Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel and its subsidiaries. The MD&A is provided as a supplement to and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report.
Overview
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Endoscopy, Water Purification and Filtration, Healthcare Disposables and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections. We operate our four operating segments through wholly-owned subsidiaries in the United States and internationally.
Fiscal 2017 Highlights
Some of our key financial results for fiscal
2017
compared with fiscal
2016
were as follows:
|
|
•
|
Net sales increased by
15.9%
to $
770,157
from
$664,755
, with organic sales growth of
11.0%
,
|
|
|
•
|
Net income increased by
19.1%
to
$71,378
from
$59,953
,
|
|
|
•
|
Non-GAAP net income* increased by
18.9%
to
$86,740
from
$72,938
,
|
|
|
•
|
Diluted EPS increased by
18.9%
to
$1.71
from
$1.44
,
|
|
|
•
|
Non-GAAP diluted EPS* increased by
18.7%
to
$2.08
from
$1.75
, and
|
|
|
•
|
Adjusted EBITDAS* increased by
17.0%
to
$161,466
from
$137,949
.
|
* See Non-GAAP Financial Measures below.
Recent Developments
On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Hygienetechnik Holding GmbH (“BHT Group”), a leader in the German market in automated endoscope reprocessing and related equipment and services, for total consideration, excluding acquisition related costs, of
$61,236
. The BHT Group consists of a portfolio of high-quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products globally distributed by our Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central sterile applications, associated technical service and parts as well as flexible endoscope repair services. BHT Group will be included in our Endoscopy segment.
Acquisitions
Fiscal 2017
On April 1, 2017, we purchased certain endoscopy-related net assets of CR Kennedy, related to its distribution and sale of our Medivators endoscopy products in Australia for total consideration, excluding acquisition related costs, of
$11,999
. The CR Kennedy business includes a full sales and service organization and our exclusive distributor of Medivators-branded automated endoscope reprocessors, chemistries, endoscopy procedure products and other consumables in Australia, and is included in our Endoscopy segment.
On September 26, 2016, we acquired certain net assets of Vantage, related to its distribution and sale of our Medivators endoscopy products in Canada for total consideration, excluding acquisition-related costs, of
$4,044
. Vantage was our exclusive distributor of Medivators capital equipment (e.g., automated endoscope reprocessors) and related consumables and accessories in Canada, and is included in our Endoscopy segment.
On August 1, 2016, we acquired all of the issued and outstanding stock of Accutron, a Phoenix-based company for total consideration, excluding acquisition-related costs, of
$53,049
. The Accutron business designs, manufactures and sells nitrous oxide conscious sedation equipment and single use nasal masks for use in dental procedures, and is included in our Healthcare Disposables segment.
(dollar amounts in thousands except share and per share data or as otherwise specified)
23
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Fiscal 2016
On March 1, 2016, we acquired certain net assets of North American Science Associates, Inc.’s Sterility Assurance Monitoring Products Division ("NAMSA") for total consideration, excluding acquisition-related costs, of
$13,424
. The NAMSA business manufactures a broad suite of high-quality biological and chemical indicators which are used to accurately monitor the effectiveness of sterilization processes primarily for manufacturers of medical device, life science and other products, and is included in our Healthcare Disposables segment.
On September 14, 2015, we acquired all of the issued and outstanding stock of Medical Innovations Group Holdings Ltd. ("MI"), a company providing specialized endoscopy medical devices and products primarily in the United Kingdom for total consideration, excluding acquisition-related costs, of
$79,597
. The MI business includes proprietary short-term and long-term endoscope transport and storage systems, a comprehensive range of endoscopic consumable accessories, OEM mobile medical carts, as well as specialized products for patient warming and patient transfer, and is included in our Endoscopy segment.
See Note 3 to our consolidated financial statements in Part II, Item 8 of this report.
Results of Operations
The following table gives information as to the percentages of net sales represented by selected items reflected in our consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31
|
|
Percentage Change
|
Statement of Income Data:
|
2017
|
|
2016
|
|
2015
|
|
2017 / 2016
|
|
2016 / 2015
|
Net sales
|
$
|
770,157
|
|
100.0
|
%
|
|
$
|
664,755
|
|
100.0
|
%
|
|
$
|
565,004
|
|
100.0
|
%
|
|
15.9
|
%
|
|
17.7
|
%
|
Cost of sales
|
402,997
|
|
52.3
|
%
|
|
355,569
|
|
53.5
|
%
|
|
311,537
|
|
55.1
|
%
|
|
13.3
|
%
|
|
14.1
|
%
|
Gross profit
|
367,160
|
|
47.7
|
%
|
|
309,186
|
|
46.5
|
%
|
|
253,467
|
|
44.9
|
%
|
|
18.8
|
%
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
116,113
|
|
15.1
|
%
|
|
99,062
|
|
14.9
|
%
|
|
80,787
|
|
14.3
|
%
|
|
17.2
|
%
|
|
22.6
|
%
|
General and administrative
|
122,270
|
|
15.9
|
%
|
|
97,463
|
|
14.7
|
%
|
|
77,897
|
|
13.8
|
%
|
|
25.5
|
%
|
|
25.1
|
%
|
Research and development
|
18,367
|
|
2.4
|
%
|
|
15,410
|
|
2.3
|
%
|
|
14,022
|
|
2.5
|
%
|
|
19.2
|
%
|
|
9.9
|
%
|
|
256,750
|
|
33.4
|
%
|
|
211,935
|
|
31.9
|
%
|
|
172,706
|
|
30.6
|
%
|
|
21.1
|
%
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
110,410
|
|
14.3
|
%
|
|
97,251
|
|
14.6
|
%
|
|
80,761
|
|
14.3
|
%
|
|
13.5
|
%
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
4,303
|
|
0.5
|
%
|
|
3,320
|
|
0.5
|
%
|
|
2,364
|
|
0.4
|
%
|
|
29.6
|
%
|
|
40.4
|
%
|
Other income
|
(126
|
)
|
—
|
%
|
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Loss on sale of business
|
—
|
|
—
|
%
|
|
—
|
|
—
|
%
|
|
2,206
|
|
0.4
|
%
|
|
—
|
%
|
|
(100.0
|
)%
|
Income before income taxes
|
106,233
|
|
13.8
|
%
|
|
93,931
|
|
14.1
|
%
|
|
76,191
|
|
13.5
|
%
|
|
13.1
|
%
|
|
23.3
|
%
|
Income taxes
|
34,855
|
|
4.5
|
%
|
|
33,978
|
|
5.1
|
%
|
|
28,238
|
|
5.0
|
%
|
|
2.6
|
%
|
|
20.3
|
%
|
Net income
|
$
|
71,378
|
|
9.3
|
%
|
|
$
|
59,953
|
|
9.0
|
%
|
|
$
|
47,953
|
|
8.5
|
%
|
|
19.1
|
%
|
|
25.0
|
%
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
24
Cantel Medical Corp. 2017 Annual Report on Form 10-K
The following table gives information as to the net sales by reporting segment and geography, as well as the related percentage of such sales to the total net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
Net Sales by Segment
|
2017
|
|
2016
|
|
2015
|
Endoscopy
|
$
|
398,773
|
|
|
51.8
|
%
|
|
$
|
341,752
|
|
|
51.4
|
%
|
|
$
|
248,654
|
|
|
44.0
|
%
|
Water Purification and Filtration
|
196,446
|
|
|
25.5
|
%
|
|
177,669
|
|
|
26.7
|
%
|
|
173,834
|
|
|
30.8
|
%
|
Healthcare Disposables
|
144,457
|
|
|
18.7
|
%
|
|
112,584
|
|
|
17.0
|
%
|
|
106,920
|
|
|
18.9
|
%
|
Dialysis
|
30,481
|
|
|
4.0
|
%
|
|
32,750
|
|
|
4.9
|
%
|
|
31,240
|
|
|
5.5
|
%
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,356
|
|
|
0.8
|
%
|
Total net sales
|
$
|
770,157
|
|
|
100.0
|
%
|
|
$
|
664,755
|
|
|
100.0
|
%
|
|
$
|
565,004
|
|
|
100.0
|
%
|
Net Sales by Geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
599,657
|
|
|
77.9
|
%
|
|
$
|
515,055
|
|
|
77.4
|
%
|
|
$
|
447,848
|
|
|
79.3
|
%
|
International
|
170,500
|
|
|
22.1
|
%
|
|
149,700
|
|
|
22.6
|
%
|
|
117,156
|
|
|
20.7
|
%
|
Total net sales
|
$
|
770,157
|
|
|
100.0
|
%
|
|
$
|
664,755
|
|
|
100.0
|
%
|
|
$
|
565,004
|
|
|
100.0
|
%
|
The following table gives information as to the amount of operating income, as well as operating income as a percentage of net sales, for each of our reporting segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
Operating Income (including percentage of net sales):
|
2017
|
|
2016
|
|
2015
|
Endoscopy
|
$
|
73,440
|
|
|
18.4
|
%
|
|
$
|
61,021
|
|
|
17.9
|
%
|
|
$
|
40,863
|
|
|
16.4
|
%
|
Water Purification and Filtration
|
33,159
|
|
|
16.9
|
%
|
|
30,620
|
|
|
17.2
|
%
|
|
30,606
|
|
|
17.6
|
%
|
Healthcare Disposables
|
28,000
|
|
|
19.4
|
%
|
|
24,486
|
|
|
21.7
|
%
|
|
19,904
|
|
|
18.6
|
%
|
Dialysis
|
8,154
|
|
|
26.8
|
%
|
|
7,907
|
|
|
24.1
|
%
|
|
6,749
|
|
|
21.6
|
%
|
Other
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
1,118
|
|
|
25.7
|
%
|
Operating income by segment
|
142,753
|
|
|
18.5
|
%
|
|
124,034
|
|
|
18.7
|
%
|
|
99,240
|
|
|
17.6
|
%
|
General corporate expenses
|
32,343
|
|
|
4.2
|
%
|
|
26,783
|
|
|
3.9
|
%
|
|
18,479
|
|
|
3.3
|
%
|
Income from operations
|
$
|
110,410
|
|
|
14.3
|
%
|
|
$
|
97,251
|
|
|
14.6
|
%
|
|
$
|
80,761
|
|
|
14.3
|
%
|
Fiscal 2017 compared with Fiscal 2016
Net Sales
Total net sales increased by
$105,402
or
15.9%
, to
$770,157
in fiscal
2017
from
$664,755
in fiscal
2016
. The
15.9%
increase in net sales for fiscal
2017
includes an increase of
11.0%
in organic sales, an increase of
5.9%
in sales due to acquisitions, partially offset by a decrease of
1.0%
due to foreign currency translation.
International net sales increased by
$20,800
, or
13.9%
, to
$170,500
in fiscal
2017
from
$149,700
in fiscal
2016
. The
13.9%
increase in net sales consist of an increase of
9.2%
in organic sales and an increase of
8.9%
in net sales due to acquisitions, partially offset by a decrease of
4.2%
due to foreign currency translation.
Endoscopy.
Net sales of endoscopy products and services increased by
$57,021
, or
16.7%
, in fiscal
2017
compared with fiscal
2016
. The
16.7%
increase in net sales consist of an increase of
15.0%
in organic net sales and an increase of
3.5%
in net sales due to acquisitions, partially offset by a decrease of
1.8%
due to foreign currency translation. The increase in organic net sales was primarily due to volume increases in the United States and internationally for endoscopy procedure products, storage cabinets and mobile medical carts, and disinfectants and service due to the increased installed base of our endoscope reprocessing equipment. We expect net sales of disinfectants, service, filters and equipment accessories, most of which carry higher margins, to continue to benefit as the installed base of endoscope reprocessing equipment increases.
Water Purification and Filtration.
Net sales of water purification and filtration products and services increased by
$18,777
, or
10.6%
, in fiscal
2017
compared with fiscal
2016
. The
10.6%
increase in net sales was primarily due to an increase in demand for our water purification equipment.
(dollar amounts in thousands except share and per share data or as otherwise specified)
25
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Healthcare Disposables.
Net sales of healthcare disposables products increased by
$31,873
, or
28.3%
, in fiscal
2017
when compared with fiscal
2016
. The
28.3%
increase in net sales consists of an increase of
23.9%
in net sales due to acquisitions and an increase of
4.4%
in organic net sales. The increase in organic net sales was driven by our higher margin products such as sterility assurance and waterline disinfection products, as well as our branded products.
Dialysis.
Net sales of dialysis products and services decreased by
$2,269
, or
6.9%
, in fiscal
2017
when compared with fiscal
2016
, principally due to the decrease in demand for our sterilant product and reprocessing equipment, both internationally and in the United States, due to the continued market shift from reusable to single-use dialyzers, as further described below.
Net sales in our Dialysis segment in recent years have been adversely impacted by the decrease in demand for our sterilants and reprocessing equipment principally due to the shift from reusable to single-use dialyzers as a result of the declining cost of single-use dialyzers and the ease of using a dialyzer one time as well as the commitment of Fresenius, the largest dialysis provider chain in the United States and a manufacturer of single-use dialyzers, to convert dialysis clinics performing reuse to single-use facilities.
