Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2019.

☐Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission file number: 001-31337

Cantel Medical Corp.

(Exact name of registrant as specified in its charter)



Delaware		22-1760285
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)



150 Clove Road	Little Falls	New Jersey	07424	(973)	890-7220
(Address of principal executive offices)			(Zip code)	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Common Stock	CMD	New York Stock Exchange
(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐	Smaller reporting company	☐
Non-accelerated filer	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock outstanding as of November 30, 2019: 42,576,934.

Cantel Medical Corp. 2020 First Quarter Form 10-Q

TABLE OF CONTENTS



		Page No.
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets (unaudited)	1
	Condensed Consolidated Statements of Income (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		30

Cantel Medical Corp. 2020 First Quarter Form 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)



	October 31, 2019			July 31, 2019
Assets
Cash and cash equivalents	$	49,285		$	44,535
Accounts receivable, net of allowance for doubtful accounts of $2,818 and $2,322	174,931			146,910
Inventories, net	200,312			138,234
Prepaid expenses and other current assets	25,204			22,117
Total current assets	449,732			351,796

Property and equipment, net	227,940			185,242
Right-of-use assets, net	51,604			—
Intangible assets, net	506,877			141,513
Goodwill	655,395			378,109
Other assets	10,029			9,425
Deferred income taxes	4,469			4,281
Total assets	$	1,906,046		$	1,070,366
Liabilities and stockholders’ equity
Accounts payable	$	40,386		$	39,450
Compensation payable	35,727			32,762
Accrued expenses	41,113			38,545
Deferred revenue	26,980			27,840
Current portion of long-term debt	24,500			10,000
Income taxes payable	4,939			2,803
Current portion of lease liabilities	9,752			—
Total current liabilities	183,397			151,400

Long-term debt	875,755			220,851
Deferred income taxes	30,923			29,278
Contingent consideration	35,100			—
Long-term lease liabilities	43,150			—
Other long-term liabilities	5,530			7,300
Total liabilities	1,173,855			408,829
Commitments and contingencies (Note 12)

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 47,218,113 shares and outstanding 42,576,825 shares as of October 31, 2019; issued 46,362,902 shares and outstanding 41,771,228 shares as of July 31, 2019	4,722			4,636
Additional paid-in capital	268,032			204,795
Retained earnings	544,864			539,097
Accumulated other comprehensive loss	(17,020		)	(22,197		)
Treasury Stock; 4,641,288 shares as of October 31, 2019; 4,591,674 shares as of July 31, 2019	(68,407		)	(64,794		)
Total stockholders’ equity	732,191			661,537
Total liabilities and stockholders’ equity	$	1,906,046		$	1,070,366

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. 2020 First Quarter Form 10-Q

Condensed Consolidated Statements of Income

(Unaudited)



	Three Months Ended October 31,
	2019		2018
Net sales
Product sales	$	225,678	$	195,760
Product service	31,568		29,829
Total net sales	257,246		225,589

Cost of sales
Product sales	120,586		99,310
Product service	20,791		21,030
Total cost of sales	141,377		120,340

Gross profit	115,869		105,249

Expenses:
Selling	38,411		33,958
General and administrative	55,287		36,535
Research and development	7,747		7,078
Total operating expenses	101,445		77,571

Income from operations	14,424		27,678

Interest expense, net	5,719		2,026

Income before income taxes	8,705		25,652

Income taxes	2,938		6,410

Net income	$	5,767	$	19,242

Earnings per common share:
Basic	$	0.14	$	0.46
Diluted	$	0.14	$	0.46

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. 2020 First Quarter Form 10-Q

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended October 31,
	2019		2018
Net income	$	5,767	$	19,242

Other comprehensive income (loss):
Foreign currency translation	3,932		(5,223		)
Interest rate swap, net of tax	1,245		—
Total other comprehensive income (loss):	5,177		(5,223		)

Comprehensive income	$	10,944	$	14,019

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. 2020 First Quarter Form 10-Q

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)



	Common Stock				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury stock, at cost			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury stock, at cost			Total Stockholders’ Equity
Balance, July 31, 2019	41,771,228		$	4,636	$	204,795	$	539,097	$	(22,197	)	$	(64,794	)	$	661,537
Repurchases of shares	(49,614	)	—		—		—		—			(3,613		)	(3,613		)
Stock-based compensation	—		—		2,404		—		—			—			2,404
Issuance of shares	751,471		75		59,925		—		—			—			60,000
Equity vests/option exercises	104,686		11		908		—		—			—			919
Cancellations of restricted stock	(946	)	—		—		—		—			—			—
Net income	—		—		—		5,767		—			—			5,767
Other comprehensive income	—		—		—		—		5,177			—			5,177
Balance, October 31, 2019	42,576,825		$	4,722	$	268,032	$	544,864	$	(17,020	)	$	(68,407	)	$	732,191



	Common Stock				Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Treasury stock, at cost			Total Stockholders’ Equity
	Shares		Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Treasury stock, at cost			Total Stockholders’ Equity
Balance, July 31, 2018	41,706,084		$	4,624	$	184,212		$	491,540	$	(11,456	)	$	(60,053	)	$	608,867
Repurchases of shares	(37,802	)	—		—			—		—			(4,288		)	(4,288		)
Stock-based compensation	—		—		2,576			—		—			—			2,576
Equity vests/option exercises	53,320		7		948			—		—			—			955
Cancellations of restricted stock	(286	)	—		—			—		—			—			—
Net income	—		—		—			19,242		—			—			19,242
Cumulative impact of ASC 606 adoption	—		—		—			865		—			—			865
Other	—		—		(634		)	—		—			—			(634		)
Other comprehensive loss	—		—		—			—		(5,223		)	—			(5,223		)
Balance, October 31, 2018	41,721,316		$	4,631	$	187,102		$	511,647	$	(16,679	)	$	(64,341	)	$	622,360

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. 2020 First Quarter Form 10-Q

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended October 31,
	2019			2018
Cash flows from operating activities
Net income	$	5,767		$	19,242
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	6,338			4,691
Amortization	6,029			6,041
Stock-based compensation expense	2,404			2,576
Amortization of right-of-use assets	2,722			—
Deferred income taxes	1,454			(674		)
Inventory step-up amortization	4,772			—
Other non-cash items, net	(548		)	1,236
Changes in assets and liabilities, net of effects of acquisitions/dispositions:
Accounts receivable	(348		)	(4,087		)
Inventories	(6,254		)	(3,359		)
Prepaid expenses and other assets	1,147			1,089
Accounts payable and other liabilities	(13,664		)	1,055
Income taxes	1,450			4,459
Operating lease liabilities	(2,338		)	—
Net cash provided by operating activities	8,931			32,269

