CMD Cantel Medical Corp

CANTEL MEDICAL CORP. 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

Three Months Ended

Six Months Ended

January 31,

January 31,

2016

2015

2016

2015

Net sales

$   158,271

$   135,430

$ 312,050

$ 272,241

Cost of sales

85,934

74,839

168,515

151,136

Gross profit

72,337

60,591

143,535

121,105

Expenses:

  Selling

22,620

19,257

44,080

38,668

  General and administrative

22,252

19,822

44,449

38,329

  Research and development

3,069

3,211

6,834

6,760

Total operating expenses

47,941

42,290

95,363

83,757

Income from operations

24,396

18,301

48,172

37,348

Interest expense, net  

871

646

1,616

1,180

Income before income taxes

23,525

17,655

46,556

36,168

Income taxes

8,136

6,570

16,913

13,844

Net income 

$     15,389

$     11,085

$  29,643

$  22,324

Earnings per common share - diluted  

$         0.37

$        0.27

$      0.71

$      0.54

Dividends per common share 

$               -

$        0.05

$      0.06

$      0.05

Weighted average shares - diluted 

41,748

41,584

41,708

41,569

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

January 31,

July 31,

2016

2015

                    Assets

     Current assets

$     196,546

$     188,361

     Property and equipment, net

69,995

62,541

     Intangible assets, net

113,805

85,836

     Goodwill

277,847

241,951

     Other assets

5,135

5,342

$     663,328

            Liabilities and stockholders' equity

     Current liabilities

$       66,107

$       70,624

     Long-term debt

133,500

78,500

     Other long-term liabilities 

36,269

28,274

     Stockholders' equity

427,452

406,633

$     663,328

$     584,031

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 (i) adjusted net income, (ii) adjusted diluted earnings per share ("EPS"), (iii) income before interest, taxes, depreciation, amortization and stock-based compensation expense ("EBITDAS"), (iv) EBITDAS adjusted for atypical items ("Adjusted EBITDAS") and (v) net debt. 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.

Reconciliations 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 and six months ended January 31, 2016 and 2015, we made adjustments to net income and diluted EPS to exclude (i) amortization expense, (ii) acquisition related items impacting current operating performance including transaction and integration charges and ongoing fair value adjustments and (iii) with respect to the current year periods, the impact of favorable tax legislation to arrive at our non-GAAP financial measures, adjusted net income and adjusted EPS.

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.

Tax legislation was enacted in the United States and internationally that enabled us to record favorable tax benefits in our second quarter of fiscal 2016 relating to the entire calendar 2015. Since these favorable tax benefits are largely unrelated to our second quarter's income before taxes and is unrepresentative of our normal effective tax rate, we excluded its impact on net income and EPS for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current performance and a comparison to past performance.

The reconciliations of net income to adjusted net income were calculated as follows:

   Three Months Ended

   Six Months Ended

(Amounts in thousands)

January 31,

January 31,

(Unaudited)

2016

2015

2016

2015

Net Income, as reported

$         15,389

$         11,085

$    29,643

$    22,324

Intangible amortization (1)

3,297

3,232

6,391

6,188

Acquisition related items (2)

597

2,256

1,531

3,512

Income tax benefit on above adjustments

(1,070)

(1,476)

(2,232)

(2,742)

Tax legislative changes (3)

(800)

-

(800)

-

Adjusted net income

$         17,413

$         15,097

$    34,533

$    29,282

(1) Amounts are recorded in general and administrative expenses.

(2) For the three and six months ended January 31, 2016, acquisition related items of $311,000 and $571,000, respectively, were recorded in cost of sales and $286,000 and $960,000, respectively, were recorded in general administrative expenses. For the three and six months ended January 31, 2015, acquisition related items of $876,000 and $1,543,000, respectively, were recorded in cost of sales and $1,380,000 and $1,969,000, respectively, were recorded in general administrative expenses.

(3) Amounts are recorded in income taxes.

The reconciliations of diluted EPS to adjusted diluted EPS were calculated as follows:

   Three Months Ended

  Six Months Ended

January 31,

January 31,

(Unaudited)

2016

2015

2016

2015

Diluted EPS, as reported

$             0.37

$             0.27

$        0.71

$        0.54

Intangible amortization, net of tax

0.06

0.05

0.11

0.10

Acquisition related items, net of tax

0.01

0.04

0.03

0.07

Tax legislative changes

(0.02)

-

(0.02)

-

Adjusted diluted EPS (1)

$             0.42

$             0.36

$        0.83

$        0.70

(1) The summation of diluted EPS for the six months ended January 31, 2015 does not equal the adjusted diluted EPS of $0.70 due to rounding.

Reconciliation of EBITDAS and Adjusted EBITDAS with Net Income

We believe 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, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a complement to operating income, net income and other GAAP financial performance measures.

We define Adjusted EBITDAS as EBITDAS excluding the same atypical items as previously described as adjustments to net income. We use Adjusted EBITDAS when evaluating the operating performance of the Company because we believe the exclusion of such atypical items, of which a significant portion are non-cash items, is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period.

The reconciliations of EBITDAS and Adjusted EBITDAS with net income were calculated as follows:

Three Months Ended

Six Months Ended

(Amounts in thousands)

January 31,

January 31,

(Unaudited)

2016

2015

2015

Net income, as reported

$     15,389

$     11,085

$     29,643

$  22,324

Interest expense, net  

871

646

1,616

1,180

Income taxes

8,136

6,570

16,913

13,844

Depreciation

2,871

2,541

5,693

4,853

Amortization

3,297

3,232

6,391

6,188

Loss on disposal of fixed assets

11

24

111

37

Stock-based compensation expense

1,875

1,420

3,595

3,001

EBITDAS

32,450

25,518

63,962

51,427

Acquisition related items

597

2,256

1,531

3,512

Adjusted EBITDAS

$     33,047

$     27,774

$     65,493

$  54,939

Reconciliation of Debt with Net Debt 

We define net debt as long-term debt less cash and cash equivalents. Each of the components of net debt appears in the Condensed Consolidated Balance Sheets. We believe that the presentation of net debt provides useful information to investors because we review net debt as part of our management of our overall liquidity, financial flexibility, capital structure and leverage.

The reconciliations of debt with net debt were calculated as follows:

(Amounts in thousands)

January 31,

July 31,

(Unaudited)

2016

2015

Long-term debt

$    133,500

$     78,500

Less cash and cash equivalents

(21,604)

(31,720)

Net debt

$    111,896

$     46,780