UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended October 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 number: 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
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|
(973)
890-7220
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
|
(Registrants
telephone number, including area code)
|
Indicate by check mark
whether registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant 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
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
Number of shares of Common
Stock outstanding as of November 30, 2010: 17,064,131.
PART I
- FINANCIAL INFORMATION
ITEM
1. - FINANCIAL STATEMENTS
CANTEL
MEDICAL CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Dollar
Amounts in Thousands, Except Share Data)
(Unaudited)
|
|
October 31,
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July 31,
|
|
|
|
2010
|
|
2010
|
|
Assets
|
|
|
|
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|
Current
assets:
|
|
|
|
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|
Cash
and cash equivalents
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|
$
|
15,954
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|
$
|
22,612
|
|
Accounts
receivable, net of allowance for doubtful accounts of $835 at October 31
and $870 at July 31
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34,075
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|
31,870
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|
Inventories:
|
|
|
|
|
|
Raw
materials
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15,043
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|
14,003
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|
Work-in-process
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|
4,668
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|
5,153
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|
Finished
goods
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16,699
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15,466
|
|
Total
inventories
|
|
36,410
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34,622
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|
Deferred
income taxes
|
|
2,436
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|
2,420
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|
Prepaid
expenses and other current assets
|
|
3,855
|
|
3,207
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|
Total
current assets
|
|
92,730
|
|
94,731
|
|
Property
and equipment, net
|
|
34,814
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|
35,243
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|
Intangible
assets, net
|
|
40,399
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|
32,717
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|
Goodwill
|
|
128,555
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|
116,783
|
|
Other
assets
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|
1,350
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|
1,191
|
|
|
|
$
|
297,848
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|
$
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280,665
|
|
Liabilities and stockholders equity
|
|
|
|
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|
Current
liabilities:
|
|
|
|
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|
Current
portion of long-term debt
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|
$
|
33,000
|
|
$
|
10,000
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|
Accounts
payable
|
|
10,822
|
|
9,640
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|
Compensation
payable
|
|
4,421
|
|
10,675
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|
Accrued
expenses
|
|
6,721
|
|
6,370
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|
Deferred
revenue
|
|
3,446
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|
4,233
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|
Acquisition
payable
|
|
2,067
|
|
|
|
Dividends
payable
|
|
1,026
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|
|
|
Income
taxes payable
|
|
2,329
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|
66
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|
Total
current liabilities
|
|
63,832
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|
40,984
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|
|
|
|
|
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|
Long-term
debt
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|
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11,000
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|
Deferred
income taxes
|
|
17,440
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17,868
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|
Long-term
acquisition payable
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1,033
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|
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Other
long-term liabilities
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1,334
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1,408
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Stockholders
equity:
|
|
|
|
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Preferred
Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued
|
|
|
|
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Common
Stock, par value $.10 per share; authorized 30,000,000 shares;
October 31 - 18,432,792 shares issued and 17,022,844 shares outstanding;
July 31 - 18,272,574 shares issued and 16,866,284 shares outstanding
|
|
1,843
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1,827
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|
Additional
paid-in capital
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95,562
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94,714
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|
Retained
earnings
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124,312
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120,363
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Accumulated
other comprehensive income
|
|
8,103
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|
8,045
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|
Treasury
Stock, at cost; October 31 - 1,409,948 shares; July 31 - 1,406,290
shares
|
|
(15,611
|
)
|
(15,544
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)
|
Total
stockholders equity
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|
214,209
|
|
209,405
|
|
|
|
$
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297,848
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$
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280,665
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|
See accompanying notes.
2
CANTEL
MEDICAL CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Dollar
Amounts in Thousands, Except Per Share Data)
(Unaudited)
|
|
Three Months Ended
|
|
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October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
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Net
sales
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|
$
|
71,993
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|
$
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70,995
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|
|
|
|
|
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Cost
of sales
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|
43,801
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|
41,537
|
|
|
|
|
|
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Gross
profit
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28,192
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|
29,458
|
|
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|
Expenses:
|
|
|
|
|
|
Selling
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|
9,631
|
|
8,524
|
|
General
and administrative
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9,118
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|
9,305
|
|
Research
and development
|
|
1,629
|
|
1,265
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|
Total
operating expenses
|
|
20,378
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|
19,094
|
|
|
|
|
|
|
|
Income
before interest and income taxes
|
|
7,814
|
|
10,364
|
|
|
|
|
|
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Interest
expense
|
|
241
|
|
387
|
|
Interest
income
|
|
(19
|
)
|
(8
|
)
|
|
|
|
|
|
|
Income
before income taxes
|
|
7,592
|
|
9,985
|
|
|
|
|
|
|
|
Income
taxes
|
|
2,617
|
|
3,817
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,975
|
|
$
|
6,168
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
Basic
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|
$
|
0.29
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|
$
|
0.37
|
|
|
|
|
|
|
|
Diluted
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|
$
|
0.29
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|
$
|
0.37
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
0.06
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|
$
|
|
|
See accompanying notes.
3
CANTEL
MEDICAL CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar
Amounts in Thousands)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net
income
|
|
$
|
4,975
|
|
$
|
6,168
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
1,628
|
|
1,564
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|
Amortization
|
|
1,319
|
|
1,278
|
|
Stock-based
compensation expense
|
|
765
|
|
789
|
|
Amortization
of debt issuance costs
|
|
79
|
|
103
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|
Gain
on disposal of fixed assets
|
|
(11
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)
|
|
|
Deferred
income taxes
|
|
(538
|
)
|
(312
|
)
|
Excess
tax benefits from stock-based compensation
|
|
(20
|
)
|
(7
|
)
|
Changes
in assets and liabilities, net of assets acquired and liabilities assumed:
|
|
|
|
|
|
Accounts
receivable
|
|
(2,177
|
)
|
(1,415
|
)
|
Inventories
|
|
1,368
|
|
(2,187
|
)
|
Prepaid
expenses and other current assets
|
|
(882
|
)
|
(481
|
)
|
Accounts
payable and other current liabilities
|
|
(5,655
|
)
|
(2,556
|
)
|
Income
taxes payable
|
|
2,369
|
|
3,512
|
|
Net
cash provided by operating activities
|
|
3,220
|
|
6,456
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital
expenditures
|
|
(1,192
|
)
|
(1,377
|
)
|
Proceeds
from disposal of fixed assets
|
|
29
|
|
|
|
Earnout
paid to Twist seller
|
|
|
|
(157
|
)
|
Acquisition
of Gambro Water
|
|
(20,600
|
)
|
|
|
Other,
net
|
|
(98
|
)
|
(130
|
)
|
Net
cash used in investing activities
|
|
(21,861
|
)
|
(1,664
|
)
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings
under revolving credit facility
|
|
20,500
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|
|
|
Repayments
under term loan facility
|
|
(2,500
|
)
|
(2,500
|
)
|
Repayments
under revolving credit facility
|
|
(6,000
|
)
|
(2,800
|
)
|
Proceeds
from exercises of stock options
|
|
81
|
|
240
|
|
Excess
tax benefits from stock-based compensation
|
|
20
|
|
7
|
|
Purchases
of treasury stock
|
|
(67
|
)
|
|
|
Net
cash provided by (used in) financing activities
|
|
12,034
|
|
(5,053
|
)
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
(51
|
)
|
(2
|
)
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
(6,658
|
)
|
(263
|
)
|
Cash
and cash equivalents at beginning of period
|
|
22,612
|
|
23,368
|
|
Cash
and cash equivalents at end of period
|
|
$
|
15,954
|
|
$
|
23,105
|
|
See accompanying notes.
4
CANTEL
MEDICAL
CORP
.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.
Basis
of Presentation
The unaudited Condensed
Consolidated Financial Statements have been prepared in accordance with United
States generally accepted accounting principles for interim financial reporting
and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X.
Accordingly, they do not include certain information and note disclosures
required by generally accepted accounting principles for annual financial
reporting and should be read in conjunction with the Consolidated Financial
Statements and notes thereto included in the Annual Report of Cantel Medical
Corp. (Cantel) on Form 10-K for the fiscal year ended July 31, 2010
(the 2010 Form 10-K), and Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere herein.
The unaudited interim
financial statements reflect all adjustments (of a normal and recurring nature)
which management considers necessary for a fair presentation of the results of
operations for these periods. The results of operations for the interim periods
are not necessarily indicative of the results for the full year.
The Condensed Consolidated
Balance Sheet at July 31, 2010 was derived from the audited Consolidated
Balance Sheet of Cantel at that date.
Cantel had five principal
operating companies at each of October 31, 2010 and July 31, 2010,
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 our fourth quarter of
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. As a result of this
internal reorganization, certain research and development projects were
reclassified among segments. All prior period segment results have been
restated to reflect this change.
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.
On October 6, 2010, our
Mar Cor subsidiary acquired from Gambro Renal Products, Inc.
5
(GRP) and a Swedish-based
affiliate of GRP (collectively, Gambro) certain net assets and the exclusive
rights in the United States and Puerto Rico 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
Condensed Consolidated Financial Statements. Gambro Waters results of operations are included in our results of
operations for the three months ended October 31, 2010 subsequent to its
acquisition date and are excluded from the three months ended October 31,
2009.
