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Stockholders' Equity (Unaudited)
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(Exact name of registrant as specified in its charter)
iDelaware
i22-1760285
(State
or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
i150
Clove Road
iLittle Falls
iNew Jersey
i07424
i(973)
i890-7220
(Address
of principal executive offices)
(Zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
iCommon Stock
iCMD
iNew
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. iYes☒
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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Smaller reporting company
i☐
Non-accelerated filer
☐
Emerging growth company
i☐
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 i☐
No ☒
Number of shares of common stock outstanding as of February 28, 2021: i42,267,238.
Cantel
Medical Corp. 2021 Second Quarter Form 10-Q
Accounts
receivable, net of allowance for doubtful accounts of $i3,784 and $i3,905
i159,372
i148,419
Inventories,
net
i170,075
i167,960
Prepaid
expenses and other current assets
i22,388
i18,443
Income
taxes receivable
i43,144
i33,933
Total
current assets
i638,040
i646,626
Property
and equipment, net
i226,132
i225,222
Right-of-use
assets, net
i50,026
i48,684
Intangible
assets, net
i463,448
i480,032
Goodwill
i665,570
i660,172
Other
long-term assets
i7,094
i6,231
Deferred
income taxes
i—
i4,787
Total
assets
$
i2,050,310
$
i2,071,754
Liabilities
and stockholders’ equity
Accounts payable
$
i54,228
$
i42,008
Compensation
payable
i54,873
i47,769
Accrued
expenses
i56,730
i41,480
Deferred
revenue
i29,908
i26,223
Current
portion of long-term debt
i22,125
i7,375
Income
taxes payable
i6,155
i4,373
Current
portion of lease liabilities
i10,528
i10,268
Total
current liabilities
i234,547
i179,496
Long-term
debt
i788,451
i926,834
Convertible
debt
i128,443
i124,835
Deferred
income taxes
i49,571
i49,533
Long-term
lease liabilities
i42,104
i40,679
Other
long-term liabilities
i19,528
i20,778
Total
liabilities
i1,262,644
i1,342,155
Commitments
and contingencies (Note 12)
i
i
Preferred
Stock, par value $ii1.00/
per share; authorized ii1,000,000/
shares; iinone/ issued
i—
i—
Common
Stock, par value $ii0.10/ per share; authorized
ii75,000,000/ shares; issued i46,961,589
shares and outstanding i42,265,728 shares at January 31, 2021; issued i46,812,750 shares and outstanding i42,162,218
shares at July 31, 2020
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation
i16,618
i14,215
Amortization
i17,868
i15,003
Stock-based
compensation expense
i8,488
i5,816
Deferred
income taxes
i3,107
(i2,467)
Amortization
of right-of-use assets
i6,127
i5,084
Non-cash
interest expense
i8,907
i1,936
Inventory
step-up amortization
i—
i16,700
Fair
value adjustments to contingent consideration
i—
i10,578
Other
non-cash items, net
i648
(i1,029)
Changes
in assets and liabilities, net of effects of acquisitions/dispositions:
Accounts receivable
(i9,656)
i5,706
Inventories
i26
(i2,198)
Prepaid
expenses and other assets
(i3,792)
i314
Accounts
payable and other liabilities
i39,280
(i22,682)
Income
taxes
(i7,652)
(i1,551)
Operating
lease payments
(i6,749)
(i5,396)
Net
cash provided by operating activities
i109,752
i43,533
Cash
flows from investing activities
Capital expenditures
(i17,008)
(i21,098)
Sale
of businesses, net of cash retained
(i175)
i2,236
Acquisition
of businesses, net of cash acquired
i—
(i686,350)
Net
cash used in investing activities
(i17,183)
(i705,212)
Cash
flows from financing activities
Proceeds from issuance of long term debt
i—
i400,000
Repayments
of long-term debt
i—
(i4,750)
Borrowings
under revolving credit facility
i—
i317,900
Repayments
under revolving credit facility
(i125,000)
(i20,900)
Dividends
paid
i—
(i4,471)
Debt
issuance costs
i—
(i9,234)
Finance
lease payments
(i224)
(i209)
Purchases
of treasury stock
(i2,325)
(i3,700)
Net
cash (used in) provided by financing activities
(i127,549)
i674,636
Effect
of exchange rate changes on cash and cash equivalents
i170
i1,238
(Decrease)
increase in cash and cash equivalents
(i34,810)
i14,195
Cash
and cash equivalents at beginning of period
i277,871
i44,535
Cash
and cash equivalents at end of period
$
i243,061
$
i58,730
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. 2021 Second Quarter Form 10-Q
Notes to Condensed Consolidated Financial Statements (Unaudited).
1. iBasis
of Presentation
Throughout this document, references to “Cantel,”“us,”“we,”“our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. See Note 15, “Reportable Segments.” Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread
of infections.
The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial reporting and the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by GAAP 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, 2020 (the “2020 Annual Report on Form 10-K”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal
and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at July 31, 2020 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.
Merger Agreement with STERIS
On January 12, 2021, we entered into a definitive merger agreement with itwo
wholly owned subsidiaries of STERIS, plc (“STERIS”), under which STERIS will acquire Cantel in a cash and stock transaction with an equity value of approximately $i3.6 billion, based on the closing price of STERIS shares of $i200.46
on January 11, 2021 (STERIS and Cantel Merger). The STERIS and Cantel Merger is expected to close in the fourth quarter of fiscal 2021.
In connection with the STERIS and Cantel Merger, we have incurred, and will continue to incur, merger-related and integration-related preparation costs. A significant portion of those costs are contingent on the merger closing, such as investment banking fees, legal fees, and other employee related costs. We incurred $ii11,620/
of such costs during the three and six month periods ended January 31, 2021, which were recorded in general and administrative expense within the Condensed Consolidated Statements of Income.
COVID-19
In March 2020, the World Health Organization categorized the novel Coronavirus disease 2019, or (COVID-19) as a pandemic. We are subject to risks and uncertainties as a result of the COVID-19 pandemic. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including social distancing measures, travel bans and restrictions, and business and government shutdowns, continue to create
significant negative economic impacts on a global basis. The extent of the impact of the COVID-19 pandemic on our business remains uncertain and difficult to predict, as the response to the pandemic continues to evolve.
During the second half of fiscal 2020, the COVID-19 pandemic negatively impacted net sales and the related operations of both our Medical and Dental segments as a result of the postponement of elective medical procedures and routine dental procedures. Towards the end of fiscal 2020, we experienced gradual improvements in these respective businesses as restrictions were lifted and limitations eased. Demand in both of our medical and dental businesses continued to improve this quarter. While we currently expect to see improvement in the remainder of fiscal 2021, the effects of the COVID-19 pandemic remains fluid and continues to evolve differently across various geographies
and still could have a negative impact on our businesses if a resurgence of the virus occurs around the world.
In preparing the Condensed Consolidated Financial Statements, management is required to make estimates and assumptions, including estimates and assumptions specific to any impact that the COVID-19 pandemic will have on our operations and cash flows. The estimates and assumptions used by management affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting periods. Changes to estimates related to the COVID-19 disruptions could result in
(dollar amounts in thousands except share and per share data or as
otherwise noted) 6
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
other impacts, including but not limited to goodwill and long-lived asset impairment charges, inventory write downs and bad debt expense. Actual results could differ from these estimates and the differences could be material. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, our results of operations, financial position and cash flows could be adversely impacted.
Subsequent Events
We performed a review of events subsequent to January 31,
2021 through the date of issuance of the accompanying unaudited consolidated interim financial statements.
2. iAccounting Pronouncements
i
Newly
Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” (“ASU 2020-04”) to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. ASU 2020-04 is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 was subject to election as of March
20, 2020 and can be elected for both interim and annual periods through December 31, 2022. We adopted ASU 2020-04 on August 1, 2020. The adoption of ASU 2020-04 did not have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”) to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 is effective for fiscal years
beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. We adopted ASU 2018-15 on August 1, 2020. The adoption of ASU 2018-15 did not 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. We adopted ASU 2018-13 on August
1, 2020. The adoption of ASU 2018-13 did not have a material impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, “(Topic 350) Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”) to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December 31, 2019 (our fiscal year 2021) and early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted ASU 2017-04 on August 1, 2020. The adoption of ASU 2017-04 did not 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). We adopted ASU 2016-13 on August 1, 2020. The adoption of ASU 2016-13 did not have a material impact on our financial position, results of operations or cash flows.
Recently Issued Accounting Standards
In August 2020, the FASB issued ASU 2020-06, “(Subtopic 470-20): Debt—Debt with Conversion and Other Options” (“ASU 2020-06”) to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. The ASU includes amendments to the guidance on convertible
instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include
(dollar amounts in thousands except share and per share data or as otherwise noted) 7
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments.
ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 (our fiscal year 2022), including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2020-06 on our financial position, results of operations or cash flows. The impact on our diluted earnings per share could be material upon the adoption of ASU 2020-06.
In December 2019, the FASB issued ASU 2019-12, “(Topic 740) Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and 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.
