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 and control 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
21
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Fiscal
2018
Highlights
Some of our key financial results for fiscal
2018
compared with fiscal
2017
were as follows:
|
|
•
|
Net sales increased by
13.2%
to $
871,922
from
$770,157
, with organic sales growth of
8.4%
,
|
|
|
•
|
Net income increased by
27.5%
to
$91,041
from
$71,378
,
|
|
|
•
|
Non-GAAP net income increased by
20.3%
to
$104,346
from
$86,740
,
|
|
|
•
|
Diluted EPS increased by
27.6%
to
$2.18
from
$1.71
,
|
|
|
•
|
Non-GAAP diluted EPS increased by
20.6%
to
$2.51
from
$2.08
, and
|
|
|
•
|
Adjusted EBITDAS increased by
10.8%
to
$178,270
from
$160,942
.
|
See Non-GAAP Financial Measures below.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act, among other provisions, lowered the applicable U.S. federal statutory income tax rate from 35% to 21% and implemented the imposition of a one-time transition tax on previously deferred foreign earnings. All of the undistributed earnings of our foreign subsidiaries are deemed repatriated and considered previously taxed income (“PTI”.) We continue to be indefinitely reinvested and continue to evaluate our assertion of certain legal entities. Accounting Standards Codification (“ASC”) 740 requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted, including the revaluation of deferred income tax assets and liabilities. During fiscal 2018 we recorded a favorable benefit of $8,657 related to a revaluation of our deferred tax assets and liabilities as a result of the 2017 Tax Act. See Non-GAAP Financial Measures below.
Legal Matter
In May 2017, Cantel Medical (UK) Limited and Cantel (UK) Limited filed a lawsuit in the UK High Court of Justice against ARC Medical Design Limited (“ARC”) seeking a judgment of invalidity on two of ARC’s patents and additionally/alternatively a declaration of non-infringement of our AmplifEYE
TM
Endoscopic device. ARC filed counterclaims alleging that the AmplifEYE
TM
device infringed the two patents as well as registered community design marks and unregistered design rights that ARC had in its Endocuff
TM
and Endocuff Vision
TM
devices. In February 2018, the trial judge entered a judgment in favor of ARC, and we decided not to appeal the decision. We entered into a settlement agreement with ARC in March 2018 under which we agreed not to make, use, sell or offer to sell the AmplifEYE
TM
device in the European Union until ARC’s rights expire, and reimbursed ARC for a portion of their legal costs. During fiscal 2018, we recorded $2,608 of litigation costs associated with this matter.
Cybersecurity
We have established an enterprise risk management committee to monitor and escalate enterprise level issues, including cybersecurity matters, to the appropriate management levels within our organization and to members of our Board of Directors as appropriate. Utilizing an escalation framework, our enterprise risk management committee and internal auditor are charged with reviewing cybersecurity risks and incidents for potential financial, operational, and reputational risks. Matters determined to present potential material impacts to our financial results, operations or reputation are reported by management to the chair of our Audit Committee. In addition, the enterprise risk committee is charged with ensuring that management responsible for overseeing the effectiveness of disclosure controls is informed in a timely manner of known cybersecurity risks and incidents that may materially impact our operations so that timely public disclosure can be made as appropriate.
Our directors and executive officers are subject to our Securities Trading Policy, which is designed to facilitate compliance with insider trading laws and governs transactions in our common stock and related derivative securities. Our Stock Trading Policy designates certain blackout periods, dictated by our financial quarters and the release of financial results, during which trading is restricted for individuals in information-sensitive positions, including directors and executive officers. Our Stock Trading Policy also expressly restricts trading at any time while in possession of material non-public information, and permits designated officers to impose additional blackout periods. Cybersecurity risks are one of several matters that may be deemed material information under our Stock Trading Policy, and therefore form the basis of restricting participation in the market outside of a blackout period, or for designating a blackout period.
(dollar amounts in thousands except share and per share data or as otherwise specified)
22
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Acquisitions
Post-Fiscal 2018
On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its controlled environmental solutions business (“CES business”) for total cash consideration, excluding acquisition-related costs, of
$17,000
. The CES business is a leading provider of testing and certification, environmental monitoring and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance and quality control, and will be included in our Water Purification and Filtration segment.
Fiscal 2018
On March 21, 2018, we purchased all of the issued and outstanding stock of Aexis Medical for total consideration, excluding acquisition-related costs, of
$21,600
, consisting of
$20,308
of cash consideration (net of cash acquired), plus contingent consideration ranging from zero to a maximum of
$1,850
, which is payable upon the achievement of certain purchase order targets through March 21, 2020. Aexis Medical specializes in advanced software solutions focused on the tracking and monitoring of instrument reprocessing for hospitals and healthcare professionals, and is included in our Endoscopy segment.
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 cash consideration, excluding acquisition related costs, of
$60,216
. 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 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
|
2018
|
|
2017
|
|
2016
|
|
2018 / 2017
|
|
2017 / 2016
|
Net sales
|
$
|
871,922
|
|
100.0
|
%
|
|
$
|
770,157
|
|
100.0
|
%
|
|
$
|
664,755
|
|
100.0
|
%
|
|
13.2
|
%
|
|
15.9
|
%
|
Cost of sales
|
457,951
|
|
52.5
|
%
|
|
402,997
|
|
52.3
|
%
|
|
355,569
|
|
53.5
|
%
|
|
13.6
|
%
|
|
13.3
|
%
|
Gross profit
|
413,971
|
|
47.5
|
%
|
|
367,160
|
|
47.7
|
%
|
|
309,186
|
|
46.5
|
%
|
|
12.7
|
%
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
129,642
|
|
14.9
|
%
|
|
116,113
|
|
15.1
|
%
|
|
99,062
|
|
14.9
|
%
|
|
11.7
|
%
|
|
17.2
|
%
|
General and administrative
|
138,019
|
|
15.8
|
%
|
|
122,270
|
|
15.9
|
%
|
|
97,463
|
|
14.7
|
%
|
|
12.9
|
%
|
|
25.5
|
%
|
Research and development
|
24,646
|
|
2.8
|
%
|
|
18,367
|
|
2.4
|
%
|
|
15,410
|
|
2.3
|
%
|
|
34.2
|
%
|
|
19.2
|
%
|
Total operating expenses
|
292,307
|
|
33.5
|
%
|
|
256,750
|
|
33.4
|
%
|
|
211,935
|
|
31.9
|
%
|
|
13.8
|
%
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
121,664
|
|
14.0
|
%
|
|
110,410
|
|
14.3
|
%
|
|
97,251
|
|
14.6
|
%
|
|
10.2
|
%
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
5,289
|
|
0.6
|
%
|
|
4,303
|
|
0.5
|
%
|
|
3,320
|
|
0.5
|
%
|
|
22.9
|
%
|
|
29.6
|
%
|
Other income
|
(1,138
|
)
|
(0.1
|
)%
|
|
(126
|
)
|
—
|
%
|
|
—
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Income before income taxes
|
117,513
|
|
13.5
|
%
|
|
106,233
|
|
13.8
|
%
|
|
93,931
|
|
14.1
|
%
|
|
10.6
|
%
|
|
13.1
|
%
|
Income taxes
|
26,472
|
|
3.1
|
%
|
|
34,855
|
|
4.5
|
%
|
|
33,978
|
|
5.1
|
%
|
|
(24.1
|
)%
|
|
2.6
|
%
|
Net income
|
$
|
91,041
|
|
10.4
|
%
|
|
$
|
71,378
|
|
9.3
|
%
|
|
$
|
59,953
|
|
9.0
|
%
|
|
27.5
|
%
|
|
19.1
|
%
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
23
Cantel Medical Corp. 2018 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
|
2018
|
|
2017
|
|
2016
|
Endoscopy
|
$
|
473,937
|
|
|
54.4
|
%
|
|
$
|
398,773
|
|
|
51.8
|
%
|
|
$
|
341,752
|
|
|
51.4
|
%
|
Water Purification and Filtration
|
211,209
|
|
|
24.2
|
%
|
|
196,446
|
|
|
25.5
|
%
|
|
177,669
|
|
|
26.7
|
%
|
Healthcare Disposables
|
155,180
|
|
|
17.8
|
%
|
|
144,457
|
|
|
18.7
|
%
|
|
112,584
|
|
|
17.0
|
%
|
Dialysis
|
31,596
|
|
|
3.6
|
%
|
|
30,481
|
|
|
4.0
|
%
|
|
32,750
|
|
|
4.9
|
%
|
Total net sales
|
$
|
871,922
|
|
|
100.0
|
%
|
|
$
|
770,157
|
|
|
100.0
|
%
|
|
$
|
664,755
|
|
|
100.0
|
%
|
Net sales by geography
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
643,744
|
|
|
73.9
|
%
|
|
$
|
599,657
|
|
|
77.9
|
%
|
|
$
|
515,055
|
|
|
77.4
|
%
|
International
|
228,178
|
|
|
26.1
|
%
|
|
170,500
|
|
|
22.1
|
%
|
|
149,700
|
|
|
22.6
|
%
|
Total net sales
|
$
|
871,922
|
|
|
100.0
|
%
|
|
$
|
770,157
|
|
|
100.0
|
%
|
|
$
|
664,755
|
|
|
100.0
|
%
|
The following table gives information as to the amount of income from operations, as well as income from operations as a percentage of net sales, for each of our reporting segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
Income from operations
|
2018
|
|
2017
|
|
2016
|
Endoscopy
|
$
|
86,833
|
|
|
18.3
|
%
|
|
$
|
73,440
|
|
|
18.4
|
%
|
|
$
|
61,021
|
|
|
17.9
|
%
|
Water Purification and Filtration
|
35,100
|
|
|
16.6
|
%
|
|
33,159
|
|
|
16.9
|
%
|
|
30,620
|
|
|
17.2
|
%
|
Healthcare Disposables
|
31,707
|
|
|
20.4
|
%
|
|
28,000
|
|
|
19.4
|
%
|
|
24,486
|
|
|
21.7
|
%
|
Dialysis
|
7,380
|
|
|
23.4
|
%
|
|
8,154
|
|
|
26.8
|
%
|
|
7,907
|
|
|
24.1
|
%
|
Operating income by segment
|
161,020
|
|
|
18.5
|
%
|
|
142,753
|
|
|
18.5
|
%
|
|
124,034
|
|
|
18.6
|
%
|
General corporate expenses
|
39,356
|
|
|
4.5
|
%
|
|
32,343
|
|
|
4.2
|
%
|
|
26,783
|
|
|
4.0
|
%
|
Income from operations
|
$
|
121,664
|
|
|
14.0
|
%
|
|
$
|
110,410
|
|
|
14.3
|
%
|
|
$
|
97,251
|
|
|
14.6
|
%
|
Fiscal 2018 compared with Fiscal 2017
Net Sales
Total net sales increased by
$101,765
, or
13.2%
, to
$871,922
for fiscal
2018
from
$770,157
for fiscal
2017
. The
13.2%
increase in net sales includes an increase of
8.4%
in organic sales, an increase of
4.0%
in net sales due to acquisitions and an increase of
0.8%
due to foreign currency translation. International net sales increased by
$57,678
, or
33.8%
, to
$228,178
for fiscal
2018
from
$170,500
for fiscal
2017
. The
33.8%
increase in international net sales consists of a 17.2% increase due to acquisitions, 12.7% organic sales growth and an increase of 3.9% due to foreign currency translation.