Cash flows from investing activities
Capital expenditures	(10,390		)	(38,834		)
Acquisitions, net of cash acquired	(658,932		)	(17,000		)
Net cash used in investing activities	(669,322		)	(55,834		)

Cash flows from financing activities
Borrowings of long-term debt	400,000			—
Repayments of long-term debt	(2,375		)	(2,500		)
Borrowings under revolving credit facility	291,400			—
Repayments under revolving credit facility	(10,900		)	—
Debt issuance costs	(9,234		)	—
Finance lease liabilities	(127		)	—
Purchases of treasury stock	(3,613		)	(4,288		)
Net cash provided by (used in) financing activities	665,151			(6,788		)

Effect of exchange rate changes on cash and cash equivalents	(10		)	286

Increase (decrease) in cash and cash equivalents	4,750			(30,067		)
Cash and cash equivalents at beginning of period	44,535			94,097
Cash and cash equivalents at end of period	$	49,285		$	64,030

See accompanying notes to Condensed Consolidated Financial Statements.

(dollar amounts in thousands except share and per share data or as otherwise noted) 5

Cantel Medical Corp. 2020 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.

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, 2019 (the “2019 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, 2019 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, 2019 through the date of issuance of the accompanying unaudited consolidated interim financial statements.

2. Accounting Pronouncements

Newly Adopted Accounting Standards

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 our condensed consolidated 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,” and ASU 2018-11, “Leases (Topic 842) Targeted Improvements,” in December 2018, the FASB issued ASU 2018-20, “Narrow-Scope Improvements for Lessors” and in March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements.” These ASUs provide 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 adopted the collective standard “ASC 842” using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Therefore, results for reporting periods beginning after August 1, 2019 are presented under the new leasing standard; however, the comparative prior period amounts have not been restated and continue to be reported in accordance with historic accounting under ASC Topic 840. The most significant effects of adoption of the new leasing standard relate to the recognition of right-of-use assets of $35,842 and lease liabilities of $36,417 for operating leases, which we recorded on our condensed consolidated balance sheet on August 1, 2019. The new leasing standard did not impact our condensed consolidated statements of income or condensed consolidated statements of cash flows. See Note 6, “Leases” for a discussion of the impact to the condensed consolidated balance sheets and related disclosures.

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. Accordingly, we adopted ASU 2018-02 on August 1, 2019. The adoption of ASU 2018-02 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 noted) 6

Cantel Medical Corp. 2020 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 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 June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”) to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021). The adoption of ASU 2016-13 is not expected to have a material impact on our financial position, results of operations or cash flows.


3.	Acquisitions

Fiscal 2020

Hu-Friedy: On October 1, 2019, we purchased all of the issued and outstanding membership interests of Hu-Friedy Mfg. Co. LLC (“Hu-Friedy), for a total consideration (net of cash acquired), excluding acquisition-related costs, of $718,933, consisting of $658,933 of cash and $60,000 of stock consideration, plus contingent consideration, payable in cash, ranging from zero to a maximum of $50,000, which is payable upon the achievement of certain commercial milestones through March 31, 2021. Hu-Friedy is a leading global manufacturer of instruments and instrument reprocessing systems serving the dental industry, and is included in our Dental segment.

Fiscal 2019

Omnia: On February 1, 2019, we purchased all of the issued and outstanding stock of Omnia S.p.A. (“Omnia”), an Italian-based market leader in dental surgical consumables solutions, for total consideration (net of cash acquired), excluding acquisition-related costs, of $19,808, consisting of $16,598 of cash and $3,210 of stock consideration, plus additional earn-outs ranging from zero to a maximum of $5,800, which is payable upon the achievement of certain performance-based financial 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, and is included in our Dental segment.

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 $17,047. 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) 7

Cantel Medical Corp. 2020 First Quarter Form 10-Q

The following table presents our purchase price allocations of our material acquisitions:



	2020			2019
Purchase Price Allocation	Hu-Friedy			Omnia			CES Business⁽¹⁾
	(Preliminary)			(Preliminary)			(Final)
Purchase Price:
Cash paid	$	658,933		$	16,598		$	17,047
Fair value of contingent consideration	35,100			—			—
Common stock issued	60,000			3,210			—
Total	$	754,033		$	19,808		$	17,047

Allocation:
Property and equipment	38,571			1,285			539
Intangible assets:
Customer relationships	226,000			10,206			8,100
Technology	32,000			1,257			—
Brand names	112,000			1,600			—
Goodwill	276,483			11,340			6,137
Deferred income taxes	—			(2,346		)	—
Inventories	60,596			—			—
Other working capital	43,483			1,673			2,271
Contingent consideration	(35,100		)	—			—
Long-term debt	—			(5,207		)	—
Total	$	754,033		$	19,808		$	17,047

_______________________________________________


(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 following pro forma summary of operations presents our operations as if the Hu-Friedy acquisition had occurred as of the beginning of fiscal 2019. In addition to including the results of operations of this acquisition, the pro forma information gives effect to amortization of the step-up in inventory, depreciation of the step-up in property and equipment, the interest on additional borrowings, the amortization of intangible assets and the issuance of shares of common stock. On an actual basis, the Hu-Friedy acquisition contributed $18,725 to our consolidated net sales for the three months ended October 31, 2019.



	Three Months Ended October 31,
Pro Forma Summary of Operations	2019		2018
Net sales	$	296,454	$	279,428
Net income	$	952	$	19,619
Earnings per common share:
Basic	$	0.02	$	0.46
Diluted	$	0.02	$	0.46

The pro forma information presented above does not purport to be indicative of the results that actually would have been attained had the Hu-Friedy acquisition occurred as of the beginning of fiscal 2019.

(dollar amounts in thousands except share and per share data or as otherwise noted) 8

Cantel Medical Corp. 2020 First Quarter Form 10-Q

4. Stock-Based Compensation

2016 Equity Incentive Plan

At October 31, 2019, 452,221 nonvested restricted stock awards were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At October 31, 2019, 511,487 shares were collectively available for issuance pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.

