Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
July 31, 2018
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
64,030
|
|
|
$
|
94,097
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,378 and $1,149
|
125,140
|
|
|
118,642
|
|
Inventories, net
|
111,071
|
|
|
107,592
|
|
Prepaid expenses and other current assets
|
17,340
|
|
|
17,912
|
|
Total current assets
|
317,581
|
|
|
338,243
|
|
|
|
|
|
Property and equipment, net
|
148,584
|
|
|
111,417
|
|
Intangible assets, net
|
137,758
|
|
|
137,361
|
|
Goodwill
|
370,878
|
|
|
368,027
|
|
Other assets
|
5,512
|
|
|
5,749
|
|
Deferred income taxes
|
3,286
|
|
|
2,911
|
|
Total assets
|
$
|
983,599
|
|
|
$
|
963,708
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
41,984
|
|
|
$
|
34,258
|
|
Compensation payable
|
23,875
|
|
|
30,595
|
|
Accrued expenses
|
31,274
|
|
|
28,525
|
|
Deferred revenue
|
29,280
|
|
|
28,614
|
|
Current portion of long-term debt
|
10,000
|
|
|
10,000
|
|
Income taxes payable
|
7,374
|
|
|
2,791
|
|
Total current liabilities
|
143,787
|
|
|
134,783
|
|
|
|
|
|
Long-term debt
|
184,940
|
|
|
187,302
|
|
Deferred income taxes
|
27,326
|
|
|
27,624
|
|
Other long-term liabilities
|
5,186
|
|
|
5,132
|
|
Total liabilities
|
361,239
|
|
|
354,841
|
|
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 $0.10 per share; authorized 75,000,000 shares; issued 46,307,058 shares and outstanding 41,721,316 shares as of October 31, 2018; issued 46,243,582 shares and outstanding 41,706,084 shares as of July 31, 2018
|
4,631
|
|
|
4,624
|
|
Additional paid-in capital
|
187,102
|
|
|
184,212
|
|
Retained earnings
|
511,647
|
|
|
491,540
|
|
Accumulated other comprehensive loss
|
(16,679
|
)
|
|
(11,456
|
)
|
Treasury Stock, at cost; 4,585,742 shares as of October 31, 2018; 4,537,498 shares as of
July 31, 2018
|
(64,341
|
)
|
|
(60,053
|
)
|
Total stockholders’ equity
|
622,360
|
|
|
608,867
|
|
Total liabilities and stockholders' equity
|
$
|
983,599
|
|
|
$
|
963,708
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise noted)
1
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Condensed Consolidated Statements of Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
Product sales
|
$
|
195,760
|
|
|
$
|
187,965
|
|
Product service
|
29,829
|
|
|
24,801
|
|
Total net sales
|
225,589
|
|
|
212,766
|
|
|
|
|
|
Cost of sales
|
|
|
|
|
|
Product sales
|
99,310
|
|
|
95,099
|
|
Product service
|
21,030
|
|
|
17,008
|
|
Total cost of sales
|
120,340
|
|
|
112,107
|
|
|
|
|
|
Gross profit
|
105,249
|
|
|
100,659
|
|
|
|
|
|
Expenses:
|
|
|
|
Selling
|
33,958
|
|
|
31,600
|
|
General and administrative
|
36,535
|
|
|
32,096
|
|
Research and development
|
7,078
|
|
|
5,329
|
|
Total operating expenses
|
77,571
|
|
|
69,025
|
|
|
|
|
|
Income from operations
|
27,678
|
|
|
31,634
|
|
|
|
|
|
Interest expense, net
|
2,026
|
|
|
1,189
|
|
Other income
|
—
|
|
|
(1,138
|
)
|
|
|
|
|
Income before income taxes
|
25,652
|
|
|
31,583
|
|
|
|
|
|
Income taxes
|
6,410
|
|
|
8,654
|
|
|
|
|
|
Net income
|
$
|
19,242
|
|
|
$
|
22,929
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$
|
0.46
|
|
|
$
|
0.55
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.55
|
|
Dividends per common share
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise noted)
2
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Net income
|
$
|
19,242
|
|
|
$
|
22,929
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
Foreign currency translation
|
(5,223
|
)
|
|
(1,233
|
)
|
Total other comprehensive loss
|
(5,223
|
)
|
|
(1,233
|
)
|
|
|
|
|
Comprehensive income
|
$
|
14,019
|
|
|
$
|
21,696
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise noted)
3
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
$
|
19,242
|
|
|
$
|
22,929
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
4,691
|
|
|
4,036
|
|
Amortization
|
6,041
|
|
|
4,048
|
|
Stock-based compensation expense
|
2,576
|
|
|
1,851
|
|
Deferred income taxes
|
(674
|
)
|
|
780
|
|
Other non-cash items, net
|
1,236
|
|
|
(67
|
)
|
Changes in assets and liabilities, net of effects of business acquisitions:
|
|
|
|
|
|
Accounts receivable
|
(4,087
|
)
|
|
8,584
|
|
Inventories
|
(3,359
|
)
|
|
(2,629
|
)
|
Prepaid expenses and other assets
|
1,089
|
|
|
(6,273
|
)
|
Accounts payable and other liabilities
|
1,055
|
|
|
(6,679
|
)
|
Income taxes
|
4,459
|
|
|
3,492
|
|
Net cash provided by operating activities
|
32,269
|
|
|
30,072
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Capital expenditures
|
(38,834
|
)
|
|
(6,492
|
)
|
Acquisition of businesses, net of cash acquired
|
(17,000
|
)
|
|
(60,345
|
)
|
Net cash used in investing activities
|
(55,834
|
)
|
|
(66,837
|
)
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Repayments of long-term debt
|
(2,500
|
)
|
|
—
|
|
Borrowings under revolving credit facility
|
—
|
|
|
61,300
|
|
Repayments under revolving credit facility
|
—
|
|
|
(19,300
|
)
|
Purchases of treasury stock
|
(4,288
|
)
|
|
(5,822
|
)
|
Net cash (used in) provided by financing activities
|
(6,788
|
)
|
|
36,178
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
286
|
|
|
1,223
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
(30,067
|
)
|
|
636
|
|
Cash and cash equivalents at beginning of period
|
94,097
|
|
|
36,584
|
|
Cash and cash equivalents at end of period
|
$
|
64,030
|
|
|
$
|
37,220
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise noted)
4
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Notes to Condensed Consolidated Financial Statements (unaudited).
1. Basis of Presentation
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.
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve. This decision resulted in a change from a financial reporting perspective as the industrial biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation. See Note 15, “Reportable Segments.”