We expect the downward trend in reuse dialyzers in the United States to continue during fiscal 2018 and thereafter as the most significant manufacturers of reuse dialyzers have indicated that they will cease manufacturing of such products in the near term. A substantial decrease in the market for reprocessing products is likely to result in a significant loss of net sales and a lower level of profitability and operating cash flow in this segment in the future as well as potential future impairments of long-lived assets. Such reduction would also have a material effect on our consolidated results of operations. See "Risk Factors” in Part I, Item 1A in this report.
Gross Profit
Gross profit increased by
$57,974
or
18.8%
, to
$367,160
in fiscal
2017
from
$309,186
in fiscal
2016
. Gross profit as a percentage of net sales in fiscal
2017
and
2016
was
47.7%
and
46.5%
, respectively. Excluding the impact of acquisition related items, gross profit as a percentage of net sales in fiscal
2017
and
2016
was 47.7% and 46.6%, respectively.
The higher gross profit as a percentage of net sales in fiscal
2017
and
2016
was primarily attributable to (i) more favorable sales mix due to increases in sales volume of certain higher margin products, such as our endoscopy procedure products and disinfectants in our Endoscopy segment and sterility assurance and waterline disinfection products in our Healthcare Disposables segment, (ii) lower manufacturing costs primarily due to cost control initiatives, (iii) increased plant productivity due to increased sales volume and (iv) the favorable impact of the suspension of the U.S. medical device excise tax, partially offset by an increase in net sales of lower margin capital equipment primarily in our Water Purification and Filtration segment and increased warranty charges primarily relating to our water purification equipment.
In December 2015, the Consolidated Appropriations Act of 2016 was signed into law and included a two-year moratorium effective January 1, 2016 on the medical device excise tax, which was a tax on medical device manufacturers in the form of a 2.3% excise tax on all U.S. medical device sales. A significant portion of our net sales are considered U.S. medical device sales and therefore our gross profit percentage will continue to be favorably impacted until the two-year moratorium expires. However, we are investing a significant portion of the savings from this moratorium into sales and marketing, product development and human resources initiatives.
Operating Expenses
Selling expenses increased by
$17,051
, or
17.2%
, to
$116,113
in fiscal
2017
from
$99,062
in fiscal
2016
. In fiscal
2017
, selling expenses increased primarily due to (i) higher commission expense relating to increased net sales in our Endoscopy segment, (ii) increased sales and marketing initiatives to expand into new markets, including international markets, and to gain or maintain market share by hiring and training additional sales and marketing personnel, (iii) the inclusion of selling and marketing expenses of acquisitions, and (iv) an increase in salary and incentive compensation costs. Selling expenses as a percentage of net sales were
15.1%
and
14.9%
in fiscal
2017
and
2016
, respectively.
General and administrative expenses increased by
$24,807
, or
25.5%
, to
$122,270
in fiscal
2017
from
$97,463
in fiscal
2016
. General and administrative expenses increased primarily due to (i) increases in annual salaries and incentive compensation, including stock-based compensation, (ii) the addition of internal and external resources to address various growth initiatives and compliance requirements, (iii) an increase in amortization expense related to recent acquisitions and (iv) severance and other restructuring costs, partially offset by lower acquisition related items such as transaction and integration charges and fair value adjustments. General and administrative expenses as a percentage of net sales were
15.9%
and
14.7%
in fiscal
2017
and
2016
, respectively.
(dollar amounts in thousands except share and per share data or as otherwise specified)
26
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Research and development expenses (which include continuing engineering costs) increased by
$2,957
, or
19.2%
, to
$18,367
in fiscal
2017
from
$15,410
in fiscal
2016
. The increase was primarily due to additional product development initiatives primarily in our Endoscopy segment, including projects relating to recent acquisitions. Research and development expenses as a percentage of net sales were
2.4%
and
2.3%
% in fiscal
2017
and
2016
, respectively.
Operating Income
Endoscopy.
The Endoscopy segment’s operating income increased by
$12,419
, or
20.4%
, in fiscal
2017
compared with fiscal
2016
, primarily due to favorable product mix and increased sales volume in the United States and internationally for our endoscopy products and services, as further explained above and the impact of our recent acquisitions, partially offset by increased compensation-related costs and investments in our sales team and other selling initiatives.
Water Purification and Filtration.
The Water Purification and Filtration segment’s operating income increased by
$2,539
, or
8.3%
, in fiscal
2017
compared with fiscal
2016
, primarily as a result of higher sales, partially offset by (i) increased compensation-related costs, (ii) higher commission expenses, and (iii) lower margins due to increased bad debt and warranty expenses.
Healthcare Disposables.
The Healthcare Disposables segment’s operating income increased by
$3,514
, or
14.4%
, in fiscal
2017
compared with fiscal
2016
, primarily due to the sales impact of our recent acquisition and favorable product mix of both core and acquired products. This was partially offset by increased salary and incentive compensation costs, the hiring of additional sales personnel and commission expense associated with our recent acquisition.
Dialysis.
The Dialysis segment’s operating income increased by
$247
, or
3.1%
in fiscal
2017
compared with fiscal
2016
, primarily due to cost control initiatives, partially offset by lower net sales, as further explained above.
General Corporate Expenses
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition program and being a publicly traded company. Such expenses increased by
$5,560
, or
20.8%
in fiscal
2017
compared with fiscal
2016
, primarily due to (i) various restructuring and business optimization activities, (ii) the addition of internal and external resources to address various growth initiatives and compliance requirements and (iii) increases in compensation-related costs, including stock-based compensation expense, partially offset by a decrease in costs associated with the retirement of our Chief Executive Officer in fiscal 2016.
Interest
Interest expense, net increased by
$983
to
$4,303
in fiscal
2017
from
$3,320
in fiscal
2016
, as a result of an increase in the average outstanding borrowings due to the funding of acquisitions.
Income Taxes
The consolidated effective tax rate decreased by
3.4%
to
32.8%
in fiscal
2017
from
36.2%
in fiscal
2016
, due to the favorable impact recording the excess tax benefits relating to stock awards as a result of the adoption of ASU 2016-09 on August 1, 2016 and the favorable impact in the current year from the retroactive application for the research and experimentation tax credit for fiscal 2016, 2015, and 2014 in Minnesota where our principal research & development activities occur, as further described within Non-GAAP Financial Measures elsewhere in this MD&A. Additionally, the current year consolidated effective tax rate was negatively impacted by increased state tax expense due to expanded presence within various U.S. tax jurisdictions.
Fiscal 2016 compared with Fiscal 2015
Net Sales
Total net sales increased by $99,751 or 17.7%, to $664,755 in fiscal 2016 from $565,004 in fiscal 2015. The 17.7% increase in net sales for fiscal 2016 includes an increase of 12.7% in organic sales, an increase of 5.5% in sales due to acquisitions, partially offset by the divestiture of our specialty packaging business and a decrease of 0.5% due to foreign currency translation.
International net sales increased by $32,544, or 27.8%, to $149,700 in fiscal 2016 from $117,156 in fiscal 2015. The 27.8% increase in net sales consist of an increase of 12.5% in organic sales and an increase of 17.5% in net sales due to acquisitions, partially offset by a decrease of 2.2% due to foreign currency translation.
(dollar amounts in thousands except share and per share data or as otherwise specified)
27
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Endoscopy.
Net sales of endoscopy products and services increased by $93,098, or 37.4%, in fiscal 2016 compared with fiscal 2015. The 37.4% increase in net sales consist of an increase of 28.0% in organic net sales and an increase of 10.2% in net sales due to acquisitions, partially offset by a decrease of 0.8% due to foreign currency translation. The increase in organic net sales was primarily due to increases in demand in the United States and internationally for our (i) endoscopy procedure products (disposable infection control products used in GI endoscopy procedures) due to sales and marketing efforts, (ii) endoscope reprocessing equipment due to our sales and marketing programs and (iii) disinfectants and service due to the increase in the installed base of endoscope reprocessing equipment. These increases were partially offset by overall lower selling prices principally related to endoscopy reprocessing equipment and endoscopy procedure products as a result of our strategic growth plan and increased competition.
Water Purification and Filtration.
Net sales of water purification and filtration products and services increased by $3,835, or 2.2%, in fiscal 2016 compared with fiscal 2015. The 2.2% increase in net sales consist of an increase of 1.0% in organic net sales and an increase of 1.6% in net sales due to acquisitions, partially offset by a decrease of 0.4% due to foreign currency translation. The increase in organic net sales was primarily due to an increase in demand for our sterilants products, service and water purification equipment used for commercial and industrial (large capital) applications.
Healthcare Disposables.
Net sales of healthcare disposables products increased by $5,664, or 5.3%, in fiscal 2016 when compared with fiscal 2015. The 5.3% increase in net sales consist of increase of 0.3% in organic net sales and an increase of 5.0% in net sales due to acquisitions. Organic net sales for fiscal 2016 were similar to fiscal 2015 as the increase in sales of sterility assurance and waterline disinfection products in the fiscal 2016 were offset by the elevated demand during the first half of fiscal 2015 for our face masks and certain sterilization products as a result of customers buying products in advance of certain sales price increases and customer response to the Ebola virus.
Dialysis.
Net sales of dialysis products and services increased by $1,510, or 4.8% in fiscal 2016 when compared with fiscal 2015, principally due to an increase in demand for our concentrate product by a single customer, partially offset by a decrease in demand for our sterilant products and RENATRON
®
reprocessing equipment due to the market shift from reusable to single-use dialyzers.
Gross Profit
Gross profit increased by $55,719 or 22.0%, to $309,186 in fiscal 2016 from $253,467 in fiscal 2015. Gross profit as a percentage of net sales in fiscal 2016 and 2015 was 46.5% and 44.9%, respectively. Excluding the impact of acquisition accounting charges, gross profit as a percentage of net sales in fiscal 2016 and 2015 was 46.7% and 45.2%, respectively.
The higher gross profit as a percentage of net sales in fiscal 2016 and 2015 was primarily attributable to (i) more favorable sales mix due to increases in sales volume of certain products that carry higher gross margin percentages such as our endoscopy procedure products and disinfectants in our Endoscopy segment, sterility assurance and waterline disinfection products in our Healthcare Disposables segment and sterilants and filters in our Water Purification and Filtration segment, (ii) the inclusion of higher margin sales in our Endoscopy and Healthcare Disposables segments as a result of the MI and NAMSA acquisitions, respectively, (iii) lower manufacturing costs and (iv) decrease of $2,334 in medical device excise tax due to the recent moratorium, partially offset by an increase in net sales of lower margin capital equipment primarily in our Endoscopy segment and higher charges for warranty primarily relating to our water purification equipment.
Operating Expenses
Selling expenses increased by $18,275, or 22.6%, to $99,062 in fiscal 2016 from $80,787 in fiscal 2015. In fiscal 2016, selling expenses increased primarily due to (i) higher commission expense relating to increased net sales in our Endoscopy segment, (ii) increased sales and marketing initiatives to expand into new markets, including international markets, and to gain or maintain market share by hiring and training additional sales and marketing personnel and increasing travel budgets in our Endoscopy, Water Purification and Filtration and Healthcare Disposables segments, (iii) the inclusion of selling and marketing expenses of acquisitions, and (iv) increases in annual salaries. These increases were partially offset by a decrease of $884 in selling expense for fiscal 2016 relating to our specialty packaging business divested in April 2015. Selling expenses as a percentage of net sales were 14.9% and 14.3% in fiscal 2016 and 2015, respectively.
General and administrative expenses increased by $19,566, or 25.1%, to $97,463 in fiscal 2016 from $77,897 in fiscal 2015. General and administrative expenses increased primarily due to (i) the inclusion of general and administrative expenses of our acquisitions, (ii) the impact of atypical items relating to acquisitions and costs associated with the retirement of our Chief Executive Officer, partially offset by the prior year impairment of an acquired license, as further described below and within Non-GAAP Financial Measures elsewhere in this MD&A, and (iii) increases in annual salaries and incentive compensation including
(dollar amounts in thousands except share and per share data or as otherwise specified)
28
Cantel Medical Corp. 2017 Annual Report on Form 10-K
stock-based compensation. General and administrative expenses as a percentage of net sales were 14.7% and 13.8% in fiscal 2016 and 2015, respectively.
Research and development expenses (which include continuing engineering costs) increased by $1,388, or 9.9%, to $15,410 in fiscal 2016 from $14,022 in fiscal 2015. The increase was primarily due to additional product development initiatives primarily in our Endoscopy segment, including the inclusion of projects relating to acquisitions. Research and development expenses as a percentage of net sales were 2.3% and 2.5% in fiscal 2016 and 2015, respectively.
Operating Income
Endoscopy.
The Endoscopy segment’s operating income increased by $20,158, or 49.3%, in fiscal 2016 compared with fiscal 2015, primarily due to increases in sales in the United States and internationally for our endoscopy products and services, as further explained above, and to a much lesser extent, the inclusion of operating income from acquisitions. These items were partially offset by (i) higher commission expense and other incentive compensation, (ii) increased investment in our sales team and other selling initiatives, (iii) an increase in annual salaries and (iii) the net unfavorable impact from certain items, as further described below and within Non-GAAP Financial Measures elsewhere in this MD&A.
Water Purification and Filtration.
The Water Purification and Filtration segment’s operating income increased slightly in fiscal 2016 compared with fiscal 2015, primarily as a result of higher sales, partially offset by increases in annual salaries, the hiring of additional sales personnel, increased travel budgets and higher charges for warranty related to our water purification equipment.
Healthcare Disposables.