3. iAcquisitions
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 total consideration (net of cash acquired), excluding acquisition-related costs, of $i716,542, consisting of $i662,151 of
cash and $i54,391 of common 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 izero
to a maximum of $i50,000 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.
i
The
following table presents our purchase price allocation of our material acquisition (which was accounted for as a business combination in accordance with ASC Topic 805 “Business Combinations”):
2020
Purchase Price Allocation
Hu-Friedy
(Final)
Purchase Price:
Cash paid
$
i662,151
Fair
value of contingent consideration(1)
i38,371
Common stock issued
i54,391
Total
$
i754,913
Allocation:
Property
and equipment
i38,613
Intangible assets:
Customer relationships
i225,000
Technology
i32,000
Brand
names
i112,000
Goodwill(2)
i276,744
Deferred
income taxes
(i222)
Inventories
i63,680
Other
working capital
i7,098
Total
$
i754,913
_______________________________________________
(1)During
the second quarter of fiscal 2020, we paid $i25,000 to settle a portion of the contingent consideration, and during the third quarter of fiscal 2020, we paid $i35,000
to repurchase a portion of the common stock issued, both of which were included in Acquisitions, net of cash acquired in the Condensed Consolidated Statement of Cash Flows. See Note 9, “Fair Value Measurements” for additional information.
(2)The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.
/
(dollar amounts in thousands except share and per share data or as otherwise noted) 8
Cantel
Medical Corp. 2021 Second Quarter Form 10-Q
Unaudited Pro Forma Summary of Operations
i
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 $i54,403 and $i56,649
to our consolidated net sales for the three months ended January 31, 2021 and 2020, respectively, and $i115,209 and $i75,374
to our consolidated net sales for the six months ended January 31, 2021 and 2020 respectively.
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.iStock-Based Compensation
2020
Equity Incentive Plan
On December 16, 2020, we terminated the Cantel Medical Corp. 2016 Equity Incentive Plan (the “2016 Plan”) and adopted the Cantel Medical Corp. 2020 Equity Incentive Plan (the “2020 Plan”). As a result, no further awards will be granted under the 2016 Plan. The 2020 Plan provides for the granting of stock options, stock appreciation rights (SARs), restricted stock awards, restricted stock units (RSUs) and performance-based awards to our employees, non-employee directors, independent contractors and consultants. The 2020 Plan does not permit the granting of discounted options or discounted stock appreciation rights.
The maximum number of shares as to which equity awards may be granted under the 2020 Plan is i2,475,000
shares. The 2020 Plan will terminate on the date of our annual meeting of stockholders following the close of our fiscal year ending in 2030, unless terminated earlier by the Board of Directors. Stock awards under this plan:
•will be granted at the closing market price at the time of the grant,
•will include terms which may not exceed iten years, subject
to certain exceptions set forth in the 2020 Plan, and
•may be granted in the form of restricted stock and restricted stock units, performance-based awards, or dividends.
Stock awards outstanding under this plan are subject to risk of forfeiture solely due to an employment length-of-service restriction, with such restriction lapsing as to one-third of the shares of each of the first three anniversaries of the grant date subject to being employed through such vesting date. At January 31, 2021, iino/
unvested restricted stock shares or options were outstanding under the 2020 plan and i2,475,000 shares are collectively available for issuance.
2016 Equity Incentive Plan
At January 31, 2021, i726,392
nonvested restricted stock awards were outstanding under the 2016 plan. iNo options were outstanding under the 2016 plan.
(dollar amounts in thousands except share and per share data or as otherwise noted) 9
Cantel
Medical Corp. 2021 Second Quarter Form 10-Q
i
The following table shows the components of stock-based compensation expense recognized in the condensed consolidated statements of income:
At
January 31, 2021, total unrecognized stock-based compensation expense related to total nonvested restricted stock awards was $i30,977 with a remaining weighted average period of i19
months over which such expense is expected to be recognized.
i
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:
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, 2021, income tax deductions of $i2,272 were generated, of which $i3,288
was recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $i1,016 was recorded as an increase in income tax expense. For the six months ended January 31, 2020, income tax deductions of $i2,022
were generated, of which $i2,581 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $i559
was recorded as an increase to income tax expense.
(dollar amounts in thousands except share and per share data or as otherwise noted) 10
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
5. iRevenue
Recognition
i
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
2021
2020
2021
2020
United States
$
i205,694
$
i207,598
$
i420,781
$
i397,682
Europe/Africa/Middle
East
i51,144
i49,496
i98,929
i90,514
Asia/Pacific
i23,852
i22,266
i43,783
i39,331
Canada
i10,960
i7,745
i22,459
i15,578
Latin
America/South America
i2,388
i1,393
i5,115
i2,639
Total
$
i294,038
$
i288,498
$
i591,067
$
i545,744
Net
sales by product line
Capital equipment
$
i52,030
$
i59,724
$
i100,670
$
i118,472
Consumables
i166,624
i154,209
i333,974
i307,488
Product
service
i32,940
i31,563
i66,399
i63,131
Instrument
i40,885
i40,821
i86,315
i54,341
All
other(1)
i1,559
i2,181
i3,709
i2,312
Total
$
i294,038
$
i288,498
$
i591,067
$
i545,744
_______________________________________________
(1)Primarily
includes software licensing revenues.
/
Remaining Performance Obligations
At January 31, 2021, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $i82,428,
primarily within the Medical segment. We expect to recognize revenue on approximately i70% of these remaining performance obligations over the remainder of fiscal 2021 and fiscal 2022. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.
Contract
liabilities included in Other long-term liabilities
(i72)
(i349)
Deferred
revenue
$
i29,908
$
i25,614
/
Our
contract liabilities arise primarily in the Medical segment 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.
6. iiLeases/
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. Our lease portfolio consists primarily of real estate, equipment and vehicles. We have approximately i90
real estate leases with lease terms ranging from i1 year to i16 years, which include our corporate
(dollar amounts in thousands except share and per share data or as otherwise noted) 11
Cantel
Medical Corp. 2021 Second Quarter Form 10-Q
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.
i
Supplemental balance sheet information related to our leases follows:
Right-of-use assets
obtained in exchange for lease liabilities:
Operating leases(1)
$
i6,666
$
i17,738
Finance
leases(2)
$
i196
$
i4,798
_______________________________________________
(1) The
six months ended January 31, 2020 primarily relates to new warehouse facility included in our Dental segment and operating leases acquired in the Hu-Friedy acquisition.
(2) The six months ended January 31, 2020 includes finance leases acquired in the Hu-Friedy acquisition.
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 or sell Euros, British Pounds, Canadian dollars, Australian dollars, Singapore dollars and Chinese Renminbi, which contracts are ione-month
in duration. These short-term contracts are designated as fair value hedge instruments. There were ifive and isix
foreign currency forward contracts with an aggregate notional value of $i71,595 and $i81,677
at January 31, 2021 and July 31, 2020, 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, 2021 and 2020, 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 itwo interest rate swaps with a combined notional value of $i150,000, expiring on June
28, 2023. The swaps fixed interest rates at i2.265%. In March 2020, we terminated our existing interest rate swaps and entered into a new
(dollar amounts in thousands except share and per share data or as otherwise noted) 13
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
interest
rate swap (the “March 2020 Swap”) with a notional value of $i500,000, which fixed interest rates at i1.297% and was set to expire on September 6, 2024. As
the original forecasted hedged transactions (interest payments on variable rate debt) are still probable to occur, the $i8,534 net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination date will be amortized to interest expense through June 28, 2023, the original maturity date of the swaps.
On
May 13, 2020, in connection with the Second Amendment to our credit agreement, we terminated the March 2020 Swap and entered into a new interest rate swap (the “May 2020 Swap”) with a notional value of $i500,000, which included a LIBOR floor of i1.00%,
fixed interest rates at i2.08% and will expire on September 6, 2024. As the original forecasted hedged transactions related to the March 2020 Swap (interest payments on variable rate debt) are still probable to occur, the $i19,980
net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination date will be amortized to interest expense through September 6, 2024, the original maturity date of the swap. The new interest rate swap reflects the i1.00% LIBOR floor included in the Amended Credit Agreement, which allows for continued hedge accounting treatment. Changes in the fair value of the amended interest rate swap contract will continue to be
recognized in other comprehensive income.
At January 31, 2021, the fair value of the interest rate swap was $i18,611, which included $i5,462
recorded in accrued expenses and $i13,149 recorded in other long-term liabilities. As of July 31, 2020, the fair value of the interest rate swap was $i21,156,
which included $i5,462 recorded in accrued expenses and $i15,694 recorded in other long-term liabilities. The fair value of the interest rate swap is subject to movements
in LIBOR and will fluctuate in future periods.
9. iFair 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.
The fair value of the interest rate swaps, all of which qualify for cash flow hedge accounting, is recorded on our condensed consolidated balance sheet as an asset or liability with the related gains or losses reported as a component of accumulated other comprehensive income. The changes in fair value are reclassified from accumulated other comprehensive income into earnings in the same period that the hedged items affect earnings. The valuation technique used to determine fair value is the income approach. Under this approach, we use projected future interest rates, which fall into Level 2 of the fair value hierarchy as defined by ASC 820, as provided by counterparties to the interest rate swap agreements and the fixed rates that we are obligated to pay under the agreements. See Note 8, “Derivatives” for additional information.