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, 2019, options to purchase 15,000 shares of common stock 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,
	2019		2018
Cost of sales	$	260	$	237
Operating expenses:
Selling	536		571
General and administrative	1,527		1,710
Research and development	81		58
Total operating expenses	2,144		2,339
Stock-based compensation expense	$	2,404	$	2,576

At October 31, 2019, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $29,900 with a remaining weighted average period of 21 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,
	2019		2018
Volatility of common stock	30.73	%	27.54	%
Average volatility of peer companies	36.28	%	36.55	%
Average correlation coefficient of peer companies	24.63	%	27.18	%
Risk-free interest rate	1.49	%	2.93	%

A summary of nonvested stock award activity for the three months ended October 31, 2019 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, 2019	234,864		40,210		32,079		307,153		$	88.99
Granted	204,206		—		47,967		252,173		$	73.67
Vested⁽¹⁾	(86,937	)	(8,475	)	(3,462	)	(98,874	)	$	90.74
Forfeited	(8,016	)	(215	)	—		(8,231	)	$	80.25
October 31, 2019	344,117		31,520		76,584		452,221		$	80.14

_______________________________________________


(1)	The aggregate fair value of all nonvested stock awards which vested was approximately $8,971.

(dollar amounts in thousands except share and per share data or as otherwise noted) 9

Cantel Medical Corp. 2020 First Quarter Form 10-Q

A summary of stock option activity for the three months ended October 31, 2019 follows:



	Number of shares		Weighted Average Exercise Price		Weighted Average Contractual Life Remaining (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2019	40,000		$	43.70
Exercised	(25,000	)	$	36.70
Outstanding at October 31, 2019	15,000		$	55.36	0.95	$	263
Exercisable at October 31, 2019	15,000		$	55.36	0.95	$	263

During the three months ended October 31, 2019, 25,000 options were exercised, with an aggregate fair value of approximately $1,067. At October 31, 2019, 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, 2019, income tax deductions of $2,022 were generated, of which $2,581 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $559 was recorded as an increase in income tax expense. 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.

5. Revenue Recognition

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. Due to the cumulative impact of adopting ASC 606, we recorded a net increase of $865 to opening retained earnings, net of tax, as of August 1, 2018. 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.

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	2019		2018
United States	$	190,084	$	168,938
Europe/Africa/Middle East	41,018		32,014
Asia/Pacific	17,065		15,752
Canada	7,833		7,373
Latin America/South America	1,246		1,512
Total	$	257,246	$	225,589
Net sales by product line
Capital equipment	$	58,748	$	58,132
Consumables	153,279		136,821
Product service	31,568		29,829
Instrument sales	13,520		—
All other⁽¹⁾	131		807
Total	$	257,246	$	225,589

_______________________________________________


(1)	Primarily includes software licensing revenues.

(dollar amounts in thousands except share and per share data or as otherwise noted) 10

Cantel Medical Corp. 2020 First Quarter Form 10-Q

Remaining Performance Obligations

At October 31, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $73,456, primarily within the Medical segment. We expect to recognize revenue on approximately 70% of these remaining performance obligations over the remainder of fiscal 2020 and fiscal 2021. 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 follows:



	Three Months Ended October 31,
	2019			2018
Beginning balance	$	28,235		$	29,015
Revenue deferred in current year	2,007			14,524
Deferred revenue recognized	(2,982		)	(13,547		)
Foreign currency translation	104			(163		)
Ending balance	27,364			29,829
Contract liabilities included in Other long-term liabilities	(384		)	(549		)
Deferred revenue	$	26,980		$	29,280

6. Leases

Adoption of “Leases (ASC 842)”

We adopted ASC 842, effective August 1, 2019, using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Results for reporting beginning after August 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and will continue to be reported in accordance with our historical accounting under ASC 840.

We elected a package of practical expedients that were consequently applied to all leases. We did not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, nor whether previously capitalized initial direct costs would qualify for capitalization under the new standard. Upon transition, we did not elect to use hindsight with respect to lease renewals and purchase options when accounting for existing leases, as well as assessing the impairment of right-of-use assets. Therefore, lease terms largely remained unchanged. In addition, we elected the short-term lease recognition exemption and did not recognize a lease liability and right-of-use asset on our condensed consolidated balance sheet for all leases with terms of 12 months or less. We elected the practical expedient to combine lease and non-lease components in total gross rent for all of our leases which resulted in larger lease liabilities recorded on our condensed consolidated balance sheet.

Our lease portfolio consists primarily of real estate, equipment and vehicles. We have approximately 90 real estate leases with lease terms ranging from 1 year to 16 years, which include our corporate headquarters, regional headquarters, and other facilities for sales and administration, warehousing, manufacturing and training. Our equipment leases primarily consist of furniture, computers and other office equipment.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. At lease commencement, we record a liability for our lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. We use our collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of our leases do not provide an implicit rate that is readily determinable. We do not recognize a lease liability and right-of-use asset on our condensed consolidated balance sheet for any leases with an initial term of 12 months or less. Some real estate leases include one or more options to renew or terminate a lease. The exercise of a lease renewal or termination option is assessed at commencement of the lease and only reflected in the lease term if we are reasonably certain to exercise the option. We have lease agreements that contain both lease and non-lease components, such as common area maintenance fees, and we have made a policy election to

(dollar amounts in thousands except share and per share data or as otherwise noted) 11

Cantel Medical Corp. 2020 First Quarter Form 10-Q

combine both fixed lease and non-lease components in total gross rent for all of our leases. Operating lease expense is recognized on a straight-line basis over the respective lease term.

Supplemental balance sheet information related to our leases follows:



Lease Type	October 31, 2019
Assets:
Operating lease assets	$	46,718
Finance lease assets	4,886
Right-of-use assets, net	$	51,604

Liabilities:
Operating lease liabilities	$	9,425
Finance lease liabilities	327
Current portion of lease liabilities	9,752

Operating lease liabilities	38,803
Finance lease liabilities	4,347
Long-term lease liabilities	43,150
Total lease liabilities	$	52,902

Weighted average remaining lease term:
Operating leases	6.64 years
Finance leases	6.52 years
Weighted average discount rate:
Operating leases	2.75		%
Finance leases	23.67		%

At October 31, 2019, maturities of lease liabilities for the periods set forth below were as follows:



Fiscal year	Operating			Finance			Total
Remaining 2020	$	7,997		$	1,064		$	9,061
2021	9,436			1,425			10,861
2022	7,498			1,411			8,909
2023	6,664			1,399			8,063
2024	5,934			1,407			7,341
Thereafter	15,868			2,444			18,312
Total lease payments	53,397			9,150			62,547
Less: interest	(5,169		)	(4,476		)	(9,645		)
Present value of lease liabilities	$	48,228		$	4,674		$	52,902