The Healthcare Disposables segment’s operating income increased by $4,582, or 23.0%, in fiscal 2016 compared with fiscal 2015, primarily due to (i) the inclusion of sales relating to acquisitions, (ii) less amortization expense and (iii) lower manufacturing costs, partially offset by increases to annual salaries and the hiring of additional sales personnel.
Dialysis.
The Dialysis segment’s operating income increased by $1,158, or 17.2% in fiscal 2016 compared with fiscal 2015, primarily due to an increase in sales for our low margin concentrate product to a single customer and successful cost control initiatives, partially offset by a decrease in demand for our higher margin sterilant products and RENATRON
®
reprocessing equipment.
General Corporate Expenses
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition program and being a publicly traded company. Such expenses increased by $8,304, or 44.9% in fiscal 2016 compared with fiscal 2015, primarily due to (i) $3,487 of costs recorded in the second half of fiscal 2016 associated with the retirement of our Chief Executive Officer, (ii) the addition of internal and external resources to address various growth initiatives and compliance requirements, (iii) increases in costs associated with our acquisition program and (iv) increases in annual salaries and incentive compensation, including stock-based compensation expense.
Interest
Interest expense, net increased by $956 to $3,320 in fiscal 2016 from $2,364 in fiscal 2015, as a result of an increase in the average outstanding borrowings due to the funding of the MI and NAMSA acquisitions in September 2015 and March 2016, respectively.
Income Taxes
The consolidated effective tax rate decreased by
0.9%
to
36.2%
in fiscal
2016
, from
37.1%
in fiscal 2015, due to the negative impact of the divesture of our specialty packaging business in fiscal 2015 and the favorable impact in fiscal 2016 from the enactment of tax legislation in the United States and internationally, partially offset by higher non-deductible acquisition related items in fiscal 2016, as further described within Non-GAAP Financial Measures elsewhere in this MD&A. Additionally, the fiscal 2016 consolidated effective tax rate was favorably impacted by improved operating results of our international operations, which are located in lower tax rate jurisdictions.
(dollar amounts in thousands except share and per share data or as otherwise specified)
29
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Non-GAAP Financial Measures
In evaluating our operating performance, we supplement the reporting of our financial information determined under generally accepted accounting principles in the United States (“GAAP”) with certain non-GAAP financial measures including (i) non-GAAP net income; (ii) non-GAAP earnings per diluted share ("EPS"); (iii) earnings before interest, taxes, depreciation, amortization, loss on disposal of fixed assets, and stock-based compensation expense (“EBITDAS”); (iv) adjusted EBITDAS; (v) net debt; and (vi) organic sales. These non-GAAP financial measures are indicators of the Company's performance that are 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, stockholders and other readers of our 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.
To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are examples of the types of adjustments that are excluded: (i) amortization of purchased intangible assets; (ii) acquisition related items; (iii) business optimization and restructuring-related charges; (iv) certain significant and discrete tax matters; and (v) other significant items management deems irregular or non-operating in nature.
Amortization expense of purchased intangible assets 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 our acquisition program 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 our acquisition program, 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 these acquisition related items are irregular 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.
As a result of the adoption of a new accounting standard on August 1, 2016, as further described in Note 2, Note 11 and Note 15 of the consolidated financial statements in Part II, Item 8 of this report, we no longer record excess tax benefits as an adjustment to additional paid-in capital, but record such excess tax benefits on a prospective basis as a reduction of income tax expense, which amounted to $2,241 in fiscal 2017. The magnitude of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon our future grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on grant date and the exercise behavior of our stock option holders. Since these favorable tax benefits are largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded its impact on net income and diluted EPS for fiscal 2017 to arrive at our non-GAAP financial measures.
In fiscal 2016, we announced the retirement plans of our Chief Executive Officer and recorded the majority of the costs associated with his retirement in our consolidated financial statements. Since these costs are irregular and mask our underlying operating performance, we made an adjustment to our net income and diluted EPS for fiscal 2017 and 2016 to exclude such costs to arrive at our non-GAAP financial measures.
Tax legislation was enacted in the United States and internationally that enabled us to record favorable tax benefits in the second quarter of fiscal 2016 relating to the 2015 calendar year. Since these favorable tax benefits were largely unrelated to fiscal 2016, we excluded its impact on net income and diluted EPS for fiscal 2016 for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current performance and a comparison to past performance.
(dollar amounts in thousands except share and per share data or as otherwise specified)
30
Cantel Medical Corp. 2017 Annual Report on Form 10-K
On April 7, 2015, we completed the sale of our specialty packaging business that resulted in a $2,206 loss, or $0.04 in diluted EPS. This was recorded as a loss on sale of business in our consolidated statements of income. Since the divestiture of a business is infrequent and non-operating in nature and the loss on sale masks our underlying operating performance, we excluded the loss on sale of business for purposes of calculating these non-GAAP financial measures for fiscal 2015.
In Fiscal 2015, we recorded an impairment loss of $1,287 associated with an acquired license, which was recorded in general and administrative expenses in the consolidated statements of income. Since the acquisition of the license and subsequent impairment were outside our standard endoscopy business operations, we excluded the impairment of the acquired license 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.
Fiscal 2017
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition related items, (iii) costs associated with the retirement of our former Chief Executive Officer and (iv) other business optimization and restructuring-related charges to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
Fiscal 2016
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition related items, (iii) costs associated with the retirement of our former Chief Executive Officer, (iv) other business optimization and restructuring-related charges and (v) the favorable impact of tax legislation to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
Fiscal 2015
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition related items, (iii) the loss on sale of our specialty packaging business and (iv) the impairment of an acquired license to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income/Diluted EPS, as reported
|
$
|
71,378
|
|
|
$
|
1.71
|
|
|
$
|
59,953
|
|
|
$
|
1.44
|
|
|
$
|
47,953
|
|
|
$
|
1.15
|
|
Intangible amortization, net of tax
(1)
|
12,800
|
|
|
0.30
|
|
|
9,283
|
|
|
0.22
|
|
|
8,778
|
|
|
0.21
|
|
Acquisition related items, net of tax
(2)
|
1,533
|
|
|
0.04
|
|
|
2,290
|
|
|
0.06
|
|
|
747
|
|
|
0.02
|
|
CEO retirement costs, net of tax
(1)
|
1,213
|
|
|
0.03
|
|
|
2,212
|
|
|
0.05
|
|
|
—
|
|
|
—
|
|
Restructuring related charges, net of tax
(1)
|
2,057
|
|
|
0.05
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Excess tax benefit
(3)
|
(2,241
|
)
|
|
(0.05
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss on sale of business, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,746
|
|
|
0.04
|
|
Impairment of acquired license, net of tax
(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
815
|
|
|
0.02
|
|
Tax legislative changes
(3)
|
—
|
|
|
—
|
|
|
(800
|
)
|
|
(0.02
|
)
|
|
—
|
|
|
—
|
|
Non-GAAP net income/Non-GAAP diluted EPS
|
$
|
86,740
|
|
|
$
|
2.08
|
|
|
$
|
72,938
|
|
|
$
|
1.75
|
|
|
$
|
60,039
|
|
|
$
|
1.44
|
|
________________________________________________
|
|
(1)
|
Amounts were recorded in general and administrative expenses.
|
|
|
(2)
|
In fiscal 2017, pre-tax acquisition related items of $353 were recorded in cost of sales and $2,094 were recorded in general and administrative expenses. In fiscal 2016, pre-tax acquisition related items of $959 were recorded in cost of sales and $2,254 were recorded in general and administrative expenses. In fiscal 2015, pre-tax acquisition related items of $1,981 were recorded in cost of sales and a $402 favorable pre-tax benefit was recorded in general and administrative expenses.
|
|
|
(3)
|
Amounts are recorded in income taxes.
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
31
Cantel Medical Corp. 2017 Annual Report on Form 10-K
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 have on the Company’s net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased 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 non-GAAP adjustments to net income discussed previously in this document. We use adjusted EBITDAS when evaluating the operating performance of the Company because we believe the exclusion of such adjustments, 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 net income to EBITDAS and adjusted EBITDAS were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income, as reported
|
$
|
71,378
|
|
|
$
|
59,953
|
|
|
$
|
47,953
|
|
Interest expense, net
|
4,303
|
|
|
3,320
|
|
|
2,364
|
|
Income taxes
|
34,855
|
|
|
33,978
|
|
|
28,238
|
|
Depreciation
|
15,045
|
|
|
11,989
|
|
|
10,692
|
|
Amortization
|
18,407
|
|
|
13,095
|
|
|
13,265
|
|
Loss on disposal of fixed assets
|
966
|
|
|
553
|
|
|
360
|
|
Stock-based compensation expense
|
8,844
|
|
|
8,361
|
|
|
5,867
|
|
EBITDAS
|
153,798
|
|
|
131,249
|
|
|
108,739
|
|
Acquisition related items
|
2,447
|
|
|
3,213
|
|
|
1,579
|
|
CEO retirement costs
|
1,937
|
|
|
3,487
|
|
|
—
|
|
Restructuring related charges
|
3,284
|
|
|
—
|
|
|
—
|
|
Loss on sale of business
|
—
|
|
|
—
|
|
|
2,206
|
|
Impairment of acquired license
|
—
|
|
|
—
|
|
|
1,287
|
|
Adjusted EBITDAS
|
$
|
161,466
|
|
|
$
|
137,949
|
|
|
$
|
113,811
|
|
We define net debt as long-term debt less cash and cash equivalents. Each of the components of net debt appears on our 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
|
2015
|
Long-term debt
|
$
|
126,000
|
|
|
$
|
116,000
|
|
|
$
|
78,500
|
|
Less cash and cash equivalents
|
(36,584
|
)
|
|
(28,367
|
)
|
|
(31,720
|
)
|
Net debt
|
$
|
89,416
|
|
|
$
|
87,633
|
|
|
$
|
46,780
|
|
We define organic sales as net sales less (i) the impact of foreign currency translation and (ii) net sales related to acquired businesses during the first twelve months of ownership and (iii) divestures during the periods being compared. We believe that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior periods. We exclude the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions because the nature, size, and number of acquisitions can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult. The reconciliation of net sales to organic sales can be found elsewhere in this MD&A in “Fiscal 2017 compared with Fiscal 2016.”
(dollar amounts in thousands except share and per share data or as otherwise specified)
32
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions of businesses and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we supplement operating cash flow with borrowings from our revolving credit facility to fund our business activities.
Cash Flows
Net Cash Provided by Operating Activities.
Net cash provided by operating activities increased by
$27,925
, or
34.8%
, to
$108,193
for fiscal
2017
from
$80,268
for fiscal
2016
, primarily due to the increase in net income (after adjusting for non-cash items) and decreases in inventory levels (net of acquisitions), partially offset by decreases in accounts payable (due to timing of payments). Net cash provided by operating activities increased by
$21,198
, or
35.9%
, to
$80,268
for fiscal
2016
from
$59,070
for fiscal
2015
, primarily due to the increase in net income (after adjusting for non-cash items) and increases in accounts payable and other current liabilities (due to the timing of payments), partially offset by increases in inventories (due to planned strategic increases in stock levels of certain products primarily in our Endoscopy segment) and accounts receivables (due to strong sales of endoscopy products and services).
Net Cash Used in Investing Activities.
Net cash used in investing activities decreased by
$15,920
, or
14.1%
, to
$97,062
for fiscal
2017
from
$112,982
for fiscal
2016
, primarily due to a decrease in cash consideration paid for acquisitions, partially offset by an increase in capital expenditures. Net cash used in investing activities increased by
$60,688
, or
116.1%
, to
$112,982
for fiscal
2016
from
$52,294
for fiscal
2015
, primarily due to an increase in cash consideration paid for acquisitions. During fiscal 2017, 2016 and 2015 net cash used in investing activities included capital expenditures of
$27,065
,
$18,889
and
$12,760
, respectively, which included expenditures for building improvements and purchases of manufacturing and computer equipment.
Net Cash Provided by (used in) Financing Activities.
Net cash provided by (used in) financing activities increased by
$32,693
, or
109.2%
, to
$2,751
of cash used for fiscal
2017
from
$29,942
provided by for fiscal
2016
. Net cash provided by financing activities increased by
$36,047
, or
590.5%
, to
$29,942
of cash provided for fiscal
2016
from
$6,105
of cash used for fiscal
2015
. The changes in net cash provided by (used in) financing activities were primarily due to borrowings under our revolving credit facility to fund acquisitions, offset by repayments under our credit facility.
Dividends
For a discussion of our dividend policy, see the information set forth under the heading "Dividends" in Part II, Item 5 of this report.
Debt
On March 4, 2014, we entered into a $250,000 Third Amended and Restated Credit Agreement (the “2014 Credit Agreement”). The 2014 Credit Agreement includes a five-year $250,000 senior secured revolving facility with sublimits of up to $100,000 for borrowings in foreign currencies, $30,000 for letters of credit and $10,000 for swing line loans (the “2014 Revolving Credit Facility”). Subject to the satisfaction of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the 2014 Revolving Credit Facility by an aggregate amount not to exceed $100,000. The 2014 Credit Agreement expires on March 4, 2019. Additionally, subject to certain restrictions and conditions (i) any of our domestic or foreign subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies.
On
July 31, 2017
, we had
$126,000
of outstanding borrowings under the 2014 Credit Agreement. Subsequent to
July 31, 2017
, we borrowed
$61,300
to fund the purchase price and transaction costs of the BHT acquisition.