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 Condensed Consolidated Financial Statements. Puritys
results of operations are included in our results of operations for the three
months ended October 31, 2010 and are excluded from the three
months ended October 31, 2009.
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
We performed a review of
events subsequent to October 31, 2010. Based upon that review, no
subsequent events occurred that required updating to our Condensed Consolidated
Financial Statements or disclosures.
Note 2.
Stock-Based
Compensation
The following table shows
the income statement components of stock-based compensation expense recognized
in the Condensed Consolidated Statements of Income:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
38,000
|
|
$
|
18,000
|
|
Operating
expenses:
|
|
|
|
|
|
Selling
|
|
115,000
|
|
69,000
|
|
General
and administrative
|
|
604,000
|
|
698,000
|
|
Research
and development
|
|
8,000
|
|
4,000
|
|
Total
operating expenses
|
|
727,000
|
|
771,000
|
|
Stock-based
compensation before income taxes
|
|
765,000
|
|
789,000
|
|
Income
tax benefits
|
|
(275,000
|
)
|
(290,000
|
)
|
Total
stock-based compensation expense, net of tax
|
|
$
|
490,000
|
|
$
|
499,000
|
|
|
|
|
|
|
|
Decrease
in earnings per common share due to stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.03
|
|
The above stock-based
compensation expense before income taxes was recorded in the
6
Condensed Consolidated
Financial Statements as stock-based compensation expense and an increase to
additional paid-in capital. The related income tax benefits (which pertain only
to stock awards and options that do not qualify as incentive stock options) were
recorded as an increase to long-term deferred income tax assets (which are
netted with long-term deferred income tax liabilities) and a reduction to
income tax expense.
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. At October 31, 2010, total unrecognized stock-based
compensation expense before income taxes related to total nonvested stock
options and stock awards was $5,655,000 with a remaining weighted average
period of 19 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. 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, 2010
|
|
158,652
|
|
$
|
13.89
|
|
Granted
|
|
152,550
|
|
18.19
|
|
Vested
|
|
(13,744
|
)
|
15.79
|
|
Nonvested
stock awards at October 31, 2010
|
|
297,458
|
|
$
|
16.01
|
|
There were no option grants
during the three months ended October 31, 2010. 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 the
three months ended October 31, 2009:
Weighted-Average
|
|
|
|
Black-Scholes Option
|
|
Three Months Ended
|
|
Valuation Assumptions
|
|
October 31, 2009
|
|
|
|
|
|
Dividend
yield
|
|
0.00
|
%
|
Expected
volatility (1)
|
|
0.455
|
|
Risk-free
interest rate (2)
|
|
1.95
|
%
|
Expected
lives (in years) (3)
|
|
3.52
|
|
(1) Volatility was
based on historical closing prices of our Common Stock.
(2) The U.S. Treasury
rate on the expected life at the date of grant.
(3) Based on historical
exercise behavior.
Additionally, all options
were considered to be deductible for tax purposes in the valuation model,
except for certain incentive options granted under the 1997 Employee Plan and
to employees residing outside of the United States. Such non-qualified options
were tax-effected using the Companys estimated U.S. effective tax rate at the
time of grant. For the three months ended October 31, 2009, the weighted
average fair value of all options granted was approximately
7
$5.61. The aggregate intrinsic value (i.e., the
excess market price over the exercise price) of all options exercised was
$52,000 and $101,000 for the three months ended October 31, 2010 and 2009,
respectively.
A summary of stock option
activity follows:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
|
|
Outstanding
at July 31, 2010
|
|
1,427,863
|
|
$
|
15.95
|
|
Exercised
|
|
(7,668
|
)
|
10.50
|
|
Expired
|
|
(3,750
|
)
|
19.35
|
|
Outstanding
at October 31, 2010
|
|
1,416,445
|
|
$
|
15.97
|
|
|
|
|
|
|
|
Exercisable
at July 31, 2010
|
|
778,864
|
|
$
|
16.76
|
|
|
|
|
|
|
|
Exercisable
at October 31, 2010
|
|
904,801
|
|
$
|
16.66
|
|
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.
For the three months ended October 31, 2010 and 2009, such income tax
deductions reduced income taxes payable by $107,000 and $29,000, respectively.
We
classify the cash flows resulting from excess tax benefits as financing cash
flows on our Condensed Consolidated Statements of Cash Flows. Excess tax
benefits arise when the ultimate tax effect of the deduction for tax purposes
is greater than the tax benefit on stock compensation expense (including tax
benefits on stock compensation expense that has only been reflected in past pro
forma disclosures relating to fiscal years prior to August 1, 2005) which
was determined based upon the awards fair value.
Note 3.
Acquisitions
Gambro Water
On October 6, 2010, our
Mar Cor subsidiary acquired from Gambro certain net assets and the exclusive
rights in the United States and Puerto Rico 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 and Puerto Rico markets. The manufacturing of these products
is being transitioned into our own manufacturing facility in Plymouth, Minnesota.
With annual pre-acquisition revenues of approximately $14 million
(approximately 75% of such revenues are from one customer), the Gambro
Acquisition expands our Water Purification and Filtrations annual business in
terms of sales, particularly with respect to product and service sales volumes
in both existing and new dialysis clinics across the United States and Puerto
Rico. Total consideration for the transaction, excluding acquisition-related
costs of approximately $205,000, was approximately $23,697,000, of which
$3,100,000 will be paid in six equal quarterly payments
8
ending April 2012. The
Gambro Acquisition is included in our Water Purification and Filtration
operating segment.
The purchase price was
preliminarily allocated to the assets acquired and assumed liabilities based on
estimated fair values as follows:
|
|
Preliminary
|
|
Net Assets
|
|
Allocation
|
|
Current
assets (principally inventories)
|
|
$
|
3,180,000
|
|
Property,
plant and equipment
|
|
11,000
|
|
Amortizable
intangible assets:
|
|
|
|
Technology
(8-year life)
|
|
1,170,000
|
|
Customer
relationships (11.5- year weighted average life)
|
|
6,640,000
|
|
Non-compete
agreement (14-year life)
|
|
1,050,000
|
|
Current
liabilities
|
|
(63,000
|
)
|
Net
assets acquired
|
|
$
|
11,988,000
|
|
There were no in-process
research and development projects acquired in connection with the acquisition.
The excess purchase price of $11,709,000 was assigned to goodwill. Such
goodwill, all of which is deductible for income tax purposes, has been included
in our Water Purification and Filtration reporting segment.
The reasons for the
acquisition were as follows: (i) the expansion of our water purification
product line, particularly in the area of cost effective heat sanitizable 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.
For the three months ended October 31,
2010 subsequent to its acquisition, Gambro Water contributed approximately
$940,000 to our net sales and $75,000 to our income before interest and income
taxes, excluding acquisition-related costs. Such operating performance may not
necessarily be indicative of future operating performance. The results of
operations of Gambro Water are excluded from the three months ended October 31,
2009. 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.
Purity Water
Company of San Antonio, Inc.
On
June 1, 2010, Mar Cor acquired all of the issued and outstanding stock of
Purity, a private company based in San Antonio, Texas with pre-acquisition
annual revenues of approximately $2,300,000 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.
9
The purchase price was
preliminarily 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 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 for the three months ended October 31,
2010 and is excluded from our results
of operations for the three months ended October 31, 2009. Pro
forma consolidated statements of income data have not been presented due to the
insignificant impact of this acquisition.
Note 4.
Recent
Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standard Update (ASU) 2009-13,
Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements, a consensus of the FASB
Emerging Issues Task Force,
(ASU 2009-13), which amends
Accounting Standards Codification 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. Accordingly, we adopted ASU
2009-13 on August 1, 2010. The adoption of ASU 2009-13 did not have a
material effect on our financial position or results of operations.
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, as more fully described in Note 6 to the Condensed
Consolidated Financial Statements, established by ASC 820,
Fair Value Measurements and Disclosures,
(ASC 820). ASU 2010-06 also
clarifies the existing
10
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.
Note 5.
Other
Comprehensive Income
The Companys comprehensive
income for the three months ended October 31, 2010 and 2009 is set forth
in the following table:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,975,000
|
|
$
|
6,168,000
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
Foreign
currency translation
|
|
58,000
|
|
(148,000
|
)
|
Comprehensive
income
|
|
$
|
5,033,000
|
|
$
|
6,020,000
|
|
Note 6.
