UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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, 2019.2020.
or
☐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: 42,576,934.2020: 42,244,649.
Cantel Medical Corp. 20202021 First Quarter Form 10-Q
TABLE OF CONTENTS
| | | | | | | | |
| | Page No. |
| | Page No. |
| PART I – FINANCIAL INFORMATION | |
Item 1. | | |
| | |
| | |
| | |
| Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)(Unaudited) | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II – OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
Signatures | | |
Cantel Medical Corp. 20202021 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 |
|
(Unaudited) | | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
Assets | | | |
Cash and cash equivalents | $ | 258,021 | | | $ | 277,871 | |
Accounts receivable, net of allowance for doubtful accounts of $4,029 and $3,905 | 158,763 | | | 148,419 | |
Inventories, net | 163,880 | | | 167,960 | |
Prepaid expenses and other current assets | 19,429 | | | 18,443 | |
Income taxes receivable | 27,036 | | | 33,933 | |
Total current assets | 627,129 | | | 646,626 | |
| | | |
Property and equipment, net | 223,510 | | | 225,222 | |
Right-of-use assets, net | 47,901 | | | 48,684 | |
Intangible assets, net | 471,337 | | | 480,032 | |
Goodwill | 660,421 | | | 660,172 | |
Other long-term assets | 6,467 | | | 6,231 | |
Deferred income taxes | 3,738 | | | 4,787 | |
Total assets | $ | 2,040,503 | | | $ | 2,071,754 | |
Liabilities and stockholders’ equity | | | |
Accounts payable | $ | 46,891 | | | $ | 42,008 | |
Compensation payable | 47,788 | | | 47,769 | |
Accrued expenses | 45,525 | | | 41,480 | |
Deferred revenue | 28,454 | | | 26,223 | |
Current portion of long-term debt | 14,750 | | | 7,375 | |
Income taxes payable | 6,759 | | | 4,373 | |
Current portion of lease liabilities | 10,044 | | | 10,268 | |
Total current liabilities | 200,211 | | | 179,496 | |
| | | |
Long-term debt | 845,142 | | | 926,834 | |
Convertible debt | 126,617 | | | 124,835 | |
Deferred income taxes | 49,533 | | | 49,533 | |
Long-term lease liabilities | 40,296 | | | 40,679 | |
Other long-term liabilities | 20,323 | | | 20,778 | |
Total liabilities | 1,282,122 | | | 1,342,155 | |
Commitments and contingencies (Note 12) | | | |
| | | |
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; NaN issued | 0 | | | 0 | |
Common Stock, par value $0.10 per share; authorized 75,000,000 shares; issued 46,924,945 shares and outstanding 42,243,881 shares at October 31, 2020; issued 46,812,750 shares and outstanding 42,162,218 shares at July 31, 2020 | 4,693 | | | 4,681 | |
Additional paid-in capital | 276,450 | | | 273,040 | |
Retained earnings | 572,798 | | | 548,334 | |
Accumulated other comprehensive loss | (25,249) | | | (27,599) | |
Treasury Stock; 4,681,064 shares at October 31, 2020; 4,650,532 shares at July 31, 2020 | (70,311) | | | (68,857) | |
Total stockholders’ equity | 758,381 | | | 729,599 | |
Total liabilities and stockholders’ equity | $ | 2,040,503 | | | $ | 2,071,754 | |
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. 20202021 First Quarter Form 10-Q
Condensed Consolidated Statements of Income
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended October 31, |
| | | | | 2020 | | 2019 |
Net sales | | | | | | | |
Product sales | | | | | $ | 263,570 | | | $ | 225,678 | |
Product service | | | | | 33,459 | | | 31,568 | |
Total net sales | | | | | 297,029 | | | 257,246 | |
| | | | | | | |
Cost of sales | | | | | | | |
Product sales | | | | | 129,655 | | | 120,586 | |
Product service | | | | | 20,008 | | | 20,791 | |
Total cost of sales | | | | | 149,663 | | | 141,377 | |
| | | | | | | |
Gross profit | | | | | 147,366 | | | 115,869 | |
| | | | | | | |
Expenses: | | | | | | | |
Selling | | | | | 40,063 | | | 38,411 | |
General and administrative | | | | | 49,378 | | | 55,287 | |
Research and development | | | | | 7,573 | | | 7,747 | |
Total operating expenses | | | | | 97,014 | | | 101,445 | |
| | | | | | | |
Income from operations | | | | | 50,352 | | | 14,424 | |
| | | | | | | |
Interest expense, net | | | | | 16,293 | | | 5,719 | |
| | | | | | | |
| | | | | | | |
Income before income taxes | | | | | 34,059 | | | 8,705 | |
| | | | | | | |
Income taxes | | | | | 9,595 | | | 2,938 | |
| | | | | | | |
Net income | | | | | $ | 24,464 | | | $ | 5,767 | |
| | | | | | | |
Earnings per common share: | | | | | | | |
Basic | | | | | $ | 0.58 | | | $ | 0.14 | |
Diluted | | | | | $ | 0.57 | | | $ | 0.14 | |
| | | | | | | |
Dividends per common share | | | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | |
| 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. 20202021 First Quarter Form 10-Q
Condensed Consolidated Statements of Comprehensive Income
| | | Three Months Ended October 31, | | | Three Months Ended October 31, |
| 2019 | | 2018 | | | 2020 | | 2019 |
Net income | $ | 5,767 |
| | $ | 19,242 |
| Net income | | $ | 24,464 | | | $ | 5,767 | |
| | | | | | |
Other comprehensive income (loss): | |
| | |
| |
Other comprehensive income: | | Other comprehensive income: | | | | |
Foreign currency translation | 3,932 |
| | (5,223 | ) | Foreign currency translation | | 502 | | | 3,932 | |
Interest rate swap, net of tax | 1,245 |
| | — |
| Interest rate swap, net of tax | | 1,848 | | | 1,245 | |
Total other comprehensive income (loss): | 5,177 |
| | (5,223 | ) | |
Total other comprehensive income: | | Total other comprehensive income: | | 2,350 | | | 5,177 | |
| | | | | | | | |
Comprehensive income | $ | 10,944 |
| | $ | 14,019 |
| Comprehensive income | | $ | 26,814 | | | $ | 10,944 | |
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. 20202021 First Quarter Form 10-Q
Condensed Consolidated Statements of Changes in Stockholders’ Equity
| | | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury stock, at cost | | Total Stockholders’ Equity |
| | | Shares | | Amount | |
Balance, July 31, 2020 | | Balance, July 31, 2020 | 42,162,218 | | | $ | 4,681 | | | $ | 273,040 | | | $ | 548,334 | | | $ | (27,599) | | | $ | (68,857) | | | $ | 729,599 | |
Repurchases of shares | | Repurchases of shares | (30,532) | | | — | | | — | | | — | | | — | | | (1,454) | | | (1,454) | |
Stock-based compensation | | Stock-based compensation | — | | | — | | | 3,422 | | | — | | | — | | | — | | | 3,422 | |
| Equity vests/option exercises | | Equity vests/option exercises | 112,195 | | | 12 | | | (12) | | | — | | | — | | | — | | | — | |
| Net income | | Net income | — | | | — | | | — | | | 24,464 | | | — | | | — | | | 24,464 | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 2,350 | | | — | | | 2,350 | |
Balance, October 31, 2020 | | Balance, October 31, 2020 | 42,243,881 | | | $ | 4,693 | | | $ | 276,450 | | | $ | 572,798 | | | $ | (25,249) | | | $ | (70,311) | | | $ | 758,381 | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury stock, at cost | | Total Stockholders’ Equity | |
| Shares | | Amount | | |
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 | | | | | |
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury stock, at cost | | Total Stockholders’ Equity |
| Shares | | Amount | | | | | |
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 | |
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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. 20202021 First Quarter Form 10-Q
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended October 31, |
| 2020 | | 2019 |
Cash flows from operating activities | | | |
Net income | $ | 24,464 | | | $ | 5,767 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 8,409 | | | 6,338 | |
Amortization | 8,918 | | | 6,029 | |
Stock-based compensation expense | 3,422 | | | 2,404 | |
Deferred income taxes | 441 | | | 1,454 | |
Amortization of right-of-use assets | 2,982 | | | 2,310 | |
Non-cash interest expense | 4,445 | | | 925 | |
Inventory step-up amortization | 0 | | | 4,772 | |
| | | |
Other non-cash items, net | 8 | | | (1,061) | |
Changes in assets and liabilities, net of effects of acquisitions/dispositions: | | | |
Accounts receivable | (10,302) | | | (348) | |
Inventories | 4,214 | | | (6,254) | |
Prepaid expenses and other assets | (1,206) | | | 1,147 | |
Accounts payable and other liabilities | 10,221 | | | (13,664) | |
Income taxes | 9,284 | | | 1,450 | |
Operating lease payments | (3,293) | | | (2,338) | |
Net cash provided by operating activities | 62,007 | | | 8,931 | |
Cash flows from investing activities | | | |
Capital expenditures | (5,495) | | | (10,390) | |
Proceeds from sale of businesses, net of cash retained | 348 | | | 0 | |
Acquisition of businesses, net of cash acquired | 0 | | | (658,932) | |
Net cash used in investing activities | (5,147) | | | (669,322) | |
Cash flows from financing activities | | | |
Proceeds from issuance of long term debt | 0 | | | 400,000 | |
Repayments of long-term debt | 0 | | | (2,375) | |
Borrowings under revolving credit facility | 0 | | | 291,400 | |
Repayments under revolving credit facility | (75,000) | | | (10,900) | |
| | | |
| | | |
Debt issuance costs | 0 | | | (9,234) | |
Finance lease payments | (103) | | | (127) | |
| | | |
Purchases of treasury stock | (1,454) | | | (3,613) | |
Net cash (used in) provided by financing activities | (76,557) | | | 665,151 | |
| | | |
Effect of exchange rate changes on cash and cash equivalents | (153) | | | (10) | |
| | | |
(Decrease) increase in cash and cash equivalents | (19,850) | | | 4,750 | |
Cash and cash equivalents at beginning of period | 277,871 | | | 44,535 | |
Cash and cash equivalents at end of period | $ | 258,021 | | | $ | 49,285 | |
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| | | |
| | | |
(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. 20202021 First Quarter Form 10-Q
Notes to Condensed Consolidated Financial Statements (unaudited)(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. See Note 15, “Reportable Segments.” 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 (“GAAP”) for interim financial reporting and the requirements of Form 10-Q and Rule 10.0110-01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principlesGAAP 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, 20192020 (the “2019“2020 Annual Report on 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, 20192020 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.