(dollar amounts in thousands except share and per share data or as otherwise noted) 12

Cantel Medical Corp. 2020 First Quarter Form 10-Q

As previously disclosed in our 2019 Annual Report on Form 10-K and in accordance with our historical accounting under ASC 840, 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	Total
2020	$	9,099
2021	7,671
2022	6,021
2023	5,659
2024	5,159
Thereafter	15,251
Total	$	48,860

Supplemental income statement information related to our leases follows:



	Three Months Ended October 31, 2019
Operating lease costs	$	2,651
Finance lease costs:
Amortization of right-of-use assets	71
Interest on lease obligations	90
Variable lease costs	846
Short-term lease costs	248
Net lease cost	$	3,906

Supplemental cash flow information related to leases follows:



	Three Months Ended October 31, 2019
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	14,153
Finance leases⁽²⁾	$	4,798

_______________________________________________

(1) Primarily relates to new warehouse facility included in our Dental segment and operating leases acquired in the Hu-Friedy acquisition.

(2) Includes finance leases acquired in the Hu-Friedy acquisition.

7. Inventories, Net

A summary of inventories, net is as follows:



	October 31, 2019			July 31, 2019
Raw materials and parts	$	71,361		$	69,498
Work-in-process	29,244			5,801
Finished goods	116,088			73,050
Reserve for excess and obsolete inventory	(16,381		)	(10,115		)
Total Inventories, net	$	200,312		$	138,234

8. Derivatives

Foreign Currency

In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar, Singapore dollar and Chinese Renminbi 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 such foreign currencies, which contracts are one-month in duration. These

(dollar amounts in thousands except share and per share data or as otherwise noted) 13

Cantel Medical Corp. 2020 First Quarter Form 10-Q

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 foreign currencies 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 Japanese Yen 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 six foreign currency forward contracts with an aggregate notional value of $73,559 and $78,264 at October 31, 2019 and July 31, 2019, 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, 2019 and 2018, the settlements of our forward contracts resulted in immaterial amounts of currency conversion gains and losses on the hedged items in the aggregate.

Variable Rate Borrowings

In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, in fiscal 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.45%. At October 31, 2019, we had a short-term asset of $1,119 recorded in prepaid expenses and other current assets, and a long-term asset of $3,812 recorded in other assets, which represent the fair value of the interest rate swaps. At July 31, 2019, we had a short-term asset of $486 recorded in prepaid expenses and other current assets, and a long-term asset of $2,826 recorded in other assets. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.

9. 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 condensed 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 Hu-Friedy acquisition, additional purchase price payments ranging from zero to $50,000 are contingent upon the achievement of certain commercial milestones through March 31, 2021. We estimated the aggregate fair value of the two contingent consideration arrangements to be $35,100 at the date of acquisition, and was reported separately in our condensed consolidated balance sheet. The initial value assigned to the contingent consideration arrangements was determined on the basis of forecasted sales of Hu-Friedy products over the next twelve to eighteen months. The fair value was determined by employing a Monte Carlo simulation in a risk neutral framework, with the underlying simulated variable of net sales and the related achievement of certain gross margin percentages. The model also included assumptions on the market price of risk, which was calculated as the weighted average cost of capital less the long-term risk free-rate. We are required to reassess the fair value of contingent payments on a periodic basis. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

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.

(dollar amounts in thousands except share and per share data or as otherwise noted) 14

Cantel Medical Corp. 2020 First Quarter Form 10-Q

The fair values of our financial instruments measured on a recurring basis were categorized as follows:



	October 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money markets	$	104	$	—	$	—	$	104
Prepaid and other current assets:
Interest rate swap	—		1,119		—		1,119
Other Assets:
Interest rate swap	—		3,812		—		3,812
Total assets	$	104	$	4,931	$	—	$	5,035

Accrued expenses:
Contingent consideration	—		—		1,668		1,668
Other long-term liabilities:
Contingent consideration	—		—		35,100		35,100
Total liabilities	$	—	$	—	$	36,768	$	36,768



	July 31, 2019
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money markets	$	104	$	—	$	—	$	104
Prepaid expenses and other current assets:
Interest rate swap	—		486		—		486
Other Assets:
Interest rate swap	—		2,826		—		2,826
Total assets	$	104	$	3,312	$	—	$	3,416

Other long-term liabilities:
Contingent consideration	—		—		1,411		1,411
Total liabilities	$	—	$	—	$	1,411	$	1,411

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		Hu-Friedy Contingent Consideration		Total
Balance, July 31, 2019	$	1,411	$	—	$	1,411
Fair value adjustments included in general and administrative expenses	257		—		257
Acquisitions and settlements, net	—		35,100		35,100
Balance, October 31, 2019	$	1,668	$	35,100	$	36,768

Disclosure of Fair Value of Financial Instruments

At October 31, 2019 and July 31, 2019, 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, 2019 and July 31, 2019, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations as the respective borrowing rates reflect prevailing market interest rates.

(dollar amounts in thousands except share and per share data or as otherwise noted) 15

Cantel Medical Corp. 2020 First Quarter Form 10-Q


10.	Intangibles and Goodwill

Our intangible assets consist of the following:



	October 31, 2019							July 31, 2019
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible assets with finite lives:
Customer relationships	$	372,059	$	(58,109	)	$	313,950	$	146,204	$	(54,866	)	$	91,338
Technology	92,439		(25,669		)	66,770		60,032		(24,081		)	35,951
Brand names	8,619		(3,458		)	5,161		8,361		(3,256		)	5,105
Non-compete agreements	2,850		(1,671		)	1,179		2,880		(1,653		)	1,227
Patents and other registrations	2,407		(701		)	1,706		2,866		(1,252		)	1,614
	478,374		(89,608		)	388,766		220,343		(85,108		)	135,235
Trademarks and tradenames	118,111		—			118,111		6,278		—			6,278
Total intangible assets	$	596,485	$	(89,608	)	$	506,877	$	226,621	$	(85,108	)	$	141,513

Amortization expense related to intangible assets was $6,029 and $6,041 for the three months ended October 31, 2019 and 2018, respectively. We expect to recognize an additional $26,117 of amortization expense related to intangible assets for the remainder of fiscal 2020, and thereafter $34,708, $34,336, $33,303, $32,435 and $29,205 of amortization expense for fiscal years 2021, 2022, 2023, 2024 and 2025, respectively.