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 October 31, 2010, all of our
derivatives were 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) are denominated and ultimately settled in
United States dollars but must be converted into its functional Canadian dollar
currency. Furthermore, certain cash bank accounts, accounts receivable, and
liabilities of our United States subsidiaries, Minntech and Mar Cor, are
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
11
forward contracts with an
aggregate value of $3,989,000 at October 31, 2010, which covered certain
assets and liabilities that were denominated in currencies other than our
subsidiaries functional currencies. Such contracts expired on November 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. For the three months
ended October 31, 2010, 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 $49,000 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:
|
|
October 31, 2010
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
and cash equilavents:
|
|
|
|
|
|
|
|
|
|
Bank
deposits and certificates of deposit
|
|
$
|
11,038,000
|
|
$
|
|
|
$
|
|
|
$
|
11,038,000
|
|
Money
markets
|
|
4,916,000
|
|
|
|
|
|
4,916,000
|
|
Total
cash and cash equilavents
|
|
$
|
15,954,000
|
|
$
|
|
|
$
|
|
|
$
|
15,954,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2010
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash
and cash equilavents:
|
|
|
|
|
|
|
|
|
|
Bank
deposits and certificates of deposit
|
|
$
|
17,696,000
|
|
$
|
|
|
$
|
|
|
$
|
17,696,000
|
|
Money
markets
|
|
4,916,000
|
|
|
|
|
|
4,916,000
|
|
Total
cash and cash equilavents
|
|
$
|
22,612,000
|
|
$
|
|
|
$
|
|
|
$
|
22,612,000
|
|
As of October 31, 2010
and July 31, 2010, 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 October 31,
2010 and July 31, 2010, the fair value of our outstanding borrowings under
our credit facilities approximated the carrying value of those obligations
since the borrowing rates were at prevailing market interest rates, principally
under LIBOR contracts ranging from one to twelve months.
12
Note 7.
Intangible
Assets and Goodwill
Our intangible assets with
definite lives consist primarily of customer relationships, technology, brand
names, non-compete agreements and patents. These intangible assets are being
amortized using the straight-line method over the estimated useful lives of the
assets ranging from 3-20 years and have a weighted average amortization period
of 10 years. Amortization expense related to definite life intangible assets
was $1,319,000 and $1,278,000 for the three months ended October 31, 2010
and 2009, 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:
|
|
October 31, 2010
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
Amortization
|
|
Net
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
32,850,000
|
|
$
|
(12,834,000
|
)
|
$
|
20,016,000
|
|
Technology
|
|
9,585,000
|
|
(5,344,000
|
)
|
4,241,000
|
|
Brand
names
|
|
9,275,000
|
|
(4,799,000
|
)
|
4,476,000
|
|
Non-compete
agreements
|
|
2,951,000
|
|
(1,621,000
|
)
|
1,330,000
|
|
Patents
and other registrations
|
|
1,260,000
|
|
(330,000
|
)
|
930,000
|
|
|
|
55,921,000
|
|
(24,928,000
|
)
|
30,993,000
|
|
Trademarks
and trade names
|
|
9,406,000
|
|
|
|
9,406,000
|
|
Total
intangible assets
|
|
$
|
65,327,000
|
|
$
|
(24,928,000
|
)
|
$
|
40,399,000
|
|
|
|
|
|
|
|
|
|
|
|
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 trade names
|
|
9,396,000
|
|
|
|
9,396,000
|
|
Total
intangible assets
|
|
$
|
57,576,000
|
|
$
|
(24,859,000
|
)
|
$
|
32,717,000
|
|
Estimated amortization
expense of our intangible assets for the remainder of fiscal 2011 and the next
five years is as follows:
Nine
month period ending July 31, 2011
|
|
$
|
4,199,000
|
|
Fiscal
2012
|
|
5,172,000
|
|
Fiscal
2013
|
|
5,098,000
|
|
Fiscal
2014
|
|
4,903,000
|
|
Fiscal
2015
|
|
4,727,000
|
|
Fiscal
2016
|
|
1,569,000
|
|
13
Goodwill changed during
fiscal 2010 and the three months ended October 31, 2010 as follows:
|
|
Water
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purification
|
|
Endoscope
|
|
Healthcare
|
|
|
|
|
|
Total
|
|
|
|
and Filtration
|
|
Reprocessing
|
|
Disposables
|
|
Dialysis
|
|
All Other
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
July 31, 2009
|
|
$
|
38,375,000
|
|
$
|
9,648,000
|
|
$
|
50,630,000
|
|
$
|
8,133,000
|
|
$
|
8,209,000
|
|
$
|
114,995,000
|
|
Acquisition
|
|
1,217,000
|
|
|
|
|
|
|
|
|
|
1,217,000
|
|
Foreign
currency translation
|
|
255,000
|
|
|
|
|
|
|
|
316,000
|
|
571,000
|
|
Balance,
July 31, 2010
|
|
39,847,000
|
|
9,648,000
|
|
50,630,000
|
|
8,133,000
|
|
8,525,000
|
|
116,783,000
|
|
Acquisition
|
|
11,709,000
|
|
|
|
|
|
|
|
|
|
11,709,000
|
|
Foreign
currency translation
|
|
27,000
|
|
|
|
|
|
|
|
36,000
|
|
63,000
|
|
Balance,
October 31, 2010
|
|
$
|
51,583,000
|
|
$
|
9,648,000
|
|
$
|
50,630,000
|
|
$
|
8,133,000
|
|
$
|
8,561,000
|
|
$
|
128,555,000
|
|
On July 31, 2010, we
performed impairment studies of the Companys goodwill and trademarks and trade
names and concluded that such assets were not impaired.
Note 8.
Warranty
A summary of activity in the
Companys warranty reserves follows:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
1,181,000
|
|
$
|
949,000
|
|
Acquisitions
|
|
10,000
|
|
|
|
Provisions
|
|
611,000
|
|
427,000
|
|
Charges
|
|
(515,000
|
)
|
(401,000
|
)
|
Ending
balance
|
|
$
|
1,287,000
|
|
$
|
975,000
|
|
The warranty provisions and
charges during the three months ended October 31, 2010 and 2009 relate
principally to the Companys endoscope reprocessing and water purification
products. Warranty reserves are included in accrued expenses in the Condensed
Consolidated Balance Sheets.
Note 9.
Financing
Arrangements
Our
United States credit facilities, as amended, include (i) a six-year $40.0
million senior secured amortizing term loan facility and (ii) a five-year
$50.0 million senior secured revolving credit facility, which both expire on August 1,
2011 (the U.S. Credit Facilities). Amounts we repay under the term loan
facility may not be re-borrowed. 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 $224,000 at October 31, 2010.
At
October 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 facilities (EBITDA). At October 31, 2010, the lenders base
rate was 3.25% and the LIBOR rates ranged from 0.26% to 1.21%. The margins
applicable to our outstanding borrowings at October 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 October 31,
14
2010.
The revolving credit facility also provides for fees on the unused portion at
rates ranging from 0.20% to 0.40%, depending upon our consolidated ratio of
debt to EBITDA; such rate was 0.20% at October 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 annual cash
dividends on our Common Stock in excess of $3,000,000 without the consent of
our United States lenders. As of October 31, 2010, we were in compliance
with all financial and other covenants under the credit facilities.
On October 31, 2010, we
had $33,000,000 of outstanding borrowings under the U.S Credit Facilities,
which consisted of $7,500,000 and $25,500,000 under the term loan facility and
the revolving credit facility, respectively, and $24,500,000 was available to
be borrowed under our revolving credit facility.
The U.S. 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 our credit facilities, including an extension of the
termination date of our revolving facility, and expect to formally modify the
revolving credit facility before the expiration date. However, since any
modification will not be completed until later in fiscal 2011, subsequent to July 31,
2010 the entire outstanding balance of the revolver was reclassified from
long-term to current.
Note
10.
Earnings
Per Common Share
Basic EPS is computed based
upon the weighted average number of common shares outstanding during the
period. Diluted EPS is computed based upon the weighted average number of
common shares outstanding during the period plus the dilutive effect of Common Stock
equivalents using the treasury stock method and the average market price of our
Common Stock for the period.
We
include participating securities (unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents) in the
computation of EPS pursuant to the two-class method. 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.
15
The following table sets
forth the computation of basic and diluted EPS available to shareholders of
common stock (excluding participating securities):
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
Net
income
|
|
$
|
4,975,000
|
|
$
|
6,168,000
|
|
Less
income allocated to participating securities
|
|
(57,000
|
)
|
(87,000
|
)
|
Net
income available to common shareholders
|
|
$
|
4,918,000
|
|
$
|
6,081,000
|
|
|
|
|
|
|
|
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
|
|
16,712,353
|
|
16,423,016
|
|
|
|
|
|
|
|
Dilutive
effect of stock options using the treasury stock method and the average
market price for the period
|
|
107,553
|
|
108,274
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share - weighted average number of shares and common
stock equivalents attributable to common stock
|
|
16,819,906
|
|
16,531,290
|
|
|
|
|
|
|
|
Earnings
per share attributable to common stock:
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.29
|
|
$
|
0.37
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.29
|
|
$
|
0.37
|
|
|
|
|
|
|
|
Stock
options excluded from weighted average dilutive common shares outstanding
because their inclusion would have been antidilutive
|
|
906,251
|
|
1,247,251
|
|
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:
|
|
Three
Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
Denominator
for diluted earnings per share - weighted average number of shares and common
stock equivalents attributable to common stock
|
|
16,819,906
|
|
16,531,290
|
|
|
|
|
|
|
|
Participating
securities
|
|
173,218
|
|
237,347
|
|
|
|
|
|
|
|
Total
weighted average number of shares and common stock equivalents attributable
to both common stock and participating securities
|
|
16,993,124
|
|
16,768,637
|
|
16
Note
11.