Endoscopy.
Net sales increased by
$75,164
, or
18.8%
, for fiscal
2018
compared with fiscal
2017
, which consisted of
10.0%
organic sales growth, a
7.4%
increase due to acquisitions and an increase of
1.4%
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, including storage cabinets and mobile medical carts, disinfectants and service due to the increased installed base of our endoscope reprocessing equipment.
Water Purification and Filtration.
Net sales of water purification and filtration products and services increased by
$14,763
, or
7.5%
, for fiscal
2018
compared with fiscal
2017
. The increase was primarily due to increased demand for our water purification equipment and increased sales of our chemistries products. Foreign currency translation increased net sales by
0.3%
for fiscal
2018
.
Healthcare Disposables.
Net sales of healthcare disposables products increased by
$10,723
, or
7.4%
, for fiscal
2018
compared with fiscal
2017
. The increase was primarily driven by our higher margin products such as sterility assurance and waterline disinfection products, as well as our branded products, and to a lesser extent, improved pricing.
Dialysis.
Net sales of dialysis products and services increased by
$1,115
or
3.7%
, for fiscal
2018
compared with fiscal
2017
. The increase was primarily due to the increase in sales volume for our domestic concentrate.
(dollar amounts in thousands except share and per share data or as otherwise specified)
24
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Gross Profit
Gross profit increased by
$46,811
, or
12.7%
, to
$413,971
for fiscal
2018
from
$367,160
for fiscal
2017
. Gross profit as a percentage of net sales for fiscal
2018
and 2017 was
47.5%
and
47.7%
, respectively. Excluding the impact of acquisition-related and restructuring-related items, gross profit as a percentage of net sales for fiscal
2018
and
2017
was
47.8%
and
47.7%
, respectively.
The decrease in gross profit as a percentages of net sales for fiscal
2018
was primarily due to the reclassification of certain salary and benefit related costs that had previously been recorded in operating expenses into cost of sales and the dilutive effect of the BHT acquisition, partially offset by increased productivity and operational efficiencies. The reclassification negatively impacted gross profit as a percentage of net sales by approximately
0.7%
for fiscal
2018
.
Operating Expenses
Operating expenses as a percentage of net sales for fiscal
2018
and
2017
were
33.5%
and
33.4%
, respectively. As stated above, there was a reclassification of certain salary and benefit related costs that had previously been recorded in operating expenses into cost of sales, which positively impacted operating expenses as a percentage of net sales by approximately
0.7%
for fiscal
2018
.
Selling expenses increased by
$13,529
, or
11.7%
, to
$129,642
for fiscal
2018
from
$116,113
for fiscal
2017
. The increase was due to higher sales incentive compensation-related costs primarily in our Endoscopy segment, additional sales and marketing initiatives to expand into new markets (including international markets) and the inclusion of selling and marketing expenses of our recent acquisitions. Selling expenses as a percentage of net sales were
14.9%
and
15.1%
for fiscal
2018
and
2017
, respectively.
General and administrative expenses increased by
$15,749
, or
12.9%
, to
$138,019
for fiscal
2018
from
$122,270
for fiscal
2017
. The increase was primarily due to incremental internal and external resources to support various growth initiatives and compliance requirements and higher acquisition-related items such as transaction and integration-related costs. General and administrative expenses were also negatively impacted by the fiscal 2018 settlement of a patent infringement matter. These cost increases were partially offset by a decrease in costs associated with the fiscal 2016 retirement of our former Chief Executive Officer. General and administrative expenses as a percentage of net sales were
15.8%
and
15.9%
for fiscal
2018
and 2017, respectively.
Research and development expenses (which include continuing engineering costs) increased by
$6,279
, or
34.2%
, to
$24,646
for fiscal
2018
from
$18,367
for fiscal
2017
. The increase was primarily due to additional product development initiatives primarily in our Endoscopy segment. Research and development expenses as a percentage of net sales were
2.8%
and
2.4%
for fiscal
2018
and
2017
, respectively.
Operating Income
Endoscopy.
The Endoscopy segment’s operating income increased by
$13,393
, or
18.2%
, for fiscal
2018
compared with fiscal
2017
. The increase was primarily due to increased sales volume in the United States and internationally for our endoscopy products and services, as further explained above. This was partially offset by increases in acquisition-related and restructuring-related costs, litigation matters, sales commission expense and other compensation-related costs due to increased headcount. The settlement of a patent infringement matter affected operating income as a percentage of sales by approximately 0.5% for fiscal
2018
.
Water Purification and Filtration.
The Water Purification and Filtration segment’s operating income increased by
$1,941
, or
5.9%
, for fiscal
2018
compared with fiscal
2017
. The increase was primarily due to higher sales, partially offset by compensation-related costs, research and development costs and higher sales commission expense.
Healthcare Disposables.
The Healthcare Disposables segment’s operating income increased by
$3,707
, or
13.2%
, for fiscal
2018
compared with fiscal
2017
. The increase was due to higher sales (primarily acquisition-related) and improved gross margins resulting from increased productivity and favorable mix, mostly offset by inventory adjustments, increased compensation-related costs and increased research and development.
Dialysis.
The Dialysis segment’s operating income decreased by
$774
, or
9.5%
, for fiscal
2018
compared with fiscal
2017
. The decrease was primarily due to the shift to lower margin products, partially offset by higher net sales.
(dollar amounts in thousands except share and per share data or as otherwise specified)
25
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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
$7,013
, or
21.7%
, for fiscal
2018
from fiscal
2017
. These increases were primarily due to the addition of internal and external resources to address our continued growth initiatives, compliance requirements and various restructuring-related activities. This was partially offset by a decrease in costs associated with the fiscal 2016 retirement of our former Chief Executive Officer.
Interest Expense, Net
Interest expense, net increased by
$986
, or
22.9%
, to
$5,289
for fiscal
2018
from
$4,303
for fiscal
2017
. The increase resulted from an increase in the average outstanding borrowings due to the funding of acquisitions.
Other Income
Other income of
$1,138
for fiscal
2018
represents the favorable resolution of the contingent liability associated with a previous acquisition.
Income Taxes
The consolidated effective tax rate decreased to
22.5%
for fiscal
2018
from
32.8%
for fiscal
2017
. The decrease was attributed to the recording of the discrete net tax benefits associated with the
$8,657
impact of the revaluation of our U.S. net deferred tax liabilities as a result of the 2017 Tax Act, which includes an adjustment to prior reported excess tax benefits as a result of the change in the U.S. federal statutory rate applicable to stock compensation. The decrease was partially offset by the recording of a $2,785 valuation allowance on deferred tax assets related to a previous acquisition.
As a result of the 2017 Tax Act, we revised our annual effective rate to reflect the change in the U.S. federal statutory rate by computing a tentative tax under both rates, and then prorating the tentative tax based on the number of days with and without the rate change to arrive at a blended tax rate of 26.9%. This blended rate was applied for fiscal 2018, and the new U.S. federal statutory rate of 21% will apply to fiscal 2019 and beyond.
Fiscal 2017 compared with Fiscal 2016
Net Sales
Total net sales increased by $105,402, or 15.9%, to $770,157 for fiscal 2017 from $664,755 for fiscal 2016. The 15.9% increase in net sales 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 for fiscal 2017 from $149,700 for fiscal 2016. The 13.9% increase in net sales consists 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%, for fiscal 2017 compared with fiscal 2016. The 16.7% increase in net sales consists 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%, for 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.
Healthcare Disposables.
Net sales of healthcare disposables products increased by $31,873, or 28.3%, for fiscal 2017 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
26
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Dialysis.
Net sales of dialysis products and services decreased by $2,269, or 6.9%, for fiscal 2017 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.
Gross Profit
Gross profit increased by $57,974, or 18.8%, to $367,160 for fiscal 2017 from $309,186 for fiscal 2016. Gross profit as a percentage of net sales for 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 for fiscal 2017 and 2016 was 47.7% and 46.6%, respectively.
