Company Quick10K Filing
Quick10K
Cantel Medical
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$67.81 42 $2,830
10-Q 2019-01-31 Quarter: 2019-01-31
10-Q 2018-10-31 Quarter: 2018-10-31
10-K 2018-07-31 Annual: 2018-07-31
10-Q 2018-04-30 Quarter: 2018-04-30
10-Q 2018-01-31 Quarter: 2018-01-31
10-Q 2017-10-31 Quarter: 2017-10-31
10-K 2017-07-31 Annual: 2017-07-31
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-31 Quarter: 2017-01-31
10-Q 2016-10-31 Quarter: 2016-10-31
10-K 2016-07-31 Annual: 2016-07-31
10-Q 2016-04-30 Quarter: 2016-04-30
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-10-31 Quarter: 2015-10-31
10-K 2015-07-31 Annual: 2015-07-31
10-Q 2015-04-30 Quarter: 2015-04-30
10-Q 2015-01-31 Quarter: 2015-01-31
10-Q 2014-10-31 Quarter: 2014-10-31
10-K 2014-07-31 Annual: 2014-07-31
10-Q 2014-04-30 Quarter: 2014-04-30
10-Q 2014-01-31 Quarter: 2014-01-31
8-K 2019-03-29 Officers
8-K 2019-03-22 Regulation FD, Exhibits
8-K 2019-03-08 Enter Agreement, Officers, Other Events, Exhibits
8-K 2018-12-19 Shareholder Vote
8-K 2018-11-29 Earnings, Exhibits
8-K 2018-09-27 Earnings, Exhibits
8-K 2018-06-28 Enter Agreement, Exhibits
8-K 2018-05-31 Earnings, Exhibits
8-K 2018-01-03 Shareholder Vote, Exhibits
FMS Fresenius Medical Care 25,320
FLT FleetCor 21,640
ESS Essex Property Trust 18,290
ABCB Ameris Bancorp 1,710
BABY Natus Medical 844
SWAV ShockWave Medical 816
TCS Container Store 425
CEC CEC Entertainment 0
EOCC Enel Generacion Chile 0
RSRV Reserve Petroleum 0
CMD 2019-01-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 cmd1312019ex311.htm
EX-31.2 cmd1312019ex312.htm
EX-32 cmd1312019ex32.htm

Cantel Medical Earnings 2019-01-31

CMD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cmd131201910q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549
 
Form 10-Q

☒Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the quarterly period ended January 31, 2019.
 
or
 
☐Transition Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the transition period from            to           .
 
Commission file number:   001-31337
 
CANTEL MEDICAL CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
 
22-1760285
(State or other jurisdiction of
 
(I.R.S. employer
incorporation or organization)
 
identification no.)
 
150 Clove Road, Little Falls, New Jersey
 
07424
 
(973) 890-7220
(Address of principal executive offices)
 
(Zip code)
 
(Registrant's telephone number, including area code)
 
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 February 28, 2019: 41,721,300.




Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

TABLE OF CONTENTS

 
 
Page No.
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
 
 
Item 2.
Item 3.
Item 4.
 
PART II – OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Signatures
 




Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
 
January 31, 2019
 
July 31, 2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
71,031

 
$
94,097

Accounts receivable, net of allowance for doubtful accounts of $1,498 and $1,149
127,093

 
118,642

Inventories, net
115,886

 
107,592

Prepaid expenses and other current assets
21,801

 
17,912

Total current assets
335,811

 
338,243

 
 
 
 
Property and equipment, net
164,836

 
111,417

Intangible assets, net
141,548

 
137,361

Goodwill
371,015

 
368,027

Other assets
5,140

 
5,749

Deferred income taxes
3,683

 
2,911

Total assets
$
1,022,033

 
$
963,708

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
35,138

 
$
34,258

Compensation payable
21,681

 
30,595

Accrued expenses
28,132

 
28,525

Deferred revenue
27,136

 
28,614

Current portion of long-term debt
10,000

 
10,000

Income taxes payable
561

 
2,791

Total current liabilities
122,648

 
134,783

 
 
 
 
Long-term debt
227,577

 
187,302

Deferred income taxes
25,301

 
27,624

Other long-term liabilities
4,904

 
5,132

Total liabilities
380,430

 
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 46,307,808 shares and outstanding 41,721,186 shares as of January 31, 2019; issued 46,243,582 shares and outstanding 41,706,084 shares as of July 31, 2018
4,631