Income
Taxes
The consolidated effective
tax rate was 34.5% and 38.2% for the three months ended October 31, 2010
and 2009, respectively. The decrease in the consolidated effective tax rate was
principally due to the geographic mix of pre-tax income and an increase to a
United States Federal income tax deduction, 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 36.7% and 38.1% for the three months ended October 31,
2010 and 2009, respectively. The lower overall effective tax rate for the three
months ended October 31, 2010 was principally caused by Federal tax
legislation that is now fully phased in, which enabled us to claim a larger
income tax deduction offered to United States manufacturers. Approximately 85%
of our income before income taxes was generated from our United States
operations during the three months ended October 31, 2010. For the three
months ended October 31, 2009, virtually all of our income before income
taxes related to our United States operations.
Approximately 8.8% of our
income before income taxes was generated from our Canadian operations for the
three months ended October 31, 2010 compared with an insignificant amount
in the prior year period. Our Canadian operations had an overall effective tax
rate of 29.0% for the three months ended October 31, 2010.
For the three months ended October 31,
2010 and 2009, approximately 3.4% and 1.2%, respectively, 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 16.4% and 8.2% for the three months ended October 31, 2010
and 2009, respectively.
Approximately 1.9% of our
income before income taxes was generated from our subsidiary in Japan for the
three months ended October 31, 2010 compared with a small loss in the
prior year period. Due to the uncertainty of our Japan subsidiary utilizing tax
benefits in the future, a tax benefit was not recorded on the losses from
operations at our Japan subsidiary during the three months ended October 31,
2009, thereby adversely affecting our overall consolidated effective tax rate
in the prior year period. For the three months ended October 31, 2010, our
Japan operation was slightly profitable and we recorded no income taxes due to
the existence of net operating loss carryforwards.
The results of operations
for our Netherlands subsidiary did not have a significant impact on our overall
effective tax rate for the three months ended October 31, 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
Condensed Consolidated Financial Statements because it does not meet the
more-likely-than-not recognition threshold that the uncertain tax position
would be sustained upon examination by the applicable taxing authority. The 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. Any
adjustments upon resolution of income tax uncertainties that predate or result
from acquisitions are recognized in our results of operations.
17
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, 2009
|
|
$
|
380,000
|
|
Lapse
of statute of limitations
|
|
(172,000
|
)
|
Unrecognized
tax benefits on July 31, 2010
|
|
208,000
|
|
Activity
during the three months ended October 31, 2010
|
|
|
|
Unrecognized
tax benefits on October 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 Condensed Consolidated Financial Statements. However, such
amounts have been relatively insignificant due to the amount of our
unrecognized tax benefits relating to uncertain tax positions.
Note 12.
Commitments and Contingencies
Long-term contractual
obligations
As of October 31, 2010,
aggregate annual required payments over the remaining fiscal year, the next
four years and thereafter under our contractual obligations that have long-term
components were as follows:
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
Year Ending July 31,
|
|
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Maturities
of the credit facilities
|
|
$
|
7,500
|
|
$
|
25,500
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
33,000
|
|
Expected
interest payments under the credit facilities (1)
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
Minimum
commitments under noncancelable operating leases
|
|
2,360
|
|
2,546
|
|
1,861
|
|
1,519
|
|
1,150
|
|
5,695
|
|
15,131
|
|
Minimum
commitments under noncancelable capital leases
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Deferred
compensation and other
|
|
304
|
|
307
|
|
37
|
|
33
|
|
33
|
|
132
|
|
846
|
|
Acquisition
payable
|
|
1,550
|
|
1,550
|
|
|
|
|
|
|
|
|
|
3,100
|
|
Employment
agreements
|
|
1,886
|
|
943
|
|
|
|
|
|
|
|
|
|
2,829
|
|
Total
contractual obligations
|
|
$
|
14,062
|
|
$
|
30,846
|
|
$
|
1,898
|
|
$
|
1,552
|
|
$
|
1,183
|
|
$
|
5,827
|
|
$
|
55,368
|
|
18
(1) The expected
interest payments under the term and revolving credit facilities reflect
interest rates of 2.48% and 1.98%, respectively, which were our weighted
average interest rates on outstanding borrowings at October 31, 2010.
Operating leases
Minimum commitments under
operating leases include minimum rental commitments for our leased
manufacturing facilities, warehouses, office space and equipment.
Deferred compensation
Included in other long-term liabilities
are deferred compensation arrangements for certain former Minntech directors
and officers.
Acquisition payable
In connection with the
Gambro Water acquisition, as more fully described in Note 3 to the Condensed
Consolidated Financial Statements, a portion of the purchase price amounting to
$3,100,000 will be paid in six equal quarterly payments beginning January 2011
and ending April 2012.
Employment agreements
We had previously entered
into various employment agreements with executives of the Company, including
our Corporate executive officers and our subsidiary Chief Executive Officers.
All of such contracts expired and most were replaced effective January 1,
2010 with severance contracts that defined certain compensation arrangements
relating to various employment termination scenarios.
Note
13.
Operating
Segments
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 our fourth quarter of
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
19
capitalize on our chemistry
expertise and expand our product offerings in existing and new markets within the
infection prevention and control arena. As a result of this internal
reorganization, certain research and development projects were reclassified
among segments. All prior period segment results have been restated to reflect
these changes.
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 20% of our Water Purification and Filtration segment net sales
and approximately 6% of our consolidated net sales during the three months ended
October 31, 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.
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 59% of our Healthcare Disposables segment net sales
and approximately 14% of our consolidated net sales during the three months
ended October 31, 2010.
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 accounted for
approximately 36% of our Dialysis segment net sales and approximately 8% of our
consolidated net sales during the three months ended October 31, 2010.
All Other
In accordance with
quantitative thresholds established by ASC 280, we have combined 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.
20
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.
None
of our customers accounted for 10% or more of our consolidated net sales during
the three months ended October 31, 2010 and 2009. However, as a result of
the Gambro Acquisition, DaVita (the largest customer of Gambro Water) would
have likely accounted for approximately 10% of our consolidated net sales for
the three months ended October 31, 2010 had the acquisition occurred at
the beginning of the fiscal year.
The operating segments
follow the same accounting policies used for our Condensed Consolidated
Financial Statements as described in Note 2 to the 2010 Form 10-K.
Information as to operating
segments is summarized below:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
20,606,000
|
|
$
|
18,114,000
|
|
Endoscope
Reprocessing
|
|
19,700,000
|
|
14,790,000
|
|
Healthcare
Disposables
|
|
17,321,000
|
|
20,582,000
|
|
Dialysis
|
|
9,820,000
|
|
12,829,000
|
|
All
Other
|
|
4,546,000
|
|
4,680,000
|
|
Total
|
|
$
|
71,993,000
|
|
$
|
70,995,000
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
1,712,000
|
|
$
|
2,027,000
|
|
Endoscope
Reprocessing
|
|
2,035,000
|
|
1,728,000
|
|
Healthcare
Disposables
|
|
2,870,000
|
|
4,848,000
|
|
Dialysis
|
|
2,573,000
|
|
2,988,000
|
|
All
Other
|
|
580,000
|
|
1,121,000
|
|
|
|
9,770,000
|
|
12,712,000
|
|
General
corporate expenses
|
|
(1,956,000
|
)
|
(2,348,000
|
)
|
Interest
expense, net
|
|
(222,000
|
)
|
(379,000
|
)
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
7,592,000
|
|
$
|
9,985,000
|
|
Note 14.
Legal
Proceedings
In the normal course of
business, we are subject to pending and threatened legal actions. It is our
policy to accrue for amounts related to these legal matters if it is probable
that a liability has been incurred and an amount of anticipated exposure can be
reasonably estimated. We do not believe that any of these pending claims or
legal actions will have a material effect on our business, financial condition,
results of operations or cash flows.
21
Note 15.
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 Condensed Consolidated Balance Sheets at October 31,
2010 and July 31, 2010. 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.
22
ITEM 2.
|
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The following Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) is
intended to help you understand Cantel Medical Corp. (Cantel). The MD&A
is provided as a supplement to and should be read in conjunction with our
financial statements and the accompanying notes. Our MD&A includes the
following sections:
Overview
provides a
brief description of our business and a summary of significant activity that
has affected or may affect our results of operations and financial condition.
Results of Operations
provides a
discussion of the consolidated results of operations for the three months ended
October 31, 2010 compared with the three months ended October 31,
2009.
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.
Forward-Looking Statements
provides a
discussion of cautionary factors that may affect future results.
Overview
Cantel is a leading provider of infection
prevention and control products 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.
·
Endoscope
Reprocessing
: Medical device reprocessing systems,
disinfectants, detergents and other supplies used to high-level disinfect
flexible endoscopes.
·
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.
·
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 the 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 the All Other reporting segment.)
·
Chemistries:
Sterilants, disinfectants, detergents and
decontamination services used in various applications for infection prevention
and control. (Included in the All Other reporting segment.)
Most of our equipment,
consumables and supplies are used to help prevent the occurrence
23
or spread of infections.
