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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
CMD
New
York Stock Exchange
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether
the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding as of May 31, 2019: 41,766,952.
Accounts
receivable, net of allowance for doubtful accounts of $1,609 and $1,149
142,504
118,642
Inventories, net
134,193
107,592
Prepaid expenses
and other current assets
23,018
17,912
Income taxes receivable
1,483
—
Total current assets
352,546
338,243
Property
and equipment, net
173,070
111,417
Intangible assets, net
148,075
137,361
Goodwill
378,144
368,027
Other
assets
7,337
5,749
Deferred income taxes
3,621
2,911
Total assets
$
1,062,793
$
963,708
Liabilities
and stockholders’ equity
Current liabilities:
Accounts payable
$
50,537
$
34,258
Compensation
payable
29,665
30,595
Accrued expenses
33,412
28,525
Deferred revenue
26,635
28,614
Current
portion of long-term debt
10,000
10,000
Income taxes payable
819
2,791
Total current liabilities
151,068
134,783
Long-term
debt
223,214
187,302
Deferred income taxes
25,663
27,624
Other long-term liabilities
6,983
5,132
Total
liabilities
406,928
354,841
Commitments and contingencies (Note 11)
Stockholders’
equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued
$
—
$
—
Common
Stock, par value $0.10 per share; authorized 75,000,000 shares; issued 46,356,251 shares and outstanding 41,765,917 shares as of April 30, 2019; issued 46,243,582 shares and outstanding 41,706,084 shares as of July 31, 2018
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation
15,455
12,816
Amortization
15,508
12,892
Stock-based
compensation expense
11,885
7,033
Deferred income taxes
(2,671
)
(7,499
)
Other non-cash items, net
263
586
Changes
in assets and liabilities, net of effects of acquisitions/dispositions:
Accounts receivable
(18,642
)
892
Inventories
(24,671
)
(9,791
)
Prepaid
expenses and other assets
(4,929
)
(7,256
)
Accounts payable and other liabilities
13,608
13,859
Income taxes
(3,537
)
(7,682
)
Net
cash provided by operating activities
48,486
90,003
Cash flows from investing activities
Capital
expenditures
(75,387
)
(23,772
)
Proceeds from sale of business
3,053
—
Acquisitions, net of cash acquired
(40,644
)
(84,595
)
Net
cash used in investing activities
(112,978
)
(108,367
)
Cash flows from financing activities
Repayments
of long-term debt
(12,707
)
—
Borrowings under revolving credit facility
50,000
82,300
Repayments under revolving credit facility
(7,000
)
(39,300
)
Dividends
paid
(4,173
)
(3,546
)
Purchases of treasury stock
(4,628
)
(6,216
)
Net cash provided by financing activities
21,492
33,238
Effect
of exchange rate changes on cash and cash equivalents
251
458
(Decrease) increase in cash and cash equivalents
(42,749
)
15,332
Cash
and cash equivalents at beginning of period
94,097
36,584
Cash and cash equivalents at end of period
$
51,348
$
51,916
See
accompanying notes to Condensed Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise noted) 6
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Notes to Condensed Consolidated Financial Statements (unaudited).
1. Basis of
Presentation
Throughout this document, references to “Cantel,”“us,”“we,”“our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve. This decision resulted in a change from a financial reporting perspective as the industrial biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the
current year presentation. See Note 15, “Reportable Segments.”
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included
in the Annual Report of Cantel Medical Corp. on Form 10-K for the fiscal year ended July 31, 2018 (the “2018 Form 10-K”) and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at July 31, 2018 was derived from the audited Consolidated Balance Sheet of Cantel at that date. Certain prior year amounts have been reclassified to conform to the current year
presentation.
Subsequent Events
We performed a review of events subsequent to April 30, 2019 through the date of issuance of the accompanying unaudited consolidated interim financial statements.
2. Accounting Pronouncements
Newly Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” (“ASU 2017-12”) to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities
in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. We early adopted ASU 2017-12 effective August 1, 2018. The adoption of ASU 2017-12 did not have a material impact on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “(Topic 718) Scope of Modification Accounting,” (“ASU 2017-09”) to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. ASU 2017-09 is effective for fiscal years beginning after December
15, 2017 (our fiscal year 2019), including interim periods within that reporting period. Accordingly, we adopted ASU 2017-09 on August 1, 2018. The adoption of ASU 2017-09 did not have a material impact on our financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “(Topic 230) Classification of Certain Cash Receipts and Cash Payments,” (“ASU 2016-15”). This guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019). Accordingly, we adopted ASU 2016-15 on August
1, 2018. The adoption of ASU 2016-15 did not have a material impact on our financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition” (“ASC 605”). ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract.
(dollar amounts in thousands except share and per share data or as otherwise noted) 7
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
In
August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year to fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2016-12”), which provided narrow scope improvements and practical expedients relating to ASU 2014-09. We adopted the collective standard (“ASC 606”) on August 1, 2018. See
Note 5, “Revenue Recognition” for a discussion of the impact and required disclosures.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”) to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 is effective for fiscal years beginning after December
15, 2019 (our fiscal year 2021), including interim periods within that reporting period. The adoption of ASU 2018-15 is not expected to have a material impact on our financial position, results of operations or cash flows.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”) to modify the disclosure requirements on fair value measurements in ASC 820, “Fair Value Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. The adoption of ASU 2018-13 is not expected to have a material impact
on our financial position, results of operations or cash flows.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) to allow for the reclassification from accumulated other comprehensive income to retained earnings of stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. The adoption of ASU 2018-02 is not expected to have a material impact on our financial position, results of operations or cash flows.
In
January 2017, the FASB issued ASU 2017-04, “(Topic 350) Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”) to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December 31, 2019 (our fiscal year 2021) and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU
2017-04 is not expected to have a material impact on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “(Topic 842) Leases,” (“ASU 2016-02”). The new guidance requires the recording of assets and liabilities arising from leases on the balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 31, 2018 (our fiscal year 2020), including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual period. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,”
and ASU 2018-11, “Leases (Topic 842) Targeted Improvements,” in December 2018, the FASB issued ASU 2018-20, “Narrow-Scope Improvements for Lessors” and in March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements.” These ASUs provide adjustments relating to ASU 2016-02 and improvements to comparative reporting requirements for initial adoption and for separating components of a contract for lessors. We are currently in the process of evaluating the impact of the collective standard (“ASC 842”) on our financial position, results of operations and cash flows.
3.
Acquisitions
Fiscal
2019
Omnia: On February 1, 2019, we purchased all of the issued and outstanding stock of Omnia S.p.A. (“Omnia”), an Italian-based market leader in dental surgical consumables solutions, for total consideration (net of cash acquired), excluding acquisition-related costs, of $19,808, consisting of $16,597 of cash and $3,211 of stock consideration, plus additional earn-outs ranging from zero to a maximum of $5,800, which is payable upon the achievement of certain performance-based financial targets. Omnia’s business consists of a wide-ranging portfolio of sutures, irrigation tubing
and customized dental surgical procedure kits, with a focus on procedure room set-up and cross-contamination prevention, and is included in our Dental segment.
(dollar amounts in thousands except share and per share data or as otherwise noted) 8
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
CES business: On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its controlled environmental solutions business (“CES business”)
for total cash consideration, excluding acquisition-related costs, of $17,047. The CES business is a leading provider of testing and certification, environmental monitoring and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance and quality control, and is included in our Life Sciences segment.