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. on Form 10-K for the fiscal year ended
July 31, 2018
(the “2018 Form 10-K”) and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at
July 31, 2018
was derived from the audited Consolidated Balance Sheet of Cantel at that date. Certain prior year amounts have been reclassified to conform to the current year presentation.
Subsequent Events
We performed a review of events subsequent to
October 31, 2018
through the date of issuance of the accompanying unaudited consolidated interim financial statements. See Note 16, “Subsequent Event.”
2. Accounting Pronouncements
Newly Adopted Accounting Standards
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 ASC 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. Accordingly, we adopted ASU 2017-09 on August 1, 2018. The adoption of ASU 2017-09 did not have a material impact on our financial position, results of operations and 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 guidance makes 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). Accordingly, we adopted ASU 2016-15 on August 1, 2018. The adoption of ASU 2016-15 did not have a material impact 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 supersedes 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. We adopted the collective standard (“ASC 606”) on August 1, 2018. See Note 5, “Revenue Recognition” for a discussion of the impact and required disclosures.
(dollar amounts in thousands except share and per share data or as otherwise noted)
5
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15,
“Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”
(“ASU 2018-15”) to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. The adoption of ASU 2018-15 is not expected to have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-13,
“Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”) to modify the disclosure requirements on fair value measurements in ASC 820,
“Fair Value Measurement”
. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. The adoption of ASU 2018-13 is not expected to have a material impact on our financial position, results of operations or cash flows.
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 material 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 material 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. 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 material 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. 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. In July 2018, the FASB issued ASU 2018-10,
“Codification Improvements to Topic 842, Leases”
(“ASU 2018-10”), and ASU 2018-11,
“Leases (Topic 842) Targeted Improvements”
(“ASU 2018-11”), which provide narrow adjustments relating to ASU 2016-02 and improvements to comparative reporting requirements for initial adoption and for separating components of a contract for lessors. We are currently in the process of evaluating the impact of the collective standard (“ASC 842”) on our financial position, results of operations and cash flows.
Fiscal 2019
CES business:
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 is included in our Life Sciences segment.
(dollar amounts in thousands except share and per share data or as otherwise noted)
6
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Fiscal 2018
Aexis:
On March 21, 2018, we purchased all of the issued and outstanding stock of Aexis Medical BVBA (“Aexis”) 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 specializes in advanced software solutions focused on the tracking and monitoring of instrument reprocessing for hospitals and healthcare professionals, and is included in our Medical segment.
BHT Group:
On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Hygienetechnik Holding GmbH (“BHT Group”), a leader in the German market in automated endoscope reprocessing and related equipment and services for total consideration (net of cash acquired), 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 Medical segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Purchase Price Allocation
|
|
CES Business
(1)
|
|
Aexis
(1)
|
|
BHT Group
(1)
|
|
|
(Preliminary)
|
|
(Preliminary)
|
|
(Final)
|
Purchase Price:
|
|
|
|
|
|
|
Cash paid
|
|
$
|
17,000
|
|
|
$
|
20,308
|
|
|
$
|
60,216
|
|
Fair value of contingent consideration
|
|
—
|
|
|
1,292
|
|
|
—
|
|
Total
|
|
$
|
17,000
|
|
|
$
|
21,600
|
|
|
$
|
60,216
|
|
|
|
|
|
|
|
|
Allocation:
|
|
|
|
|
|
|
Property and equipment
|
|
548
|
|
|
130
|
|
|
835
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
Customer relationships
|
|
8,100
|
|
|
1,800
|
|
|
12,500
|
|
Technology
|
|
—
|
|
|
4,600
|
|
|
6,200
|
|
Goodwill
|
|
6,129
|
|
|
17,092
|
|
|
40,934
|
|
Deferred income taxes
|
|
—
|
|
|
(1,639
|
)
|
|
(5,881
|
)
|
Other working capital
|
|
2,223
|
|
|
909
|
|
|
5,628
|
|
Contingent consideration
|
|
—
|
|
|
(1,292
|
)
|
|
—
|
|
Total
|
|
$
|
17,000
|
|
|
$
|
21,600
|
|
|
$
|
60,216
|
|
_______________________________________________
|
|
(1)
|
The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.
|
Unaudited Pro Forma Summary of Operations
The acquisitions above, both individually and in the aggregate, were not material to our consolidated results of operations or financial position and, therefore, pro forma financial information is not presented.
4.
Stock-Based Compensation
2016 Equity Incentive Plan
At
October 31, 2018
,
281,708
nonvested restricted stock awards were outstanding under the 2016 plan.
No
options were outstanding under the 2016 plan. At
October 31, 2018
,
813,905
shares were collectively available pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.
(dollar amounts in thousands except share and per share data or as otherwise noted)
7
Cantel Medical Corp. 2019 First Quarter Form 10-Q
2006 Equity Incentive Plan
The 2006 Plan was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan. At
October 31, 2018
, options to purchase
40,000
shares of common stock were outstanding, and
114
nonvested restricted stock awards were outstanding under the 2006 Plan. No additional awards will be granted under this plan.
The following table shows the components of stock-based compensation expense recognized in the condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
237
|
|
|
$
|
115
|
|
Operating expenses:
|
|
|
|
|
|
Selling
|
571
|
|
|
365
|
|
General and administrative
|
1,710
|
|
|
1,333
|
|
Research and development
|
58
|
|
|
38
|
|
Total operating expenses
|
2,339
|
|
|
1,736
|
|
Stock-based compensation expense
|
$
|
2,576
|
|
|
$
|
1,851
|
|
At
October 31, 2018
, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was
$23,664
with a remaining weighted average period of
22 months
over which such expense is expected to be recognized.