COVID-19
In March 2020, the World Health Organization categorized the novel Coronavirus disease 2019, or (COVID-19) as a pandemic. We are subject to risks and uncertainties as a result of the COVID-19 pandemic. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, continue to create significant negative economic impacts on a global basis. The extent of the impact of the COVID-19 pandemic on our business remains uncertain and difficult to predict, as the response to the pandemic continues to evolve.
During the second half of fiscal 2020, the COVID-19 pandemic negatively impacted net sales and the related operations of both our Medical and Dental segments as a result of the postponement of elective medical procedures and routine dental procedures. Towards the end of fiscal 2020, we experienced gradual improvements in these respective businesses as restrictions were lifted and limitations eased. In the first quarter of fiscal 2021, patient procedure volume trends have improved as demand for both medical and dental procedures have increase during this period.
While we currently expect to see improvement in the remainder of fiscal 2021, the effects of the COVID-19 pandemic remains fluid and continues to evolve differently across various geographies. We believe it is likely to continue to experience unexpected impacts on our business due to the resurgence of the virus occurring in cities across the globe.
In preparing the Condensed Consolidated Financial Statements, management is required to make estimates and assumptions, including estimates and assumptions specific to any impact that the COVID-19 pandemic will have on our operations and cash flows. The estimates and assumptions used by management affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting periods. Changes to estimates related to the COVID-19 disruptions could result in other impacts, including but not limited to goodwill and long-lived asset impairment charges, inventory write downs and bad debt expense. Actual results could differ from these estimates and the differences could be material. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, our results of operations, financial position and cash flows could be adversely impacted.
Subsequent Events
We performed a review of events subsequent to October 31, 20192020 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” andin 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. 20202021 First Quarter Form 10-Q
2. Accounting Pronouncements
Recently IssuedNewly Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” (“ASU 2020-04”) to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. ASU 2020-04 is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 was subject to election as of March 20, 2020 and can be elected for both interim and annual periods through December 31, 2022. We adopted ASU 2020-04 on August 1, 2020. The adoption of ASU 2020-04 did not have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-15,“Customer’s “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. We adopted ASU 2018-15 on August 1, 2020. The adoption of ASU 2018-15 isdid 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 “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“Fair Value Measurement”.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. We adopted ASU 2018-13 on August 1, 2020. The adoption of ASU 2018-13 isdid 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. We adopted ASU 2017-04 on August 1, 2020. The adoption of ASU 2017-04 isdid 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“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). We adopted ASU 2016-13 on August 1, 2020. The adoption of ASU 2016-13 did not have a material impact on our financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, “(Subtopic 470-20): Debt—Debt with Conversion and Other Options” (“ASU 2020-06”) to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 (our fiscal year 2022), including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2020-06 on our financial position, results of operations or cash flows. The impact on our diluted earnings per share could be material upon the adoption of ASU 2020-06.
In December 2019, the FASB issued ASU 2019-12, “(Topic 740) Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and
(dollar amounts in thousands except share and per share data or as otherwise noted) 7
Cantel Medical Corp. 2021 First Quarter Form 10-Q
amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 (our fiscal year 2022), including interim periods within that reporting period. The adoption of ASU 2019-12 is not expected to have a material impact on our financial position, results of operations or cash flows.
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)Hu-Friedy”), for a total consideration (net of cash acquired), excluding acquisition-related costs, of $718,933,$716,542, consisting of $658,933$662,151 of cash and $60,000$54,391 of common stock consideration (subject to adjustment), plus contingent consideration payable in cash, ranging from 0cash. The additional contingent consideration payments are (i) subject to a maximum of $50,000, which is payable upon the achievement of certain commercial milestones through March 31, 2021.2021 ranging from 0 to a maximum of $50,000 and (ii) contingent upon changes in our stock price from the date of closing through a future date subject to a registration rights agreement. See Note 9, “Fair Value Measurements,” for further details regarding these contingent payments. 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 0 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 allocationsallocation of our material acquisitions:acquisition (which was accounted for as a business combination in accordance with ASC Topic 805 “Business Combinations”):
|
| | | | | | | | | | | | |
| | 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 |
|
| | | | | |
| 2020 |
Purchase Price Allocation | Hu-Friedy(1)(2) |
| (Final) |
Purchase Price: | |
Cash paid | $ | 662,151 | |
Fair value of contingent consideration | 38,371 | |
Common stock issued | 54,391 | |
Total | $ | 754,913 | |
| |
(1)Allocation: | The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for |
Property and equipment | 38,613 | |
Intangible assets: | |
Customer relationships | 225,000 | |
Technology | 32,000 | |
Brand names | 112,000 | |
Goodwill | 276,744 | |
Deferred income tax purposes.taxes | (222) | |
Inventories | 63,680 | |
Other working capital | 7,098 | |
Total | $ | 754,913 | |
(1)During the second quarter of fiscal 2020, we paid $25,000 to settle a portion of the contingent consideration, and during the third quarter of fiscal 2020, we paid $35,000 to repurchase a portion of the common stock issued, both of which were included in Acquisitions, net of cash acquired in the Condensed Consolidated Statement of Cash Flows. See Note 9, “Fair Value Measurements” for additional information.
(2)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
(dollar amounts in thousands except share and per share data or as otherwise noted) 8
Cantel Medical Corp. 2021 First Quarter Form 10-Q
Hu-Friedy acquisition contributed $60,806 and $18,725 to our consolidated net sales for the three months ended October 31, 2019.2020 and 2019 respectively.
| | | | | | | | | | |
Pro Forma Summary of Operations | | | | | | Three Months Ended October 31, 2019 |
Net sales | | | | | | $ | 296,454 | |
Net income | | | | | | $ | 952 | |
Earnings per common share: | | | | | | |
Basic | | | | | | $ | 0.02 | |
Diluted | | | | | | $ | 0.02 | |
|
| | | | | | | | |
| | 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, 452,2212020, 763,315 nonvested restricted stock awards were outstanding under the 2016 plan. NaN options were outstanding under the 2016 plan. At October 31, 2019, 511,4872020, 51,760 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, |
| | | | | 2020 | | 2019 |
Cost of sales | | | | | $ | 299 | | | $ | 260 | |
Operating expenses: | | | | | | | |
Selling | | | | | 826 | | | 536 | |
General and administrative | | | | | 2,208 | | | 1,527 | |
Research and development | | | | | 89 | | | 81 | |
Total operating expenses | | | | | 3,123 | | | 2,144 | |
Stock-based compensation expense | | | | | $ | 3,422 | | | $ | 2,404 | |
|
| | | | | | | |
| 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, 2019,2020, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $29,900$36,996 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, |
| 2020 | | 2019 |
Volatility of common stock | 57.27 | % | | 30.73 | % |
Average volatility of peer companies | 45.37 | % | | 36.28 | % |
Average correlation coefficient of peer companies | 34.81 | % | | 24.63 | % |
Risk-free interest rate | 0.20 | % | | 1.49 | % |
|
| | | | | |
| 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. 20202021 First Quarter Form 10-Q
A summary of nonvested stock award activity for the three months ended October 31, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Time-based Awards | | Number of Performance-based Awards | | Number of Market-based Awards | | Number of Total Awards | | Weighted Average Fair Value |
At July 31, 2020 | 318,702 | | | 29,174 | | | 63,839 | | | 411,715 | | | $ | 76.29 | |
Granted | 388,605 | | | (4,455) | | | 86,915 | | | 471,065 | | | $ | 46.80 | |
Vested(1) | (103,819) | | | (3,037) | | | (6,383) | | | (113,239) | | | $ | 82.34 | |
Forfeited | (5,255) | | | 0 | | | (971) | | | (6,226) | | | $ | 74.10 | |
At October 31, 2020 | 598,233 | | | 21,682 | | | 143,400 | | | 763,315 | | | $ | 57.53 | |
(1)The aggregate fair value of all nonvested stock awards which vested was approximately $9,328.
A summary of stock option activity for the three months ended October 31, 20192020 is as follows:
| | | | | | | | | | | | | | |
| Number of shares | | Weighted Average Exercise Price | | | |
Outstanding at July 31, 2020 | 15,000 | | | $ | 55.36 | | | | |
Expired | (15,000) | | | $ | 55.36 | | | | |
Outstanding at October 31, 2020 | 0 | | | $ | 0 | | | | |
|
| | | | | | | | | | | | |
| 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, 2020, income tax deductions of $1,698 were generated, of which $2,778 was recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $1,080 was recorded as an increase in income tax expense. 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 into 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 | | | | | 2020 | | 2019 |
United States | | | | | $ | 215,087 | | | $ | 190,084 | |
Europe/Africa/Middle East | | | | | 47,785 | | | 41,018 | |
Asia/Pacific | | | | | 19,931 | | | 17,065 | |
Canada | | | | | 11,499 | | | 7,833 | |
Latin America/South America | | | | | 2,727 | | | 1,246 | |
Total | | | | | $ | 297,029 | | | $ | 257,246 | |
Net sales by product line | | | | | | | |
Capital equipment | | | | | $ | 48,640 | | | $ | 58,748 | |
Consumables | | | | | 167,350 | | | 153,279 | |
Product service | | | | | 33,459 | | | 31,568 | |
Instrument | | | | | 45,430 | | | 13,520 | |
All other(1) | | | | | 2,150 | | | 131 | |
Total | | | | | $ | 297,029 | | | $ | 257,246 | |
(1) |
| | | | | | | |
| 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 |
|
_______________________________________________Primarily includes software licensing revenues. | |
(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, 2019,2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $73,456,$81,556, primarily within the Medical segment. We expect to recognize revenue on approximately 70% of these remaining performance obligations over the remainder of fiscal 20202021 and fiscal 2021.2022. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.