Fiscal 2018
Aexis: On March 21, 2018, we purchased all of the issued and outstanding stock of Aexis Medical BVBA (“Aexis”) for total consideration, excluding acquisition-related costs, of $21,600, consisting of $20,308 of
cash consideration (net of cash acquired), plus contingent consideration ranging from zero to a maximum of $1,850, which is payable upon the achievement of certain purchase order targets through March 21, 2020. Aexis specializes in advanced software solutions focused on the tracking and monitoring of instrument reprocessing for hospitals and healthcare professionals, and is included in our Medical segment.
BHT Group: On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Hygienetechnik Holding GmbH (“BHT Group”), a leader in the German market in automated endoscope reprocessing and related equipment and services for total consideration
(net of cash acquired), excluding acquisition related costs, of $60,216. BHT Group consists of a portfolio of high-quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products globally distributed by our Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central sterile applications, associated technical service and parts as well as flexible endoscope repair services. BHT Group is included in our Medical segment.
The following table presents our purchase price allocations of our material acquisitions:
2019
2018
Purchase
Price Allocation
Omnia
CES Business(1)
Aexis
BHT Group
(Preliminary)
(Preliminary)
(Final)
(Final)
Purchase
Price:
Cash paid
$
16,597
$
17,047
$
20,308
$
60,216
Fair
value of contingent consideration
—
—
1,292
—
Common stock issued
3,211
—
—
—
Total
$
19,808
$
17,047
$
21,600
$
60,216
Allocation:
Property
and equipment
1,285
539
130
835
Amortizable intangible assets:
Customer
relationships
9,259
8,100
1,800
12,500
Technology
1,600
—
4,600
6,200
Brand
names
1,600
—
—
—
Goodwill
9,101
6,137
17,092
40,934
Deferred
income taxes
—
—
(1,639
)
(5,881
)
Other working capital
2,170
2,271
909
5,628
Contingent
consideration
—
—
(1,292
)
—
Long-term debt
(5,207
)
—
—
—
Total
$
19,808
$
17,047
$
21,600
$
60,216
_______________________________________________
(1)
The
excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.
Unaudited Pro Forma Summary of Operations
The acquisitions above, both individually and in the aggregate, were not material to our consolidated results of operations or financial position and, therefore, pro forma financial information is not presented.
(dollar amounts in thousands except share and per share data or as otherwise noted) 9
Cantel
Medical Corp. 2019 Third Quarter Form 10-Q
4. Stock-Based Compensation
2016 Equity Incentive Plan
At April 30, 2019, 281,044 nonvested restricted stock awards were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At April 30, 2019, 793,110 shares were collectively available for issuance pursuant to restricted stock and other stock awards,
stock options and stock appreciation rights.
2006 Equity Incentive Plan
The 2006 Plan was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan. At April 30, 2019, options to purchase 40,000 shares of common stock were outstanding under the 2006 Plan. No additional awards will be granted under this plan.
The following table shows the components of stock-based compensation expense recognized in the condensed consolidated statements of income:
The
increase in stock-based compensation expense primarily relates to the accelerated vesting of awards resulting from organizational leadership changes.
At April 30, 2019, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $15,427 with a remaining weighted average period of 14 months over which such expense is expected to be recognized.
We determined the fair value of our market-based restricted stock awards using a Monte Carlo simulation on the date of grant using the following assumptions:
During the nine
months ended April 30, 2019, 5,000 options vested, with an aggregate fair value of approximately $277. During the nine months ended April 30, 2019, 30,000 options were exercised, with an aggregate fair value of approximately $1,787. At April 30, 2019, all outstanding options were vested.
Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes
is greater than the income tax benefit on stock-based compensation. For the nine months ended April 30, 2019, income tax deductions of $2,465 were generated, of which $1,902 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $563 was recorded as a reduction in income tax expense. For the nine months ended April 30, 2018, income tax deductions of $3,406 were generated, of which $1,394 were
recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $2,012 was recorded as a reduction in income tax expense.
5. Revenue Recognition
Adoption of “Revenue from Contracts with Customers (ASC 606)”
We adopted ASC 606, effective August 1, 2018, using the modified retrospective method applied to those contracts
which were not completed as of August 1, 2018. Results for reporting beginning after August 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC 605.
Due to the cumulative impact of adopting ASC 606, we recorded a net increase of $865 to opening retained earnings, net of tax, as of August 1, 2018. The impact is primarily related to the timing of revenue recognition for the shipment of products in both our Medical and Life Sciences segments where risk of loss provisions are present (“synthetic FOB destination”). The new standard does not require us to defer revenue for
these products and allows us to recognize revenue at the time of shipment. The cumulative adjustment to retained earnings also includes the impact of the change in timing of revenue recognition associated with software licensing arrangements in our Medical segment. Additionally, revenue related to software renewals was historically recognized on a ratable basis over the license period. Under ASC 606, the license is considered functional intellectual property, and is considered to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period. As a result, revenue related to our annual software license renewals has been accelerated.
Revenue Recognition
A portion of our medical, life sciences and dialysis sales include multiple performance obligations,
whereby revenue is allocated to the equipment, installation and consumable components based upon their relative standalone selling prices, which includes comparable historical transactions of similar equipment, installation and consumables sold as stand-alone components. Revenue on capital equipment and consumables is recognized when control of the equipment or consumable transfers to the customer, which is generally driven by the underlying shipping terms of the transaction. Revenue on the installation component is recognized when the installation is complete. The most significant judgments related to these arrangements include identifying the various performance obligations of these arrangements and determining the relative standalone selling price of each performance obligation.
With respect to certain of our customers, rebates are provided. Such rebates, which consist primarily
of volume rebates, are provided for as a reduction of sales at the time of revenue recognition. Such allowances are determined based on estimated projections of sales volume for the entire rebate periods. If it becomes known that sales volume to customers will deviate from original projections, the rebate provisions originally established would be adjusted accordingly. We also offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. We use information available at the time and our historical experience with each customer to estimate the rebate amount by applying the expected value method.
(dollar amounts in thousands except share and per share data or as otherwise noted) 11
Cantel
Medical Corp. 2019 Third Quarter Form 10-Q
The following table gives information as to the net sales disaggregated by geography and product line:
Three Months Ended April 30,
Nine Months
Ended April 30,
Net sales by geography
2019
2018(1)
2019
2018(1)
United States
$
163,367
$
159,375
$
497,469
$
478,024
Europe/Africa/Middle
East
39,949
33,702
106,278
94,254
Asia/Pacific
15,140
14,341
46,476
41,190
Canada
8,555
7,842
24,064
24,638
Latin
America/South America
1,541
2,008
4,392
4,962
Total
$
228,552
$
217,268
$
678,679
$
643,068
Net
sales by product line
Capital equipment
$
51,351
$
58,935
$
166,870
$
177,175
Consumables
144,515
130,155
417,067
385,963
Product
service
31,074
27,407
91,428
78,758
All other(2)
1,612
771
3,314
1,172
Total
$
228,552
$
217,268
$
678,679
$
643,068
_______________________________________________
(1)
As
noted above, prior year amounts have not been adjusted under the modified retrospective method.
(2)
Primarily includes software licensing revenues.
Remaining Performance Obligations
At April 30, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $66,534, primarily within the Medical segment.
We expect to recognize revenue on approximately 60% of these remaining performance obligations over the remainder of fiscal 2019 and fiscal 2020. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.
Contract liabilities primarily relate to payments received from customers in advance of performance under the contract. Our contract
liabilities arise primarily in the Medical and Life Sciences segments when payment is received upfront for various multi-period extended service arrangements. We expect to recognize substantially all of this revenue over the next twelve months.