For
the Hu-Friedy acquisition, additional purchase price payments were (i) contingent upon the achievement of certain commercial milestones through March 31, 2021, and (ii) contingent upon changes in our common stock price from the date of closing through a future date subject to a registration rights agreement. We estimated the aggregate fair value of these contingent consideration arrangements to be $i38,371
at the date of acquisition, which was reported separately in our 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. During the second quarter of fiscal 2020, we paid $i25,000 to settle a portion of this contingent consideration
arrangement related to net sales achieved for the twelve month period ended December 31, 2019. During fiscal 2020, the remaining contingent consideration arrangement related to net sales and gross profit percentage achievement was reduced from a liability of approximately $i17,210 to $i0
due to the impact that the COVID-19 pandemic had on Hu-Friedy’s results in fiscal 2020. This specific contingent consideration arrangement also includes a change in control provision. We may be required to accrue for and ultimately pay $i25,000 to the former owners of Hu-Friedy upon the closing of the STERIS and Cantel Merger. See Note 1, “Basis of Presentation” for additional information.
For
the contingent consideration arrangement based upon changes in our common stock price through a future date, we were required to pay to the sellers of Hu-Friedy an amount in cash equal to $i35,000 minus the aggregate net proceeds received by the
(dollar amounts in thousands except share and per share data or as otherwise noted) 14
Cantel
Medical Corp. 2021 Second Quarter Form 10-Q
seller in connection with a future equity issuance if the amount of such aggregate net proceeds was less than $i35,000. The initial fair value assigned to this contingent consideration arrangement was determined based on the closing price of our common stock at the date that the acquisition closed (October
1, 2019) relative to the contracted stock price stipulated in the purchase agreement. On February 13, 2020, we entered into a stock repurchase agreement with Dental Holding LLC, the former owners of Hu-Friedy (the “Repurchase Agreement”). The Repurchase Agreement amended the Hu-Friedy purchase and sale agreement and the related registration rights agreement to provide that we repurchase a portion of the shares from the seller included in the equity consideration transferred at a price per share of $i64.51
(the “Repurchase”), which equals the closing price of shares of our common stock traded on the New York Stock Exchange on February 12, 2020. The Repurchase of i438,359 common shares was completed on February 13, 2020, and the shares were thereafter canceled and retired. The Hu-Friedy purchase and sale agreement further required us to pay to the seller an amount in cash equal to $i35,000
minus the aggregate net proceeds received by the seller from an equity issuance if the amount of such aggregate net proceeds was less than $i35,000 (the “True-Up Obligation”). The Repurchase Agreement further amended the purchase and sale agreement to provide that in satisfaction of the True-Up Obligation, we make a payment to the sellers in an amount equal to $i6,721
to settle the contingent obligation, which amount equals $i35,000 minus the aggregate amount of $i28,279
paid to Dental Holding as consideration for the Repurchase. These payments were made to Dental Holding on February 13, 2020.
For the fiscal 2018 Aexis Medical BVBA acquisition, additional purchase price payments ranging from izero to $i1,850
were contingent upon the achievement of certain purchase order targets through March 21, 2020. We estimated the original fair value of the contingent consideration using the weighted probabilities of the possible contingent payments. At the date of acquisition, we estimated the original fair value of the contingent consideration to be $i1,292. In June 2020, we paid $i1,691
to settle the contingent consideration.
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.
i
The fair values of our financial instruments measured on a recurring basis were categorized
as follows:
(dollar
amounts in thousands except share and per share data or as otherwise noted) 15
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Disclosure of Fair Value of Financial Instruments
At January 31, 2021 and July 31, 2020, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments.
We estimate the fair value of our long-term debt carried at face value
less unamortized discount and issuance costs on a quarterly basis for disclosure purposes. The estimated fair value of our log-term debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. At January 31, 2021 and July 31, 2020, the fair value of our long-term debt was $i799,866 and $i911,105,
respectively.
We estimate the fair value of our convertible debt carried at face value less unamortized discount and issuance costs on a quarterly basis for disclosure purposes. The estimated fair value of our convertible debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. At January 31, 2021 and July 31, 2020, the fair value of our convertible debt was $i336,479
and $i224,330, respectively.
Amortization
expense related to intangible assets was $i17,868 and $i15,003 for the six months ended January 31,
2021 and 2020, respectively. We expect to recognize an additional $i17,402 of amortization expense related to intangible assets for the remainder of fiscal 2021, and thereafter $i34,016,
$i32,744, $i31,828, $i29,121
and $i27,293 of amortization expense for fiscal years 2022, 2023, 2024, 2025 and 2026, respectively.
i
Goodwill
changed during the six months ended January 31, 2021 as follows:
Total
long-term debt, net of unamortized debt issuance costs
i810,576
i934,209
Current
portion of long-term debt
(i22,125)
(i7,375)
Long-term
debt, net of unamortized debt issuance costs and excluding current portion
$
i788,451
$
i926,834
/
(dollar
amounts in thousands except share and per share data or as otherwise noted) 16
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
First Amendment to Credit Agreement
On September 6, 2019, we entered into a First Amendment (the “First Amendment”), amending our Fourth Amended and Restated Credit Agreement. The First Amendment added a $i400,000
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 were 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 corporate purposes.
Second Amendment to Credit Agreement
On May 11, 2020, we entered into a Second Amendment (the “Second Amendment”) further amending the Fourth Amended and Restated Credit Agreement (as
amended, the “Amended Credit Agreement”). The Second Amendment’s principal changes include (i) increasing the maximum consolidated leverage ratio covenant for the fiscal quarter ended April 30, 2020 from i4.25x to i5.25x,
(ii) suspending such financial maintenance covenant until October 31, 2021, (iii) maintaining a minimum liquidity (as defined in the Amended Credit Agreement) of at least $i50,000 during the fiscal quarter ended July 31, 2020 and $i75,000
during each of the following fiscal quarters ending with the fiscal quarter ending July 31, 2021, (iv) requiring us to maintain minimum consolidated EBITDA (as defined in the Amended Credit Agreement) for each period of four fiscal quarters ending on the last day of the fiscal quarters ended July 31, 2020 through July 31, 2021 and (v) limiting our ability to pay dividends and repurchase shares of our common stock during the period the consolidated leverage ratio and consolidated interest coverage ratio are suspended.
The interest rates have been amended so that loans under the Amended Credit Agreement, until the third business day following the date on which a compliance certificate is delivered for the fiscal quarter ending October
31, 2021, bear interest at i2.00% above the base rate for base rate borrowings, or at i3.00% above LIBOR for LIBOR-based borrowings, and also provides
for fees on the unused portion of the revolving credit facility at a rate of i0.50%. Thereafter, borrowings bear interest at rates ranging from i0.00%
to i1.75% above base rate for base rate borrowings, or at rates ranging from i1.00% to i2.75%
above LIBOR for LIBOR-based borrowings, depending on our consolidated leverage ratio, which is the consolidated ratio of total funded debt (minus certain unrestricted cash) to consolidated EBITDA. The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates ranging from i0.20% to i0.50%,
depending on our consolidated leverage ratio. Interest rates have also been amended to include a i1.00% floor on all borrowings. As of January 31, 2021, the average interest rate on our outstanding borrowings was approximately i4.00%.
The
Amended Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by Cantel and its U.S.-based subsidiaries that guarantees the obligations under the Amended Credit Agreement of all of the outstanding shares of its U.S.-based subsidiaries and i65%
of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries. As of January 31, 2021, we were in compliance with all financial covenants under the Amended Credit Agreement.
During the six months ended January 31, 2021, we were not required to make loan A principal payments. The tranche A term loan is subject to principal amortization, with $i7,375
due and payable in the fourth quarter of fiscal 2021, $iii29,500//
due and payable in each of fiscal 2022, 2023 and 2024, with the remaining $i450,500 due and payable at maturity on September 6, 2024. During the three months ended January 31, 2020, we made principal payments of $i2,375.
During the six months ended January 31, 2021, we repaid $i125,000 of the revolving credit facility under the Amended Credit Agreement. In March 2021, we repaid an additional $i50,000
of borrowings under our revolving credit facility.
Total
convertible debt, net of unamortized discount and debt issuance costs
$
i128,443
$
i124,835
/
On
May 15, 2020, we issued $i168,000 aggregate principal amount of i3.25% convertible senior notes due 2025 (the “Notes”)
in a private placement, including pursuant to the grant to the initial purchasers of $i140,000 aggregate principal amount of the
(dollar amounts in thousands except share and per share data or as otherwise noted) 17
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Notes,
an option to purchase up to an additional $i28,000 aggregate principal amount of Notes. The private placement offering closed on May 15, 2020. The initial conversion price is $i41.51
per share of common stock (based on an initial conversion rate of 24.0912 shares of common stock per $1,000 principal amount of Notes) and will be subject to adjustment if certain events occur. The net proceeds from this offering were approximately $i162,977 (including net proceeds relating to the issuance of the additional Notes), after deducting the initial purchasers’ discount and before the cost of offering expenses. As required by the Amended Credit Agreement, we were required to apply at least i50%
of the amount by which the net proceeds exceed $i100,000, or $i31,500,
to the repayment of debt under our credit facilities in fiscal 2020.
Due to the cash conversion feature included in the Notes, the carrying value of the Notes was allocated between a liability and an equity component. Upon issuance, the liability component of the convertible debt was $i123,346, net of a $i40,289
discount and net of debt issuance costs of $i4,365. The initial carrying value of the equity component recorded in additional paid-in-capital was $i29,184,
net of a $i10,072 deferred tax liability, $i1,377 of debt issuance costs and a $i344
deferred tax asset. The $i40,289 debt discount and $i4,365 of debt issuance costs are amortized as non-cash interest expense over the contractual term of the convertible
debt using the effective interest method, at a rate of i9.36%. Cash interest for the six months ended January 31, 2021 was $i2,730.