(dollar amounts in thousands except share and per share data or as otherwise noted) 10
Cantel Medical Corp. 2021 First Quarter Form 10-Q
Contract Liabilities
ContractA summary of contract liabilities primarily relate to payments received from customers in advance of performance under the contract. activity follows:
| | | | | | | | | | | |
| Three Months Ended October 31, |
| 2020 | | 2019 |
Beginning balance | $ | 26,520 | | | $ | 28,235 | |
Revenue deferred in current year | 18,300 | | | 2,007 | |
Deferred revenue recognized | (15,590) | | | (2,982) | |
Foreign currency translation | 33 | | | 104 | |
Ending balance | 29,263 | | | 27,364 | |
Contract liabilities included in Other long-term liabilities | (809) | | | (384) | |
Deferred revenue | $ | 28,454 | | | $ | 26,980 | |
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 rightSupplemental balance sheet information related 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 tofollows:
| | | | | | | | | | | |
Lease Type | October 31, 2020 | | July 31, 2020 |
Assets: | | | |
Operating lease assets | $ | 43,679 | | | $ | 44,267 | |
Finance lease assets | 4,222 | | | 4,417 | |
Right-of-use assets, net | $ | 47,901 | | | $ | 48,684 | |
Liabilities: | | | |
Operating lease liabilities | $ | 9,602 | | | $ | 9,852 | |
Finance lease liabilities | 442 | | | 416 | |
Current portion of lease liabilities | 10,044 | | | 10,268 | |
| | | |
Operating lease liabilities | 36,263 | | | 36,515 | |
Finance lease liabilities | 4,033 | | | 4,164 | |
Long-term lease liabilities | 40,296 | | | 40,679 | |
Total lease liabilities | $ | 50,340 | | | $ | 50,947 | |
Additional Lease Data | | | |
Weighted average remaining lease term: | | | |
Operating leases | 6.04 years | | 6.11 years |
Finance leases | 5.61 years | | 5.86 years |
Weighted average discount rate: | | | |
Operating leases | 2.75 | % | | 2.73 | % |
Finance leases | 22.84 | % | | 23.39 | % |
(dollar amounts in thousands except share and per share data or as otherwise noted) 11
Cantel Medical Corp. 20202021 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, 2019,2020, maturities of lease liabilities for the periods set forth below were as follows:
| | | | | | | | | | | | | | | | | |
Fiscal year | Operating | | Finance | | Total |
Remaining 2021 | $ | 8,324 | | | $ | 1,086 | | | $ | 9,410 | |
2022 | 9,410 | | | 1,432 | | | 10,842 | |
2023 | 8,332 | | | 1,425 | | | 9,757 | |
2024 | 7,037 | | | 1,434 | | | 8,471 | |
2025 | 5,264 | | | 1,422 | | | 6,686 | |
Thereafter | 11,900 | | | 919 | | | 12,819 | |
Total lease payments | 50,267 | | | 7,718 | | | 57,985 | |
Less: interest | (4,402) | | | (3,243) | | | (7,645) | |
Present value of lease liabilities | $ | 45,865 | | | $ | 4,475 | | | $ | 50,340 | |
|
| | | | | | | | | | | | |
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, |
| | 2020 | | 2019 |
Operating lease costs: | | | | | | |
Amortization of right-of-use assets | | | | $ | 2,786 | | | $ | 2,239 | |
Interest on lease obligations | | | | 312 | | | 412 | |
Finance lease costs: | | | | | | |
Amortization of right-of-use assets | | | | 196 | | | 71 | |
Interest on lease obligations | | | | 255 | | | 90 | |
Variable lease costs | | | | 895 | | | 846 | |
Short-term lease costs | | | | 286 | | | 248 | |
Net lease cost | | | | $ | 4,730 | | | $ | 3,906 | |
|
| | | | |
| | 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, |
| | Three Months Ended October 31, 2019 | | | 2020 | | 2019 |
Right-of-use assets obtained in exchange for lease liabilities: | |
|
| Right-of-use assets obtained in exchange for lease liabilities: | | | | |
Operating leases(1) | | $ | 14,153 |
| Operating leases(1) | | $ | 2,206 | | | $ | 14,153 | |
Finance leases(2) | | $ | 4,798 |
| Finance leases(2) | | $ | 0 | | | $ | 4,798 | |
(1) PrimarilyThe three months ended October 31, 2019 primarily relates to new warehouse facility included in our Dental segment and operating leases acquired in the Hu-Friedy acquisition.
(2) IncludesThe three months ended October 31, 2019 includes finance leases acquired in the Hu-Friedy acquisition.
7. Inventories, Net
A summary of inventories, net is as follows:
| | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
Raw materials and parts | $ | 65,577 | | | $ | 64,888 | |
Work-in-process | 7,661 | | | 6,745 | |
Finished goods | 110,809 | | | 114,606 | |
Reserve for excess and obsolete inventory | (20,167) | | | (18,279) | |
Total inventories, net | $ | 163,880 | | | $ | 167,960 | |
|
| | | | | | | |
| 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 |
|
(dollar amounts in thousands except share and per share data or as otherwise noted) 12
Cantel Medical Corp. 2021 First Quarter Form 10-Q
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,or sell Euros, British Pounds, Canadian dollars, Australian dollars, Singapore dollars and Chinese Renminbi, 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 6 foreign currency forward contracts with an aggregate notional value of $73,559$63,836 and $78,264$81,677 at October 31, 20192020 and July 31, 2019,2020, 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, 20192020 and 2018,2019, 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 2 interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.45%2.265%. In March 2020, we terminated our existing interest rate swaps and entered into a new interest rate swap (the “March 2020 Swap”) with a notional value of $500,000, which fixed interest rates at 1.297% and was set to expire on September 6, 2024. As the original forecasted hedged transactions (interest payments on variable rate debt) are still probable to occur, the $8,534 net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination date will be amortized to interest expense through June 28, 2023, the original maturity date of the swaps.
On May 13, 2020, in connection with the Second Amendment to our credit agreement, we terminated the March 2020 Swap and entered into a new interest rate swap (the “May 2020 Swap”) with a notional value of $500,000, which included a LIBOR floor of 1.00%, fixed interest rates at 2.08% and will expire on September 6, 2024. As the original forecasted hedged transactions related to the March 2020 Swap (interest payments on variable rate debt) are still probable to occur, the $19,980 net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination date will be amortized to interest expense through September 6, 2024, the original maturity date of the swap. The new interest rate swap reflects the 1.00% LIBOR floor included in the Amended Credit Agreement, which allows for continued hedge accounting treatment. Changes in the fair value of the amended interest rate swap contract will continue to be recognized in other comprehensive income.
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 represent2020, the fair value of the interest rate swaps. At July 31, 2019, we had a short-term asset of $486swap was $20,119, which included $5,465 recorded in prepaidaccrued expenses and other current assets, and a long-term asset of $2,826$14,654 recorded in other assets.long-term liabilities. As of July 31, 2020, the fair value of the interest rate swap was $21,156, which included $5,462 recorded in accrued expenses and $15,694 recorded in other long-term liabilities. The fair value of thesethe interest rate swapsswap 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,”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.
The fair value of the interest rate swaps, all of which qualify for cash flow hedge accounting, is recorded on our condensed consolidated balance sheet as an asset or liability with the related gains or losses reported as a component of accumulated other comprehensive income. The changes in fair value are reclassified from accumulated other comprehensive income into earnings in the same period that the hedged items affect earnings. The valuation technique used to determine fair value is the income approach. Under this approach, we use projected future interest rates, which fall into Level 2 of the fair value hierarchy as
(dollar amounts in thousands except share and per share data or as otherwise noted) 13
Cantel Medical Corp. 2021 First Quarter Form 10-Q
defined by ASC 820, as provided by counterparties to the interest rate swap agreements and the fixed rates that we are obligated to pay under the agreements. See Note 8, “Derivatives” for additional information.
For the Hu-Friedy acquisition, additional purchase price payments ranging from 0 to $50,000 arewere (i) contingent upon the achievement of certain commercial milestones through March 31, 2021.2021, and (ii) contingent upon changes in our common stock price from the date of closing through a future date subject to a registration rights agreement. We estimated the aggregate fair value of the twothese contingent consideration arrangements to be $35,100$38,371 at the date of acquisition, andwhich was reported separately in our condensed consolidated balance sheet. The initial value assigned toFor the contingent consideration arrangements based upon the achievement of certain commercial milestones, the initial value assigned at the date of acquisition was determined on the basis of forecasted sales and gross profit percentage of Hu-Friedy products over the next twelve to eighteen months. The fair value was determined by employingDuring the second quarter of fiscal 2020, we paid $25,000 to settle a Monte Carlo simulation in a risk neutral framework, withportion of this contingent consideration arrangement related to net sales achieved for the underlying simulated variable oftwelve month period ended December 31, 2019. For the remaining contingent consideration arrangement related to 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 reassessprofit percentage, we reduced the fair value from a liability of contingent paymentsapproximately $17,210 to $0 due to the impact of the COVID-19 pandemic on a periodic basis. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.Hu-Friedy’s current and expected performance.
For the contingent consideration arrangement based upon changes in our common stock price through a future date, we were required to pay to the sellers of Hu-Friedy an amount in cash equal to $35,000 minus the aggregate net proceeds received by the seller in connection with a future equity issuance if the amount of such aggregate net proceeds was less than $35,000. The initial fair value assigned to this contingent consideration arrangement was determined based on the closing price of our common stock at the date that the acquisition closed (October 1, 2019) relative to the contracted stock price stipulated in the purchase agreement. On February 13, 2020, we entered into a stock repurchase agreement with Dental Holding LLC, the former owners of Hu-Friedy (the “Repurchase Agreement”). The Repurchase Agreement amended the Hu-Friedy purchase and sale agreement and the related registration rights agreement to provide that we repurchase a portion of the shares from the seller included in the equity consideration transferred at a price per share of $64.51 (the “Repurchase”), which equals the closing price of shares of our common stock traded on the New York Stock Exchange on February 12, 2020. The Repurchase of 438,359 common shares was completed on February 13, 2020, and the shares were thereafter canceled and retired. The Hu-Friedy purchase and sale agreement further required us to pay to the seller an amount in cash equal to $35,000 minus the aggregate net proceeds received by the seller from an equity issuance if the amount of such aggregate net proceeds was less than $35,000 (the “True-Up Obligation”). The Repurchase Agreement further amended the purchase and sale agreement to provide that in satisfaction of the True-Up Obligation, we make a payment to the sellers in an amount equal to $6,721 to settle the contingent obligation, which amount equals $35,000 minus the aggregate amount of $28,279 paid to Dental Holding as consideration for the Repurchase. These payments were made to Dental Holding on February 13, 2020.
