Company Quick10K Filing
Cantel Medical
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 42 $3,630
10-Q 2019-12-10 Quarter: 2019-10-31
10-K 2019-09-25 Annual: 2019-07-31
10-Q 2019-06-06 Quarter: 2019-04-30
10-Q 2019-03-01 Quarter: 2019-01-31
10-Q 2018-11-30 Quarter: 2018-10-31
10-K 2018-09-27 Annual: 2018-07-31
10-Q 2018-06-01 Quarter: 2018-04-30
10-Q 2018-03-08 Quarter: 2018-01-31
10-Q 2017-12-07 Quarter: 2017-10-31
10-K 2017-09-28 Annual: 2017-07-31
10-Q 2017-06-08 Quarter: 2017-04-30
10-Q 2017-03-09 Quarter: 2017-01-31
10-Q 2016-12-08 Quarter: 2016-10-31
10-K 2016-09-29 Annual: 2016-07-31
10-Q 2016-06-09 Quarter: 2016-04-30
10-Q 2016-03-10 Quarter: 2016-01-31
10-Q 2015-12-10 Quarter: 2015-10-31
10-K 2015-09-29 Annual: 2015-07-31
10-Q 2015-06-09 Quarter: 2015-04-30
10-Q 2015-03-12 Quarter: 2015-01-31
10-Q 2014-12-10 Quarter: 2014-10-31
10-K 2014-09-29 Annual: 2014-07-31
10-Q 2014-06-09 Quarter: 2014-04-30
10-Q 2014-03-12 Quarter: 2014-01-31
10-Q 2013-12-10 Quarter: 2013-10-31
10-K 2013-09-30 Annual: 2013-07-31
10-Q 2013-06-10 Quarter: 2013-04-30
10-Q 2013-03-12 Quarter: 2013-01-31
10-Q 2012-12-10 Quarter: 2012-10-31
10-K 2012-10-15 Annual: 2012-07-31
10-Q 2012-06-11 Quarter: 2012-04-30
10-Q 2012-03-12 Quarter: 2012-01-31
10-Q 2011-12-12 Quarter: 2011-10-31
10-K 2011-10-14 Annual: 2011-07-31
10-Q 2011-06-09 Quarter: 2011-04-30
10-Q 2011-03-11 Quarter: 2011-01-31
10-Q 2010-12-10 Quarter: 2010-10-31
10-K 2010-10-14 Annual: 2010-07-31
10-Q 2010-06-09 Quarter: 2010-04-30
10-Q 2010-03-10 Quarter: 2010-01-31
8-K 2020-02-12 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2020-01-09 Regulation FD, Exhibits
8-K 2019-12-18 Shareholder Vote
8-K 2019-12-12 Enter Agreement, Exhibits
8-K 2019-12-10 Earnings, Exhibits
8-K 2019-10-28 Officers
8-K 2019-10-01 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2019-09-23 Earnings, Exhibits
8-K 2019-09-06 Enter Agreement, Exhibits
8-K 2019-07-29 Enter Agreement, Sale of Shares, Regulation FD, Exhibits
8-K 2019-07-09 Officers, Exhibits
8-K 2019-06-04 Exhibits
8-K 2019-05-13 Officers, Other Events, Exhibits
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 2019-02-28 Earnings, 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 2018-03-08 Earnings, Exhibits
8-K 2018-01-03 Shareholder Vote, Exhibits
CMD 2019-10-31
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 cmd10312019ex311.htm
EX-31.2 cmd10312019ex312.htm
EX-32 cmd10312019ex32.htm

Cantel Medical Earnings 2019-10-31

CMD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ICUI 5,345 1,623 305 1,311 508 47 127 5,031 39% 39.5 3%
IART 4,669 3,290 1,869 1,493 930 101 262 5,393 62% 20.6 3%
GMED 4,300 1,391 103 743 573 143 221 4,182 77% 18.9 10%
CMD 3,630 1,070 409 918 427 55 126 3,816 47% 30.3 5%
TNDM 3,601 255 110 282 147 -55 -49 3,470 52% -70.5 -22%
MMSI 3,357 1,736 786 949 423 39 141 3,722 45% 26.4 2%
NUVA 3,283 1,805 1,127 814 52 194 3,765 72% 19.4 3%
GKOS 2,779 302 114 211 182 -12 -7 2,730 87% -384.5 -4%
NVRO 1,957 448 246 379 261 -93 -77 2,049 69% -26.5 -21%
IRTC 1,941 207 159 182 137 -44 -40 1,923 75% -48.5 -21%

