Cantel Medical 10Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended January 31, 2020.

☐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 February 29, 2020: 42,141,460.

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

TABLE OF CONTENTS


		Page No.
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets (unaudited)	1
	Condensed Consolidated Statements of Income (unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (unaudited)	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	4
	Condensed Consolidated Statements of Cash Flows (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
Signatures		33

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)


	January 31, 2020		July 31, 2019
Assets
Cash and cash equivalents	$	58,730	$	44,535
Accounts receivable, net of allowance for doubtful accounts of $2,784 and $2,322	168,878		146,910
Inventories, net	184,177		138,234
Prepaid expenses and other current assets	25,963		22,117
Total current assets	437,748		351,796

Property and equipment, net	230,023		185,242
Right-of-use assets, net	52,014		—
Intangible assets, net	496,735		141,513
Goodwill	656,612		378,109
Other long-term assets	10,808		9,425
Deferred income taxes	6,958		4,281
Total assets	$	1,890,898	$	1,070,366
Liabilities and stockholders’ equity
Accounts payable	$	37,693	$	39,450
Compensation payable	36,761		32,762
Accrued expenses	36,615		38,545
Deferred revenue	25,614		27,840
Current portion of long-term debt	29,500		10,000
Income taxes payable	2,255		2,803
Current portion of lease liabilities	10,207		—
Contingent consideration	25,346		—
Total current liabilities	203,991		151,400

Long-term debt	885,442		220,851
Deferred income taxes	29,490		29,278

Long-term lease liabilities	43,323		—
Other long-term liabilities	5,371		7,300
Total liabilities	1,167,617		408,829
Commitments and contingencies (Note 12)

Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; NaN issued	—		—
Common Stock, par value $0.10 per share; authorized 75,000,000 shares; issued 47,221,781 shares and outstanding 42,579,275 shares at January 31, 2020; issued 46,362,902 shares and outstanding 41,771,228 shares at July 31, 2019	4,722		4,636
Additional paid-in capital	265,837		204,795
Retained earnings	538,130		539,097
Accumulated other comprehensive loss	(16,914)		(22,197)
Treasury Stock; 4,642,506 shares at January 31, 2020; 4,591,674 shares at July 31, 2019	(68,494)		(64,794)
Total stockholders’ equity	723,281		661,537
Total liabilities and stockholders’ equity	$	1,890,898	$	1,070,366

See accompanying notes to Condensed Consolidated Financial Statements.

(dollar amounts in thousands except share and per share data or as otherwise noted) 1

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Condensed Consolidated Statements of Income

(Unaudited)


	Three Months Ended January 31,						Six Months Ended January 31,
	2020		2019		2020		2019
Net sales
Product sales	$	256,935	$	194,013	$	482,613	$	389,773
Product service	31,563		30,525		63,131		60,354
Total net sales	288,498		224,538		545,744		450,127

Cost of sales
Product sales	144,891		100,418		265,477		199,728
Product service	21,363		19,445		42,154		40,475
Total cost of sales	166,254		119,863		307,631		240,203

Gross profit	122,244		104,675		238,113		209,924

Expenses:
Selling	44,740		33,198		83,151		67,156
General and administrative	62,051		37,358		117,338		73,893
Research and development	7,857		7,923		15,604		15,001
Total operating expenses	114,648		78,479		216,093		156,050

Income from operations	7,596		26,196		22,020		53,874

Interest expense, net	10,250		2,207		15,969		4,233
Other income, net	—		(1,313)		—		(1,313)

(Loss) income before income taxes	(2,654)		25,302		6,051		50,954

Income taxes	(391)		6,502		2,547		12,912

Net (loss) income	$	(2,263)	$	18,800	$	3,504	$	38,042

(Loss) earnings per common share:
Basic	$	(0.05)	$	0.45	$	0.08	$	0.91
Diluted	$	(0.05)	$	0.45	$	0.08	$	0.91

Dividends per common share	$	0.11	$	0.10	$	0.11	$	0.10

See accompanying notes to Condensed Consolidated Financial Statements.

(dollar amounts in thousands except share and per share data or as otherwise noted) 2

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended January 31,						Six Months Ended January 31,
	2020		2019		2020		2019
Net (loss) income	$	(2,263)	$	18,800	$	3,504	$	38,042

Other comprehensive income (loss):
Foreign currency translation	(140)		(417)		3,792		(5,640)
Interest rate swap, net of tax	246		—		1,491		—
Total other comprehensive income (loss):	106		(417)		5,283		(5,640)

Comprehensive (loss) income	$	(2,157)	$	18,383	$	8,787	$	32,402

See accompanying notes to Condensed Consolidated Financial Statements.

(dollar amounts in thousands except share and per share data or as otherwise noted) 3

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)


	Common Stock					Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury stock, at cost		Total Stockholders’ Equity
	Shares	Amount
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
Repurchases of shares	(1,218)	—		—		—		—		(87)		(87)
Stock-based compensation	—	—		3,412		—		—		—		3,412
Issuance of shares	—	—		(5,608)		—		—		—		(5,608)
Equity vests/option exercises	3,900	—		1		—		—		—		1
Cancellations of restricted stock	(232)	—		—		—		—		—		—
Dividends	—	—		—		(4,471)		—		—		(4,471)
Net loss	—	—		—		(2,263)		—		—		(2,263)
Other comprehensive income	—	—		—		—		106		—		106
Balance, January 31, 2020	42,579,275	$	4,722	$	265,837	$	538,130	$	(16,914)	$	(68,494)	$	723,281


	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
Repurchases of shares	(880)	—		—		—		—		(67)		(67)
Stock-based compensation	—	—		3,587		—		—		—		3,587
Equity vests/option exercises	1,857	—		—		—		—		—		—
Cancellations of restricted stock	(1,107)	—		—		—		—		—		—
Dividends on common stock	—	—		—		(4,173)		—		—		(4,173)
Net income	—	—		—		18,800		—		—		18,800
Other	—	—		1,513		—		—		—		1,513
Other comprehensive loss	—	—		—		—		(417)		—		(417)
Balance, January 31, 2018	41,721,186	$	4,631	$	192,202	$	526,274	$	(17,096)	$	(64,408)	$	641,603

See accompanying notes to Condensed Consolidated Financial Statements.

(dollar amounts in thousands except share and per share data or as otherwise noted) 4

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended January 31,
	2020		2019
Cash flows from operating activities
Net income	$	3,504	$	38,042
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	14,215		9,563
Amortization	15,003		10,552
Stock-based compensation expense	5,816		6,163
Amortization of right-of-use assets	5,945		—
Deferred income taxes	(2,467)		(3,096)
Inventory step-up amortization	16,700		—
Fair value adjustments to contingent consideration	10,578		—
Other non-cash items, net	46		(154)
Changes in assets and liabilities, net of effects of acquisitions/dispositions:
Accounts receivable	5,706		(6,909)
Inventories	(2,198)		(9,517)
Prepaid expenses and other assets	314		(2,980)
Accounts payable and other liabilities	(22,682)		(10,105)
Income taxes	(1,551)		(2,365)
Operating lease liabilities	(5,396)		—
Net cash provided by operating activities	43,533		29,194
Cash flows from investing activities
Capital expenditures	(21,098)		(62,062)
Proceeds from sale of businesses	2,236		3,053
Acquisitions, net of cash acquired	(686,350)		(24,047)
Net cash used in investing activities	(705,212)		(83,056)
Cash flows from financing activities
Borrowings of long-term debt	400,000		—
Repayments of long-term debt	(4,750)		(5,000)
Borrowings under revolving credit facility	317,900		45,000
Repayments under revolving credit facility	(20,900)		—
Dividends paid	(4,471)		(4,173)
Debt issuance costs	(9,234)		—
Finance lease liabilities	(209)		—
Purchases of treasury stock	(3,700)		(4,355)
Net cash provided by financing activities	674,636		31,472

Effect of exchange rate changes on cash and cash equivalents	1,238		(676)

Increase (decrease) in cash and cash equivalents	14,195		(23,066)
Cash and cash equivalents at beginning of period	44,535		94,097
Cash and cash equivalents at end of period	$	58,730	$	71,031

See accompanying notes to Condensed Consolidated Financial Statements.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Notes to Condensed Consolidated Financial Statements (unaudited).