For the fiscal 2018 Aexis Medical BVBA acquisition, additional purchase price payments ranging from 0 to $1,850 arewere 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. In June 2020, we paid $1,691 to settle the contingent consideration.
We are required to reassess the fair value of contingent consideration 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, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents: | | | | | | | |
Money markets | $ | 106 | | | $ | 0 | | | $ | 0 | | | $ | 106 | |
Total assets | $ | 106 | | | $ | 0 | | | $ | 0 | | | $ | 106 | |
| | | | | | | |
Accrued expenses: | | | | | | | |
Interest rate swap | $ | 0 | | | $ | 5,465 | | | $ | 0 | | | $ | 5,465 | |
Contingent consideration | 0 | | | 0 | | | 0 | | | 0 | |
Other long-term liabilities: | | | | | | | |
Interest rate swap | 0 | | | 14,654 | | | 0 | | | 14,654 | |
Total liabilities | $ | 0 | | | $ | 20,119 | | | $ | 0 | | | $ | 20,119 | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
(dollar amounts in thousands except share and per share data or as otherwise noted) 14
Cantel Medical Corp. 2021 First Quarter Form 10-Q
| | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents: | | | | | | | |
Money markets | $ | 106 | | | $ | 0 | | | $ | 0 | | | $ | 106 | |
Total assets | $ | 106 | | | $ | 0 | | | $ | 0 | | | $ | 106 | |
| | | | | | | |
Accrued expenses: | | | | | | | |
Interest rate swap | $ | 0 | | | $ | 5,462 | | | $ | 0 | | | $ | 5,462 | |
| | | | | | | |
Other long-term liabilities: | | | | | | | |
Interest rate swap | 0 | | | 15,694 | | | 0 | | | 15,694 | |
Total liabilities | $ | 0 | | | $ | 21,156 | | | $ | 0 | | | $ | 21,156 | |
Disclosure of Fair Value of Financial Instruments
At October 31, 20192020 and July 31, 2019,2020, 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
We estimate the fair value of these obligationsour convertible debt carried at face value less unamortized discount and issuance costs on a quarterly basis for disclosure purposes. The estimated fair value of our convertible debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. At October 31, 2020 and July 31, 2020, the fair value of our convertible debt was $226,066 and $224,330, respectively.
10. Intangibles and Goodwill
Our intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
| Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Intangible assets with finite lives: | | | | | | | | | | | |
Customer relationships | $ | 373,183 | | | $ | (86,328) | | | $ | 286,855 | | | $ | 373,018 | | | $ | (79,386) | | | $ | 293,632 | |
Technology | 91,706 | | | (32,288) | | | 59,418 | | | 91,613 | | | (30,552) | | | 61,061 | |
Brand names | 8,738 | | | (4,187) | | | 4,551 | | | 8,721 | | | (4,002) | | | 4,719 | |
Non-compete agreements | 2,850 | | | (1,866) | | | 984 | | | 2,850 | | | (1,818) | | | 1,032 | |
Patents and other registrations | 2,696 | | | (1,278) | | | 1,418 | | | 2,637 | | | (1,160) | | | 1,477 | |
| 479,173 | | | (125,947) | | | 353,226 | | | 478,839 | | | (116,918) | | | 361,921 | |
Trademarks, trade names and brand names | 118,111 | | | — | | | 118,111 | | | 118,111 | | | — | | | 118,111 | |
Total intangible assets | $ | 597,284 | | | $ | (125,947) | | | $ | 471,337 | | | $ | 596,950 | | | $ | (116,918) | | | $ | 480,032 | |
Amortization expense related to intangible assets was $8,918 and $6,029 for the three months ended October 31, 2020 and 2019, respectively. We expect to recognize an additional $26,434 of amortization expense related to intangible assets for the remainder of fiscal 2021, and thereafter $34,912, $33,641, $32,742, $29,985 and $28,260 of amortization expense for fiscal years 2022, 2023, 2024, 2025 and 2026, respectively.
Goodwill changed during the three months ended October 31, 2020 as the respective borrowing rates reflect prevailing market interest rates.follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Medical | | Life Sciences | | Dental | | Dialysis | | Total |
Balance, July 31, 2020 | $ | 185,922 | | | $ | 64,394 | | | $ | 401,723 | | | $ | 8,133 | | | $ | 660,172 | |
| | | | | | | | | |
Dispositions | 0 | | | (56) | | | 0 | | | 0 | | | (56) | |
Foreign currency translation | 267 | | | 19 | | | 19 | | | 0 | | | 305 | |
Balance, October 31, 2020 | $ | 186,189 | | | $ | 64,357 | | | $ | 401,742 | | | $ | 8,133 | | | $ | 660,421 | |
(dollar amounts in thousands except share and per share data or as otherwise noted) 15
Cantel Medical Corp. 20202021 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-termLong-term debt consists of the following:
| | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
Revolving credit loans outstanding | $ | 324,000 | | | $ | 399,000 | |
Tranche A term loans outstanding | 546,375 | | | 546,375 | |
Unamortized debt issuance costs | (10,483) | | | (11,166) | |
Total long-term debt, net of unamortized debt issuance costs | 859,892 | | | 934,209 | |
Current portion of long-term debt | (14,750) | | | (7,375) | |
Long-term debt, net of unamortized debt issuance costs and excluding current portion | $ | 845,142 | | | $ | 926,834 | |
|
| | | | | | | |
| 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 |
|
First Amendment to Credit Agreement
On September 6, 2019, we entered into a First Amendment (the “Amendment”“First Amendment”), amending the 2018our Fourth Amended and Restated Credit Agreement, and as amended by the Amendment, the (“Amended Credit Agreement”) dated as of June 28, 2018.Agreement. The First 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 waswere 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
Second Amendment to Credit Agreement
On May 11, 2020, we entered into a Second Amendment (the “Second Amendment”) further amending the Fourth Amended and Restated Credit Agreement (as amended, the “Amended Credit Agreement”). The Second Amendment’s principal changes include (i) increasing the maximum consolidated leverage ratio covenant for the fiscal quarter ended April 30, 2020 from 4.25x to 5.25x, (ii) suspending such financial maintenance covenant until October 31, 2021, (iii) maintaining a minimum liquidity (as defined in the Amended Credit Agreement) of at least $50,000 during the fiscal quarter ended July 31, 2020 and $75,000 during each of the following fiscal quarters ending with the fiscal quarter ending July 31, 2021, (iv) requiring us to maintain minimum consolidated EBITDA (as defined in the Amended Credit Agreement) for each period of four fiscal quarters ending on the last day of the fiscal quarters ended July 31, 2020 through July 31, 2021 and (v) limiting our ability to pay dividends and repurchase shares of our common stock during the period the consolidated leverage ratio and consolidated interest coverage ratio are suspended.
The interest rates have been amended so that loans under the Amended Credit Agreement, subject tountil the satisfactionthird business day following the date on which a compliance certificate is delivered for the fiscal quarter ending October 31, 2021, bear interest at 2.00% above the base rate for base rate borrowings, or at 3.00% above LIBOR for LIBOR-based borrowings, and also provides for fees on the unused portion 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 sumat a rate 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 A0.50%. Thereafter, 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%1.75% above primebase rate for base rate borrowings, or at rates ranging from 1.00% to 2.25%2.75% above the London Interbank Offered Rate (“LIBOR”),LIBOR for LIBOR-based borrowings, depending uponon our “Consolidated Leverage Ratio,”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 ourthe revolving credit facility at rates ranging from 0.20% to 0.40%0.50%, depending uponon our Consolidated Leverage Ratio, which was 0.40% atconsolidated leverage ratio. Interest rates have also been amended to include a 1.00% floor on all borrowings. As of October 31, 2019. At October 31, 2019,2020, the average interest rate on our outstanding borrowings was approximately 4.28%4.00%.
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 PartyCantel and its U.S.-based subsidiaries that guarantees the obligations under the Amended Credit Agreement 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 areAs of October 31, 2020, we were in compliance with all financial covenants under the Amended Credit Agreement.
During the three months ended October 31, 2020, we were not required to make loan A principal payments. The tranche A term loan is subject to principal amortization, with $7,375 due and payable in the fourth quarter of fiscal 2021, $29,500 due and payable in each of fiscal 2022, 2023 and 2024, with the remaining $450,500 due and payable at maturity on September 6, 2024. During the three months ended October 31, 2019, we made principal payments of $2,375. During the three months ended
(dollar amounts in thousands except share and per share data or as otherwise noted) 16
Cantel Medical Corp. 2021 First Quarter Form 10-Q
October 31, 2020, we repaid $75,000 of the revolving credit facility under the Amended Credit Agreement. In November 2020, we repaid an additional $50,000 of borrowings under our revolving credit facility.
Convertible Debt
| | | | | | | | | | | |
| October 31, 2020 | | July 31, 2020 |
Convertible debt principal amount | $ | 168,000 | | | $ | 168,000 | |
Unamortized original issue discount | (37,282) | | | (38,919) | |
Unamortized debt issuance costs | (4,101) | | | (4,246) | |
Total convertible debt, net of unamortized discount and debt issuance costs | $ | 126,617 | | | $ | 124,835 | |
On May 15, 2020, we issued $168,000 aggregate principal amount of 3.25% convertible senior notes due 2025 (the “Notes”) in a private placement, including pursuant to the grant to the initial purchasers of $140,000 aggregate principal amount of the Notes, an option to purchase up to an additional $28,000 aggregate principal amount of Notes. The private placement offering closed on May 15, 2020. The initial conversion price is $41.51 per share of common stock (based on an initial conversion rate of 24.0912 shares of common stock per $1,000 principal amount of Notes) and will be subject to adjustment if certain events occur. The net proceeds from this offering were approximately $162,977 (including net proceeds relating to the issuance of the additional Notes), after deducting the initial purchasers’ discount and before the cost of offering expenses. As required by the Amended Credit Agreement, we were required to apply at least 50% of the amount by which the net proceeds exceed $100,000, or $31,500, to the repayment of debt under our credit facilities in fiscal 2020.