Document
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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 October 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
cantellogo10k.jpg 
 Cantel Medical Corp.
(Exact name of registrant as specified in its charter)

Delaware
 
22-1760285
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
150 Clove Road
Little Falls
New Jersey
07424
 
(973)
890-7220
(Address of principal executive offices)
(Zip code)
 
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock
CMD
New York Stock Exchange
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 
 
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
☐ 
Smaller reporting company
Non-accelerated filer
☐ 
Emerging growth company
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 
 
Number of shares of common stock outstanding as of November 30, 2019: 42,576,934.




Cantel Medical Corp.                                 2020 First 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.                                 2020 First Quarter Form 10-Q

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

 
 

Cash and cash equivalents
$
49,285

 
$
44,535

Accounts receivable, net of allowance for doubtful accounts of $2,818 and $2,322
174,931

 
146,910

Inventories, net
200,312

 
138,234

Prepaid expenses and other current assets
25,204

 
22,117

Total current assets
449,732

 
351,796

 
 
 
 
Property and equipment, net
227,940

 
185,242

Right-of-use assets, net
51,604

 

Intangible assets, net
506,877

 
141,513

Goodwill
655,395

 
378,109

Other assets
10,029

 
9,425

Deferred income taxes
4,469

 
4,281

Total assets
$
1,906,046

 
$
1,070,366

Liabilities and stockholders’ equity
 

 
 

Accounts payable
$
40,386

 
$
39,450

Compensation payable
35,727

 
32,762

Accrued expenses
41,113

 
38,545

Deferred revenue
26,980

 
27,840

Current portion of long-term debt
24,500

 
10,000

Income taxes payable
4,939

 
2,803

Current portion of lease liabilities
9,752

 

Total current liabilities
183,397

 
151,400

 
 
 
 
Long-term debt
875,755

 
220,851

Deferred income taxes
30,923

 
29,278

Contingent consideration
35,100

 

Long-term lease liabilities
43,150

 

Other long-term liabilities
5,530

 
7,300

Total liabilities
1,173,855

 
408,829

Commitments and contingencies (Note 12)


 


 
 
 
 
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued

 

Common Stock, par value $0.10 per share; authorized 75,000,000 shares; issued 47,218,113 shares and outstanding 42,576,825 shares as of October 31, 2019; issued 46,362,902 shares and outstanding 41,771,228 shares as of July 31, 2019
4,722

 
4,636

Additional paid-in capital
268,032

 
204,795

Retained earnings
544,864

 
539,097

Accumulated other comprehensive loss
(17,020
)
 
(22,197
)
Treasury Stock; 4,641,288 shares as of October 31, 2019; 4,591,674 shares as of July 31, 2019
(68,407
)
 
(64,794
)
Total stockholders’ equity
732,191

 
661,537

Total liabilities and stockholders’ equity
$
1,906,046

 
$
1,070,366

See accompanying notes to Condensed Consolidated Financial Statements.


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

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

 
 

Product sales
$
225,678

 
$
195,760

Product service
31,568

 
29,829

Total net sales
257,246

 
225,589

 
 
 
 
Cost of sales
 

 
 

Product sales
120,586

 
99,310

Product service
20,791

 
21,030

Total cost of sales
141,377

 
120,340

 
 
 
 
Gross profit
115,869

 
105,249

 
 
 
 
Expenses:
 
 
 
Selling
38,411

 
33,958

General and administrative
55,287

 
36,535

Research and development
7,747

 
7,078

Total operating expenses
101,445

 
77,571

 
 
 
 
Income from operations
14,424

 
27,678

 
 
 
 
Interest expense, net
5,719

 
2,026

 
 
 
 
Income before income taxes
8,705

 
25,652

 
 
 
 
Income taxes
2,938

 
6,410

 
 
 
 
Net income
$
5,767

 
$
19,242

 
 
 
 
Earnings per common share:
 

 
 

Basic
$
0.14

 
$
0.46

Diluted
$
0.14

 
$
0.46

 
 
 
 
Dividends per common share
$

 
$

 
See accompanying notes to Condensed Consolidated Financial Statements.