We determined the fair value of our market-based restricted stock awards using a Monte Carlo simulation on the date of grant using the following assumptions:
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Volatility of common stock
|
27.54
|
%
|
|
26.60
|
%
|
Average volatility of peer companies
|
36.55
|
%
|
|
33.72
|
%
|
Average correlation coefficient of peer companies
|
27.18
|
%
|
|
32.26
|
%
|
Risk-free interest rate
|
2.93
|
%
|
|
1.62
|
%
|
A summary of nonvested stock award activity for the
three
months ended
October 31, 2018
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Time-based Awards
|
|
Number of Performance-based Awards
|
|
Number of Market-based Awards
|
|
Number of
Total
Awards
|
|
Weighted Average
Fair Value
|
July 31, 2018
|
|
168,320
|
|
|
26,076
|
|
|
17,710
|
|
|
212,106
|
|
|
$
|
88.87
|
|
Granted
|
|
117,832
|
|
|
27,336
|
|
|
16,765
|
|
|
161,933
|
|
|
$
|
91.91
|
|
Vested
(1)
|
|
(80,728
|
)
|
|
(10,235
|
)
|
|
—
|
|
|
(90,963
|
)
|
|
$
|
76.16
|
|
Forfeited
|
|
(1,254
|
)
|
|
—
|
|
|
—
|
|
|
(1,254
|
)
|
|
$
|
88.01
|
|
October 31, 2018
|
|
204,170
|
|
|
43,177
|
|
|
34,475
|
|
|
281,822
|
|
|
$
|
94.95
|
|
_______________________________________________
|
|
(1)
|
The aggregate fair value of all nonvested stock awards which vested was approximately
$6,930
.
|
A summary of stock option activity for the
three
months ended
October 31, 2018
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Contractual Life Remaining (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at July 31, 2018
|
70,000
|
|
|
$
|
38.60
|
|
|
|
|
|
Exercised
|
(30,000
|
)
|
|
31.81
|
|
|
|
|
|
Outstanding at October 31, 2018
|
40,000
|
|
|
$
|
43.70
|
|
|
1.32
|
|
$
|
1,418
|
|
Exercisable at October 31, 2018
|
40,000
|
|
|
$
|
43.70
|
|
|
1.32
|
|
$
|
1,418
|
|
(dollar amounts in thousands except share and per share data or as otherwise noted)
8
Cantel Medical Corp. 2019 First Quarter Form 10-Q
During the
three
months ended
October 31, 2018
,
5,000
options vested, with an aggregate fair value of approximately
$277
. During the
three
months ended
October 31, 2018
,
30,000
options were exercised, with an aggregate fair value of approximately
$1,787
. At
October 31, 2018
, all outstanding options were vested.
Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on stock-based compensation. For the
three
months ended
October 31, 2018
, income tax deductions of
$3,059
were generated, of which
$2,062
were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of
$997
was recorded as a reduction in income tax expense. For the
three
months ended
October 31, 2017
, income tax deductions of
$4,125
were generated, of which
$1,839
were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of
$2,286
was recorded as a reduction in income tax expense.
5. Revenue Recognition
Adoption of “Revenue from Contracts with Customers (ASC 606)”
We adopted ASC 606, effective August 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of August 1, 2018. Results for reporting beginning after August 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC 605.
Due to the cumulative impact of adopting ASC 606, we recorded a net increase to opening retained earnings, net of tax, as of August 1, 2018, which was not material. The impact is primarily related to the timing of revenue recognition for the shipment of products in both our Medical and Life Sciences 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 cumulative adjustment to retained earnings also includes the impact of the change in timing of revenue recognition associated with software licensing arrangements in our Medical segment. Additionally, revenue related to software renewals was historically recognized on a ratable basis over the license period. Under ASC 606, the license is considered functional intellectual property, and is considered to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period. As a result, revenue related to our annual software license renewals has been accelerated.
Revenue Recognition
The following table gives information as to the net sales disaggregated by geography and product line:
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
Net sales by geography
|
2018
|
|
2017
(1)
|
United States
|
$
|
168,938
|
|
|
$
|
160,940
|
|
Europe/Africa/Middle East
|
32,014
|
|
|
28,101
|
|
Asia/Pacific
|
15,752
|
|
|
13,607
|
|
Canada
|
7,373
|
|
|
8,476
|
|
Latin America/South America
|
1,512
|
|
|
1,642
|
|
Total
|
$
|
225,589
|
|
|
$
|
212,766
|
|
Net sales by product line
|
|
|
|
Capital equipment
|
$
|
58,132
|
|
|
$
|
59,169
|
|
Consumables
|
136,821
|
|
|
128,359
|
|
Product service
|
29,829
|
|
|
24,801
|
|
All other
(2)
|
807
|
|
|
437
|
|
Total
|
$
|
225,589
|
|
|
$
|
212,766
|
|
_______________________________________________
|
|
(1)
|
As noted above, prior year amounts have not been adjusted under the modified retrospective method.
|
|
|
(2)
|
Primarily includes software licensing revenues.
|
A portion of our medical, life sciences and dialysis sales include multiple performance obligations, whereby revenue is allocated to the equipment, installation and consumable components based upon their relative standalone selling prices, which includes comparable historical transactions of similar equipment, installation and consumables sold as stand-alone components. Revenue
(dollar amounts in thousands except share and per share data or as otherwise noted)
9
Cantel Medical Corp. 2019 First Quarter Form 10-Q
on capital equipment and consumables is recognized when control of the equipment or consumable transfers to the customer, which is generally driven by the underlying shipping terms of the transaction. Revenue on the installation component is recognized when the installation is complete. The most significant judgments related to these arrangements include (i) identifying the various performance obligations of these arrangements and (ii) determining the relative standalone selling price of each performance obligation.
With respect to certain of our 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. 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. We also offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. We use information available at the time and our historical experience with each customer to estimate the rebate amount by applying the expected value method.
Remaining Performance Obligations
At
October 31, 2018
, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately
$71,549
, primarily within the Medical segment. We expect to recognize revenue on approximately
70%
of these remaining performance obligations over the remainder of fiscal 2019 and fiscal 2020. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.
Contract Liabilities
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. Our contract liabilities arise primarily in the Medical and Life Sciences segments when payment is received upfront for various multi-period extended service arrangements. We expect to recognize substantially all of this revenue over the next twelve months. A summary of contract liabilities activity for the
three
months ended
October 31, 2018
follows:
|
|
|
|
|
|
Contract Liabilities
|
Balance, August 1, 2018
|
$
|
29,015
|
|
Revenue deferred in current year
|
14,524
|
|
Deferred revenue recognized
|
(13,547
|
)
|
Foreign currency translation
|
(163
|
)
|
Balance, October 31, 2018
|
29,829
|
|
Contract liabilities included in Other long-term liabilities
|
(549
|
)
|
Deferred revenue
|
$
|
29,280
|
|
Practical Expedients and Policy Elections
As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract. Under ASC 606, we have elected to expense these costs as incurred when the period of benefit is less than one year. For certain multi-period contracts, we capitalize these amounts as contract costs, and amortize them based on the contract duration to which the assets relate, which ranges from two to five years. The amounts at
October 31, 2018
, were not material. For certain international contracts with distributors, we recognize a receivable at the point in time in which we have an unconditional right to payment. Most customers are required to pay a portion of the transaction price in advance and the remaining balance within 30 days of receiving the related products. Accordingly, we have elected to use the practical expedient which allows us to ignore the possible existence of a significant financing component within these contracts.