Due to the cash conversion feature included in the Notes, the carrying value of the Notes was allocated between a liability and an equity component. Upon issuance, the liability component of the convertible debt was $123,346, net of a $40,289 discount and net of debt issuance costs of $4,365. The initial carrying value of the equity component recorded in additional paid-in-capital was $29,184, net of a $10,072 deferred tax liability, $1,377 of debt issuance costs and a $344 deferred tax asset. The $40,289 debt discount and $4,365 of debt issuance costs are amortized as non-cash interest expense over the contractual term of the convertible debt using the effective interest method, at a rate of 9.36%. Cash interest for the three months ended October 31, 2020 was $1,365.
COVID-19
As further described in Note 1 “Basis of Presentation,” the magnitude and depth of disruption to our business resulting from the COVID-19 pandemic continue to remain highly uncertain. However, based on our current estimates, we do not anticipate these disruptions will impact our ability to maintain compliance with our debt covenants through the end of fiscal 2021.
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 MattersProceedings
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.
In connection with our response to COVID-19, our ongoing efforts to streamline and consolidate our global operations and integrate the Hu-Friedy acquisition with our legacy Dental business, we have incurred approximately $5,592 and $5,428 of restructuring-related charges in each of the three months periods ended October 31, 2020, and 2019, respectively. The majority of these charges consisted of onetime benefit-related costs (severance, accelerated stock-based compensation costs and other benefit costs) associated with actions taken to reduce headcount. At October 31, 2020 and July 31, 2020, $8,468 and $7,887 was included in compensation payable on our condensed consolidated balance sheet. For the three months ended October 31, 2020, we made $5,011 of severance-related cash payments. The remaining unpaid severance at October 31, 2020, will be paid out ratably during the remainder of fiscal 2021 and into fiscal 2022 in accordance with our employee separation policy.
(dollar amounts in thousands except share and per share data or as otherwise noted) 17
Cantel Medical Corp. 2021 First Quarter Form 10-Q
13. Accumulated Other Comprehensive Loss
The components and changes in accumulated other comprehensive loss follow:
| | | | | | | | | | | | | | | |
| | | Three Months Ended October 31, |
| | | | | 2020 | | 2019 |
Beginning balance | | | | | $ | (27,599) | | | $ | (22,197) | |
Foreign currency translation | | | | | 502 | | | 3,932 | |
Interest rate swap, net of taxes(1)(2) | | | | | 1,848 | | | 1,245 | |
Ending balance | | | | | $ | (25,249) | | | $ | (17,020) | |
(1)Includes tax effect of $602 and $375 for the three months ended October 31, 2020 and 2019, respectively.
(2)For the three months ended October 31, 2020, we recognized $1,413 in interest expense, net relating to the non-cash amortization of the net loss on terminated swaps reported in accumulated other comprehensive loss.
14. Earnings Per Common Share
Basic EPSearnings per common share (“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. As we expect to settle the principal amount of our outstanding convertible debt in cash and any excess in shares of our common stock, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $41.51 per share. Our convertible debt is further described in Note 11, “Financing Arrangements.”
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, |
| | | | | 2020 | | 2019 |
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | | | | | $ | 24,464 | | | $ | 5,767 | |
Less income allocated to participating securities | | | | | 0 | | | (2) | |
Net income available to common shareholders | | | | | $ | 24,464 | | | $ | 5,765 | |
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 | | | | | 42,184,486 | | | 42,022,383 | |
Dilutive effect of stock awards using the treasury stock method and the average market price for the year | | | | | 154,352 | | | 146,422 | |
Dilutive effect of convertible debt outstanding | | | | | 619,640 | | | 0 | |
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock | | | | | 42,958,478 | | | 42,168,805 | |
Earnings per share attributable to common stock: | | | | | | | |
Basic earnings per share | | | | | $ | 0.58 | | | $ | 0.14 | |
Diluted earnings per share | | | | | $ | 0.57 | | | $ | 0.14 | |
Stock awards excluded because their inclusion would have been anti-dilutive | | | | | 0 | | | 0 | |
|
| | | | | | | |
| 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 | — |
| | — |
|
(dollar amounts in thousands except share and per share data or as otherwise noted) 18
Cantel Medical Corp. 2021 First Quarter Form 10-Q
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, |
| | | | | 2020 | | 2019 |
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock | | | | | 42,958,478 | | | 42,168,805 | |
Participating securities | | | | | 0 | | | 16,857 | |
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities | | | | | 42,958,478 | | | 42,185,662 | |
|
| | | | | |
| 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, pharmaceutical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science markets through a worldwide distributor network. Two customers collectively accounted for approximately 45.7%48.3% and 43.9%45.7% of our Life Sciences segment net sales for the three months ended October 31, 20192020 and 2018,2019, 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 the global dental practitioners. We are alsoprofession comprising a leading global manufacturercomplete circle of protection. Our products include hand and powered dental instruments, infection control products, personal protective equipment (PPE) and instrument reprocessing workflow systems servingwater quality products for the dental industry.suite. Three customers collectively accounted for approximately 43.5%41.2% and 50.2%43.5% of our Dental segment net sales for the three months ended October 31, 20192020 and 2018,2019, 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%50.8% and 41.4%46.1% of our Dialysis segment net sales for the three months ended October 31, 20192020 and 2018,2019, respectively. These customers include one of the top two customers noted above under our Life Sciences segment.
None of our customersNo customer accounted for 10% or more of our consolidated net sales for the three months ended October 31, 20192020 and 2018.2019.
Information as to reportable segments is summarized below:below
| | | | | | | | | | | | | | | |
| | | Three Months Ended October 31, |
Net sales | | | | | 2020 | | 2019 |
Medical | | | | | $ | 132,319 | | | $ | 133,353 | |
Life Sciences | | | | | 45,568 | | | 49,141 | |
Dental | | | | | 111,006 | | | 67,243 | |
Dialysis | | | | | 8,136 | | | 7,509 | |
Total net sales | | | | | $ | 297,029 | | | $ | 257,246 | |
|
| | | | | | | |
| 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 |
|
(dollar amounts in thousands except share and per share data or as otherwise noted) 19
Cantel Medical Corp. 2021 First Quarter Form 10-Q
| | | | | | | | | | | | | | | |
| | | Three Months Ended October 31, |
Income from operations | | | | | 2020 | | 2019 |
Medical | | | | | $ | 26,716 | | | $ | 21,119 | |
Life Sciences | | | | | 8,075 | | | 7,135 | |
Dental | | | | | 25,307 | | | 5,004 | |
Dialysis | | | | | 2,566 | | | 1,622 | |
| | | | | 62,664 | | | 34,880 | |
General corporate expenses(1) | | | | | 12,312 | | | 20,456 | |
Total income from operations | | | | | $ | 50,352 | | | $ | 14,424 | |
(1)The three months ended October 31, 2019 includes acquisition-related charges incurred in connection with the Hu-Friedy acquisition.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.
Overview
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
COVID-19
The COVID-19 pandemic continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. The global pandemic has adversely impacted and is likely to further adversely impact our business and markets, including our workforce and operations and the operations of our customers, suppliers, and business partners. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, have already created significant negative economic impacts on a global basis.
To date, we have been able to continue our operations with limited disruptions in supply and manufacturing. Although, it is difficult to predict the broad macroeconomic effects that the COVID-19 pandemic will have on industries or individual companies, we have assessed the possible effects and outcomes of the pandemic on, among other things, our supply chain, customers and distributors, discounts and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand. During the second half of fiscal 2020, we implemented several measures to reduce operating costs, conserve liquidity and navigate through this unprecedented situation. These management cost reduction measures included salary reductions, employee furloughs, travel reductions and the deferral of certain operating and capital expenditures.
During the second half of fiscal 2020, the COVID-19 pandemic negatively impacted net sales and the related operations of both our Medical and Dental segments as a result of the postponement of elective medical procedures and routine dental procedures. Towards the end of fiscal 2020, we experienced gradual improvements in these respective businesses as restrictions were lifted and limitations eased. In the first quarter of fiscal 2021, patient procedure volume trends have improved as demand for both medical and dental procedures have increase during this period.
While we currently expect to see improvement in the remainder of fiscal 2021, the effects of the COVID-19 pandemic remains fluid and continues to evolve differently across various geographies. We believe it is likely to continue to experience unexpected impacts on our business based on some of the resurgence of the virus that is now occurring in cities across the globe. See “Results of Operations” for a more detailed discussion.
(dollar amounts in thousands except share and per share data or as otherwise noted) 1920
Cantel Medical Corp. 20202021 First Quarter Form 10-Q
First Quarter 2020 Summary (on a comparative basis)
A summary ofKey GAAP financial results for the three months ended October 31, 20192020 were as follows:
• compared withNet sales increased by 15.5% to $297,029 from $257,246,
•Net income increased by 324.2% to $24,464 from $5,767, and
•Diluted earnings per share increased by 307.1% to $0.57 from $0.14
Key Non-GAAP financial results for the three months ended October 31, 20182020 were as follows:
• follows:
Net sales increased by 14.0% to $257,246 from $225,589, with organicOrganic net sales growth of 4.8%
Net income decreased by 70.0% to $5,767 from $19,2421.8%
| |
• | Diluted earnings per share decreased by 70.3% to $0.14 from $0.46
|
Non-GAAP net income increased by 5.1%41.3% to $27,219$38,474 from $25,891$27,219,
•Non-GAAP diluted earnings per share increased by 4.8%38.5% to $0.90 from $0.65, and
•Adjusted EBITDAS increased by 48.6% to $76,257 from $0.62$51,306
See Please see a description of our Non-GAAP Financial Measures below.
Reportable Segment Changes
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.