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended October 31,
 
2019
 
2018
Net income
$
5,767

 
$
19,242

 
 
 
 
Other comprehensive income (loss):
 

 
 

Foreign currency translation
3,932

 
(5,223
)
Interest rate swap, net of tax
1,245

 

Total other comprehensive income (loss):
5,177

 
(5,223
)
 
 
 
 
Comprehensive income
$
10,944

 
$
14,019

See accompanying notes to Condensed Consolidated Financial Statements.


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury stock,
at cost
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
Balance, July 31, 2019
41,771,228

 
$
4,636

 
$
204,795

 
$
539,097

 
$
(22,197
)
 
$
(64,794
)
 
$
661,537

Repurchases of shares
(49,614
)
 

 

 

 

 
(3,613
)
 
(3,613
)
Stock-based compensation

 

 
2,404

 

 

 

 
2,404

Issuance of shares
751,471

 
75

 
59,925

 

 

 

 
60,000

Equity vests/option exercises
104,686

 
11

 
908

 

 

 

 
919

Cancellations of restricted stock
(946
)
 

 

 

 

 

 

Net income

 

 

 
5,767

 

 

 
5,767

Other comprehensive income

 

 

 

 
5,177

 

 
5,177

Balance, October 31, 2019
42,576,825

 
$
4,722

 
$
268,032

 
$
544,864

 
$
(17,020
)
 
$
(68,407
)
 
$
732,191

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury stock,
at cost
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
 
Balance, July 31, 2018
41,706,084

 
$
4,624

 
$
184,212

 
$
491,540

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

Repurchases of shares
(37,802
)
 

 

 

 

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

 

 
2,576

 

 

 

 
2,576

Equity vests/option exercises
53,320

 
7

 
948

 

 

 

 
955

Cancellations of restricted stock
(286
)
 

 

 

 

 

 

Net income

 

 

 
19,242

 

 

 
19,242

Cumulative impact of ASC 606 adoption

 

 

 
865

 

 

 
865

Other

 

 
(634
)
 

 

 

 
(634
)
Other comprehensive loss

 

 

 

 
(5,223
)
 

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

 
$
4,631

 
$
187,102

 
$
511,647

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

See accompanying notes to Condensed Consolidated Financial Statements.




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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

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

 
 

Net income
$
5,767

 
$
19,242

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

 
 

Depreciation
6,338

 
4,691

Amortization
6,029

 
6,041

Stock-based compensation expense
2,404

 
2,576

Amortization of right-of-use assets
2,722

 

Deferred income taxes
1,454

 
(674
)
Inventory step-up amortization
4,772

 

Other non-cash items, net
(548
)
 
1,236

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

 
 

Accounts receivable
(348
)
 
(4,087
)
Inventories
(6,254
)
 
(3,359
)
Prepaid expenses and other assets
1,147

 
1,089

Accounts payable and other liabilities
(13,664
)
 
1,055

Income taxes
1,450

 
4,459

Operating lease liabilities
(2,338
)
 

Net cash provided by operating activities
8,931

 
32,269

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures
(10,390
)
 
(38,834
)
Acquisitions, net of cash acquired
(658,932
)
 
(17,000
)
Net cash used in investing activities
(669,322
)
 
(55,834
)
 
 
 
 
Cash flows from financing activities
 

 
 

Borrowings of long-term debt
400,000

 

Repayments of long-term debt
(2,375
)
 
(2,500
)
Borrowings under revolving credit facility
291,400

 

Repayments under revolving credit facility
(10,900
)
 

Debt issuance costs
(9,234
)
 

Finance lease liabilities
(127
)
 

Purchases of treasury stock
(3,613
)
 
(4,288
)
Net cash provided by (used in) financing activities
665,151

 
(6,788
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(10
)
 
286

 
 
 
 
Increase (decrease) in cash and cash equivalents
4,750

 
(30,067
)
Cash and cash equivalents at beginning of period
44,535

 
94,097

Cash and cash equivalents at end of period
$
49,285

 
$
64,030

 
See accompanying notes to Condensed Consolidated Financial Statements.


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

Notes to Condensed Consolidated Financial Statements (unaudited).
 