See our Annual Report on Form 10-K
for the fiscal year ended July 31, 2010 (the 2010 Form 10-K) and
our Condensed Consolidated Financial Statements for additional financial
information regarding our reporting segments.
Significant Activity
(i)
Despite slight
growth in net sales of 1.4% to $71,993,000 for the three months ended October 31,
2010 compared with the three months ended October 31, 2009, which
represents a new quarterly record for our business, net income decreased by
19.3% in the current year quarter. The primary factors that contributed to this
reduction in net income, as further described elsewhere in this MD&A, were
as follows:
·
a decrease in
gross profit percentage to 39.2% for the three months ended October 31,
2010 from 41.5% in the comparative quarter due principally to unfavorable sales
mix attributable to,
(i)
atypical demand
in the prior year period for higher margin face masks and other healthcare
disposables products as a result of the elevated level of reported cases of the
novel H1N1 flu (swine flu), which contributed approximately $2,600,000 and
$1,640,000 in incremental gross profit and net income, respectively, or $0.10
in earnings per share, and
(ii)
an increase in
sales volume of lower margin capital equipment in our Endoscope Reprocessing
and Water Purification and Filtration segments including sales associated with
our recent acquisitions.
·
decreases in
net sales and profitability in our Dialysis segment, and
·
increased
investment in sales, marketing and research and development activities.
The
above factors were partially offset by:
·
significant
increases in net sales of capital equipment, service, disinfectants and
equipment accessories in our Endoscope Reprocessing segment resulting in
increased profitability for this segment,
·
favorable
interest costs due to lower average outstanding borrowings, and
·
a decrease in
the consolidated effective tax rate primarily due to the geographic mix of
pre-tax income.
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 70% of our net sales are
attributable to consumable products and service.
24
(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, sterilants and
reprocessing supplies, 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 profitability in this
segment in the future. See Risk Factors in our 2010 Form 10-K for a
discussion of our Dialysis segment.
(iii)
We acquired the
United States water purification business of Gambro Renal Products, Inc. (GRP)
and a Swedish-based affiliate of GRP (Gambro Water or the Gambro Acquisition)
on October 6, 2010, as more fully described
in Note 3 to the Condensed Consolidated Financial Statements.
(iv)
While overall
sales have increased in our Water Purification and Filtration segment for the
three months ended October 31, 2010 compared with the three months ended October 31,
2009, this segments profitability was adversely impacted by a decrease in net
sales of capital equipment used for dialysis due to the slow growth of the
economy, the timing of orders in the prior year period from our largest
customer in this segment, lower gross margins on capital equipment due to sales
mix and one-time charges related to acquiring Gambro Water, as more fully
described elsewhere in this MD&A.
(v)
In fiscal 2010,
we declared our first semiannual cash dividend of $0.05 per share of
outstanding common stock, which was paid on each of January 29, 2010 and July 30,
2010. On October 21, 2010, we announced an increase in the semiannual cash
dividend to $0.06 per share of outstanding common stock and declared the next
dividend to be paid on January 28, 2011 to shareholders of record at the
close of business on January 14, 2011, as more fully described elsewhere
in this MD&A.
(vi)
We created a
new operating segment named Chemistries, as more fully described elsewhere in
this MD&A.
(vii)
We acquired the
business of Purity Water Company of San Antonio, Inc. (Purity) on June 1,
2010, as more fully described in Note 3 to the Condensed Consolidated Financial
Statements.
(viii)
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.
25
Results of Operations
The results of operations
described below reflect the operating results of Cantel and its wholly-owned
subsidiaries. Since the Gambro Acquisition was completed on October 6,
2010, its results of operations are included in our results of operations for
the portion of the three months ended October 31, 2010 subsequent to its
acquisition date, but are not reflected in our results of operations for the
three months ended October 31, 2009. Since the acquisition of Purity was
completed on June 1, 2010, its results of operations are included in our
results of operations for the three months ended October 31, 2010, but are
not reflected in our results of operations for the three months ended October 31,
2009.
During our fourth quarter of
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. As a result of this
internal reorganization, certain research and development projects were
reclassified among segments. All prior period segment results have been
restated to reflect these changes.
The following discussion
should also be read in conjunction with our 2010 Form 10-K.
The following table gives
information as to the net sales and the percentage to the total net sales for
each of our reporting segments:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollar amounts in thousands)
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Water
Purification and Filtration
|
|
$
|
20,606
|
|
28.6
|
|
$
|
18,114
|
|
25.5
|
|
Endoscope
Reprocessing
|
|
19,700
|
|
27.4
|
|
14,790
|
|
20.8
|
|
Healthcare
Disposables
|
|
17,321
|
|
24.1
|
|
20,582
|
|
29.0
|
|
Dialysis
|
|
9,820
|
|
13.6
|
|
12,829
|
|
18.1
|
|
All
Other
|
|
4,546
|
|
6.3
|
|
4,680
|
|
6.6
|
|
|
|
$
|
71,993
|
|
100.0
|
|
$
|
70,995
|
|
100.0
|
|
Net Sales
Net sales increased by
$998,000, or 1.4%, to $71,993,000 for the three months ended October 31,
2010 from $70,995,000 for the three months ended October 31, 2009.
The increase in net sales
for the three months ended October 31, 2010 was principally attributable
to increases in sales of endoscope reprocessing products and services and water
purification and filtration products and services, partially offset by
decreases in sales of healthcare disposables products and dialysis products.
26
Net sales of endoscope
reprocessing products and services increased by 33.2% for the three months
ended October 31, 2010, compared with the three months ended October 31,
2009, primarily due to increases in both domestic and international demand for (i) our
endoscope reprocessing equipment and (ii) our service, disinfectants and
equipment accessories due to the increased field population of equipment. We
attribute the increased demand in our endoscope reprocessing equipment to our
investments in new product offerings and sales and marketing programs.
Partially offsetting these increases were slightly lower net sales as a result
of decreases in selling prices of our endoscope reprocessing equipment.
Net sales of water
purification and filtration products and services increased by 13.8% for the
three months ended October 31, 2010, compared with the three months ended October 31,
2009, primarily due to (i) an increase in demand for capital equipment
used for commercial and industrial applications, (ii) approximately
$940,000 of net sales due to the Gambro Acquisition on October 6, 2010 and
(iii) an increase in demand for our sterilants and filters within our
installed equipment base of business. Partially offsetting these increases was
a decrease in demand for our water purification equipment used for dialysis
primarily as a result of the slow growth of the overall economy and the timing
of orders in the prior year period from our largest customer in this segment.
Increases in selling prices of our water purification products and services did
not have a significant effect on net sales for the three months ended October 31,
2010, compared with the three months ended October 31, 2009.
Net sales of healthcare
disposables products decreased by 15.8% for the three months ended October 31,
2010, compared with the three months ended October 31, 2009, primarily due
to decreased sales volume of higher margin face masks, disinfectants and other
healthcare disposables products that were in strong demand during the prior year
outbreak of the novel H1N1 flu (swine flu). Although the outbreak of the novel
H1N1 flu resulted in strong sales volume of higher 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, with the exception of
sales to certain distributors who are overstocked with face masks, given that
the elevated level of reported cases of influenza viruses has subsided and a
new outbreak has not occurred. 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, government agencies
and the general public develop and maintain with respect to epidemic and
pandemic preparedness. Partially offsetting this decrease in sales volume were (i) increased
demand for our sterilization accessories as a result of favorable sales and
marketing initiatives and (ii) approximately $330,000 in higher net sales
as a result of increases in selling prices that were implemented to offset
corresponding supplier cost increases.
Net sales of dialysis
products and services decreased by 23.5% for the three months ended October 31,
2010, compared with the three months ended October 31, 2009, primarily due
to (i) the expected 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) for our Renatron dialyzer reprocessing equipment, sterilants
27
and reprocessing supplies.
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 profitability in
this segment in the future. Increases in selling prices of our dialysis
products did not have a significant effect on net sales for the three months
ended October 31, 2010, compared with the three months ended October 31,
2009.
Gross profit
Gross profit decreased by
$1,266,000, or 4.3%, to $28,192,000 for the three months ended October 31,
2010 from $29,458,000 for the three months ended October 31 2009. Gross
profit as a percentage of net sales for the three months ended October 31,
2010 and 2009 was 39.2% and 41.5%, respectively.
The gross profit percentage
for the three months ended October 31, 2010 decreased compared with the
three months ended October 31, 2009 primarily due to (i) a less
favorable sales mix due to a decrease in sales volume of high margin face
masks, disinfectants and other healthcare disposables products that were in
strong demand during the prior year outbreak of the novel H1N1 flu (swine flu)
and increases in sales volume of certain lower margin products such as capital
equipment sales in our Endoscope Reprocessing and Water Purification and
Filtration segments, (ii) lower overhead absorption in our Water
Purification and Filtration segment as a result of the decrease in sales of
capital equipment used for dialysis, (iii) the inclusion of sales with
lower gross margin as a result of acquiring Gambro Water and (iv) an
increase in raw materials and distribution costs primarily due to the higher
price of oil.