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 | |
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 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended October 31, | | Percentage Change |
Statement of Income Data: | 2020 | | 2019 | |
Net sales | $ | 297,029 | | 100.0 | % | | $ | 257,246 | | 100.0 | % | | 15.5 | % |
Cost of sales | 149,663 | | 50.4 | % | | 141,377 | | 55.0 | % | | 5.9 | % |
Gross profit | 147,366 | | 49.6 | % | | 115,869 | | 45.0 | % | | 27.2 | % |
| | | | | | | |
Selling | 40,063 | | 13.5 | % | | 38,411 | | 14.9 | % | | 4.3 | % |
General and administrative | 49,378 | | 16.6 | % | | 55,287 | | 21.5 | % | | (10.7) | % |
Research and development | 7,573 | | 2.5 | % | | 7,747 | | 3.0 | % | | (2.2) | % |
Total operating expenses | 97,014 | | 32.6 | % | | 101,445 | | 39.4 | % | | (4.4) | % |
| | | | | | | |
Income from operations | 50,352 | | 17.0 | % | | 14,424 | | 5.6 | % | | 249.1 | % |
| | | | | | | |
Interest expense, net | 16,293 | | 5.5 | % | | 5,719 | | 2.2 | % | | 184.9 | % |
| | | | | | | |
Income before income taxes | 34,059 | | 11.5 | % | | 8,705 | | 3.4 | % | | 291.3 | % |
Income taxes | 9,595 | | 3.3 | % | | 2,938 | | 1.2 | % | | 226.6 | % |
Net income | $ | 24,464 | | 8.2 | % | | $ | 5,767 | | 2.2 | % | | 324.2 | % |
(dollar amounts in thousands except share and per share data or as otherwise noted) 2021
Cantel Medical Corp. 20202021 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.sales, for each of our reportable segments.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended October 31, |
Net sales by segment | | | | | 2020 | | 2019 |
Medical | | | | | | | $ | 132,319 | | 44.5 | % | | $ | 133,353 | | 51.8 | % |
Life Sciences | | | | | | | 45,568 | | 15.3 | % | | 49,141 | | 19.1 | % |
Dental | | | | | | | 111,006 | | 37.4 | % | | 67,243 | | 26.1 | % |
Dialysis | | | | | | | 8,136 | | 2.8 | % | | 7,509 | | 3.0 | % |
Total net sales | | | | | | | $ | 297,029 | | 100.0 | % | | $ | 257,246 | | 100.0 | % |
Net sales by geography | | | | | | | | | | | |
United States | | | | | | | $ | 215,087 | | 72.4 | % | | $ | 190,084 | | 73.9 | % |
International | | | | | | | 81,942 | | 27.6 | % | | 67,162 | | 26.1 | % |
Total net sales | | | | | | | $ | 297,029 | | 100.0 | % | | $ | 257,246 | | 100.0 | % |
|
| | | | | | | | | | | |
| 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended October 31, |
Income from operations | | | | | 2020 | | 2019 |
Medical | | | | | | | $ | 26,716 | | 20.2 | % | | $ | 21,119 | | 15.8 | % |
Life Sciences | | | | | | | 8,075 | | 17.7 | % | | 7,135 | | 14.5 | % |
Dental | | | | | | | 25,307 | | 22.8 | % | | 5,004 | | 7.4 | % |
Dialysis | | | | | | | 2,566 | | 31.5 | % | | 1,622 | | 21.6 | % |
| | | | | | | 62,664 | | 21.1 | % | | 34,880 | | 13.6 | % |
General corporate expenses | | | | | | | 12,312 | | 4.1 | % | | 20,456 | | 8.0 | % |
Total income from operations | | | | | | | $ | 50,352 | | 17.0 | % | | $ | 14,424 | | 5.6 | % |
Net Sales
Total net sales increased by $31,657$39,783 or 14.0%15.5%, to $297,029 for the three months ended October 31, 2020 from $257,246 for the three months ended October 31, 2019, from $225,589which consisted of an increase of 16.5% in net sales due to acquisitions and an increase of 0.8% due to foreign currency translation, partially offset by a decrease of 1.8% in organic sales. International net sales increased by $14,780 or 22.0%, to $81,942 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%, to2020 from $67,162 for the three months ended October 31, 2019 from $56,651 for the three months ended October 31, 2018.2019. The 18.6%22.0% increase in international net sales consisted of 10.2%10.1% increase in net sales due to acquisition and a 9.2% increase in organic sales growth, a 11.1%and an 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.translation.
Medical. Net sales increaseddecreased by $5,801$1,034 or 4.5%0.8%, for the three months ended October 31, 20192020 compared with the three months ended October 31, 2018,2019, which consisted of 5.7% organic sales growth and a decrease of 1.2%2.2% in organic sales offset by an increase of 1.4% due to foreign currency translation. The increasedecrease in organic net sales was primarily driven by increasedthe delayed timing of capital equipment sales relateddue to servicethe COVID-19 pandemic. Although U.S. endoscopy procedure volumes have declined compared to the prior year, procedural product sales have outperformed the underlying volume declines across all regions. While we expect to see improvement during the remainder of fiscal 2021 as surgical and chemistries,elective procedure volumes return to pre-COVID levels, we could experience variable impacts on our Medical business if a resurgence of the virus emerges 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.elective procedures were postponed again.
Life Sciences. Net sales decreased by $2,701$3,573 or 5.2%7.3% for the three months ended October 31, 20192020 compared with the three months ended October 31, 2018,2019, which consisted of a 4.0%7.3% decrease due to divestitures, 1.1%in organic sales decrease and a decrease of 0.1% due to foreign currency translation.sales. The decrease in net sales was primarily due the divestiture of our high purity water businessto lower demand for portable reverse osmosis units resulting from unprecedented demand shift in Canada, which occurredprior fiscal year and delayed capital projects in the second quarter of fiscal 2019, and the continued softness in demand for capital equipment, primarily in the medicalhemodialysis water business. We expect this softness in demand to begin to stabilize inAs the latter partmajority 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% forbusiness supports non-elective medical treatment, 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 comparedCOVID-19 pandemic has not materially impacted this business, 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 toexception of the timing of marketing-related spendportable reverse osmosis units and to a lesser extent, lower sales commissions.delayed capital projects at our customers. If the pandemic continues, it could further impact capital equipment volume and future service revenues at our customers.
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. 20202021 First Quarter Form 10-Q
Dental. Net sales increased by $43,763 or 65.1%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019, which consisted of a 63.3% increase due to acquisitions and 1.8% organic sales increase. The Hu-Friedy acquisition contributed $42,081 of incremental net sales in the quarter. Although we experienced an organic sales increase during the current period due to increased PPE sales, the COVID-19 pandemic has significantly impacted the Dental segment due to reduced dental procedures during the three months ended October 31, 2020. While we expect to see improvement during the remainder of fiscal 2021 as routine and elective dental procedure volumes return to pre-COVID levels, we could experience variable impacts on our Dental business if a resurgence of the virus emerges and such procedures were postponed again.
Dialysis.Net sales increased by $627 or 8.3%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019.
Gross Profit
Gross profit increased by $31,497 or 27.2%, to $147,366 for the three months ended October 31, 2020 from $115,869 for the three months ended October 31, 2019. Gross profit as a percentage of net sales for the three months ended October 31, 2020 and 2019 was 49.6% and 45.0%, respectively. The increase in gross profit for the three month period primarily related to certain actions taken by management to reduce variable costs in response to lower sales volume due to the COVID-19 pandemic, partially offset by the decreases in net sales in the Medical segment due to the COVID-19 pandemic and the related excess capacity costs and changes in product mix. The increase in gross profit as a percentage of net sales was driven by a lower cost base as a result of measures taken as a result of the COVID-19 pandemic and favorable leverage of our fixed manufacturing costs, primarily in our Medical and Dental segments.
Operating Expenses
Operating expenses decreased by $4,431 or 4.4% to $97,014 for the three months ended October 31, 2020 from $101,445 for the three months ended October 31, 2019, primarily resulting from a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic during fiscal 2020. This was partially offset by a full quarter of operating costs related to the Hu-Friedy acquisition. Operating expenses as a percentage of net sales for the three months ended October 31, 2020 and 2019 were 32.6% and 39.4%, respectively.
Selling expenses increased by $1,652 or 4.3%, to $40,063 for the three months ended October 31, 2020 from $38,411 for the three months ended October 31, 2019. The increase was primarily due to the acquired operations of Hu-Friedy for a full fiscal quarter in the current year. Selling expenses as a percentage of net sales were 13.5% and 14.9% for the three months ended October 31, 2020 and 2019, respectively.
General and administrative expenses decreased by $5,909 or 10.7%, to $49,378 for the three months ended October 31, 2020 from $55,287 for the three months ended October 31, 2019. The decrease for the three month period primarily relates to a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic during fiscal 2020. This was partially offset by restructuring-related costs, higher amortization expense and a full quarter of general and administrative expenses related to the Hu-Friedy acquisition. General and administrative expenses as a percentage of net sales were 16.6% and 21.5% for the three months ended October 31, 2020 and 2019, respectively.
Research and development expenses (which include continuing engineering costs) decreased by $174 or 2.2%, to $7,573 for the three months ended October 31, 2020 from $7,747 for the three months ended October 31, 2019. The decrease was primarily a result of a reduction in research and development expense in our Medical segment. Research and development expenses as a percentage of net sales were 2.5% and 3.0% for the three months ended October 31, 2020 and 2019, respectively.
Income from Operations
Medical. Income from operations increased by $5,597 or 26.5%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019. Although net sales declined slightly due to the impact of the COVID-19 pandemic noted above, income from operations improved due to the decrease in certain operating expenses resulting from management cost reduction measures taken in response to the COVID-19 pandemic and a shift towards higher margin products.
Life Sciences. Income from operations increased by $940 or 13.2%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019. Although net sales declined as noted above, income from operations
(dollar amounts in thousands except share and per share data or as otherwise noted) 23
Cantel Medical Corp. 2021 First Quarter Form 10-Q
improved due to the decrease in certain operating expenses resulting from management cost reduction measures taken in response to the COVID-19 pandemic and to a lesser extent, a shift towards higher margin products.