As a policy, for shipping and handling costs incurred after the customer has obtained control of a good, we will continue to treat these costs as a fulfillment cost rather than as an additional promised service. Additionally, in certain U.S. states, we are required to collect sales taxes from our customers, and in certain international jurisdictions, we are required to collect value added taxes. The tax collected is recorded as a liability until remitted to the taxing authority.
(dollar amounts in thousands except share and per share data or as otherwise noted)
10
Cantel Medical Corp. 2019 First Quarter Form 10-Q
6. Inventories, Net
A summary of inventories is as follows:
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
July 31, 2018
|
Raw materials and parts
|
$
|
53,097
|
|
|
$
|
49,054
|
|
Work-in-process
|
14,122
|
|
|
13,189
|
|
Finished goods
|
52,348
|
|
|
53,948
|
|
Reserve for excess and obsolete inventory
|
(8,496
|
)
|
|
(8,599
|
)
|
Total
|
$
|
111,071
|
|
|
$
|
107,592
|
|
7. Derivatives
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. 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. 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 and Sri Lankan Rupee relative to the U.S. dollar because the overall foreign currency exposure relating to these currencies is not material.
There were
seven
foreign currency forward contracts with an aggregate notional value of
$37,684
and
$30,159
at
October 31, 2018
and
July 31, 2018
, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the three months ended
October 31, 2018
and
2017
, the settlements of our forward contracts resulted in immaterial amounts of currency conversion gains and losses on the hedged items in the aggregate.
8. 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.
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 acquisition, additional purchase price payments ranging from
zero
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. At 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 is not 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 zero. See Note 11, "Commitments and Contingencies."
(dollar amounts in thousands except share and per share data or as otherwise noted)
11
Cantel Medical Corp. 2019 First Quarter Form 10-Q
The fair values of our financial instruments measured on a recurring basis were categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 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
|
—
|
|
|
—
|
|
|
1,320
|
|
|
1,320
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,320
|
|
|
$
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 obligation
|
—
|
|
|
—
|
|
|
1,298
|
|
|
1,298
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
|
$
|
1,298
|
|
A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aexis Contingent Consideration
|
|
Jet Prep Assumed Contingent Obligation
|
|
Total
|
Balance, July 31, 2018
|
$
|
1,298
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
Loss included in general and administrative expense
|
22
|
|
|
—
|
|
|
22
|
|
Net purchases, issuances, sales and settlements
|
—
|
|
|
—
|
|
|
—
|
|
Balance, October 31, 2018
|
$
|
1,320
|
|
|
$
|
—
|
|
|
$
|
1,320
|
|
Disclosure of Fair Value of Financial Instruments
At
October 31, 2018
and
July 31, 2018
, 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. At
October 31, 2018
and
July 31, 2018
, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations as the respective borrowings rates reflect prevailing market interest rates.
(dollar amounts in thousands except share and per share data or as otherwise noted)
12
Cantel Medical Corp. 2019 First Quarter Form 10-Q
|
|
9.
|
Intangibles and Goodwill
|
Our intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
July 31, 2018
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
$
|
134,866
|
|
|
$
|
(43,177
|
)
|
|
$
|
91,689
|
|
|
$
|
133,347
|
|
|
$
|
(45,618
|
)
|
|
$
|
87,729
|
|
Technology
(1)
|
50,918
|
|
|
(18,724
|
)
|
|
32,194
|
|
|
54,585
|
|
|
(19,836
|
)
|
|
34,749
|
|
Brand names
(1)
|
6,874
|
|
|
(2,774
|
)
|
|
4,100
|
|
|
8,141
|
|
|
(3,857
|
)
|
|
4,284
|
|
Non-compete agreements
(1)
|
2,880
|
|
|
(1,505
|
)
|
|
1,375
|
|
|
3,060
|
|
|
(1,628
|
)
|
|
1,432
|
|
Patents and other registrations
|
2,855
|
|
|
(1,150
|
)
|
|
1,705
|
|
|
2,826
|
|
|
(1,179
|
)
|
|
1,647
|
|
|
198,393
|
|
|
(67,330
|
)
|
|
131,063
|
|
|
201,959
|
|
|
(72,118
|
)
|
|
129,841
|
|
Trademarks and tradenames
|
6,695
|
|
|
—
|
|
|
6,695
|
|
|
7,520
|
|
|
—
|
|
|
7,520
|
|
Total intangible assets
|
$
|
205,088
|
|
|
$
|
(67,330
|
)
|
|
$
|
137,758
|
|
|
$
|
209,479
|
|
|
$
|
(72,118
|
)
|
|
$
|
137,361
|
|
_______________________________________________
|
|
(1)
|
During the first quarter of fiscal 2019, we wrote off
$10,335
of fully amortized intangible assets.
|
Amortization expense related to intangible assets was
$6,041
and
$4,048
for the three months ended
October 31, 2018
and
2017
, respectively. We expect to recognize an additional
$13,451
of amortization expense related to intangible assets for the remainder of fiscal
2019
, and thereafter
$16,288
,
$15,949
,
$15,948
,
$15,576
and
$14,476
of amortization expense for fiscal years
2020
,
2021
,
2022
,
2023
and
2024
, respectively.
Goodwill changed during the
three
months ended
October 31, 2018
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
Life Sciences
|
|
Dental
|
|
Dialysis
|
|
Total
Goodwill
|
Balance, July 31, 2018
|
$
|
186,690
|
|
|
$
|
58,925
|
|
|
$
|
114,279
|
|
|
$
|
8,133
|
|
|
$
|
368,027
|
|
Acquisitions
|
—
|
|
|
6,129
|
|
|
—
|
|
|
—
|
|
|
6,129
|
|
Foreign currency translation
|
(3,180
|
)
|
|
(98
|
)
|
|
—
|
|
|
—
|
|
|
(3,278
|
)
|
Balance, October 31, 2018
|
$
|
183,510
|
|
|
$
|
64,956
|
|
|
$
|
114,279
|
|
|
$
|
8,133
|
|
|
$
|
370,878
|
|
10. Financing Arrangements
Our long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
July 31, 2018
|
Tranche A term loan outstanding
|
$
|
197,500
|
|
|
$
|
200,000
|
|
Unamortized debt issuance costs
|
(2,560
|
)
|
|
(2,698
|
)
|
Total long-term debt, net of unamortized debt issuance costs
|
194,940
|
|
|
197,302
|
|
Current portion of long-term debt
|
(10,000
|
)
|
|
(10,000
|
)
|
Long-term debt, net of unamortized debt issuance costs and excluding current portion
|
$
|
184,940
|
|
|
$
|
187,302
|
|
On June 28, 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”). The 2018 Agreement refinances our credit facility under the Third Amended and Restated Credit Agreement (the “Existing Credit Agreement”) dated March 4, 2014, 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.