Goodwill changed during the three months ended October 31, 2019 as follows:



	Medical		Life Sciences		Dental			Dialysis		Total
Balance, July 31, 2019	$	180,197	$	64,481	$	125,298		$	8,133	$	378,109
Acquisitions	—		—		276,483			—		276,483
Foreign currency translation	1,652		39		(888		)	—		803
Balance, October 31, 2019	$	181,849	$	64,520	$	400,893		$	8,133	$	655,395

11. Financing Arrangements

Our long-term debt consists of the following:



	October 31, 2019			July 31, 2019
Revolving credit loans outstanding	$	323,500		$	43,000
Tranche A term loans outstanding	587,625			190,000
Unamortized debt issuance costs	(10,870		)	(2,149		)
Total long-term debt, net of unamortized debt issuance costs	900,255			230,851
Current portion of long-term debt	(24,500		)	(10,000		)
Long-term debt, net of unamortized debt issuance costs and excluding current portion	$	875,755		$	220,851

On September 6, 2019, we entered into a First Amendment (the “Amendment”), amending the 2018 Credit Agreement, and as amended by the Amendment, the (“Amended Credit Agreement”) dated as of June 28, 2018. The Amendment added a $400,000 delayed draw term loan facility (the “Delayed Draw Facility”), in addition to the existing tranche A term loan and existing revolving credit facility. The Delayed Draw Facility and a portion of the revolving credit facility was used to finance a portion of the cash consideration for our acquisition of Hu-Friedy. The remaining proceeds were used to refinance certain existing indebtedness of Cantel and Hu-Friedy, and to pay the fees and expenses incurred in connection therewith, as well as for working capital, capital expenditures and other lawful corporate purposes. Pursuant to the Amended Credit Agreement, subject to the satisfaction of certain conditions precedent, including the consent of the lenders, the Company may from time to time increase its borrowing capacity under the revolving credit facility by, or incur incremental term loans in, an aggregate amount not to exceed the sum of (i) the greater of (x) $300,000 or (y) an amount equal to two times the our consolidated EBITDA, calculated on a pro forma basis, plus (ii) the aggregate principal amount of voluntary prepayments of the revolving loans and term loans.

(dollar amounts in thousands except share and per share data or as otherwise noted) 16

Cantel Medical Corp. 2020 First Quarter Form 10-Q

At October 31, 2019, we had $587,625 of term loan A borrowings outstanding and $323,500 revolver borrowings under the Amended Credit Agreement. The tranche A term loans are subject to principal amortization, with $19,500 due and payable in fiscal 2020, $29,500 due and payable in each of fiscal 2021, 2022, 2023, and 2024, with the remaining $452,500 due and payable at maturity on September 6, 2024. During the three months ended October 31, 2019, we made principal payments of $2,375.

Borrowings under the Amended Credit Agreement bear interest at rates ranging from 0.00% to 1.25% above prime rate for base rate borrowings, or at rates ranging from 1.00% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon our “Consolidated Leverage Ratio,” which is the consolidated ratio of total funded debt (minus certain unrestricted cash) to consolidated EBITDA. At October 31, 2019, the lender’s base rate was 4.75% and the LIBOR rate was 2.03%. The margins applicable to our outstanding borrowings were 1.25% above the lender’s base rate or 2.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at October 31, 2019. The Amended Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio, which was 0.40% at October 31, 2019. At October 31, 2019, the interest rate on our outstanding borrowings was approximately 4.28%.

The Amended 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 each Loan Party 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 Amended Credit Agreement.

12. Commitments and Contingencies

Contingent Consideration and Assumed Contingent Liability

At October 31, 2019, $35,100 was recorded associated with the Hu-Friedy acquisition, which is for the estimated fair value of contingent consideration arrangements that are payable upon the achievement of certain commercial milestones through March 31, 2021. Additionally, $1,668 was recorded associated with 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. See Note 9, “Fair Value Measurements.”

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.

13. 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) 17

Cantel Medical Corp. 2020 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,
	2019			2018
Numerator for basic and diluted earnings per share:
Net income	$	5,767		$	19,242
Less income allocated to participating securities	(2		)	(33		)
Net income available to common shareholders	$	5,765		$	19,209
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	42,022,383			41,640,745
Dilutive effect of stock awards using the treasury stock method and the average market price for the year	146,422			65,028
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	42,168,805			41,705,773
Earnings per share attributable to common stock:
Basic earnings per share	$	0.14		$	0.46
Diluted earnings per share	$	0.14		$	0.46
Stock options excluded 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,
	2019	2018
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	42,168,805	41,705,773
Participating securities	16,857	69,452
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	42,185,662	41,775,225

14. Accumulated Other Comprehensive Loss

The components and changes in accumulated other comprehensive loss follow:



	Three Months Ended October 31,
	2019			2018
Beginning balance	$	(22,197	)	$	(11,456	)
Foreign currency translation	3,932			(5,223		)
Interest rate swap, net of taxes⁽¹⁾	1,245			—
Ending balance	$	(17,020	)	$	(16,679	)

_______________________________________________


(1)	Includes tax effect of $375 for the three months ended October 31, 2019.

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.

In the first quarter of fiscal 2020 and as a result of the Hu-Friedy acquisition, we moved the financial reporting and management of our industrial biological and chemical indicator business to our Dental segment from our Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation.

(dollar amounts in thousands except share and per share data or as otherwise noted) 18

Cantel Medical Corp. 2020 First Quarter Form 10-Q

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 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 45.7% and 43.9% of our Life Sciences segment net sales for the three months ended October 31, 2019 and 2018, respectively.

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. We are also a leading global manufacturer of instruments and instrument reprocessing workflow systems serving the dental industry. Three customers collectively accounted for approximately 43.5% and 50.2% of our Dental segment net sales for the three months ended October 31, 2019 and 2018, 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. Three customers accounted for approximately 46.1% and 41.4% of our Dialysis segment net sales for the three months ended October 31, 2019 and 2018, respectively. These customers include one of the top 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, 2019 and 2018.