Dental. Income from operations increased by $20,303 or 405.7%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019. The increase was primarily due to inclusion of Hu-Friedy operations (which includes overall higher margin products) for a full quarter in the current fiscal year, cost synergies resulting from the Hu-Friedy integration and the reduction of certain acquisition and integration-related costs and inventory step-up amortization. The three month period was negatively impacted by the COVID-19 pandemic with reduced procedure volumes as noted above and a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic.
Dialysis. Income from operations increased by $944 or 58.2%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019.
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 (including fair value adjustments to contingent consideration) and costs of being a publicly traded company. Such expenses increaseddecreased by $9,283$8,144 or 83.1%39.8%, for the three months ended October 31, 20192020 from the three months ended October 31, 2018. The increase2019. This decrease was primarily due to an increase indriven by acquisition-related and transaction charges incurred in connection with the Hu-Friedy acquisition.acquisition in the prior year period and to a lesser extent, a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic.
Interest Expense, Net
Interest expense, net increased by $3,693$10,574 or 182.3%184.9%, to $16,293 for the three months ended October 31, 2020 from $5,719 for the three months ended October 31, 2019 from $2,026 for the three months ended October 31, 2018. These2019. The increase resulted from an increase in the average outstanding borrowings due todebt, which includes both theour term loan and revolver borrowings made to support the funding of our recent acquisitions,the Hu-Friedy acquisition and to increase our liquidity. In addition, interest expense has also increased as a lesser extent, higher variableresult of the May 2020 issuance of convertible debt, which was also done to increase our liquidity in response to the COVID-19 pandemic. Interest expense, net includes non-cash interest rates.of $829 and $421 for the three months ended October 31, 2020 and 2019, respectively, related to the amortization of debt issuance costs. Non-cash interest of $1,637 related to the amortization of the discount on the convertible debt was also included in the three months ended October 31, 2020. Non-cash interest of $1,413 related to the amortization of the loss on terminated interest rate swaps was also included in the three months ended October 31, 2020. We expect interest expense to be elevated during fiscal 2021 as a result of a full year of interest expense associated with our convertible debt and the amortization of the loss on terminated interest rate swaps.
Income Taxes
The consolidated effective tax rate increaseddecreased to 28.2% for the three months ended October 31, 2020 from 33.8% for the three months ended October 31, 2019 from 25.0% for the three months ended October 31, 2018.2019. The increasedecrease was primarily the result of the excess tax charges related to share-based compensation,driven by less permanent taxable items affecting our rate and to a lesser extent, the jurisdictional tax structure of the acquired Hu-Friedy international operations.favorable geographic income mix.
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
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Cantel Medical Corp. 2021 First Quarter Form 10-Q
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
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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 and expenses 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 benefitseffects 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.
We are required under GAAP to separately account for the liability (debt) and equity (conversion option) components of our convertible debt issued in May 2020. Accordingly, we are required to recognize non-cash interest expense that is associated with the debt discount component recorded in equity. Since the amortization of the debt discount is a non-cash expense, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures as we believe that the exclusion of the non-cash interest expense provides investors an enhanced view of our operational performance related to cash flow and liquidity.
As a result of terminating our interest rate swaps during fiscal 2020, we recorded a loss in other comprehensive income which is required by GAAP to be amortized through interest expense through the original maturity date of the swaps. Since the amortization of the loss is a non-cash expense, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures as we believe that the exclusion of the non-cash interest expense provides investors an enhanced view of our operational performance related to cash flow and liquidity.
Three Months Ended October 31, 2020
During the three months ended October 31, 2018,2020, we recorded specific discrete tax items associated with our international operationscompleted the disposition of a service business in Canada, which resulted in a pre-tax gain of $249 through general and administrative expenses. Since we believe that were unrelated to fiscal 2019. As these items were unrepresentativethis gain was not representative 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,ordinary course past or future operations, we made an adjustment to our net income and diluted EPS for fiscal 2019 to exclude such coststhis gain 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.
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Cantel Medical Corp. 20202021 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, | | Three Months Ended October 31, |
| 2019 | | 2018 | | 2020 | | 2019 |
Net income/Diluted EPS, as reported | $ | 5,767 |
| | $ | 0.14 |
| | $ | 19,242 |
| | $ | 0.46 |
| Net income/Diluted EPS, as reported | $ | 24,464 | | | $ | 0.57 | | | $ | 5,767 | | | $ | 0.14 | |
Intangible amortization, net of tax(1) | 5,021 |
| | 0.12 |
| | 4,626 |
| | 0.11 |
| Intangible amortization, net of tax(1) | 6,936 | | | 0.16 | | | 5,021 | | | 0.12 | |
Acquisition-related items, net of tax(2) | 12,520 |
| | 0.30 |
| | 1,349 |
| | 0.03 |
| Acquisition-related items, net of tax(2) | 503 | | | 0.01 | | | 12,520 | | | 0.30 | |
Restructuring-related charges, net of tax(3) | 3,352 |
| | 0.08 |
| | 641 |
| | 0.02 |
| Restructuring-related charges, net of tax(3) | 3,775 | | | 0.09 | | | 3,352 | | | 0.08 | |
Excess tax benefits(4) | 559 |
| | 0.01 |
| | (997 | ) | | (0.02 | ) | |
Tax matters(4) | — |
| | — |
| | 896 |
| | 0.02 |
| |
Litigation matters(1) | — |
| | — |
| | 134 |
| | — |
| |
Non-cash interest, net of tax(4) | | Non-cash interest, net of tax(4) | 1,895 | | | 0.04 | | | — | | | — | |
Gain on disposition of business, net of tax(1) | | Gain on disposition of business, net of tax(1) | (179) | | | — | | | — | | | — | |
Excess tax benefits(5) | | Excess tax benefits(5) | 1,080 | | | 0.03 | | | 559 | | | 0.01 | |
Non-GAAP net income/Non-GAAP diluted EPS | $ | 27,219 |
| | $ | 0.65 |
| | $ | 25,891 |
| | $ | 0.62 |
| Non-GAAP net income/Non-GAAP diluted EPS | $ | 38,474 | | | $ | 0.90 | | | $ | 27,219 | | | $ | 0.65 | |
| |
(1) | (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. |
(2)For the three months ended October 31, 2020, pre-tax acquisition-related items of $540 were recorded in general and administrative expenses. 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.
(3)For the three months ended October 31, 2020, pre-tax restructuring-related items of $1,299 were recorded in cost of sales and $3,682 were recorded in general and administrative expenses. 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.
(4)Amounts were recorded in interest expense, net.
(5)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, | | | Three Months Ended October 31, |
| 2019 | | 2018 | | | 2020 | | 2019 |
Net income, as reported | $ | 5,767 |
| | $ | 19,242 |
| Net income, as reported | | $ | 24,464 | | | $ | 5,767 | |
Interest expense, net | 5,719 |
| | 2,026 |
| Interest expense, net | | 16,293 | | | 5,719 | |
Income taxes | 2,938 |
| | 6,410 |
| Income taxes | | 9,595 | | | 2,938 | |
Depreciation | 6,338 |
| | 4,691 |
| Depreciation | | 8,409 | | | 6,338 | |
Amortization | 6,029 |
| | 6,041 |
| Amortization | | 8,918 | | | 6,029 | |
Loss on disposal of fixed assets | 167 |
| | 1,053 |
| Loss on disposal of fixed assets | | — | | | 167 | |
Stock-based compensation expense | 2,404 |
| | 2,576 |
| Stock-based compensation expense | | 3,422 | | | 2,404 | |
EBITDAS | 29,362 |
| | 42,039 |
| EBITDAS | | 71,101 | | | 29,362 | |
Acquisition-related items | 16,577 |
| | 1,827 |
| |
Acquisition-related items(1) | | Acquisition-related items(1) | | 511 | | | 16,577 | |
Restructuring-related charges(1) | 5,367 |
| | 742 |
| Restructuring-related charges(1) | | 4,894 | | | 5,367 | |
Litigation matters | — |
| | 163 |
| |
Gain on disposition of business | | Gain on disposition of business | | (249) | | | — | |
Adjusted EBITDAS | $ | 51,306 |
| | $ | 44,771 |
| Adjusted EBITDAS | | $ | 76,257 | | | $ | 51,306 | |
| |
(1) | Excludes stock-based compensation expense. |
(1)Excludes stock-based compensation expense.
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Cantel Medical Corp. 20202021 First Quarter Form 10-Q
We define net debt as long-term debt (bank debt excluding unamortized debt issuance costs) plus the convertible debt (excluding unamortized debt issuance costs and unamortized discount), less cash and cash equivalents. Each of the components of net debt appears on our condensed consolidated balance sheets.sheets and in our notes to the consolidated financial statements included in Part I, Item 1 of this report. 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, 2020 | | July 31, 2020 |
Long-term bank debt (excluding debt issuance costs) | $ | 870,375 | | | $ | 945,375 | |
Convertible debt (excluding debt issuance costs and discount) | 168,000 | | | 168,000 | |
Less cash and cash equivalents | (258,021) | | | (277,871) | |
Net debt | $ | 780,354 | | | $ | 835,504 | |
|
| | | | | | | |
| 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) divestituresdispositions 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 divestituresdispositions because the nature, size, and number of acquisitions and divestituresdispositions can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult. The
For the three months ended October 31, 2020, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our four reportable segments werewas calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Sales | | Medical Net Sales | | Life Sciences Net Sales | | Dental Net Sales | | Dialysis Net Sales |
Net sales growth | | 15.5 | % | | (0.8) | % | | (7.3) | % | | 65.1 | % | | 8.3 | % |
Impact due to foreign currency translation | | (0.8) | % | | (1.4) | % | | — | % | | — | % | | 0.0 | % |
Sales related to acquisitions/dispositions | | (16.5) | % | | — | % | | — | % | | (63.3) | % | | — | % |
Organic sales growth | | (1.8) | % | | (2.2) | % | | (7.3) | % | | 1.8 | % | | 8.3 | % |
|
| | | | | | | | | | | | | | | |
| | 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 dispositionsof businesses and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we supplementhave supplemented our operating cash flow with borrowings from our revolving credit facility and other financing resources, such as convertible debt, to fund our acquisitions and related business activities.