At
October 31, 2018
, we had
$197,500
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
$10,000
due and payable in each of fiscal 2019,
(dollar amounts in thousands except share and per share data or as otherwise noted)
13
Cantel Medical Corp. 2019 First Quarter Form 10-Q
2020, 2021 and 2022, with the remaining
$160,000
due and payable at maturity on June 28, 2023. During the
three
months ended
October 31, 2018
, we made principal payments of
$2,500
.
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”). At
October 31, 2018
, the lender’s base rate was
5.25%
and the LIBOR rate was
2.30%
. 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
October 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
October 31, 2018
. At
October 31, 2018
, the tranche A term loan interest rate was approximately
3.55%
.
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.
11. Commitments and Contingencies
Contingent Consideration and Assumed Contingent Liability
At
October 31, 2018
,
$1,320
was recorded related to the Aexis 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 formal notification, we reduced the
$1,138
contingent obligation to
zero
during the first quarter of fiscal 2018, resulting in a benefit through other income for the three months ended
October 31, 2017
.
Legal Matters
In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows.
12. Earnings Per Common Share
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (nonvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of nonvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities.
(dollar amounts in thousands except share and per share data or as otherwise noted)
14
Cantel Medical Corp. 2019 First Quarter Form 10-Q
The following table sets forth the computation of basic and diluted EPS available to stockholders of common stock (excluding participating securities):
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
Net income
|
$
|
19,242
|
|
|
$
|
22,929
|
|
Less income allocated to participating securities
|
(33
|
)
|
|
(124
|
)
|
Net income available to common shareholders
|
$
|
19,209
|
|
|
$
|
22,805
|
|
Denominator for basic and diluted earnings per share, adjusted for participating securities:
|
|
|
|
|
Denominator for basic earnings per share - weighted average number of shares outstanding attributable to common stock
|
41,640,745
|
|
|
41,521,952
|
|
Dilutive effect of stock awards using the treasury stock method and the average market price for the year
|
65,028
|
|
|
66,233
|
|
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
|
41,705,773
|
|
|
41,588,185
|
|
Earnings per share attributable to common stock:
|
|
|
|
|
Basic earnings per share
|
$
|
0.46
|
|
|
$
|
0.55
|
|
Diluted earnings per share
|
$
|
0.46
|
|
|
$
|
0.55
|
|
Stock options excluded from weighted average dilutive common shares because their inclusion would have been anti-dilutive
|
—
|
|
|
—
|
|
A reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined above, to our total weighted average number of shares and common stock equivalents, including participating securities, is set forth in the following table:
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
|
41,705,773
|
|
|
41,588,185
|
|
Participating securities
|
69,452
|
|
|
225,675
|
|
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities
|
41,775,225
|
|
|
41,813,860
|
|
13. Income Taxes
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 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 (the “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
(dollar amounts in thousands except share and per share data or as otherwise noted)
15
Cantel Medical Corp. 2019 First Quarter Form 10-Q
applied for fiscal 2018 (beginning with the second quarter) and the new U.S. federal statutory rate of 21% applies to fiscal 2019 and beyond.
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 recorded a benefit of
$8,657
due to the impact of the 2017 Tax Act on our deferred tax assets and liabilities on the basis of actual fiscal 2018 results of operations.
A reconciliation of the consolidated effective income tax rate from the
three
months ended
October 31, 2017
to the
three
months ended
October 31, 2018
is as follows:
|
|
|
|
Effective Rate, October 31, 2017
|
27.4
|
%
|
U.S. federal statutory rate decrease
|
(14.0
|
)%
|
Foreign operations
|
5.0
|
%
|
State taxes
|
0.9
|
%
|
Excess tax benefit
|
3.4
|
%
|
Other
|
2.3
|
%
|
Effective Rate, October 31, 2018
|
25.0
|
%
|
14. Accumulated Other Comprehensive Loss
The components and changes in accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
(11,456
|
)
|
|
$
|
(9,900
|
)
|
Other comprehensive loss for foreign currency translation
|
(5,223
|
)
|
|
(1,233
|
)
|
Ending balance
|
$
|
(16,679
|
)
|
|
$
|
(11,133
|
)
|
15. Reportable Segments
In accordance with ASC Topic 280, “
Segment Reporting,”
(“ASC 280”), we have determined our reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by us in analyzing segment performance are net sales and income from operations.
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve. As a result of this change, our industrial biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation.
Our reportable segments are as follows:
Medical:
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.
Life Sciences:
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.
Two
customers collectively accounted for approximately
43.9%
and
53.4%
of our Life Sciences segment net sales for the
three
months ended
October 31, 2018
and
2017
, respectively.
(dollar amounts in thousands except share and per share data or as otherwise noted)
16
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Dental:
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.
Three
customers collectively accounted for approximately
50.2%
and
49.1%
of our Dental segment net sales for the
three
months ended
October 31, 2018
and
2017
, respectively.
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.
Two
customers accounted for approximately
41.4%
and
43.1%
of our Dialysis segment net sales for the
three
months ended
October 31, 2018
and
2017
, respectively. These customers are the same two customers noted above under our Life Sciences segment.
None of our customers accounted for 10% or more of our consolidated net sales for the
three
months ended
October 31, 2018
and
2017
.
Information as to reportable segments is summarized below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
Net sales
|
2018
|
|
2017
|
Medical
|
$
|
127,552
|
|
|
$
|
112,385
|
|
Life Sciences
|
53,345
|
|
|
54,770
|
|
Dental
|
36,628
|
|
|
37,677
|
|
Dialysis
|
8,064
|
|
|
7,934
|
|
Total net sales
|
$
|
225,589
|
|
|
$
|
212,766
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
Income from operations
|
2018
|
|
2017
|
Medical
|
$
|
25,211
|
|
|
$
|
19,684
|
|
Life Sciences
|
6,331
|
|
|
10,375
|
|
Dental
|
5,925
|
|
|
8,675
|
|
Dialysis
|
1,384
|
|
|
2,099
|
|
|
38,851
|
|
|
40,833
|
|
General corporate expenses
|
11,173
|
|
|
9,199
|
|
Total income from operations
|
$
|
27,678
|
|
|
$
|
31,634
|
|
16. Subsequent Event
On November 12, 2018, we entered into a definitive agreement to purchase Omnia S.p.A. (“Omnia”), an Italian-based market leader in dental surgical consumables solutions, for total consideration, excluding acquisition-related costs, of
$31,900
, consisting of
$26,100
of cash and stock consideration (net of cash acquired), plus contingent consideration ranging from
zero
to a maximum of
$5,800
, which is payable upon the achievement of certain performance-based targets. Omnia’s business consists of a wide-ranging portfolio of sutures, irrigation tubing and customized dental surgical procedure kits, with a focus on procedure room set-up and cross-contamination prevention. Omnia will be included in our Dental segment.