1. Basis of Presentation

Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.

Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.

The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. on Form 10-K for the fiscal year ended July 31, 2019 (the “2019 Form 10-K”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at July 31, 2019 was derived from the audited Consolidated Balance Sheet of Cantel at that date. Certain prior year amounts have been reclassified to conform to the current year presentation.

Subsequent Events

We performed a review of events subsequent to January 31, 2020 through the date of issuance of the accompanying unaudited consolidated interim financial statements. See Note 16, “Subsequent Events.”

2. Accounting Pronouncements

Newly Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “(Topic 842) Leases,” (“ASU 2016-02”). The new guidance requires the recording of assets and liabilities arising from leases on our condensed consolidated balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 31, 2018 (our fiscal year 2020), including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual period. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11, “Leases (Topic 842) Targeted Improvements,” in December 2018, the FASB issued ASU 2018-20, “Narrow-Scope Improvements for Lessors” and in March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements.” These ASUs provide adjustments relating to ASU 2016-02 and improvements to comparative reporting requirements for initial adoption and for separating components of a contract for lessors. We adopted the collective standard “ASC 842” using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Therefore, results for reporting periods beginning after August 1, 2019 are presented under the new leasing standard; however, the comparative prior period amounts have not been restated and continue to be reported in accordance with historic accounting under ASC Topic 840. The most significant effects of adoption of the new leasing standard relate to the recognition of right-of-use assets of $35,842 and lease liabilities of $36,417 for operating leases, which we recorded on our condensed consolidated balance sheet on August 1, 2019. Additionally, the amortization of the right-of-use assets and the cash flow impact from lease liabilities are separately disclosed in the condensed consolidated statement of cash flows. The new leasing standard did not impact our condensed consolidated statements of income. See Note 6, “Leases” for a discussion of the impact to the condensed consolidated balance sheets and related disclosures.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) to allow for the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. Accordingly, we adopted ASU 2018-02 on August 1, 2019. The adoption of ASU 2018-02 did not have a material impact on our financial position, results of operations or cash flows.

(dollar amounts in thousands except share and per share data or as otherwise noted) 6

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Recently Issued Accounting Standards

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 Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and 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.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”) to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. The adoption of ASU 2018-15 is not expected to have a material impact on our financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”) to modify the disclosure requirements on fair value measurements in ASC 820, “Fair Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. The adoption of ASU 2018-13 is not expected to have a material impact on our financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU 2017-04, “(Topic 350) Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”) to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December 31, 2019 (our fiscal year 2021) and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on our financial position, results of operations or cash flows.

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

3. Acquisitions

Fiscal 2020

Hu-Friedy: On October 1, 2019, we purchased all of the issued and outstanding membership interests of Hu-Friedy Mfg. Co. LLC (“Hu-Friedy”), for a total consideration (net of cash acquired), excluding acquisition-related costs, of $716,542, consisting of $662,151 of cash and $54,391 of stock consideration (subject to adjustment), plus contingent consideration payable in cash. The additional contingent consideration payments are (i) subject to the achievement of certain commercial milestones through March 31, 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 $19,007, consisting of $15,797 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

(dollar amounts in thousands except share and per share data or as otherwise noted) 7

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

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.

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


	2020		2019
Purchase Price Allocation	Hu-Friedy		Omnia		CES Business⁽¹⁾
	(Preliminary)		(Final)		(Final)
Purchase Price:
Cash paid	$	662,151	$	15,797	$	17,047
Fair value of contingent consideration	38,371		—		—
Common stock issued	54,391		3,210		—
Total	$	754,913	$	19,007	$	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	278,001		10,539		6,137
Deferred income taxes	—		(2,346)		—
Inventories	60,596		—		—
Other working capital	7,745		1,673		2,271
Long-term debt	—		(5,207)		—
Total	$	754,913	$	19,007	$	17,047

_______________________________________________

(1)The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.

Unaudited Pro Forma Summary of Operations

The following pro forma summary of operations presents our operations as if the Hu-Friedy acquisition had occurred as of the beginning of fiscal 2019. In addition to including the results of operations of this acquisition, the pro forma information gives effect to amortization of the step-up in inventory, depreciation of the step-up in property and equipment, the interest on additional borrowings, the amortization of intangible assets and the issuance of shares of common stock. On an actual basis, the Hu-Friedy acquisition contributed $56,649 and $75,374 to our consolidated net sales for the three and six months ended January 31, 2020, respectively.


	Three Months Ended January 31,						Six Months Ended January 31,
Pro Forma Summary of Operations	2020		2019		2020		2019
Net sales	$	288,498	$	277,532	$	584,669	$	557,805
Net (loss) income	$	(2,263)	$	18,388	$	(1,514)	$	38,256
(Loss) earnings per common share:
Basic	$	(0.05)	$	0.43	$	(0.04)	$	0.90
Diluted	$	(0.05)	$	0.43	$	(0.04)	$	0.90

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

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.

4. Stock-Based Compensation

2016 Equity Incentive Plan

At January 31, 2020, 433,801 nonvested restricted stock awards were outstanding under the 2016 plan. NaN options were outstanding under the 2016 plan. At January 31, 2020, 524,775 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 January 31, 2020, 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 January 31,						Six Months Ended January 31,
	2020		2019		2020		2019
Cost of sales	$	390	$	287	$	650	$	524
Operating expenses:
Selling	609		575		1,145		1,146
General and administrative	2,306		2,665		3,833		4,375
Research and development	107		60		188		118
Total operating expenses	3,022		3,300		5,166		5,639
Stock-based compensation expense	$	3,412	$	3,587	$	5,816	$	6,163

At January 31, 2020, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $25,234 with a remaining weighted average period of 18 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:


	Six Months Ended January 31,
	2020		2019
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 six months ended January 31, 2020 follows:


	Number of Time-based Awards	Number of Performance-based Awards	Number of Market-based Awards	Number of Total Awards	Weighted Average Fair Value
Nonvested stock awards at July 31, 2019	234,864	40,210	32,079	307,153	$	88.99
Granted	207,311	—	47,967	255,278	$	73.66
Vested⁽¹⁾	(91,439)	(8,475)	(3,462)	(103,376)	$	90.25
Forfeited	(14,684)	(1,165)	(9,405)	(25,254)	$	85.19
Nonvested stock awards at January 31, 2020	336,052	30,570	67,179	433,801	$	79.81

_______________________________________________

(1)The aggregate fair value of all nonvested stock awards which vested was approximately $9,329.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

A summary of stock option activity for the six months ended January 31, 2020 follows:


	Number of shares	Weighted Average Exercise Price		Weighted Average Contractual Life Remaining (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2019	40,000	$	43.70
Exercised	(25,000)	$	36.70
Outstanding at January 31, 2020	15,000	$	55.36	0.70	$	146
Exercisable at January 31, 2020	15,000	$	55.36	0.70	$	146

During the six months ended January 31, 2020, 25,000 options were exercised, with an aggregate fair value of approximately $1,067. At January 31, 2020, 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 six months ended January 31, 2020, 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 six months ended January 31, 2019, income tax deductions of $3,059 were generated, of which $2,062 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $997 was recorded as a reduction in income tax expense.

