repurchases
of shares
|
|
(22,218
|
)
|
|
|
|
|
|
|
|
|
(426
|
)
|
(426
|
)
|
|
|
Stock-based
compensation
|
|
|
|
|
|
3,130
|
|
|
|
|
|
|
|
3,130
|
|
|
|
Issuance
of restricted stock
|
|
47,825
|
|
5
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax deficiency from exercises of stock options and vesting of restricted
stock
|
|
|
|
|
|
(578
|
)
|
|
|
|
|
|
|
(578
|
)
|
|
|
Dividends
on common stock
|
|
|
|
|
|
|
|
(1,681
|
)
|
|
|
|
|
(1,681
|
)
|
|
|
Translation
adjustment, net of $1,302 in tax
|
|
|
|
|
|
|
|
|
|
(236
|
)
|
|
|
(236
|
)
|
$
|
(236
|
)
|
Net
income
|
|
|
|
|
|
|
|
19,941
|
|
|
|
|
|
19,941
|
|
19,941
|
|
Total
comprehensive income for fiscal 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,705
|
|
Balance,
July 31, 2010
|
|
16,866,284
|
|
$
|
1,827
|
|
$
|
94,714
|
|
$
|
120,363
|
|
$
|
8,045
|
|
$
|
(15,544
|
)
|
$
|
209,405
|
|
|
|
See accompanying notes.
4
CANTEL MEDICAL CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,941
|
|
$
|
15,569
|
|
$
|
8,693
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
6,333
|
|
6,217
|
|
6,058
|
|
Amortization
|
|
5,105
|
|
5,152
|
|
5,674
|
|
Stock-based compensation expense
|
|
3,130
|
|
3,187
|
|
1,961
|
|
Amortization of debt issuance costs
|
|
470
|
|
549
|
|
377
|
|
Loss on disposal of fixed assets
|
|
238
|
|
52
|
|
126
|
|
Deferred income taxes
|
|
(2,221
|
)
|
(1,955
|
)
|
(1,977
|
)
|
Excess tax benefits from stock-based compensation
|
|
(424
|
)
|
(267
|
)
|
(434
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(1,065
|
)
|
(185
|
)
|
1,189
|
|
Inventories
|
|
(5,189
|
)
|
2,298
|
|
(3,343
|
)
|
Prepaid expenses and other current assets
|
|
436
|
|
(1,405
|
)
|
(1,052
|
)
|
Accounts payable, deferred revenue and accrued
expenses
|
|
1,272
|
|
953
|
|
(471
|
)
|
Income taxes payable
|
|
1,007
|
|
827
|
|
1,756
|
|
Net cash provided by operating activities
|
|
29,033
|
|
30,992
|
|
18,557
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(5,605
|
)
|
(4,215
|
)
|
(4,983
|
)
|
Proceeds from disposal of fixed assets
|
|
5
|
|
1,669
|
|
23
|
|
Earnout paid to Crosstex sellers
|
|
|
|
(3,666
|
)
|
(3,667
|
)
|
Acquisition of Twist
|
|
(157
|
)
|
(629
|
)
|
(15
|
)
|
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
|
)
|
|
|
Acquisition of Purity Water, net of cash acquired
|
|
(1,970
|
)
|
|
|
|
|
Purchase of convertible note receivable
|
|
(300
|
)
|
(200
|
)
|
|
|
Other, net
|
|
(213
|
)
|
5
|
|
43
|
|
Net cash used in investing activities
|
|
(8,240
|
)
|
(11,450
|
)
|
(18,466
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
Borrowings under revolving credit facilities, net
of debt issuance costs
|
|
|
|
3,500
|
|
15,050
|
|
Repayments under term loan facility
|
|
(10,000
|
)
|
(8,000
|
)
|
(6,000
|
)
|
Repayments under revolving credit facility
|
|
(12,300
|
)
|
(10,500
|
)
|
(7,750
|
)
|
Proceeds from exercises of stock options
|
|
2,139
|
|
1,315
|
|
1,151
|
|
Dividends paid
|
|
(1,683
|
)
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
424
|
|
267
|
|
434
|
|
Purchase of interest rate cap
|
|
|
|
|
|
(148
|
)
|
Purchases of treasury stock
|
|
(426
|
)
|
(402
|
)
|
(855
|
)
|
Net cash (used in) provided by financing
activities
|
|
(21,846
|
)
|
(13,820
|
)
|
1,882
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
297
|
|
(672
|
)
|
485
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
(756
|
)
|
5,050
|
|
2,458
|
|
Cash and cash equivalents at beginning of year
|
|
23,368
|
|
18,318
|
|
15,860
|
|
Cash and cash equivalents at end of year
|
|
$
|
22,612
|
|
$
|
23,368
|
|
$
|
18,318
|
|
See accompanying notes.
5
CANTEL MEDICAL CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Years Ended July 31, 2010, 2009 and 2008
1. Business Description
Cantel Medical Corp. (Cantel)
is a leading provider of infection prevention and control products and services
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 prevention and control
products used principally in the dental market including face masks,
sterilization pouches, towels and bibs, tray covers, saliva ejectors,
germicidal wipes, plastic cups and disinfectants.
·
Endoscope
Reprocessing
: Medical device reprocessing systems,
disinfectants, enzymatic detergents and other supplies used to high-level
disinfect flexible endoscopes.
·
Dialysis
: Medical
device reprocessing systems, sterilants/disinfectants, dialysate concentrates
and other supplies for renal dialysis.
·
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.)
·
Chemistries:
Sterilants, disinfectants, detergents and
decontamination services used in various applications for infection prevention
and control. (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 2010, 2009 and 2008, Minntech Corporation (Minntech),
Crosstex International, Inc. (Crosstex), Mar Cor Purification, Inc.
(Mar Cor), Biolab Equipment Ltd. (Biolab) and Saf-T-Pak Inc. (Saf-T-Pak),
all of which are wholly-owned operating subsidiaries. In addition, Minntech has
three foreign subsidiaries, Minntech B.V., Minntech Asia/Pacific Ltd. and
Minntech Japan K.K., which serve as Minntechs bases in Europe, Asia/Pacific
and Japan, respectively.
During fiscal 2010, we
changed our internal reporting processes to include a new operating segment
called Chemistries to reflect the way the Company, through its executive
management, manages, allocates resources and measures the performance of its
businesses. This new operating segment is the combination of a small portion of
our existing sterilant business, comprised of products sold on an OEM basis and
previously recorded in our Water Purification and Filtration segment, and a new
business operation that was created to capitalize on our chemistry expertise
and expand our product offerings in existing and new markets within the
infection prevention and control arena. All periods presented have been
restated to reflect this change.
As such, we currently
operate our business through seven operating segments: Water Purification and
Filtration (through Mar Cor, Biolab and Minntech), Healthcare Disposables
(through Crosstex), Endoscope Reprocessing (through Minntech), Dialysis
(through Minntech), Therapeutic Filtration (through Minntech), Specialty
Packaging (through Saf-T-Pak) and Chemistries (through Minntech). The
Therapeutic Filtration, Specialty Packaging and Chemistries operating segments
are combined in the All Other reporting segment for financial reporting
purposes.
6
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 fiscals 2010 and 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 included in our results of operations for fiscals 2010 and
2009 and the portion of fiscal 2008 subsequent to their respective acquisition
dates. 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 included
in our results of operations for fiscal 2010, but are not reflected in our
results of operations for fiscals 2009 and 2008. Its net assets are included in
our Consolidated Balance Sheets at July 31, 2010 and 2009. G.E.M. is included in our Water Purification
and Filtration segment.
On June 1, 2010, we
acquired all of the issued and outstanding stock of Purity Water Company of San Antonio, Inc. (Purity),
as more fully described in Note 3 to the Consolidated Financial Statements. Its
results of operations are included in our results of operations in fiscal 2010
subsequent to its acquisition date and are excluded for all prior
periods.
In
June 2008, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Codification (ASC) 260-10-45,
Earnings Per Share Other Presentation Matters,
(ASC 260-10-45). ASC 260-10-45
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share (EPS) pursuant to the two-class method. ASC 260-10-45 is
effective for fiscal years beginning after December 15, 2008 and therefore
was adopted on August 1, 2009 as further described in Note 2 to the
Consolidated Financial Statements. All prior period EPS data have been adjusted
retrospectively to conform to the provisions of ASC 260-10-45. In fiscals
2009 and 2008, such retrospective application caused an insignificant increase
in the denominator of our weighted average shares calculation, which decreased
previously reported basic EPS in fiscals 2009 and 2008 from $0.96 to $0.94 and
$0.54 to $0.53, respectively, but had no impact on previously reported diluted
EPS.