1.    Basis of Presentation
Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles for interim financial reporting and the requirements of Form 10-Q and Rule 10.01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by generally accepted accounting principles for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. on Form 10-K for the fiscal year ended July 31, 2019 (the “2019 Form 10-K”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at July 31, 2019 was derived from the audited Consolidated Balance Sheet of Cantel at that date. Certain prior year amounts have been reclassified to conform to the current year presentation.
Subsequent Events
We performed a review of events subsequent to October 31, 2019 through the date of issuance of the accompanying unaudited consolidated interim financial statements.
2.           Accounting Pronouncements
Newly Adopted Accounting Standards
In February 2016, the FASB issued ASU 2016-02, “(Topic 842) Leases,” (“ASU 2016-02”). The new guidance requires the recording of assets and liabilities arising from leases on our condensed consolidated balance sheet accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 31, 2018 (our fiscal year 2020), including interim periods within that reporting period. Early adoption is permitted as of the beginning of an interim or annual period. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11, “Leases (Topic 842) Targeted Improvements,” in December 2018, the FASB issued ASU 2018-20, “Narrow-Scope Improvements for Lessors” and in March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements.” These ASUs provide adjustments relating to ASU 2016-02 and improvements to comparative reporting requirements for initial adoption and for separating components of a contract for lessors. We adopted the collective standard “ASC 842” using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Therefore, results for reporting periods beginning after August 1, 2019 are presented under the new leasing standard; however, the comparative prior period amounts have not been restated and continue to be reported in accordance with historic accounting under ASC Topic 840. The most significant effects of adoption of the new leasing standard relate to the recognition of right-of-use assets of $35,842 and lease liabilities of $36,417 for operating leases, which we recorded on our condensed consolidated balance sheet on August 1, 2019. The new leasing standard did not impact our condensed consolidated statements of income or condensed consolidated statements of cash flows. See Note 6, “Leases” for a discussion of the impact to the condensed consolidated balance sheets and related disclosures.

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


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


Cantel Medical Corp.                                 2020 First 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 January 2017, the FASB issued ASU 2017-04, “(Topic 350) Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”) to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. The guidance will be applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December 31, 2019 (our fiscal year 2021) and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on our financial position, results of operations or cash flows.

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

3.
Acquisitions
 
Fiscal 2020

Hu-Friedy: On October 1, 2019, we purchased all of the issued and outstanding membership interests of Hu-Friedy Mfg. Co. LLC (“Hu-Friedy), for a total consideration (net of cash acquired), excluding acquisition-related costs, of $718,933, consisting of $658,933 of cash and $60,000 of stock consideration, plus contingent consideration, payable in cash, ranging from zero to a maximum of $50,000, which is payable upon the achievement of certain commercial milestones through March 31, 2021. Hu-Friedy is a leading global manufacturer of instruments and instrument reprocessing systems serving the dental industry, and is included in our Dental segment.

Fiscal 2019

Omnia: On February 1, 2019, we purchased all of the issued and outstanding stock of Omnia S.p.A. (“Omnia”), an Italian-based market leader in dental surgical consumables solutions, for total consideration (net of cash acquired), excluding acquisition-related costs, of $19,808, consisting of $16,598 of cash and $3,210 of stock consideration, plus additional earn-outs ranging from 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.

CES business: On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its controlled environmental solutions business (“CES business”) for total cash consideration, excluding acquisition-related costs, of $17,047. The CES business is a leading provider of testing and certification, environmental monitoring and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance and quality control, and is included in our Life Sciences segment.



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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

The following table presents our purchase price allocations of our material acquisitions:
 
 
2020
 
2019
Purchase Price Allocation
 
Hu-Friedy
 
Omnia
 
CES Business(1)
 
 
(Preliminary)
 
(Preliminary)
 
(Final)
Purchase Price:
 
 
 
 
 
 
Cash paid
 
$
658,933

 
$
16,598

 
$
17,047

Fair value of contingent consideration
 
35,100

 

 

Common stock issued
 
60,000

 
3,210

 

Total
 
$
754,033

 
$
19,808

 
$
17,047

 
 
 
 
 
 
 
Allocation:
 
 
 
 
 
 
Property and equipment
 
38,571

 
1,285

 
539

Intangible assets:
 
 
 
 
 
 
Customer relationships
 
226,000

 
10,206

 
8,100

Technology
 
32,000

 
1,257

 

Brand names
 
112,000

 
1,600

 

Goodwill
 
276,483

 
11,340

 
6,137

Deferred income taxes
 

 
(2,346
)
 

Inventories
 
60,596

 

 