The increase in gross profit as a percentages of net sales for fiscal 2017 was primarily attributable to 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, lower manufacturing costs primarily due to cost control initiatives, increased plant productivity due to increased sales volume and 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 for fiscal 2017 from $99,062 for fiscal 2016. Selling expenses increased primarily due to higher commission expense relating to increased net sales in our Endoscopy segment, 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, the inclusion of selling and marketing expenses of acquisitions, and an increase in salary and incentive compensation costs. Selling expenses as a percentage of net sales were 15.1% and 14.9% for fiscal 2017 and 2016, respectively.
General and administrative expenses increased by $24,807, or 25.5%, to $122,270 for fiscal 2017 from $97,463 for fiscal 2016. General and administrative expenses increased primarily due to increases in compensation related costs, including stock-based compensation, the addition of internal and external resources to address various growth initiatives and compliance requirements, an increase in amortization expense related to recent acquisitions and various restructuring-related activities. This was partially offset by lower acquisition related items such as transaction and integration-related charges and fair value adjustments. General and administrative expenses as a percentage of net sales were 15.9% and 14.7% for fiscal 2017 and 2016, respectively.
Research and development expenses (which include continuing engineering costs) increased by $2,957, or 19.2%, to $18,367 for fiscal 2017 from $15,410 for 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% for fiscal 2017 and 2016, respectively.
Operating Income
Endoscopy.
The Endoscopy segment’s operating income increased by $12,419, or 20.4%, for 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%, for fiscal 2017 compared with fiscal 2016, primarily as a result of higher sales, partially offset by increased compensation-related costs, higher commission expenses, and 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%, for fiscal 2017 compared with fiscal 2016, primarily due to the sales impact of our recent acquisition and favorable product mix of
(dollar amounts in thousands except share and per share data or as otherwise specified)
27
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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%, for 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% for fiscal 2017 compared with fiscal 2016, primarily due to various restructuring-related and business optimization activities, the addition of internal and external resources to address various growth initiatives and compliance requirements and increases in compensation-related costs, including stock-based compensation expense, partially offset by a decrease in costs associated with the retirement of our former Chief Executive Officer in fiscal 2016.
Interest expense. net
Interest expense, net increased by $983 to $4,303 for fiscal 2017 from $3,320 for 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 to 32.8% for fiscal 2017 from 36.2% for 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 and development activities occur. Additionally, the fiscal 2017 consolidated effective tax rate was negatively impacted by increased state tax expense due to expanded presence within various U.S. tax jurisdictions.
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 our 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 reduce our 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
(dollar amounts in thousands except share and per share data or as otherwise specified)
28
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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 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 exclude 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.
The 2017 Tax Act significantly revised U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income, (2) the Foreign Derived Intangible Income deduction, and (3) the Base Erosion Anti-Abuse Tax and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses. During fiscal 2018, we recorded a favorable benefit related to a revaluation of our deferred tax assets and liabilities as a result of the 2017 Tax Act. Since the tax benefit is largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded the impact on net income and diluted EPS to arrive at our non-GAAP financial measures.
The portion of the excess tax benefits related to stock compensation which is recorded as a reduction of income tax expense at the time of settlement or vesting amounted to $2,173 and $2,241 in fiscal 2018 and 2017, respectively. 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 their impact on net income and diluted EPS to arrive at our non-GAAP financial measures.
During fiscal 2018, the Israeli Government notified us that they would forgive any future amounts due under a contingent obligation payable from a previous acquisition. As a result of this formal notification, we reduced the
$1,138
contingent obligation payable to $0 during fiscal 2018, resulting in a gain through other income. Since this gain was irregular, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.
During fiscal 2018, we settled a patent infringement matter and also recorded an adjustment to another minor litigation matter 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 to exclude such costs to arrive at our non-GAAP financial measures.
During fiscal 2018, we recorded a $2,785 valuation allowance on deferred tax assets related to a prior acquisition. Since this tax adjustment is related to acquired net operating losses and is not representative of our normal effective tax rate, we excluded its impact on net income and diluted EPS for fiscal 2018 to arrive at our non-GAAP financial measures.
During fiscal 2016, we announced the retirement plans of our former 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 to exclude such costs to arrive at our non-GAAP financial measures.
Tax legislation was enacted internationally that enabled us to record favorable tax benefits in 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.
Fiscal 2018
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) other business optimization and restructuring-related charges, (iv) litigation matter, (v) a loss on debt extinguishment, (vi) the resolution of the contingent liability associated with a previous acquisition, (vii) the excess tax benefits applicable to stock compensation, (viii) the establishment of a valuation allowance on deferred tax assets related to a prior acquisition and (ix) the net tax benefit associated with the estimated impact of the revaluation of our U.S. net deferred tax liabilities as a result of the 2017 Tax Act to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
(dollar amounts in thousands except share and per share data or as otherwise specified)
29
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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, (iv) other business optimization and restructuring-related charges and (v) the excess tax benefits applicable to stock compensation 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 and (iv) the favorable impact of tax legislation 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,
|
|
2018
|
|
2017
|
|
2016
|
Net income/Diluted EPS, as reported
|
$
|
91,041
|
|
|
$
|
2.18
|
|
|
$
|
71,378
|
|
|
$
|
1.71
|
|
|
$
|
59,953
|
|
|
$
|
1.44
|
|
Intangible amortization, net of tax
(1)
|
13,267
|
|
|
0.32
|
|
|
12,800
|
|
|
0.30
|
|
|
9,283
|
|
|
0.22
|
|
Acquisition-related items, net of tax
(2)
|
2,835
|
|
|
0.07
|
|
|
1,533
|
|
|
0.04
|
|
|
2,290
|
|
|
0.06
|
|
CEO retirement costs, net of tax
(1)
|
—
|
|
|
—
|
|
|
1,213
|
|
|
0.03
|
|
|
2,212
|
|
|
0.05
|
|
Business optimization and restructuring-related charges, net of tax
(3)
|
4,658
|
|
|
0.11
|
|
|
2,057
|
|
|
0.05
|
|
|
—
|
|
|
—
|
|
Litigation matters, net of tax
(1)
|
1,637
|
|
|
0.04
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss on debt extinguishment, net of tax
(4)
|
91
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Resolution of contingent liability
(5)
|
(1,138
|
)
|
|
(0.03
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Excess tax benefit
(6)
|
(2,173
|
)
|
|
(0.05
|
)
|
|
(2,241
|
)
|
|
(0.05
|
)
|
|
—
|
|
|
—
|
|
Tax valuation allowance
(6)
|
2,785
|
|
|
0.07
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax legislative changes
(6)
|
(8,657
|
)
|
|
(0.20
|
)
|
|
—
|
|
|
—
|
|
|
(800
|
)
|
|
(0.02
|
)
|
Non-GAAP net income/Non-GAAP diluted EPS
|
$
|
104,346
|
|
|
$
|
2.51
|
|
|
$
|
86,740
|
|
|
$
|
2.08
|
|
|
$
|
72,938
|
|
|
$
|
1.75
|
|
________________________________________________
|
|
(1)
|
Amounts were recorded in general and administrative expenses.
|
|
|
(2)
|
In fiscal 2018, pre-tax acquisition-related items of $893 were recorded in cost of sales and $3,154 were recorded in general and administrative expenses. 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.
|
|
|
(3)
|
In fiscal 2018, pre-tax restructuring-related items of $1,517 were recorded in cost of sales and $3,814 were recorded in general and administrative expenses. In fiscal 2017, pre-tax restructuring-related items of $3,284 were recorded in general and administrative expenses.
|
|
|
(4)
|
Amounts were recorded in interest expense, net.
|
|
|
(5)
|
Amounts were recorded in other income.
|
|
|
(6)
|
Amounts were recorded in income taxes.
|
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 net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased intangible assets that reduce 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 income from operations, 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 operating performance 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
30
Cantel Medical Corp. 2018 Annual Report on Form 10-K
The reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income, as reported
|
$
|
91,041
|
|
|
$
|
71,378
|
|
|
$
|
59,953
|
|
Interest expense, net
|
5,289
|
|
|
4,303
|
|
|
3,320
|
|
Income taxes
|
26,472
|
|
|
34,855
|
|
|
33,978
|
|
Depreciation
|
17,473
|
|
|
15,045
|
|
|
11,989
|
|
Amortization
|
17,357
|
|
|
18,407
|
|
|
13,095
|
|
Loss on disposal of fixed assets
|
768
|
|
|
966
|
|
|
553
|
|
Stock-based compensation expense
|
9,615
|
|
|
8,844
|
|
|
8,361
|
|
EBITDAS
|
168,015
|
|
|
153,798
|
|
|
131,249
|
|
Acquisition-related items
|
4,047
|
|
|
2,447
|
|
|
3,213
|
|
CEO retirement costs
(1)
|
—
|
|
|
1,937
|
|
|
3,487
|
|
Restructuring-related charges
(2)
|
5,001
|
|
|
2,760
|
|
|
—
|
|
Litigation matters
|
2,345
|
|
|
—
|
|
|
—
|
|
Resolution of contingent liability
|
(1,138
|
)
|
|
—
|
|
|
—
|
|
Adjusted EBITDAS
|
$
|
178,270
|
|
|
$
|
160,942
|
|
|
$
|
137,949
|
|
________________________________________________
|
|
(1)
|
For comparative purposes, we have revised the amounts associated with CEO retirement costs for the twelve months ended July 31, 2017 to exclude stock-based compensation expense which was reported in "Stock-based compensation expense" above.
|
|
|
(2)
|
Excludes stock-based compensation expense.
|
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,
|
|
2018
|
|
2017
|
|
2016
|
Long-term debt (excluding debt issuance costs)
|
$
|
200,000
|
|
|
$
|
126,000
|
|
|
$
|
116,000
|
|
Less cash and cash equivalents
|
(94,097
|
)
|
|
(36,584
|
)
|
|
(28,367
|
)
|
Net debt
|
$
|
105,903
|
|
|
$
|
89,416
|
|
|
$
|
87,633
|
|
We define organic sales as net sales less (i) the impact of foreign currency translation, (ii) net sales related to acquired businesses during the first twelve months of ownership and (iii) divestitures 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 and divestitures because the nature, size, and number of acquisitions and divestitures 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 “Net Sales.”