We cannot provide assurances
that our gross profit percentage will not be further adversely affected in the
future (i) by price competition in certain of our segments such as
Healthcare Disposables, Endoscope Reprocessing and Dialysis, (ii) by
uncertainties associated with our product mix or (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 for the remainder of fiscal 2011 in our Healthcare Disposables
segment as a result of low cost competition in China and Southeast Asia.
Operating Expenses
Selling expenses increased
by $1,107,000, or 13.0%, to $9,631,000 for the three months ended October 31,
2010 from $8,524,000 for the three months ended October 31, 2009,
primarily due to (i) an increase of approximately $920,000 relating to
additional sales personnel and higher
28
incentive compensation in
order to expand into new markets and gain market share principally in our
Endoscope Reprocessing and Water Purification and Filtration segments, and to a
lesser extent in our new Chemistries segment, and (ii) an increase of
approximately $120,000 in advertising and marketing expense primarily related
to our Healthcare Disposables segment.
Selling
expenses as a percentage of net sales were 13.4% and 12.0% for the three months
ended October 31, 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 decreased by $187,000 to $9,118,000 for the three
months ended October 31, 2010, from $9,305,000 for the three months ended October 31,
2009, primarily due to a decrease of approximately $485,000 in incentive
compensation in all of our locations and a $94,000 decrease in stock-based
compensation expense, partially offset by increases of approximately $220,000
in administrative personnel, including temporary employees, and approximately
$205,000 in acquisition-related costs related to the Gambro Acquisition.
General
and administrative expenses as a percentage of net sales were 12.7% and 13.1%
for the three months ended October 31, 2010 and 2009, respectively.
Research
and development expenses (which include continuing engineering costs) increased
by $364,000 to $1,629,000 for the three months ended October 31, 2010, from
$1,265,000 for the three months ended October 31, 2009. This increase is
primarily due to development work on certain new products in our newly created
Chemistries operating segment. For the remainder of fiscal 2011, we intend to
accelerate investments in research and development to leverage our new
Chemistry group across various infection prevention and control opportunities.
Interest
Interest expense decreased
by $146,000 to $241,000 for the three months ended October 31, 2010, from
$387,000 for the three months ended October 31, 2009, primarily due to
decreases in average outstanding borrowings.
Interest income increased by
$11,000 to $19,000 for the three months ended October 31, 2010, from
$8,000 for the three months ended October 31, 2009, due to increasing our
investment in a senior subordinated convertible promissory note issued by
BIOSAFE, Inc. (BIOSAFE), as more fully described elsewhere in this
MD&A.
Income taxes
The consolidated effective
tax rate was 34.5% and 38.2% for the three months ended October 31, 2010
and 2009, respectively. The decrease in the consolidated effective tax rate was
principally due to the geographic mix of pre-tax income and an increase to a
United States Federal income tax deduction, 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 36.7% and 38.1% for the three months ended October 31,
2010 and 2009, respectively. The lower overall effective tax rate for the three
months ended October 31, 2010 was principally caused by Federal tax
legislation that is now fully phased in, which enabled us to claim a larger
income tax deduction offered to United States
29
manufacturers. Approximately
85% of our income before income taxes was generated from our United States
operations during the three months ended October 31, 2010. For the three
months ended October 31, 2009, virtually all of our income before income
taxes related to our United States operations.
Approximately 8.8% of our
income before income taxes was generated from our Canadian operations for the
three months ended October 31, 2010 compared with an insignificant amount
in the prior year period. Our Canadian operations had an overall effective tax
rate of 29.0% for the three months ended October 31, 2010.
For the three months ended October 31,
2010 and 2009, approximately 3.4% and 1.2%, respectively, 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 16.4% and 8.2% for the three months ended October 31, 2010
and 2009, respectively.
Approximately 1.9% of our
income before income taxes was generated from our subsidiary in Japan for the
three months ended October 31, 2010 compared with a small loss in the
prior year period. Due to the uncertainty of our Japan subsidiary utilizing tax
benefits in the future, a tax benefit was not recorded on the losses from
operations at our Japan subsidiary during the three months ended October 31,
2009, thereby adversely affecting our overall consolidated effective tax rate
in the prior year period. For the three months ended October 31, 2010, our
Japan operation was slightly profitable and we recorded no income taxes due to
the existence of net operating loss carryforwards.
The results of operations
for our Netherlands subsidiary did not have a significant impact on our overall
effective tax rate for the three months ended October 31, 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
Condensed Consolidated Financial Statements because it does not meet the
more-likely-than-not recognition threshold that the uncertain tax position
would be sustained upon examination by the applicable taxing authority. The 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. Any
adjustments upon resolution of income tax uncertainties that predate or result
from acquisitions are recognized in our results of operations. However, if our
unrecognized tax benefits are recognized in our financial statements in future
periods, there would not be a significant impact to our 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.
30
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, 2009
|
|
$
|
380,000
|
|
Lapse
of statute of limitations
|
|
(172,000
|
)
|
Unrecognized
tax benefits on July 31, 2010
|
|
208,000
|
|
Activity
during the three months ended October 31, 2010
|
|
|
|
Unrecognized
tax benefits on October 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 Condensed Consolidated Financial Statements. However, such
amounts have been relatively insignificant due to the amount of our
unrecognized tax benefits relating to uncertain tax positions.
Stock-Based Compensation
The following table shows
the income statement components of stock-based compensation expense recognized
in the Condensed Consolidated Statements of Income:
|
|
Three Months Ended
|
|
|
|
October 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
38,000
|
|
$
|
18,000
|
|
Operating
expenses:
|
|
|
|
|
|
Selling
|
|
115,000
|
|
69,000
|
|
General
and administrative
|
|
604,000
|
|
698,000
|
|
Research
and development
|
|
8,000
|
|
4,000
|
|
Total
operating expenses
|
|
727,000
|
|
771,000
|
|
Stock-based
compensation before income taxes
|
|
765,000
|
|
789,000
|
|
Income
tax benefits
|
|
(275,000
|
)
|
(290,000
|
)
|
Total
stock-based compensation expense, net of tax
|
|
$
|
490,000
|
|
$
|
499,000
|
|
|
|
|
|
|
|
Decrease
in earnings per common share due to stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.03
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.03
|
|
The above stock-based
compensation expense before income taxes was recorded in the Condensed Consolidated
Financial Statements as stock-based compensation expense and an increase to
additional paid-in capital. The related income tax benefits (which pertain only
to stock awards and options that do not qualify as incentive stock options)
were recorded as an increase to long-term
31
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 the Condensed Consolidated Financial Statements may not be
representative of the effect of stock-based compensation expense in future
periods due to the level of awards issued in past years (which level may not be
similar in the future), 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 January 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 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. At October 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 $5,655,000 with a
remaining weighted average period of 19 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 a
reduction of income taxes payable. For the three months ended October 31,
2010 and 2009, such income tax deductions reduced income taxes payable by
$107,000 and $29,000, respectively.
We classify the cash flows resulting from excess tax
benefits as financing cash flows on our Condensed Consolidated Statements of
Cash Flows. Excess tax benefits arise when the ultimate tax effect of the
deduction for tax purposes is greater than the tax benefit on stock
compensation expense (including tax benefits on stock compensation expense that
has only been reflected in past pro forma disclosures relating to fiscal years
prior to August 1, 2005) which was determined based upon the awards fair
value.
Liquidity and Capital Resources
Working capital
At
October 31, 2010, the Companys working capital was $28,898,000, compared
with $53,747,000 at July 31, 2010. The decrease in working capital was
primarily due to borrowing
32
$20,500,000 under our
revolving credit facility to acquire Gambro Water and reclassifying the entire
outstanding balance of our revolving credit facility from long-term to current
as a result of its expiration occurring in less than one year on August 1,
2011.
Cash flows from operating activities
Net
cash provided by operating activities was $3,220,000 and $6,456,000 for the
three months ended October 31, 2010 and 2009, respectively. For the three
months ended October 31, 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 taxes), an increase
in income taxes payable (due to the timing associated with tax payments) and a
decrease in inventories, partially offset by a decrease in accounts payable and
other current liabilities (due primarily to the timing associated with
incentive compensation payments) and an increase in accounts receivables. The
increase in accounts receivable and the decrease in inventories were primarily
due to strong sales of capital equipment for commercial and industrial
applications in our Water Purification and Filtration segment.
For
the three months ended October 31, 2009, the net cash provided by
operating activities was primarily due to net income (after adjusting for
depreciation, amortization, stock-based compensation expense and deferred
taxes) and an increase in taxes payable (due to the timing associated with tax
payments), partially offset by increases in inventories (due to planned
increases in stock levels of certain products primarily in our Healthcare
Disposables and Endoscope Reprocessing segments) and accounts receivable (due
to strong October sales primarily in our Healthcare Disposables segment)
and a decrease in accounts payable and other current liabilities (due primarily
to the timing associated with incentive compensation payments).
Cash flows from investing activities
Net
cash used in investing activities was $21,861,000 and $1,664,000 for the three
months ended October 31, 2010 and 2009, respectively. For the three months
ended October 31, 2010, the net cash used in investing activities was
primarily for the acquisition of Gambro Water as well as capital expenditures.
For the three months ended October 31, 2009, the net cash used in
investing activities was primarily for capital expenditures.