Information as to reportable segments is summarized below:



	Three Months Ended October 31,
Net sales	2019		2018
Medical	$	133,353	$	127,552
Life Sciences	49,141		51,842
Dental	67,243		38,131
Dialysis	7,509		8,064
Total net sales	$	257,246	$	225,589



	Three Months Ended October 31,
Income from operations	2019		2018
Medical	$	21,119	$	25,211
Life Sciences	7,135		5,572
Dental	5,004		6,684
Dialysis	1,622		1,384
	34,880		38,851
General corporate expenses	20,456		11,173
Total income from operations	$	14,424	$	27,678

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

(dollar amounts in thousands except share and per share data or as otherwise noted) 19

Cantel Medical Corp. 2020 First Quarter Form 10-Q

First Quarter 2020 Summary

A summary of financial results for the three months ended October 31, 2019 compared with the three months ended October 31, 2018 follows:


•	Net sales increased by 14.0% to $257,246 from $225,589, with organic net sales growth of 4.8%


•	Net income decreased by 70.0% to $5,767 from $19,242


•	Diluted earnings per share decreased by 70.3% to $0.14 from $0.46


•	Non-GAAP net income increased by 5.1% to $27,219 from $25,891


•	Non-GAAP diluted earnings per share increased by 4.8% to $0.65 from $0.62

See Non-GAAP Financial Measures below.

Reportable Segment Changes

Acquisitions

On October 1, 2019, we purchased all of the issued and outstanding membership interests of Hu-Friedy Mfg. Co. LLC (“Hu-Friedy), for a total consideration (net of cash acquired), excluding acquisition-related costs, of $718,933, consisting of $658,933 of cash and $60,000 of stock consideration, plus contingent consideration, payable in cash, ranging from zero to a maximum of $50,000, which is payable upon the achievement of certain commercial milestones through March 31, 2021. Hu-Friedy is a leading global manufacturer of instruments and instrument reprocessing systems serving the dental industry, and is included in our Dental segment.

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:	2019				2018				Percentage Change
Net sales	$	257,246	100.0	%	$	225,589	100.0	%	14.0	%
Cost of sales	141,377		55.0	%	120,340		53.3	%	17.5	%
Gross profit	115,869		45.0	%	105,249		46.7	%	10.1	%

Selling	38,411		14.9	%	33,958		15.1	%	13.1	%
General and administrative	55,287		21.5	%	36,535		16.2	%	51.3	%
Research and development	7,747		3.0	%	7,078		3.1	%	9.5	%
Total operating expenses	101,445		39.4	%	77,571		34.4	%	30.8	%

Operating income	14,424		5.6	%	27,678		12.3	%	(47.9	)%

Interest expense, net	5,719		2.2	%	2,026		0.9	%	182.3	%
Other income, net	—		—	%	—		—	%	—	%
Income before income taxes	8,705		3.4	%	25,652		11.4	%	(66.1	)%
Income taxes	2,938		1.2	%	6,410		2.9	%	(54.2	)%
Net income	$	5,767	2.2	%	$	19,242	8.5	%	(70.0	)%

(dollar amounts in thousands except share and per share data or as otherwise noted) 20

Cantel Medical Corp. 2020 First Quarter Form 10-Q

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	2019				2018
Medical	$	133,353	51.8	%	$	127,552	56.5	%
Life Sciences	49,141		19.1	%	51,842		23.0	%
Dental	67,243		26.1	%	38,131		16.9	%
Dialysis	7,509		3.0	%	8,064		3.6	%
Total net sales	$	257,246	100.0	%	$	225,589	100.0	%
Net sales by geography
United States	$	190,084	73.9	%	$	168,938	74.9	%
International	67,162		26.1	%	56,651		25.1	%
Total net sales	$	257,246	100.0	%	$	225,589	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 reportable segments.



	Three Months Ended October 31,
Income from operations by segment	2019				2018
Medical	$	21,119	15.8	%	$	25,211	19.8	%
Life Sciences	7,135		14.5	%	5,572		10.7	%
Dental	5,004		7.4	%	6,684		17.5	%
Dialysis	1,622		21.6	%	1,384		17.2	%
Income from operations by segment	34,880		13.6	%	38,851		17.2	%
General corporate expenses	20,456		8.0	%	11,173		4.9	%
Income from operations	$	14,424	5.6	%	$	27,678	12.3	%

Net Sales

Total net sales increased by $31,657 or 14.0%, to $257,246 for the three months ended October 31, 2019 from $225,589 for the three months ended October 31, 2018, which consisted of an increase of 4.8% in organic sales, an increase of 9.9% in net sales due to acquisitions and a decrease of 0.7% due to foreign currency translation. International net sales increased by $10,511 or 18.6%, to $67,162 for the three months ended October 31, 2019 from $56,651 for the three months ended October 31, 2018. The 18.6% increase in international net sales consisted of 10.2% organic sales growth, a 11.1% increase due to acquisitions (offset by dispositions), and a decrease of 2.7% due to foreign currency translation, resulting from the strengthening of the U.S. dollar.

Medical. Net sales increased by $5,801 or 4.5%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018, which consisted of 5.7% organic sales growth and a decrease of 1.2% due to foreign currency translation. The increase in organic net sales was primarily driven by increased sales related to service and chemistries, and to a lesser extent, our procedure room products and consumables. The sales growth was driven by international sales increases, most notably in Canada, and our domestic service business.

Life Sciences. Net sales decreased by $2,701 or 5.2% for the three months ended October 31, 2019 compared with the three months ended October 31, 2018, which consisted of a 4.0% decrease due to divestitures, 1.1% organic sales decrease and a decrease of 0.1% due to foreign currency translation. The decrease in sales was primarily due the divestiture of our high purity water business in Canada, which occurred in the second quarter of fiscal 2019, and the continued softness in demand for capital equipment, primarily in the medical water business. We expect this softness in demand to begin to stabilize in the latter part of fiscal 2020. For a more detailed discussion on the competitive threat to our hemodialysis water business, see Part I, Item 1A, Risk Factors, in our 2019 Annual Report on Form 10-K.

Dental. Net sales increased by $29,112 or 76.3%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018, which consisted of a 64.3% increase due to acquisitions and a 12.0% organic sales increase. The Hu-Friedy and Omnia acquisitions contributed $18,725 and $5,777 of net sales, respectively. The inventory adjustments within

(dollar amounts in thousands except share and per share data or as otherwise noted) 21

Cantel Medical Corp. 2020 First Quarter Form 10-Q

our distributor network in fiscal 2019, which negatively impacted our 2019 net sales, did not reoccur in 2020. As a result, our net sales have returned to normalized organic growth during the three months ended October 31, 2019.

Dialysis. Net sales decreased by $555 or 6.9%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018. The decrease was primarily due to the decrease in domestic sales as our customer base continues to shift to dry acid, further eroding our liquid concentrate business.