COVID-19
As
further described in Note 1 “Basis of Presentation,” the magnitude and depth of disruption to our business resulting from the COVID-19 pandemic continue to remain highly uncertain. However, based on our current estimates, we do not anticipate these disruptions will impact our ability to maintain compliance with our debt covenants through the end of fiscal 2021.
12. iCommitments
and Contingencies
Legal Proceedings
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.
Restructuring Matters
In connection with our response to COVID-19, our ongoing efforts to streamline and consolidate our global operations and integrate the Hu-Friedy acquisition with
our legacy Dental business, we have incurred approximately $i7,449 and $i5,428 of restructuring-related charges in each of the six months periods ended January 31,
2021, and 2020, respectively. The majority of these charges consisted of onetime benefit-related costs (severance, accelerated stock-based compensation costs and other benefit costs) associated with actions taken to reduce headcount. At January 31, 2021 and July 31, 2020, $i4,438 and $i7,887
was included in compensation payable on our condensed consolidated balance sheet. For the six months ended January 31, 2021 and 2020, we made $i10,898 and $i2,941
of severance-related cash payments, respectively. The remaining unpaid severance at January 31, 2021, will be paid out ratably during the remainder of fiscal 2021 and into fiscal 2022 in accordance with our employee separation policy.
(dollar amounts in thousands except share and per share data or as otherwise noted) 18
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
13. iAccumulated
Other Comprehensive Loss
i
The components and changes in accumulated other comprehensive loss follow:
(1)Includes
tax effect of $i706 and $i375
for the three months ended January 31, 2021 and 2020, respectively, and $i1,308 and $i521
for the six months ended January 31, 2021 and 2020, respectively.
(2)For the three and six months ended January 31, 2021, we recognized $i1,384 and $i2,797
in interest expense, net, respectively, relating to the non-cash amortization of the net loss on terminated swaps reported in accumulated other comprehensive loss.
/
14. iEarnings Per Common Share
Basic
earnings per common share (“EPS”) is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. As we expect to settle the principal amount of our outstanding convertible debt in cash and any excess in shares of our common stock, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $i41.51
per share. Our convertible debt is further described in Note 11, “Financing Arrangements.”
We include participating securities (nonvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of nonvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock and participating securities.
i
The
following table sets forth the computation of basic and diluted EPS available to stockholders of common stock (excluding participating securities):
Numerator
for basic and diluted earnings per share:
Net income:
$
i12,068
$
(i2,263)
$
i36,532
$
i3,504
Denominator
for basic and diluted earnings per share, adjusted for participating securities:
Denominator for basic earnings per share - weighted average number of shares outstanding attributable to common stock
i42,253,846
i42,561,178
i42,219,166
i42,298,833
Dilutive
effect of stock awards using the treasury stock method and the average market price for the year
i182,261
i—
i168,307
i91,286
Dilutive
effect of convertible debt outstanding
i1,637,076
i—
i1,128,357
i—
Denominator
for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
i44,073,183
i42,561,178
i43,515,830
i42,390,119
Earnings
per share attributable to common stock:
Basic earnings per share
$
i0.29
$
(i0.05)
$
i0.87
$
i0.08
Diluted
earnings per share
$
i0.27
$
(i0.05)
$
i0.84
$
i0.08
Stock
awards excluded because their inclusion would have been anti-dilutive
i—
i36,150
i—
i—
/
(dollar
amounts in thousands except share and per share data or as otherwise noted) 19
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
i
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:
Denominator
for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
i44,073,183
i42,561,178
i43,515,830
i42,390,119
Participating
securities
i—
i2,981
i—
i9,962
Total
weighted average number of shares and common stock equivalents attributable to both common stock and participating securities
i44,073,183
i42,564,159
i43,515,830
i42,400,081
/
15. iReportable
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.
Our reportable segments are as follows:
Medical: designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.
Life
Sciences: designs, develops, manufactures, sells, and installs water purification systems for medical, pharmaceutical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science markets through a worldwide distributor network. Two customers collectively accounted for approximately i45.1% and i45.0%
of our Life Sciences segment net sales for the six months ended January 31, 2021 and 2020, respectively.
Dental: designs, manufactures, sells, supplies and distributes a broad selection of products used by the global dental profession comprising a complete circle of protection. Our products include hand and powered dental instruments, infection control products, personal protective equipment (PPE) and water quality products for the dental suite. Three customers collectively accounted for approximately i47.6%
and i43.3% of our Dental segment net sales for the six months ended January 31, 2021 and 2020, 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 i46.9%
and i50.7% of our Dialysis segment net sales for the six months ended January 31, 2021 and 2020, respectively. These customers include the top two customers noted above under our Life Sciences segment.
No customer accounted for 10% or more of our consolidated net sales for the six months ended January 31, 2021 and 2020.
i
Information
as to reportable segments is summarized below:
Three Months Ended January 31,
Six Months Ended January 31,
Net sales
2021
2020
2021
2020
Medical
$
i133,754
$
i130,959
$
i266,073
$
i264,312
Life
Sciences
i46,223
i50,122
i91,791
i99,263
Dental
i105,419
i101,044
i216,425
i168,287
Dialysis
i8,642
i6,373
i16,778
i13,882
Total
net sales
$
i294,038
$
i288,498
$
i591,067
$
i545,744
/
(dollar
amounts in thousands except share and per share data or as otherwise noted) 20
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Three Months Ended January 31,
Six
Months Ended January 31,
Income from operations
2021
2020
2021
2020
Medical
$
i27,274
$
i21,534
$
i53,990
$
i42,653
Life
Sciences
i9,034
i7,700
i17,109
i14,835
Dental
i16,339
(i856)
i41,646
i4,148
Dialysis
i2,118
i1,507
i4,684
i3,129
i54,765
i29,885
i117,429
i64,765
General
corporate expenses(1)
i23,136
i22,289
i35,448
i42,745
Total
income from operations
$
i31,629
$
i7,596
$
i81,981
$
i22,020
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand Cantel. The MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes.
Overview
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies
are used to help prevent the occurrence or spread of infections.
Merger Agreement with STERIS
On January 12, 2021, we entered into a definitive merger agreement with two wholly owned subsidiaries of STERIS, plc (“STERIS”), under which STERIS will acquire Cantel in a cash and stock transaction with an equity value of approximately $3.6 billion, based on the closing price of STERIS shares of $200.46 on January 11, 2021 (STERIS and Cantel Merger). The STERIS and Cantel Merger is expected to close in the fourth quarter of fiscal 2021.
In connection with the STERIS and
Cantel Merger, we have incurred, and will continue to incur, merger-related and integration-related preparation costs. A significant portion of those costs are contingent on the merger closing, such as investment banking fees, legal fees, and other employee related costs. We incurred $11,620 of such costs during the three and six month periods ended January 31, 2021, which were recorded in general and administrative expense within the Condensed Consolidated Statements of Income.
COVID-19
The COVID-19 pandemic continues to spread throughout the United States and other countries across the world, and the duration and severity of its effects are currently unknown. The global pandemic has adversely impacted and is likely to further adversely impact our business and markets, including our workforce
and operations and the operations of our customers, suppliers, and business partners. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including social distancing measures, travel bans and restrictions, and business and government shutdowns, have already created significant negative economic impacts on a global basis.
To date, we have been able to continue our operations with limited disruptions in supply and manufacturing. Although, it is difficult to predict the broad macroeconomic effects that the COVID-19 pandemic will have on industries or individual companies, we have assessed the possible effects and outcomes of the pandemic on, among other things, our supply chain, customers and distributors, discounts
and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand. During the second half of fiscal 2020, we implemented several measures to reduce operating costs, conserve liquidity and navigate through this unprecedented situation. These management cost reduction measures included salary reductions, employee furloughs, travel reductions and the deferral of certain operating and capital expenditures.
During the second half of fiscal 2020, the COVID-19 pandemic negatively impacted net sales and the related operations of both our Medical and Dental segments as a result of the postponement of elective medical procedures and routine dental procedures. Towards the end of fiscal 2020, we experienced gradual improvements in these respective businesses as
(dollar
amounts in thousands except share and per share data or as otherwise noted) 21
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
restrictions were lifted and limitations eased. Demand in both of our medical and dental businesses continued to improve this quarter.
While we currently expect to see improvement in the remainder of fiscal 2021, the effects of the COVID-19 pandemic remains fluid and continues to evolve differently across various geographies and still could have a negative impact on our businesses if a resurgence of the virus occurs around the world. See “Results of Operations” for a more detailed discussion.
Second
Quarter 2020 Summary (on a comparative basis)
Key GAAP financial results for the three months ended January 31, 2021 were as follows:
•Net sales increased by 1.9% to $294,038 from $288,498,
•Net income increased to $12,068 from a net loss of $2,263 and
•Earnings per diluted share increased to $0.27 from a net loss per diluted share of $(0.05).
Key Non-GAAP financial results for the three months ended January 31, 2021 were as follows:
•Non-GAAP net income increased by 34.0% to
$34,640 from $25,844,
•Non-GAAP earnings per diluted share increased by 29.5% to $0.79 from $0.61 and
•Adjusted EBITDAS increased by 37.5% to $147,283 from $107,105.
Please see a description of our Non-GAAP Financial Measures below.