 
4,624

Additional paid-in capital
192,202

 
184,212

Retained earnings
526,274

 
491,540

Accumulated other comprehensive loss
(17,096
)
 
(11,456
)
Treasury Stock, at cost; 4,586,622 shares as of January 31, 2019; 4,537,498 shares as of July 31, 2018
(64,408
)
 
(60,053
)
Total stockholders’ equity
641,603

 
608,867

Total liabilities and stockholders’ equity
$
1,022,033

 
$
963,708

See accompanying notes to Condensed Consolidated Financial Statements.


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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

Condensed Consolidated Statements of Income
(Unaudited) 
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net sales
 

 
 

 
 

 
 

Product sales
$
194,013

 
$
186,484

 
$
389,773

 
$
374,449

Product service
30,525

 
26,550

 
60,354

 
51,351

Total net sales
224,538

 
213,034

 
450,127

 
425,800

 
 
 
 
 
 
 
 
Cost of sales
 

 
 

 
 

 
 

Product sales
100,418

 
94,144

 
199,728

 
189,243

Product service
19,445

 
17,655

 
40,475

 
34,663

Total cost of sales
119,863

 
111,799

 
240,203

 
223,906

 
 
 
 
 
 
 
 
Gross profit
104,675

 
101,235

 
209,924

 
201,894

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 
 
 
Selling
33,198

 
30,922

 
67,156

 
62,522

General and administrative
37,358

 
32,188

 
73,893

 
64,284

Research and development
7,923

 
5,643

 
15,001

 
10,972

Total operating expenses
78,479

 
68,753

 
156,050

 
137,778

 
 
 
 
 
 
 
 
Income from operations
26,196

 
32,482

 
53,874

 
64,116

 
 
 
 
 
 
 
 
Interest expense, net
2,207

 
1,135

 
4,233

 
2,324

Other income, net
(1,313
)
 

 
(1,313
)
 
(1,138
)
 
 
 
 
 
 
 
 
Income before income taxes
25,302

 
31,347

 
50,954

 
62,930

 
 
 
 
 
 
 
 
Income taxes
6,502

 
(1,141
)
 
12,912

 
7,513

 
 
 
 
 
 
 
 
Net income
$
18,800

 
$
32,488

 
$
38,042

 
$
55,417

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.45

 
$
0.78

 
$
0.91

 
$
1.33

Diluted
$
0.45

 
$
0.78

 
$
0.91

 
$
1.33

Dividends per common share
$
0.10

 
$
0.09

 
$
0.10

 
$
0.09

 
See accompanying notes to Condensed Consolidated Financial Statements.


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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net income
$
18,800

 
$
32,488

 
$
38,042

 
$
55,417

 
 
 
 
 
 
 
 
Other comprehensive loss (income):
 

 
 

 
 

 
 

Foreign currency translation
(417
)
 
12,379

 
(5,640
)
 
11,146

Total other comprehensive loss (income)
(417
)
 
12,379

 
(5,640
)
 
11,146

 
 
 
 
 
 
 
 
Comprehensive income
$
18,383

 
$
44,867

 
$
32,402

 
$
66,563

See accompanying notes to Condensed Consolidated Financial Statements.




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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Treasury stock,
at cost
 
Total Stockholders’ Equity
 
Number of Shares Outstanding
 
 
 
 
 
 
 
 
 
Amount
 
 
 
 
 
Balance, July 31, 2018
41,706,084

 
$
4,624

 
$
184,212

 
$
491,540

 
$
(11,456
)
 
$
(60,053
)
 
$
608,867

Repurchases of shares
(37,802
)
 

 

 

 

 
(4,288
)
 
(4,288
)
Stock-based compensation

 

 
2,576

 

 

 

 
2,576

Equity vestings/option exercises
53,320

 
7

 
948

 

 

 

 
955

Cancellations of restricted stock
(286
)
 

 

 

 

 

 

Dividends on common stock

 

 

 

 

 

 

Net income

 

 

 
19,242

 

 

 
19,242

Cumulative impact of 606 adoption

 

 

 
865

 

 

 
865

Other

 

 
(634
)
 

 

 