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.
Subsequent Events
On October 6, 2010, our
Mar Cor subsidiary acquired from Gambro Renal Products, Inc. (GRP) and a
Swedish-based affiliate of GRP (collectively, Gambro) certain net assets and
the exclusive rights in the United States to manufacture and sell Gambros
water treatment products used in the production of water for hemodialysis (Gambro
Water or the Gambro Acquisition), as more fully described in Note 3 to the
Consolidated Financial Statements. Since the acquisition occurred subsequent to
July 31, 2010, the Gambro Acquisition is not included in our results of
operations for any of the periods presented.
We performed a review of
events subsequent to July 31, 2010. Based upon that review, no additional
subsequent events occurred that required updating to our Consolidated Financial
Statements or disclosures.
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.
7
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, chemistries 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 includes comparable historical transactions of similar
equipment and installation sold as stand alone components.
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 $2,909,000, $2,461,000
and $1,757,000 in fiscals 2010, 2009 and 2008, respectively. The increase in volume
rebates in fiscal 2010 compared with fiscal 2009 is primarily due to increased
sales volume primarily in our Healthcare Disposables and Endoscope Reprocessing
segments. The increase in volume rebates in fiscal 2009 compared with fiscal
2008 is primarily due to new terms in a 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; specialty
packaging products are sold to third-party distributors, medical research
companies, laboratories, pharmaceutical companies, hospitals, government
agencies and other end-users; and chemistries products and services are sold to
medical products and service companies, laboratories, pharmaceutical companies,
hospitals 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
8
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 certain customers paid their delinquent
receivables, reductions in allowances may be required.
Inventories
Inventories consist of raw
materials, work-in-process 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.
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. Depreciation and amortization expense related to property and
equipment for fiscals 2010, 2009 and 2008 was $6,333,000, $6,217,000 and
$6,058,000, 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 average fair value results of
the market multiple and discounted cash flow methodologies, as well as the
comparable transaction methodology when applicable. 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
9
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,
2010, 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 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. As of July 31, 2010 and 2009, such debt
issuance costs, net of related amortization, were included in other assets and
amounted to $297,000 and $587,000, 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
For fiscal 2005 and earlier
periods, we accounted for stock options using the intrinsic value method under
which stock compensation expense was not recognized because we granted stock
options with exercise prices equal to the market value of the shares at the
date of grant. Beginning August 1, 2005, we accounted for stock options
under ASC Topic 718, Compensation-Stock Compensation, (ASC 718), 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.
All of our stock options 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 over the vesting period, 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
10
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 historically has been 0% and is now
approximately 0.6% as we began paying dividends in January 2010), and the
expected option life (which is based on historical exercise behavior). If
factors change and we employ different assumptions in future periods, the
compensation expense that we would record 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.
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 charges associated with exit or disposal activities in
fiscals 2009 and 2008 relating to our restructuring plan for our Netherlands
manufacturing operations, as further described in Note 18 to the Consolidated
Financial Statements.
Earnings Per Common Share
Basic EPS is computed based
upon the weighted average number of common shares outstanding for the year.
Diluted EPS is computed based upon the weighted average number of common shares
outstanding for 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.
Advertising Costs
Our policy is to expense
advertising costs as they are incurred. Advertising costs charged to expense
were $1,853,000, $1,483,000 and $1,186,000 for fiscals 2010, 2009 and 2008,
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,
11
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.
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 is
based primarily upon managements assessment of exposure associated with
acquired companies. Previously, any adjustments upon resolution of income tax
uncertainties that predate or result from acquisitions were recorded as an
increase or decrease to goodwill. On August 1, 2009, we adopted ASC Topic
805,
Business Combinations,
(ASC
805), 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. 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. The ultimate settlement of such liabilities may be for amounts
which are different from the amounts recorded.
Recent Accounting Pronouncements
In
June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168,
The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162,
(codified
as ASC 105). ASC 105 establishes the Accounting Standards Codification
as the source of authoritative accounting literature recognized by the FASB to
be applied by nongovernmental entities in addition to rules and
interpretive releases of the Securities and Exchange Commission (SEC), which
are sources of authoritative generally accepted accounting principles (GAAP)
for SEC registrants. All other non-grandfathered, non-SEC accounting literature
not included in the codification will become non-authoritative. ASC 105
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of the financial statements. Following
this statement, the FASB will issue new standards in the form of Accounting
Standards Updates (ASU). This standard became effective for financial
statements for interim and annual reporting periods ending after
September 15, 2009 and therefore was adopted by us on August 1, 2009.
As the codification was not intended to change or alter existing GAAP, it did
not have any impact on our Consolidated Financial Statements.
In
February 2010, the FASB issued ASU 2010-09,
Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements,
(ASU 2010-09). ASU 2010-09 addresses practical
issues for SEC registrants with respect to managements review of subsequent
events by no longer requiring SEC registrants to disclose the date through
which management evaluated subsequent events in financial statements. This
change alleviates potential conflicts with SEC guidance. ASU 2010-09 was
effective immediately upon issuance for all financial statements that had
12
not
been issued or had not become available to be issued. As ASU 2010-09 was not
intended to change our subsequent events procedures, it did not have any impact
on our Consolidated Financial Statements other than excluding the disclosure of
the date through which management evaluated subsequent events in these
financial statements.
In
January 2010, the FASB issued ASU 2010-06,
Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements,
(ASU 2010-06).
Reporting entities will have to provide information about movements of assets
among Levels 1 and 2, and a reconciliation of purchases, sales, issuance, and
settlements of activity valued with a Level 3 method, of the three-tier fair
value hierarchy established by ASC 820,
Fair
Value Measurements and Disclosures,
(ASC 820). ASU 2010-06 also clarifies the existing guidance
to require fair value measurement disclosures for each class of assets and
liabilities. ASU 2010-06 is effective for interim and annual reporting periods
beginning after December 15, 2009 for Level 1 and 2 disclosure
requirements, which was adopted in our third quarter of fiscal 2010, and after
December 15, 2010 for Level 3 disclosure requirements, which we will adopt
in our third quarter of fiscal 2011 if we have any assets valued with a Level 3
method. The adoption of ASU 2010-06 for Level 1 and 2 disclosure requirements
did not have any impact upon our financial position, results of operations and financial
statement disclosures due to the nature of our Level 1 assets and the lack of
any assets valued with a Level 2 method.
In
October 2009, the FASB issued ASU 2009-13,
Revenue
Recognition (Topic 605): Multiple-Deliverable Arrangements, a consensus of the
FASB Emerging Issues Task Force,
(ASU 2009-13), which amends ASC
605-25,
Revenue
Recognition-Multiple-Element Arrangements.
ASU 2009-13
provides principles for the allocation of consideration among multiple-element
arrangements, allowing more flexibility in identifying and accounting for
separate deliverables. ASU 2009-13 introduces an estimated selling price
method for allocating revenue to the elements of a bundled arrangement if
vendor-specific objective evidence or third-party evidence of selling price is
not available, and significantly expands related disclosure
requirements. This standard is effective on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, and therefore is effective for our
fiscal 2011. We are currently in the process of evaluating the impact of
ASU 2009-13 on our financial position and results of operations.
In
December 2007, the FASB issued ASC 805,
Business
Combinations,
(ASC 805), 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. Some of the
revised guidance of ASC 805 includes initial capitalization of acquired
in-process research and development, expensing transaction and restructuring
costs and recording contingent consideration payments at fair value, with
subsequent adjustments recorded to net earnings. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. ASC 805 was effective
for business combinations that occur during or after fiscal years beginning
after December 15, 2008 and therefore was adopted by us on August 1,
2009. The adoption of ASC 805 did not have a material effect on our financial
position or results of operations due to the small size and straight-forward
nature of the terms of the Purity acquisition. However, any acquisitions we
make in future periods will be subject to this new accounting guidance, which
may materially affect our financial position or results of operations as
compared to accounting guidance in effect prior to the adoption of ASC 805.
In
September 2006, the FASB issued ASC 820. ASC 820 establishes a
framework for measuring fair value, clarifies the definition of fair value, and
requires additional disclosures about fair value measurements that are already
required or permitted by other accounting standards (except for measurements of
share-based payments) and is expected to increase the consistency of those
measurements. ASC 820, as issued, was 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,
the effective date of ASC 820 was deferred for certain nonfinancial assets and
nonfinancial liabilities to fiscal years beginning after November 15, 2008
and therefore this portion of ASC 820 was adopted on August 1, 2009. The
implementation of ASC 820 did not have a material impact on our financial
position or results of operations at either date.