5. Revenue Recognition

We adopted ASC 606, effective August 1, 2018, using the modified retrospective method applied to those contracts which were not completed as of August 1, 2018. Due to the cumulative impact of adopting ASC 606, we recorded a net increase of $865 to opening retained earnings, net of tax, as of August 1, 2018. The impact is primarily related to the timing of revenue recognition for the shipment of products in both our Medical and Life Sciences segments where risk of loss provisions are present (“synthetic FOB destination”). The new standard does not require us to defer revenue for these products and allows us to recognize revenue at the time of shipment. The cumulative adjustment to retained earnings also includes the impact of the change in timing of revenue recognition associated with software licensing arrangements in our Medical segment. Additionally, revenue related to software renewals was historically recognized on a ratable basis over the license period. Under ASC 606, the license is considered functional intellectual property, and is considered to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period. As a result, revenue related to our annual software license renewals has been accelerated.

The following table gives information as to the net sales disaggregated by geography and product line:


	Three Months Ended January 31,						Six Months Ended January 31,
Net sales by geography	2020		2019		2020		2019
United States	$	207,598	$	165,164	$	397,682	$	334,102
Europe/Africa/Middle East	49,496		34,319		90,514		66,333
Asia/Pacific	22,266		15,568		39,331		31,320
Canada	7,745		8,138		15,578		15,509
Latin America/South America	1,393		1,349		2,639		2,863
Total	$	288,498	$	224,538	$	545,744	$	450,127
Net sales by product line
Capital equipment	$	59,724	$	57,387	$	118,472	$	115,519
Consumables	154,209		135,731		307,488		272,552
Product service	31,563		30,525		63,131		60,354
Instrument sales	40,821		—		54,341		—
All other⁽¹⁾	2,181		895		2,312		1,702
Total	$	288,498	$	224,538	$	545,744	$	450,127

_______________________________________________

(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 Second Quarter Form 10-Q

Remaining Performance Obligations

At January 31, 2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $72,451, primarily within the Medical segment. We expect to recognize revenue on approximately 60% of these remaining performance obligations over the remainder of fiscal 2020 and fiscal 2021. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.

Contract Liabilities

Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. Our contract liabilities arise primarily in the Medical and Life Sciences segments when payment is received upfront for various multi-period extended service arrangements. We expect to recognize substantially all of this revenue over the next twelve months.

A summary of contract liabilities activity follows:


	Six Months Ended January 31,
	2020		2019
Beginning balance	$	28,235	$	29,015
Revenue deferred in current year	27,197		31,525
Deferred revenue recognized	(29,605)		(32,444)
Foreign currency translation	136		(443)
Ending balance	25,963		27,653
Contract liabilities included in Other long-term liabilities	(349)		(517)
Deferred revenue	$	25,614	$	27,136

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, such as common area maintenance fees, in total gross rent for all of our leases which resulted in larger lease liabilities recorded on our condensed consolidated balance sheet.

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

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. At lease commencement, we record a liability for our lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. We use our collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of our leases do not provide an implicit rate that is readily determinable. 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

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

only reflected in the lease term if we are reasonably certain to exercise the option. 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	January 31, 2020
Assets:
Operating lease assets	$	47,329
Finance lease assets	4,685
Right-of-use assets, net	$	52,014

Liabilities:
Operating lease liabilities	$	9,859
Finance lease liabilities	348
Current portion of lease liabilities	10,207

Operating lease liabilities	39,080
Finance lease liabilities	4,243
Long-term lease liabilities	43,323
Total lease liabilities	$	53,530

Weighted average remaining lease term:
Operating leases	6.42 years
Finance leases	6.29 years
Weighted average discount rate:
Operating leases	2.74		%
Finance leases	23.69		%

At January 31, 2020, maturities of lease liabilities for the periods set forth below were as follows:


Fiscal year	Operating		Finance		Total
Remaining 2020	$	5,561	$	708	$	6,269
2021	10,217		1,421		11,638
2022	8,317		1,406		9,723
2023	7,339		1,398		8,737
2024	6,390		1,407		7,797
Thereafter	16,038		2,457		18,495
Total lease payments	53,862		8,797		62,659
Less: interest	(4,923)		(4,206)		(9,129)
Present value of lease liabilities	$	48,939	$	4,591	$	53,530

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

Cantel Medical Corp. 2020 Second 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:


	Six Months Ended January 31, 2020
Operating lease costs	$	5,684
Finance lease costs:
Amortization of right-of-use assets	261
Interest on lease obligations	358
Variable lease costs	1,534
Short-term lease costs	591
Net lease cost	$	8,428

Supplemental cash flow information related to leases follows:


	Six Months Ended January 31, 2020
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases⁽¹⁾	$	17,738
Finance leases⁽²⁾	$	4,798

_______________________________________________

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

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

7. Inventories, Net

A summary of inventories, net is as follows:


	January 31, 2020		July 31, 2019
Raw materials and parts	$	70,068	$	69,498
Work-in-process	8,946		5,801
Finished goods	121,853		73,050
Reserve for excess and obsolete inventory	(16,690)		(10,115)
Total Inventories, net	$	184,177	$	138,234

8. Derivatives

Foreign Currency

In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar, Singapore dollar and Chinese Renminbi relative to the U.S. dollar on the conversion of such net assets into the functional currencies, we enter into short-term forward contracts to purchase such foreign currencies, which contracts are one-month in duration. These 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

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

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 $69,302 and $78,264 at January 31, 2020 and July 31, 2019, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the three and six months ended January 31, 2020 and 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 2.265%. At January 31, 2020, we had a short-term asset of $1,253 recorded in prepaid expenses and other current assets, and a long-term asset of $4,071 recorded in other assets, which represent the fair value of the interest rate swaps. At July 31, 2019, we had a short-term asset of $486 recorded in prepaid expenses and other current assets, and a long-term asset of $2,826 recorded in other assets. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.

9. Fair Value Measurements

Fair Value Hierarchy

We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

Our financial assets that are re-measured at fair value on a recurring basis include money market funds that are classified as cash and cash equivalents in the condensed consolidated balance sheets. These money market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.

For the Hu-Friedy acquisition, additional purchase price payments are (i) contingent upon the achievement of certain commercial milestones through March 31, 2021, and (ii) contingent upon changes in our stock price from the date of closing through a future date subject to a registration rights agreement. We estimated the aggregate fair value of these contingent consideration arrangements to be $38,371 at the date of acquisition and was reported separately in our condensed consolidated balance sheet. For 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 employing a Monte Carlo simulation in a risk neutral framework with the underlying simulated variable of net sales and the related achievement of certain gross profit 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. During the second quarter of fiscal 2020, we paid $25,000 to settle a portion of this contingent consideration arrangement related to net sales achieved for the twelve month period ended December 31, 2019.

For the contingent consideration arrangement based upon changes in our stock price through a future date, we are required 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 are less than $35,000. The initial fair value assigned to this contingent consideration arrangement was determined based on the closing price of our stock price 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 paid $6,722 to the former owners of Hu-Friedy to settle this contingent consideration. See Note 16, “Subsequent Events.”

For the Aexis acquisition, additional purchase price payments ranging from 0 to $1,850 are contingent upon the achievement of certain purchase order targets through March 21, 2020. We estimated the original fair value of the contingent consideration using the weighted probabilities of the possible contingent payments. At the date of acquisition, we estimated the original fair

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

value of the contingent consideration to be $1,292. We are required to reassess the fair value of contingent payments on a periodic basis. The significant inputs used in these estimates include numerous possible scenarios for the payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario. Given the short term nature of the financial instrument, the contingent consideration is not discounted to present value.

We are required to reassess the fair value of contingent consideration payments on a periodic basis. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

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


	January 31, 2020
	Level 1		Level 2		Level 3		Total
Cash and cash equivalents:
Money markets	$	107	$	—	$	—	$	107
Prepaid and other current assets:
Interest rate swap	—		1,253		—		1,253
Other Assets:
Interest rate swap	—		4,071		—		4,071
Total assets	$	107	$	5,324	$	—	$	5,431


Contingent consideration:	6,481		—		18,865		25,346





Total liabilities	$	6,481	$	—	$	18,865	$	25,346


	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 (Earnouts)		Hu-Friedy Contingent Consideration (Stock Price)		Total
Balance, July 31, 2019	1,411		—		—		1,411
Acquisitions	—		35,100		3,272		38,372
Fair value adjustments included in general and administrative expenses	242		7,112		3,209		10,563
Settlements/payments	—		(25,000)		—		(25,000)
Balance, January 31, 2020	$	1,653	$	17,212	$	6,481	$	25,346

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Disclosure of Fair Value of Financial Instruments

At January 31, 2020 and July 31, 2019, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments. At January 31, 2020 and July 31, 2019, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations as the respective borrowing rates reflect prevailing market interest rates.