 
(634
)
Other comprehensive loss

 

 

 

 
(5,223
)
 

 
(5,223
)
Balance, October 31, 2018
41,721,316

 
$
4,631

 
$
187,102

 
$
511,647

 
$
(16,679
)
 
$
(64,341
)
 
$
622,360

Repurchases of shares
(880
)
 

 

 

 

 
(67
)
 
(67
)
Stock-based compensation

 

 
3,587

 

 

 

 
3,587

Equity vestings/option exercises
1,857

 

 

 

 

 

 

Cancellations of restricted stock
(1,107
)
 

 

 

 

 

 

Dividends on common stock

 

 

 
(4,173
)
 

 

 
(4,173
)
Net income

 

 

 
18,800

 

 

 
18,800

Other

 

 
1,513

 

 

 

 
1,513

Other comprehensive loss

 

 

 

 
(417
)
 

 
(417
)
Balance, January 31, 2019
41,721,186

 
$
4,631

 
$
192,202

 
$
526,274

 
$
(17,096
)
 
$
(64,408
)
 
$
641,603

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Treasury stock,
at cost
 
Total Stockholders’ Equity
 
Number of Shares Outstanding
 
 
 
 
 
 
 
 
 
Amount
 
 
 
 
 
Balance, July 31, 2017
41,728,934

 
$
4,619

 
$
174,602

 
$
407,590

 
$
(9,900
)
 
$
(52,979
)
 
$
523,932

Repurchases of shares
(52,008
)
 

 

 

 

 
(5,822
)
 
(5,822
)
Stock-based compensation

 

 
1,851

 

 

 

 
1,851

Equity vestings/option exercises
42,168

 
5

 
874

 

 

 

 
879

Cancellations of restricted stock
(1,315
)
 

 

 

 

 

 

Dividends on common stock

 

 

 

 

 

 

Net income

 

 

 
22,929

 

 

 
22,929

Other
88,100

 
10

 
32

 

 

 

 
42

Other comprehensive loss

 

 

 

 
(1,233
)
 

 
(1,233
)
Balance, October 31, 2017
41,805,879

 
$
4,634

 
$
177,359

 
$
430,519

 
$
(11,133
)
 
$
(58,801
)
 
$
542,578

Repurchases of shares
(1,272
)
 

 

 

 

 
(131
)
 
(131
)
Stock-based compensation

 

 
2,739

 

 

 

 
2,739

Equity vestings/option exercises

 

 

 

 

 

 

Cancellations of restricted stock
(1,604
)
 

 

 

 

 

 

Dividends on common stock

 

 

 
(3,545
)
 

 

 
(3,545
)
Net income

 

 

 
32,488

 

 

 
32,488

Other
(88,100
)
 
(10
)
 
(15
)
 

 

 

 
(25
)
Other comprehensive loss

 

 

 

 
12,379

 

 
12,379

Balance, January 31, 2018
41,714,903

 
$
4,624

 
$
180,083

 
$
459,462

 
$
1,246

 
$
(58,932
)
 
$
586,483




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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended January 31,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net income
$
38,042

 
$
55,417

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
9,563

 
8,190

Amortization
10,552

 
8,412

Stock-based compensation expense
6,163

 
4,590

Deferred income taxes
(3,096
)
 
(6,453
)
Other non-cash items, net
(154
)
 
299

Changes in assets and liabilities, net of effects of acquisitions/dispositions:
 

 
 

Accounts receivable
(6,909
)
 
1,145

Inventories
(9,517
)
 
(8,073
)
Prepaid expenses and other assets
(2,980
)
 
(2,139
)
Accounts payable and other liabilities
(10,105
)
 
557

Income taxes
(2,365
)
 
(7,274
)
Net cash provided by operating activities
29,194

 
54,671

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(62,062
)
 
(13,476
)
Proceeds from sale of business
3,053

 

Acquisitions, net of cash acquired
(24,047
)
 
(64,287
)
Net cash used in investing activities
(83,056
)
 
(77,763
)
 
 
 
 
Cash flows from financing activities
 

 
 

Repayments of long-term debt
(5,000
)
 

Borrowings under revolving credit facility
45,000

 
61,300

Repayments under revolving credit facility

 
(27,300
)
Dividends paid
(4,173
)
 
(3,545
)
Purchases of treasury stock
(4,355
)
 
(5,952
)
Net cash provided by financing activities
31,472

 
24,503

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(676
)
 
1,982

 
 
 
 
(Decrease) increase in cash and cash equivalents
(23,066
)
 
3,393

Cash and cash equivalents at beginning of period
94,097

 
36,584

Cash and cash equivalents at end of period
$
71,031

 
$
39,977

 
See accompanying notes to Condensed Consolidated Financial Statements.