Borrowings under the 2014 Credit Agreement bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at rates ranging from 1.25% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2014 Credit Agreement (“Consolidated EBITDA”). The 2014 Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio.
For further information regarding the 2014 Credit Agreement, including a description of affirmative and negative covenants, see Note 10 to our consolidated financial statements in Part II, Item 8 of this report.
(dollar amounts in thousands except share and per share data or as otherwise specified)
33
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Financing Needs
On July 31, 2017, our long-term debt of
$126,000
, net of our cash and cash equivalents of
$36,584
, was
$89,416
. Stockholders' equity as of that date was
$523,932
.
Our operating segments generate significant cash from operations. At
July 31, 2017
, we had a cash balance of
$36,584
, of which $15,032 was held by foreign subsidiaries. Our foreign cash is needed by our foreign subsidiaries for working capital purposes as well as for current international growth initiatives. Accordingly, our foreign unremitted earnings are considered permanently reinvested and unavailable for repatriation.
We believe that our current cash position, anticipated cash flows from operations and the funds available under our 2014 Credit Agreement will be sufficient to satisfy our worldwide cash operating requirements for the foreseeable future based upon our existing operations, particularly given that we historically have not needed to borrow for working capital purposes. At September 28, 2017, approximately $76,000 was available under our 2014 Credit Agreement.
Inflation
Although overall inflation did not have a significant effect on our business, an increase in commodity prices can adversely affect our gross margins. Specifically, our businesses can be adversely impacted by rising fuel and oil prices and are heavily reliant on certain raw materials, such as chemicals, paper, resin, stainless steel and plastic components. From time to time, we experience price increases for raw materials. If we are unable to implement price increases to our customers, our gross margins could be adversely affected.
Compensation Agreements
We have previously entered into various severance contracts with executives of the Company, including our corporate executive officers and certain of our subsidiary Chief Executive Officers, which define certain compensation arrangements relating to various employment termination scenarios, and multi-year employment agreements with certain executive officers of businesses we have acquired. Additionally, in March 2016 we entered into a succession plan agreement due to the planned retirement of our Chief Executive Officer who was succeeded on July 31, 2016, but remained employed as a senior advisor until October 15, 2016. This succession plan agreement requires future payments to our former Chief Executive Officer beginning in fiscal 2017 for transition-related services. The majority of those future payments were recorded in general and administrative expenses from March 17, 2016 through his October 15, 2016 retirement date.
Other Long-Term Obligations
Other long-term obligations include monies owed to the central bank of Italy related to a liability assumed as part of the International Medical Service S.r.l. acquisition in fiscal 2015 and deferred compensation arrangements for certain former Medivators directors and officers and is recorded in other long-term liabilities.
Commitments and Contractual Obligations
As of
July 31, 2017
, aggregate annual required payments over the next five years and thereafter under our contractual obligations that have long-term components are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
Maturity of the credit facility
|
$
|
—
|
|
|
$
|
126,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
126,000
|
|
Expected interest payments under the credit facility
|
3,150
|
|
|
1,838
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,988
|
|
Minimum commitments under noncancelable operating leases
|
6,522
|
|
|
5,278
|
|
|
3,779
|
|
|
2,719
|
|
|
1,231
|
|
|
2,454
|
|
|
21,983
|
|
Compensation agreements
|
7,836
|
|
|
1,210
|
|
|
510
|
|
|
384
|
|
|
292
|
|
|
292
|
|
|
10,524
|
|
Other long-term obligations
|
202
|
|
|
220
|
|
|
12
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
437
|
|
Total contractual obligations
|
$
|
17,710
|
|
|
$
|
134,546
|
|
|
$
|
4,301
|
|
|
$
|
3,106
|
|
|
$
|
1,523
|
|
|
$
|
2,746
|
|
|
$
|
163,932
|
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
34
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related 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.
Our significant accounting policies are described more fully in Note 2 to our consolidated financial statements in Part II, Item 8 of this report. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is determined based upon the FOB terms specified for each shipment. With respect to endoscopy and dialysis products, shipment terms are generally FOB origin for common carrier and when our distribution fleet is utilized (except for three customers in our Water Purification and Filtration segment and several customers in our Endoscopy segment 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 and endoscopy product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s 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 have been substantially fulfilled such that the products are deemed functional by the end-user. 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.
A portion of our endoscopy, water purification and filtration and dialysis sales are recognized as multiple element arrangements, whereby revenue is allocated to the equipment, installation and consumable components based upon vendor specific objective evidence, which includes comparable historical transactions of similar equipment, installation and consumables 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 and consumables components are recognized as the equipment or consumable is shipped to customers and title passes. Revenue on the installation component is recognized when the installation is complete.
A portion of our healthcare disposables sales relating to the mail-in spore test kit is recorded as deferred revenue when initially sold. We recognize the revenue on these test kits using an estimate based on historical experience of the amount of time that elapses from the point of sale to when the kit is returned to us and we communicate to the customer the results of the required laboratory test. The related cost of the kits is recorded in inventory and recognized in cost of sales as the revenue is earned.
Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at our facilities and the products are shipped to customers. With respect to certain service contracts in our Endoscopy and Water Purification and Filtration operating segments, service revenue is recognized on a straight-line basis over the contractual term of the arrangement.
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 product sales in each segment. 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, healthcare disposables, water purification and filtration and endoscopy customers, rebates are provided. Such rebates, which consist primarily of volume rebates, are provided for as a reduction of sales at the time of revenue recognition, and amounted to
$6,291
,
$5,944
, and
$5,597
in fiscal
2017
,
2016
, and
2015
, 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 rebate provisions originally established would be adjusted accordingly.
(dollar amounts in thousands except share and per share data or as otherwise specified)
35
Cantel Medical Corp. 2017 Annual Report on Form 10-K
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 management’s expectations and provisions established, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Alternatively, if certain customers paid their delinquent receivables, reductions in allowances may be required.
Inventories
Inventories consist of raw materials, work-in-process and finished products which are sold in the ordinary course of our business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, we must make estimates and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the saleable condition of products. In performing such evaluations, we use historical experience as well as current market information. With few exceptions, the saleable value of our inventories has historically been within management’s expectation and provisions established, however, rapid changes in the market due to competition, technology and various other factors could impact 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 responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations.
While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly dependent on management’s projections of our future operating results and cash flows (which management believes to be reasonable), discount rates based on the Company’s 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 and earnings forecasts. Subsequent changes in these assumptions and estimates could result in future impairment. Although we consistently use the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results.
Long-Lived Assets
We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. With the exception of the impairment on an acquired license as further described in Note 6 to our consolidated financial statements in Part II, Item 8 of this report, 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. On July 31, 2017, management concluded that no other events or changes in circumstances have occurred that would indicate that the carrying amount of our long-lived assets may not be recoverable.
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 certain endoscopy and water purification and filtration products that require installation may carry a warranty period of up to twenty-four months. Additionally, many of our consumables, accessories, parts and service have a 90 day warranty. 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
36
Cantel Medical Corp. 2017 Annual Report on Form 10-K
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
Stock compensation expense is recognized for any option or stock award grant based upon the fair value of the award. We estimate the fair value of our stock-based compensation using fair value pricing models which require the use of significant assumptions. The determination of fair value using valuation models is affected by our stock price as well as assumptions regarding a numbers of subjective variables. These variables may include, but are not limited to, the expected stock price volatility over the term of the expected life of the award, the expected dividend yield, the expected life of the award, the probability of meeting performance objectives and the stock price of our peers in the S&P Healthcare Equipment Index.
The stock-based compensation expense recorded in our 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 prior years (which level may not be similar in the future), modifications to existing awards, accelerated vesting related to certain employment terminations, the level of actual forfeitures, the ability to meet performance objectives and assumptions used in determining fair value.
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. Such initial fair value amounts as well as other acquired assets and liabilities, including deferred tax assets and liabilities, are sometimes refined requiring subsequent adjustments.
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 contingent consideration, certain deferred income tax liabilities, income tax and sales and use tax exposures, including tax liabilities related to our foreign subsidiaries, as well as reserves for accounts receivable, inventories, warranties and contingent obligations. We account for contingent consideration relating to business combinations as a liability and an increase to goodwill at the date of the acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through our consolidated statements of income. We determine the fair value of contingent consideration based on future operating projections under various potential scenarios and weight the probability of these outcomes. Similarly, other acquisition related liabilities can be required to be recorded at fair value at the date of the acquisition and continually re-measured at each balance sheet date. The ultimate settlement of liabilities relating to business combinations may be for amounts which are materially different from the amounts initially recorded and may cause volatility in our results of operations.
Off-balance Sheet Arrangements
As of
July 31, 2017
, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Recent Accounting Pronouncements
Refer to Note 2 to the consolidated financial statements in Part II, Item 8 of this report.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cantel Medical Corp.
We have audited the accompanying consolidated balance sheets of Cantel Medical Corp. as of
July 31, 2017
and
2016
, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended
July 31, 2017
. Our audits also included the financial statement schedule included in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cantel Medical Corp. at
July 31, 2017
and
2016
, and the consolidated results of its operations and its cash flows for each of the three years in the period ended
July 31, 2017
, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cantel Medical Corp.’s internal control over financial reporting as of
July 31, 2017
, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated September 28, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
September 28, 2017
(dollar amounts in thousands except share and per share data or as otherwise specified)
39
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cantel Medical Corp.
We have audited Cantel Medical Corp.’s internal control over financial reporting as of
July 31, 2017
, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Cantel Medical Corp.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Accutron, Inc., which is included in the 2017 consolidated financial statements of Cantel Medical Corp. and constituted 7.6% and 10.3% of total and net assets, respectively, as of July 31, 2017, and 3.0% and 4.1% of net sales and net income for the year then ended. Our audit of internal control over financial reporting of Cantel Medical Corp. also did not include an evaluation of the internal control over financial reporting of Accutron, Inc.