In
August 2009, the FASB issued ASU 2009-05, which amends ASC 820. ASU
2009-05 provides amendments for fair value measurements of liabilities. It
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more alternate
techniques. ASU 2009-05 also clarifies that when estimating fair value of
a liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. ASU 2009-05 was effective for the
first reporting period (including interim periods)
13
beginning
after issuance and was adopted by us during our first quarter of fiscal 2010. The
adoption of ASU 2009-05 did not have a material impact on our financial
position or results of operations.
3. Acquisitions
Post-Fiscal 2010
Gambro Water
On October 6, 2010, our Mar
Cor subsidiary acquired from Gambro certain net assets and the exclusive rights
in the United States to manufacture and sell Gambros water treatment products
used in the production of water for hemodialysis. Immediately following the
acquisition, we commenced sales and service of all Gambro water products,
components, parts and consumables solely intended for the United States market.
The manufacturing of these products will be transitioned into our own
manufacturing facility in Plymouth, Minnesota over the next few months. With an
installed base of over 1,200 water equipment customers in the United States and
annual pre-acquisition revenues of approximately $14 million (approximately 80%
of such revenues are from one customer), the Gambro Acquisition is anticipated
to expand our Water Purification and Filtrations annual business by
approximately 19% in terms of sales, particularly with respect to product and
service sales volumes in both existing and new dialysis clinics across the United
States. Total consideration for the transaction, excluding transaction costs,
was approximately $23,750,000, of which $3,100,000 will be paid in six equal
quarterly payments ending April 2012. The Gambro Acquisition will be included
in our Water Purification and Filtration operating segment.
The reasons for the
acquisition were as follows: (i) the expansion of our water purification
product line, particularly in the area of cost effective heat sanitizing water
purification equipment, (ii) the opportunity to add an installed equipment base
of business into which we can (a) increase service revenue while improving the
density and efficiency of the Mar Cor service network and (b) increase
consumable sales per clinic; (iii) the potential revenue and cost savings
synergies and efficiencies that could be realized through optimizing and
combining the acquired assets (including Gambro employees) into Mar Cor; and (iv)
the expectation that the acquisition will be accretive to our future earnings
per share.
Since the acquisition was
completed on October 6, 2010, the results of operations of Gambro Water are not
included in our results of operations for any period presented herein. Pro
forma consolidated statement of income data has not been presented due to the unavailability
of pre-acquisition Gambro Water financial statements, since Gambro Water did
not maintain separate financial statements related to these purchased assets,
and the expected insignificant impact of this acquisition on our consolidated
net income in fiscal 2011 subsequent to its acquisition date.
Fiscal 2010
Purity
Water Company of San Antonio, Inc.
On
June 1, 2010, Mar Cor acquired all of the issued and outstanding capital stock
of Purity, a private company with pre-acquisition annual revenues of
approximately $2,300,000 based in San Antonio, Texas that designs, installs and
services high quality, high purity water systems for use in laboratory,
industrial, medical, pharmaceutical and semiconductor environments. Total
consideration for the transaction was $2,014,000.
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
|
|
$
|
493,000
|
|
Property,
plant and equipment
|
|
185,000
|
|
Amortizable
intangible assets:
|
|
|
|
Trade
name (3-year life)
|
|
10,000
|
|
Non-compete
agreement (5-year life)
|
|
38,000
|
|
Customer
relationships (9-year life)
|
|
433,000
|
|
Current
liabilities
|
|
(347,000
|
)
|
Noncurrent
deferred income tax liabilities, net
|
|
(15,000
|
)
|
Net
assets acquired
|
|
$
|
797,000
|
|
There were no in-process
research and development projects acquired in connection with the acquisition.
The excess
14
purchase price of $1,217,000
was assigned to goodwill. Such goodwill, all of which is non-deductible for
income tax purposes, has been included in our Water Purification and Filtration
reporting segment.
The primary reason for the
acquisition was to add a base of business and expand the Mar Cor service
network in the southwest United States. Following the acquisition, Purity was
merged with and into Mar Cor.
The acquisition of Purity is
included in our results of operations in fiscal 2010 subsequent to its
acquisition date and is excluded from
our results of operations for fiscals 2009 and 2008. Pro forma
consolidated statements of income data have not been presented due to the
insignificant impact of this acquisition.
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.
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
|
|
$
|
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.
The acquisition of G.E.M. is
included in our results of operations in fiscal 2010. 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 and
2008, but its net assets are included in our Consolidated Balance Sheets at
both July 31, 2010 and 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, 2010, none of
the additional consideration had been earned.
15
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, 2010, none of the additional
consideration had been earned.
The purchase price was
allocated to the assets acquired and assumed liabilities based on estimated
fair values as follows:
|
|
Final
|
|
Net Assets
|
|
Allocation
|
|
Current
assets
|
|
$
|
948,000
|
|
Property
and equipment
|
|
146,000
|
|
Amortizable
intangible assets:
|
|
|
|
Customer
relationships (1-year life)
|
|
165,000
|
|
Branded
products (3-year life)
|
|
281,000
|
|
Technology
(17-year life)
|
|
532,000
|
|
Other
assets
|
|
166,000
|
|
Current
liabilities
|
|
(415,000
|
)
|
Noncurrent
liabilities
|
|
(65,000
|
)
|
Net
assets acquired
|
|
$
|
1,758,000
|
|
There were no in-process
research and development projects acquired in connection with the acquisition.
The excess purchase price of $3,148,000 was assigned to goodwill. Such
goodwill, all of which is deductible for income tax purposes, has been included
in our Endoscope Reprocessing reporting segment.
The principal reasons for
the acquisition were to (i) add a technologically advanced product that fits
squarely in our existing customer call pattern for Medivators products, (ii) leverage
our national, direct hospital field sales force and
16
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 fiscals 2010 and 2009 and the portion
of fiscal 2008 subsequent to the respective acquisition dates. 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 fiscal 2008 have not been presented due to the insignificant
impact of these acquisitions individually and in the aggregate.
4. Inventories
A summary of inventories is
as follows:
|
|
July 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Raw
materials and parts
|
|
$
|
14,003,000
|
|
$
|
10,980,000
|
|
Work-in-process
|
|
5,153,000
|
|
3,074,000
|
|
Finished
goods
|
|
15,466,000
|
|
15,146,000
|
|
Total
|
|
$
|
34,622,000
|
|
$
|
29,200,000
|
|
5.
Financial
Instruments
We account for derivative
instruments and hedging activities in accordance with ASC 815,
Derivatives and Hedging,
(ASC 815), 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, 2010, all of our derivatives
were
17
designated as hedges.
Changes in the value of (i) the
Canadian dollar against the United States dollar, (ii) the euro against the
United States dollar and (iii) the British pound against 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 and Endoscope Reprocessing
segments) are denominated and ultimately settled in United States dollars 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, certain
cash bank accounts, accounts receivable and liabilities 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 (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 $4,254,000 at July
31, 2010, which covered certain assets and liabilities that were denominated in
currencies other than our subsidiaries functional currencies. Such contracts
expired on August 31, 2010. 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 fiscals
2010, 2009 and 2008, 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 and resulted in a
net currency conversion loss, net of tax, of $100,000, $200,000 and $230,000,
respectively, on the items hedged. 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.
On August 1, 2008, we
adopted ASC 820 for our financial assets and liabilities. ASC 820 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. ASC 820 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.
The fair values of the
Companys financial instruments measured on a recurring basis were categorized
as follows:
|
|
July 31,
2010
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Bank
deposits and certificates of deposit
|
|
$
|
17,696,000
|
|
$
|
|
|
$
|
|
|
$
|
17,696,000
|
|
Money
markets
|
|
4,916,000
|
|
|
|
|
|
4,916,000
|
|
Total
cash and cash equivalents
|
|
$
|
22,612,000
|
|
$
|
|
|
$
|
|
|
$
|
22,612,000
|
|
|
|
July 31,
2009
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Bank
deposits and certificates of deposit
|
|
$
|
11,821,000
|
|
$
|
|
|
$
|
|
|
$
|
11,821,000
|
|
Money
markets
|
|
11,547,000
|
|
|
|
|
|
11,547,000
|
|
Total
cash and cash equivalents
|
|
$
|
23,368,000
|
|
$
|
|
|
$
|
|
|
$
|
23,368,000
|
|
18
As of July 31, 2010 and
2009, the carrying amounts for cash and cash equivalents, accounts receivable
and accounts payable approximated fair value due to the short maturity of these
instruments. We believe that as of July 31, 2010 and 2009, the fair value of
our outstanding borrowings under our credit facilities approximated the
carrying value of those obligations since the borrowing rates were 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 $5,105,000,
$5,152,000 and $5,674,000 for fiscals 2010, 2009 and 2008, respectively. Our
intangible assets that have indefinite useful lives and therefore are not
amortized consist of trademarks and trade names.