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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

Notes to Condensed Consolidated Financial Statements (unaudited).
 
1.    Basis of Presentation
Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.
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 January 31, 2019 through the date of issuance of the accompanying unaudited consolidated interim financial statements.
2.           Accounting Pronouncements
Newly Adopted Accounting Standards
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 and 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 and 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. 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.


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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

Recently Issued Accounting Standards

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

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

In 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 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. The adoption of ASU 2017-12 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,” and in December 2018, the FASB issued ASU 2018-20, “Narrow-Scope Improvements for Lessors.” These ASUs provide narrow 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 $27,190, consisting of $23,971 of cash and $3,219 of stock consideration, plus contingent consideration 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. Omnia will be included in our Dental segment.




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


Cantel Medical Corp.                                 2019 Second 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
 
CES Business(1)
 
Aexis(1)
 
BHT Group(1)
 
 
(Preliminary)
 
(Preliminary)
 
(Final)
Purchase Price:
 
 
 
 
 
 
Cash paid
 
$
17,047

 
$
20,308

 
$
60,216

Fair value of contingent consideration
 

 
1,292

 

Total
 
$
17,047

 
$
21,600

 
$
60,216

 
 
 
 
 
 
 
Allocation:
 
 
 
 
 
 
Property and equipment
 
539

 
130

 
835

Amortizable intangible assets:
 
 
 
 
 
 
Customer relationships
 
8,100

 
1,800

 
12,500

Technology
 

 
4,600

 
6,200

Goodwill
 
6,137

 
17,092

 
40,934

Deferred income taxes
 

 
(1,639
)
 
(5,881
)
Other working capital
 
2,271

 
909

 
5,628

Contingent consideration
 

 
(1,292
)
 

Total
 
$
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) 8
   


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

4.      Stock-Based Compensation
2016 Equity Incentive Plan
 
At January 31, 2019, 275,400 nonvested restricted stock awards were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At January 31, 2019, 815,698 shares were collectively available for issuance pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.
 
2006 Equity Incentive Plan
 
The 2006 Plan was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan. At January 31, 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:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Cost of sales
$
287

 
$
181

 
$
524

 
$
296

Operating expenses:
 

 
 

 
 

 
 

Selling
575

 
264

 
1,146

 
629

General and administrative
2,665

 
2,257

 
4,375

 
3,590

Research and development
60

 
37

 
118

 
75

Total operating expenses
3,300

 
2,558

 
5,639

 
4,294

Stock-based compensation expense
$
3,587

 
$
2,739

 
$
6,163

 
$
4,590

 
At January 31, 2019, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $19,881 with a remaining weighted average period of 19 months over which such expense is expected to be recognized.

We determined the fair value of our market-based restricted stock awards using a Monte Carlo simulation on the date of grant using the following assumptions:
 
Six Months Ended January 31,
 
2019
 
2018
Volatility of common stock
27.54
%
 
26.60
%
Average volatility of peer companies
36.55
%
 
33.72
%
Average correlation coefficient of peer companies
27.18
%
 
32.26
%
Risk-free interest rate
2.93
%
 
1.62
%

A summary of nonvested stock award activity for the six months ended January 31, 2019 follows:
 
 
Number of
Time-based Awards
 
Number of Performance-based Awards
 
Number of Market-based Awards
 
Number of
Total
Awards
 
Weighted Average
Fair Value
July 31, 2018
 
168,320

 
26,076

 
17,710

 
212,106

 
$
88.87

Granted
 
122,478

 
27,231

 
16,765

 
166,474

 
$
91.63

Vested(1)
 
(85,308
)
 
(10,284
)
 

 
(95,592
)
 
$
76.71

Forfeited
 
(6,865
)
 
(723
)
 

 
(7,588
)
 
$
89.13

January 31, 2019
 
198,625

 
42,300

 
34,475

 
275,400

 
$
94.99

_______________________________________________
(1)
The aggregate fair value of all nonvested stock awards which vested was approximately $7,335.