10. Intangibles and Goodwill

Our intangible assets consist of the following:


	January 31, 2020										July 31, 2019
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Intangible assets with finite lives:
Customer relationships	$	372,075	$	(65,049)	$	307,026	$	146,204	$	(54,866)	$	91,338
Technology	90,840		(27,052)		63,788		60,032		(24,081)		35,951
Brand names	8,459		(3,649)		4,810		8,361		(3,256)		5,105
Non-compete agreements	2,850		(1,720)		1,130		2,880		(1,653)		1,227
Patents and other registrations	2,513		(810)		1,703		2,866		(1,252)		1,614
	476,737		(98,280)		378,457		220,343		(85,108)		135,235
Trademarks and tradenames	118,278		—		118,278		6,278		—		6,278
Total intangible assets	$	595,015	$	(98,280)	$	496,735	$	226,621	$	(85,108)	$	141,513

Amortization expense related to intangible assets was $15,003 and $10,552 for the six months ended January 31, 2020 and 2019, respectively. We expect to recognize an additional $17,625 of amortization expense related to intangible assets for the remainder of fiscal 2020, and thereafter $35,135, $34,763, $33,730, $32,866 and $30,024 of amortization expense for fiscal years 2021, 2022, 2023, 2024 and 2025, respectively.

Goodwill changed during the six months ended January 31, 2020 as follows:


	Medical		Life Sciences		Dental		Dialysis		Total
Balance, July 31, 2019	$	180,197	$	64,481	$	125,298	$	8,133	$	378,109
Acquisitions	—		—		277,200		—		277,200

Foreign currency translation	1,457		20		(174)		—		1,303
Balance, January 31, 2020	$	181,654	$	64,501	$	402,324	$	8,133	$	656,612

11. Financing Arrangements

Our long-term debt consists of the following:


	January 31, 2020		July 31, 2019
Revolving credit loans outstanding	$	340,000	$	43,000
Tranche A term loans outstanding	585,250		190,000
Unamortized debt issuance costs	(10,308)		(2,149)
Total long-term debt, net of unamortized debt issuance costs	914,942		230,851
Current portion of long-term debt	(29,500)		(10,000)
Long-term debt, net of unamortized debt issuance costs and excluding current portion	$	885,442	$	220,851

On September 6, 2019, we entered into a First Amendment (the “Amendment”), amending the 2018 Credit Agreement, and as amended by the Amendment, the (“Amended Credit Agreement”) dated as of June 28, 2018. The Amendment added a $400,000 delayed draw term loan facility (the “Delayed Draw Facility”), in addition to the existing tranche A term loan and existing revolving credit facility. The Delayed Draw Facility and a portion of the revolving credit facility was used to finance a portion of the cash consideration for our acquisition of Hu-Friedy. The remaining proceeds were used to refinance certain existing indebtedness of Cantel and Hu-Friedy, and to pay the fees and expenses incurred in connection therewith, as well as for working capital, capital expenditures and other lawful corporate purposes. Pursuant to the Amended Credit Agreement, subject

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

to the satisfaction of certain conditions precedent, including the consent of the lenders, we may from time to time increase its borrowing capacity under the revolving credit facility by, or incur incremental term loans in, an aggregate amount not to exceed the sum of (i) the greater of (x) $300,000 or (y) an amount equal to two times the our consolidated EBITDA, calculated on a pro forma basis, plus (ii) the aggregate principal amount of voluntary prepayments of the revolving loans and term loans.

At January 31, 2020, we had $585,250 of term loan A borrowings outstanding and $340,000 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 six months ended January 31, 2020, we made principal payments of $4,750.

Borrowings under the Amended Credit Agreement bear interest at rates ranging from 0.00% to 1.25% above prime rate for base rate borrowings, or at rates ranging from 1.00% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon our “Consolidated Leverage Ratio,” which is the consolidated ratio of total funded debt (minus certain unrestricted cash) to consolidated EBITDA. At January 31, 2020, 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 January 31, 2020. The Amended Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio, which was 0.40% at January 31, 2020. At January 31, 2020, the interest rate on our outstanding borrowings was approximately 3.98%.

The Amended Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by each Loan Party of all of the outstanding shares of its U.S.-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial covenants under the Amended Credit Agreement.

12. Commitments and Contingencies

Contingent Consideration Arrangements

At January 31, 2020, $17,212 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, $6,481 was recorded, which is for the estimated fair value of contingent consideration arrangement based upon changes in our stock price through a future date. At January 31, 2020, $1,653 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” for additional information.

Legal Matters

In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows.

13. Earnings Per Common Share

Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (nonvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of nonvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities.

(dollar amounts in thousands except share and per share data or as otherwise noted) 17

Cantel Medical Corp. 2020 Second 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 January 31,						Six Months Ended January 31,
	2020		2019		2020		2019
Numerator for basic and diluted earnings per share:
Net (loss) income	$	(2,263)	$	18,800	$	3,504	$	38,042
Less income allocated to participating securities	—		(16)		—		(49)
Net (loss) income available to common shareholders	$	(2,263)	$	18,784	$	3,504	$	37,993
Denominator for basic and diluted (loss) earnings per share, adjusted for participating securities:
Denominator for basic (loss) earnings per share - weighted average number of shares outstanding attributable to common stock	42,561,178		41,667,955		42,298,833		41,660,095
Dilutive effect of stock awards using the treasury stock method and the average market price for the year	—		18,088		91,286		41,558
Denominator for diluted (loss) earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	42,561,178		41,686,043		42,390,119		41,701,653
(Loss) earnings per share attributable to common stock:
Basic (loss) earnings per share	$	(0.05)	$	0.45	$	0.08	$	0.91
Diluted (loss) earnings per share	$	(0.05)	$	0.45	$	0.08	$	0.91
Stock awards excluded because their inclusion would have been anti-dilutive	36,150		—		—		—

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 January 31,			Six Months Ended January 31,
	2020	2019	2020	2019
Denominator for diluted (loss) earnings per share - weighted average number of shares and common stock equivalents attributable to common stock	42,561,178	41,686,043	42,390,119	41,701,653
Participating securities	2,981	33,400	9,962	55,436
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities	42,564,159	41,719,443	42,400,081	41,757,089

14. Accumulated Other Comprehensive Loss

The components and changes in accumulated other comprehensive loss follow:


	Three Months Ended January 31,						Six Months Ended January 31,
	2020		2019		2020		2019
Beginning balance	$	(17,020)	$	(16,679)	$	(22,197)	$	(11,456)
Foreign currency translation	(140)		(417)		3,792		(5,640)
Interest rate swap, net of taxes⁽¹⁾	246		—		1,491		—
Ending balance	$	(16,914)	$	(17,096)	$	(16,914)	$	(17,096)

_______________________________________________

(1)Includes tax effect of $375 and $521 for the three and six months ended January 31, 2020, respectively.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

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.

Our reportable segments are as follows:

Medical: designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.

Life Sciences: designs, develops, manufactures, sells, and installs water purification systems for medical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science markets through a worldwide distributor network. Two customers collectively accounted for approximately 45.0% and 42.5% of our Life Sciences segment net sales for the six months ended January 31, 2020 and 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 dental practitioners. We are also a leading global manufacturer of instruments and instrument reprocessing workflow systems serving the dental industry. Three customers collectively accounted for approximately 43.3% and 47.9% of our Dental segment net sales for the six months ended January 31, 2020 and 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 50.7% and 20.6% of our Dialysis segment net sales for the six months ended January 31, 2020 and 2019, respectively. These customers include the top two customers noted above under our Life Sciences segment.