The Companys intangible
assets consist of the following:
|
|
July 31,
2010
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
26,205,000
|
|
$
|
(12,102,000
|
)
|
$
|
14,103,000
|
|
Technology
|
|
9,267,000
|
|
(6,085,000
|
)
|
3,182,000
|
|
Brand
names
|
|
9,556,000
|
|
(4,829,000
|
)
|
4,727,000
|
|
Non-compete
agreements
|
|
1,901,000
|
|
(1,536,000
|
)
|
365,000
|
|
Patents
and other registrations
|
|
1,251,000
|
|
(307,000
|
)
|
944,000
|
|
|
|
48,180,000
|
|
(24,859,000
|
)
|
23,321,000
|
|
Trademarks
and tradenames
|
|
9,396,000
|
|
|
|
9,396,000
|
|
Total
intangible assets
|
|
$
|
57,576,000
|
|
$
|
(24,859,000
|
)
|
$
|
32,717,000
|
|
|
|
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
|
|
Estimated annual
amortization expense of our intangible assets for the next five years is as
follows:
Year Ending
July 31,
|
|
2011
|
|
$
|
4,820,000
|
|
2012
|
|
4,355,000
|
|
2013
|
|
4,281,000
|
|
2014
|
|
4,087,000
|
|
2015
|
|
3,912,000
|
|
|
|
|
|
|
19
Goodwill changed during
fiscals 2010 and 2009 as follows:
|
|
Water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purification
|
|
Healthcare
|
|
|
|
Endoscope
|
|
|
|
Total
|
|
|
|
and Filtration
|
|
Disposables
|
|
Dialysis
|
|
Reprocessing
|
|
All Other
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2008
|
|
$
|
37,191,000
|
|
$
|
50,473,000
|
|
$
|
8,133,000
|
|
$
|
9,648,000
|
|
$
|
8,513,000
|
|
$
|
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
|
|
38,375,000
|
|
50,630,000
|
|
8,133,000
|
|
9,648,000
|
|
8,209,000
|
|
114,995,000
|
|
Acquisitions
|
|
1,217,000
|
|
|
|
|
|
|
|
|
|
1,217,000
|
|
Foreign
currency translation
|
|
255,000
|
|
|
|
|
|
|
|
316,000
|
|
571,000
|
|
Balance,
July 31, 2010
|
|
$
|
39,847,000
|
|
$
|
50,630,000
|
|
$
|
8,133,000
|
|
$
|
9,648,000
|
|
$
|
8,525,000
|
|
$
|
116,783,000
|
|
On July 31, 2010 and 2009,
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,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
949,000
|
|
$
|
916,000
|
|
Acquisitions
|
|
10,000
|
|
10,000
|
|
Provisions
|
|
1,826,000
|
|
1,345,000
|
|
Charges
|
|
(1,605,000
|
)
|
(1,281,000
|
)
|
Foreign
currency translation
|
|
1,000
|
|
(41,000
|
)
|
Ending
Balance
|
|
$
|
1,181,000
|
|
$
|
949,000
|
|
The warranty provisions and
charges during fiscals 2010 and 2009 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 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 U.S. Credit Facilities, as amended, include (i) a
six-year $40.0 million senior secured amortizing term loan facility expiring August
1, 2011 and (ii) a five-year $50.0 million senior secured revolving credit
facility that was scheduled to expire on August 1, 2010. Amounts we repay under
the term loan facility may not be re-borrowed. On May 28, 2010, we amended the
U.S. Credit Facilities, which amendment included the extension of the
termination date for the revolving credit facility to August 1, 2011. Debt
issuance costs relating to the U.S. Credit Facilities were recorded in other
assets and are being amortized over the life of the credit facilities. Such
unamortized debt issuance costs amounted to approximately $297,000 at July 31,
2010.
At July 31, 2010, borrowings
under the U.S. Credit Facilities bear interest at rates ranging from 0.50% to
1.50% above the lenders base rate, or at rates ranging from 1.50% to 2.50%
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 U.S. Credit
Facilities (EBITDA). At July 31, 2010, the lenders base rate was 3.25% and
the LIBOR rates applicable to our outstanding borrowings ranged from 0.35% to
1.21%. The margins
20
applicable to our
outstanding borrowings at July 31, 2010 were 0.50% above the lenders base rate
and 1.50% above LIBOR. All of our outstanding borrowings were under LIBOR
contracts at July 31, 2010. The U.S. Credit Facilities also provide for fees on
the unused portion of our facilities at rates ranging from 0.20% to 0.40%,
depending upon our consolidated ratio of debt to EBITDA; such rate was 0.20% at
July 31, 2010.
The
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 in
excess of $3,000,000 without the consent of our United States lenders. As of July
31, 2010, we were in compliance with all financial and other covenants under
the U.S. Credit Facilities.
On July 31, 2010, we had
$21,000,000 of outstanding borrowings under the U.S. Credit Facilities, which
consisted of $10,000,000 and $11,000,000 under the term loan facility and the
revolving credit facility, respectively, and $39,000,000 was available to be
borrowed under our revolving credit facility. In September 2010, we repaid
$6,000,000 under the revolving credit facility and $2,500,000 under our term
loan facility reducing our total outstanding borrowings to $12,500,000 by the
end of September. In October, we borrowed $20,500,000 under our revolving
credit facility to fund a portion of the purchase price of the Gambro
Acquisition. The maturities of our credit facilities are described in Note 10
to the Consolidated Financial Statements.
The U.S. Credit Facilities
have a termination date of August 1, 2011. Although we may repay a portion of
our outstanding borrowings throughout fiscal 2011, we do not presently
anticipate paying off the revolving credit facility in full by its termination
date. We are in discussions with our bank syndicate regarding modifications to
such facility and expect to formally modify the facility before the expiration
date. However, since any modification will not be completed until later in
fiscal 2011, we will be required to reclassify the entire outstanding balance
of the revolver from long-term to current in periods subsequent to July 31,
2010.
9. Income Taxes
The
consolidated effective tax rate from operations was 36.8%, 37.6% and 37.2% for
fiscals 2010, 2009, and 2008, respectively, and reflects income tax expense for
our United States and international operations at their respective statutory
rates.