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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

A summary of stock option activity for the six months ended January 31, 2019 follows:
 
Number of shares
 
Weighted Average Exercise Price
 
Weighted Average Contractual Life Remaining (Years)
 
Aggregate Intrinsic Value
Outstanding at July 31, 2018
70,000

 
$
38.60

 
 
 
 
Exercised
(30,000
)
 
$
31.81

 
 
 
 
Outstanding at January 31, 2019
40,000

 
$
43.70

 
1.07
 
$
1,509

Exercisable at January 31, 2019
40,000

 
$
43.70

 
1.07
 
$
1,509

 
During the six months ended January 31, 2019, 5,000 options vested, with an aggregate fair value of approximately $277. During the six months ended January 31, 2019, 30,000 options were exercised, with an aggregate fair value of approximately $1,787. At January 31, 2019, all outstanding options were vested.

Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on stock-based compensation. For the six months ended January 31, 2019, income tax deductions of $3,059 were generated, of which $2,062 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $997 was recorded as a reduction in income tax expense. For the six months ended January 31, 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) 10
   


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

The following table gives information as to the net sales disaggregated by geography and product line:
 
Three Months Ended January 31,
Six Months Ended January 31,
Net sales by geography
2019
 
2018
2019
 
  2018(1)
United States
$
165,164

 
$
157,708

$
334,102

 
$
318,648

Europe/Africa/Middle East
34,319

 
32,498

66,333

 
60,553

Asia/Pacific
15,568

 
12,987

31,320

 
26,849

Canada
8,138

 
8,318

15,509

 
16,796

Latin America/South America
1,349

 
1,523

2,863

 
2,954

Total
$
224,538

 
$
213,034

$
450,127

 
$
425,800

Net sales by product line
 
 
 
 
 
 
Capital equipment
$
57,387

 
$
59,071

$
115,519

 
$
118,240

Consumables
135,731

 
127,413

272,552

 
255,807

Product service
30,525

 
26,550

60,354

 
51,351

All other(2)
895

 

1,702

 
402

Total
$
224,538

 
$
213,034

$
450,127

 
$
425,800

_______________________________________________
(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 January 31, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $67,281, primarily within the Medical segment. We expect to recognize revenue on approximately 65% 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

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 six months ended January 31, 2019 follows:
 
Contract Liabilities
Balance, August 1, 2018
$
29,015

Revenue deferred in current year
31,525

Deferred revenue recognized
(32,444
)
Foreign currency translation
(443
)
Balance, January 31, 2019
27,653

Contract liabilities included in Other long-term liabilities
(517
)
Deferred revenue
$
27,136


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 January 31, 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) 11
   


Cantel Medical Corp.                                 2019 Second 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.

6.    Inventories, Net
 
A summary of inventories is as follows:
 
January 31, 2019
 
July 31, 2018
Raw materials and parts
$
57,812

 
$
49,054

Work-in-process
11,573

 
13,189

Finished goods
55,738

 
53,948

Reserve for excess and obsolete inventory
(9,237
)
 
(8,599
)
Total
$
115,886

 
$
107,592

 
7.    Derivatives
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 seven foreign currency forward contracts with an aggregate notional value of $62,904 and $30,159 at January 31, 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 six months ended January 31, 2019 and 2018, the settlements of our forward contracts resulted in immaterial amounts of currency conversion gains and losses on the hedged items in the aggregate.

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.

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


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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

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:
 
January 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents:
 

 
 

 
 

 
 

Money markets
$
104

 
$

 
$

 
$
104

Total assets
$
104

 
$

 
$

 
$
104

Liabilities:
 

 
 

 
 

 
 

Other long-term liabilities:
 

 
 

 
 

 
 

Contingent consideration

 

 
1,352

 
1,352

Total liabilities
$

 
$

 
$
1,352

 
$
1,352

 
July 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Cash and cash equivalents:
 

 
 

 
 

 
 

Money markets
$
104

 
$

 
$

 
$
104

Total assets
$
104

 
$

 
$

 
$
104

Liabilities:
 

 
 

 
 

 
 

Other long-term liabilities:
 

 
 

 
 

 
 

Contingent obligation

 

 
1,298

 
1,298

Total liabilities
$

 
$

 
$
1,298

 
$
1,298


A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:
 
Aexis Contingent Consideration
Balance, July 31, 2018
$
1,298

Net activity
54

Balance, January 31, 2019
$
1,352

 
Disclosure of Fair Value of Financial Instruments
 
At January 31, 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 January 31, 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 borrowings rates reflect prevailing market interest rates.