A summary of contract liabilities activity for the nine months ended April 30, 2019 follows:
Contract liabilities included in Other long-term liabilities
(824
)
Deferred revenue
$
26,635
Practical Expedients and Policy Elections
As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract. Under ASC 606, we have elected to expense these costs as incurred when the period of benefit is less than one year. For certain multi-period contracts, we capitalize these amounts as contract costs, and amortize them based on the contract duration
to which the assets relate, which ranges from two to five years. The amounts at April 30, 2019, were not material. For certain international contracts with distributors, we recognize a receivable at the point in time in which we have an unconditional right to payment. Most customers are required to pay a portion of the transaction price in advance and the remaining balance within 30 days of
(dollar amounts in thousands except share and per share data or as otherwise noted) 12
Cantel
Medical Corp. 2019 Third Quarter Form 10-Q
receiving the related products. Accordingly, we have elected to use the practical expedient which allows us to ignore the possible existence of a significant financing component within these contracts.
As a policy, for shipping and handling costs incurred after the customer has obtained control of a good, we will continue to treat these costs as a fulfillment cost rather than as an additional promised service. Additionally, in certain U.S. states, we are required to collect sales taxes from our customers, and in certain international jurisdictions, we are required to collect value added taxes. The tax collected is recorded as a liability until remitted
to the taxing authority.
In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar and Singapore dollar relative to the U.S. dollar on the conversion of such net assets into the functional currencies, we enter into short-term forward contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars, which contracts are one-month in duration. These short-term contracts are designated as fair value hedge instruments. These foreign currency forward contracts
are continually replaced with new one-month contracts as long as we have significant net assets that are denominated and ultimately settled in currencies other than each entity’s functional currency. Gains and losses related to hedging contracts to buy Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Chinese Renminbi and Sri Lankan Rupee relative to the U.S. dollar because the overall foreign currency exposure relating to these
currencies is not material.
There were six foreign currency forward contracts with an aggregate notional value of $61,447 and $30,159 at April 30, 2019 and July 31, 2018, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the nine months ended April 30, 2019 and 2018,
the settlements of our forward contracts resulted in immaterial amounts of currency conversion gains and losses on the hedged items in the aggregate.
Variable Rate Borrowings
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, on April 9, 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.45%. At April 30,
2019, we had an asset of $751 recorded in other assets, and a liability of $142 recorded in accrued expenses, which represent the fair value of the interest rate swaps. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.
8. Fair Value Measurements
Fair Value Hierarchy
We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and liabilities that are re-measured and reported
at fair value each reporting period and our nonfinancial assets and liabilities that are re-measured and reported at fair value on a non-recurring basis. We define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
(dollar amounts in thousands except share and per share data or as otherwise noted) 13
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Assets and Liabilities Measured and Recorded at
Fair Value on a Recurring Basis
Our financial assets that are re-measured at fair value on a recurring basis include money market funds that are classified as cash and cash equivalents in the consolidated balance sheets. These money market funds are classified within Level 1 of the fair value hierarchy and are valued using quoted market prices for identical assets.
For the Aexis acquisition, additional purchase price payments ranging from zero to $1,850 are contingent upon the achievement of certain purchase order targets through March 21, 2020. We estimated the original fair value of the contingent consideration using the weighted probabilities of the
possible contingent payments. At the date of acquisition, we estimated the original fair value of the contingent consideration to be $1,292. We are required to reassess the fair value of contingent payments on a periodic basis. The significant inputs used in these estimates include numerous possible scenarios for the payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario. Given the short term nature of the financial instrument, the contingent consideration is not discounted to present value. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.
In connection with the Jet Prep Ltd. (“Jet Prep”) acquisition in fiscal 2014, we assumed a contingent obligation payable to the
Israeli Government based on future sales. This fair value measurement was based on significant inputs not observed in the market and thus represent Level 3 measurements. In November 2017, the Israeli Government formally notified us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business. During the first quarter of fiscal 2018, we reduced the fair value of this obligation to zero. See Note 11, “Commitments and Contingencies.”
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) 14
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:
At April 30, 2019 and July 31, 2018, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments. At April 30, 2019 and July 31, 2018, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations as the respective borrowing rates reflect prevailing market interest rates.
During
the nine months ended April 30, 2019, we wrote off $10,127 of fully amortized intangible assets.
Amortization expense related to intangible assets was $15,508 and $12,892 for the nine months ended April 30, 2019 and 2018, respectively. We expect to recognize an additional $5,547 of amortization expense related to intangible assets for the remainder of fiscal 2019,
and thereafter $18,382, $18,051, $17,252, $16,222 and $15,352 of amortization expense for fiscal years 2020, 2021, 2022, 2023 and 2024, respectively.
Goodwill changed during the nine months ended April 30, 2019 as follows:
Total long-term debt, net of unamortized debt issuance costs
233,214
197,302
Current portion of long-term debt
(10,000
)
(10,000
)
Long-term
debt, net of unamortized debt issuance costs and excluding current portion
$
223,214
$
187,302
On June 28, 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”). The 2018 Agreement refinances our credit facility under the Third Amended and Restated Credit Agreement (the “Existing Credit Agreement”)
dated March 4, 2014, to include a $200,000 tranche A term loan and a $400,000 revolving credit facility. Subject to the satisfaction of certain conditions precedent, including the consent of the lenders, we may from time to time increase our borrowing capacity under the revolving credit facility or tranche A term loan by an aggregate amount not to exceed $300,000. The 2018 Credit Agreement expires on June 28, 2023. Additionally, subject to certain restrictions and conditions (i) any of our domestic or foreign subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies.
At
April 30, 2019, we had $192,500 of term loan A borrowings outstanding and $43,000 revolver borrowings under the 2018 Credit Agreement. The tranche A term loan is subject to principal amortization, with $10,000 due and payable in each of fiscal 2019, 2020, 2021 and 2022, with the remaining $160,000 due and payable at maturity on June 28, 2023. During the nine months ended April 30, 2019, we made principal payments of $7,500.
Borrowings
under the 2018 Credit Agreement bear interest at rates ranging from 0.00% to 1.00% above prime rate for base rate borrowings, or at rates ranging from 1.00% to 2.00% above the London Interbank Offered Rate (“LIBOR”), depending upon our “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2018 Credit Agreement (“Consolidated EBITDA”). At April 30, 2019, the lender’s base rate was 5.75% and the LIBOR rate was 3.73%. The margins applicable
to our outstanding borrowings were 0.25% above the lender’s base rate or 1.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at April 30, 2019. The 2018 Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from 0.20% to 0.35%, depending upon our Consolidated Leverage Ratio, which was 0.20% at April 30, 2019. At April 30, 2019,
the interest rate on our outstanding borrowings was approximately 3.74%.
The 2018 Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by Cantel of all of the outstanding shares of its U.S.-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries.
We are in compliance with all financial covenants under the 2018 Credit Agreement.
11. Commitments and Contingencies
Contingent Consideration and Assumed Contingent Liability
At April 30, 2019, $1,374 was recorded related to the Aexis acquisition, which is for the estimated fair value of contingent consideration payable upon the achievement of certain purchase order targets through March 21, 2020. During fiscal 2017, we decided to exit
the Jet Prep business that was acquired in fiscal 2014. At the time of the acquisition, we assumed a contingent obligation payable to the Israeli Government based on future sales. In November 2017, the Israeli Government formally notified us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business. As a result of this formal notification, we reduced the $1,138 contingent obligation to zero during the first quarter of fiscal 2018, resulting in a benefit through other income for the nine months ended April 30, 2018.