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:
2021
2020
Net sales
$
294,038
100.0
%
$
288,498
100.0
%
1.9
%
Cost
of sales
150,560
51.2
%
166,254
57.6
%
(9.4)
%
Gross profit
143,478
48.8
%
122,244
42.4
%
17.4
%
Selling
38,434
13.1
%
44,740
15.5
%
(14.1)
%
General
and administrative
65,855
22.4
%
62,051
21.5
%
6.1
%
Research and development
7,560
2.5
%
7,857
2.8
%
(3.8)
%
Total
operating expenses
111,849
38.0
%
114,648
39.8
%
(2.4)
%
Income from operations
31,629
10.8
%
7,596
2.6
%
316.4
%
Interest
expense, net
15,491
5.3
%
10,250
3.5
%
51.1
%
Income (loss) before income taxes
16,138
5.5
%
(2,654)
(0.9)
%
NM
Income
taxes
4,070
1.4
%
(391)
(0.1)
%
NM
Net income (loss)
$
12,068
4.1
%
$
(2,263)
(0.8)
%
NM
NM
= Not meaningful
(dollar amounts in thousands except share and per share data or as otherwise noted) 22
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Six
Months Ended January 31,
Percentage Change
Statement of Income Data:
2021
2020
Net sales
$
591,067
100.0
%
$
545,744
100.0
%
8.3
%
Cost
of sales
300,223
50.8
%
307,631
56.4
%
(2.4)
%
Gross profit
290,844
49.2
%
238,113
43.6
%
22.1
%
Selling
78,497
13.3
%
83,151
15.2
%
(5.6)
%
General
and administrative
115,233
19.5
%
117,338
21.5
%
(1.8)
%
Research and development
15,133
2.5
%
15,604
2.9
%
(3.0)
%
Total
operating expenses
208,863
35.3
%
216,093
39.6
%
(3.3)
%
Income from operations
81,981
13.9
%
22,020
4.0
%
272.3
%
Interest
expense, net
31,784
5.4
%
15,969
2.9
%
99.0
%
Income before income taxes
50,197
8.5
%
6,051
1.1
%
729.6
%
Income
taxes
13,665
2.3
%
2,547
0.5
%
436.5
%
Net income
$
36,532
6.2
%
$
3,504
0.6
%
942.6
%
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, for each of our reportable segments.
Three
Months Ended January 31,
Six Months Ended January 31,
Net sales by segment
2021
2020
2021
2020
Medical
$
133,754
45.5
%
$
130,959
45.4
%
$
266,073
45.0
%
$
264,312
48.4
%
Life
Sciences
46,223
15.7
%
50,122
17.4
%
91,791
15.5
%
99,263
18.2
%
Dental
105,419
35.9
%
101,044
35.0
%
216,425
36.6
%
168,287
30.8
%
Dialysis
8,642
2.9
%
6,373
2.2
%
16,778
2.9
%
13,882
2.6
%
Total
net sales
$
294,038
100.0
%
$
288,498
100.0
%
$
591,067
100.0
%
$
545,744
100.0
%
Net
sales by geography
United States
$
205,694
70.0
%
$
207,598
72.0
%
$
420,781
71.2
%
$
397,682
72.9
%
International
88,344
30.0
%
80,900
28.0
%
170,286
28.8
%
148,062
27.1
%
Total
net sales
$
294,038
100.0
%
$
288,498
100.0
%
$
591,067
100.0
%
$
545,744
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 from operations
2021
2020
2021
2020
Medical
$
27,274
20.4
%
$
21,534
16.4
%
$
53,990
20.3
%
$
42,653
16.1
%
Life
Sciences
9,034
19.5
%
7,700
15.4
%
17,109
18.6
%
14,835
14.9
%
Dental
16,339
15.5
%
(856)
(0.8)
%
41,646
19.2
%
4,148
2.5
%
Dialysis
2,118
24.5
%
1,507
23.6
%
4,684
27.9
%
3,129
22.5
%
54,765
18.6
%
29,885
10.4
%
117,429
19.9
%
64,765
11.9
%
General
corporate expenses
23,136
7.8
%
22,289
7.8
%
35,448
6.0
%
42,745
7.9
%
Total income from operations
$
31,629
10.8
%
$
7,596
2.6
%
$
81,981
13.9
%
$
22,020
4.0
%
Net
Sales
Total net sales increased by $5,540 or 1.9%, to $294,038 for the three months ended January 31, 2021 from $288,498 for the three months ended January 31, 2020, which consisted of an increase of 1.1% in organic sales and an increase of 0.8%
(dollar amounts in thousands except share and per share data or as otherwise noted) 23
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
due to favorable foreign currency translation. International net sales increased by $7,444 or 9.2%,
to $88,344 for the three months ended January 31, 2021 from $80,900 for the three months ended January 31, 2020. The 9.2% increase in international net sales consisted of a 5.8% increase in organic sales and an increase of 3.4% due to favorable foreign currency translation of our net sales in Europe, the United Kingdom and Australia. Total net sales increased by $45,323 or 8.3%, to $591,067 for the six months ended January 31, 2021 from $545,744 for the six months ended January 31, 2020, which consisted of a 7.8% increase in net sales due to acquisitions (net of dispositions) and an increase of 0.8% due to foreign currency translation, slightly offset by a decrease of 0.3% in organic sales. International net sales increased by $22,224 or 15.0%, to $170,286 for the six months
ended January 31, 2021 from $148,062 for the six months ended January 31, 2020. The 15.0% increase in international net sales consisted of a 7.3% increase in organic sales, an increase in net sales due to acquisitions of 4.6% (offset by dispositions) and an increase of 3.1% due to favorable foreign currency translation of our net sales in Europe, the United Kingdom and Australia.
Medical. Net sales increased by $2,795 or 2.1%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020, which consisted of an increase of 2.0% due to foreign currency translation and an 0.1% increase in organic sales. Net sales increased by $1,761
or 0.7%, for the six months ended January 31, 2021 compared with the six months ended January 31, 2020, which consisted of an increase of 1.7% due to foreign currency translation partially offset by a decrease of 1.0% in organic sales. The decrease in organic net sales for the six month period was primarily driven by the delayed timing of capital equipment sales due to the COVID-19 pandemic. Although U.S. endoscopy procedure volumes have declined compared to the prior year, procedural product sales have outperformed the underlying volume declines across all regions. While we expect to see improvement during the remainder of fiscal 2021 (demonstrated by the slight improvement in organic sales for the three month period) as surgical and elective procedure volumes return to pre-COVID-19 levels, we could experience variable impacts on our Medical business if a resurgence of
the virus emerges and elective procedures were postponed again.
Life Sciences. Net sales decreased by $3,899 or 7.8% for the three months ended January 31, 2021 compared with the three months ended January 31, 2020, which consisted of a 8.0% decrease in organic sales, slightly offset by an increase of 0.2% due to foreign currency translation. Net sales decreased by $7,472 or 7.5% for the six months ended January 31, 2021 compared with the six months ended January 31, 2020, which consisted of a 7.6% decrease in organic sales, slightly offset by an increase of 0.1% due to foreign currency translation. The decreases in net sales for the three and six month periods were
primarily due to lower demand for portable reverse osmosis units and delayed capital projects in our hemodialysis water business. As the majority of our Life Sciences business supports non-elective medical treatment, the COVID-19 pandemic has not materially impacted this business, with the exception of the timing of portable reverse osmosis units and delayed capital projects at our customers. If the pandemic continues, it could further impact capital equipment volume and future service revenues at our customers.
Dental. Net sales increased by $4,375 or 4.3%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020, which consisted of a 4.3% organic sales increase. Net sales increased by $48,138 or 28.6%, for the six months
ended January 31, 2021 compared with the six months ended January 31, 2020, which consisted of a 25.3% increase due to acquisitions and a 3.3% organic sales increase. The Hu-Friedy acquisition contributed $39,835 of incremental net sales for the six month period. The increases in organic sales for the three and six months periods were driven by increased personal protective equipment (PPE) and disinfectant chemistries sales. In the latter half of fiscal 2020, the COVID-19 pandemic had significantly impacted the Dental segment due to reduced dental procedures. However, dental procedure volumes have improved and continue to stabilize in fiscal 2021. While we expect to see continued improvement during the remainder of fiscal 2021 as routine and elective dental procedure volumes return to pre-COVID-19 levels, we could experience variable impacts on our Dental business if a
resurgence of the virus emerges and such procedures were postponed again.
Dialysis.Net sales increased by $2,269 or 35.6%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020. Net sales increased by $2,896 or 20.9%, for the six months ended January 31, 2021 compared with the six months ended January 31, 2020.
Gross Profit
Gross profit increased by $21,234 or 17.4%, to $143,478 for the three months ended January 31,
2021 from $122,244 for the three months ended January 31, 2020. The increase in gross profit primarily relates to certain actions taken by management to reduce variable costs in response to lower sales volume due to the COVID-19 pandemic and net sales increases in Medical and Dental segments. Gross profit increased by $52,731 or 22.1%, to $290,844 for the six months ended January 31, 2021 from $238,113 for the six months ended January 31, 2020. The increase in gross profit for the six month period primarily relates to $40,258 of incremental gross profit contributed by Hu-Friedy and certain actions taken by management to reduce variable costs in response to lower sales volume due to the COVID-19 pandemic.
(dollar amounts in
thousands except share and per share data or as otherwise noted) 24
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Gross profit as a percentage of net sales for the three months ended January 31, 2021 and 2020 was 48.8% and 42.4%, respectively. Gross profit as a percentage of net sales for the six months ended January 31, 2021 and 2020 was 49.2% and 43.6%, respectively. The increases in gross profit as a percentage of net sales for the three and six month periods were driven by a lower cost base as a result of measures taken as a result of the
COVID-19 pandemic and favorable leverage of our fixed manufacturing costs, primarily in our Medical and Dental segments.