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 acquisitions and related business activities.
Cash Flows
(dollar amounts in thousands except share and per share data or as otherwise specified)
31
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Net Cash Provided by Operating Activities.
Net cash provided by operating activities increased by
$17,719
to
$125,912
in fiscal 2018 from
$108,193
in fiscal 2017, primarily due to the increase in net income (after adjusting for non-cash items) and the timing of receipts associated with accounts receivable and the timing of payments associated with accounts payable (both net of acquisitions). This was partially offset by an increase in prepaid expenses primarily due to a change in the timing of our annual insurance program. Net cash provided by operating activities increased by
$27,925
to
$108,193
in fiscal 2017 from
$80,268
in 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 the timing of payments.
Net Cash Used in Investing Activities.
Net cash used in investing activities increased by
$28,124
to
$125,186
in fiscal 2018 from
$97,062
in fiscal 2017, primarily due to an increase in cash paid for acquisitions and by an increase in capital expenditures. Net cash used in investing activities decreased by
$15,920
to
$97,062
in fiscal 2017 from
$112,982
in fiscal 2016, primarily due to a decrease in cash consideration paid for acquisitions, partially offset by an increase in capital expenditures. During fiscal 2018, 2017 and 2016, net cash used in investing activities included capital expenditures of
$37,698
,
$27,065
and
$18,889
, respectively, which included expenditures for ERP software, 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
$59,888
to
$57,137
of cash provided in fiscal 2018 from
$2,751
cash used in fiscal 2017. Net cash used in financing activities increased by
$32,693
to
$2,751
of cash used in fiscal 2017 from
$29,942
of cash provided in fiscal 2016. The changes in net cash provided by (used in) financing activities were primarily due to the refinancing of our credit facility, resulting in $200,000 in term loan borrowings in fiscal 2018, and the net effect of borrowings and repayments under our revolving 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 June 28, 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”). The Amended Credit Agreement refinances our credit facility under the Third Amended and Restated Credit Agreement (the “Existing Credit Agreement”) dated March 4, 2011, to include a
$200,000
tranche A term loan and a
$400,000
revolving credit facility. Subject to the satisfaction of certain conditions precedent, including the consent of the lenders, we may from time to time increase our borrowing capacity under the revolving credit facility or tranche A term loan by an aggregate amount not to exceed
$300,000
. The 2018 Credit Agreement expires on June 28, 2023. 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.
As of
July 31, 2018
, we had
$200,000
of term loan A borrowings under the 2018 Credit Agreement. Subsequent to
July 31, 2018
, we utilized cash on hand from term loan A borrowings under our new credit facility to fund the $17,000 purchase price of the CES business acquisition.
Borrowings under the 2018 Credit Agreement bear interest at rates ranging from
0.00%
to
1.00%
above prime rate for base rate borrowings, or at rates ranging from
1.00%
to
2.00%
above the London Interbank Offered Rate (“LIBOR”), depending upon our “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 2018 Credit Agreement (“Consolidated EBITDA”). The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates ranging from
0.20%
to
0.35%
, depending on our Consolidated Leverage Ratio.
We are in compliance with all financial and other covenants under the 2018 Credit Agreement. For further information regarding the 2018 Credit Agreement, including a description of affirmative and negative covenants, see Note 9 to our consolidated financial statements in Part II, Item 8 of this report.
Financing Needs
At
July 31, 2018
, our total long-term debt (excluding debt issuance costs) of
$200,000
, net of our cash and cash equivalents of
$94,097
, was
$105,903
. Stockholders' equity as of that date was
$608,867
. Our operating segments generate significant cash from operations. At
July 31, 2018
, we had a cash balance of
$94,097
, of which $30,041 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 indefinitely reinvested and unavailable for repatriation. We believe that our current cash position, anticipated cash flows from operations and the funds available under our 2018 Credit Agreement
(dollar amounts in thousands except share and per share data or as otherwise specified)
32
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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 27, 2018
, approximately $400,000 was available under our 2018 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 margin. 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 margin could be adversely affected.
Compensation Agreements
We have previously entered into various severance contracts with our senior executives, including our corporate executive officers and certain of our subsidiary principal executive officers, which define certain compensation arrangements relating to various employment termination scenarios. Additionally, in March 2016 we entered into a succession plan agreement due to the planned retirement of our former 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 required payments to our former Chief Executive Officer which began 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 that is recorded in other long-term liabilities.
Commitments and Contractual Obligations
As of
July 31, 2018
, 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,
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Maturity of the credit facility
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
160,000
|
|
|
$
|
—
|
|
|
$
|
200,000
|
|
Expected interest payments under the credit facility
|
7,346
|
|
|
7,011
|
|
|
6,676
|
|
|
6,341
|
|
|
5,521
|
|
|
—
|
|
|
32,895
|
|
Minimum commitments under noncancelable operating leases
|
7,958
|
|
|
6,208
|
|
|
4,666
|
|
|
2,904
|
|
|
2,104
|
|
|
3,593
|
|
|
27,433
|
|
Compensation agreements
|
5,954
|
|
|
1,238
|
|
|
386
|
|
|
292
|
|
|
292
|
|
|
—
|
|
|
8,162
|
|
Contingent consideration
|
—
|
|
|
1,298
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,298
|
|
Other long-term obligations
|
385
|
|
|
619
|
|
|
128
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
1,150
|
|
Total contractual obligations
|
$
|
31,643
|
|
|
$
|
26,374
|
|
|
$
|
21,856
|
|
|
$
|
19,555
|
|
|
$
|
167,917
|
|
|
$
|
3,593
|
|
|
$
|
270,938
|
|
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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
33
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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 one large customer in our Dialysis segment and several customers in our Endoscopy segment whereby all products are shipped FOB destination and include risk of loss provisions). 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 is 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.
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 endoscopy and water purification and filtration service contracts, 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
$8,401
,
$6,291
, and
$5,944
in fiscal
2018
,
2017
, and
2016
, 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.
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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
34
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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 net realizable value. 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 our 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. 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, 2018
, 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.
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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
35
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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, 2018
, 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
To the stockholders and the Board of Directors of Cantel Medical Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Cantel Medical Corp. and subsidiaries (the “Company”) as of
July 31, 2018
, the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows, for the year ended
July 31, 2018
, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
July 31, 2018
, and the results of its operations and its cash flows for the year ended
July 31, 2018
, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
September 27, 2018
, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 27, 2018
We have served as the Company's auditor since 2017.
Cantel Medical Corp. 2018 Annual Report on Form 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Cantel Medical Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Cantel Medical Corp. and subsidiaries (the “Company”) as of July 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
July 31, 2018
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended
July 31, 2018
, of the Company and our report dated
September 27, 2018
, expressed an unqualified opinion on those financial statements.
As described in
Management’s Report on Internal Control Over Financial Reporting
, management excluded from its assessment the internal control over financial reporting at BHT Group and Aexis Medical which were acquired on August 23, 2017 and March 21, 2018, respectively and whose financial statements constitute 10.2% and 13.8% of total assets and net assets, respectively, 3.4% of net sales, and 2.4% of net income of the consolidated financial statement amounts as of and for the year ended
July 31, 2018
. Accordingly, our audit did not include the internal control over financial reporting at BHT Group and Aexis Medical.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 27, 2018
Cantel Medical Corp. 2018 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 the accompanying consolidated balance sheet of Cantel Medical Corp. as of July 31, 2017 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the two years in the period ended July 31, 2017. Our audits also included the financial statement schedule included in the Index at Item 15(a) for the two year period ended July 31, 2017. 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 the consolidated results of its operations and its cash flows for each of the two 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.