(dollar amounts in thousands except share and per share
data or as otherwise noted) 16
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Legal Matters
In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows.
12. Earnings
Per Common Share
Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (nonvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of nonvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates earnings per share for
common stock and participating securities.
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
$
8,175
$
18,736
$
46,217
$
74,153
Less
income allocated to participating securities
(5
)
(59
)
(51
)
(281
)
Net income available to common shareholders
$
8,170
$
18,677
$
46,166
$
73,872
Denominator
for basic and diluted earnings per share, adjusted for participating securities:
Denominator for basic earnings per share - weighted average number of shares outstanding attributable to common stock
41,720,733
41,580,387
41,685,623
41,559,312
Dilutive
effect of stock awards using the treasury stock method and the average market price for the year
38,705
69,134
40,608
63,642
Denominator for
diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
41,759,438
41,649,521
41,726,231
41,622,954
Earnings
per share attributable to common stock:
Basic earnings per share
$
0.20
$
0.45
$
1.11
$
1.78
Diluted
earnings per share
$
0.20
$
0.45
$
1.11
$
1.77
Stock
options excluded from weighted average dilutive common shares because their inclusion would have been anti-dilutive
—
—
—
—
A
reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined above, to our total weighted average number of shares and common stock equivalents, including participating securities, is set forth in the following table:
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
41,759,438
41,649,521
41,726,231
41,622,954
Participating
securities
25,002
133,954
45,485
159,932
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities
41,784,440
41,783,475
41,771,716
41,782,886
(dollar
amounts in thousands except share and per share data or as otherwise noted) 17
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
13. Income Taxes
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act significantly revised U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial
tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income (“GILTI”), (2) the Foreign Derived Intangible Income (“FDII”) deduction, and (3) the Base Erosion Anti-Abuse Tax (“BEAT”), and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses.
ASC 740, “Income Taxes,” requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the 2017 Tax Act’s provisions, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which allows companies to record the tax effects of the 2017 Tax Act
on a provisional basis and then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year from enactment. As a result, we provided a provisional estimate of the effect of the Tax Act for the fiscal year ended July 31, 2018, and recorded a net benefit of $8,657 due to the impact on our deferred taxes on the basis of the actual fiscal 2018 results of operations. The measurement period provided by SAB 118 concluded during the second quarter of fiscal 2019, and no material adjustments were made to the provisional estimates recorded.
As part of U.S. tax reform,
the 2017 Tax Act imposed a one-time transition tax on certain accumulated positive foreign earnings (net of foreign deficits) across all non-U.S. subsidiaries, as computed under U.S. tax principles. As of December 31, 2017, our non-U.S. subsidiaries were in a net foreign deficit position in the aggregate, and therefore no accrual for the transition tax was made.
Section 15 of the Internal Revenue Code (the “Code”) governs rate changes and was not amended by the 2017 Tax Act. Section 15 requires a blended tax rate for fiscal-year taxpayers for their fiscal year that includes the effective date of the rate change, which was January
1, 2018. As a result of the 2017 Tax Act, we revised our estimated annual effective rate to reflect the change in the U.S. federal statutory rate by computing a tentative tax under both rates, and then prorating the tentative tax based on the number of days with and without the rate change to arrive at a blended tax rate of 26.9%, as required by the Code. This blended rate was applied for fiscal 2018 (beginning with the second quarter) and the new U.S. federal statutory rate of 21% applies to fiscal 2019 and beyond.
As noted above, the 2017 Tax Act also establishes new tax laws that will affect the fiscal year ending July 31, 2019, which include the GILTI provision, the FDII deduction, a new minimum tax related to payments to foreign subsidiaries
and affiliates known as BEAT and certain employee expense deductions. The provisional estimates were based on our understanding of the 2017 Tax Act and other information available at the time of the estimates, including assumptions and expectations about future events, such as projected financial performance, and are subject to further refinement as additional information becomes available, including potential new or interpretative guidance issued by the SEC, the FASB, or IRS.
A reconciliation of the consolidated effective income tax rate is as follows:
In accordance with ASC Topic 280, “Segment Reporting,” (“ASC 280”), we have determined our reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by us in analyzing segment performance are net sales and income from operations.
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve. As a result of this change, our industrial biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation.
Our
reportable segments are as follows:
Medical: designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.
Life Sciences: designs, develops, manufactures, sells, and installs water purification systems for medical, pharmaceutical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science markets through a worldwide distributor network. Two customers collectively accounted for approximately 40.9%
and 50.1% of our Life Sciences segment net sales for the nine months ended April 30, 2019 and 2018, respectively.
Dental: designs, manufactures, sells, supplies and distributes a broad selection of infection prevention healthcare products, the majority of which are single-use products used by dental practitioners. Three customers collectively accounted for approximately 45.7% and 47.7% of our Dental segment net sales for the nine
months ended April 30, 2019 and 2018, respectively.
Dialysis: designs, develops, manufactures, sells and services reprocessing systems and sterilants for dialyzers (a device serving as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis. Three customers accounted for approximately 45.6% and 39.0% of our Dialysis segment net sales for the nine months ended April 30, 2019
and 2018, respectively. These customers include one of the top two customers noted above under our Life Sciences segment.
None of our customers accounted for 10% or more of our consolidated net sales for the nine months ended April 30, 2019 and 2018.
Information as to reportable segments is summarized below:
Three
Months Ended April 30,
Nine Months Ended April 30,
Net sales
2019
2018
2019
2018
Medical
$
130,722
$
118,396
$
386,854
$
347,446
Life
Sciences
46,478
54,020
151,692
161,127
Dental
43,628
36,832
116,189
110,599
Dialysis
7,724
8,020
23,944
23,896
Total
net sales
$
228,552
$
217,268
$
678,679
$
643,068
(dollar
amounts in thousands except share and per share data or as otherwise noted) 19
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Three Months Ended April 30,
Nine
Months Ended April 30,
Income from operations
2019
2018
2019
2018
Medical
$
24,302
$
20,515
$
75,038
$
64,662
Life
Sciences
4,842
9,018
18,496
27,976
Dental
4,758
7,025
15,571
22,258
Dialysis
1,151
1,778
3,728
5,795
35,053
38,336
112,833
120,691
General
corporate expenses
20,241
11,269
44,147
29,508
Total income from operations
$
14,812
$
27,067
$
68,686
$
91,183
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.
Third Quarter 2019 Summary
A summary of financial results for the three months ended April 30, 2019 compared with the three months ended April 30, 2018 follows:
•
Net sales increased by 5.2% to $228,552 from $217,268,
with organic net sales growth of 2.7%
•
Net income decreased by 56.4% to $8,175 from $18,736
•
Non-GAAP net income decreased by 7.9% to $22,966 from $24,929
•
Diluted
EPS decreased by 56.4% to $0.20 from $0.45
•
Non-GAAP diluted EPS decreased by 7.5% to $0.55 from $0.60
•
Adjusted EBITDAS decreased by 5.0%
to $41,384 from $43,569
See Non-GAAP Financial Measures below.
Reportable Segment Name Changes
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve. As a result of this change, our industrial biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation.
Acquisitions
On
February 1, 2019, we purchased all of the issued and outstanding stock of Omnia, an Italian-based market leader in dental surgical consumables solutions, for total consideration (net of cash acquired), excluding acquisition-related costs, of $19,808, consisting of $16,597 of cash and $3,211 of stock consideration, plus additional earn-outs ranging from zero to a maximum of $5,800, which is payable upon the achievement of certain performance-based financial targets. Omnia’s business consists of a wide-ranging portfolio of sutures, irrigation tubing and customized dental surgical procedure kits, with a focus on procedure room set-up and cross-contamination prevention, and is included in our Dental
segment.