Operating Expenses
Operating expenses decreased by $2,799 or 2.4% to $111,849 for the three months ended January 31, 2021 from $114,648 for the three months ended January 31, 2020. Operating expenses decreased by $7,230 or 3.3% to $208,863 for the three months ended January 31, 2021 from $216,093 for the three months ended January 31, 2020. For the three and six month periods, these decreases were due to the reduction in integration and acquisition-related costs incurred in the prior-year
periods associated with the Hu-Friedy acquisition and a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic, partially offset by merger-related costs associated with the STERIS and Cantel Merger. Operating expenses as a percentage of net sales for the three months ended January 31, 2021 and 2020 were 38.0% and 39.8%, respectively. Operating expenses as a percentage of net sales for the six months ended January 31, 2021 and 2020 were 35.3% and 39.6%, respectively.
Selling expenses decreased by $6,306 or 14.1%, to $38,434 for the three months ended January 31, 2021 from $44,740 for the
three months ended January 31, 2020. The decrease was primarily due to reduced marketing spend and salesperson compensation in the Dental segment, inclusive of cost synergies from the Hu-Friedy acquisition. Selling expenses decreased by $4,654 or 5.6%, to $78,497 for the six months ended January 31, 2021 from $83,151 for the six months ended January 31, 2020. The decrease was primarily due to reduced marketing spend and compensation expense in the Dental segment (which includes synergies from the Hu-Friedy acquisition). Selling expenses as a percentage of net sales were 13.1% and 15.5% for the three months ended January 31, 2021 and 2020, respectively. Selling expenses as a percentage of net sales were 13.3% and 15.2% for
the six months ended January 31, 2021 and 2020, respectively.
General and administrative expenses increased by $3,804 or 6.1%, to $65,855 for the three months ended January 31, 2021 from $62,051 for the three months ended January 31, 2020. The increase primarily relates to merger-related costs associated with the recently announced STERIS and Cantel Merger and increased incentive-based compensation costs, offset by a reduction in acquisition-related costs incurred in the prior-year period associated with the Hu-Friedy acquisition. General and administrative expenses decreased by $2,105 or 1.8%, to $115,233 for the six months ended January 31,
2021 from $117,338 for the six months ended January 31, 2020. The decrease primarily relates to lower acquisition-related costs incurred in the prior-year period related to the Hu-Friedy acquisition. This was partially offset by merger-related costs associated with the recently announced STERIS and Cantel Merger, higher incentive-based compensation costs, higher amortization expense and incremental expenses related to the Hu-Friedy business for a full six month period as compared to the prior year period. General and administrative expenses as a percentage of net sales were 22.4% and 21.5% for the three months ended January 31, 2021 and 2020, respectively. General and administrative expenses as a percentage of net sales were 19.5% and 21.5% for the six months ended January 31,
2021 and 2020, respectively.
Research and development expenses (which include continuing engineering costs) decreased by $297 or 3.8%, to $7,560 for the three months ended January 31, 2021 from $7,857 for the three months ended January 31, 2020. Research and development expenses decreased by $471 or 3.0%, to $15,133 for the six months ended January 31, 2021 from $15,604 for the six months ended January 31, 2020. The decreases in the three and six month periods were primarily a result of a reduction in expenses in our Life Sciences segment, partially offset by increases in our Medical segment. Research and development expenses as a percentage
of net sales were 2.5% and 2.8% for the three months ended January 31, 2021 and 2020, respectively. Research and development expenses as a percentage of net sales were 2.5% and 2.9% for the six months ended January 31, 2021 and 2020, respectively.
Income from Operations
Medical. Income from operations increased by $5,740 or 26.7%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020. Income from operations increased by $11,337 or 26.6%,
for the six months ended January 31, 2021 compared with the six months ended January 31, 2020. Net sales have increased slightly for both the three and six month periods which contributed to an increase of income from operations. In addition, decreases in certain operating expenses resulting from management cost reduction measures taken in response to the COVID-19 pandemic and a shift towards higher margin products also contributed to this overall increase in both periods.
(dollar amounts in thousands except share and per share data or as otherwise noted) 25
Cantel Medical Corp. 2021
Second Quarter Form 10-Q
Life Sciences. Income from operations increased by $1,334 or 17.3%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020. Income from operations increased by $2,274 or 15.3%, for the six months ended January 31, 2021 compared with the six months ended January 31, 2020. Although net sales declined as noted above, income from operations improved due to the decrease in certain operating expenses resulting from management cost reduction measures taken in response to the COVID-19 pandemic and to a lesser extent, a shift towards higher margin products.
Dental.
Income from operations increased by $17,195 or 2,008.8%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020. The increase is primarily driven by a reduction in integration and acquisition-related costs and inventory step-up amortization related to the Hu-Friedy acquisition in the prior year period and an increase in net sales noted above. Income from operations increased by $37,498 or 904.0%, for the six months ended January 31, 2021 compared with the six months ended January 31, 2020. The increase was primarily due to inclusion of Hu-Friedy operations (which includes overall higher margin products) for a full six months in the current fiscal year, increased net sales, cost synergies resulting from the Hu-Friedy integration
and the reduction of certain acquisition and integration-related costs and inventory step-up amortization in the prior year period.
Dialysis. Income from operations increased by $611 or 40.5%, for the three months ended January 31, 2021 compared with the three months ended January 31, 2020. Income from operations increased by $1,555 or 49.7%, for the six months ended January 31, 2021 compared with the six months ended January 31, 2020.
General Corporate Expenses
General corporate expenses relate
to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition and integration programs (including fair value adjustments to contingent consideration) and costs of being a publicly traded company. General corporate expenses increased by $847 or 3.8%, for the three months ended January 31, 2021 from the three months ended January 31, 2020. This increase was primarily driven by merger-related costs associated with the STERIS and Cantel Merger and higher incentive-based compensation costs, partially offset by the lower acquisition-related and transaction items incurred in connection with the Hu-Friedy acquisition and to a lesser extent, a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic. General corporate expenses decreased by
$7,297 or 17.1%, for the six months ended January 31, 2021 from the six months ended January 31, 2020. This decrease was primarily driven by significant reduction in acquisition-related and transaction charges incurred in connection with the Hu-Friedy acquisition in the prior year period and to a lesser extent, a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic, partially offset by merger-related costs associated with the STERIS and Cantel Merger and higher incentive-based compensation costs.
Interest Expense, Net
Interest expense, net increased by $5,241 or 51.1%, to $15,491 for the three months ended January 31,
2021 from $10,250 for the three months ended January 31, 2020. Interest expense, net increased by $15,815 or 99.0%, to $31,784 for the six months ended January 31, 2021 from $15,969 for the six months ended January 31, 2020. The increases in both the three and six month periods resulted from an increase in the average outstanding debt, which includes both our term loan and our revolver borrowings to support the funding of the Hu-Friedy acquisition in October 2019 and the interest expense associated with the issuance of convertible debt in May 2020. Interest expense, net includes non-cash interest related to the amortization of debt issuance costs of $836 and $562 for the three months ended January 31, 2021 and 2020, respectively,
and $1,664 and $983 for the six months ended January 31, 2021 and 2020, respectively. Non-cash interest of $1,674 and $3,311 related to the amortization of the discount on the convertible debt was also included in the three and six months ended January 31, 2021. Non-cash interest of $1,384 and $2,797 related to the amortization of the loss on terminated interest rate swaps was also included in the three and six months ended January 31, 2021. We expect interest expense to be elevated during fiscal 2021 as a result of a full year of interest expense associated with our convertible debt and the amortization of the loss on terminated interest rate swaps. Including the $50,000 repayment made in March 2021, we have made a total of $175,000 of repayments towards our outstanding
revolver borrowings. Such repayments will help offset any incremental interest expense for the remainder of fiscal 2021.
Income Taxes
The consolidated effective tax rate increased to 25.2% for the three months ended January 31, 2021 from 14.7% for the three months ended January 31, 2020. The increase was primarily driven by positive income from operations in the current quarter and the unfavorable impact of stock-based compensation, partially offset by favorable geographic income mix. The consolidated effective tax rate decreased to 27.2% for the six months ended January 31, 2021 from 42.1% for the six months
(dollar
amounts in thousands except share and per share data or as otherwise noted) 26
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
ended January 31, 2020. The decrease was primarily driven by positive income from operations in the current period and by favorable geographic income mix.
Non-GAAP Financial Measures
In evaluating our operating performance, we supplement the reporting of our financial information determined under generally accepted accounting
principles in the United States (“GAAP”) with certain non-GAAP financial measures including (i) non-GAAP net income, (ii) non-GAAP earnings per diluted share (“EPS”), (iii) earnings before interest, taxes, depreciation, amortization, loss on disposal of fixed assets, and stock-based compensation expense (“EBITDAS”), (iv) adjusted EBITDAS, (v) net debt and (vi) organic sales. These non-GAAP financial measures are indicators of our performance that are not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, stockholders and other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations.
These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures.
To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of 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.
Merger-related
items consist primarily of transaction-related costs such as banking and legal fees associated with the STERIS and Cantel Merger which was announced in January 2021. Since these merger-related items are irregular and specific to this acquisition, we excluded these amounts for purposes of calculating our non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.