None of our customers accounted for 10% or more of our consolidated net sales for the six months ended January 31, 2020 and 2019.

Information as to reportable segments is summarized below


	Three Months Ended January 31,						Six Months Ended January 31,
Net sales	2020		2019		2020		2019
Medical	$	130,959	$	128,580	$	264,312	$	256,132
Life Sciences	50,122		50,516		99,263		102,358
Dental	101,044		37,286		168,287		75,417
Dialysis	6,373		8,156		13,882		16,220
Total net sales	$	288,498	$	224,538	$	545,744	$	450,127


	Three Months Ended January 31,						Six Months Ended January 31,
Income (loss) from operations	2020		2019		2020		2019
Medical	$	21,534	$	25,525	$	42,653	$	50,736
Life Sciences	7,700		6,701		14,835		12,273
Dental	(856)		5,510		4,148		12,194
Dialysis	1,507		1,193		3,129		2,577
	29,885		38,929		64,765		77,780
General corporate expenses	22,289		12,733		42,745		23,906
Total income from operations	$	7,596	$	26,196	$	22,020	$	53,874

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

16. Subsequent Events

On February 13, 2020, we entered into a stock repurchase agreement with Dental Holding, 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 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 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 will make a payment to the sellers in an amount equal to $6,722, 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.

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

Second Quarter 2020 Summary

A summary of financial results for the three months ended January 31, 2020 compared with the three months ended January 31, 2019 follows:

•Net sales increased by 28.5% to $288,498 from $224,538, with organic net sales growth of 1.3%

•Income from operations decreased by 71.0% to $7,596 from $26,196

•Non-GAAP income from operations increased by 33.3% to $45,107 from $33,849

•Net income decreased by 112.0% to a $2,263 loss from $18,800

•Diluted earnings per share decreased by 111.1% to $(0.05) from $0.45

•Non-GAAP net income increased by 9.5% to $25,844 from $23,611

•Non-GAAP diluted earnings per share increased by 7.0% to $0.61 from $0.57

•Cash flows from operating activities increased by 49.1% to $43,533 from $29,194 (on year to date basis)

See Non-GAAP Financial Measures and required reconciliations below.

Reportable Segment Changes

Acquisitions

On October 1, 2019, we purchased all of the issued and outstanding membership interests of Hu-Friedy Mfg. Co. LLC (“Hu-Friedy”), for a total consideration (net of cash acquired), excluding acquisition-related costs, of $716,542, consisting of $662,151 of cash and $54,391 of stock consideration (subject to adjustment), plus contingent consideration payable in cash. The additional contingent consideration payments are (i) subject to the achievement of certain commercial milestones through March 31, 2021 ranging from zero 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. Hu-Friedy is a leading global manufacturer of

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

instruments and instrument reprocessing systems serving the dental industry, and is included in our Dental segment. During the second quarter of fiscal 2020, we paid $25,000 to settle a portion of the contingent consideration arrangements related to net sales achieved for the twelve month period ended December 31, 2019. On February 13, 2020, we made payments totaling $35,000 to (i) repurchase a portion of the shares from the seller which were included in the equity consideration transferred at closing and (ii) settle a contingent consideration arrangement entered into at closing which was based on changes in our stock price.

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 January 31,										Percentage Change
Statement of Income Data:	2020						2019
Net sales	$	288,498	100.0	%	$	224,538	100.0	%	28.5	%
Cost of sales	166,254		57.6	%	119,863		53.4	%	38.7	%
Gross profit	122,244		42.4	%	104,675		46.6	%	16.8	%

Selling	44,740		15.5	%	33,198		14.8	%	34.8	%
General and administrative	62,051		21.5	%	37,358		16.6	%	66.1	%
Research and development	7,857		2.8	%	7,923		3.5	%	(0.8)	%
Total operating expenses	114,648		39.8	%	78,479		34.9	%	46.1	%

Income from operations	7,596		2.6	%	26,196		11.7	%	(71.0)	%

Interest expense, net	10,250		3.5	%	2,207		1.0	%	364.4	%
Other income, net	—		—	%	(1,313)		(0.6)	%	—	%
(Loss) income before income taxes	(2,654)		(0.9)	%	25,302		11.3	%	(110.5)	%
Income taxes	(391)		(0.1)	%	6,502		2.9	%	(106.0)	%
Net (loss) income	$	(2,263)	(0.8)	%	$	18,800	8.4	%	(112.0)	%


	Six Months Ended January 31,										Percentage Change
Statement of Income Data:	2020						2019
Net sales	$	545,744	100.0	%	$	450,127	100.0	%	21.2	%
Cost of sales	307,631		56.4	%	240,203		53.4	%	28.1	%
Gross profit	238,113		43.6	%	209,924		46.6	%	13.4	%

Selling	83,151		15.2	%	67,156		14.9	%	23.8	%
General and administrative	117,338		21.5	%	73,893		16.4	%	58.8	%
Research and development	15,604		2.9	%	15,001		3.3	%	4.0	%
Total operating expenses	216,093		39.6	%	156,050		34.6	%	38.5	%

Income from operations	22,020		4.0	%	53,874		12.0	%	(59.1)	%

Interest expense, net	15,969		2.9	%	4,233		0.9	%	277.3	%
Other income, net	—		—	%	(1,313)		(0.2)	%	—	%
Income before income taxes	6,051		1.1	%	50,954		11.3	%	(88.1)	%
Income taxes	2,547		0.5	%	12,912		2.8	%	(80.3)	%
Net income	$	3,504	0.6	%	$	38,042	8.5	%	(90.8)	%

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

The following table gives information as to the net sales by reportable segment and geography, as well as the related percentage of such net sales to the total net sales.


	Three Months Ended January 31,															Six Months Ended January 31,
Net sales by segment	2020						2019						2020					2019
Medical	$	130,959	45.4	%	$	128,580	57.3	%	$	264,312	48.4	%		$	256,132	56.9	%
Life Sciences	50,122		17.4	%	50,516		22.5	%	99,263		18.2	%		102,358		22.7	%
Dental	101,044		35.0	%	37,286		16.6	%	168,287		30.8	%		75,417		16.8	%
Dialysis	6,373		2.2	%	8,156		3.6	%	13,882		2.6	%		16,220		3.6	%
Total net sales	$	288,498	100.0	%	$	224,538	100.0	%	$	545,744	100.0	%		$	450,127	100.0	%
Net sales by geography
United States	$	207,598	72.0	%	$	165,164	73.6	%	$	397,682	72.9	%		$	334,102	74.2	%
International	80,900		28.0	%	59,374		26.4	%	148,062		27.1	%		116,025		25.8	%
Total net sales	$	288,498	100.0	%	$	224,538	100.0	%	$	545,744	100.0	%		$	450,127	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 January 31,															Six Months Ended January 31,
Income (loss) from operations	2020						2019						2020					2019
Medical	$	21,534	16.4	%	$	25,525	19.9	%	$	42,653	16.1	%		$	50,736	19.8	%
Life Sciences	7,700		15.4	%	6,701		13.3	%	14,835		14.9	%		12,273		12.0	%
Dental	(856)		(0.8)	%	5,510		14.8	%	4,148		2.5	%		12,194		16.2	%
Dialysis	1,507		23.6	%	1,193		14.6	%	3,129		22.5	%		2,577		15.9	%
	29,885		10.4	%	38,929		17.3	%	64,765		11.9	%		77,780		17.3	%
General corporate expenses	22,289		7.8	%	12,733		5.6	%	42,745		7.9	%		23,906		5.3	%
Total income from operations	$	7,596	2.6	%	$	26,196	11.7	%	$	22,020	4.0	%		$	53,874	12.0	%

Net Sales

Total net sales increased by $63,960 or 28.5%, to $288,498 for the three months ended January 31, 2020 from $224,538 for the three months ended January 31, 2019, which consisted of an increase of 1.3% in organic sales, an increase of 27.4% in net sales due to acquisitions and a decrease of 0.2% due to foreign currency translation. International net sales increased by $21,526 or 36.3%, to $80,900 for the three months ended January 31, 2020 from $59,374 for the three months ended January 31, 2019. The 36.3% increase in international net sales consisted of 6.9% organic sales growth, a 30.0% increase due to acquisitions (offset by dispositions), and a decrease of 0.6% due to foreign currency translation, resulting from the strengthening of the U.S. dollar.