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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

9.
Intangibles and Goodwill
 
Our intangible assets consist of the following:
 
January 31, 2019
 
July 31, 2018
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Intangible assets with finite lives:
 

 
 

 
 

 
 
 
 
 
 
Customer relationships(1)
$
135,330

 
$
(46,153
)
 
$
89,177

 
$
133,347

 
$
(45,618
)
 
$
87,729

Technology(1)
58,728

 
(20,144
)
 
38,584

 
54,585

 
(19,836
)
 
34,749

Brand names(1)
6,919

 
(2,944
)
 
3,975

 
8,141

 
(3,857
)
 
4,284

Non-compete agreements(1)
2,880

 
(1,555
)
 
1,325

 
3,060

 
(1,628
)
 
1,432

Patents and other registrations
2,987

 
(1,195
)
 
1,792

 
2,826

 
(1,179
)
 
1,647

 
206,844

 
(71,991
)
 
134,853

 
201,959

 
(72,118
)
 
129,841

Trademarks and tradenames
6,695

 

 
6,695

 
7,520

 

 
7,520

Total intangible assets
$
213,539

 
$
(71,991
)
 
$
141,548

 
$
209,479

 
$
(72,118
)
 
$
137,361

_______________________________________________
(1)
During the six months ended January 31, 2019, we wrote off $10,319 of fully amortized intangible assets.

Amortization expense related to intangible assets was $10,552 and $8,412 for the six months ended January 31, 2019 and 2018, respectively. We expect to recognize an additional $9,611 of amortization expense related to intangible assets for the remainder of fiscal 2019, and thereafter $17,384, $17,077, $16,695, $15,665 and $14,786 of amortization expense for fiscal years 2020, 2021, 2022, 2023 and 2024, respectively.

Goodwill changed during the six months ended January 31, 2019 as follows:
 
Medical
 
Life Sciences
 
Dental
 
Dialysis
 
Total
Goodwill
Balance, July 31, 2018
$
186,690

 
$
58,925

 
$
114,279

 
$
8,133

 
$
368,027

Acquisitions

 
6,137

 

 

 
6,137

Divestitures

 
(495
)
 

 

 
(495
)
Foreign currency translation
(2,562
)
 
(92
)
 

 

 
(2,654
)
Balance, January 31, 2019
$
184,128

 
$
64,475

 
$
114,279

 
$
8,133

 
$
371,015


10.    Financing Arrangements
Our long-term debt consists of the following:

 
January 31, 2019
 
July 31, 2018
Revolving credit loans outstanding
$
45,000

 
$

Tranche A term loan outstanding
195,000

 
200,000

Unamortized debt issuance costs
(2,423
)
 
(2,698
)
Total long-term debt, net of unamortized debt issuance costs
237,577

 
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
$
227,577

 
$
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.



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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

At January 31, 2019, we had $195,000 of term loan A borrowings outstanding and $45,000 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 six months ended January 31, 2019, we made principal payments of $5,000.

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 January 31, 2019, the lender’s base rate was 5.75% and the LIBOR rate was 3.77%. 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 January 31, 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 January 31, 2019. At January 31, 2019, the interest rate on our outstanding borrowings was approximately 3.75%.
 
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 January 31, 2019, $1,352 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 six months ended January 31, 2018.

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.