Excess tax benefits and expenses resulting from stock compensation are recorded as an adjustment to income tax expense. The magnitude of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon our future grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on grant date and the exercise behavior of our stock award holders. Since
these tax effects are largely unrelated to our
(dollar amounts in thousands except share and per share data or as otherwise noted) 27
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
results and unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS to arrive at our non-GAAP financial measures.
We are required under GAAP to separately account for the liability (debt) and equity (conversion option) components of our convertible debt issued in May 2020. Accordingly, we are required to recognize non-cash interest expense
that is associated with the debt discount component recorded in equity. Since the amortization of the debt discount is a non-cash expense, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures as we believe that the exclusion of the non-cash interest expense provides investors an enhanced view of our operational performance related to cash flow and liquidity.
As a result of terminating our interest rate swaps during fiscal 2020, we recorded a loss in other comprehensive income which is required by GAAP to be amortized and recorded in interest expense through the original maturity date of the terminated swaps. Since the amortization of the loss is a non-cash expense, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures as we believe that the exclusion of the non-cash interest expense provides investors
an enhanced view of our operational performance related to cash flow and liquidity.
During the three months ended January 31, 2021, we completed the disposition of certain assets of our Aexis business and the disposition of a service business in Canada, which resulted in a pre-tax loss of $391 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, 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 three months ended January 31, 2020, we completed the disposition of a dental product line. This resulted in a pre-tax loss of $170 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
(1)Amounts
were recorded in general and administrative expenses.
(2)For the three months ended January 31, 2021, pre-tax acquisition-related items of $2,501 were recorded in general and administrative expenses. 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.
(3)For the three months ended January 31, 2021, pre-tax restructuring-related items of $729 were recorded in cost of sales and $2,797 were recorded in general and administrative expenses. 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.
(4)Amounts were recorded in interest expense, net.
(5)Amounts were recorded in income taxes.
(dollar amounts in thousands except share and per share data or as otherwise noted) 28
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
During
the six months ended January 31, 2021, we completed the disposition of certain assets of our Aexis business and the disposition of a service business in Canada, which resulted in a pre-tax loss of $142 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, 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, 2020, we completed the disposition of a dental product line. This resulted in a pre-tax loss of $170 recorded
in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
(1)Amounts
were recorded in general and administrative expenses.
(2)For the six months ended January 31, 2021, pre-tax acquisition-related items of $3,041 were recorded in general and administrative expenses. 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.
(3)For the six months ended January 31, 2021, pre-tax restructuring-related items of $2,029 were recorded in cost of sales and $6,479 were recorded in general and administrative expenses. 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.
(4)Amounts were recorded in interest expense, net.
(5)Amounts were recorded in income taxes.
We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment have on net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased intangible assets that reduce net income. Additionally, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a
complement to operating income, net income and other GAAP financial performance measures. We define adjusted EBITDAS as EBITDAS excluding the same non-GAAP adjustments to net income discussed above. We use adjusted EBITDAS when evaluating operating performance because we believe the exclusion of such adjustments, of which a significant portion are non-cash items, is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period.
(dollar amounts in thousands except share and per share data or as otherwise noted) 29
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
The
reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
We define net debt as long-term debt (bank debt excluding unamortized debt issuance costs) plus the convertible debt (excluding unamortized debt issuance costs and unamortized discount), less cash and cash equivalents. Each of the components of net debt appears on our condensed consolidated balance sheets and in our notes to the consolidated financial statements included in Part I, Item 1 of this report. We believe that the presentation of net debt provides useful information to investors because we review net debt as part of our management of our overall liquidity, financial flexibility, capital structure and leverage.
Long-term bank debt (excluding debt issuance costs)
$
820,375
$
945,375
Convertible debt (excluding debt issuance costs and discount)
168,000
168,000
Less cash and cash equivalents
(243,061)
(277,871)
Net
debt
$
745,314
$
835,504
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 dispositions 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, 2021, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our four reportable segments was calculated as follows:
Net Sales
Medical Net Sales
Life
Sciences Net Sales
Dental Net Sales
Dialysis Net Sales
Net sales growth
1.9
%
2.1
%
(7.8)
%
4.3
%
35.6
%
Impact
due to foreign currency translation
(0.8)
%
(2.0)
%
(0.2)
%
—
%
—
%
Organic
sales growth
1.1
%
0.1
%
(8.0)
%
4.3
%
35.6
%
(dollar amounts in thousands except share and per share data or as otherwise noted) 30
Cantel
Medical Corp. 2021 Second Quarter Form 10-Q
For the six months ended January 31, 2021, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our four reportable segments was calculated as follows:
Net Sales
Medical Net Sales
Life
Sciences Net Sales
Dental Net Sales
Dialysis Net Sales
Net sales growth
8.3
%
0.7
%
(7.5)
%
28.6
%
20.9
%
Impact
due to foreign currency translation
(0.8)
%
(1.7)
%
(0.1)
%
—
%
—
%
Sales related to acquisitions/dispositions
(7.8)
%
—
%
—
%
(25.3)
%
—
%
Organic
sales growth
(0.3)
%
(1.0)
%
(7.6)
%
3.3
%
20.9
%
Liquidity and Capital Resources
We assess
our liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions of businesses and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we have supplemented our operating cash flow with borrowings from our revolving credit facility and other financing resources, such as convertible debt, to fund our acquisitions and related business activities.
Cash Flows
Net Cash Provided by Operating Activities.Net cash provided by operating activities increased by $66,219 to $109,752 for the six months ended January 31,
2021 from $43,533 for the six months ended January 31, 2020, primarily due to a reduction in acquisition-related payments, better inventory management and the timing of accounts payable and other accrued expenses. This was partially offset by higher federal income tax payments, the timing of the collection of our outstanding accounts receivables and the initial payment of certain banking and legal fees associated with the recently announced STERIS and Cantel Merger.
Net Cash Used in Investing Activities. Net cash used in investing activities decreased by $688,029 to $17,183 for the six months ended January 31, 2021 from $705,212 for the six months ended January 31, 2020, primarily due to the Hu-Friedy acquisition
in the prior year, and a decrease in capital expenditures, as we have reduced spending associated with certain capital projects in response to the COVID-19 pandemic in order to maximize our liquidity and cash position. We continue to monitor our capital expenditure spending to ensure we maintain flexibility during the remainder of fiscal 2021.
Net Cash Used in Financing Activities.Net cash used in financing activities increased by $802,185 to $127,549 for the six months ended January 31, 2021 from $674,636 of cash provided for the six months ended January 31, 2020, primarily due to repayments of borrowings of our revolving credit facility in the current year. During the six months ended January
31, 2020, we made borrowings of approximately $678,125 to support the Hu-Friedy acquisition.
Second Amendment to Credit Agreement
At January 31, 2021, we had $546,375 of outstanding term loan borrowings and $274,000 of revolver borrowings under the First Amendment to our Fourth Amended and Restated Credit Agreement.
On May 11, 2020, we entered into a Second Amendment (the “Second Amendment”) further amending the Fourth Amended and Restated Credit Agreement (as amended, the “Amended Credit Agreement”). The Second Amendment’s principal changes include (i) increasing the maximum consolidated leverage ratio
covenant for the fiscal quarter ended April 30, 2020 to 5.25x, (ii) suspending such financial maintenance covenant until October 31, 2021, (iii) maintaining a minimum liquidity (as defined in the credit agreement) of at least $50,000 during the fiscal quarter ending July 31, 2020 and $75,000 during each of the following fiscal quarters ending with the fiscal quarter ending July 31, 2021, (iv) requiring us to maintain minimum consolidated EBITDA for each period of four fiscal quarters ending on the last day of the fiscal quarters ending July 31, 2020 through July 31, 2021 and (v) limiting our ability to pay dividends and repurchase shares of our common stock during the period
the consolidated leverage ratio and consolidated interest coverage ratio are suspended.
The interest rates have been amended so that loans under the Amended Credit Agreement, until the third business day following the date on which a compliance certificate is delivered for the fiscal quarter ending October 31, 2021, bear interest at 2.00% above the base rate for base rate borrowings, or at 3.00% above LIBOR for LIBOR-based borrowings, and also provides for fees on the unused portion of the revolving credit facility at a rate of 0.50%. Thereafter, (i) borrowings bear interest at rates ranging from 0.00% to 1.75% above base rate for base rate borrowings, or at rates ranging from 1.00% to 2.75% above LIBOR for LIBOR-based borrowings, depending on our consolidated leverage ratio, which is the consolidated ratio of total funded debt
(dollar
amounts in thousands except share and per share data or as otherwise noted) 31
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
(minus certain unrestricted cash) to consolidated EBITDA. The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates ranging from 0.20% to 0.50%, depending on our consolidated leverage ratio. Interest rates have also been amended to include a 1.00% floor on all borrowings.
The Amended Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries,
(ii) a pledge by Cantel and its U.S.-based subsidiaries that guarantees the obligations under the Credit agreement of all of the outstanding shares of its U.S.-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries.
Interest Rate Swaps
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate
borrowings, in fiscal 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.265%. In March, 2020, we terminated our existing interest rate swaps and entered into a new interest rate swap (the “March 2020 Swap”) with a notional value of $500,000, which fixed interest rates at 1.297% and was set to expire on September 6, 2024. On May 13, 2020, in connection with the Second Amendment to our credit agreement, we terminated the March 2020 Swap and entered into a new interest rate swap (the “May 2020 Swap”) with a notional value of $500,000, which included a LIBOR floor of 1.00%, fixed interest rates at 2.08% and will expire on September 6, 2024.