Gross Profit

Gross profit increased by $10,620 or 10.1%, to $115,869 for the three months ended October 31, 2019 from $105,249 for the three months ended October 31, 2018. Gross profit as a percentage of net sales for the three months ended October 31, 2019 and 2018 was 45.0% and 46.7%, respectively. The decrease in gross profit as a percentage of net sales was due to the amortization of the step up in inventory acquired in the Hu-Friedy acquisition, and to a lesser extent, increased labor costs resulting from livable wage increases taken in the latter part of fiscal 2019, partially offset by favorable mix associated with the Hu-Friedy products.

Operating Expenses

Operating expenses increased $23,874 or 30.8% to $101,445 for the three months ended October 31, 2019 from $77,571 for the three months ended October 31, 2018. Operating expenses as a percentage of net sales for the three months ended October 31, 2019 and 2018 was 39.4% and 34.4%, respectively.

Selling expenses increased by $4,453 or 13.1%, to $38,411 for the three months ended October 31, 2019 from $33,958 for the three months ended October 31, 2018. The increase was primarily due to our recent acquisitions. Selling expenses as a percentage of net sales were 14.9% and 15.1% for the three months ended October 31, 2019 and 2018, respectively.

General and administrative expenses increased by $18,752 or 51.3%, to $55,287 for the three months ended October 31, 2019 from $36,535 for the three months ended October 31, 2018. The increase was primarily due to our recent acquisitions, certain transaction and integration-related costs, restructuring-related costs, higher amortization expense and elevated depreciation expense related to our new ERP platform and our new Medical headquarters in Minnesota. General and administrative expenses as a percentage of net sales were 21.5% and 16.2% for the three months ended October 31, 2019 and 2018, respectively.

Research and development expenses (which include continuing engineering costs) increased by $669 or 9.5%, to $7,747 for the three months ended October 31, 2019 from $7,078 for the three months ended October 31, 2018. The increase was due primarily to research and development projects in our Life Sciences segment. Research and development expenses as a percentage of net sales were 3.0% and 3.1% for the three months ended October 31, 2019 and 2018, respectively.

Income from Operations

Medical. Income from operations decreased by $4,092 or 16.2%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018. The decrease was primarily due to restructuring-related charges, elevated depreciation expense associated with our new ERP platform and our new headquarters facility in Minnesota, partially offset by the decrease in certain operating expenses, due to the timing of marketing-related spend and to a lesser extent, lower sales commissions.

Life Sciences. Income from operations increased by $1,563 or 28.1%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018. The increase was primarily due to a reduction of this segment’s overall expense base as a result of the divestiture of our high purity water business in Canada, partially offset by lower net sales.

Dental. Income from operations decreased by $1,680 or 25.1%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018. The decrease was primarily due to certain acquisition and integration-related costs, inventory step-up amortization as a result of the Hu-Friedy acquisition, higher depreciation and amortization expense as a result of our recent acquisitions, partially offset by incremental income from operations related to these recent acquisitions.

Dialysis. Income from operations increased by $238 or 17.2%, for the three months ended October 31, 2019 compared with the three months ended October 31, 2018. The increase was primarily due gross margin improvements resulting from cost saving initiatives, partially offset by the decrease in net sales.

(dollar amounts in thousands except share and per share data or as otherwise noted) 22

Cantel Medical Corp. 2020 First Quarter Form 10-Q

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 and integration programs and being a publicly traded company. Such expenses increased by $9,283 or 83.1%, for the three months ended October 31, 2019 from the three months ended October 31, 2018. The increase was primarily due to an increase in acquisition-related and transaction charges incurred in connection with the Hu-Friedy acquisition.

Interest Expense, Net

Interest expense, net increased by $3,693 or 182.3%, to $5,719 for the three months ended October 31, 2019 from $2,026 for the three months ended October 31, 2018. These increase resulted from an increase in the average outstanding borrowings due to both the term loan and revolver borrowings to support the funding of our recent acquisitions, and to a lesser extent, higher variable interest rates.

Income Taxes

The consolidated effective tax rate increased to 33.8% for the three months ended October 31, 2019 from 25.0% for the three months ended October 31, 2018. The increase was primarily the result of the excess tax charges related to share-based compensation, and to a lesser extent, the jurisdictional tax structure of the acquired Hu-Friedy international operations.

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

(dollar amounts in thousands except share and per share data or as otherwise noted) 23

Cantel Medical Corp. 2020 First Quarter Form 10-Q

these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.

Restructuring-related and business optimization items consist of severance-related costs associated with work force reductions and other restructuring-related activities. Such costs include (i) salary continuation, (ii) bonus payments, (iii) outplacement services, (iv) medical-related premium costs and (v) accelerated stock-compensation costs. Since these restructuring-related and business optimization items 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 an adjustment to 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 were unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS for fiscal 2019 to arrive at our non-GAAP financial measures.

During the three months ended October 31, 2018, we recorded an adjustment to a 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 for fiscal 2019 to exclude such costs to arrive at our non-GAAP financial measures.

Three Months Ended October 31, 2019

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges and (iv) excess tax expenses applicable to stock compensation, to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.

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) 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.

(dollar amounts in thousands except share and per share data or as otherwise noted) 24

Cantel Medical Corp. 2020 First Quarter Form 10-Q

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,
	2019				2018
Net income/Diluted EPS, as reported	$	5,767	$	0.14	$	19,242		$	0.46
Intangible amortization, net of tax⁽¹⁾	5,021		0.12		4,626			0.11
Acquisition-related items, net of tax⁽²⁾	12,520		0.30		1,349			0.03
Restructuring-related charges, net of tax⁽³⁾	3,352		0.08		641			0.02
Excess tax benefits⁽⁴⁾	559		0.01		(997		)	(0.02		)
Tax matters⁽⁴⁾	—		—		896			0.02
Litigation matters⁽¹⁾	—		—		134			—
Non-GAAP net income/Non-GAAP diluted EPS	$	27,219	$	0.65	$	25,891		$	0.62

________________________________________________


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

(2)

For the three months ended October 31, 2019, pre-tax acquisition-related items of $4,771 were recorded in cost of sales and $11,806 were recorded in general and administrative expenses. 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.


(3)	For the three months ended October 31, 2019, pre-tax restructuring-related items of $1,157 were recorded in cost of sales, and $4,271 were recorded in general and administrative expenses. 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.


(4)	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 operating income, net income and other GAAP financial performance measures. We define adjusted EBITDAS as EBITDAS excluding the same non-GAAP adjustments to net income discussed 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.