Total net sales increased by $95,617 or 21.2%, to $545,744 for the six months ended January 31, 2020 from $450,127 for the six months ended January 31, 2019, which consisted of an increase of 3.0% in organic sales, an increase of 18.6% in net sales due to acquisitions and a decrease of 0.4% due to foreign currency translation. International net sales increased by $32,037 or 27.6%, to $148,062 for the six months ended January 31, 2020 from $116,025 for the six months ended January 31, 2019. The 27.6% increase in international net sales consisted of 8.5% organic sales growth, a 20.8% increase due to acquisitions (offset by dispositions), and a decrease of 1.7% due to foreign currency translation, resulting from the strengthening of the U.S. dollar.

Medical. Net sales increased by $2,379 or 1.9%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019, which consisted of 2.2% organic sales growth and a decrease of 0.3% due to foreign currency translation. Net sales increased by $8,180 or 3.2%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019, which consisted of 4.0% organic sales growth and a decrease of 0.8% due to foreign currency translation. The increases in organic net sales for both the three and six month periods were primarily driven by increased sales related to service and chemistries. For the three months ended January 31, 2020, the increase in net sales was partially offset by decreases in U.S. capital equipment sales as we have experienced softer order rates in the U.S. during fiscal 2020.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Life Sciences. Net sales decreased by $394 or 0.8% for the three months ended January 31, 2020 compared with the three months ended January 31, 2019, which consisted of a 2.4% decrease due to dispositions, offset by a 1.6% organic sales increase. Net sales decreased by $3,095 or 3.0% for the six months ended January 31, 2020 compared with the six months ended January 31, 2019, which consisted of a 3.2% decrease due to dispositions, offset by a 0.2% organic sales decrease. The decreases in net sales for both the three and six month periods were primarily due the disposition of our high purity water business in Canada, which occurred in the second quarter of fiscal 2019, and the continued softness in demand for capital equipment, primarily in the medical water business. The softness in demand has begun to stabilize and we expect continued improvement in the latter part of fiscal 2020. For a more detailed discussion on the competitive threat to our hemodialysis water business, see Part I, Item 1A, Risk Factors, in our 2019 Annual Report on Form 10-K.

Dental. Net sales increased by $63,758 or 171.0%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019, which consisted of a 168.1% increase due to acquisitions and a 2.9% organic sales increase. The Hu-Friedy and Omnia acquisitions contributed $56,649 and $6,020 of net sales, respectively. Net sales increased by $92,870 or 123.1%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019, which consisted of a 115.6% increase due to acquisitions and a 7.5% organic sales increase. The Hu-Friedy and Omnia acquisitions contributed $75,374 and $11,672 of net sales, respectively. The inventory adjustments within 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 and six months ended January 31, 2020.

Dialysis. Net sales decreased by $1,783 or 21.9%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019. Net sales decreased by $2,338 or 14.4%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019. The decreases in net sales for both the three and six month periods were 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 $17,569 or 16.8%, to $122,244 for the three months ended January 31, 2020 from $104,675 for the three months ended January 31, 2019. Gross profit as a percentage of net sales for the three months ended January 31, 2020 and 2019 was 42.4% and 46.6%, respectively. Gross profit increased by $28,189 or 13.4%, to $238,113 for the six months ended January 31, 2020 from $209,924 for the six months ended January 31, 2019. Gross profit as a percentage of net sales for the six months ended January 31, 2020 and 2019 was 43.6% and 46.6%, respectively. The decreases in gross profit as a percentage of net sales for both the three and six month periods were 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 $36,169 or 46.1% to $114,648 for the three months ended January 31, 2020 from $78,479 for the three months ended January 31, 2019. Operating expenses as a percentage of net sales for the three months ended January 31, 2020 and 2019 were 39.8% and 34.9%, respectively. Operating expenses increased $60,043 or 38.5% to $216,093 for the six months ended January 31, 2020 from $156,050 for the six months ended January 31, 2019. Operating expenses as a percentage of net sales for the six months ended January 31, 2020 and 2019 were 39.6% and 34.6%, respectively.

Selling expenses increased by $11,542 or 34.8%, to $44,740 for the three months ended January 31, 2020 from $33,198 for the three months ended January 31, 2019. Selling expenses increased by $15,995 or 23.8%, to $83,151 for the six months ended January 31, 2020 from $67,156 for the six months ended January 31, 2019. The increases for both the three and six month periods were primarily due to the Hu-Friedy and Omnia acquisitions. Selling expenses as a percentage of net sales were 15.5% and 14.8% for the three months ended January 31, 2020 and 2019, respectively. Selling expenses as a percentage of net sales were 15.2% and 14.9% for the six months ended January 31, 2020 and 2019, respectively.

General and administrative expenses increased by $24,693 or 66.1%, to $62,051 for the three months ended January 31, 2020 from $37,358 for the three months ended January 31, 2019. General and administrative expenses increased by $43,445 or 58.8%, to $117,338 for the six months ended January 31, 2020 from $73,893 for the six months ended January 31, 2019. The increases for both the three and six month periods were primarily due to the Hu-Friedy and Omnia acquisitions, certain transaction and integration-related costs (including fair value adjustments to contingent consideration arrangements), 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

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

16.6% for the three months ended January 31, 2020 and 2019, respectively. General and administrative expenses as a percentage of net sales were 21.5% and 16.4% for the six months ended January 31, 2020 and 2019, respectively.

Research and development expenses (which include continuing engineering costs) decreased by $66 or 0.8%, to $7,857 for the three months ended January 31, 2020 from $7,923 for the three months ended January 31, 2019. Research and development expenses increased by $603 or 4.0%, to $15,604 for the six months ended January 31, 2020 from $15,001 for the six months ended January 31, 2019. The decrease for the three month period was due primarily to a reduction in research and development expense in our Medical segment, offset by increased spending on projects in our Life Sciences segment and additional research and development costs incurred by Hu-Friedy. For the six month period, the increase was primarily a result of the Hu-Friedy acquisition and increased Life Sciences spending, partially offset by a reduction in research and development expense in our Medical segment. Research and development expenses as a percentage of net sales were 2.9% and 3.5% for the three months ended January 31, 2020 and 2019, respectively. Research and development expenses as a percentage of net sales were 2.9% and 3.3% for the six months ended January 31, 2020 and 2019, respectively.

Income from Operations

Medical. Income from operations decreased by $3,991 or 15.6%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019. Income from operations decreased by $8,083 or 15.9%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019. The decreases for both the three and six month periods were primarily due to the softness in organic sales growth in the U.S., restructuring-related charges, elevated depreciation expense associated with our new ERP platform and our new Medical headquarters in Minnesota, partially offset by the decrease in certain operating expenses, due to the timing of marketing-related spend and to a lesser extent, lower sales commissions.

Life Sciences. Income from operations increased by $999 or 14.9%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019. Income from operations increased by $2,562 or 20.9%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019. The increase was primarily due to a reduction of this segment’s overall expense base as a result of the disposition of our high purity water business in Canada and the stabilization of our organic sales.

Dental. Income from operations decreased by $6,366 or 115.5%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019. Income from operations decreased by $8,046 or 66.0%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019. The decreases for both the three and six month periods were primarily due to certain acquisition and integration-related costs, inventory step-up amortization, higher depreciation and amortization expense primarily as a result of the Hu-Friedy acquisition, partially offset by incremental income from operations related to both the Hu-Friedy and Omnia acquisitions.