In
connection with our interest rate swap transactions, we designate our hedge relationships as cash flow hedges. At inception, we employed the hypothetical derivative method to assess hedge effectiveness. At January 31, 2021, we performed a qualitative analysis of hedge effectiveness and will perform such qualitative analysis in future reporting periods. At January 31, 2021, $5,462 was recorded in accrued expenses and $13,149 was recorded in other long-term liabilities, which represents the fair value of the interest rate swap. As of July 31, 2020, $5,462 was recorded in accrued expenses and $15,694 was recorded in other long-term liabilities, which represents the fair value of the interest rate swap.
As these interest rate swaps were accounted
for as cash flow hedges, the changes in fair value were recorded in accumulated other comprehensive loss. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods. As the original forecasted hedged transactions (interest payments on variable rate debt) are still probable to occur, the net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination dates will be amortized to interest expense through the original maturity date of the original swaps. For the six months ended January 31, 2021, we recognized $2,797 in interest expense, net relating to the non-cash amortization of the net loss on the terminated swaps reported in accumulated other comprehensive loss. We expect to recognize approximately $2,687 in interest expense, net for the remainder of fiscal 2021.
Convertible
Senior Notes Offering
On May 15, 2020, we issued $168,000 aggregate principal amount of 3.25% convertible senior notes due 2025 (the “Notes”) in a private placement, including pursuant to the grant to the initial purchasers of $140,000 aggregate principal amount of the Notes, an option to purchase up to an additional $28,000 aggregate principal amount of Notes. The private placement offering closed on May 15, 2020. The net proceeds from this offering were approximately $162,977 (including net proceeds relating to the issuance of the additional Notes), after deducting the initial purchasers’ discount and before the cost of offering expenses. The initial conversion price will be approximately $41.51 per share of common stock and will be subject to adjustment if certain events occur.
We intend to use the net proceeds from this offering for general corporate purposes, which includes applying at least 50% of the amount by which the net proceeds exceed $100,000 to the repayment of debt under our credit facilities as required by the Second Amended Credit Agreement.
We expect our annual cash interest to increase by approximately $5,460 as a result of issuance of the Notes. In addition, diluted earnings per share may be negatively impacted by the Notes because of the dilutive nature of the potential conversion into shares of common stock.
Financing Needs
At January 31, 2021, our total debt (excluding debt issuance costs and unamortized discount) of
$988,375, net of our cash and cash equivalents of $243,061, was $745,314. Stockholders’ equity as of that date was $787,666. Our operating segments generate significant cash from operations. At January 31, 2021, we had a cash balance of $243,061, of which $80,151 was held by foreign subsidiaries. Our foreign cash is needed by our foreign subsidiaries for working capital purposes as well as for current international growth initiatives. Accordingly, our foreign unremitted earnings are considered indefinitely reinvested and unavailable for repatriation. We believe that our current cash position, including the proceeds we received as part of the
(dollar
amounts in thousands except share and per share data or as otherwise noted) 32
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Notes offering in May 2020, and our anticipated cash flows from operations in the upcoming quarters as we recover from the COVID-19 pandemic will be sufficient to satisfy our worldwide cash operating requirements for the foreseeable future based upon our existing operations, particularly given that we historically have not needed to borrow for working capital purposes. In March 2021, we repaid an additional $50,000 of borrowings under our revolving credit facility. At March 10, 2021, approximately $175,551 was available under our Amended Credit Agreement.
Critical
Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 2020 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. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on current expectations, estimates, or forecasts about our businesses,
the industries in which we operate, and the current beliefs and assumptions of management; they do not relate strictly to historical or current facts. Without limiting the foregoing, words or phrases such as “expect,”“anticipate,”“goal,”“project,”“intend,”“plan,”“believe,”“seek,”“may,”“could,”“aspire,” and variations of such words and similar expressions generally identify forward-looking statements. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth, strategic objectives, performance drivers and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that
are difficult to predict, including the impacts of the COVID-19 pandemic on our operations and financial results, general economic conditions, technological and market changes in the medical device industry, our ability to execute on our strategy, risks associated with operating our international business, including limited operating experience and market recognition in new international markets, changes in United States healthcare policy at both the state and federal level, product liability claims resulting from the use of products we sell and distribute, and risks related to our intellectual property and proprietary rights needed to maintain our competitive position. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2020 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.
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 2020 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.
During
the period covered by this Quarterly Report on Form 10-Q, no changes occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.
(dollar amounts in thousands except share and per share data or as otherwise noted) 33
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
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 acquisition, we enhanced
our internal control process to ensure that all financial information related to this acquisition was properly reflected in our consolidated financial statements. As of January 31, 2021, the integration of the internal controls relating to the acquired business has been substantially completed, and the acquired business will be included in our evaluation of the effectiveness of our internal control over financial reporting for fiscal 2021.
Following the acquisition of Hu-Friedy, we also began the process of integrating our legacy U.S. Dental segment operations into the Hu-Friedy SAP operating and financial reporting system, which we expect to complete during fiscal 2021. As the integration 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.
Environmental Matters
Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believes will exceed a specified threshold. Pursuant to recent SEC amendments to this item, we will be using a threshold of $1 million for such proceedings. Applying this threshold, there are no environmental matters to disclose for this period.
Item 1A. Risk Factors
There
have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2020 Annual Report on Form 10-K, except as noted below. The risk factors disclosed in Part I, Item 1A to our 2020 Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition, results of operations or cash flows.
There are risks and uncertainties associated with our planned merger with STERIS. On January 12, 2021, the Company announced its entry into an agreement and plan of merger (the “Merger Agreement”) with STERIS plc, Solar New US Holding Co, LLC and
Crystal Merger Sub 1, LLC. Completion of the proposed transaction is subject to various conditions, including, among others, (i) the adoption of the Merger Agreement by our stockholders; (ii) effectiveness of the registration statement on Form S-4 registering the STERIS ordinary shares to be issued in the transaction (iii) absence of specified adverse laws or orders; (iv) expiration of the waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 and other foreign regulatory approvals; (v) the ordinary shares of STERIS to be issued in the transaction having been approved for listing on the New York Stock Exchange; (vi) the representations and warranties of the other party being true and correct, subject to the materiality standards contained in the Merger Agreement; (vii) material compliance by the other party with its covenants; and (viii) no “material adverse effect” (as defined in the Merger
Agreement) having occurred with respect to the other party since the signing of the Merger Agreement. We cannot provide any assurance that these conditions will be satisfied or waived, or that we will be able to successfully consummate the proposed transaction as provided for under the Merger Agreement in a timely manner, or at all. If the proposed transaction is not completed, our stock price may fall to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, we may be required to pay STERIS a termination fee of $127.4 million if the Merger Agreement is terminated under circumstances specified in the Merger Agreement.
In this regard, we face risks and uncertainties due to the pendency of the proposed transaction as well as the potential failure to consummate the proposed transaction,
including:
•the occurrence of any event, change or other circumstances that could give us or STERIS the right to terminate the Merger Agreement in accordance with its terms;
•any legal proceedings that may be instituted against us, STERIS or our respective directors with respect to the proposed transaction;
34
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
•the risk that we may not obtain the required stockholder approval on the expected schedule or at all;
•the
ability to obtain regulatory approvals and satisfy other closing conditions to the proposed transaction in a timely manner or at all, including the risk that regulatory approvals required for the proposed merger are not obtained or are obtained subject to conditions that are not anticipated;
•the risk that the announcement of the proposed transaction, or failure or delay in completing the transaction, could have adverse effects on the market price of our common stock or STERIS’s ordinary shares or our or STERIS’s respective future business and financial results, and the uncertainty as to the long-term value of the ordinary shares of the combined company following the proposed merger; and
•certain restrictions during the pendency of the proposed transaction that may impact our ability to pursue certain business opportunities or strategic
transactions, and which may discourage other companies from making favorable alternative transaction proposals.
We will also face risks and uncertainties even if we consummate the proposed transaction, including:
•any adverse effects the proposed transaction could have on our ability or the ability of STERIS to retain and hire key personnel or maintain relationships with suppliers and customers, or on our or STERIS’s operating results and businesses generally; and
•difficulties and delays in integrating our business with STERIS’s business or fully realizing any anticipated cost savings or other benefits expected from the proposed transaction.
In addition, we have incurred,
and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs, which may be in excess of what we expected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to common stock purchases we made 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
313
$
48.03
—
—
December
1 - December 31
11,466
$
74.35
—
—
January 1 - January 31
41
$
78.86
—
—
Total
11,820
$
73.67
—
—
We
do not currently have a repurchase program. All shares purchased during the current quarter represent shares surrendered to us to pay employee withholding taxes due upon the vesting of restricted stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item
5. Other Information
None.
(dollar amounts in thousands except share and per share data or as otherwise noted) 35
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Agreement
and Plan of Merger, dated as of January 12, 2021, by and among STERIS plc, Solar New US Holding Co, LLC, Crystal Merger Sub 1, LLC and Cantel Medical Corp.*
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)
________________________________________________
*
Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the U.S. Securities and Exchange Commission a copy of any omitted schedule or exhibit upon request.
(dollar amounts in thousands except share and per share data or as otherwise noted) 36
Cantel Medical Corp. 2021 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.