In our opinion, Cantel Medical Corp. maintained, in all material respects, effective internal control over financial reporting as of
July 31, 2017
, based on the COSO criteria
.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cantel Medical Corp. as of
July 31, 2017
and
2016
and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended
July 31, 2017
of Cantel Medical Corp. and our report dated September 28, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
September 28, 2017
(dollar amounts in thousands except share and per share data or as otherwise specified)
40
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
36,584
|
|
|
$
|
28,367
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,808 in 2017 and $1,850 in 2016
|
110,656
|
|
|
93,332
|
|
Inventories, net
|
98,724
|
|
|
91,486
|
|
Prepaid expenses and other current assets
|
11,407
|
|
|
9,557
|
|
Total current assets
|
257,371
|
|
|
222,742
|
|
|
|
|
|
Property and equipment, net
|
88,338
|
|
|
74,604
|
|
Intangible assets, net
|
124,512
|
|
|
111,719
|
|
Goodwill
|
311,445
|
|
|
280,318
|
|
Other assets
|
4,707
|
|
|
5,149
|
|
Total assets
|
$
|
786,373
|
|
|
$
|
694,532
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
27,469
|
|
|
$
|
26,263
|
|
Compensation payable
|
27,468
|
|
|
25,555
|
|
Accrued expenses
|
23,393
|
|
|
20,283
|
|
Deferred revenue
|
25,282
|
|
|
20,173
|
|
Income taxes payable
|
3,167
|
|
|
4,061
|
|
Total current liabilities
|
106,779
|
|
|
96,335
|
|
|
|
|
|
Long-term debt
|
126,000
|
|
|
116,000
|
|
Deferred income taxes
|
24,714
|
|
|
23,579
|
|
Other long-term liabilities
|
4,948
|
|
|
4,248
|
|
Total liabilities
|
262,441
|
|
|
240,162
|
|
Commitments and Contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued
|
—
|
|
|
—
|
|
Common Stock, par value $.10 per share; authorized 75,000,000 shares; issued 2017 - 46,194,370 shares, outstanding 2017 - 41,728,934 shares; issued 2016 - 46,084,047 shares, outstanding 2016 - 41,708,214 shares
|
4,619
|
|
|
4,608
|
|
Additional paid-in capital
|
174,602
|
|
|
165,573
|
|
Retained earnings
|
407,590
|
|
|
342,053
|
|
Accumulated other comprehensive loss
|
(9,900
|
)
|
|
(11,795
|
)
|
Treasury Stock, at cost; 2017 - 4,465,440 shares; 2016 - 4,375,833 shares
|
(52,979
|
)
|
|
(46,069
|
)
|
Total stockholders’ equity
|
523,932
|
|
|
454,370
|
|
Total liabilities and stockholders' equity
|
$
|
786,373
|
|
|
$
|
694,532
|
|
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
41
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
684,678
|
|
|
$
|
584,750
|
|
|
$
|
493,656
|
|
Product service
|
85,479
|
|
|
80,005
|
|
|
71,348
|
|
Total net sales
|
770,157
|
|
|
664,755
|
|
|
565,004
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Product sales
|
343,641
|
|
|
300,704
|
|
|
260,903
|
|
Product service
|
59,356
|
|
|
54,865
|
|
|
50,634
|
|
Total cost of sales
|
402,997
|
|
|
355,569
|
|
|
311,537
|
|
|
|
|
|
|
|
Gross profit
|
367,160
|
|
|
309,186
|
|
|
253,467
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling
|
116,113
|
|
|
99,062
|
|
|
80,787
|
|
General and administrative
|
122,270
|
|
|
97,463
|
|
|
77,897
|
|
Research and development
|
18,367
|
|
|
15,410
|
|
|
14,022
|
|
Total operating expenses
|
256,750
|
|
|
211,935
|
|
|
172,706
|
|
|
|
|
|
|
|
Income from operations
|
110,410
|
|
|
97,251
|
|
|
80,761
|
|
|
|
|
|
|
|
Interest expense, net
|
4,303
|
|
|
3,320
|
|
|
2,364
|
|
Other income
|
(126
|
)
|
|
—
|
|
|
—
|
|
Loss on sale of business
|
—
|
|
|
—
|
|
|
2,206
|
|
|
|
|
|
|
|
Income before income taxes
|
106,233
|
|
|
93,931
|
|
|
76,191
|
|
|
|
|
|
|
|
Income taxes
|
34,855
|
|
|
33,978
|
|
|
28,238
|
|
|
|
|
|
|
|
Net income
|
$
|
71,378
|
|
|
$
|
59,953
|
|
|
$
|
47,953
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.71
|
|
|
$
|
1.44
|
|
|
$
|
1.16
|
|
Diluted
|
$
|
1.71
|
|
|
$
|
1.44
|
|
|
$
|
1.15
|
|
Dividends per common share
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
42
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income
|
$
|
71,378
|
|
|
$
|
59,953
|
|
|
$
|
47,953
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Foreign currency translation
|
1,895
|
|
|
(13,019
|
)
|
|
(7,064
|
)
|
Reclassification adjustment to loss on sale of business for foreign currency translation gain included in net income during the year
|
—
|
|
|
—
|
|
|
(1,264
|
)
|
Total other comprehensive income (loss)
|
1,895
|
|
|
(13,019
|
)
|
|
(8,328
|
)
|
|
|
|
|
|
|
Comprehensive income
|
$
|
73,273
|
|
|
$
|
46,934
|
|
|
$
|
39,625
|
|
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
43
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Consolidated Statements of Changes in Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Treasury
Stock,
at cost
|
|
Total Stockholders' Equity
|
|
Common Stock
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balance, July 31, 2014
|
41,442,260
|
|
|
$
|
4,564
|
|
|
$
|
146,048
|
|
|
$
|
243,306
|
|
|
$
|
9,552
|
|
|
$
|
(38,224
|
)
|
|
$
|
365,246
|
|
Exercises of options
|
130,911
|
|
|
13
|
|
|
981
|
|
|
—
|
|
|
—
|
|
|
(386
|
)
|
|
608
|
|
Repurchases of shares
|
(100,286
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,727
|
)
|
|
(3,727
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
5,867
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,867
|
|
Issuance of restricted stock
|
144,278
|
|
|
15
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancellations of restricted stock
|
(12,804
|
)
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Excess tax benefit from exercises of stock options and vesting of restricted stock
|
—
|
|
|
—
|
|
|
3,168
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,168
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,154
|
)
|
|
—
|
|
|
—
|
|
|
(4,154
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
47,953
|
|
|
—
|
|
|
—
|
|
|
47,953
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,328
|
)
|
|
—
|
|
|
(8,328
|
)
|
Balance, July 31, 2015
|
41,604,359
|
|
|
$
|
4,591
|
|
|
$
|
156,050
|
|
|
$
|
287,105
|
|
|
$
|
1,224
|
|
|
$
|
(42,337
|
)
|
|
$
|
406,633
|
|
Repurchases of shares
|
(67,038
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,732
|
)
|
|
(3,732
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
8,361
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,361
|
|
Issuance of restricted stock
|
175,700
|
|
|
17
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancellations of restricted stock
|
(4,807
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Excess tax benefit from exercises of stock options and vesting of restricted stock
|
—
|
|
|
—
|
|
|
1,179
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,179
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,005
|
)
|
|
—
|
|
|
—
|
|
|
(5,005
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
59,953
|
|
|
—
|
|
|
—
|
|
|
59,953
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,019
|
)
|
|
—
|
|
|
(13,019
|
)
|
Balance, July 31, 2016
|
41,708,214
|
|
|
$
|
4,608
|
|
|
$
|
165,573
|
|
|
$
|
342,053
|
|
|
$
|
(11,795
|
)
|
|
$
|
(46,069
|
)
|
|
$
|
454,370
|
|
Repurchases of shares
|
(89,607
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,910
|
)
|
|
(6,910
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
8,844
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,844
|
|
Issuance of restricted stock
|
116,506
|
|
|
12
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancellations of restricted stock
|
(6,179
|
)
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Excess tax benefit from exercises of stock options and vesting of restricted stock
|
—
|
|
|
—
|
|
|
196
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
196
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,841
|
)
|
|
—
|
|
|
—
|
|
|
(5,841
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
71,378
|
|
|
—
|
|
|
—
|
|
|
71,378
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,895
|
|
|
—
|
|
|
1,895
|
|
Balance, July 31, 2017
|
41,728,934
|
|
|
$
|
4,619
|
|
|
$
|
174,602
|
|
|
$
|
407,590
|
|
|
$
|
(9,900
|
)
|
|
$
|
(52,979
|
)
|
|
$
|
523,932
|
|
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
44
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
$
|
71,378
|
|
|
$
|
59,953
|
|
|
$
|
47,953
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
15,045
|
|
|
11,989
|
|
|
10,692
|
|
Amortization
|
18,407
|
|
|
13,095
|
|
|
13,265
|
|
Stock-based compensation expense
|
8,844
|
|
|
8,361
|
|
|
5,867
|
|
Amortization of debt issuance costs
|
401
|
|
|
401
|
|
|
401
|
|
Loss on disposal of fixed assets
|
966
|
|
|
553
|
|
|
360
|
|
Loss on sale of business
|
—
|
|
|
—
|
|
|
2,206
|
|
Impairment of assets
|
—
|
|
|
—
|
|
|
1,287
|
|
Fair value adjustments to acquisition related liabilities
|
(265
|
)
|
|
(687
|
)
|
|
(2,585
|
)
|
Deferred income taxes
|
118
|
|
|
(1,710
|
)
|
|
(1,449
|
)
|
Excess tax benefits from stock-based compensation
|
—
|
|
|
(1,179
|
)
|
|
(3,168
|
)
|
Changes in assets and liabilities, net of effects of business acquisitions/divestiture:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(12,860
|
)
|
|
(12,729
|
)
|
|
(3,905
|
)
|
Inventories
|
887
|
|
|
(15,558
|
)
|
|
(10,075
|
)
|
Prepaid expenses and other current assets
|
(1,005
|
)
|
|
(2,850
|
)
|
|
(2,996
|
)
|
Accounts payable and other current liabilities
|
7,039
|
|
|
17,657
|
|
|
(3,347
|
)
|
Income taxes
|
(895
|
)
|
|
2,972
|
|
|
4,564
|
|
Other assets and liabilities
|
133
|
|
|
—
|
|
|
—
|
|
Net cash provided by operating activities
|
108,193
|
|
|
80,268
|
|
|
59,070
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(27,065
|
)
|
|
(18,889
|
)
|
|
(12,760
|
)
|
Proceeds from disposal of fixed assets
|
47
|
|
|
96
|
|
|
25
|
|
Proceeds from sale of business, net of cash retained and disposal costs
|
—
|
|
|
—
|
|
|
3,767
|
|
Acquisition of businesses, net of cash acquired
|
(70,044
|
)
|
|
(94,528
|
)
|
|
(43,567
|
)
|
Other, net
|
—
|
|
|
339
|
|
|
241
|
|
Net cash used in investing activities
|
(97,062
|
)
|
|
(112,982
|
)
|
|
(52,294
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility
|
74,000
|
|
|
96,500
|
|
|
47,000
|
|
Repayments under revolving credit facility
|
(64,000
|
)
|
|
(59,000
|
)
|
|
(49,000
|
)
|
Proceeds from exercises of stock options
|
—
|
|
|
—
|
|
|
608
|
|
Dividends paid
|
(5,841
|
)
|
|
(5,005
|
)
|
|
(4,154
|
)
|
Excess tax benefits from stock-based compensation
|
—
|
|
|
1,179
|
|
|
3,168
|
|
Purchases of treasury stock
|
(6,910
|
)
|
|
(3,732
|
)
|
|
(3,727
|
)
|
Net cash (used in) provided by financing activities
|
(2,751
|
)
|
|
29,942
|
|
|
(6,105
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(163
|
)
|
|
(581
|
)
|
|
(732
|
)
|
Increase (decrease) in cash and cash equivalents
|
8,217
|
|
|
(3,353
|
)
|
|
(61
|
)
|
Cash and cash equivalents at beginning of period
|
28,367
|
|
|
31,720
|
|
|
31,781
|
|
Cash and cash equivalents at end of period
|
$
|
36,584
|
|
|
$
|
28,367
|
|
|
$
|
31,720
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash interest payments
|
$
|
3,455
|
|
|
$
|
3,001
|
|
|
$
|
1,970
|
|
Cash income tax payments
|
$
|
35,858
|
|
|
$
|
33,559
|
|
|
$
|
25,239
|
|
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
45
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Notes to Consolidated Financial Statements.
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. Unless otherwise indicated, references in this Form 10-K to
2017
,
2016
,
2015
or “fiscal”
2017
,
2016
,
2015
or other years refer to our fiscal year ended July 31 of that respective year, and references to
2017
or “fiscal”
2018
refer to our fiscal year ending July 31,
2018
.
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments:
Endoscopy:
designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.
Water Purification and Filtration:
designs, develops, manufactures, sells and installs water purification systems for medical, pharmaceutical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science markets through a worldwide distributor network.
Healthcare Disposables:
designs, manufactures, sells, supplies and distributes a broad selection of infection prevention healthcare products, the majority of which are single-use products used by dental practitioners.
Dialysis:
designs, develops, manufactures, sells and services reprocessing systems and sterilants for dialyzers (a device serving as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis.
In addition, through April 7, 2015, we had another operating segment, known as Specialty Packaging. This segment included 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. The Specialty Packaging operating segment, which comprised the Other reporting segment for financial reporting purposes, was divested on April 7, 2015. See Note 17, "Information as to Operating Segments and Foreign and Domestic Operations."
Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
|
|
2.
|
Summary of Significant Accounting Policies
|
The following is a summary of our significant accounting policies used to prepare our consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of Cantel and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we evaluate the adequacy of our reserves and the estimates used in calculations of reserves as well as other judgmental financial statement items, including, but not limited to: collectability of accounts receivable, volume rebates and trade-in allowances, inventory values and obsolescence reserves, warranty reserves, contingent consideration, contingent guaranteed obligations, depreciation and amortization periods, deferred income taxes, goodwill and intangible assets, impairment of long-lived assets, unrecognized tax benefits for uncertain tax positions, reserves for legal exposure, stock-based compensation and expense accruals. Such estimates and assumptions are subjective in nature. We reflect such amounts based upon the most recent information available.
Subsequent Events
We have evaluated subsequent events for disclosure through the date of issuance of the accompanying consolidated financial statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
46
Cantel Medical Corp. 2017 Annual Report on Form 10-K
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 endoscopy and dialysis products, shipment terms are generally FOB origin for common carrier and when our distribution fleet is utilized (except for
one
large customer in dialysis and several endoscopy customers 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 and endoscopy product sales, equipment is sold as part of a system for which the equipment is functionally interdependent or the customer’s 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 have been substantially fulfilled such that the products are deemed functional by the end-user. 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.
A portion of our endoscopy, water purification and filtration and dialysis sales are recognized as multiple element arrangements, whereby revenue is allocated to the equipment, installation and consumable components based upon vendor specific objective evidence, which includes comparable historical transactions of similar equipment, installation and consumables 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 and consumables components are recognized as the equipment or consumable is shipped to customers and title passes. Revenue on the installation component is recognized when the installation is complete.
A portion of our healthcare disposables sales relating to the mail-in spore test kit is recorded as deferred revenue when initially sold. We recognize the revenue on these test kits using an estimate based on historical experience of the amount of time that elapses from the point of sale to when the kit is returned to us and we communicate to the customer the results of the required laboratory test. The related cost of the kits is recorded in inventory and recognized in cost of sales as the revenue is earned.
Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at our facilities and the products are shipped to customers. With respect to certain service contracts in our Endoscopy and Water Purification and Filtration operating segments, service revenue is recognized on a straight-line basis over the contractual term of the arrangement.
Our endoscopy products and services are sold directly to hospitals and other end-users in the United States and primarily to distributors internationally except for the United Kingdom, Italy, Netherlands, Singapore, China and Germany where we sell directly to hospitals and other end-users. Water purification and filtration products and services are sold directly to hospitals, dialysis clinics, pharmaceutical and biotechnology companies, laboratories, medical products and service companies and other end-users as well as through third-party distributors. The majority of our healthcare disposable products are sold to third party distributors, and with respect to some of our sterility assurance products, to hospitals, surgery centers, physician and dental offices, dental schools, medical research companies, laboratories and other end-users. The majority of our dialysis products are sold to dialysis clinics and hospitals. Sales to all of these customers follow our revenue recognition policies.
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 product sales in each segment. 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, healthcare disposables, water purification and filtration and endoscopy customers, rebates are provided; such rebates, which consist primarily of volume rebates, are provided for as a reduction of sales at the time of revenue recognition and amounted to
$6,291
,
$5,944
, and
$5,597
in fiscal
2017
,
2016
, and
2015
, 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 rebate provisions originally established would be adjusted accordingly.