/s/ Ernst & Young LLP
New York, New York
September 28, 2017
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
94,097
|
|
|
$
|
36,584
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,149 and $1,808
|
118,642
|
|
|
110,656
|
|
Inventories, net
|
107,592
|
|
|
98,724
|
|
Prepaid expenses and other current assets
|
17,912
|
|
|
11,407
|
|
Total current assets
|
338,243
|
|
|
257,371
|
|
|
|
|
|
Property and equipment, net
|
111,417
|
|
|
88,338
|
|
Intangible assets, net
|
137,361
|
|
|
124,512
|
|
Goodwill
|
368,027
|
|
|
311,445
|
|
Other assets
|
5,749
|
|
|
4,707
|
|
Deferred income taxes
|
2,911
|
|
|
—
|
|
Total assets
|
$
|
963,708
|
|
|
$
|
786,373
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
34,258
|
|
|
$
|
27,469
|
|
Compensation payable
|
30,595
|
|
|
27,468
|
|
Accrued expenses
|
28,525
|
|
|
23,393
|
|
Deferred revenue
|
28,614
|
|
|
25,282
|
|
Current portion of long-term debt
|
10,000
|
|
|
—
|
|
Income taxes payable
|
2,791
|
|
|
3,167
|
|
Total current liabilities
|
134,783
|
|
|
106,779
|
|
|
|
|
|
Long-term debt
|
187,302
|
|
|
126,000
|
|
Deferred income taxes
|
27,624
|
|
|
24,714
|
|
Other long-term liabilities
|
5,132
|
|
|
4,948
|
|
Total liabilities
|
354,841
|
|
|
262,441
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
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 46,243,582 shares and outstanding 41,706,084 shares as of July 31, 2018; issued 46,194,374 shares and outstanding 41,728,934 shares as of July 31, 2017
|
4,624
|
|
|
4,619
|
|
Additional paid-in capital
|
184,212
|
|
|
174,602
|
|
Retained earnings
|
491,540
|
|
|
407,590
|
|
Accumulated other comprehensive loss
|
(11,456
|
)
|
|
(9,900
|
)
|
Treasury Stock, at cost; 4,537,498 shares as of July 31, 2018; 4,465,440 shares as of July 31, 2017
|
(60,053
|
)
|
|
(52,979
|
)
|
Total stockholders’ equity
|
608,867
|
|
|
523,932
|
|
Total liabilities and stockholders' equity
|
$
|
963,708
|
|
|
$
|
786,373
|
|
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. 2018 Annual Report on Form 10-K
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
|
|
|
|
|
|
|
|
Product sales
|
$
|
765,158
|
|
|
$
|
684,678
|
|
|
$
|
584,750
|
|
Product service
|
106,764
|
|
|
85,479
|
|
|
80,005
|
|
Total net sales
|
871,922
|
|
|
770,157
|
|
|
664,755
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
Product sales
|
385,597
|
|
|
343,641
|
|
|
300,704
|
|
Product service
|
72,354
|
|
|
59,356
|
|
|
54,865
|
|
Total cost of sales
|
457,951
|
|
|
402,997
|
|
|
355,569
|
|
|
|
|
|
|
|
Gross profit
|
413,971
|
|
|
367,160
|
|
|
309,186
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Selling
|
129,642
|
|
|
116,113
|
|
|
99,062
|
|
General and administrative
|
138,019
|
|
|
122,270
|
|
|
97,463
|
|
Research and development
|
24,646
|
|
|
18,367
|
|
|
15,410
|
|
Total operating expenses
|
292,307
|
|
|
256,750
|
|
|
211,935
|
|
|
|
|
|
|
|
Income from operations
|
121,664
|
|
|
110,410
|
|
|
97,251
|
|
|
|
|
|
|
|
Interest expense, net
|
5,289
|
|
|
4,303
|
|
|
3,320
|
|
Other income
|
(1,138
|
)
|
|
(126
|
)
|
|
—
|
|
|
|
|
|
|
|
Income before income taxes
|
117,513
|
|
|
106,233
|
|
|
93,931
|
|
|
|
|
|
|
|
Income taxes
|
26,472
|
|
|
34,855
|
|
|
33,978
|
|
|
|
|
|
|
|
Net income
|
$
|
91,041
|
|
|
$
|
71,378
|
|
|
$
|
59,953
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.18
|
|
|
$
|
1.71
|
|
|
$
|
1.44
|
|
Diluted
|
$
|
2.18
|
|
|
$
|
1.71
|
|
|
$
|
1.44
|
|
Dividends per common share
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
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. 2018 Annual Report on Form 10-K
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
Net income
|
$
|
91,041
|
|
|
$
|
71,378
|
|
|
$
|
59,953
|
|
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
Foreign currency translation
|
(1,556
|
)
|
|
1,895
|
|
|
(13,019
|
)
|
Total other comprehensive (loss) income
|
(1,556
|
)
|
|
1,895
|
|
|
(13,019
|
)
|
|
|
|
|
|
|
Comprehensive income
|
$
|
89,485
|
|
|
$
|
73,273
|
|
|
$
|
46,934
|
|
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. 2018 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, August 1, 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
|
|
Repurchases of shares
|
(62,559
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,074
|
)
|
|
(7,074
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
9,615
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,615
|
|
Issuance of restricted stock
|
46,551
|
|
|
5
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancellations of restricted stock
|
(6,842
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,091
|
)
|
|
—
|
|
|
—
|
|
|
(7,091
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
91,041
|
|
|
—
|
|
|
—
|
|
|
91,041
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,556
|
)
|
|
—
|
|
|
(1,556
|
)
|
Balance, July 31, 2018
|
41,706,084
|
|
|
$
|
4,624
|
|
|
$
|
184,212
|
|
|
$
|
491,540
|
|
|
$
|
(11,456
|
)
|
|
$
|
(60,053
|
)
|
|
$
|
608,867
|
|
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. 2018 Annual Report on Form 10-K
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
$
|
91,041
|
|
|
$
|
71,378
|
|
|
$
|
59,953
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
17,473
|
|
|
15,045
|
|
|
11,989
|
|
Amortization
|
17,357
|
|
|
18,407
|
|
|
13,095
|
|
Stock-based compensation expense
|
9,615
|
|
|
8,844
|
|
|
8,361
|
|
Deferred income taxes
|
(7,520
|
)
|
|
118
|
|
|
(1,710
|
)
|
Excess tax benefits from stock-based compensation
|
—
|
|
|
—
|
|
|
(1,179
|
)
|
Other non-cash items, net
|
1,076
|
|
|
1,102
|
|
|
267
|
|
Changes in assets and liabilities, net of effects of business acquisitions/divestitures:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
(3,700
|
)
|
|
(12,860
|
)
|
|
(12,729
|
)
|
Inventories
|
(3,785
|
)
|
|
887
|
|
|
(15,558
|
)
|
Prepaid expenses and other assets
|
(5,169
|
)
|
|
(957
|
)
|
|
(2,850
|
)
|
Accounts payable and other liabilities
|
10,614
|
|
|
7,124
|
|
|
17,657
|
|
Income taxes
|
(1,090
|
)
|
|
(895
|
)
|
|
2,972
|
|
Net cash provided by operating activities
|
125,912
|
|
|
108,193
|
|
|
80,268
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
(37,698
|
)
|
|
(27,065
|
)
|
|
(18,889
|
)
|
Proceeds from disposal of fixed assets
|
—
|
|
|
47
|
|
|
96
|
|
Acquisition of businesses, net of cash acquired
|
(87,488
|
)
|
|
(70,044
|
)
|
|
(94,528
|
)
|
Other, net
|
—
|
|
|
—
|
|
|
339
|
|
Net cash used in investing activities
|
(125,186
|
)
|
|
(97,062
|
)
|
|
(112,982
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
200,000
|
|
|
—
|
|
|
—
|
|
Borrowings under revolving credit facility
|
82,300
|
|
|
74,000
|
|
|
96,500
|
|
Repayments under revolving credit facility
|
(208,300
|
)
|
|
(64,000
|
)
|
|
(59,000
|
)
|
Debt issuance costs
|
(2,698
|
)
|
|
—
|
|
|
—
|
|
Dividends paid
|
(7,091
|
)
|
|
(5,841
|
)
|
|
(5,005
|
)
|
Excess tax benefits from stock-based compensation
|
—
|
|
|
—
|
|
|
1,179
|
|
Purchases of treasury stock
|
(7,074
|
)
|
|
(6,910
|
)
|
|
(3,732
|
)
|
Net cash provided by (used in) financing activities
|
57,137
|
|
|
(2,751
|
)
|
|
29,942
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(350
|
)
|
|
(163
|
)
|
|
(581
|
)
|
Increase (decrease) in cash and cash equivalents
|
57,513
|
|
|
8,217
|
|
|
(3,353
|
)
|
Cash and cash equivalents at beginning of period
|
36,584
|
|
|
28,367
|
|
|
31,720
|
|
Cash and cash equivalents at end of period
|
$
|
94,097
|
|
|
$
|
36,584
|
|
|
$
|
28,367
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash interest payments
|
$
|
5,156
|
|
|
$
|
3,455
|
|
|
$
|
3,001
|
|
Cash income tax payments
|
$
|
35,251
|
|
|
$
|
35,858
|
|
|
$
|
33,559
|
|
Accruals related to purchases of property and equipment
|
$
|
2,281
|
|
|
$
|
192
|
|
|
$
|
—
|
|
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. 2018 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
2018
,
2017
,
2016
or “fiscal”
2018
,
2017
,
2016
or other years refer to our fiscal year ended July 31 of that respective year, and references to
2019
or “fiscal”
2019
refer to our fiscal year ending July 31,
2019
.
Cantel is a leading provider of infection prevention and control 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.
See Note 16, "Reportable Segments."
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 performed a review of events subsequent to
July 31, 2018
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. 2018 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 and include risk of loss provisions). 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.
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 endoscopy and water purification and filtration service contracts, 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 certain countries 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
$8,401
,
$6,291
, and
$5,944
in fiscal
2018
,
2017
, and
2016
, 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 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
47
Cantel Medical Corp. 2018 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 net realizable value. 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
-
40
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
2018
,
2017
and
2016
was
$17,473
,
$15,045
and
$11,989
, 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 May 1, 2018, 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 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.
Historically, goodwill and indefinite lived intangible assets were tested annually for impairment as of July 31 of each fiscal year. In fiscal 2018, we changed our measurement date to May 1 of each year to better align the annual impairment test with the timing of our annual strategic planning process.
(dollar amounts in thousands except share and per share data or as otherwise specified)
48
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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 May 1,
2018
, 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.
We did not recognize any impairment charges for goodwill or indefinite lived intangibles in the years presented.
Long-Lived Assets
We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. Our historical assessments of our long-lived assets have not differed significantly from the actual amounts realized. However, the determination of fair value requires us to make certain assumptions and estimates and is highly subjective. On
July 31, 2018
, 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.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized to interest expense over the term of the related credit agreements. As of
July 31, 2018
, such debt issuance costs, net of related amortization, were included as a reduction to long-term debt and amounted to
$2,698
.