Dialysis. Income from operations increased by $314 or 26.3%, for the three months ended January 31, 2020 compared with the three months ended January 31, 2019. Income from operations increased by $552 or 21.4%, for the six months ended January 31, 2020 compared with the six months ended January 31, 2019. The increases for both the three and six month periods were primarily due gross margin improvements resulting from cost saving initiatives, partially offset by decreases in net sales.

General Corporate Expenses

General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition and integration programs and being a publicly traded company. Such expenses increased by $9,556 or 75.0%, for the three months ended January 31, 2020 from the three months ended January 31, 2019. These expenses increased by $18,839 or 78.8%, for the six months ended January 31, 2020 from the six months ended January 31, 2019. The increases for both the three and six month periods were primarily due to an increase in acquisition-related and transaction charges incurred in connection with the Hu-Friedy acquisition.

Interest Expense, Net

Interest expense, net increased by $8,043 or 364.4%, to $10,250 for the three months ended January 31, 2020 from $2,207 for the three months ended January 31, 2019. Interest expense, net increased by $11,736 or 277.3%, to $15,969 for the six months ended January 31, 2020 from $4,233 for the six months ended January 31, 2019. These increases for both the three and six month periods resulted from an increase in the average outstanding debt which includes both the term loan and revolver borrowings made to support the funding of our recent acquisitions, and to a lesser extent, increases in non-cash amortization of debt issuance costs associated with the amended credit facility.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Income Taxes

The consolidated effective tax rate decreased to 14.7% for the three months ended January 31, 2020 from 25.7% for the three months ended January 31, 2019. The decrease was primarily due to period costs related to the Hu-Friedy acquisition. The consolidated effective tax rate increased to 42.1% for the six months ended January 31, 2020 from 25.3% for the six months ended January 31, 2019. The increase was primarily the result of the excess tax charges related to share-based compensation, and to a lesser extent, the jurisdictional tax structure of the acquired Hu-Friedy international operations and the shift in our income before taxes during fiscal 2020.

Non-GAAP Financial Measures

In evaluating our operating performance, we supplement the reporting of our financial information determined under generally accepted accounting principles in the United States (“GAAP”) with certain non-GAAP financial measures including (i) non-GAAP net income, (ii) non-GAAP earnings per diluted share (“EPS”), (iii) earnings before interest, taxes, depreciation, amortization, loss on disposal of fixed assets, and stock-based compensation expense (“EBITDAS”), (iv) adjusted EBITDAS, (v) net debt and (vi) organic sales. These non-GAAP financial measures are indicators of our performance that are not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, stockholders and other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures.

To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are examples of the types of adjustments that are excluded: (i) amortization of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, (iv) certain significant and discrete tax matters and (v) other significant items management deems irregular or non-operating in nature.

Amortization expense of purchased intangible assets is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduce our net income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and invest in our continued growth.

Acquisition-related items consist of (i) fair value adjustments to contingent consideration and other contingent liabilities resulting from acquisitions, (ii) due diligence, integration, legal fees and other transaction costs associated with our acquisition program and (iii) acquisition accounting charges for the amortization of the initial fair value adjustments of acquired inventory and deferred revenue. The adjustments of contingent consideration and other contingent liabilities are periodic adjustments to record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the determination of fair value calculations, fair value adjustments may potentially cause significant earnings volatility that are not representative of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with our acquisition program, including accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since these acquisition-related items are irregular and often mask underlying operating performance, we exclude these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.

Restructuring-related and business optimization items consist of severance-related costs associated with work force reductions and other restructuring-related activities. Such costs include (i) salary continuation, (ii) bonus payments, (iii) outplacement services, (iv) medical-related premium costs and (v) accelerated stock-compensation costs. Since these restructuring-related and business optimization items often mask underlying operating performance, we exclude these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.

Excess tax benefits resulting from stock compensation are recorded as an adjustment to income tax expense. The magnitude of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon our future grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

grant date and the exercise behavior of our stock award holders. Since these tax benefits are largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS to arrive at our non-GAAP financial measures.

In January 2020, we completed the disposition of a dental product line. This resulted in a pre-tax loss of $170 through general and administrative expenses for the three and six months ended January 31, 2020. Since this loss was irregular, we made an adjustment to our net income and diluted EPS to exclude this loss to arrive at our non-GAAP financial measures.

During the six months ended January 31, 2019, we recorded specific discrete tax items associated with our international operations that were unrelated to fiscal 2019. As these items were unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS for fiscal 2019 to arrive at our non-GAAP financial measures.

In November 2018, we completed the disposition of our high quality water business in Canada, The resulted in a pre-tax gain of $1,313 through other income, net for the three and six months ended January 31, 2019. Since this gain was irregular, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.

During the six months ended January 31, 2019, we recorded an adjustment to a minor litigation matter in our consolidated financial statements. Since these costs are irregular and mask our underlying operating performance, we made an adjustment to our net income and diluted EPS for fiscal 2019 to exclude such costs to arrive at our non-GAAP financial measures.

Three Months Ended January 31, 2020

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) loss on disposition of product line to arrive at non-GAAP net income and non-GAAP diluted EPS.

Three Months Ended January 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) other business optimization and restructuring-related charges, (vi) gain on disposition of business and (v) tax matters to arrive at non-GAAP net income and non-GAAP diluted EPS.

The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:


	Three Months Ended January 31,
	2020						2019
Net (loss) income/Diluted EPS, as reported	$	(2,263)	$	(0.05)	$	18,800	$	0.45
Intangible amortization, net of tax⁽¹⁾	7,967		0.19		3,452		0.09
Acquisition-related items, net of tax⁽²⁾	18,078		0.42		840		0.02
Restructuring-related charges, net of tax⁽³⁾	1,932		0.05		1,444		0.03
Gain on disposition of business, net of tax⁽⁴⁾	—		—		(929)		(0.02)
Loss on disposition of product line, net of tax⁽¹⁾	130		—		—		—

Tax matters⁽⁵⁾	—		—		4		—

Non-GAAP net income/Non-GAAP diluted EPS	$	25,844	$	0.61	$	23,611	$	0.57

________________________________________________

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

(2)For the three months ended January 31, 2020, pre-tax acquisition-related items of $11,929 were recorded in cost of sales and $12,214 were recorded in general and administrative expenses. For the three months ended January 31, 2019, pre-tax acquisition-related items of $87 were recorded in net sales, $38 were recorded in cost of sales and $1,005 were recorded in general and administrative expenses.

(3)For the three months ended January 31, 2020, pre-tax restructuring-related items of $1,662 were recorded in cost of sales, and $2,562 were recorded in general and administrative expenses. For the three months ended January 31, 2019, pre-tax restructuring-related items of $2,013 were recorded in general and administrative expenses and a gain of $1,313 was recorded in other income.

(4)Amounts were recorded in other income, net.

(5)Amounts were recorded in income taxes.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Six Months Ended January 31, 2020

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, (vi) loss on disposition of business and (v) excess tax expenses applicable to stock compensation, to arrive at non-GAAP net income and non-GAAP diluted EPS.

Six Months Ended January 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) other business optimization and restructuring-related charges, (iv) excess tax benefits applicable to stock compensation, (v) gain on disposition of business, (vi) tax matters and (vii) litigation matters to arrive at non-GAAP net income and non-GAAP diluted EPS.