Translation of Foreign Currency Financial Statements
Assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at year-end exchange rates; sales and expenses are translated using average exchange rates during the year. The cumulative effect of the translation of the accounts of the foreign subsidiaries is presented as a component of accumulated other comprehensive income or loss. Foreign exchange gains and losses related to the purchase of inventories denominated in foreign currencies are included in cost of sales and foreign exchange gains
(dollar amounts in thousands except share and per share data or as otherwise specified)
47
Cantel Medical Corp. 2017 Annual Report on Form 10-K
and losses related to the incurrence of operating costs denominated in foreign currencies and the conversion of foreign assets and liabilities into functional currencies are included in general and administrative expenses.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are reserves for the estimated loss from the inability of customers to make required payments. We use historical experience as well as current market information in determining the estimate. While actual losses have historically been within management’s expectations and provisions established, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Alternatively, if certain customers paid their delinquent receivables, reductions in allowances may be required.
Inventories
Inventories consist of raw materials, work-in-process and finished products which are sold in the ordinary course of our business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, we must make estimates and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the saleable condition of products. In performing such evaluations, we use historical experience as well as current market information. With few exceptions, the saleable value of our inventories has historically been within management’s expectation and provisions established, however, rapid changes in the market due to competition, technology and various other factors could impact the value of our inventories, resulting in the need for additional reserves.
Property and Equipment
Property and equipment are stated at cost. Additions and improvements are capitalized, while maintenance and repair costs are expensed. When assets are retired or otherwise disposed, the cost and related accumulated depreciation or amortization is removed from the respective accounts and any resulting gain or loss is included in income. Depreciation and amortization is provided on the straight-line method over the estimated useful lives of the assets which generally range from
2
-
15
years for furniture and equipment,
5
-
32
years for buildings and improvements and the shorter of the life of the asset or the life of the lease for leasehold improvements. Depreciation expense related to property and equipment in fiscal
2017
,
2016
and
2015
was
$15,045
,
$11,989
and
$10,692
, respectively.
Goodwill and Intangible Assets
Certain of our identifiable intangible assets, including customer relationships, technology, brand names, non-compete agreements and patents, are amortized using the straight-line method over their estimated useful lives which range from
3
to
20
years. Additionally, we have recorded goodwill and trademarks and trade names, all of which have indefinite useful lives and are therefore not amortized. All of our intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually
.
Our management is responsible for determining if impairment exists and considers a number of factors, including third-party valuations, when making these determinations.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount before proceeding to step one of the two-step quantitative goodwill impairment test, if necessary. Such qualitative factors that are assessed include evaluating a segment’s financial performance, industry and market conditions, macroeconomic conditions and specific issues that can directly affect the segment such as changes in business strategies, competition, supplier relationships, operating costs, regulatory matters, litigation and the composition of the segment’s assets due to acquisitions or other events. At
July 31, 2017
, because we determined through qualitative factors that the fair values of our Endoscopy, Water Purification and Filtration and Healthcare Disposables segments were unlikely to be less than the carrying value, we did not proceed to step one of the two-step quantitative goodwill impairment test for those three segments. We performed step one of the two-step quantitative goodwill impairment test for Dialysis due to the continuing shift by our customers from reusable to single-use dialyzers, which is having an adverse impact on our business and is expected to continue. In performing a detailed quantitative review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related reporting units by using weighted fair value results of the discounted cash flow methodology, as well as the market
(dollar amounts in thousands except share and per share data or as otherwise specified)
48
Cantel Medical Corp. 2017 Annual Report on Form 10-K
multiple and comparable transaction methodologies, where applicable. The first step is a review for potential impairment, and the second step measures the amount of impairment, if any.
We perform our annual impairment review for indefinite lived intangibles by first assessing qualitative factors, such as those described above, to determine whether it is more likely than not that the fair value of such assets is less than the carrying values, and if necessary, we perform a quantitative analysis comparing the current fair value of our indefinite lived intangibles assets to their carrying values. At
July 31, 2017
, because we determined through qualitative factors that the fair values of all of our indefinite lived intangible assets were unlikely to be less than the carrying value, we did not perform a quantitative analysis for those assets. 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.
Management concluded that
none
of our intangible assets or goodwill was impaired as of
July 31, 2017
.
Long-Lived Assets
We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. With the exception of the impairment on an acquired license, our historical assessments of our long-lived assets have not differed significantly from the actual amounts realized. See Note 8, "Intangibles and Goodwill." However, the determination of fair value requires us to make certain assumptions and estimates and is highly subjective. On
July 31, 2017
, management concluded that no other events or changes in circumstances have occurred that would indicate that the carrying amount of our long-lived assets may not be recoverable.
Other Assets
Debt issuance costs associated with our credit facilities are amortized to interest expense over the life of the credit facilities. As of
July 31, 2017
and
2016
, such debt issuance costs, net of related amortization, were included in other assets and amounted to
$580
and
$946
, respectively.
Warranties
We provide for estimated costs that may be incurred to remedy deficiencies of quality or performance of our products at the time of revenue recognition. Most of our products have a
one year
warranty, although certain endoscopy and water purification and filtration products that require installation may carry a warranty period of up to
24 months
. Additionally, many of our consumables, accessories, parts and service have a
90
day warranty. 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 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
Stock compensation expense is recognized for any option or stock award grant based upon the fair value of the award. Our stock options and time-based stock awards are subject to graded vesting in which portions of the award vest ratably over the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis over the vesting period. In October 2016, we granted for the first time to certain employees equity awards with performance conditions and equity awards with market conditions. We recognize compensation expense for the awards with performance conditions using the accelerated attribution method over the requisite service period for each separately vesting portion of the award when it is probable that the performance condition will be achieved. We record expense for the awards with market conditions ratably over the vesting period regardless of whether the market condition is satisfied. As a result of the adoption of ASU 2016-09 on August 1, 2016, we have elected to account for forfeitures as they occur, rather than estimate forfeitures over the course of the vesting period.
(dollar amounts in thousands except share and per share data or as otherwise specified)
49
Cantel Medical Corp. 2017 Annual Report on Form 10-K
We determine the fair value if each time-based stock award and performance-based stock award by using the closing market price of our common stock on the last trading date immediately prior to the date of grant. We determine the fair value of each award with market conditions using a Monte Carlo simulation model 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 valuation models is affected by our stock price as well as assumptions regarding a number of subjective variables. These variables may include, but are not limited to, the expected price volatility over the term of the expected equity award life, the expected dividend yield, the expected equity award life, the probability of meeting performance objectives and the stock price of our peers in the S&P Healthcare Equipment Index.
Advertising Costs
Our policy is to expense advertising costs as they are incurred. Advertising costs charged to expense were
$3,694
,
$3,349
and
$3,333
in fiscal
2017
,
2016
and
2015
, respectively.
Income Taxes
Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, statutory income tax rates, changes in uncertain tax benefits and the deductibility of expenses or availability of tax credits in various taxing jurisdictions. Tax laws are complex, subject to different interpretations by the taxpayer and the respective governmental taxing authorities and are subject to future modification, expiration or repeal by government legislative bodies. We use significant judgment on a quarterly basis in determining our annual effective income tax rate and evaluating our tax positions.
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 income tax rates were to change in the future, particularly in the United States and to a lesser extent Canada, the U.K. and Italy, our items of deferred tax could be materially affected. All of such evaluations require significant management judgments.
We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our consolidated financial statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. Any adjustments upon resolution of income tax uncertainties 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. Historically, we have not had significant unrecognized tax benefits.
Newly Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, “
Improvements to Employee Share-Based Payment Accounting
” (“ASU 2016-09”), which simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements. The new guidance also requires that all tax-related cash flows resulting from share-based payments to be reported as operating activities in the statement of cash flows. We early adopted ASU 2016-09 on August 1, 2016, on a prospective basis. As a result, we no longer record excess tax benefits as an adjustment to additional paid-in capital, we record such excess tax benefits as a reduction of income tax expense, which amounted to
$2,241
for the year ended July 31, 2017. See Note 11, "Income Taxes" and Note 15, "Stock-based Compensation." In addition, we elected to record excess tax benefits as an operating cash flow prospectively and not adjust the prior year period. As such, the current period excess tax benefits were reflected as an operating cash flow rather than a financing cash flow on our consolidated statement of cash flows for the year ended July 31, 2017. Furthermore, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the course of a vesting period since forfeitures have been insignificant historically.
Recently Issued Accounting Standards
In May 2017, the FASB issued ASU 2017-09, "
Scope of Modification Accounting
" ("ASU 2017-09") to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-12 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim
(dollar amounts in thousands except share and per share data or as otherwise specified)
50
Cantel Medical Corp. 2017 Annual Report on Form 10-K
periods within that reporting period. We are currently in the process of evaluating the impact of ASU 2017-09 on our financial position and result of operations.
In January 2017, the FASB issued ASU 2017-04,
“Intangibles - Goodwill and Other”
(“ASU 2017-04”) to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. Under the revised guidance, an entity would recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to the reporting unit. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December 31, 2018 (our fiscal year 2020) and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a significant impact on our financial position and result of operations.
In January 2017, the FASB issued ASU 2017-01, “
Business Combinations (Topic 805)”
(“ASU 2017-01”) to clarify the definition of a business. The revised guidance creates a more robust framework to use in determining whether a set of assets and activities is a business. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. We are currently in the process of evaluating the impact of ASU 2017-01 on our financial position and result of operations.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows”
(“ASU 2016-15”). This new guidance will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019). ASU 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. We are currently in the process of evaluating the impact of ASU 2016-15 on our financial position and result of operations.
In February 2016, FASB issued ASU 2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”). The new guidance requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The new guidance is expected to provide transparency of information and comparability among organizations. ASU 2016-02 is effective for fiscal years beginning after December 31, 2018 (our fiscal year 2020), including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual period. We are currently in the process of evaluating the impact of ASU 2016-02 on our financial position and results of operations.
In September 2015, the FASB issued ASU 2015-16, “
Simplifying the Accounting for Measurement-Period Adjustments (Topic 805)”
(“ASU 2015-16”). The new guidance requires an acquirer in a business combination to recognize a measurement-period adjustment during the period in which it determines the amount, and eliminates the requirement for an acquirer to account for measurement-period adjustments retrospectively. The acquirer must also disclose the amounts and reasons for adjustments to the provisional amounts. ASU 2015-16 is effective for fiscal years beginning after December 15, 2016 (our fiscal year 2018), including interim periods within that reporting period. Accordingly, we will adopt ASU 2015-06 in our first quarter of fiscal 2018. The adoption of ASU 2015-06 is not expected to have a material impact upon on our financial position and results of operations.
In July 2015, the FASB issued ASU 2015-11,
“Inventory (Topic 330) Simplifying the Measurement of Inventory,”
(“ASU 2015-11”). The new guidance requires companies using the first-in, first-out and average costs methods to measure inventory using the lower of cost and net realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 (our fiscal year 2018), including interim periods within that reporting period. Accordingly, we will adopt ASU 2015-11 in our first quarter of fiscal 2018. The adoption of ASU 2015-11 is not expected to have a material impact upon on our financial position and results of operations.
In May 2014, the FASB issued ASU 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”), which will supersede the revenue recognition requirements in Accounting Standards Codification 605,
“Revenue Recognition”
("ASC 605"). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14,
“Revenue from Contracts with Customers (Topic 606),”
which defers the effective date of ASU 2014-09 by one year to fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim
(dollar amounts in thousands except share and per share data or as otherwise specified)
51
Cantel Medical Corp. 2017 Annual Report on Form 10-K
periods within that reporting period. In May 2016, the FASB issued ASU 2016-12,
“Revenue from Contracts with Customers (Topic 606),”
(“ASU 2016-12”), which provided narrow scope improvements and practical expedients relating to ASU 2014-09. In preparation for our adoption of ASU 2014-09 and ASU 2016-12 on August 1, 2018, we are obtaining representative samples of contracts and other forms of agreements with our customers in the United States and international locations and plan to evaluate the provisions contained therein in light of the five-step model specified by the new guidance. We are also evaluating the impact of the new standard on certain common practices currently employed by us and by other health care manufacturers and service providers, such as multiple-element arrangements, deferred revenues, warranties, rebates and other pricing allowances. We anticipate adopting the standard using the modified retrospective method. There may be differences in timing of revenue recognition under the new standard compared to recognition under ASC 605.
Post-Fiscal
2017
BHT Group
On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Group, a leader in the German market in automated endoscope reprocessing and related equipment and services for total consideration, excluding acquisition related costs, of
$61,236
. The BHT Group consists of a portfolio of high-quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products globally distributed by our Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central sterile applications, associated technical service and parts as well as flexible endoscope repair services. BHT Group will be included in our Endoscopy segment.
Fiscal 2017
CR Kennedy
On April 1, 2017, we purchased certain endoscopy-related net assets of CR Kennedy related to its distribution and sale of our Medivators endoscopy products in Australia for total consideration, excluding acquisition related costs, of
$11,999
. The CR Kennedy business includes a full sales and service organization and our Medivators-branded automated endoscope reprocessors, chemistries, endoscopy procedure products and other consumables in Australia, and is included in our Endoscopy segment.