The provision for income
taxes from operations consists of the following:
|
|
Year Ended
July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
11,884,000
|
|
$
|
(1,911,000
|
)
|
$
|
9,165,000
|
|
$
|
(1,282,000
|
)
|
$
|
5,336,000
|
|
$
|
(1,418,000
|
)
|
State
|
|
1,417,000
|
|
(118,000
|
)
|
1,610,000
|
|
(402,000
|
)
|
1,081,000
|
|
(408,000
|
)
|
Canada
|
|
410,000
|
|
(177,000
|
)
|
545,000
|
|
(327,000
|
)
|
657,000
|
|
(306,000
|
)
|
Singapore
|
|
100,000
|
|
(19,000
|
)
|
76,000
|
|
|
|
|
|
|
|
Netherlands
|
|
26,000
|
|
|
|
|
|
|
|
26,000
|
|
|
|
Japan
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
190,000
|
|
Total
|
|
$
|
13,839,000
|
|
$
|
(2,225,000
|
)
|
$
|
11,398,000
|
|
$
|
(2,011,000
|
)
|
$
|
7,100,000
|
|
$
|
(1,942,000
|
)
|
21
The geographic components of
income from operations before income taxes are as follows:
|
|
Year Ended
July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
30,016,000
|
|
$
|
23,566,000
|
|
$
|
13,330,000
|
|
Canada
|
|
1,030,000
|
|
1,296,000
|
|
1,563,000
|
|
Netherlands
|
|
106,000
|
|
(285,000
|
)
|
(925,000
|
)
|
Japan
|
|
(283,000
|
)
|
(201,000
|
)
|
(133,000
|
)
|
Singapore
|
|
686,000
|
|
580,000
|
|
16,000
|
|
Total
|
|
$
|
31,555,000
|
|
$
|
24,956,000
|
|
$
|
13,851,000
|
|
The effective tax rate from
operations differs from the United States statutory tax rate (35.0% in 2010 and
2009 and 34.2% in 2008) due to the following:
|
|
Year Ended
July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Expected
statutory tax
|
|
$
|
11,044,000
|
|
$
|
8,735,000
|
|
$
|
4,737,000
|
|
Differential
attributable to foreign operations:
|
|
|
|
|
|
|
|
Canada
|
|
(126,000
|
)
|
(235,000
|
)
|
(186,000
|
)
|
Netherlands
|
|
(11,000
|
)
|
100,000
|
|
342,000
|
|
Japan
|
|
101,000
|
|
72,000
|
|
236,000
|
|
Singapore
|
|
(159,000
|
)
|
(127,000
|
)
|
(6,000
|
)
|
State
and local taxes
|
|
859,000
|
|
785,000
|
|
443,000
|
|
Extraterritorial
income exclusion
|
|
|
|
|
|
(20,000
|
)
|
Stock
option expense
|
|
(96,000
|
)
|
(193,000
|
)
|
(101,000
|
)
|
Tax
reserve provision
|
|
165,000
|
|
|
|
(58,000
|
)
|
Domestic
production deduction
|
|
(447,000
|
)
|
(449,000
|
)
|
(219,000
|
)
|
Taxes
on foreign dividends
|
|
262,000
|
|
493,000
|
|
|
|
R&E
tax credit
|
|
(72,000
|
)
|
(197,000
|
)
|
|
|
Change
in our U.S. Federal tax rate
|
|
|
|
287,000
|
|
(41,000
|
)
|
Other
|
|
94,000
|
|
116,000
|
|
31,000
|
|
Total
income tax expense
|
|
$
|
11,614,000
|
|
$
|
9,387,000
|
|
$
|
5,158,000
|
|
22
Deferred income tax assets
and liabilities from operations are comprised of the following:
|
|
July 31,
|
|
|
|
2010
|
|
2009
|
|
Current
deferred tax assets:
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
1,268,000
|
|
$
|
957,000
|
|
Inventories
|
|
968,000
|
|
929,000
|
|
Accounts
receivable
|
|
327,000
|
|
385,000
|
|
Subtotal
|
|
2,563,000
|
|
2,271,000
|
|
Valuation
allowance
|
|
(143,000
|
)
|
(373,000
|
)
|
|
|
$
|
2,420,000
|
|
$
|
1,898,000
|
|
Non-current
deferred tax assets:
|
|
|
|
|
|
Other
long-term liabilities
|
|
$
|
456,000
|
|
$
|
597,000
|
|
Stock-based
compensation
|
|
1,868,000
|
|
2,595,000
|
|
Foreign
tax credit
|
|
294,000
|
|
1,058,000
|
|
Domestic
NOLs
|
|
167,000
|
|
|
|
Foreign
NOLs
|
|
1,426,000
|
|
1,705,000
|
|
Subtotal
|
|
4,211,000
|
|
5,955,000
|
|
Valuation
allowance
|
|
(1,615,000
|
)
|
(2,466,000
|
)
|
|
|
2,596,000
|
|
3,489,000
|
|
Non-current
deferred tax liabilities:
|
|
|
|
|
|
Property
and equipment
|
|
(5,306,000
|
)
|
(5,841,000
|
)
|
Intangible
assets
|
|
(9,350,000
|
)
|
(10,669,000
|
)
|
Goodwill
|
|
(2,422,000
|
)
|
(1,565,000
|
)
|
Cumulative
translation adjustment
|
|
(3,070,000
|
)
|
(1,767,000
|
)
|
Tax
on unremitted foreign earnings
|
|
(316,000
|
)
|
(25,000
|
)
|
|
|
(20,464,000
|
)
|
(19,867,000
|
)
|
Net
non-current deferred tax liabilities
|
|
$
|
(17,868,000
|
)
|
$
|
(16,378,000
|
)
|
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 37.7% and 38.1% for
fiscals 2010 and 2009, respectively.
At July 31, 2010, we had net
operating loss carryforwards (NOLs) for domestic tax reporting purposes of
$478,000 which originated from the Purity acquisition and will begin to expire
on July 31, 2029. For foreign tax reporting purposes, our NOLs at July 31, 2010
are approximately $6,031,000. Of this amount NOLs from our Japanese subsidiary
total approximately $1,065,000 and will begin to expire on July 31, 2013 and
NOLs from our Netherlands subsidiary total approximately $4,966,000 and will
begin to expire on July 31, 2016. 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 2010, no
dividends were repatriated from our foreign subsidiaries. However, we have
provided U.S. federal and state income taxes and foreign withholding taxes
related to an anticipated repatriation from one of our Canadian subsidiaries in
fiscal 2011. During fiscal 2009, we repatriated dividends of approximately
$11,400,000 from our foreign subsidiaries for which we provided U.S. Federal
and state income taxes and foreign withholding taxes. During fiscal 2008, no
dividends were repatriated from our foreign subsidiaries.
We have a deferred tax asset
of $294,000 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 during fiscal 2010 by approximately $1,034,000. The
decrease was mainly attributable to additional foreign source income generated
during fiscal 2010 due to the foreign dividend repatriation and the fiscal 2011
anticipated repatriation for which taxes have been provided. As we currently do
not expect significant future additional foreign source income, a valuation
allowance has been
23
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 credit.
We
decreased our overall valuation allowances during fiscal 2010 by $1,081,000,
from $2,839,000 at July 31, 2009 to $1,758,000 at July 31, 2010, 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 $7,867,000 was considered to be
indefinitely reinvested at July 31, 2010. Accordingly, no provision has been
made for United States income taxes that might result from repatriation of these
earnings.
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 tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon settlement with the tax authorities. The
majority of our unrecognized tax benefits originated from acquisitions.
Previously, any adjustments upon resolution of income tax uncertainties that
predate or result from acquisitions were recorded as an increase or decrease to
goodwill. On August 1, 2009, we adopted ASC 805 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 overall effective tax
rate due to the size of the unrecognized tax benefits in relation to our income
before income taxes. Except for decreases due to the lapse of applicable
statutes of limitation, 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 July 31, 2008
|
|
$
|
427,000
|
|
Lapse
of statute of limitations
|
|
(47,000
|
)
|
Unrecognized
tax benefits on July 31, 2009
|
|
380,000
|
|
Lapse
of statute of limitations
|
|
(172,000
|
)
|
Unrecognized
tax benefits on July 31, 2010
|
|
$
|
208,000
|
|
Generally, the Company is no
longer subject to federal, state or foreign income tax examinations for fiscal
years ended prior to July 31, 2004.
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.
24
10. Commitments and Contingencies
Long-term contractual
obligations
As of July 31, 2010,
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)
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of the credit facilities (1)
|
|
$
|
10,000
|
|
$
|
11,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
21,000
|
|
Expected
interest payments under the credit facilities (2)
|
|
340
|
|
1
|
|
|
|
|
|
|
|
|
|
341
|
|
Minimum
commitments under noncancelable operating leases
|
|
3,181
|
|
2,375
|
|
1,705
|
|
1,370
|
|
1,005
|
|
5,574
|
|
15,210
|
|
Minimum
commitments under noncancelable capital leases
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Deferred
compensation and other
|
|
406
|
|
264
|
|
38
|
|
33
|
|
34
|
|
132
|
|
907
|
|
Employment
agreements
|
|
3,073
|
|
356
|
|
|
|
|
|
|
|
|
|
3,429
|
|
Total
contractual obligations
|
|
$
|
17,014
|
|
$
|
13,996
|
|
$
|
1,743
|
|
$
|
1,403
|
|
$
|
1,039
|
|
$
|
5,706
|
|
$
|
40,901
|
|
(1)
As of July 31,
2010, annual required payments during the year ending July 31, 2012
represent the outstanding balance on the revolving credit facility since the May 28,
2010 amendment to our revolving credit facility extended the expiration date
from August 1, 2010 to August 1, 2011. In September 2010, we
repaid $6,000,000 under the revolving credit facility and $2,500,000 under our
term loan facility reducing our total outstanding borrowings to $12,500,000 at
the end of September. In October, we borrowed $20,500,000 under our revolving
credit facility to fund a portion of the purchase price of the Gambro
Acquisition thereby increasing total outstanding borrowings to $33,000,000. The
remaining purchase price of $3,100,000 is payable in six equal quarterly
payments ending April 2012.