Cash flows from financing activities
Net
cash provided by financing activities was $12,034,000 for the three months
ended October 31, 2010, compared with net cash used in financing
activities of $5,053,000 for the three months ended October 31, 2009. For
the three months ended October 31, 2010, the net cash provided by
financing activities was due primarily to a borrowing under our revolving
credit facility relating to the Gambro Acquisition, partially offset by
repayments under our credit facilities. For the three months ended October 31,
2009, the net cash used in financing activities was primarily attributable to
repayments under our credit facilities, partially offset by proceeds from the
exercises of stock options.
Dividends
In
fiscal 2010, we declared our first semiannual cash dividends of $0.05 per share
of outstanding common stock, which were paid on each of January 29, 2010
and July 30, 2010, which totaled $1,683,000. On October 21, 2010, we
announced an increase in the semiannual cash
33
dividend to $0.06 per share
of outstanding common stock and declared the next dividend to be paid on January 28,
2011 to shareholders of record at the close of business on January 14,
2011. 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.
Long-term contractual
obligations
As of October 31, 2010,
aggregate annual required payments over the remaining fiscal year, the next
four years and thereafter under our contractual obligations that have long-term
components were as follows:
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
Year Ending July 31,
|
|
|
|
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
2015
|
|
Thereafter
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Maturities
of the credit facilities
|
|
$
|
7,500
|
|
$
|
25,500
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
33,000
|
|
Expected
interest payments under the credit facilities (1)
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
Minimum
commitments under noncancelable operating leases
|
|
2,360
|
|
2,546
|
|
1,861
|
|
1,519
|
|
1,150
|
|
5,695
|
|
15,131
|
|
Minimum
commitments under noncancelable capital leases
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Deferred
compensation and other
|
|
304
|
|
307
|
|
37
|
|
33
|
|
33
|
|
132
|
|
846
|
|
Acquisition
payable
|
|
1,550
|
|
1,550
|
|
|
|
|
|
|
|
|
|
3,100
|
|
Employment
agreements
|
|
1,886
|
|
943
|
|
|
|
|
|
|
|
|
|
2,829
|
|
Total
contractual obligations
|
|
$
|
14,062
|
|
$
|
30,846
|
|
$
|
1,898
|
|
$
|
1,552
|
|
$
|
1,183
|
|
$
|
5,827
|
|
$
|
55,368
|
|
(1) The
expected interest payments under the term and revolving credit facilities
reflect interest rates of 2.48% and 1.98%, respectively, which were our weighted
average interest rates on outstanding borrowings at October 31, 2010.
Credit facilities
Our United States credit facilities, as amended, include (i) a
six-year $40.0 million senior secured amortizing term loan facility and
(ii) a five-year $50.0 million senior secured revolving credit facility,
which both expire on August 1, 2011 (the U.S. Credit Facilities).
Amounts we repay under the term loan facility may not be re-borrowed. 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 $224,000 at October 31,
2010.
At
November 30, 2010, borrowings under our 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 facilities (EBITDA). At November 30, 2010, the lenders base
rate was 3.25% and the LIBOR rates ranged from 0.25% to 1.21%. The margins
applicable to our outstanding borrowings at November 30, 2010 were 0.50%
above the lenders base rate and 1.50% above LIBOR. All of our outstanding
borrowings were under LIBOR contracts at November 30, 2010. The revolving
credit facility also provides for fees on the unused portion at
34
rates
ranging from 0.20% to 0.40%, depending upon our consolidated ratio of debt to
EBITDA; such rate was 0.20% at November 30, 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 Products, Inc.)
and (ii) our pledge of all of the outstanding shares of Minntech, Mar Cor,
Crosstex and Strong Dental Products, Inc. and 65% of the outstanding shares
of our foreign-based subsidiaries. Additionally, we are not permitted to pay
annual cash dividends on our Common Stock in excess of $3,000,000 without the
consent of our United States lenders. As of October 31, 2010, we were in
compliance with all financial and other covenants under the credit facilities.
On October 31, 2010, we
had $33,000,000 of outstanding borrowings under the U.S. Credit Facilities,
which consisted of $7,500,000 and $25,500,000 under the term loan facility and
the revolving credit facility, respectively, and $24,500,000 was available to
be borrowed under our revolving credit facility. Subsequent to October 31,
2010, we repaid $1,000,000 under the revolving credit facility reducing our
total outstanding borrowings to $32,000,000.
The U.S. 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 our credit facilities, including an extension of the
termination date of the revolving credit facility, and expect to formally
modify the revolving credit facility before the expiration date. However, since
any modification will not be completed until later in fiscal 2011, subsequent
to July 31, 2010 the entire outstanding balance of the revolver was
reclassified from long-term to current.
Operating leases
Minimum commitments under
operating leases include minimum rental commitments for our leased
manufacturing facilities, warehouses, office space and equipment.
Deferred compensation
Included in other long-term
liabilities are deferred compensation arrangements for certain former Minntech
directors and officers.
Acquisition payable
In connection with the
Gambro Water acquisition, as more fully described in Note 3 to the Condensed
Consolidated Financial Statements, a portion of the purchase price amounting to
$3,100,000 will be paid in six equal quarterly payments beginning January 2011
and ending April 2012.
Employment agreements
We had previously entered
into various employment agreements with executives of the Company, including
our Corporate executive officers and our subsidiary Chief Executive Officers.
All of such contracts expired and most were replaced effective January 1,
2010 with severance contracts that defined certain compensation arrangements
relating to various
35
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., 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 Condensed Consolidated Balance Sheets at October 31,
2010 and July 31, 2010. 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.
Financing needs
Although
all 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 October 31,
2010, we had a cash balance of $15,954,000, of which $2,907,000 was held by
foreign subsidiaries. On September 28, 2010, we repatriated $5,500,000 in
earnings from one of the foreign subsidiaries.
We
believe that our current cash position, anticipated cash flows from operations
and the funds available under our revolving credit facility will be sufficient
to satisfy our cash operating requirements for the foreseeable future based
upon our existing operations, particularly given that we historically have not
needed to borrow for working capital purposes. At November 30, 2010,
$25,500,000 was available under our revolving credit facility, which expires on
August 1, 2011.
Under
the terms of our U.S. 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. The aggregate purchase
price permitted for acquisitions subsequent to May 28, 2010, the date of
the latest bank amendment, without obtaining prior bank approval was
$50,000,000, of which $2,014,000 and $23,697,000 was used for the acquisitions
of Purity and Gambro Water, respectively.
Foreign currency
During
the three months ended October 31, 2010, compared with the three months
ended October 31, 2009, the average value of the Canadian dollar increased
by approximately 4.0%
36
relative to the value of the
United States dollar. Additionally, at October 31, 2010 compared with July 31,
2010, the value of the Canadian dollar relative to the value of the United
States dollar increased by approximately 0.5%. The financial statements of our
Canadian subsidiaries are translated using the accounting policies described in
Note 2 to the 2010 Form 10-K and therefore are impacted by changes in the
Canadian dollar exchange rate. Additionally, changes in the value of the
Canadian dollar against the United States dollar affect our results of
operations because a portion of our Canadian subsidiaries inventories and
operating costs (which are reported in the Water Purification and Filtration
and Specialty Packaging segments) are purchased in the United States and a
significant amount of their sales are to customers in the United States.
For the three months ended October 31,
2010, compared with the three months ended October 31, 2009, the average
value of the euro and British pound decreased by approximately 8.8% and 4.0%,
respectively, relative to the value of the United States dollar. Additionally,
at October 31, 2010 compared with July 31, 2010, the value of the
euro and British pound relative to the United States dollar increased by
approximately 6.2% and 2.6%, respectively. Changes in the value of the euro and
British pound against the United States dollar affect our results of operations
because certain cash bank accounts, accounts receivable and liabilities of our
United States subsidiaries, Minntech and Mar Cor, are denominated and
ultimately settled in euros or British pounds but must be converted into our
functional United States currency. Furthermore, the financial statements of our
Netherlands subsidiary are translated using the accounting policies described
in Note 2 of the 2010 Form 10-K and therefore are impacted by changes in
the euro exchange rate relative to the United States dollar.
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 $4,312,000 at November 30, 2010, which cover certain assets and
liabilities that were denominated in currencies other than our subsidiaries
functional currencies. Such contracts expire on December 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 U.S. 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. For the three months ended October 31,
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.
Changes
in the value of the Japanese yen relative to the United States dollar during
the three months ended October 31, 2010, compared with the three months
ended October 31, 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.
37
Overall,
fluctuations in the rates of currency exchange had an insignificant impact upon
our net income for the three months ended October 31, 2010 compared with
the three months ended October 31, 2009.
For
purposes of translating the balance sheet at October 31, 2010 compared
with July 31, 2010, the total of the foreign currency movements resulted
in a foreign currency translation gain of $58,000, net of tax, for the three
months ended October 31, 2010, thereby increasing stockholders equity.
Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an ongoing basis, we continually evaluate our
estimates. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our Condensed Consolidated
Financial Statements.