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. As of
July 31, 2018
and
2017
, our warranty reserves are included in accrued expenses in the consolidated balance sheets and amounted to
$3,280
and
$2,328
, respectively. Our warranty provisions and settlements in fiscal
2018
and
2017
were not material and principally relate to our endoscope reprocessing and water purification products.
Stock-Based Compensation
Stock-based 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 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. We account for forfeitures as they occur, rather than estimate forfeitures over the course of the vesting period.
We determine the fair value of 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 award, the expected dividend yield, the expected term of the award, the probability of meeting performance objectives and the stock price of our peers in the S&P Healthcare Equipment Index.
(dollar amounts in thousands except share and per share data or as otherwise specified)
49
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Advertising Costs
Our policy is to expense advertising costs as they are incurred. Advertising costs charged to expense were
$4,115
,
$3,694
and
$3,349
in fiscal
2018
,
2017
and
2016
, 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 Germany, 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 September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, “
(Topic 805) Simplifying the Accounting for Measurement-Period Adjustments
,” (“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 adopted ASU 2015-06 on August 1, 2017. The adoption of ASU 2015-16 did not have a material impact on our financial position, results of operations or cash flows.
In July 2015, the FASB issued ASU 2015-11, “
(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 adopted ASU 2015-11 on August 1, 2017. The adoption of ASU 2015-11 did not have a material impact on our financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-01, “
(Topic 805) Clarifying the Definition of a Business
,”
(“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 early adopted ASU-2017-01 on August 1, 2017. The adoption of ASU 2017-01 did not have a material impact on our financial position, results of operations or cash flows.
(dollar amounts in thousands except share and per share data or as otherwise specified)
50
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Recently Issued Accounting Standards
In February 2018, the FASB issued ASU 2018-02,
“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”
(“ASU 2018-02”) to allow for the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. The adoption of ASU 2018-02 is not expected to have a significant impact on our financial position, results of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12,
“Targeted Improvements to Accounting for Hedging Activities”
(“ASU 2017-12”) to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. The adoption of ASU 2017-12 is not expected to have a significant impact on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “
(Topic 718) 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 periods within that reporting period. The adoption of ASU 2017-09 is not expected to have a significant impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04,
“(Topic 350) Simplifying the Test for Goodwill Impairment
,” (“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, 2019 (our fiscal year 2021) 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, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15,
“(Topic 230) Classification of Certain Cash Receipts and Cash Payments
,
”
(“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. The adoption of ASU 2016-15 is not expected to have a significant impact on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “
(Topic 842) Leases
,” (“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, results of operations and cash flows.
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),”
(“ASU 2015-14”), 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 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
51
Cantel Medical Corp. 2018 Annual Report on Form 10-K
In preparation for our adoption of ASU 2014-09 and ASU 2016-12 on August 1, 2018, we have obtained representative samples of contracts and other forms of agreements with our customers in the United States and international locations and have evaluated the provisions contained therein in light of the five-step model specified by the new guidance. We have also evaluated 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 have reached conclusions on our accounting assessments related to the standard and finalized updates to our accounting policies, processes and controls and will adopt the new standard on August 1, 2018 using the modified retrospective approach. We expect to record an immaterial adjustment to retained earnings upon adoption of Topic 606 in the first quarter of fiscal 2019, primarily related to the timing of revenue recognition for the shipment of products in both our Endoscopy and Water Purification and Filtration segments where risk of loss provisions are present (“synthetic FOB destination”). The new standard does not require us to defer revenue for these products and allows us to recognize revenue at the time of shipment. The adjustment to retained earnings also includes the impact of the change in timing of revenue recognition associated with software licensing arrangements in our Endoscopy segment. Overall, we expect the adoption of Topic 606 to have an immaterial impact on our fiscal 2019 financial position, results of operations or cash flows. The timing of revenue recognition for our primary revenue streams will not change.
Additionally, we have completed our assessment of new disclosure requirements. Upon adoption of Topic 606, we will provide additional disclosures in the notes to the consolidated financial statements, specifically related to performance obligations and multiple-element revenue streams. We have designed new internal controls that will be implemented in the first quarter of fiscal 2019 to address risks associated with applying the five-step model. Additionally, we have established monitoring controls to identify new sales arrangements and changes in our business environment that could impact our current accounting assessment.
Post-Fiscal
2018
On August 1, 2018, we acquired certain net assets of Stericycle Inc.'s controlled environmental solutions business (“CES business”) for total cash consideration, excluding acquisition-related costs, of
$17,000
. The CES business is a leading provider of testing and certification, environmental monitoring and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance and quality control, and will be included in our Water Purification and Filtration segment.
Fiscal 2018
Aexis Medical
On March 21, 2018, we purchased all of the issued and outstanding stock of Aexis Medical for total consideration, excluding acquisition-related costs, of
$21,600
, consisting of
$20,308
of cash consideration (net of cash acquired), plus contingent consideration ranging from
zero
to a maximum of
$1,850
, which is payable upon the achievement of certain purchase order targets through March 21, 2020. Aexis Medical specializes in advanced software solutions focused on the tracking and monitoring of instrument reprocessing for hospitals and healthcare professionals, and is included in our Endoscopy segment.
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 cash consideration, excluding acquisition related costs, of
$60,216
. 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 is 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 cash 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
52
Cantel Medical Corp. 2018 Annual Report on Form 10-K
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 cash 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 cash 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Purchase Price Allocation
|
|
Aexis Medical
(1)
|
|
BHT Group
(1)
|
|
CR Kennedy
|
|
Vantage
(1)
|
|
Accutron
(1)
|
|
|
(Preliminary)
|
|
(Final)
|
|
(Final)
|
|
(Final)
|
|
(Final)
|
Purchase Price:
|
|
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$
|
20,308
|
|
|
$
|
60,216
|
|
|
$
|
11,999
|
|
|
$
|
4,044
|
|
|
$
|
53,049
|
|
Fair value of contingent consideration
|
|
1,292
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
21,600
|
|
|
$
|
60,216
|
|
|
$
|
11,999
|
|
|
$
|
4,044
|
|
|
$
|
53,049
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation:
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
130
|
|
|
835
|
|
|
—
|
|
|
433
|
|
|
1,676
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
1,800
|
|
|
12,500
|
|
|
4,200
|
|
|
992
|
|
|
12,800
|
|
Technology
|
|
4,600
|
|
|
6,200
|
|
|
—
|
|
|
—
|
|
|
10,000
|
|
Brand names
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,000
|
|
Goodwill
|
|
17,092
|
|
|
40,934
|
|
|
5,894
|
|
|
2,299
|
|
|
21,989
|
|
Deferred income taxes
|
|
(1,639
|
)
|
|
(5,881
|
)
|
|
—
|
|
|
—
|
|
|
112
|
|
Other working capital
|
|
909
|
|
|
5,628
|
|
|
1,905
|
|
|
320
|
|
|
4,472
|
|
Contingent consideration
|
|
(1,292
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
21,600
|
|
|
$
|
60,216
|
|
|
$
|
11,999
|
|
|
$
|
4,044
|
|
|
$
|
53,049
|
|
_______________________________________________
|
|
(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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
53
Cantel Medical Corp. 2018 Annual Report on Form 10-K
4. Inventories, Net
A summary of inventories, net, is as follows:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2018
|
|
2017
|
Raw materials and parts
|
$
|
49,054
|
|
|
$
|
45,831
|
|
Work-in-process
|
13,189
|
|
|
13,484
|
|
Finished goods
|
53,948
|
|
|
48,262
|
|
Less: reserve for excess and obsolete inventory
|
(8,599
|
)
|
|
(8,853
|
)
|
Total inventories, net
|
$
|
107,592
|
|
|
$
|
98,724
|
|
|
|
5.
|
Property and Equipment, Net
|
A summary of property and equipment, net, is as follows:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2018
|
|
2017
|
Land, buildings and improvements
|
$
|
50,162
|
|
|
$
|
46,921
|
|
Furniture, equipment and software
|
121,248
|
|
|
114,735
|
|
Leasehold improvements
|
9,544
|
|
|
7,858
|
|
Construction in process
|
26,003
|
|
|
4,947
|
|
Less: accumulated depreciation
|
(95,540
|
)
|
|
(86,123
|
)
|
Total property and equipment, net
|
$
|
111,417
|
|
|
$
|
88,338
|
|
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, 2018
, 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 forward contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars, which contracts are
one
-month in duration. These short-term contracts are designated as fair value hedge instruments. There were
seven
foreign currency forward contracts with an aggregate notional value of
$30,159
at
July 31, 2018
, 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, 2018
, 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 gains, 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 or Sri Lankan Rupee relative to the U.S. dollar because the overall foreign currency exposures relating to those currencies are currently not deemed significant.
(dollar amounts in thousands except share and per share data or as otherwise specified)
54
Cantel Medical Corp. 2018 Annual Report on Form 10-K
|
|
7.
|
Fair Value Measurements
|
Fair Value Hierarchy
We apply the provisions of 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.
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.
For the Aexis Medical acquisition, additional purchase price payments ranging from
$0
to
$1,850
are contingent upon the achievement of certain purchase order targets through March 21, 2020. We estimated the original fair value of the contingent consideration using the weighted probabilities of the possible contingent payments. As of the date of acquisition, we estimated the original fair value of the contingent consideration to be
$1,292
. We are required to reassess the fair value of contingent payments on a periodic basis. The significant inputs used in these estimates include numerous possible scenarios for the payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario. Given the short term nature of the financial instrument, the contingent consideration will not be discounted to present value. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.