Other working capital
 
43,483

 
1,673

 
2,271

Contingent consideration
 
(35,100
)
 

 

Long-term debt
 

 
(5,207
)
 

Total
 
$
754,033

 
$
19,808

 
$
17,047

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

Unaudited Pro Forma Summary of Operations
                          
The following pro forma summary of operations presents our operations as if the Hu-Friedy acquisition had occurred as of the beginning of fiscal 2019. In addition to including the results of operations of this acquisition, the pro forma information gives effect to amortization of the step-up in inventory, depreciation of the step-up in property and equipment, the interest on additional borrowings, the amortization of intangible assets and the issuance of shares of common stock. On an actual basis, the Hu-Friedy acquisition contributed $18,725 to our consolidated net sales for the three months ended October 31, 2019.
 
 
Three Months Ended October 31,
Pro Forma Summary of Operations
 
2019
 
2018
Net sales
 
$
296,454

 
$
279,428

Net income
 
$
952

 
$
19,619

Earnings per common share:
 
 
 
 
Basic
 
$
0.02

 
$
0.46

Diluted
 
$
0.02

 
$
0.46


The pro forma information presented above does not purport to be indicative of the results that actually would have been attained had the Hu-Friedy acquisition occurred as of the beginning of fiscal 2019.



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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

4.      Stock-Based Compensation
2016 Equity Incentive Plan
 
At October 31, 2019, 452,221 nonvested restricted stock awards were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At October 31, 2019, 511,487 shares were collectively available for issuance pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.
 
2006 Equity Incentive Plan
 
The 2006 Plan was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan. At October 31, 2019, options to purchase 15,000 shares of common stock were outstanding under the 2006 Plan. No additional awards will be granted under this plan.

The following table shows the components of stock-based compensation expense recognized in the condensed consolidated statements of income:
 
Three Months Ended October 31,
 
2019
 
2018
Cost of sales
$
260

 
$
237

Operating expenses:
 

 
 

Selling
536

 
571

General and administrative
1,527

 
1,710

Research and development
81

 
58

Total operating expenses
2,144

 
2,339

Stock-based compensation expense
$
2,404

 
$
2,576



At October 31, 2019, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $29,900 with a remaining weighted average period of 21 months over which such expense is expected to be recognized.

We determined the fair value of our market-based restricted stock awards using a Monte Carlo simulation on the date of grant using the following assumptions:
 
Three Months Ended October 31,
 
2019
 
2018
Volatility of common stock
30.73
%
 
27.54
%
Average volatility of peer companies
36.28
%
 
36.55
%
Average correlation coefficient of peer companies
24.63
%
 
27.18
%
Risk-free interest rate
1.49
%
 
2.93
%


A summary of nonvested stock award activity for the three months ended October 31, 2019 follows:
 
 
Number of
Time-based Awards
 
Number of Performance-based Awards
 
Number of Market-based Awards
 
Number of
Total
Awards
 
Weighted Average
Fair Value
July 31, 2019
 
234,864

 
40,210

 
32,079

 
307,153

 
$
88.99

Granted
 
204,206

 

 
47,967

 
252,173

 
$
73.67

Vested(1)
 
(86,937
)
 
(8,475
)
 
(3,462
)
 
(98,874
)
 
$
90.74

Forfeited
 
(8,016
)
 
(215
)
 

 
(8,231
)
 
$
80.25

October 31, 2019
 
344,117

 
31,520

 
76,584

 
452,221

 
$
80.14

_______________________________________________
(1)
The aggregate fair value of all nonvested stock awards which vested was approximately $8,971.


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

A summary of stock option activity for the three months ended October 31, 2019 follows:
 
Number of shares
 
Weighted Average Exercise Price
 
Weighted Average Contractual Life Remaining (Years)
 
Aggregate Intrinsic Value
Outstanding at July 31, 2019
40,000

 
$
43.70

 
 
 
 
Exercised
(25,000
)
 
$
36.70

 
 
 
 
Outstanding at October 31, 2019
15,000

 
$
55.36

 
0.95
 
$
263

Exercisable at October 31, 2019
15,000

 
$
55.36

 
0.95
 
$
263



During the three months ended October 31, 2019, 25,000 options were exercised, with an aggregate fair value of approximately $1,067. At October 31, 2019, all outstanding options were vested.

Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on stock-based compensation. For the three months ended October 31, 2019, income tax deductions of $2,022 were generated, of which $2,581 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $559 was recorded as an increase in income tax expense. For the three months ended October 31, 2018, income tax deductions of $3,059 were generated, of which $2,062 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit of $997 was recorded as a reduction in income tax expense.

5.    Revenue Recognition

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

The following table gives information as to the net sales disaggregated by geography and product line:
 
Three Months Ended October 31,
Net sales by geography
2019
 
2018
United States
$
190,084

 
$
168,938

Europe/Africa/Middle East
41,018

 
32,014

Asia/Pacific
17,065

 
15,752

Canada
7,833

 
7,373

Latin America/South America
1,246

 
1,512

Total
$
257,246

 
$
225,589

Net sales by product line
 
 
 
Capital equipment
$
58,748

 
$
58,132

Consumables
153,279

 
136,821

Product service
31,568

 
29,829

Instrument sales
13,520

 

All other(1)
131

 
807

Total
$
257,246

 
$
225,589

_______________________________________________
(1)
Primarily includes software licensing revenues.



(dollar amounts in thousands except share and per share data or as otherwise noted) 10
   


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

Remaining Performance Obligations

At October 31, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $73,456, primarily within the Medical segment. We expect to recognize revenue on approximately 70% of these remaining performance obligations over the remainder of fiscal 2020 and fiscal 2021. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.

Contract Liabilities

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

A summary of contract liabilities activity follows:
 
Three Months Ended October 31,
 
2019
 
2018
Beginning balance
$
28,235

 
$
29,015

Revenue deferred in current year
2,007

 
14,524

Deferred revenue recognized
(2,982
)
 
(13,547
)
Foreign currency translation
104

 
(163
)
Ending balance
27,364

 
29,829

Contract liabilities included in Other long-term liabilities
(384
)
 
(549
)
Deferred revenue
$
26,980

 
$
29,280



6.    Leases

Adoption of “Leases (ASC 842)”

We adopted ASC 842, effective August 1, 2019, using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Results for reporting beginning after August 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and will continue to be reported in accordance with our historical accounting under ASC 840.

We elected a package of practical expedients that were consequently applied to all leases. We did not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, nor whether previously capitalized initial direct costs would qualify for capitalization under the new standard. Upon transition, we did not elect to use hindsight with respect to lease renewals and purchase options when accounting for existing leases, as well as assessing the impairment of right-of-use assets. Therefore, lease terms largely remained unchanged. In addition, we elected the short-term lease recognition exemption and did not recognize a lease liability and right-of-use asset on our condensed consolidated balance sheet for all leases with terms of 12 months or less. We elected the practical expedient to combine lease and non-lease components in total gross rent for all of our leases which resulted in larger lease liabilities recorded on our condensed consolidated balance sheet.

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

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. At lease commencement, we record a liability for our lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. We use our collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of our leases do not provide an implicit rate that is readily determinable. We do not recognize a lease liability and right-of-use asset on our condensed consolidated balance sheet for any leases with an initial term of 12 months or less. Some real estate leases include one or more options to renew or terminate a lease. The exercise of a lease renewal or termination option is assessed at commencement of the lease and only reflected in the lease term if we are reasonably certain to exercise the option. We have lease agreements that contain both lease and non-lease components, such as common area maintenance fees, and we have made a policy election to


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

combine both fixed lease and non-lease components in total gross rent for all of our leases. Operating lease expense is recognized on a straight-line basis over the respective lease term.

Supplemental balance sheet information related to our leases follows:
Lease Type
 
October 31, 2019
Assets:
 
 
Operating lease assets
 
$
46,718

Finance lease assets
 
4,886

Right-of-use assets, net
 
$
51,604

 
 
 
Liabilities:
 
 
Operating lease liabilities
 
$
9,425

Finance lease liabilities
 
327

Current portion of lease liabilities
 
9,752

 
 
 
Operating lease liabilities
 
38,803

Finance lease liabilities
 
4,347

Long-term lease liabilities
 
43,150

Total lease liabilities
 
$
52,902

 
 
 
Weighted average remaining lease term:
 
 
Operating leases
 
6.64 years

Finance leases
 
6.52 years

Weighted average discount rate:
 
 
Operating leases
 
2.75
%
Finance leases
 
23.67
%


At October 31, 2019, maturities of lease liabilities for the periods set forth below were as follows:
Fiscal year
 
