CMD Cantel Medical Corp

CANTEL MEDICAL CORP. 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(unaudited)

Three Months Ended

October 31,

2014

2013

Net sales

$   136,811

$   118,272

Cost of sales

76,297

66,773

Gross profit

60,514

51,499

Expenses:

  Selling

19,411

15,764

  General and administrative

18,507

15,164

  Research and development

3,549

2,259

Total operating expenses

41,467

33,187

Income before interest and income taxes

19,047

18,312

Interest expense, net  

534

644

Income before income taxes

18,513

17,668

Income taxes

7,274

6,483

Net income 

$    11,239

$     11,185

Earnings per common share - diluted  

$        0.27

$         0.27

Dividends per common share 

$             -

$         0.05

Weighted average shares - diluted 

41,551

41,373

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(unaudited)

October 31,

July 31,

2014

2014

                    Assets

     Current assets

$     173,963

$     163,909

     Restricted cash for IMS Acquisition

24,257

-

     Property and equipment, net

52,936

52,718

     Intangible assets, net

78,484

82,952

     Goodwill

224,146

231,647

     Other assets

4,939

4,919

$     558,725

$     536,145

            Liabilities and stockholders' equity

     Current liabilities

$       64,038

$       66,499

     Long-term debt

93,500

80,500

     Other long-term liabilities 

25,489

23,900

     Stockholders' equity

375,698

365,246

$     558,725

$     536,145

SUPPLEMENTARY INFORMATION - RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

In evaluating our operating performance, we supplement the reporting of our financial information determined under accounting principles generally accepted in the United States ("GAAP") with certain internally driven non-GAAP financial measures, namely adjusted net income, adjusted diluted earnings per share ("EPS") and income before interest, taxes, depreciation, amortization and stock-based compensation expense ("EBITDAS"). These non-GAAP financial measures are indicators of the Company's performance that is not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, shareholders and other readers of our Condensed Consolidated Financial Statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures.

Reconciliation of EBITDAS with Net Income

The Company believes EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment, has on the Company's net income. In particular, acquisitions have historically resulted in significant increases in amortization of intangible assets that reduce the Company's net income. Additionally, the Company regards EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and complements operating income, net income and other GAAP financial performance measures.

The reconciliation of EBITDAS with net income for the three months ended October 31, 2014 and 2013,

respectively, is as follows:

Three Months Ended

July 31,

2014

2013

(In thousands)

(unaudited)

Net income

$    11,239

$    11,185

Income taxes

7,274

6,483

Interest expense, net  

534

644

Depreciation

2,312

1,937

Amortization

2,956

2,626

Loss on disposal of fixed assets

13

125

EBITDA

24,328

23,000

Stock-based compensation expense

1,581

1,148

EBITDAS

$    25,909

$    24,148

Reconciliation of Net Income and Diluted EPS to Adjusted Net Income and Adjusted Diluted EPS

We define adjusted net income and adjusted diluted EPS as net income and diluted EPS, respectively, adjusted to exclude amortization, acquisition related items, significant reorganization and restructuring charges, major tax events and other significant items management deems atypical or non-operating in nature.

For the three months ended October 31, 2014, we made adjustments to net income and diluted EPS to exclude amortization expense and acquisition related items impacting current operating performance including transaction and integration charges and ongoing fair value adjustments to arrive at our non-GAAP financial measures, adjusted net income and adjusted diluted EPS. For the three months ended October 31, 2013, we made adjustments to net income and diluted EPS to exclude amortization expense to arrive at our non-GAAP financial measures. Acquisition related items were not incurred for the three months ended October 31, 2013.

Amortization expense is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduced the Company's net income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and invest in our continued growth.

Acquisition related items consist of (i) fair value adjustments to contingent consideration and other contingent liabilities resulting from acquisitions, (ii) due diligence, integration, legal fees and other transaction costs associated with specific acquisitions and (iii) acquisition accounting charges for the amortization of the initial fair value adjustments of acquired inventory and deferred revenue. The adjustments of contingent consideration and other contingent liabilities are periodic adjustments to record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the determination of fair value calculations, fair value adjustments may potentially cause significant earnings volatility that are not representative of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with specific acquisitions, including acquisition accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since all of these acquisition related items are atypical and often mask underlying operating performance, we excluded these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.

For the three months ended October 31, 2014, the reconciliations of net income and diluted EPS with adjusted net income and 

adjusted diluted EPS were as follows:

As Reported,

Acquisition

Non-GAAP

(In thousands)

Three Months Ended

Intangible

Related

Three Months Ended

(unaudited)

October 31, 2014

Amortization

Items

October 31, 2014

Net sales

$               136,811

$              -

$             -

$               136,811

Cost of sales

76,297

-

(667)

75,630

Gross profit

60,514

-

667

61,181

Expenses:

  Selling

19,411

-

-

19,411

  General and administrative

18,507

(2,956)

(589)

14,962

  Research and development

3,549

-

-

3,549

Total operating expenses

41,467

(2,956)

(589)

37,922

Income before interest and income taxes

19,047

2,956

1,256

23,259

Interest expense, net

534

-

-

534

Income before income taxes

18,513

2,956

1,256

22,725

Income taxes

7,274

1,102

164

8,540

Net income/Adjusted net income

$                 11,239

$       1,854

$     1,092

$                 14,185

Diluted EPS/Adjusted diluted EPS

$                     0.27

$         0.04

$       0.03

$                     0.34

For the three months ended October 31, 2013, the reconciliations of net income and diluted EPS with adjusted net income and 

adjusted diluted EPS were as follows:

As Reported,

Acquisition

Non-GAAP

(In thousands)

Three Months Ended

Intangible

Related

Three Months Ended

(unaudited)

October 31, 2013

Amortization

Items

October 31, 2013

Net sales

$               118,272

$           -

$         -

$               118,272

Cost of sales

66,773

-

-

66,773

Gross profit

51,499

-

-

51,499

Expenses:

  Selling

15,764

-

-

15,764

  General and administrative

15,164

(2,626)

-

12,538

  Research and development

2,259

-

-

2,259

Total operating expenses

33,187

(2,626)

-

Income before interest and income taxes

18,312

2,626

-

20,938

Interest expense, net

644

-

-

644

Income before income taxes

17,668

2,626

-

20,294

Income taxes

6,483

977

-

7,460

Net income/Adjusted net income

$                 11,185

$       1,649

$         -

$                 12,834

Diluted EPS/Adjusted diluted EPS

$                     0.27

$         0.04

$         -

$                     0.31