Vantage Endoscopy Inc.’s Medivators
®
Endoscopy Business
On September 26, 2016, we acquired certain net assets of Vantage related to its distribution and sale of our Medivators endoscopy products in Canada for total consideration, excluding acquisition-related costs, of
$4,044
. Vantage was our exclusive distributor of Medivators capital equipment (e.g., automated endoscope reprocessors) and related consumables and accessories in Canada, and is included in our Endoscopy segment.
Accutron, Inc.
On August 1, 2016, we acquired all of the issued and outstanding stock of Accutron, a Phoenix-based company, for total consideration, excluding acquisition-related costs, of
$53,049
. The Accutron business designs, manufactures and sells nitrous oxide conscious sedation equipment and single use nasal masks for use in dental procedures, and is included in our Healthcare Disposables segment.
Fiscal 2016
North American Science Associates, Inc.
On March 1, 2016, we acquired certain net assets of NAMSA for total consideration, excluding acquisition-related costs, of
$13,424
. The NAMSA business manufactures a broad suite of high-quality biological and chemical indicators which are used to accurately monitor the effectiveness of sterilization processes primarily for manufacturers of medical device, life science and other products, and is included in our Healthcare Disposables segment.
(dollar amounts in thousands except share and per share data or as otherwise specified)
52
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Medical Innovations Group Holdings Limited
On September 14, 2015, we acquired all of the issued and outstanding stock of MI, a company providing specialized endoscopy medical devices and products primarily in the United Kingdom for total consideration, excluding acquisition-related costs, of
$79,597
. The MI business includes proprietary short-term and long-term endoscope transport and storage systems, a comprehensive range of endoscopic consumable accessories, OEM mobile medical carts, as well as specialized products for patient warming and patient transfer, and is included in our Endoscopy segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Purchase Price Allocation
|
|
CR Kennedy
|
|
Vantage
(1)
|
|
Accutron
(1)
|
|
NAMSA
(1)
|
|
MI
|
Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$
|
11,999
|
|
|
$
|
4,044
|
|
|
$
|
53,049
|
|
|
$
|
13,424
|
|
|
$
|
79,597
|
|
Debt acquired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
11,999
|
|
|
$
|
4,044
|
|
|
$
|
53,049
|
|
|
$
|
13,424
|
|
|
$
|
79,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation:
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
—
|
|
|
433
|
|
|
1,676
|
|
|
437
|
|
|
6,464
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
4,200
|
|
|
992
|
|
|
12,800
|
|
|
5,820
|
|
|
24,430
|
|
Technology
|
|
—
|
|
|
—
|
|
|
10,000
|
|
|
1,320
|
|
|
10,930
|
|
Brand names
|
|
—
|
|
|
—
|
|
|
2,000
|
|
|
—
|
|
|
2,030
|
|
Goodwill
|
|
5,894
|
|
|
2,299
|
|
|
21,989
|
|
|
3,687
|
|
|
40,006
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
112
|
|
|
—
|
|
|
(8,683
|
)
|
Other working capital
|
|
1,905
|
|
|
320
|
|
|
4,472
|
|
|
2,160
|
|
|
4,420
|
|
Total
|
|
$
|
11,999
|
|
|
$
|
4,044
|
|
|
$
|
53,049
|
|
|
$
|
13,424
|
|
|
$
|
79,597
|
|
_______________________________________________
|
|
(1)
|
The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.
|
Unaudited Pro Forma Summary of Operations
The acquisitions above, both individually and in the aggregate, were not material to our consolidated results of operations or financial position and, therefore, pro forma financial information is not presented.
4. Inventories, Net
A summary of inventories, net, is as follows:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
Raw materials and parts
|
$
|
45,831
|
|
|
$
|
45,867
|
|
Work-in-process
|
13,484
|
|
|
13,178
|
|
Finished goods
|
48,262
|
|
|
37,831
|
|
Less: reserve for excess and obsolete inventory
|
(8,853
|
)
|
|
(5,390
|
)
|
Total
|
$
|
98,724
|
|
|
$
|
91,486
|
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
53
Cantel Medical Corp. 2017 Annual Report on Form 10-K
|
|
5.
|
Property and Equipment, Net
|
A summary of property and equipment, net, is as follows:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
Land, buildings and improvements
|
$
|
46,921
|
|
|
$
|
44,387
|
|
Furniture and equipment
|
119,682
|
|
|
95,033
|
|
Leasehold improvements
|
7,858
|
|
|
6,048
|
|
Less: accumulated depreciation
|
(86,123
|
)
|
|
(70,864
|
)
|
Total
|
$
|
88,338
|
|
|
$
|
74,604
|
|
We recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of a derivative that is designated as a hedge will be recognized immediately in earnings. As of
July 31, 2017
, all of our derivatives were designated as hedges. We do not hold any derivative financial instruments for speculative or trading purposes.
Changes in the value of the Euro, British Pound, Singapore dollar, Canadian dollar, Australian dollar and the Chinese Renminbi against the U.S. dollar affect our results of operations because certain cash bank accounts, accounts receivable, and liabilities of Cantel and its subsidiaries are denominated and ultimately settled in U.S. dollars or these foreign currencies, but must be converted into each entity’s functional currency.
In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar and Singapore dollar relative to the U.S. dollar on the conversion of such net assets into the functional currencies, we enter into short-term contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars forward, which contracts are
one
-month in duration. These short-term contracts are designated as fair value hedge instruments. There were
nine
foreign currency forward contracts with an aggregate notional value of
$24,762
at
July 31, 2017
, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. These foreign currency forward contracts are continually replaced with new
one
-month contracts as long as we have significant net assets that are denominated and ultimately settled in currencies other than each entity’s functional currency. For the fiscal year ended
July 31, 2017
, such forward contracts partially offset the impact on operations relating to certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. This resulted in an immaterial amount of net currency conversion losses, net of tax, on the hedged items. Gains and losses related to hedging contracts to buy Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Chinese Renminbi relative to the U.S. dollar because the overall foreign currency exposures relating to those currencies are currently not deemed significant.
|
|
7.
|
Fair Value Measurements
|
Fair Value Hierarchy
We apply the provisions of Accounting Standards Codification (“ASC”) 820,
“Fair Value Measurements and Disclosures,”
(“ASC 820”), for our financial assets and liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. We define 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
54
Cantel Medical Corp. 2017 Annual Report on Form 10-K
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.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
Our financial assets that are re-measured at fair value on a recurring basis include money market funds that are classified as cash and cash equivalents in the consolidated balance sheets. These money market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.
In connection with our June 2014 acquisition of a U.K. endoscopy company (“Cantel Medical (U.K.)”), we acquired a contingent guaranteed obligation to reimburse an endoscope service company for endoscope repair costs it incurs when servicing its customers’ endoscopes that are damaged by one of Cantel Medical (U.K.)’s discontinued endoscope reprocessing machine models. The fair value of the contingent liability was
$441
as of July 31, 2016. This liability continued to be adjusted periodically by the reimbursement of repair costs, as well as adjustments associated with changes in the fair value through our consolidated statements of income. During the third quarter of fiscal 2017, we ended the agreement with the endoscopy service company and decreased this liability to
$0
at July 31, 2017.
In connection with the Jet Prep Ltd. ("Jet Prep") acquisition in fiscal 2014, we assumed a contingent obligation payable to the Israeli Government based on future sales. This fair value measurement was based on significant inputs not observed in the market and thus represent Level 3 measurements. As a result of the exit of the Jet Prep business, we did not update our fair value assumptions associated with this contingent obligation payable and the balance of such obligation remained at
$1,138
as of July 31, 2017. See Note 8, "Intangibles and Goodwill."
The fair values of the Company’s financial instruments measured on a recurring basis were categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money markets
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
102
|
|
Total assets
|
102
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Assumed contingent obligation
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Contingent guaranteed obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total accrued expenses
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Long-term debt
(1)
|
—
|
|
|
126,000
|
|
|
—
|
|
|
126,000
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Assumed contingent obligation
|
—
|
|
|
—
|
|
|
1,126
|
|
|
1,126
|
|
Contingent guaranteed obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total other long-term liabilities:
|
—
|
|
|
—
|
|
|
1,126
|
|
|
1,126
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
126,000
|
|
|
$
|
1,138
|
|
|
$
|
127,138
|
|
________________________________________________
|
|
(1)
|
Fair value estimated using Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
55
Cantel Medical Corp. 2017 Annual Report on Form 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money markets
|
$
|
740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
740
|
|
Total assets
|
$
|
740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
740
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Assumed contingent obligation
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Contingent guaranteed obligation
|
—
|
|
|
—
|
|
|
366
|
|
|
366
|
|
Total accrued expenses
|
—
|
|
|
—
|
|
|
378
|
|
|
378
|
|
Long-term debt
(1)
|
—
|
|
|
116,000
|
|
|
—
|
|
|
116,000
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Assumed contingent obligation
|
—
|
|
|
—
|
|
|
1,126
|
|
|
1,126
|
|
Contingent guaranteed obligation
|
—
|
|
|
—
|
|
|
75
|
|
|
75
|
|
Total other long-term liabilities:
|
—
|
|
|
—
|
|
|
1,201
|
|
|
1,201
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
116,000
|
|
|
$
|
1,579
|
|
|
$
|
117,579
|
|
________________________________________________
|
|
(1)
|
Fair value estimated using Level 2 inputs, which were quoted prices for identical or similar instruments in markets that are not active.
|
A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for fiscal
2017
,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jet Prep Contingent Consideration
|
|
Jet Prep Assumed Contingent Obligation
|
|
Cantel Medical (U.K.) Contingent Guaranteed Obligation
|
|
Total
|
Balance, July 31, 2014
|
|
$
|
2,722
|
|
|
$
|
1,752
|
|
|
$
|
1,395
|
|
|
$
|
5,869
|
|
Total net unrealized gains included in general and administrative expense in earnings
|
|
(1,971
|
)
|
|
(614
|
)
|
|
—
|
|
|
(2,585
|
)
|
Net purchases, issuances, sales and settlements
|
|
—
|
|
|
—
|
|
|
(507
|
)
|
|
(507
|
)
|
Balance, July 31, 2015
|
|
751
|
|
|
1,138
|
|
|
888
|
|
|
2,777
|
|
Total net unrealized (gains) losses included in general and administrative expense in earnings
|
|
(751
|
)
|
|
—
|
|
|
64
|
|
|
(687
|
)
|
Net purchases, issuances, sales and settlements
|
|
—
|
|
|
—
|
|
|
(511
|
)
|
|
(511
|
)
|
Balance, July 31, 2016
|
|
—
|
|
|
1,138
|
|
|
441
|
|
|
1,579
|
|
Total net unrealized gains included in general and administrative expense in earnings
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
|
(265
|
)
|
Net purchases, issuances, sales and settlements
|
|
—
|
|
|
—
|
|
|
(176
|
)
|
|
(176
|
)
|
Balance, July 31, 2017
|
|
$
|
—
|
|
|
$
|
1,138
|
|
|
$
|
—
|
|
|
$
|
1,138
|
|
Disclosure of Fair Value of Financial Instruments
As of
July 31, 2017
and
2016
, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments.
|
|
8.
|
Intangibles and Goodwill
|
Our intangible assets with definite lives consist primarily of customer relationships, technology, brand names, non-compete agreements and patents. These intangible assets are being amortized on the straight-line method over the estimated useful lives of
(dollar amounts in thousands except share and per share data or as otherwise specified)
56
Cantel Medical Corp. 2017 Annual Report on Form 10-K
the assets ranging from
3
-
20
years and have a weighted average amortization period of
12 years
. Amortization expense related to intangible assets was
$18,407
,
$13,095
and
$13,265
for fiscal
2017
,
2016
and
2015
, respectively. Our intangible assets that have indefinite useful lives, and therefore are not amortized, consist of trademarks and trade names.
The Company’s intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2017
|
|
July 31, 2016
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
119,576
|
|
|
$
|
(34,773
|
)
|
|
$
|
84,803
|
|
|
$
|
100,649
|
|
|
$
|
(24,689
|
)
|
|
$
|
75,960
|
|
Technology
|
42,794
|
|
|
(18,990
|
)
|
|
23,804
|
|
|
32,767
|
|
|
(11,813
|
)
|
|
20,954
|
|
Brand names
|
8,188
|
|
|
(3,225
|
)
|
|
4,963
|
|
|
6,194
|
|
|
(2,394
|
)
|
|
3,800
|
|
Non-compete agreements
|
3,092
|
|
|
(1,428
|
)
|
|
1,664
|
|
|
3,092
|
|
|
(1,193
|
)
|
|
1,899
|
|
Patents and other registrations
|
2,783
|
|
|
(1,053
|
)
|
|
1,730
|
|
|
2,508
|
|
|
(913
|
)
|
|
1,595
|
|
|
176,433
|
|
|
(59,469
|
)
|
|
116,964
|
|
|
145,210
|
|
|
(41,002
|
)
|
|
104,208
|
|
Trademarks and tradenames
|
7,548
|
|
|
—
|
|
|
7,548
|
|
|
7,511
|
|
|
—
|
|
|
7,511
|
|
Total intangible assets
|
$
|
183,981
|
|
|
$
|
(59,469
|
)
|
|
$
|
124,512
|
|
|
$
|
152,721
|
|
|
$
|
(41,002
|
)
|
|
$
|
111,719
|
|
During fiscal 2017, we decided to exit the Jet Prep business that was acquired in fiscal 2014. The Jet Prep acquisition was a fully integrated business within our Endoscopy segment. The useful life of the technology related intangible asset was revised to its respective cease use date, which resulted in accelerated amortization of approximately
$2,401
that was recorded in the consolidated statements of income. In addition, we performed a relative fair value analysis for the goodwill recorded as part of the Jet Prep acquisition and determined that all of the goodwill would remain within the Endoscopy segment. We performed our annual goodwill impairment test of all of our reportable segments as of July 31, 2017, including the Endoscopy segment, which did not result in any impairment of our goodwill.