(dollar amounts in thousands except share and per share data or as otherwise noted) 20
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its controlled environmental solutions business (“CES business”) for total cash consideration, excluding acquisition-related costs, of $17,047. The CES business is a leading provider of testing
and certification, environmental monitoring and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance and quality control, and is included in our Life Sciences segment.
U.S. Tax Reform
The 2017 Tax Act, among other provisions, lowered the applicable U.S. federal statutory income tax rate from 35% to 21% and implemented the imposition of a one-time transition tax on previously deferred foreign earnings. ASC 740 requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted, including the revaluation of deferred income tax assets and liabilities. During the second quarter ended January 31, 2018, we recorded a one-time net benefit of
$8,398 to the income tax provision as a provisional estimate of the net accounting impact of the 2017 Tax Act in accordance with SAB 118. During the third quarter ended April 30, 2018, we reduced the one-time net benefit by $294.
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 April 30,
Percentage Change
Statement of Income Data:
2019
2018
Net sales
$
228,552
100.0
%
$
217,268
100.0
%
5.2
%
Cost
of sales
121,675
53.2
%
112,594
51.8
%
8.1
%
Gross profit
106,877
46.8
%
104,674
48.2
%
2.1
%
Selling
36,077
15.8
%
33,252
15.3
%
8.5
%
General
and administrative
48,634
21.3
%
37,784
17.4
%
28.7
%
Research and development
7,354
3.2
%
6,571
3.0
%
11.9
%
Total
operating expenses
92,065
40.3
%
77,607
35.7
%
18.6
%
Income
from operations
14,812
6.5
%
27,067
12.5
%
(45.3
)%
Interest
expense, net
2,509
1.1
%
1,498
0.7
%
67.5
%
Other income, net
—
—
%
—
—
%
—
%
Income
before income taxes
12,303
5.4
%
25,569
11.8
%
(51.9
)%
Income taxes
4,128
1.8
%
6,833
3.2
%
(39.6
)%
Net
income
$
8,175
3.6
%
$
18,736
8.6
%
(56.4
)%
(dollar
amounts in thousands except share and per share data or as otherwise noted) 21
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Nine Months Ended April 30,
Percentage
Change
Statement of Income Data:
2019
2018
Net sales
$
678,679
100.0
%
$
643,068
100.0
%
5.5
%
Cost
of sales
361,878
53.3
%
336,500
52.3
%
7.5
%
Gross profit
316,801
46.7
%
306,568
47.7
%
3.3
%
Selling
103,233
15.2
%
95,774
14.9
%
7.8
%
General
and administrative
122,527
18.1
%
102,068
15.9
%
20.0
%
Research and development
22,355
3.3
%
17,543
2.7
%
27.4
%
Total
operating expenses
248,115
36.6
%
215,385
33.5
%
15.2
%
Operating
income
68,686
10.1
%
91,183
14.2
%
(24.7
)%
Interest
expense, net
6,742
1.0
%
3,822
0.6
%
76.4
%
Other income, net
(1,313
)
(0.2
)%
(1,138
)
(0.2
)%
—
%
Income
before income taxes
63,257
9.3
%
88,499
13.8
%
(28.5
)%
Income taxes
17,040
2.5
%
14,346
2.3
%
18.8
%
Net
income
$
46,217
6.8
%
$
74,153
11.5
%
(37.7
)%
The
following table gives information as to the net sales by reportable segment and geography, as well as the related percentage of such net sales to the total net sales.
Three Months Ended April 30,
Nine
Months Ended April 30,
Net sales by segment
2019
2018
2019
2018
Medical
$
130,722
57.2
%
$
118,396
54.5
%
$
386,854
57.0
%
$
347,446
54.0
%
Life
Sciences
46,478
20.3
%
54,020
24.9
%
151,692
22.4
%
161,127
25.1
%
Dental
43,628
19.1
%
36,832
17.0
%
116,189
17.1
%
110,599
17.2
%
Dialysis
7,724
3.4
%
8,020
3.6
%
23,944
3.5
%
23,896
3.7
%
Total
net sales
$
228,552
100.0
%
$
217,268
100.0
%
$
678,679
100.0
%
$
643,068
100.0
%
Net
sales by geography
United
States
$
163,367
71.5
%
$
159,375
73.4
%
$
497,469
73.3
%
$
478,024
74.3
%
International
65,185
28.5
%
57,893
26.6
%
181,210
26.7
%
165,044
25.7
%
Total
net sales
$
228,552
100.0
%
$
217,268
100.0
%
$
678,679
100.0
%
$
643,068
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 April 30,
Nine
Months Ended April 30,
Income from operations by segment
2019
2018
2019
2018
Medical
$
24,302
18.6
%
$
20,515
17.3
%
$
75,038
19.4
%
$
64,662
18.6
%
Life
Sciences
4,842
10.4
%
9,018
16.7
%
18,496
12.2
%
27,976
17.4
%
Dental
4,758
10.9
%
7,025
19.1
%
15,571
13.4
%
22,258
20.1
%
Dialysis
1,151
14.9
%
1,778
22.2
%
3,728
15.6
%
5,795
24.3
%
Income
from operations by segment
35,053
15.3
%
38,336
17.6
%
112,833
16.6
%
120,691
18.8
%
General
corporate expenses
20,241
8.8
%
11,269
5.1
%
44,147
6.5
%
29,508
4.6
%
Income
from operations
$
14,812
6.5
%
$
27,067
12.5
%
$
68,686
10.1
%
$
91,183
14.2
%
(dollar
amounts in thousands except share and per share data or as otherwise noted) 22
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Net Sales
Total net sales increased by $11,284 or 5.2%, to $228,552 for the three months ended April 30, 2019 from $217,268 for the three months ended April 30,
2018, which consisted of an increase of 2.7% in organic sales, an increase of 3.8% in net sales due to acquisitions and a decrease of 1.3% due to foreign currency translation. International net sales increased by $7,292 or 12.6%, to $65,185 for the three months ended April 30, 2019 from $57,893 for the three months ended April 30, 2018. The 12.6% increase in international net sales consisted
of 8.3% organic sales growth, a 9.5% increase due to acquisitions (offset by dispositions), and a decrease of 5.2% due to foreign currency translation, resulting from the strengthening of the U.S. dollar.
Total net sales increased by $35,611 or 5.5%, to $678,679 for the nine months ended April 30, 2019 from $643,068 for the nine months ended April 30, 2018, which consisted of an increase of 4.1%
in organic sales, an increase of 2.4% in net sales due to acquisitions and a decrease of 1.0% due to foreign currency translation. International net sales increased by $16,166 or 9.8%, to $181,210 for the nine months ended April 30, 2019 from $165,044 for the nine months ended April 30, 2018. The 9.8% increase in international net sales consisted of 9.2% organic sales growth,
a 4.5% increase due to acquisitions (offset by dispositions), and a decrease of 3.9% due to foreign currency translation, resulting from the strengthening of the U.S. dollar.
Medical. Net sales increased by $12,326 or 10.4%, for the three months ended April 30, 2019 compared with the three months ended April 30, 2018, which consisted of 12.2% organic sales growth, a 0.6% increase due to acquisitions and a decrease of 2.4% due to foreign currency
translation. Net sales increased by $39,408 or 11.3%, for the nine months ended April 30, 2019 compared with the nine months ended April 30, 2018, which consisted of 12.1% organic sales growth, a 0.9% increase due to acquisitions and a decrease of 1.7% due to foreign currency translation. The increases in organic net sales for the three and nine month periods were primarily driven by increased sales of our reprocessing products (across all product lines) and to a
lesser extent, our procedure room products and consumables. The sales growth was primarily driven by our domestic business and also supported by international sales increases, most notably in the Asia/Pacific region.