Operating
 
Finance
 
Total
Remaining 2020
 
$
7,997

 
$
1,064

 
$
9,061

2021
 
9,436

 
1,425

 
10,861

2022
 
7,498

 
1,411

 
8,909

2023
 
6,664

 
1,399

 
8,063

2024
 
5,934

 
1,407

 
7,341

Thereafter
 
15,868

 
2,444

 
18,312

Total lease payments
 
53,397

 
9,150

 
62,547

Less: interest
 
(5,169
)
 
(4,476
)
 
(9,645
)
Present value of lease liabilities
 
$
48,228

 
$
4,674

 
$
52,902





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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

As previously disclosed in our 2019 Annual Report on Form 10-K and in accordance with our historical accounting under ASC 840, future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) for the periods set forth below were as follows:
Fiscal year
 
Total
2020
 
$
9,099

2021
 
7,671

2022
 
6,021

2023
 
5,659

2024
 
5,159

Thereafter
 
15,251

Total
 
$
48,860



Supplemental income statement information related to our leases follows:
 
 
Three Months Ended October 31, 2019
Operating lease costs
 
$
2,651

Finance lease costs:
 
 

Amortization of right-of-use assets
 
71

Interest on lease obligations
 
90

Variable lease costs
 
846

Short-term lease costs
 
248

Net lease cost
 
$
3,906


Supplemental cash flow information related to leases follows:
 
 
Three Months Ended October 31, 2019
Right-of-use assets obtained in exchange for lease liabilities:
 


Operating leases(1)
 
$
14,153

Finance leases(2)
 
$
4,798

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

7.    Inventories, Net
 
A summary of inventories, net is as follows:
 
October 31, 2019
 
July 31, 2019
Raw materials and parts
$
71,361

 
$
69,498

Work-in-process
29,244

 
5,801

Finished goods
116,088

 
73,050

Reserve for excess and obsolete inventory
(16,381
)
 
(10,115
)
Total Inventories, net
$
200,312

 
$
138,234



8.    Derivatives
Foreign Currency

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


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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

short-term contracts are designated as fair value hedge instruments. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets that are denominated and ultimately settled in currencies other than each entity’s functional currency. Gains and losses related to hedging contracts to buy foreign currencies forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Japanese Yen and Sri Lankan Rupee relative to the U.S. dollar because the overall foreign currency exposure relating to these currencies is not material.

There were six foreign currency forward contracts with an aggregate notional value of $73,559 and $78,264 at October 31, 2019 and July 31, 2019, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the three months ended October 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.

Variable Rate Borrowings

In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, in fiscal 2019, we entered into 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 October 31, 2019, we had a short-term asset of $1,119 recorded in prepaid expenses and other current assets, and a long-term asset of $3,812 recorded in other assets, which represent the fair value of the interest rate swaps. At July 31, 2019, we had a short-term asset of $486 recorded in prepaid expenses and other current assets, and a long-term asset of $2,826 recorded in other assets. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.

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

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

For the Hu-Friedy acquisition, additional purchase price payments ranging from zero to $50,000 are contingent upon the achievement of certain commercial milestones through March 31, 2021. We estimated the aggregate fair value of the two contingent consideration arrangements to be $35,100 at the date of acquisition, and was reported separately in our condensed consolidated balance sheet. The initial value assigned to the contingent consideration arrangements was determined on the basis of forecasted sales of Hu-Friedy products over the next twelve to eighteen months. The fair value was determined by employing a Monte Carlo simulation in a risk neutral framework, with the underlying simulated variable of net sales and the related achievement of certain gross margin percentages. The model also included assumptions on the market price of risk, which was calculated as the weighted average cost of capital less the long-term risk free-rate. We are required to reassess the fair value of contingent payments on a periodic basis. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

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.



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


Cantel Medical Corp.                                 2020 First Quarter Form 10-Q

The fair values of our financial instruments measured on a recurring basis were categorized as follows:
 
October 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents:
 

 
 

 
 

 
 

Money markets
$
104

 
$

 
$

 
$
104

Prepaid and other current assets:
 
 
 
 
 
 
 
Interest rate swap

 
1,119

 

 
1,119

Other Assets:
 
 
 
 
 
 
 
Interest rate swap

 
3,812

 

 
3,812

Total assets
$
104

 
$
4,931

 
$

 
$
5,035