(2)
The expected
interest payments under the term and revolving credit facilities reflect
interest rates of 2.37% and 1.93%, respectively, which were our interest rates
on outstanding borrowings at July 31, 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 $16,200 during fiscal
2011 and escalates annually to approximately $20,100 in fiscal 2025 when it
expires. The Toronto building lease provides for monthly base rent of
approximately $16,000 in fiscal 2011 and escalates to approximately $16,800 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 provides
for monthly base rent of approximately $18,100 during fiscal 2011 and escalates
annually to approximately $20,800 in fiscal 2024 when it expires. The second
building lease in Santa Fe Springs, California provides for monthly base rent
of approximately $17,700 in fiscal 2011, 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
25
lease in Edmonton, Alberta
is a new lease beginning November 1, 2010 and provides for monthly base
rent of approximately $8,100 escalating annually thereafter to approximately
$9,049 in fiscal 2021 when it expires. The second building lease in Glen
Burnie, Maryland provides for monthly base rent of $6,400 during fiscal 2011
and escalates annually to approximately $6,600 in fiscal 2013 when it expires.
Rent expense related to
operating leases for fiscal 2010 was recorded on a straight-line basis and
aggregated $3,875,000, compared with $3,679,000 and $3,466,000 for fiscals 2009
and 2008, respectively.
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 officers and our subsidiary Chief Executive Officers.
The majority of such contracts expired and were replaced effective January 1,
2010 with severance contracts that defined certain compensation arrangements
relating to various employment termination scenarios.
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,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
130,000
|
|
$
|
70,000
|
|
$
|
43,000
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
|
|
410,000
|
|
216,000
|
|
123,000
|
|
General
and administrative
|
|
2,560,000
|
|
2,884,000
|
|
1,778,000
|
|
Research
and development
|
|
30,000
|
|
17,000
|
|
17,000
|
|
Total
operating expenses
|
|
3,000,000
|
|
3,117,000
|
|
1,918,000
|
|
Stock-based
compensation before income taxes
|
|
3,130,000
|
|
3,187,000
|
|
1,961,000
|
|
Income
tax benefits
|
|
(1,137,000
|
)
|
(1,226,000
|
)
|
(758,000
|
)
|
Total
stock-based compensation expense, net of tax
|
|
$
|
1,993,000
|
|
$
|
1,961,000
|
|
$
|
1,203,000
|
|
|
|
|
|
|
|
|
|
Decrease
in earnings per common share due to stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.07
|
|
The above stock-based
compensation expense before income taxes was recorded in the Consolidated
Financial Statements as stock-based compensation expense and an increase to
additional paid-in capital. The related income tax benefits (which pertain only
to stock awards and options that do not qualify as incentive stock options)
were recorded as an increase to long-term deferred income tax assets (which are
netted with long-term deferred income tax liabilities) 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,
26
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 options
and stock awards (which consist only of restricted shares) are subject to
graded vesting in which portions of the award vest at different times during
the vesting period, as opposed to awards that vest at the end of the vesting
period. We recognize compensation expense for awards subject to graded vesting
using the straight-line basis over the vesting period, reduced by estimated
forfeitures. At July 31, 2010, total unrecognized stock-based compensation
expense, before income taxes, related to total nonvested stock options and
stock awards was $3,812,000 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
|
|
Fair Value
|
|
|
|
|
|
|
|
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
|
|
Granted
|
|
47,825
|
|
15.97
|
|
Vested
|
|
(115,501
|
)
|
13.76
|
|
Nonvested
stock awards at July 31, 2010
|
|
158,652
|
|
$
|
13.89
|
|
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 2010, 2009 and 2008:
Weighted-Average
|
|
|
|
|
|
|
|
Black-Scholes Option
|
|
Year Ended July 31,
|
|
Valuation Assumptions
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Dividend
yield (1)
|
|
0.06%
|
|
|
0.00%
|
|
|
0.00%
|
|
|
Expected
volatility (2)
|
|
0.452
|
|
|
0.428
|
|
|
0.340
|
|
|
Risk-free
interest rate (3)
|
|
1.96%
|
|
|
1.74%
|
|
|
2.91%
|
|
|
Expected
lives (in years) (4)
|
|
3.68
|
|
|
4.06
|
|
|
3.87
|
|
|
(1) The
weighted average dividend yield was 0.60% for options granted after the
declaration of our first dividend in January 2010. Previously, we did not
issue dividends and therefore the dividend yield was zero. The weighted average
dividend yield for fiscal 2010 was 0.06%.
(2) Volatility
was based on historical closing prices of our Common Stock.
(3) The
U.S. Treasury rate based on the expected life at the date of grant.
(4) 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
27
non-qualified options were
tax-effected using the Companys estimated U.S. effective tax rate at the time
of grant. In fiscals 2010, 2009 and 2008, the weighted average fair value of
all options granted was $5.71, $5.12 and $3.35, respectively. The aggregate
intrinsic value (i.e. the excess market price over the exercise price) of all
options exercised was approximately $1,672,000, $1,241,000 and $2,361,000 in
fiscals 2010, 2009 and 2008, respectively. The aggregate fair value of all
options vested was approximately $1,069,000, $1,036,000 and $1,475,000 in
fiscals 2010, 2009 and 2008, respectively.
A summary of stock option
activity follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2007
|
|
1,848,846
|
|
$
|
14.55
|
|
Granted
|
|
383,250
|
|
10.95
|
|
Canceled
|
|
(183,001
|
)
|
16.68
|
|
Exercised
|
|
(291,303
|
)
|
6.23
|
|
Expired
|
|
(3,375
|
)
|
8.63
|
|
Outstanding
at July 31, 2008
|
|
1,754,417
|
|
14.94
|
|
Granted
|
|
106,250
|
|
14.33
|
|
Canceled
|
|
(45,200
|
)
|
17.16
|
|
Exercised
|
|
(263,292
|
)
|
6.83
|
|
Expired
|
|
(46,453
|
)
|
12.54
|
|
Outstanding
at July 31, 2009
|
|
1,505,722
|
|
16.32
|
|
Granted
|
|
459,250
|
|
16.02
|
|
Canceled
|
|
(31,833
|
)
|
17.35
|
|
Exercised
|
|
(340,876
|
)
|
14.76
|
|
Expired
|
|
(164,400
|
)
|
21.72
|
|
Outstanding at July 31, 2010
|
|
1,427,863
|
|
$
|
15.95
|
|
|
|
|
|
|
|
Exercisable
at July 31, 2008
|
|
1,137,624
|
|
$
|
16.28
|
|
|
|
|
|
|
|
Exercisable
at July 31, 2009
|
|
1,049,657
|
|
$
|
17.86
|
|
|
|
|
|
|
|
Exercisable at July 31, 2010
|
|
778,864
|
|
$
|
16.76
|
|
As of July 31, 2010,
1,367,181 of the outstanding options had vested or were expected to vest in future
periods and had a weighted average exercise price of $15.96.
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
or a reduction of deferred income tax assets (which are netted with long-term
deferred income tax liabilities) and as a reduction of income taxes payable. In
fiscals 2010 and 2009, such income tax deductions reduced income taxes payable
by $1,287,000 and $745,000, 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.
28
The following table
summarizes additional information related to stock options outstanding at July 31,
2010:
|
|
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, 2010
|
|
(Months)
|
|
Price
|
|
At July 31, 2010
|
|
(Months)
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$8.23
- $11.58
|
|
267,612
|
|
34
|
|
$
|
10.39
|
|
170,234
|
|
34
|
|
$
|
10.33
|
|
$14.13
- $19.79
|
|
807,750
|
|
40
|
|
$
|
15.72
|
|
256,129
|
|
22
|
|
$
|
15.60
|
|
$20.10
- $29.49
|
|
352,501
|
|
6
|
|
$
|
20.70
|
|
352,501
|
|
6
|
|
$
|
20.70
|
|
$8.23
- $29.49
|
|
1,427,863
|
|
30
|
|
$
|
15.95
|
|
778,864
|
|
17
|
|
$
|
16.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Intrinsic Value
|
|
$
|
1,834,000
|
|
|
|
|
|
$
|
1,175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 17, 2009, our stockholders approved
an amendment to the 2006 Plan that increased the number of shares of Common
Stock available for issuance under the 2006 Plan by 385,000. The maximum number of shares as to which
stock options and stock awards may be granted under the 2006 Plan is 2,085,000
shares, of which 1,200,000 shares are authorized for issuance pursuant to stock
options and stock appreciation rights and 885,000 shares are authorized for
issuance pursuant to restricted stock and other stock awards. Stock 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,
·
as to options
granted to employees, are exercisable in three or four equal annual
installments commencing on the first anniversary of the grant date,
·
include option
grants of 750 shares 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 (exercisable on the first anniversary of the grant date),
·
include option
grants of 1,500 shares on the last day of our fiscal year to each member of our
Board of Directors (50% are exercisable on the first anniversary of the grant
date and 50% are exercisable on the second anniversary of the grant date),
·
include option
grants of 15,000 shares to each newly appointed or elected director
(exercisable in three equal annual installments commencing on the first
anniversary of the grant date),
·
generally
terminate three months following termination of employment or service as a
non-employee director, and
·
expire five
years from the date of the grant.