Life Sciences. Net sales decreased by $7,542 or 14.0% for the three months ended April 30, 2019 compared with the three months ended April 30, 2018, which consisted of 17.6% organic sales decrease and a decrease of 0.3% due to foreign currency translation, partially offset
by a 3.9% increase due to acquisitions (net of divestitures). Net sales decreased by $9,435 or 5.9% for the nine months ended April 30, 2019 compared with the nine months ended April 30, 2018, which consisted of 9.3% organic sales decrease and a decrease of 0.4% due to foreign currency translation, partially offset by a 3.8% increase due to acquisitions (net of divestitures). The decreases in sales for the three and nine
month periods were primarily due to continued softness in demand for capital equipment, primarily in the medical water business, partially offset by acquisition-related growth. We expect this softness in demand to continue through the end of our fiscal year as orders for our hemodialysis water business were down this quarter, as a result of a key customer moving toward a dual source approach and a cyclical downturn in this business. For a more detailed discussion on the competitive threat to our hemodialysis water business, see Part I, Item 1A, Risk Factors, in our 2018 Annual Report on Form 10-K.
Dental. Net sales increased by $6,796 or 18.5%, for the three months ended April 30, 2019
compared with the three months ended April 30, 2018. Net sales increased by $5,590 or 5.1%, for the nine months ended April 30, 2019 compared with the nine months ended April 30, 2018. The increases for the three and nine month periods were primarily driven by acquisition-related growth, partially offset by a decrease in sales to our distributor network due to inventory adjustments within our channel at the start of this fiscal year. Organic sales for the three month period increased by 3.4% as the inventory
adjustments within our distributor network have stabilized.
Dialysis. Net sales decreased by $296 or 3.7%, for the three months ended April 30, 2019 compared with the three months ended April 30, 2018. Net sales increased by $48 or 0.2%, for the nine months ended April 30, 2019 compared with the nine
months ended April 30, 2018. The decreases in sales for the three month period was primarily due to the decrease in reprocessing sales, partially offset by the increase in sales volume for our domestic concentrate. The slight increases in sales for the nine month period was primarily due to the increase in sales volume for our domestic concentrate business, offset by decreases in reprocessing sales and the loss of concentrate business in certain international regions.
Gross Profit
Gross profit increased by $2,203 or 2.1%, to $106,877 for the three months ended
April 30, 2019 from $104,674 for the three months ended April 30, 2018. Gross profit as a percentage of net sales for the three months ended April 30, 2019 and 2018 was 46.8% and 48.2%, respectively. Gross profit increased by $10,233 or 3.3%, to $316,801 for the nine months
ended April 30, 2019 from $306,568 for the nine months ended April 30, 2018. Gross profit as a percentage of net sales for the nine months ended April 30, 2019 and 2018 was 46.7% and 47.7%, respectively. The decreases in gross profit as a percentage of net sales for the three and nine month periods ended April 30,
2019 were due to increased labor costs resulting from livable wage increases, and
(dollar amounts in thousands except share and per share data or as otherwise noted) 23
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
the reclassification of certain compensation and benefit-related costs that had previously been recorded in operating expenses into cost of sales. The reclassification of certain compensation and benefit-related costs negatively impacted gross profit as a percentage of net sales by approximately 0.5% for the three and nine
month periods ended April 30, 2019. Excluding the impact of acquisition-related and restructuring-related items, gross profit as a percentage of net sales for the three months ended April 30, 2019 and 2018, was 47.1% and 48.2%, respectively, and for the nine months ended April 30, 2019 and 2018, was 46.9% and 48.3%,
respectively.
Operating Expenses
Operating expenses as a percentage of net sales for the three months ended April 30, 2019 and 2018 was 40.3% and 35.7%, respectively. Operating expenses as a percentage of net sales for the nine months ended April 30, 2019 and 2018 was 36.6%
and 33.5%, respectively. As stated above, there was a reclassification of certain compensation and benefit-related costs that had previously been recorded in operating expenses into cost of sales, which positively impacted operating expenses as a percentage of net sales by approximately 0.5% for the three and nine month periods ended April 30, 2019.
Selling expenses increased by $2,825 or 8.5%, to $36,077 for the three months ended April 30, 2019 from $33,252
for the three months ended April 30, 2018. Selling expenses increased by $7,459 or 7.8%, to $103,233 for the nine months ended April 30, 2019 from $95,774 for the nine months ended April 30, 2018. The increase was primarily due to selling and marketing expenses of our recent acquisitions, and to a lesser extent higher compensation-related costs. Selling expenses as a percentage of net sales were 15.8%
and 15.3% for the three months ended April 30, 2019 and 2018, respectively. Selling expenses as a percentage of net sales were 15.2% and 14.9% for the nine months ended April 30, 2019 and 2018, respectively.
General and administrative expenses increased by $10,850 or 28.7%,
to $48,634 for the three months ended April 30, 2019 from $37,784 for the three months ended April 30, 2018. General and administrative expenses increased by $20,459 or 20.0%, to $122,527 for the nine months ended April 30, 2019 from $102,068 for the nine months ended April 30,
2018. The increases were primarily due to an increase in ERP implementation costs, an increase of restructuring-related costs resulting from organizational leadership changes, acquisition-related items (such as transaction and integration-related costs), and higher amortization expense as a result of our recent acquisitions. General and administrative expenses as a percentage of net sales were 21.3% and 17.4% for the three months ended April 30, 2019 and 2018, respectively. General and administrative expenses as a percentage of net sales were 18.1% and 15.9% for the nine
months ended April 30, 2019 and 2018, respectively.
Research and development expenses (which include continuing engineering costs) increased by $783 or 11.9%, to $7,354 for the three months ended April 30, 2019 from $6,571 for the three months ended April 30, 2018. Research and development expenses increased by $4,812
or 27.4%, to $22,355 for the nine months ended April 30, 2019 from $17,543 for the nine months ended April 30, 2018. The increase was primarily due to additional product development initiatives primarily in our Medical segment, and to a lesser extent due to increased headcount. Research and development expenses as a percentage of net sales were 3.2% and 3.0% for the three months ended April 30,
2019 and 2018, respectively. Research and development expenses as a percentage of net sales were 3.3% and 2.7% for the nine months ended April 30, 2019 and 2018, respectively.
Income from Operations
Medical. Income from operations increased by $3,787 or 18.5%,
for the three months ended April 30, 2019 compared with the three months ended April 30, 2018. Income from operations increased by $10,376 or 16.0%, for the nine months ended April 30, 2019 compared with the nine months ended April 30, 2018. The increases in the three and nine month periods were primarily due to increased sales volume in the United States and internationally, as further explained above. The increase
was partially offset by elevated ERP implementation costs associated with a third quarter go-live date and restructuring-related charges resulting from organizational leadership changes.
Life Sciences. Income from operations decreased by $4,176 or 46.3%, for the three months ended April 30, 2019 compared with the three months ended April 30, 2018. Income from operations decreased by $9,480 or 33.9%, for the nine months ended April 30,
2019 compared with the nine months ended April 30, 2018. The decreases in the three and nine month periods were primarily due to lower net sales, restructuring-related costs (including the accelerated amortization of certain intangible assets) and an increase in research and development costs. We expect this continued softness in demand to continue in the upcoming quarters as orders for our hemodialysis water business were down this quarter, as a result of a key customer moving toward a dual source approach and a cyclical downturn in this business.