(dollar amounts in thousands except share and per share data or as otherwise noted)
17
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Item 2. 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. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.
Overview
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
First Quarter 2019 Highlights
Some of our key financial results for the three months ended
October 31, 2018
compared with the three months ended
October 31, 2017
were as follows:
|
|
•
|
Net sales increased by
6.0%
to
$225,589
from
$212,766
, with organic net sales growth of
4.3%
|
|
|
•
|
Net income decreased by
16.1%
to
$19,242
from
$22,929
|
|
|
•
|
Non-GAAP net income increased by
7.7%
to
$25,891
from
$24,041
|
|
|
•
|
Diluted EPS decreased by
16.0%
to
$0.46
from
$0.55
|
|
|
•
|
Non-GAAP diluted EPS increased by
7.9%
to
$0.62
from
$0.57
|
|
|
•
|
Adjusted EBITDAS increased by
0.8%
to
$44,771
from
$44,395
|
See Non-GAAP Financial Measures below.
Reportable Segment Name Changes
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve. As a result of this change, our industrial biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation.
Acquisitions
On November 12, 2018, we entered into a definitive agreement to purchase Omnia S.p.A. (“Omnia”), an Italian-based market leader in dental surgical consumables solutions, for total consideration, excluding acquisition-related costs, of $31,900, consisting of $26,100 of cash and stock consideration (net of cash acquired), plus contingent consideration ranging from zero to a maximum of $5,800, which is payable upon the achievement of certain performance-based targets. Omnia’s business consists of a wide-ranging portfolio of sutures, irrigation tubing and customized dental surgical procedure kits, with a focus on procedure room set-up and cross-contamination prevention. Omnia will be included in our Dental segment.
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 is included in our Life Sciences segment.
(dollar amounts in thousands except share and per share data or as otherwise noted)
18
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Results of Operations
The following tables give information as to the percentages of net sales represented by selected items reflected in our condensed consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
Percentage Change
|
Statement of Income Data:
|
2018
|
|
2017
|
|
Net sales
|
$
|
225,589
|
|
100.0
|
%
|
|
$
|
212,766
|
|
100.0
|
%
|
|
6.0
|
%
|
Cost of sales
|
120,340
|
|
53.3
|
%
|
|
112,107
|
|
52.7
|
%
|
|
7.3
|
%
|
Gross profit
|
105,249
|
|
46.7
|
%
|
|
100,659
|
|
47.3
|
%
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
Selling
|
33,958
|
|
15.1
|
%
|
|
31,600
|
|
14.8
|
%
|
|
7.5
|
%
|
General and administrative
|
36,535
|
|
16.2
|
%
|
|
32,096
|
|
15.1
|
%
|
|
13.8
|
%
|
Research and development
|
7,078
|
|
3.1
|
%
|
|
5,329
|
|
2.5
|
%
|
|
32.8
|
%
|
Total operating expenses
|
77,571
|
|
34.4
|
%
|
|
69,025
|
|
32.4
|
%
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
Income from operations
|
27,678
|
|
12.3
|
%
|
|
31,634
|
|
14.9
|
%
|
|
(12.5
|
)%
|
|
|
|
|
|
|
|
|
Interest expense, net
|
2,026
|
|
0.9
|
%
|
|
1,189
|
|
0.6
|
%
|
|
70.4
|
%
|
Other income
|
—
|
|
—
|
%
|
|
(1,138
|
)
|
(0.5
|
)%
|
|
—
|
%
|
Income before income taxes
|
25,652
|
|
11.4
|
%
|
|
31,583
|
|
14.8
|
%
|
|
(18.8
|
)%
|
Income taxes
|
6,410
|
|
2.9
|
%
|
|
8,654
|
|
4.0
|
%
|
|
(25.9
|
)%
|
Net income
|
$
|
19,242
|
|
8.5
|
%
|
|
$
|
22,929
|
|
10.8
|
%
|
|
(16.1
|
)%
|
The following table gives information as to the net sales by reportable segment and geography, as well as the related percentage of such net sales to the total net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
Net sales by segment
|
2018
|
|
2017
|
Medical
|
$
|
127,552
|
|
56.5
|
%
|
|
$
|
112,385
|
|
52.8
|
%
|
Life Sciences
|
53,345
|
|
23.6
|
%
|
|
54,770
|
|
25.7
|
%
|
Dental
|
36,628
|
|
16.2
|
%
|
|
37,677
|
|
17.7
|
%
|
Dialysis
|
8,064
|
|
3.7
|
%
|
|
7,934
|
|
3.8
|
%
|
Total net sales
|
$
|
225,589
|
|
100.0
|
%
|
|
$
|
212,766
|
|
100.0
|
%
|
Net sales by geography
|
|
|
|
|
|
|
|
United States
|
$
|
168,938
|
|
74.9
|
%
|
|
$
|
160,940
|
|
75.6
|
%
|
International
|
56,651
|
|
25.1
|
%
|
|
51,826
|
|
24.4
|
%
|
Total net sales
|
$
|
225,589
|
|
100.0
|
%
|
|
$
|
212,766
|
|
100.0
|
%
|
(dollar amounts in thousands except share and per share data or as otherwise noted)
19
Cantel Medical Corp. 2019 First Quarter Form 10-Q
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 reportable segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
Income from operations by segment
|
2018
|
|
2017
|
Medical
|
$
|
25,211
|
|
19.8
|
%
|
|
$
|
19,684
|
|
17.5
|
%
|
Life Sciences
|
6,331
|
|
11.9
|
%
|
|
10,375
|
|
18.9
|
%
|
Dental
|
5,925
|
|
16.2
|
%
|
|
8,675
|
|
23.0
|
%
|
Dialysis
|
1,384
|
|
17.2
|
%
|
|
2,099
|
|
26.5
|
%
|
Income from operations by segment
|
38,851
|
|
17.2
|
%
|
|
40,833
|
|
19.2
|
%
|
General corporate expenses
|
11,173
|
|
4.9
|
%
|
|
9,199
|
|
4.3
|
%
|
Income from operations
|
$
|
27,678
|
|
12.3
|
%
|
|
$
|
31,634
|
|
14.9
|
%
|
Net Sales
Total net sales increased by
$12,823
or
6.0%
, to
$225,589
for the
three
months ended
October 31, 2018
from
$212,766
for the
three
months ended
October 31, 2017
, which consisted of an increase of
4.3%
in organic sales, an increase of
2.3%
in net sales due to acquisitions and a decrease of
0.6%
due to foreign currency translation. International net sales increased by
$4,825
or
9.3%
, to
$56,651
for the
three
months ended
October 31, 2018
from
$51,826
for the
three
months ended
October 31, 2017
. The
9.3%
increase in international net sales consists of 8.1% organic sales growth, a 3.7% increase due to acquisitions, and a decrease of 2.5% due to foreign currency translation.