Revenue
Recognition
Revenue
on product sales is recognized as products are shipped to customers and title
passes. The passing of title is determined based upon the FOB terms specified
for each shipment. With respect to dialysis, therapeutic, specialty packaging,
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. 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, or post-delivery
obligations such as installation has been substantially fulfilled such that the
products are deemed functional by the end-user.
A
portion of our endoscope reprocessing, water purification and filtration and
dialysis 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. If vendor-specific objective evidence of selling price is not
available, we allocate revenue to the elements of the bundled arrangement using
the estimated selling price method in order to qualify the components as
separate units of accounting. Revenue on the equipment component is recognized
as the equipment is shipped to customers and title passes. Revenue on the
installation component is recognized when the installation is complete.
38
Revenue on service sales,
including the service component of a multiple element arrangement, 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 $735,000 and $764,000
for the three months ended October 31, 2010 and 2009, respectively. 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
39
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
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. On October 31, 2010, management concluded that no events or
changes in circumstances have occurred during the three months ended October 31,
2010 that would indicate that the carrying amount of our intangible assets and
goodwill may not be recoverable.
While
the results of these annual reviews have historically not indicated impairment,
impairment reviews are highly dependent on managements projections of our
future operating results and cash flows (which management believes to be
reasonable), discount rates based on the Companys weighted-average cost of
capital and appropriate benchmark peer companies. Assumptions used in
determining future operating results and cash flows include current and
expected market conditions and future sales forecasts. Subsequent changes in
these assumptions and estimates could result in future impairment. Although we
consistently use the same methods in developing the assumptions and estimates
underlying the fair value calculations, such estimates are uncertain by nature
and can vary from actual results. At July 31, 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%.
40
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. 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.
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
We account for stock options
and stock awards under ASC 718 in which
stock compensation expense is recognized for any option or stock award grant
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 Condensed Consolidated Financial Statements may not be
representative of the effect of stock-based compensation expense in future
periods due to the level of awards issued in past years (which level may not be
similar in the future), 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
41
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 income tax rates, principally in the United States. If the
income 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 Condensed Consolidated Financial Statements because it
does not meet the more-likely-than-not recognition threshold that the uncertain
tax position would be sustained upon examination by the applicable taxing
authority. The majority of such unrecognized tax benefits originated from
acquisitions and are based primarily upon managements assessment of exposure
associated with acquired companies. Any adjustments upon resolution of income
tax uncertainties that predate or result from acquisitions are recognized in
our results of operations. Unrecognized tax benefits are analyzed periodically
and adjustments are made as events occur to warrant adjustment to the related liability.
Business
Combinations
Acquisitions
require significant estimates and judgments related to the fair value of assets
acquired and liabilities assumed. We determine fair value based on the
estimated 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.
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
42
exposures, including tax
liabilities related to our foreign subsidiaries, as well as reserves for
accounts receivable, inventories and warranties. The ultimate settlement of
such liabilities may be for amounts which are different from the amounts
recorded.
Costs Associated with Exit
or Disposal Activities
We recognize costs
associated with exit or disposal activities, such as costs to terminate a
contract, the exit or disposal of a business, or the early termination of a
leased property, by recognizing the liability at fair value when incurred,
except for certain one-time termination benefits, such as severance costs, for
which the period of recognition begins when a severance plan is communicated to
employees.
Inherent in the calculation
of liabilities relating to exit and disposal activities are significant management
judgments and estimates, including estimates of termination costs, employee
attrition and the interest rate used to discount certain expected net cash
payments. Such judgments and estimates are reviewed by us on a regular basis.
The cumulative effect of a change to a liability resulting from a revision to
either timing or the amount of estimated cash flows is recognized by us as an
adjustment to the liability in the period of the change.
Other Matters
We do not have any off
balance sheet financial arrangements, other than future commitments under
operating leases and employment and license agreements.
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking
statements as that term is defined under the Private Securities Litigation
Reform Act of 1995 and releases issued by the Securities and Exchange
Commission (the SEC) and within the meaning of
Section 27A of the
Securities Act of 1933, as amended (the Securities Act) and Section 21E
of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements are based on current
expectations, estimates, or forecasts about our businesses, the industries in
which we operate, and the beliefs and assumptions of management; they do not
relate strictly to historical or current facts. We have tried, wherever
possible, to identify such statements by using words such as expect, anticipate,
goal, project, intend, plan, believe, seek, may, could, and variations of such words
and similar expressions. In addition, any statements that refer to 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
43
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 in our 2010 Form 10-K for a discussion of the above risk factors
and certain additional risk factors that you should consider before investing
in the shares of our Common Stock.
All
forward-looking statements herein speak only as of the date of this report. We
expressly disclaim any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
For
these statements, we claim the protection of the safe harbor for
forward-looking statements contained in Section 27A of the Securities Act
and Section 21E of the Exchange Act.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency and Market Risk
A
portion of our products 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 2010 Form 10-K.
Fluctuations in the rates of currency exchange between the United States dollar
and the Canadian dollar had an insignificant impact for the three months ended October 31,
2010, compared with the three months ended October 31, 2009, upon our net
income and had a favorable impact upon stockholders equity, as described in
our MD&A.
Changes
in the value of the euro and British pound against the United States dollar
affect our results of operations because certain cash bank accounts, accounts
receivable and liabilities of
44
our United States
subsidiaries, Minntech and Mar Cor, are denominated and ultimately settled in
euros or British pounds but must be converted into our functional United States
currency. Furthermore, the financial statements of our Netherlands subsidiary are
translated using the accounting policies described in Note 2 of the 2010 Form 10-K
and therefore are impacted by changes in the euro exchange rate relative to the
United States dollar. 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 for the three months ended October 31, 2010,
compared with the three months ended October 31, 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 the functional currencies, we
enter into short-term contracts to purchase Canadian dollars, euros and British
pounds forward, which contracts are generally one month in duration. These
short-term contracts are designated as fair value hedge instruments. There were
three foreign currency forward contracts with an aggregate value of $3,989,000
at October 31, 2010, which covered certain assets and liabilities that
were denominated in currencies other than our subsidiaries functional
currencies. Such contracts expired on November 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 U.S. 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. For the three months ended October 31,
2010, 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.
The
functional currency of Minntechs Japan subsidiary is the Japanese yen. Changes
in the value of the Japanese yen relative to the United States dollar during
the three months ended October 31, 2010, compared with the three months
ended October 31, 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 insignificant impact on
our net income for the three months ended October 31, 2010, compared with
the three months ended October 31, 2009, and a favorable impact upon
stockholders equity primarily due to the increase in the value of the Canadian
dollar relative to the United States dollar.
Interest Rate Market Risk
We have United States credit
facilities 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.
45
Market Risk Sensitive
Transactions
Additional
information related to market risk sensitive transactions is contained in Part II, Item
7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2010 Form 10-K.
ITEM 4. CONTROLS
AND PROCEDURES.
We
maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified by the SEC and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures.
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 of the
end of the period covered by this report on Form 10-Q. 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 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 by the Companys management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding disclosure.
We
have evaluated our internal controls over financial reporting and determined
that no changes occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except as described below.
On October 6, 2010 and June 1,
2010, we acquired Gambro Water and Purity, respectively, as more fully
described in Note 3 to the Condensed Consolidated Financial Statements. During
the initial transition period following these acquisitions, we enhanced our
internal control process at our Mar Cor Purification subsidiary to ensure that
all financial information related to these acquisitions were properly reflected
in our Consolidated Financial Statements. As of October 31, 2010, all
aspects of the Purity acquisition were fully integrated into Mar Cors existing
internal control structure and we expect that all aspects of the Gambro Water
acquisition will be fully integrated into Mar Cors existing internal control
structure during the second quarter of fiscal 2011.
46
PART II - OTHER INFORMATION
ITEM 1.
LEGAL
PROCEEDINGS
None.
ITEM 1A.
RISK
FACTORS
There
have been no material changes in our risk factors from those disclosed in
Part I, Item 1A to our 2010 Form 10-K. The risk factors
disclosed in Part I, Item 1A to our 2010 Form 10-K, in
addition to the other information set forth in this report, could materially
affect our business, financial condition, or results of operations.
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table represents information with respect to purchases of Common
Stock made by the Company during the current quarter:
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
August
|
|
|
|
|
|
|
|
|
|
September
|
|
|
|
|
|
|
|
|
|
October
|
|
3,658
|
|
$
|
18.52
|
|
|
|
|
|
Total
|
|
3,658
|
|
$
|
18.52
|
|
|
|
|
|
The
Company does not currently have a repurchase program. All of the shares
purchased during the current quarter represent shares surrendered to the
Company to pay employee withholding taxes due upon the vesting of restricted
stock.
ITEM 3.
DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4.
RESERVED
ITEM 5.
OTHER
INFORMATION
None.
47
ITEM 6.
EXHIBITS
10(a)
|
|
Cantel Medical Corp. Long
Term Incentive Compensation Plan, as amended.
|
|
|
|
10(b)
|
|
Cantel Medical Corp.
Annual Incentive Compensation Plan, as amended.
|
|
|
|
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.
|
48
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CANTEL MEDICAL CORP.
|
|
|
Date: December 10,
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
|
49
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