Dental. Income from operations decreased by $2,267 or 32.3%,
for the three months ended April 30, 2019 compared with the three months ended April 30, 2018. Income from operations decreased by $6,687 or 30.0%, for the nine months ended April 30, 2019 compared with the nine months ended April 30, 2018. The decreases in the three and nine month periods were
(dollar
amounts in thousands except share and per share data or as otherwise noted) 24
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
primarily due to reduced gross profit (resulting from livable wage increase, decreased productivity and inflationary pressures) and increased selling and marketing expenses, partially offset by income from operations related to acquisitions.
Dialysis. Income from operations decreased by $627 or 35.3%, for the three months ended April 30,
2019 compared with the three months ended April 30, 2018. Income from operations decreased by $2,067 or 35.7%, for the nine months ended April 30, 2019 compared with the nine months ended April 30, 2018. The decreases in the three and nine month periods were primarily due to the shift to lower margin products and increased selling expenses, partially offset by higher net sales (for the nine month period).
General
Corporate Expenses
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition and integration programs and being a publicly traded company. Such expenses increased by $8,972 or 79.6%, for the three months ended April 30, 2019 from the three months ended April 30, 2018. Such expenses increased by $14,639 or 49.6%, for the nine months ended April 30,
2019 from the nine months ended April 30, 2018. The increases in the three and nine month periods were primarily due to an increase of restructuring-related costs resulting from organizational leadership changes, acquisition-related charges and ERP implementation costs.
Interest Expense, Net
Interest expense, net increased by $1,011 or 67.5%, to $2,509 for the three months ended April 30, 2019
from $1,498 for the three months ended April 30, 2018. Interest expense, net increased by $2,920 or 76.4%, to $6,742 for the nine months ended April 30, 2019 from $3,822 for the nine months ended April 30, 2018. These increases in the three and nine month periods resulted from an increase in the average outstanding borrowings
due to both the term loan and revolver borrowings to support the funding of acquisitions, and to a lesser extent, higher variable interest rates.
Other Income, Net
Other income, net of $1,313 for the nine months ended April 30, 2019 represents the gain on sale of our high purity water business in Canada. Other income, net of $1,138 for the nine months ended April 30, 2018 represents the favorable resolution of the contingent liability associated with the Jet Prep acquisition.
Income
Taxes
The consolidated effective tax rate increased by 6.9% to 33.6% for the three months ended April 30, 2019 from a 26.7% benefit for the three months ended April 30, 2018. The consolidated effective tax rate increased by 10.7% to 26.9% for the nine months ended April 30, 2019 from 16.2%
for the nine months ended April 30, 2018. The increase in the three month period was primarily the result of income mix between domestic and foreign operations, excess tax charges related to share-based compensation, partially offset by the reduction in U.S. federal tax rate. The increase in the nine month period was primarily attributed to the recording of the discrete net tax benefits associated with the estimated impact of our U.S. net deferred tax items as a result of the 2017 Tax Act during fiscal 2018.
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
(dollar amounts in thousands except share and per share data or as otherwise noted) 25
Cantel
Medical Corp. 2019 Third Quarter Form 10-Q
are examples of the types of adjustments that are excluded: (i) amortization of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, (iv) certain significant and discrete tax matters and (v) other significant items management deems irregular or non-operating in nature.
Amortization expense of purchased intangible assets is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduce our net income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations
including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and invest in our continued growth.
Acquisition-related items consist of (i) fair value adjustments to contingent consideration and other contingent liabilities resulting from acquisitions, (ii) due diligence, integration, legal fees and other transaction costs associated with our acquisition program and (iii) acquisition accounting charges for the amortization of the initial fair value adjustments of acquired inventory and deferred revenue. The adjustments of contingent consideration and other contingent liabilities are periodic adjustments to record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the determination of fair value calculations, fair value adjustments may potentially cause significant
earnings volatility that are not representative of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with our acquisition program, including accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since these acquisition-related items are irregular and often mask underlying operating performance, we exclude these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.
Excess tax benefits (expense) resulting from stock compensation are recorded as an adjustment to income tax expense. The magnitude of the impact of excess tax benefits generated
in the future, which may be favorable or unfavorable, are dependent upon our future grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on grant date and the exercise behavior of our stock award holders. Since these tax benefits are largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS to arrive at our non-GAAP financial measures.
During the nine months ended April 30, 2019, we recorded specific discrete tax items associated with our international operations that were unrelated to fiscal 2019. As these items are unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS to arrive at our non-GAAP financial measures.
The
2017 Tax Act significantly revised U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income, (2) the Foreign Derived Intangible Income deduction, and (3) the Base Erosion Anti-Abuse Tax and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses. During the nine months ended April 30, 2018, we recorded a one-time net benefit as a provisional estimate of the net accounting impact of the 2017 Tax Act in accordance with SAB 118. Since the net favorable tax benefit is largely unrelated to our results and unrepresentative of our normal effective tax
rate, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures.
In November 2018, we completed the disposition of our high purity water business in Canada. This resulted in a pre-tax gain of $1,313 through other income, net for the nine months ended April 30, 2019. Since this gain was irregular, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.
In November 2017, the Israeli Government notified us that they would forgive any future amounts due under a contingent obligation payable from a previous acquisition. As a result of this formal notification, we reduced the $1,138 contingent
obligation payable to zero during the nine months ended April 30, 2018, resulting in a gain through other income. Since this gain was irregular, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, primarily related to organizational leadership changes, (iv) an adjustment to the excess tax benefits applicable to stock compensation
and (v) tax matters to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
(dollar amounts in thousands except share and per share data or as otherwise noted) 26
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related
items, (iii) business optimization and restructuring-related charges, (iv) litigation matters, and (v) the reduction of a repatriation tax related to the 2017 Tax Act to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
Amounts
were recorded in general and administrative expenses.
(2)
For the three months ended April 30, 2019, pre-tax acquisition-related items of $47 were recorded in net sales, $394 were recorded in cost of sales and $2,400 were recorded in general and administrative expenses. For the three months ended April 30, 2018, pre-tax acquisition-related items of $953 were recorded in general and administrative expenses.
(3)
For
the three months ended April 30, 2019, pre-tax restructuring-related items of $272 were recorded in cost of sales and $9,840 were recorded in general and administrative expenses. For the three months ended April 30, 2018, pre-tax restructuring-related items of $17 were recorded in cost of sales and $1,466 were recorded in general and administrative expenses.
We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, primarily related to organizational leadership changes, (iv) gain on disposition of business, (v) excess tax benefits applicable to stock compensation, (vi) tax matters and (vii) litigation matters to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
We made adjustments to net income and diluted EPS to exclude
(i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, (iv) excess tax benefits applicable to stock compensation, (v) the net tax benefit associated with the estimated impact of the revaluation of our U.S. net deferred tax liabilities as a result of the 2017 Tax Act, (vi) litigation matters and (vii) the resolution of the contingent liability associated with the Jet Prep acquisition to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.
(dollar amounts in thousands except share and per share data or as otherwise noted) 27
Cantel
Medical Corp. 2019 Third Quarter Form 10-Q
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
Amounts
were recorded in general and administrative expenses.
(2)
For the nine months ended April 30, 2019, pre-tax acquisition-related items of $351 were recorded in net sales, $486 were recorded in cost of sales and $4,960 were recorded in general and administrative expenses. For the nine months ended April 30, 2018, pre-tax acquisition-related items of $893 were recorded in cost of sales and $2,409 were recorded in general and administrative expenses.