Commencing November 1,
2009, quarterly options are no longer granted to non-employee directors and,
commencing July 31, 2010, the annual grants of 1,500 options to non-employee
directors was changed to grants of 4,500 options that are exercisable in full
on the first anniversary of the grant date.
Restricted stock shares
outstanding under this plan are subject to risk of forfeiture solely due to an
employment length-of-service restriction, with such restriction lapsing as to
one-third of the shares on each of the first three anniversaries of the grant
date subject to being employed by the Company through such vesting date. At July 31,
2010, options to purchase 922,362 shares of Common Stock were outstanding, and
158,652 unvested restricted stock shares were outstanding, under the 2006 Plan.
At July 31, 2010, 193,583 shares are available for issuance pursuant to
stock options
29
and stock appreciation
rights and 462,096 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
exercisable in three or four equal annual installments commencing on the first
anniversary of the grant date,
·
generally
terminate three months following termination of employment, and
·
expire five
years from the date of the grant.
At
July 31, 2010, options to purchase 477,751 shares of Common Stock were
outstanding under the 1997 Employee Stock Option 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,
·
include option
grants of 15,000 shares to each newly appointed or elected director
(exercisable in three equal annual installments commencing on the first
anniversary of the grant date),
·
include option
grants of 750 shares 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 (exercisable on the grant date),
·
include option
grants of 1,500 shares on the last day of our fiscal year to each member of our
Board of Directors (50% are exercisable on the first anniversary of the grant
date and 50% are exercisable on the second anniversary of the grant date),
·
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, 2010,
options to purchase 27,750 shares of Common Stock were outstanding under the
1998 Directors Stock Option Plan. No additional options will be granted under
this plan.
12. Accumulated Other Comprehensive Income
The Companys comprehensive
income for fiscals 2010, 2009 and 2008 is set forth in the following table:
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
19,941,000
|
|
$
|
15,569,000
|
|
$
|
8,693,000
|
|
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
|
|
(236,000
|
)
|
(2,010,000
|
)
|
1,797,000
|
|
Comprehensive
income
|
|
$
|
19,705,000
|
|
$
|
13,559,000
|
|
$
|
10,490,000
|
|
We purchased an interest
rate cap agreement at the end of our fiscal 2008, which capped three-month
LIBOR on outstanding borrowings under our term loan facility at 4.25%. In July 2009,
this interest rate cap agreement was
30
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 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, 2010 compared with July 31, 2009, the
value of the Canadian dollar increased and the euro decreased by approximately
4.7% and 7.2%, respectively, compared with the value of the United States
dollar. The total of these currency movements increased the accumulated
translation adjustment before tax. However, due to a tax adjustment relating to
foreign repatriations, the accumulated translation adjustment decreased by
$236,000 during fiscal 2010 to $8,045,000 at July 31, 2010, from $8,281,000
at July 31, 2009.
13. Earnings Per Common Share
Basic EPS are computed based
upon the weighted average number of common shares outstanding during the year.
Diluted EPS is 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.
In
June 2008, the FASB issued ASC
260-10-45, which provides that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of EPS pursuant to the two-class method, a change that reduces both
basic and diluted EPS. Our participating securities consist solely of
unvested restricted stock awards, which have contractual participation rights
equivalent to those of stockholders of unrestricted common stock. The two-class
method of computing earnings per share is an allocation method that calculates
earnings per share for common stock and participating securities. Previously,
we excluded unvested restricted stock awards in the calculation of basic EPS
and included such awards in diluted EPS under the treasury stock method. ASC
260-10-45 was effective for fiscal years beginning after December 15, 2008
and therefore was adopted on August 1, 2009. All prior period EPS data
presented have been adjusted retrospectively to conform to the provisions of
ASC 260-10-45. In fiscals 2009 and 2008, such retrospective application
caused an insignificant increase in the denominator of our weighted average
shares calculation, which decreased previously reported basic EPS in fiscals
2009 and 2008 from $0.96 to $0.94 and $0.54 to $0.53, respectively, but had no
impact on previously reported diluted EPS.
31
The following table sets
forth the computation of basic and diluted EPS available to shareholders of
common stock (excluding participating securities):
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
19,941,000
|
|
$
|
15,569,000
|
|
$
|
8,693,000
|
|
Less
income allocated to participating securities
|
|
(260,000
|
)
|
(218,000
|
)
|
(85,000
|
)
|
Net
income available to common shareholders
|
|
$
|
19,681,000
|
|
$
|
15,351,000
|
|
$
|
8,608,000
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted earnings per share, as adjusted for participating
securities:
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share - weighted average number of shares outstanding attributable
to common stock
|
|
16,554,109
|
|
16,287,446
|
|
16,116,360
|
|
|
|
|
|
|
|
|
|
Dilutive
effect of stock options using the treasury stock method and the average
market price for the period
|
|
190,217
|
|
57,172
|
|
163,944
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - weighted average number of shares and common
stock equivalents attributable to common stock
|
|
16,744,326
|
|
16,344,618
|
|
16,280,304
|
|
|
|
|
|
|
|
|
|
Earnings
per share attributable to common stock:
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.19
|
|
$
|
0.94
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.18
|
|
$
|
0.94
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
Stock
options excluded from weighted average dilutive common shares outstanding
because their inclusion would have been antidilutive
|
|
671,901
|
|
1,308,140
|
|
1,324,351
|
|
A reconciliation of weighted
average number of shares and common stock equivalents attributable to common
stock, as determined above, to the Companys total weighted average number of
shares and common stock equivalents, including participating securities, are
set forth in the following table:
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Denominator
for diluted earnings per share - weighted average number of shares and common
stock equivalents attributable to common stock
|
|
16,744,326
|
|
16,344,618
|
|
16,280,304
|
|
|
|
|
|
|
|
|
|
Participating
securities
|
|
223,315
|
|
231,718
|
|
160,022
|
|
|
|
|
|
|
|
|
|
Total
weighted average number of shares and common stock equivalents attributable
to both common stock and participating securities
|
|
16,967,641
|
|
16,576,336
|
|
16,440,326
|
|
32
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.
The Company does not
currently have a publicly announced stock repurchase program. All of the shares
purchased during fiscal 2010 represent shares surrendered to the Company to pay
employee withholding taxes due upon the vesting of restricted stock or the
exercise of stock options that do not qualify as incentive stock options.
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 $1,671,000, $1,745,000 and
$1,315,000 for fiscals 2010, 2009 and 2008, respectively.
16. Supplemental Cash Flow Information
Interest paid was $919,000,
$2,256,000 and $4,332,000 for fiscals 2010, 2009 and 2008, respectively.
Income tax payments were
$12,712,000, $10,602,000 and $5,774,000 for fiscals 2010, 2009 and 2008,
respectively.
17.
Information
as to Operating Segments and Foreign and Domestic Operations
We are a leading provider of
infection prevention and control products and services 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 FASB ASC
Topic 280,
Segment Reporting,
(ASC 280), 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.
During fiscal 2010, we
changed our internal reporting processes to include a new operating segment
called Chemistries to reflect the way the Company, through its executive
management, manages, allocates resources and measures the performance of its
businesses. This new operating segment is the combination of a small portion of
our existing sterilant business, comprised of products sold on an OEM basis and
previously recorded in our Water Purification and Filtration segment, and a new
business operation that was created to capitalize on our chemistry expertise
and expand our product offerings in existing and new markets within the
infection prevention and control arena. All periods presented have been
restated to reflect this change.
33
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 24% of our Water Purification and Filtration segment net sales
and approximately 7% of our consolidated net sales in fiscal 2010.
Healthcare Disposables
, which
includes single-use infection prevention and control products used principally
in the dental market such as face masks, sterilization pouches, patient towels
and bibs, self-sealing sterilization pouches, tray covers, 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 2010.
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.
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.
One customer collectively
accounted for approximately 33% of our Dialysis segment net sales and
approximately 8% of our consolidated net sales in fiscal 2010.
All Other
In accordance with
quantitative thresholds established by ASC 280, we have combined for reporting
purposes the Therapeutic Filtration, Specialty Packaging and Chemistries
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.
Chemistries,
which includes
sterilants, disinfectants, detergents and decontamination services used in
various applications for infection prevention and control.
The operating segments
follow the same accounting policies used for our Consolidated Financial
Statements as described in Note 2.