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. In November 2017, the Israeli Government formally notified us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business. During the first quarter of fiscal 2018, we reduced the fair value of this obligation to
$0
. See Note 11, “Commitments and Contingencies.”
The fair values of our financial instruments measured on a recurring basis were categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Money markets
|
$
|
104
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
104
|
|
Total assets
|
104
|
|
|
—
|
|
|
—
|
|
|
104
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
—
|
|
|
—
|
|
|
1,298
|
|
|
1,298
|
|
Total other long-term liabilities:
|
—
|
|
|
—
|
|
|
1,298
|
|
|
1,298
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
|
$
|
1,298
|
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
55
Cantel Medical Corp. 2018 Annual Report on Form 10-K
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Total accrued expenses
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Assumed contingent obligation
|
—
|
|
|
—
|
|
|
1,126
|
|
|
1,126
|
|
Total other long-term liabilities:
|
—
|
|
|
—
|
|
|
1,126
|
|
|
1,126
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,138
|
|
|
$
|
1,138
|
|
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
2018
,
2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aexis Medical Contingent Consideration
|
|
Jet Prep Contingent Consideration
|
|
Jet Prep Assumed Contingent Obligation
|
|
Cantel Medical (U.K.) Contingent Guaranteed Obligation
|
|
Total
|
Balance, August 1, 2015
|
|
$
|
—
|
|
|
$
|
751
|
|
|
$
|
1,138
|
|
|
$
|
888
|
|
|
$
|
2,777
|
|
(Income) loss included in general and administrative expense
|
|
—
|
|
|
(751
|
)
|
|
—
|
|
|
64
|
|
|
(687
|
)
|
Net purchases, issuances, sales and settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(511
|
)
|
|
(511
|
)
|
Balance, July 31, 2016
|
|
—
|
|
|
—
|
|
|
1,138
|
|
|
441
|
|
|
1,579
|
|
Income included in general and administrative expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(265
|
)
|
|
(265
|
)
|
Net purchases, issuances, sales and settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(176
|
)
|
|
(176
|
)
|
Balance, July 31, 2017
|
|
—
|
|
|
—
|
|
|
1,138
|
|
|
—
|
|
|
1,138
|
|
Original fair value of contingent consideration
|
|
1,292
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,292
|
|
Loss included in general and administrative expense
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Net purchases, issuances, sales and settlements
|
|
—
|
|
|
—
|
|
|
(1,138
|
)
|
|
—
|
|
|
(1,138
|
)
|
Balance, July 31, 2018
|
|
$
|
1,298
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
Disclosure of Fair Value of Financial Instruments
As of
July 31, 2018
and
2017
, 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. As of
July 31, 2018
and
2017
, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations as the borrowings rates reflect prevailing market interest rates.
|
|
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 the assets ranging from
3
-
20
years and have a weighted average amortization period of
14 years
. Amortization expense related to intangible assets was
$17,357
,
$18,407
and
$13,095
for fiscal
2018
,
2017
and
2016
, respectively. Our intangible assets that have indefinite useful lives, and therefore are not amortized, consist of trademarks and trade names.
(dollar amounts in thousands except share and per share data or as otherwise specified)
56
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Our intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2018
|
|
July 31, 2017
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
133,347
|
|
|
$
|
(45,618
|
)
|
|
$
|
87,729
|
|
|
$
|
119,576
|
|
|
$
|
(34,773
|
)
|
|
$
|
84,803
|
|
Technology
(1)
|
54,585
|
|
|
(19,836
|
)
|
|
34,749
|
|
|
39,064
|
|
|
(15,260
|
)
|
|
23,804
|
|
Brand names
|
8,141
|
|
|
(3,857
|
)
|
|
4,284
|
|
|
8,188
|
|
|
(3,225
|
)
|
|
4,963
|
|
Non-compete agreements
|
3,060
|
|
|
(1,628
|
)
|
|
1,432
|
|
|
3,092
|
|
|
(1,428
|
)
|
|
1,664
|
|
Patents and other registrations
|
2,826
|
|
|
(1,179
|
)
|
|
1,647
|
|
|
2,783
|
|
|
(1,053
|
)
|
|
1,730
|
|
|
201,959
|
|
|
(72,118
|
)
|
|
129,841
|
|
|
172,703
|
|
|
(55,739
|
)
|
|
116,964
|
|
Trademarks and tradenames
|
7,520
|
|
|
—
|
|
|
7,520
|
|
|
7,548
|
|
|
—
|
|
|
7,548
|
|
Total intangible assets
|
$
|
209,479
|
|
|
$
|
(72,118
|
)
|
|
$
|
137,361
|
|
|
$
|
180,251
|
|
|
$
|
(55,739
|
)
|
|
$
|
124,512
|
|
_______________________________________________
|
|
(1)
|
The gross and accumulated amortization amounts previously reported as of July 31, 2017 have been revised to exclude the
$3,730
fully amortized technology intangible asset and associated accumulated amortization related to the Jet Prep business. This did not result in any change to the net technology intangible asset as of July 31, 2017.
|
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
$17,639
,
$15,893
,
$15,892
,
$15,550
and
$15,177
of amortization expense related to intangible assets in fiscal
2019
,
2020
,
2021
,
2022
and
2023
, respectively.
Goodwill changed during fiscal
2018
and
2017
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endoscopy
|
|
Water Purification and Filtration
|
|
Healthcare Disposables
|
|
Dialysis
|
|
Total
Goodwill
|
Balance, August 1, 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
|
|
Acquisitions
|
58,026
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58,026
|
|
Foreign currency translation
|
(1,281
|
)
|
|
(163
|
)
|
|
—
|
|
|
—
|
|
|
(1,444
|
)
|
Balance, July 31, 2018
|
$
|
186,690
|
|
|
$
|
58,925
|
|
|
$
|
114,279
|
|
|
$
|
8,133
|
|
|
$
|
368,027
|
|
On May 1, 2018, we performed impairment analysis of our 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.”
(dollar amounts in thousands except share and per share data or as otherwise specified)
57
Cantel Medical Corp. 2018 Annual Report on Form 10-K
|
|
9.
|
Financing Arrangements
|
Our long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
Revolving credit loans outstanding
|
$
|
—
|
|
|
$
|
126,000
|
|
Tranche A term loan outstanding
|
200,000
|
|
|
—
|
|
Unamortized debt issuance costs
|
(2,698
|
)
|
|
—
|
|
Total long-term debt, net of unamortized debt issuance costs
|
197,302
|
|
|
126,000
|
|
Current portion of long-term debt
|
(10,000
|
)
|
|
—
|
|
Long-term debt, net of unamortized debt issuance costs and excluding current portion
|
$
|
187,302
|
|
|
$
|
126,000
|
|
On June 28, 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”). The Amended Credit Agreement refinances our credit facility under the Third Amended and Restated Credit Agreement (the “Existing Credit Agreement”) dated March 4, 2011, to include a
$200,000
tranche A term loan and a
$400,000
revolving credit facility. Subject to the satisfaction of certain conditions precedent, including the consent of the lenders, we may from time to time increase its borrowing capacity under the revolving credit facility or tranche A term loan by an aggregate amount not to exceed
$300,000
. The 2018 Credit Agreement expires on June 28, 2023. 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.
As of
July 31, 2018
, we had
$200,000
of term loan A borrowings outstanding and
no
revolver borrowings under the 2018 Credit Agreement. The tranche A term loan is subject to principal amortization, with
$10.0 million
due and payable in each of fiscal 2019, 2020, 2021 and 2022, with the remaining
$160.0 million
due and payable at maturity on June 28, 2023.
Borrowings under the 2018 Credit Agreement bear interest at rates ranging from
0.00%
to
1.00%
above prime rate for base rate borrowings, or at rates ranging from
1.00%
to
2.00%
above the London Interbank Offered Rate (“LIBOR”), depending upon our “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 2018 Credit Agreement (“Consolidated EBITDA”). The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates ranging from
0.20%
to
0.35%
, depending on our Consolidated Leverage Ratio. At
July 31, 2018
, the lender’s base rate was
5.00%
and the LIBOR rate was
1.25%
. The margins applicable to our outstanding borrowings were
0.25%
above the lender’s base rate or
1.25%
above LIBOR. All of our outstanding borrowings were under LIBOR contracts at
July 31, 2018
. The 2018 Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from
0.20%
to
0.35%
, depending upon our Consolidated Leverage Ratio, which was
0.20%
at
July 31, 2018
. At
July 31, 2018
, the tranche A term loan interest rate was approximately
3.35%
.
The 2018 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 covenants under the 2018 Credit Agreement.
During fiscal 2018, in connection with the refinancing of our credit agreement, we incurred a loss on extinguishment of debt which included a write-off of debt financing costs of
$127
, which is recorded in interest expense, net for the fiscal year ended
July 31, 2018
.
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act significantly revises U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income (“GILTI”), (2) the Foreign Derived Intangible Income (“FDII”) deduction, and (3) the Base Erosion Anti-Abuse Tax (“BEAT”), and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses.
ASC 740, “
Income Taxes,
” requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the 2017 Tax Act’s provisions, the SEC staff issued Staff Accounting
(dollar amounts in thousands except share and per share data or as otherwise specified)
58
Cantel Medical Corp. 2018 Annual Report on Form 10-K
Bulletin No. 118 (“SAB 118”), which allows companies to record the tax effects of the 2017 Tax Act on a provisional basis based on a reasonable estimate and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment.