Medical.
Net sales increased by
$15,167
or
13.5%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
, which consisted of
12.8%
organic sales growth, a
1.7%
increase due to acquisitions and a decrease of
1.0%
due to foreign currency translation. The increase in organic net sales was primarily due to capital equipment sales in both the United States and internationally, and recurring revenue growth in all other product lines.
Life Sciences.
Net sales decreased by
$1,425
or
2.6%
for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
. The decrease was primarily due to softness in demand for capital equipment, primarily in the medical water business, partially offset by acquisition-related growth. Foreign currency translation decreased net sales by
0.3%
, for the
three
months ended
October 31, 2018
.
Dental.
Net sales decreased by
$1,049
or
2.8%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
. The decrease was primarily driven by a decrease in sales to our distributor network due to inventory adjustments within our channel, partially offset by acquisition-related growth.
Dialysis.
Net sales increased by
$130
or
1.6%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
, primarily due to the increase in sales volume for our domestic concentrate.
Gross Profit
Gross profit increased by
$4,590
or
4.6%
, to
$105,249
for the
three
months ended
October 31, 2018
from
$100,659
for the
three
months ended
October 31, 2017
. Gross profit as a percentage of net sales for the
three
months ended
October 31, 2018
and
2017
was
46.7%
and 47.3%, respectively. The decrease in gross profit as a percentages of net sales for the
three
months ended
October 31, 2018
was primarily due to the reclassification of certain compensation and benefit-related costs that had previously been recorded in operating expenses into cost of sales, partially offset by higher gross margins from recent acquisitions and higher material costs. The reclassification negatively impacted gross profit as a percentage of net sales by approximately 0.3% for the
three
months ended
October 31, 2018
. Excluding the impact of acquisition-related and restructuring-related items, gross profit as a percentage of net sales for the
three
months ended
October 31, 2018
and
2017
was
46.8%
and
48.0%
, respectively.
Operating Expenses
Operating expenses as a percentage of net sales for the
three
months ended
October 31, 2018
and
2017
was
34.4%
and
32.4%
, 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 0.3% for the
three
months ended
October 31, 2018
.
(dollar amounts in thousands except share and per share data or as otherwise noted)
20
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Selling expenses increased by
$2,358
or
7.5%
, to
$33,958
for the
three
months ended
October 31, 2018
from
$31,600
for the
three
months ended
October 31, 2017
. The increase was primarily due to selling and marketing expenses of our recent acquisitions, and to a lesser extent higher compensation-related costs. Selling expenses as a percentage of net sales were
15.1%
and
14.8%
for the
three
months ended
October 31, 2018
and
2017
, respectively.
General and administrative expenses increased by
$4,439
or
13.8%
, to
$36,535
for the
three
months ended
October 31, 2018
from
$32,096
for the
three
months ended
October 31, 2017
. The increase was primarily due to an increase in acquisition-related items (such as transaction and integration-related costs), higher amortization expense as a result of our recent acquisitions, higher restructuring-related expenses, and the addition of internal and external resources which support various growth initiatives and compliance requirements. General and administrative expenses as a percentage of net sales were
16.2%
and
15.1%
for the
three
months ended
October 31, 2018
and
2017
, respectively.
Research and development expenses (which include continuing engineering costs) increased by
$1,749
or
32.8%
, to
$7,078
for the
three
months ended
October 31, 2018
from
$5,329
for the
three
months ended
October 31, 2017
. The increase was primarily due to additional product development initiatives primarily in our Medical segment and to a lesser extent in our Life Sciences segment. Research and development expenses as a percentage of net sales were
3.1%
and
2.5%
for the
three
months ended
October 31, 2018
and
2017
, respectively.
Income from Operations
Medical.
Income from operations increased by
$5,527
or
28.1%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
. The increase was primarily due to increased sales volume in the United States and internationally for capital equipment, as further explained above. This was partially offset by increases in acquisition-related and compensation-related costs and inflationary pressures on gross profit.
Life Sciences.
Income from operations decreased by
$4,044
or
39.0%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
. The decrease was primarily due to lower net sales, restructuring-related costs (including the accelerated amortization of certain intangible assets) and an increase in research and development costs.
Dental.
Income from operations decreased by
$2,750
or
31.7%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
. The decrease was primarily due to lower net sales and reduced gross profit (resulting from decreased productivity and inflationary pressures).
Dialysis.
Income from operations decreased by
$715
or
34.1%
, for the
three
months ended
October 31, 2018
compared with the
three
months ended
October 31, 2017
. The decrease was primarily due to the shift to lower margin products, partially offset by higher net sales.
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
$1,974
or
21.5%
, for the
three
months ended
October 31, 2018
from the
three
months ended
October 31, 2017
. The increase was primarily due to acquisition-related charges and the addition of internal and external resources which support various growth initiatives and compliance requirements.
Interest Expense, Net
Interest expense, net increased by
$837
or
70.4%
, to
$2,026
for the
three
months ended
October 31, 2018
from
$1,189
for the
three
months ended
October 31, 2017
. This increase resulted from an increase in the average outstanding borrowings due to the funding of acquisitions and to a lesser extent higher variable interest rates.
Other Income
Other income of
$1,138
for the
three
months ended
October 31, 2017
represents the favorable resolution of the contingent liability associated with the Jet Prep acquisition.
(dollar amounts in thousands except share and per share data or as otherwise noted)
21
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Income Taxes
The consolidated effective tax rate decreased by
2.4%
to
25.0%
for the
three
months ended
October 31, 2018
from
27.4%
for the
three
months ended
October 31, 2017
. The decrease was primarily attributed to the change in the federal statutory rate resulting from the 2017 Tax Act, partially offset by foreign and state income taxes, the loss of the Domestic Production Allowance Deduction as a result of the 2017 Tax Act and the reduction of the excess tax benefit on stock compensation.
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 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.
Excess tax benefits resulting from stock compensation are recorded as a reduction of income tax expense. 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 award holders. Since these 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 the three months ended October 31, 2018, we recorded specific discrete tax items associated with our international operations that were unrelated to fiscal 2019. As these items are 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.