The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:


	Six Months Ended January 31,
	2020						2019
Net income/Diluted EPS, as reported	$	3,504	$	0.08	$	38,042	$	0.91
Intangible amortization, net of tax⁽¹⁾	12,988		0.31		8,078		0.20
Acquisition-related items, net of tax⁽²⁾	30,598		0.72		2,189		0.05
Restructuring-related charges, net of tax⁽³⁾	5,284		0.13		2,085		0.05
Litigation matters⁽¹⁾	—		—		134		—
Gain on disposition of business, net of tax⁽⁴⁾	—		—		(929)		(0.02)
Loss on disposition of product line, net of tax⁽¹⁾	130		—		—		—
Excess tax benefits⁽⁵⁾	559		0.01		(997)		(0.02)
Tax matters⁽⁵⁾	—		—		900		0.02
Non-GAAP net income/Non-GAAP diluted EPS	$	53,063	$	1.25	$	49,502	$	1.19

________________________________________________

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

(2)For the six months ended January 31, 2020, pre-tax acquisition-related items of $16,700 were recorded in cost of sales and $24,020 were recorded in general and administrative expenses. For the six months ended January 31, 2019, pre-tax acquisition-related items of $304 were recorded in net sales, $92 were recorded in cost of sales and $2,560 were recorded in general and administrative expenses.

(3)For the six months ended January 31, 2020, pre-tax restructuring-related items of $2,818 were recorded in cost of sales, and $6,833 were recorded in general and administrative expenses. For the six months ended January 31, 2019, pre-tax restructuring-related items of $166 were recorded in cost of sales, $2,693 were recorded in general and administrative expenses and a gain of $1,313 was recorded in other income.

(4)Amounts were recorded in other income, 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.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

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


	Three Months Ended January 31,						Six Months Ended January 31,
	2020		2019		2020		2019
Net (loss) income, as reported	$	(2,263)	$	18,800	$	3,504	$	38,042
Interest expense, net	10,250		2,207		15,969		4,233
Income taxes	(391)		6,502		2,547		12,912
Depreciation	7,877		4,872		14,215		9,563
Amortization	8,974		4,511		15,003		10,552
(Gain) loss on disposal of fixed assets	(101)		606		66		839
Stock-based compensation expense	3,412		3,587		5,816		6,163
EBITDAS	27,758		41,085		57,120		82,304
Acquisition-related items	24,143		1,129		40,720		2,956
Restructuring-related charges⁽¹⁾	3,728		1,497		9,095		2,239
Gain on disposition of business	—		(1,313)		—		(1,313)
Loss on disposition of product line	170		—		170		—
Litigation matters	—		—		—		163
Adjusted EBITDAS	$	55,799	$	42,398	$	107,105	$	86,349

________________________________________________

(1)Excludes stock-based compensation expense.

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


	January 31, 2020		July 31, 2019
Long-term debt (excluding debt issuance costs)	$	925,250	$	233,000
Less cash and cash equivalents	(58,730)		(44,535)
Net debt	$	866,520	$	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) dispositions during the periods being compared. We believe that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior periods. We exclude the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because the nature, size, and number of acquisitions and dispositions can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult.

For the three months ended January 31, 2020, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our reportable segments were calculated as follows:


	Net Sales		Medical Net Sales		Life Sciences Net Sales		Dental Net Sales		Dialysis Net Sales
Net sales growth	28.5	%	1.9	%	(0.8)	%	171.0	%	(21.9)	%
Impact due to foreign currency translation	0.2	%	0.3	%	0.0	%	—	%	0.0	%
Sales related to acquisitions/dispositions	(27.4)	%	—	%	2.4	%	(168.1)	%	—	%
Organic sales growth	1.3	%	2.2	%	1.6	%	2.9	%	(21.9)	%

(dollar amounts in thousands except share and per share data or as otherwise noted) 28

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

For the six months ended January 31, 2020, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our reportable segments were calculated as follows:


	Net Sales		Medical Net Sales		Life Sciences Net Sales		Dental Net Sales		Dialysis Net Sales
Net sales growth	21.2	%	3.2	%	(3.0)	%	123.1	%	(14.4)	%
Impact due to foreign currency translation	0.4	%	0.8	%	0.0	%	—	%	0.0	%
Sales related to acquisitions/dispositions	(18.6)	%	—	%	3.2	%	(115.6)	%	—	%
Organic sales growth	3.0	%	4.0	%	0.2	%	7.5	%	(14.4)	%

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, dispositions and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we supplement operating cash flow with borrowings from our credit facility to fund our acquisitions and related business activities.

Cash Flows

Net Cash Provided by Operating Activities. Net cash provided by operating activities increased by $14,339 to $43,533 for the six months ended January 31, 2020 from $29,194 for the six months ended January 31, 2019, primarily due to increased cash collections of outstanding accounts receivable and the reduction in inventory levels (excluding acquired Hu-Friedy inventory). This was partially offset by a decrease in net income, cash payments associated with acquisition-related and transaction costs during the period associated with the Hu-Friedy acquisition, and an increase in restructuring-related payments.

Net Cash Used in Investing Activities. Net cash used in investing activities increased by $622,156 to $705,212 for the six months ended January 31, 2020 from $83,056 for the six months ended January 31, 2019, primarily due to the Hu-Friedy acquisition, partially offset by a decrease in capital expenditures as we completed our ERP implementation for the Medical segment’s U.S. operations and corporate headquarters during the latter half of fiscal 2019.

Net Cash Provided by Financing Activities. Net cash provided by financing activities increased by $643,164 to $674,636 for the six months ended January 31, 2020 from $31,472 of cash used for the six months ended January 31, 2019, primarily due to borrowings made to support the Hu-Friedy acquisition, and the payment of debt issuance costs associated with amending our credit agreement.

Debt

At January 31, 2020, we had $585,250 of outstanding term loan borrowings and $340,000 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.

In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, during fiscal 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.27%. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.

Financing Needs

At January 31, 2020, our long-term debt (excluding debt issuance costs) of $925,250, net of our cash and cash equivalents of $58,730, was $866,520. Stockholders’ equity as of that date was $723,281.

Our operating segments generate significant cash from operations. At January 31, 2020, we had a cash balance of $58,730, of which $35,130 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.

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

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

We believe that our current cash position, anticipated cash flows from operations and the funds available under our Amended Credit Agreement will be sufficient to satisfy our worldwide cash operating requirements for the foreseeable future based upon our existing operations, particularly given that we historically have not needed to borrow for working capital purposes. At March 6, 2020, approximately 36,729 was available under our Amended Credit Agreement.

Critical Accounting Policies

There were no changes to our critical accounting policies from those disclosed in our 2019 Annual Report on Form

10-K.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and other securities laws. These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the current beliefs and assumptions of management; they do not relate strictly to historical or current facts. Without limiting the foregoing, words or phrases such as “expect,” “anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “may,” “could” and variations of such words and similar expressions generally identify forward-looking statements. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2019 Annual Report on Form 10-K, entitled Risk Factors. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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

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

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

On October 1, 2019, we acquired Hu-Friedy, as more fully described in Note 3 to the condensed consolidated financial statements. During the initial transition period following the acquisitions, we enhanced our internal control process to ensure that all financial information related to these acquisitions was properly reflected in our condensed consolidated financial

(dollar amounts in thousands except share and per share data or as otherwise noted) 30

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

statements. We expect all aspects of the Hu-Friedy business will be fully integrated into our existing overall internal control structure during fiscal 2020.

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

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

Our business may be adversely affected by the recent coronavirus outbreak. In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, the coronavirus spread to other countries, including the United States, and efforts to contain the spread of this coronavirus intensified. The outbreak and any preventative or protective actions that governments or we may take in respect of the coronavirus may result in a period of business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition and results of operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

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

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


Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the program
November 1 - November 30	57	$	72.79	—	—
December 1 - December 31	990	$	71.62	—	—
January 1 - January 31	171	$	69.64	—	—
Total	1,218	$	71.40	—	—

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

Item 3. Defaults Upon Senior Securities

None.

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits


			31.1						Certification of Principal Executive Officer.

			31.2						Certification of Principal Financial Officer.

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

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

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

(dollar amounts in thousands except share and per share data or as otherwise noted) 32

Cantel Medical Corp. 2020 Second Quarter Form 10-Q

SIGNATURES

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


	CANTEL MEDICAL CORP.

Date: March 6, 2020

	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)

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Cantel Medical (CMD) 10-Q2020 Q2 Quarterly report

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