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



	Three Months Ended October 31,
	2019		2018
Net income, as reported	$	5,767	$	19,242
Interest expense, net	5,719		2,026
Income taxes	2,938		6,410
Depreciation	6,338		4,691
Amortization	6,029		6,041
Loss on disposal of fixed assets	167		1,053
Stock-based compensation expense	2,404		2,576
EBITDAS	29,362		42,039
Acquisition-related items	16,577		1,827
Restructuring-related charges⁽¹⁾	5,367		742
Litigation matters	—		163
Adjusted EBITDAS	$	51,306	$	44,771

________________________________________________


(1)	Excludes stock-based compensation expense.

(dollar amounts in thousands except share and per share data or as otherwise noted) 25

Cantel Medical Corp. 2020 First Quarter Form 10-Q

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



	October 31, 2019			July 31, 2019
Long-term debt (excluding debt issuance costs)	$	911,125		$	233,000
Less cash and cash equivalents	(49,285		)	(44,535		)
Net debt	$	861,840		$	188,465

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 growth to organic sales growth for total net sales and net sales of our four reportable segments were calculated as follows:



	Net Sales		Medical Net Sales		Life Sciences Net Sales		Dental Net Sales		Dialysis Net Sales
Net sales growth	14.0	%	4.5	%	(5.2	)%	76.3	%	(6.9	)%
Impact due to foreign currency translation	0.7	%	1.2	%	0.1	%	—	%	0.1	%
Sales related to acquisitions/divestitures	(9.9	)%	—	%	4.0	%	(64.3	)%	—	%
Organic sales growth	4.8	%	5.7	%	(1.1	)%	12.0	%	(6.8	)%

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, dispositions 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 credit facility to fund our acquisitions and related business activities.

Cash Flows

Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased by $23,338 to $8,931 for the three months ended October 31, 2019 from $32,269 for the three months ended October 31, 2018, primarily due to the decrease in net income, cash payments associated with acquisition-related and transaction items during the period as a result of the Hu-Friedy acquisition, an increase in restructuring-related payments and an increase in inventory within our Dental and Medical segments. This was partially offset by increased cash collections of outstanding accounts receivable.

Net Cash Used in Investing Activities. Net cash used in investing activities increased by $613,488 to $669,322 for the three months ended October 31, 2019 from $55,834 for the three months ended October 31, 2018, primarily due to the Hu-Friedy acquisition, partially offset by a decrease in capital expenditures.

Net Cash Provided by (used in) Financing Activities. Net cash provided by financing activities increased by $671,939 to $665,151 for the three months ended October 31, 2019 from $6,788 of cash used for the three months ended October 31, 2018, primarily due to borrowings from the refinancing of our existing credit agreement to support the Hu-Friedy acquisition, and the debt issuance costs associated with amending our credit agreement.

Debt

At October 31, 2019, we had $587,625 of outstanding term loan borrowings and $323,500 of revolver borrowings under the First Amendment to our Fourth Amended and Restated Credit Agreement (the “Amended Credit Agreement”).

For further information regarding the Amended Credit Agreement, including a description of affirmative and negative covenants, see Note 11 to our condensed consolidated financial statements in Part I, Item 1 of this report.

(dollar amounts in thousands except share and per share data or as otherwise noted) 26

Cantel Medical Corp. 2020 First Quarter Form 10-Q

In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, during fiscal 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.45%. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.

Financing Needs

At October 31, 2019, our long-term debt (excluding debt issuance costs) of $911,125, net of our cash and cash equivalents of $49,285, was $861,840. Stockholders’ equity as of that date was $732,191.

Our operating segments generate significant cash from operations. At October 31, 2019, we had a cash balance of $49,285, of which $32,284 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 Amended 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 December 10, 2019, approximately $80,729 was available under our Amended Credit Agreement.

Critical Accounting Policies

There were no changes to our critical accounting policies from those disclosed in our 2019 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 and other securities laws. 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 2019 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2019 Annual Report on Form 10-K.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end

(dollar amounts in thousands except share and per share data or as otherwise noted) 27

Cantel Medical Corp. 2020 First Quarter Form 10-Q

of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that the design and operation of these disclosure controls and procedures were effective and designed to ensure that material information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within the time periods specified by the SEC and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

We have evaluated our internal control over financial reporting and determined that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.

On October 1, 2019, we acquired Hu-Friedy, as more fully described in Note 3 to the condensed consolidated financial statements. During the initial transition period following the acquisitions, we enhanced our internal control process to ensure that all financial information related to these acquisitions was properly reflected in our condensed consolidated financial statements. We expect all aspects of the Hu-Friedy business will be fully integrated into our existing overall internal control structure during fiscal 2020.

In 2017, we began the process of implementing a global operating and financial reporting information technology system, SAP S4 Hana (“SAP”), as part of a multi-year plan to integrate and upgrade our systems and processes. The first phase of this implementation became operational in February 2019, at our Medical segment’s United States operations, our Medivators B.V. operations and at our corporate headquarters. As the phased implementation of SAP continues, we are experiencing certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. We believe the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change and we will continue to evaluate the operating effectiveness of related key controls during subsequent periods. While we expect SAP to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2019 Annual Report on Form 10‑K. The risk factors disclosed in Part I, Item 1A to our 2019 Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition, or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table represents information with respect to purchases of common stock made by the Company during the current quarter:



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the program
August 1 - August 31	840	$	88.54	—	—
September 1 - September 30	16,824	$	79.38	—	—
October 1 - October 31	31,950	$	68.95	—	—
Total	49,614	$	72.82	—	—

The Company does not currently have a repurchase program. All of the shares purchased during the current quarter represent shares surrendered to the Company to pay employee withholding taxes due upon the vesting of restricted stock.

Cantel Medical Corp. 2020 First Quarter Form 10-Q

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits



	31.1		Certification of Principal Executive Officer.

	31.2		Certification of Principal Financial Officer.

	32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

	101		The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

	104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(dollar amounts in thousands except share and per share data or as otherwise noted) 29

Cantel Medical Corp. 2020 First Quarter Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	CANTEL MEDICAL CORP.

Date: December 10, 2019

	By:	/s/ George L. Fotiades
		George L. Fotiades
		President and Chief Executive Officer
		(Principal Executive Officer)


	By:	/s/ Shaun M. Blakeman
		Shaun M. Blakeman
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)


	By:	/s/ Brian R. Capone
		Brian R. Capone
		Senior Vice President and Chief Accounting Officer
		(Principal Accounting Officer)