(dollar amounts in thousands except share and per share data or as otherwise noted)
22
Cantel Medical Corp. 2019 First Quarter Form 10-Q
In November 2017, 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 zero during the three months ended October 31, 2017, 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.
Three Months Ended
October 31, 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) excess tax benefits applicable to stock compensation, (v) tax matters and (vi) litigation matters to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
Three Months Ended
October 31, 2017
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) excess tax benefits applicable to stock compensation and (v) the resolution of the contingent liability associated with the Jet Prep acquisition 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Net income/Diluted EPS, as reported
|
$
|
19,242
|
|
|
$
|
0.46
|
|
|
$
|
22,929
|
|
|
$
|
0.55
|
|
Intangible amortization, net of tax
(1)
|
4,626
|
|
|
0.11
|
|
|
2,869
|
|
|
0.07
|
|
Acquisition-related items, net of tax
(2)
|
1,349
|
|
|
0.03
|
|
|
1,081
|
|
|
0.03
|
|
Restructuring-related charges, net of tax
(3)
|
641
|
|
|
0.02
|
|
|
586
|
|
|
0.01
|
|
Excess tax benefit
(4)
|
(997
|
)
|
|
(0.02
|
)
|
|
(2,286
|
)
|
|
(0.05
|
)
|
Tax matters
(4)
|
896
|
|
|
0.02
|
|
|
—
|
|
|
—
|
|
Litigation matters
(1)
|
134
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Resolution of contingent liability
(5)
|
—
|
|
|
—
|
|
|
(1,138
|
)
|
|
(0.03
|
)
|
Non-GAAP net income/Non-GAAP diluted EPS
|
$
|
25,891
|
|
|
$
|
0.62
|
|
|
$
|
24,041
|
|
|
$
|
0.57
|
|
________________________________________________
|
|
(1)
|
Amounts were recorded in general and administrative expenses.
|
|
|
(2)
|
For the three months ended
October 31, 2018
, pre-tax acquisition-related items of $217 were recorded in net sales, $54 were recorded in cost of sales and $1,555 were recorded in general and administrative expenses. For the three months ended
October 31, 2017
, pre-tax acquisition-related items of $893 were recorded in cost of sales and $916 were recorded in general and administrative expenses.
|
|
|
(3)
|
For the three months ended
October 31, 2018
, pre-tax restructuring-related items of $166 were recorded in cost of sales and $680 were recorded in general and administrative expenses. For the three months ended
October 31, 2017
, pre-tax restructuring-related items of $505 were recorded in cost of sales and $443 were recorded in general and administrative expenses.
|
|
|
(4)
|
Amounts were recorded in income taxes.
|
|
|
(5)
|
Amounts were recorded in other income.
|
We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment 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 above. 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 noted)
23
Cantel Medical Corp. 2019 First Quarter Form 10-Q
The reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
|
|
2018
|
|
2017
|
Net income, as reported
|
$
|
19,242
|
|
|
$
|
22,929
|
|
Interest expense, net
|
2,026
|
|
|
1,189
|
|
Income taxes
|
6,410
|
|
|
8,654
|
|
Depreciation
|
4,691
|
|
|
4,036
|
|
Amortization
|
6,041
|
|
|
4,048
|
|
Loss on disposal of fixed assets
|
1,053
|
|
|
69
|
|
Stock-based compensation expense
|
2,576
|
|
|
1,851
|
|
EBITDAS
|
42,039
|
|
|
42,776
|
|
Acquisition-related items
|
1,827
|
|
|
1,809
|
|
Restructuring-related charges
(1)
|
742
|
|
|
948
|
|
Litigation matters
|
163
|
|
|
—
|
|
Resolution of contingent liability
|
—
|
|
|
(1,138
|
)
|
Adjusted EBITDAS
|
$
|
44,771
|
|
|
$
|
44,395
|
|
________________________________________________
|
|
(1)
|
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.
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
July 31, 2018
|
Long-term debt (excluding debt issuance costs)
|
$
|
197,500
|
|
|
$
|
200,000
|
|
Less cash and cash equivalents
|
(64,030
|
)
|
|
(94,097
|
)
|
Net debt
|
$
|
133,470
|
|
|
$
|
105,903
|
|
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
Net Cash Provided by Operating Activities.
Net cash provided by operating activities increased by
$2,197
or
7.3%
, to
$32,269
for the
three
months ended
October 31, 2018
from
$30,072
for the
three
months ended
October 31, 2017
, primarily due to the timing of accounts payable and annual insurance premiums, partially offset by decreased cash collections of outstanding accounts receivable and the decrease in net income.
(dollar amounts in thousands except share and per share data or as otherwise noted)
24
Cantel Medical Corp. 2019 First Quarter Form 10-Q
Net Cash Used in Investing Activities.
Net cash used in investing activities decreased by
$11,003
or
16.5%
, to
$55,834
for the
three
months ended
October 31, 2018
from
$66,837
for the
three
months ended
October 31, 2017
, primarily due to a decrease in cash paid for acquisitions, partially offset by increase in capital expenditures (primarily related to the purchase of a new facility and our enterprise resource planning project).
Net Cash (Used in) Provided by Financing Activities.
Net cash (used in) provided by financing activities increased by
$42,966
or
118.8%
, to
$6,788
for the
three
months ended
October 31, 2018
from
$36,178
for the
three
months ended
October 31, 2017
, primarily due to a reduction in debt repayments due the nature of our term loan, which provides for fixed quarterly principal payments.
Debt
At
October 31, 2018
, we had
$197,500
of outstanding term loan borrowings under our Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”).
For further information regarding the 2018 Credit Agreement, including a description of affirmative and negative covenants, see Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this report.
Financing Needs
At
October 31, 2018
, our long-term debt (excluding debt issuance costs) of
$197,500
, net of our cash and cash equivalents of
$64,030
, was
$133,470
. Stockholders' equity as of that date was
$622,360
.
Our operating segments generate significant cash from operations. At
October 31, 2018
, we had a cash balance of
$64,030
, of which $35,087 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 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
November 30, 2018
, approximately
$399,729
was available under our 2018 Credit Agreement.
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 2018 Annual Report on Form 10-K.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the current beliefs and assumptions of management; they do not relate strictly to historical or current facts. Without limiting the foregoing, words or phrases such as “expect,” “anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “may,” “could” and variations of such words and similar expressions generally identify forward-looking statements. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2018 Annual Report on Form 10-K, entitled Risk Factors. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
(dollar amounts in thousands except share and per share data or as otherwise noted)
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Cantel Medical Corp. 2019 First Quarter Form 10-Q