Section 15 of the Internal Revenue Code governs rate changes and was not amended by the 2017 Tax Act. Section 15 requires a blended tax rate for fiscal-year taxpayers for their fiscal year that includes the effective date of the rate change, which was January 1, 2018. As a result of the 2017 Tax Act, we revised our estimated annual effective rate to reflect the change in the U.S. federal statutory rate by computing a tentative tax under both rates, and then prorating the tentative tax based on the number of days with and without the rate change to arrive at a blended tax rate of
26.9%
, as required by the code. This blended rate was applied for fiscal 2018 and the new U.S. federal statutory rate of 21% will apply to fiscal 2019 and beyond.
During the second quarter ended January 31, 2018, we recorded a net benefit of
$8,398
to the income tax provision as a provisional estimate of the net accounting impact of the 2017 Tax Act in accordance with SAB 118. The net benefit was comprised of the following: (i) expense of
$294
related to the mandatory transition tax for unrepatriated foreign income and (ii) a benefit of
$8,692
related to a revaluation of our deferred tax assets and liabilities. During the third quarter ended April 30, 2018, we reduced the mandatory transition tax by
$294
to
$0
. Furthermore, during the fourth quarter ended July 31, 2018, upon reassessment of the revaluation of our deferred tax assets and liabilities, we recorded a benefit of
$8,657
, as compared to the provisional estimate of
$8,692
, which we recorded in the second quarter ended January 31, 2018.
Given the significant complexity of the 2017 Tax Act, anticipated guidance from the U.S. Treasury concerning implementation of the 2017 Tax Act, and the potential for additional guidance from the SEC or the FASB related to the 2017 Tax Act, the provisional estimates we recorded may require adjustment during the measurement period. The provisional estimates were based on our understanding of the 2017 Tax Act and other information available at the time of the estimates, including assumptions and expectations about future events, such as projected financial performance, and are subject to further refinement as additional information becomes available, including potential new or interpretative guidance issued by the SEC, the FASB, or the Internal Revenue Service (“IRS”). We continue to analyze the calculations of earnings and profits in certain foreign subsidiaries, including whether those earnings are held in cash or other assets, as well as the state tax impact of the 2017 Tax Act. Furthermore, such analysis includes but is not limited to provisions that take effect in fiscal 2019 and not subject to SAB 118 such as GILTI and certain employee expense deductions. In the fourth quarter ended July 31, 2018 we revised our assessment of the impact of the 2017 Tax Act on our deferred tax assets and liabilities based on actual fiscal year 2018 results of operations.
The consolidated effective tax rate was
22.5%
,
32.8%
and
36.2%
for fiscal
2018
,
2017
and
2016
, respectively, and reflects income tax expense for our U.S. and international operations at their respective statutory rates.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
|
Current
|
|
Deferred
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
24,288
|
|
|
$
|
(7,308
|
)
|
|
$
|
28,900
|
|
|
$
|
2,020
|
|
|
$
|
29,392
|
|
|
$
|
(216
|
)
|
State
|
5,078
|
|
|
491
|
|
|
4,352
|
|
|
261
|
|
|
4,433
|
|
|
(153
|
)
|
International
|
4,626
|
|
|
(703
|
)
|
|
1,545
|
|
|
(2,223
|
)
|
|
1,863
|
|
|
(1,341
|
)
|
Total
|
$
|
33,992
|
|
|
$
|
(7,520
|
)
|
|
$
|
34,797
|
|
|
$
|
58
|
|
|
$
|
35,688
|
|
|
$
|
(1,710
|
)
|
The geographic components of income (loss) before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
United States
|
$
|
115,697
|
|
|
$
|
108,329
|
|
|
$
|
92,744
|
|
International
|
1,816
|
|
|
(2,096
|
)
|
|
1,187
|
|
Total
|
$
|
117,513
|
|
|
$
|
106,233
|
|
|
$
|
93,931
|
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
59
Cantel Medical Corp. 2018 Annual Report on Form 10-K
The consolidated effective income tax rate differed from the U.S. statutory tax rate of
26.9%
in fiscal
2018
and
35.0%
in fiscal
2017
and
2016
due to the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
2018
|
|
2017
|
|
2016
|
Expected statutory tax
(1)
|
26.9
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Differential attributable to:
|
|
|
|
|
|
|
|
|
Foreign operations
|
0.6
|
%
|
|
—
|
%
|
|
0.6
|
%
|
State and local taxes
|
3.7
|
%
|
|
3.9
|
%
|
|
3.2
|
%
|
Domestic production deduction
|
(1.8
|
)%
|
|
(2.7
|
)%
|
|
(2.3
|
)%
|
Acquisition-related items, net
|
—
|
%
|
|
0.1
|
%
|
|
—
|
%
|
Impact of tax legislation on deferred taxes
|
(7.4
|
)%
|
|
—
|
%
|
|
—
|
%
|
R&E tax credit
|
(0.7
|
)%
|
|
(1.4
|
)%
|
|
(1.1
|
)%
|
Change in foreign tax rates
|
—
|
%
|
|
—
|
%
|
|
(0.4
|
)%
|
Excess tax benefits
|
(1.7
|
)%
|
|
(2.2
|
)%
|
|
—
|
%
|
Valuation allowance
|
2.4
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
0.5
|
%
|
|
0.1
|
%
|
|
1.2
|
%
|
Consolidated effective income tax rate
|
22.5
|
%
|
|
32.8
|
%
|
|
36.2
|
%
|
_______________________________________________
|
|
(1)
|
We revised our estimated annual rate to reflect a blended U.S. federal statutory rate of
26.9%
as compared to 35.0%.
|
Tax assets and liabilities, shown before and after jurisdictional netting of deferred tax assets (liabilities), are comprised of the following:
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
Accrued expenses
|
$
|
5,354
|
|
|
$
|
6,308
|
|
Inventories
|
3,165
|
|
|
4,655
|
|
Accounts receivable
|
306
|
|
|
729
|
|
Other long-term liabilities
|
103
|
|
|
180
|
|
Stock-based compensation
|
2,700
|
|
|
3,402
|
|
Capital investment
|
426
|
|
|
545
|
|
Foreign NOLs
|
8,605
|
|
|
6,490
|
|
Subtotal
|
20,659
|
|
|
22,309
|
|
Valuation allowance
|
(6,358
|
)
|
|
(2,984
|
)
|
|
14,301
|
|
|
19,325
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
(7,352
|
)
|
|
(9,957
|
)
|
Intangible assets
|
(21,300
|
)
|
|
(20,107
|
)
|
Goodwill
|
(10,362
|
)
|
|
(13,975
|
)
|
|
(39,014
|
)
|
|
(44,039
|
)
|
Net deferred income taxes
|
$
|
(24,713
|
)
|
|
$
|
(24,714
|
)
|
|
|
|
|
Reported in Consolidated Balance Sheets as:
|
|
|
|
Deferred income taxes (assets)
|
$
|
2,911
|
|
|
$
|
—
|
|
Deferred income taxes (liabilities)
|
(27,624
|
)
|
|
(24,714
|
)
|
|
$
|
(24,713
|
)
|
|
$
|
(24,714
|
)
|
(dollar amounts in thousands except share and per share data or as otherwise specified)
60
Cantel Medical Corp. 2018 Annual Report on Form 10-K
For foreign tax reporting purposes, our Net Operating Losses (“NOLs”) at
July 31, 2018
are
$8,605
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
$6,358
for these foreign NOLs, which are primarily associated with certain early-stage foreign operations as well as
$2,785
recorded in fiscal 2018 relating to pre-acquisition losses attributed to our U.K. operations. Furthermore, the accumulated loss is also related to the exit of the Jet Prep business which is 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
2018
and
2017
,
no
dividends were repatriated from our foreign subsidiaries. As a result of the mandatory one-time transition tax required under the 2017 Tax Act, all of the undistributed earnings of our foreign subsidiaries are deemed repatriated and considered previously taxed income (“PTI”). Additionally, we continue to be indefinitely reinvested and continue to evaluate our assertion for certain legal entities. Accordingly, deferred taxes are not provided on undistributed earnings of foreign subsidiaries that are indefinitely reinvested. Determining the tax liability that would arise if these earnings were remitted is not practicable. At
July 31, 2018
, the cumulative amount of such undistributed earnings, inclusive of PTI, indefinitely reinvested outside the United States was approximately
$32,774
.
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. We have no uncertain tax positions at
July 31, 2018
and
2017
.
We concluded an audit by the IRS for fiscal years 2015, 2013 and 2012. With respect to state or foreign income tax examinations, we are generally no longer subject to examinations for fiscal years ended prior to July 31, 2010.
11. 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
$8,801
,
$7,715
and
$6,675
for fiscal
2018
,
2017
and
2016
, respectively.
As of July 31, 2018, 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
|
2019
|
$
|
7,958
|
|
2020
|
6,208
|
|
2021
|
4,666
|
|
2022
|
2,904
|
|
2023
|
2,104
|
|
Thereafter
|
3,593
|
|
Total
|
$
|
27,433
|
|
Contingent Consideration
We have
$1,298
recorded as of July 31, 2018 related to the Aexis Medical acquisition, which is for the estimated fair value of contingent consideration payable upon the achievement of certain purchase order targets through March 21, 2020. During fiscal 2017, we decided to exit the Jet Prep business that was acquired in fiscal 2014. At the time of the acquisition, we assumed a contingent obligation payable to the Israeli Government based on future sales. In November 2017, the Israeli Government formally notified us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business. As a result of this
(dollar amounts in thousands except share and per share data or as otherwise specified)
61
Cantel Medical Corp. 2018 Annual Report on Form 10-K
formal notification, we reduced the
$1,138
contingent obligation to
$0
during the first quarter of fiscal 2018, resulting in a benefit through other income for the fiscal year ended
July 31, 2018
.