(3)
For
the nine months ended April 30, 2019, pre-tax restructuring-related items of $272 were recorded in cost of sales, $12,533 were recorded in general and administrative expenses and $1,313 of expenses were recorded in other income. For the nine months ended April 30, 2018, pre-tax restructuring-related items of $1,164 were recorded in cost of sales and $2,656 were recorded in general and administrative expenses.
(4)
Amounts were recorded in other income, net.
(5)
Amounts
were recorded in income taxes.
We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment have on net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased intangible assets that reduce net income. Additionally, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a complement to income from operations, net income and other GAAP financial performance measures.
We define adjusted EBITDAS as EBITDAS excluding the same non-GAAP adjustments to net income discussed
above. We use adjusted EBITDAS when evaluating operating performance because we believe the exclusion of such adjustments, of which a significant portion are non-cash items, is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period.
(dollar amounts in thousands except share and per share data or as otherwise noted) 28
Cantel Medical Corp. 2019 Third 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 less cash and cash equivalents. Each of the components of net debt appears on our consolidated balance sheets. We believe that the presentation of net debt provides useful information to investors because we review net debt as part of our management of our overall liquidity, financial flexibility, capital structure and leverage.
We define organic sales as net sales less (i) the impact of foreign currency translation, (ii) net sales related to acquired businesses during the first twelve months of ownership and (iii) divestitures during the periods being compared. We believe that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business
and facilitating easier comparisons of our revenue performance with prior periods. We exclude the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because the nature, size, and number of acquisitions and divestitures can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult. The reconciliation of net sales to organic sales can be found elsewhere in this MD&A in “Net Sales.”
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate
cash to fund operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions, dispositions and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we supplement operating cash flow with borrowings from our revolving credit facility to fund our acquisitions and related business activities.
Cash Flows
Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased by $41,517 or 46.1%, to $48,486
for the nine months ended April 30, 2019 from $90,003 for the nine months ended April 30, 2018, primarily due to the decrease in net income, decreased cash collections of outstanding accounts receivable, cash payments associated with restructuring-related activities during the period and an increase in inventory, partially offset by the timing of accounts payable and a reduction
(dollar amounts in thousands except share and per share data or as otherwise noted) 29
Cantel
Medical Corp. 2019 Third Quarter Form 10-Q
in income tax payments. The timing of our enterprise resource planning ERP go-live this quarter impacted our net cash provided by operating activities during the nine month period.
Net Cash Used in Investing Activities. Net cash used in investing activities increased by $4,611 or 4.3%, to $112,978 for the nine months ended April 30, 2019 from $108,367 for the nine
months ended April 30, 2018, primarily due to the increase in capital expenditures (primarily related to the purchase of a new facility in Minnesota and our ERP project), partially offset by a decrease in cash paid for acquisitions and the proceeds from the sale of a business.
Net Cash Provided by Financing Activities. Net cash provided by financing activities decreased by $11,746 or 35.3%, to $21,492 for the nine months ended April 30, 2019 from $33,238
for the nine months ended April 30, 2018, primarily due to a net decrease in borrowings used to support acquisition-related activity, increase in cash withheld for taxes related to the net settlement of equity awards, and an increase in dividend payments.
Debt
At April 30, 2019, we had $192,500 of outstanding term loan borrowings and $43,000 of revolver borrowings under our Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”).
For
further information regarding the 2018 Credit Agreement, including a description of affirmative and negative covenants, see Note 10 to our condensed consolidated financial statements in Part I, Item 1 of this report.
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, on April 9, 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.45%. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.
Financing
Needs
At April 30, 2019, our long-term debt (excluding debt issuance costs) of $235,500, net of our cash and cash equivalents of $51,348, was $184,152. Stockholders’ equity as of that date was $655,865.
Our operating segments generate significant cash from operations. At April 30, 2019, we had a cash balance of $51,348, of which $23,734 was held by foreign subsidiaries.
Our foreign cash is needed by our foreign subsidiaries for working capital purposes as well as for current international growth initiatives. Accordingly, our foreign unremitted earnings are considered indefinitely reinvested and unavailable for repatriation.
We believe that our current cash position, anticipated cash flows from operations and the funds available under our 2018 Credit Agreement will be sufficient to satisfy our worldwide cash operating requirements for the foreseeable future based upon our existing operations, particularly given that we historically have not needed to borrow for working capital purposes. At June 6, 2019, approximately $356,729
was available under our 2018 Credit Agreement.
Critical Accounting Policies
There were no changes to our critical accounting policies from those disclosed in our 2018 Annual Report on Form 10-K.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, or forecasts about our businesses, the industries in which we operate, and the current beliefs and assumptions
of management; they do not relate strictly to historical or current facts. Without limiting the foregoing, words or phrases such as “expect,”“anticipate,”“goal,”“project,”“intend,”“plan,”“believe,”“seek,”“may,”“could” and variations of such words and similar expressions generally identify forward-looking statements. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of
the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2018
(dollar amounts in thousands except share and per share data or as otherwise noted) 30
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Annual Report on Form 10-K, entitled Risk Factors. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based.
For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2018 Annual Report on Form 10-K.
Item 4. Controls
and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer each concluded that the design and operation of these disclosure controls and procedures were effective and designed to ensure that material information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within the time periods specified by the SEC and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
We have evaluated our internal control over financial reporting and determined
that no changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.
On February 1, 2019, we acquired Omnia, on March 21, 2018, we acquired Aexis, and on August 1, 2018, we acquired the CES business, as more fully described in Note 3 to the condensed consolidated financial statements. During the initial transition period following the acquisitions, we enhanced our internal control process to ensure that all financial information related to these acquisitions was properly reflected in our condensed consolidated financial statements. We expect all aspects of the Aexis business and CES business will be fully integrated into our existing
overall internal control structure during fiscal 2019. We expect all aspects of the Omnia business will be fully integrated into our existing overall internal control structure during fiscal 2020.
In 2017, we began the process of implementing a global operating and financial reporting information technology system, SAP S4 Hana (“SAP”), as part of a multi-year plan to integrate and upgrade our systems and processes. The first phase of this implementation became operational in February 2019, at our Medical segment's United States operations, our Medivators B.V. operations and at our corporate headquarters. As the phased implementation of SAP continues, we are experiencing certain changes to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. We believe the necessary steps have been taken to monitor and maintain
appropriate internal control over financial reporting during this period of change and we will continue to evaluate the operating effectiveness of related key controls during subsequent periods. While we expect SAP to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item
1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2018 Annual Report on Form 10‑K. The risk factors disclosed in Part I, Item 1A to our 2018 Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition, or results of operations.
31
Cantel Medical Corp. 2019 Third Quarter Form 10-Q
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
The following table represents information with respect to purchases of common stock made by the Company during the current quarter:
Period
Total number of
shares purchased
Average
price
paid per share
Total number of shares purchased as part of publicly announced plans or programs
Maximum number of shares that may yet be purchased under the program
February 1 - February 28
535
$
83.12
—
—
March
1 - March 31
1,951
$
73.93
—
—
April 1 - April 30
1,226
$
69.01
—
—
Total
3,712
$
73.63
—
—
The
Company does not currently have a repurchase program. All of the shares purchased during the current quarter represent shares surrendered to the Company to pay employee withholding taxes due upon the vesting of restricted stock.
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.
(dollar amounts in thousands except share and per share data or as otherwise noted) 32
Cantel Medical Corp. 2019 Third 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.