34
Information as to operating
segments is summarized below:
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
74,527,000
|
|
$
|
68,941,000
|
|
$
|
66,323,000
|
|
Healthcare
Disposables
|
|
69,729,000
|
|
64,085,000
|
|
58,657,000
|
|
Endoscope
Reprocessing
|
|
65,577,000
|
|
52,333,000
|
|
46,924,000
|
|
Dialysis
|
|
44,667,000
|
|
56,414,000
|
|
60,075,000
|
|
All
Other
|
|
19,452,000
|
|
18,277,000
|
|
17,395,000
|
|
Total
|
|
$
|
273,952,000
|
|
$
|
260,050,000
|
|
$
|
249,374,000
|
|
|
|
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
7,698,000
|
|
$
|
6,055,000
|
|
$
|
4,975,000
|
|
Healthcare
Disposables
|
|
12,104,000
|
|
9,489,000
|
|
7,357,000
|
|
Endoscope
Reprocessing
|
|
7,575,000
|
|
5,927,000
|
|
1,281,000
|
|
Dialysis
|
|
10,201,000
|
|
10,679,000
|
|
8,620,000
|
|
All
Other
|
|
4,104,000
|
|
3,888,000
|
|
3,950,000
|
|
|
|
41,682,000
|
|
36,038,000
|
|
26,183,000
|
|
General
corporate expenses
|
|
(9,017,000
|
)
|
(8,587,000
|
)
|
(8,216,000
|
)
|
Interest
expense, net
|
|
(1,110,000
|
)
|
(2,495,000
|
)
|
(4,116,000
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
31,555,000
|
|
$
|
24,956,000
|
|
$
|
13,851,000
|
|
35
|
|
July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Identifiable
assets:
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
75,920,000
|
|
$
|
71,628,000
|
|
$
|
70,315,000
|
|
Healthcare
Disposables
|
|
97,163,000
|
|
100,279,000
|
|
104,377,000
|
|
Endoscope
Reprocessing
|
|
36,208,000
|
|
33,379,000
|
|
31,546,000
|
|
Dialysis
|
|
28,076,000
|
|
29,622,000
|
|
32,536,000
|
|
All
Other
|
|
19,602,000
|
|
18,582,000
|
|
20,642,000
|
|
General
corporate, including cash and cash equivalents
|
|
23,696,000
|
|
24,381,000
|
|
19,774,000
|
|
Total
|
|
$
|
280,665,000
|
|
$
|
277,871,000
|
|
$
|
279,190,000
|
|
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
1,909,000
|
|
$
|
1,257,000
|
|
$
|
1,352,000
|
|
Healthcare
Disposables
|
|
1,731,000
|
|
1,071,000
|
|
952,000
|
|
Endoscope
Reprocessing
|
|
605,000
|
|
801,000
|
|
869,000
|
|
Dialysis
|
|
930,000
|
|
853,000
|
|
1,429,000
|
|
All
Other
|
|
426,000
|
|
231,000
|
|
356,000
|
|
General
corporate
|
|
4,000
|
|
2,000
|
|
25,000
|
|
Total
|
|
$
|
5,605,000
|
|
$
|
4,215,000
|
|
$
|
4,983,000
|
|
|
|
Year Ended July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
2,587,000
|
|
$
|
2,336,000
|
|
$
|
2,319,000
|
|
Healthcare
Disposables
|
|
5,600,000
|
|
5,490,000
|
|
5,375,000
|
|
Endoscope
Reprocessing
|
|
1,106,000
|
|
1,188,000
|
|
1,458,000
|
|
Dialysis
|
|
1,364,000
|
|
1,482,000
|
|
1,617,000
|
|
All
Other
|
|
749,000
|
|
836,000
|
|
926,000
|
|
General
corporate
|
|
32,000
|
|
37,000
|
|
37,000
|
|
Total
|
|
$
|
11,438,000
|
|
$
|
11,369,000
|
|
$
|
11,732,000
|
|
36
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,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
225,725,000
|
|
$
|
214,909,000
|
|
$
|
203,087,000
|
|
Canada
|
|
13,225,000
|
|
10,476,000
|
|
11,217,000
|
|
Asia/Pacific
|
|
13,082,000
|
|
11,103,000
|
|
10,247,000
|
|
Europe/Africa/Middle
East
|
|
17,772,000
|
|
13,366,000
|
|
15,905,000
|
|
Latin
America/South America
|
|
4,148,000
|
|
10,196,000
|
|
8,918,000
|
|
Total
|
|
$
|
273,952,000
|
|
$
|
260,050,000
|
|
$
|
249,374,000
|
|
|
|
July 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Total
long-lived assets:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
34,779,000
|
|
$
|
35,398,000
|
|
$
|
35,698,000
|
|
Canada
|
|
1,223,000
|
|
1,219,000
|
|
1,435,000
|
|
Asia/Pacific
|
|
288,000
|
|
170,000
|
|
122,000
|
|
Europe
|
|
144,000
|
|
137,000
|
|
2,162,000
|
|
Total
|
|
36,434,000
|
|
36,924,000
|
|
39,417,000
|
|
Goodwill
and intangible assets
|
|
149,500,000
|
|
152,037,000
|
|
155,212,000
|
|
Total
|
|
$
|
185,934,000
|
|
$
|
188,961,000
|
|
$
|
194,629,000
|
|
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 costs, which
decreased both basic and diluted earnings per share by approximately $0.02 in
both years. In fiscal 2009, $163,000 was recorded in cost of sales and $182,000
was recorded in general and administrative expenses. In fiscal 2008, $275,000
was recorded in cost of sales and $90,000 was recorded in general and
administrative expenses. The restructuring plan was completed by July 31,
2009 and we have not incurred any additional restructuring costs since that
date. The majority of the restructuring costs were included in our Endoscope
Reprocessing segment. 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.
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. The sale of the building and land resulted
in a gain of $146,000, which is being 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 in prepaid expenses and other assets.
37
19. Quarterly Results of Operations
(unaudited)
The following is a summary
of the quarterly results of operations for the years ended July 31, 2010
and 2009:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2010
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
70,995,000
|
|
$
|
66,587,000
|
|
$
|
66,559,000
|
|
$
|
69,811,000
|
|
Cost
of sales
|
|
41,537,000
|
|
39,463,000
|
|
39,866,000
|
|
42,115,000
|
|
Gross
profit
|
|
29,458,000
|
|
27,124,000
|
|
26,693,000
|
|
27,696,000
|
|
Gross
profit percentage
|
|
41.5
|
%
|
40.7
|
%
|
40.1
|
%
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,168,000
|
|
$
|
4,876,000
|
|
$
|
4,274,000
|
|
$
|
4,623,000
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
$
|
0.37
|
|
$
|
0.29
|
|
$
|
0.25
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
0.37
|
|
$
|
0.29
|
|
$
|
0.25
|
|
$
|
0.27
|
|
|
|
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
|
|
$
|
0.20
|
|
$
|
0.23
|
|
$
|
0.25
|
|
$
|
0.26
|
|
Diluted
|
|
$
|
0.20
|
|
$
|
0.23
|
|
$
|
0.25
|
|
$
|
0.26
|
|
(1)
The summation of quarterly earnings per share does not necessarily equal the
fiscal year earnings per share due to rounding.
20. 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 adverse effect on our business, financial
condition, results of operations or cash flows.
21. Convertible Note Receivable
In February 2009, we
invested an initial $200,000 in a senior subordinated convertible promissory
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 invested an additional $300,000 in notes of
BIOSAFE in January 2010 bringing the aggregate investment in BIOSAFE notes
to $500,000, as obligated under our agreement with BIOSAFE. We are not
obligated to invest any additional funds.
The notes are convertible
into a newly-created series of preferred stock of BIOSAFE. Interest is payable
in shares of BIOSAFE stock or in cash. The notes accrue interest at a per annum
rate of 8% until the maturity date of June 30, 2011 or earlier exercise.
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, is included within other assets
in our Consolidated Balance Sheet at July 31, 2010 and 2009. The carrying
value of this investment approximates fair value due to the short maturity of
the notes and the relative consistent underlying value of BIOSAFE.
38
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, 2010
|
|
$
|
1,080,000
|
|
$
|
59,000
|
(1)
|
$
|
(276,000
|
)
|
$
|
7,000
|
|
$
|
870,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(1)
The significantly lower
amount of additions in fiscal 2010, as compared with fiscals 2009 and 2008, was
primarily due to the collection of several large delinquent receivables, which
had been reserved in past fiscal years.
39
Cantel Medical (NYSE:CMD)
Historical Stock Chart
From Jun 2024 to Jul 2024
Cantel Medical (NYSE:CMD)
Historical Stock Chart
From Jul 2023 to Jul 2024