We expect to recognize
$15,617
,
$15,293
,
$13,539
,
$13,204
and
$12,821
of amortization expense related to intangible assets in fiscal years
2018
,
2019
,
2020
,
2021
and
2022
, respectively.
Goodwill changed during fiscal
2017
and
2016
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
|
Water Purification and Filtration
|
|
Healthcare Disposables
|
|
Dialysis
|
|
Total
Goodwill
|
Balance, July 31, 2015
|
$
|
87,007
|
|
|
$
|
58,872
|
|
|
$
|
87,939
|
|
|
$
|
8,133
|
|
|
$
|
241,951
|
|
Acquisitions
|
40,047
|
|
|
—
|
|
|
4,351
|
|
|
—
|
|
|
44,398
|
|
Foreign currency translation
|
(6,039
|
)
|
|
8
|
|
|
—
|
|
|
—
|
|
|
(6,031
|
)
|
Balance, July 31, 2016
|
121,015
|
|
|
58,880
|
|
|
92,290
|
|
|
8,133
|
|
|
280,318
|
|
Acquisitions
|
8,193
|
|
|
—
|
|
|
21,989
|
|
|
—
|
|
|
30,182
|
|
Foreign currency translation
|
737
|
|
|
208
|
|
|
—
|
|
|
—
|
|
|
945
|
|
Balance, July 31, 2017
|
$
|
129,945
|
|
|
$
|
59,088
|
|
|
$
|
114,279
|
|
|
$
|
8,133
|
|
|
$
|
311,445
|
|
On
July 31, 2017
, we performed impairment analysis of the Company’s goodwill and indefinite lived trademarks and trade names and concluded that such assets were not impaired, as more fully described in Note 2, "Summary of Significant Accounting Policies."
In fiscal 2014, we acquired a license from a third party granting us the exclusive right to manufacture, commercialize, distribute and sell an endoscopy product in exchange for a series of payments, which totaled
$1,000
at January 31, 2015 and was recorded in other assets in our consolidated balance sheets. We evaluated this long-lived asset for potential impairment and determined that the future use of this acquired license was unlikely based on a recent product analysis. Accordingly, we deemed the acquired license, together with related fixed assets, to be fully impaired and recorded a loss of
$1,287
during fiscal 2015 based on expected cash flows of the related endoscopy product, which was recorded in general and administrative expenses and as reductions in other assets and property and equipment in the consolidated financial statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
57
Cantel Medical Corp. 2017 Annual Report on Form 10-K
A summary of activity in the warranty reserves follows:
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
2,575
|
|
|
$
|
1,740
|
|
Acquisitions
|
179
|
|
|
28
|
|
Provisions
|
4,880
|
|
|
4,554
|
|
Settlements
|
(5,306
|
)
|
|
(3,622
|
)
|
Foreign currency translation
|
—
|
|
|
(125
|
)
|
Ending balance
|
$
|
2,328
|
|
|
$
|
2,575
|
|
The warranty provisions and settlements in fiscal
2017
and
2016
relate principally to the Company’s endoscope reprocessing and water purification products. Warranty reserves are included in accrued expenses in the consolidated balance sheets.
|
|
10.
|
Financing Arrangements
|
On March 4, 2014, we entered into a Third Amended and Restated Credit Agreement (the “2014 Credit Agreement”). The 2014 Credit Agreement includes a
five
-year
$250,000
senior secured revolving facility with sublimits of up to
$100,000
for borrowings in foreign currencies,
$30,000
for letters of credit and
$10,000
for swing line loans (the “2014 Revolving Credit Facility”). Subject to the satisfaction of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the 2014 Revolving Credit Facility by an aggregate amount not to exceed
$100,000
. The 2014 Credit Agreement expires on March 4, 2019. Additionally, subject to certain restrictions and conditions (i) any of our domestic or foreign subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies.
Borrowings under the 2014 Credit Agreement bear interest at rates ranging from
0.25%
to
1.25%
above the lender’s base rate, or at rates ranging from
1.25%
to
2.25%
above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2014 Credit Agreement (“Consolidated EBITDA”). At
July 31, 2017
, the lender’s base rate was
4.00%
and the LIBOR rates ranged from
1.22%
to
1.31%
. The margins applicable to our outstanding borrowings were
0.50%
above the lender’s base rate or
1.50%
above LIBOR. All of our outstanding borrowings were under LIBOR contracts at
July 31, 2017
. The 2014 Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from
0.20%
to
0.40%
, depending upon our Consolidated Leverage Ratio, which was
0.20%
at
July 31, 2017
.
The 2014 Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by Cantel of all of the outstanding shares of its U.S.-based subsidiaries and
65%
of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial and other covenants under the 2014 Credit Agreement.
As of
July 31, 2017
, we had
$126,000
of outstanding borrowings under the 2014 Credit Agreement. Subsequent to
July 31, 2017
, we borrowed
$61,300
to fund the purchase price and transaction costs of the BHT Group acquisition.
Debt issuance costs associated with our credit facilities are capitalized and amortized to interest expense over the term of the credit facilities. As of
July 31, 2017
and
2016
, such debt issuance costs, net of related amortization, were included in other assets, and amounted to
$580
and
$946
, respectively.
The consolidated effective tax rate was
32.8%
,
36.2%
and
37.1%
for fiscal
2017
,
2016
and
2015
, respectively, and reflects income tax expense for our U.S. and international operations at their respective statutory rates.
(dollar amounts in thousands except share and per share data or as otherwise specified)
58
Cantel Medical Corp. 2017 Annual Report on Form 10-K
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
28,900
|
|
|
$
|
2,020
|
|
|
$
|
29,392
|
|
|
$
|
(216
|
)
|
|
$
|
24,602
|
|
|
$
|
(425
|
)
|
State
|
4,352
|
|
|
261
|
|
|
4,433
|
|
|
(153
|
)
|
|
3,920
|
|
|
(218
|
)
|
International
|
1,545
|
|
|
(2,223
|
)
|
|
1,863
|
|
|
(1,341
|
)
|
|
1,165
|
|
|
(806
|
)
|
Total
|
$
|
34,797
|
|
|
$
|
58
|
|
|
$
|
35,688
|
|
|
$
|
(1,710
|
)
|
|
$
|
29,687
|
|
|
$
|
(1,449
|
)
|
The geographic components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
United States
|
$
|
108,329
|
|
|
$
|
92,744
|
|
|
$
|
73,645
|
|
International
|
(2,096
|
)
|
|
1,187
|
|
|
2,546
|
|
Total
|
$
|
106,233
|
|
|
$
|
93,931
|
|
|
$
|
76,191
|
|
The consolidated effective income tax rate differed from the U.S. statutory tax rate of
35.0%
in fiscal
2017
,
2016
and
2015
due to the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2017
|
|
2016
|
|
2015
|
Expected statutory tax
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Differential attributable to:
|
|
|
|
|
|
|
|
|
Foreign operations
|
—
|
%
|
|
0.6
|
%
|
|
1.2
|
%
|
State and local taxes
|
3.9
|
%
|
|
3.2
|
%
|
|
3.4
|
%
|
Domestic production deduction
|
(2.7
|
)%
|
|
(2.3
|
)%
|
|
(2.4
|
)%
|
Acquisition related items, net
|
0.1
|
%
|
|
—
|
%
|
|
(1.6
|
)%
|
Loss on sale of business
|
—
|
%
|
|
—
|
%
|
|
1.1
|
%
|
R&E tax credit
|
(1.4
|
)%
|
|
(1.1
|
)%
|
|
(0.5
|
)%
|
Change in foreign tax rates
|
—
|
%
|
|
(0.4
|
)%
|
|
—
|
%
|
Excess tax benefits
|
(2.2
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other
|
0.1
|
%
|
|
1.2
|
%
|
|
0.9
|
%
|
Consolidated effective tax rate
|
32.8
|
%
|
|
36.2
|
%
|
|
37.1
|
%
|
As a result of the adoption of ASU 2016-09 on August 1, 2016, we no longer record excess tax benefits as an adjustment to additional paid-in-capital, but record such excess tax benefits on a prospective basis as a reduction of income tax expense, which amounted to
$2,241
for fiscal 2017.
(dollar amounts in thousands except share and per share data or as otherwise specified)
59
Cantel Medical Corp. 2017 Annual Report on Form 10-K
Deferred income tax assets and liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Accrued expenses
|
$
|
6,308
|
|
|
$
|
5,140
|
|
Inventories
|
4,655
|
|
|
2,990
|
|
Accounts receivable
|
729
|
|
|
793
|
|
Other long-term liabilities
|
180
|
|
|
252
|
|
Stock-based compensation
|
3,402
|
|
|
3,665
|
|
Capital investment
|
545
|
|
|
546
|
|
Foreign NOLs
|
6,490
|
|
|
5,154
|
|
Subtotal
|
22,309
|
|
|
18,540
|
|
Valuation allowance
|
(2,984
|
)
|
|
(2,334
|
)
|
|
19,325
|
|
|
16,206
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
(9,957
|
)
|
|
(8,089
|
)
|
Intangible assets
|
(20,107
|
)
|
|
(19,818
|
)
|
Goodwill
|
(13,975
|
)
|
|
(11,878
|
)
|
|
(44,039
|
)
|
|
(39,785
|
)
|
Net deferred tax liabilities - noncurrent
|
$
|
(24,714
|
)
|
|
$
|
(23,579
|
)
|
For foreign tax reporting purposes, our Net Operating Losses (“NOLs”) at
July 31, 2017
are
$6,490
and originated primarily from foreign acquisitions. Most of these NOLs do not expire and are fully available for utilization against future profits in certain non-U.S. tax jurisdictions. However, we have recorded a valuation allowance of
$2,984
for these foreign NOLs, which are primarily associated with certain early-stage foreign operations as well as the exit of the Jet Prep business more fully described in Note 8, "Intangibles and Goodwill." We believe it is more likely than not that we will be unable to utilize these NOLs.
During fiscal
2017
and
2016
,
no
dividends were repatriated from our foreign subsidiaries. All of the undistributed earnings of our foreign subsidiaries are considered to be indefinitely reinvested at
July 31, 2017
. Accordingly, deferred taxes are not provided on undistributed earnings of foreign subsidiaries that are indefinitely reinvested. At
July 31, 2017
, the cumulative amount of such undistributed earnings indefinitely reinvested outside the United States was approximately
$44,509
. Determining the tax liability that would arise if these earnings were remitted is not practical.
We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken on a tax return, but is not recognized in our consolidated financial statements because it does not meet the more-likely-than-not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the tax authorities. Any adjustments upon resolution of income tax uncertainties are recognized in our results of operations. Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and administrative expense, respectively, in our consolidated financial statements. However, such amounts have been relatively insignificant due to the nominal amount of our unrecognized tax benefits relating to uncertain tax positions.
The Company concluded an audit by the Internal Revenue Service (“IRS”) for fiscal years 2015, 2013 and 2012. With respect to state or foreign income tax examinations, the Company is generally no longer subject to examinations for fiscal years ended prior to July 31, 2009.
(dollar amounts in thousands except share and per share data or as otherwise specified)
60
Cantel Medical Corp. 2017 Annual Report on Form 10-K
12. Commitments and Contingencies
Operating Leases
We have several non-cancelable operating leases, primarily for our corporate headquarters, certain of our leased manufacturing facilities, warehouses, office space and equipment. Total rental expense related to our operating leases was
$7,715
,
$6,675
and
$6,025
for fiscal 2017,
2016
and
2015
, respectively.
As of July 31, 2017, future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) for the periods set forth below were as follows:
|
|
|
|
|
Fiscal year ending:
|
Total
|
2018
|
$
|
6,522
|
|
2019
|
5,278
|
|
2020
|
3,779
|
|
2021
|
2,719
|
|
2022
|
1,231
|
|
Thereafter
|
2,454
|
|
Total
|
$
|
21,983
|
|
Contingent Consideration and Assumed Contingent Liability
We have
$1,138
recorded as of
July 31, 2017
related to the Jet Prep acquisition, which is for the estimated fair value of an assumed contingent obligation payable to the Israeli Government, as further described in Note 8, "Intangibles and Goodwill," which will be payable based on future sales. We are currently working with the Israeli Government to forgive any future amounts payable due to our decision to exit the Jet Prep business and we expect a decision from the Israeli government in the first half of fiscal 2018. Additionally, in connection with the PuriCore plc acquisition in fiscal 2014, we assumed a contingent guaranteed obligation to reimburse an endoscope service company for endoscope repair costs it incurs when servicing its customers’ endoscopes that are damaged by one of PuriCore’s discontinued endoscope reprocessing machine models. During fiscal 2017, we ended the agreement with the endoscope service company and decreased the remaining liability of
$283
through our consolidated statements of income.