Cash Flows
Net Cash Provided by Operating Activities. Net cash provided by operating activities decreasedincreased by $23,338$53,076 to $62,007 for the three months ended October 31, 2020 from $8,931 for the three months ended October 31, 2019, from $32,269 for the three months ended October 31, 2018, primarily due to a reduction in acquisition-related payments, the decreasetiming of federal income tax payments, lower cash bonus payments, and a reduction in net income, cash payments associated with acquisition-related and transaction items during the periodinventory levels as a result of the Hu-Friedy acquisition, an increase in restructuring-related paymentshigher sales volumes and an increase inbetter inventory within our Dental and Medical segments. This wasmanagement, partially offset by increased cash collectionsthe timing of the collection of our outstanding accounts receivable.receivables..
Net Cash Used in Investing Activities. Net cash used in investing activities increaseddecreased by $613,488$664,175 to $5,147 for the three months ended October 31, 2020 from $669,322 for the three months ended October 31, 2019, from $55,834primarily due to the Hu-Friedy acquisition in the prior year, and a decrease in capital expenditures, as we have reduced spending associated with certain capital projects in response to the COVID-19 pandemic in order to maximize our liquidity and cash position. We continue to monitor our capital expenditure spending to ensure we maintain flexibility during the remainder of fiscal 2021.
Net Cash Used in Financing Activities.Net cash used in financing activities increased by $741,708 to $76,557 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.Net2020 from $665,151 of cash provided by financing activities increased by $671,939 to $665,151 for the three months ended October 31, 2019, from $6,788primarily due to repayments of cash used forborrowings of our revolving credit facility in the current year. During the three months ended October 31, 2018, primarily due to2019, we had borrowings from the refinancing of our existing credit agreementapproximately $678,125 to support the Hu-Friedy acquisition, and the debt issuance costs associated with amending our credit agreement.acquisition.
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.
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Second Amendment to Credit Agreement
At October 31, 2020, we had $546,375 of outstanding term loan borrowings and $324,000 of revolver borrowings under the First Amendment to our Fourth Amended and Restated Credit Agreement.
On May 11, 2020, we entered into a Second Amendment (the “Second Amendment”) further amending the Fourth Amended and Restated Credit Agreement (as amended, the “Amended Credit Agreement”). The Second Amendment’s principal changes include (i) increasing the maximum consolidated leverage ratio covenant for the fiscal quarter ended April 30, 2020 to 5.25x, (ii) suspending such financial maintenance covenant until October 31, 2021, (iii) maintaining a minimum liquidity (as defined in the credit agreement) of at least $50,000 during the fiscal quarter ending July 31, 2020 and $75,000 during each of the following fiscal quarters ending with the fiscal quarter ending July 31, 2021, (iv) requiring us to maintain minimum consolidated EBITDA for each period of four fiscal quarters ending on the last day of the fiscal quarters ending July 31, 2020 through July 31, 2021 and (v) limiting our ability to pay dividends and repurchase shares of our common stock during the period the consolidated leverage ratio and consolidated interest coverage ratio are suspended.
The interest rates have been amended so that loans under the Amended Credit Agreement, until the third business day following the date on which a compliance certificate is delivered for the fiscal quarter ending October 31, 2021, bear interest at 2.00% above the base rate for base rate borrowings, or at 3.00% above LIBOR for LIBOR-based borrowings, and also provides for fees on the unused portion of the revolving credit facility at a rate of 0.50%. Thereafter, (i) borrowings bear interest at rates ranging from 0.00% to 1.75% above base rate for base rate borrowings, or at rates ranging from 1.00% to 2.75% above LIBOR for LIBOR-based borrowings, depending on our consolidated leverage ratio, which is the consolidated ratio of total funded debt (minus certain unrestricted cash) to consolidated EBITDA. The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates ranging from 0.20% to 0.50%, depending on our consolidated leverage ratio. Interest rates have also been amended to include a 1.00% floor on all borrowings.
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 Cantel and its U.S.-based subsidiaries that guarantees the obligations under the Credit agreement 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.
Interest Rate Swaps
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, duringin 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%2.265%. During the third quarter of fiscal 2020, we terminated our existing interest rate swaps and entered into a new interest rate swap with a notional value of $500,000, which fixed interest rates at 1.297% and expires on September 6, 2024. Upon terminating the existing interest rate swap agreements, we determined that the interest payments hedged with the credit agreement are still probable to occur, therefore the loss that accumulated on the swaps prior to the termination of $8,534 will be amortized to interest expense through June 28, 2023, the original maturity dates of the swaps. Additionally, as the cost of unwinding the liability associated with the terminated swaps was included in our new swap rate, the new swap instrument has been bifurcated into a financing component and a derivative component on our condensed consolidated balance sheet.
On May 13, 2020, in connection with the Second Amendment to the 2018 Credit Agreement, we amended our $500,000 interest rate swap to modify the LIBOR floor from 0.00% to 1.00%. The amended terms of the interest rate swap reflect the 1.00% LIBOR floor included in the Amended Credit Agreement. The amendment results in continued hedge accounting treatment as the changes in fair value will be recorded in other comprehensive income. The fair value of thesethe amended interest rate swapsswap is subject to movements in LIBOR and will fluctuate in future periods.
Convertible Senior Notes Offering
On May 15, 2020, we issued $168,000 aggregate principal amount of 3.25% convertible senior notes due 2025 (the “Notes”) in a private placement, including pursuant to the grant to the initial purchasers of $140,000 aggregate principal amount of the Notes, an option to purchase up to an additional $28,000 aggregate principal amount of Notes. The private placement offering closed on May 15, 2020. The net proceeds from this offering were approximately $162,977 (including net proceeds relating to the issuance of the additional Notes), after deducting the initial purchasers’ discount and before the cost of offering expenses. The initial conversion price will be approximately $41.51 per share of common stock and will be subject to adjustment if certain events occur. We intend to use the net proceeds from this offering for general corporate purposes, which
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Cantel Medical Corp. 2021 First Quarter Form 10-Q
includes applying at least 50% of the amount by which the net proceeds exceed $100,000 to the repayment of debt under our credit facilities as required by the Second Amended Credit Agreement.
We expect our annual cash interest to increase by approximately $5,460 as a result of issuance of the Notes. In addition, diluted earnings per share may be negatively impacted by the Notes because of the dilutive nature of the potential conversion into shares of common stock.
Financing Needs
At October 31, 2019,2020, our long-termtotal debt (excluding debt issuance costs)costs and unamortized discount) of $911,125,$1,038,375, net of our cash and cash equivalents of $49,285,$258,021, was $861,840.$780,354. Stockholders’ equity as of that date was $732,191.
$758,381. Our operating segments generate significant cash from operations. At October 31, 2019,2020, we had a cash balance of $49,285,$258,021, of which $32,284$71,394 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, including the proceeds we received as part of the Notes offering in May 2020, and our anticipated cash flows from operations andin the funds available under our Amended Credit Agreementupcoming quarters as we recover from the COVID-19 pandemic 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. In November 2020, we repaid an additional $50,000 of borrowings under our revolving credit facility. At December 10, 2019,2020, approximately $80,729$125,551 was available under our Amended Credit Agreement.
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 20192020 Annual Report on Form
10-K.
Forward LookingForward-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. 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. 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”“could,” “aspire,” 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, strategic objectives, performance drivers 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.predict, including the impacts of the COVID-19 pandemic on our operations and financial results, general economic conditions, technological and market changes in the medical device industry, our ability to execute on our strategy, risks associated with operating our international business, including limited operating experience and market recognition in new international markets, changes in United States healthcare policy at both the state and federal level, product liability claims resulting from the use of products we sell and distribute, and risks related to our intellectual property and proprietary rights needed to maintain our competitive position. 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 20192020 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 20192020 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
(dollar amounts in thousands except share and per share data or as otherwise noted) 29
Cantel Medical Corp. 2021 First Quarter Form 10-Q
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 duringDuring the period covered by this reportQuarterly Report on Form 10-Q, no changes occurred 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,acquisition, we enhanced our internal control process to ensure that all financial information related to these acquisitionsthis acquisition was properly reflected in our condensed consolidated financial statements. We expect all aspectsAs of October 31, 2020, the integration of the Hu-Friedyinternal controls relating to the acquired business has been substantially completed, and the acquired business will be fully integrated intoincluded in our existing overallevaluation of the effectiveness of our internal control structure duringover financial reporting for fiscal 2020.2021.
In 2017,Following the acquisition of Hu-Friedy, we also began the process of implementing a globalintegrating our legacy U.S. Dental segment operations into the Hu-Friedy SAP operating and financial reporting information technology system, SAP S4 Hana (“SAP”), as part of a multi-year planwhich we expect 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.complete during fiscal 2021. As the phased implementationintegration 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 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believeswill exceed a specified threshold. Pursuant to recent SEC amendments to this item, we will be using a threshold of $1 million for such proceedings. Applying this threshold, there are no environmental matters to disclose for this period.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 20192020 Annual Report on Form 10‑K.10-K. The risk factors disclosed in Part I, Item 1A to our 20192020 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.operations or cash flows.
Cantel Medical Corp. 2021 First Quarter Form 10-Q
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to purchases of common stock purchases we made by the Company during the current quarter:
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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 | | 572 | | | $ | 50.50 | | | — | | | — | |
September 1 - September 30 | | 189 | | | $ | 47.25 | | | — | | | — | |
October 1 - October 31 | | 29,771 | | | $ | 47.57 | | | — | | | — | |
Total | | 30,532 | | | $ | 47.62 | | | — | | | — | |
|
| | | | | | | | | | | | | |
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 doesWe do not currently have a repurchase program. All of the shares purchased during the current quarter represent shares surrendered to the Companyus 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
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| | | | | | | | | | |
| | | Certification of Principal Executive Officer. |
| | | |
| | | Certification of Principal Financial Officer. |
| | | |
| | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
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| 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) 2931
Cantel Medical Corp. 20202021 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.
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| CANTEL MEDICAL CORP. |
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Date: December 10, 20192020 | |
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| 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) |