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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

The following table sets forth the computation of basic and diluted EPS available to stockholders of common stock (excluding participating securities):
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Numerator for basic and diluted earnings per share:
 

 
 

 
 

 
 
Net income
$
18,800

 
$
32,488

 
$
38,042

 
$
55,417

Less income allocated to participating securities
(16
)
 
(107
)
 
(49
)
 
(225
)
Net income available to common shareholders
$
18,784

 
$
32,381

 
$
37,993

 
$
55,192

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
41,667,955

 
41,578,483

 
41,660,095

 
41,549,570

Dilutive effect of stock awards using the treasury stock method and the average market price for the year
18,088

 
55,561

 
41,558

 
60,897

Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
41,686,043

 
41,634,044

 
41,701,653

 
41,610,467

Earnings per share attributable to common stock:
 

 
 

 
 

 
 
Basic earnings per share
$
0.45

 
$
0.78

 
$
0.91

 
$
1.33

Diluted earnings per share
$
0.45

 
$
0.78

 
$
0.91

 
$
1.33

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:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock
41,686,043

 
41,634,044

 
41,701,653

 
41,610,467

Participating securities
33,400

 
138,508

 
55,436

 
172,205

Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities
41,719,443

 
41,772,552

 
41,757,089

 
41,782,672


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


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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

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:
 
Three Months Ended
 
Six Months Ended
Effective Rate, January 31, 2018
(3.6
)%
 
11.9
 %
Deferred tax revaluation
27.5
 %
 
13.7
 %
U.S. federal statutory rate decrease
(5.8
)%
 
(5.8
)%
Prior quarter true-up due to U.S. federal statutory rate decrease
8.2
 %
 
 %
Foreign operations
(1.8
)%
 
1.6
 %
State taxes
0.1
 %
 
0.5
 %
Excess tax benefit
(0.9
)%
 
1.2
 %
Other
2.0
 %
 
2.2
 %
Effective Rate, January 31, 2019
25.7
 %
 
25.3
 %

14.    Accumulated Other Comprehensive Loss
 
The components and changes in accumulated other comprehensive loss were as follows:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
(16,679
)
 
$
(11,133
)
 
$
(11,456
)
 
$
(9,900
)
Other comprehensive (income) loss due to foreign currency translation
(417
)
 
12,379

 
(5,640
)
 
11,146

Ending balance
$
(17,096
)
 
$
1,246

 
$
(17,096
)
 
$
1,246


15.    Reportable Segments
In accordance with ASC Topic 280, “Segment Reporting,” (“ASC 280”), we have determined our reportable business segments based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The primary factors used by us in analyzing segment performance are net sales and income from operations.


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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

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 42.5% and 51.3% of our Life Sciences segment net sales for the six months ended January 31, 2019 and 2018, respectively.

Dental: designs, manufactures, sells, supplies and distributes a broad selection of infection prevention healthcare products, the majority of which are single-use products used by dental practitioners. Three customers collectively accounted for approximately 47.9% and 48.3% of our Dental segment net sales for the six months ended January 31, 2019 and 2018, respectively.

Dialysis: designs, develops, manufactures, sells and services reprocessing systems and sterilants for dialyzers (a device serving as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis. Two customers accounted for approximately 20.6% and 38.7% of our Dialysis segment net sales for the six months ended January 31, 2019 and 2018, respectively. These customers are the same two customers noted above under our Life Sciences segment.
 
None of our customers accounted for 10% or more of our consolidated net sales for the six months ended January 31, 2019 and 2018.

Information as to reportable segments is summarized below:
 
Three Months Ended January 31,
 
Six Months Ended January 31,
Net sales
2019
 
2018
 
2019
 
2018
Medical
$
128,580

 
$
116,665

 
$
256,132

 
$
229,050

Life Sciences
51,869

 
52,337

 
105,214

 
107,107

Dental
35,933

 
36,090

 
72,561

 
73,767

Dialysis
8,156

 
7,942

 
16,220

 
15,876

Total net sales
$
224,538

 
$
213,034

 
$
450,127

 
$
425,800

 
Three Months Ended January 31,
 
Six Months Ended January 31,
Income from operations
2019
 
2018
 
2019
 
2018
Medical
$
25,525

 
$
24,463

 
$
50,736

 
$
44,147

Life Sciences
7,323

 
8,583

 
13,654

 
18,958

Dental
4,888

 
6,558

 
10,813

 
15,233

Dialysis
1,193

 
1,918

 
2,577

 
4,017

 
38,929

 
41,522

 
77,780

 
82,355

General corporate expenses
12,733

 
9,040

 
23,906

 
18,239

Total income from operations
$
26,196

 
$
32,482

 
$
53,874

 
$
64,116


Item 2.    Managements 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.



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


Cantel Medical Corp.                                 2019 Second Quarter Form 10-Q

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.

Second Quarter 2019 Summary

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