2015 Annual Report
Dedicated to Infection Prevention and Control
Cantel
is
a
leading
provider
of
infection
prevention
and
control
products
and
services
in
the
healthcare
market,
specializing
in
the
following
operating
segments:
•
Endoscopy: Medical
device
reprocessing
systems,
disinfectants,
detergents
and
other
supplies
used
to
high-‐level
disinfect
flexible
endoscopes
and
disposable
infection
control
products
intended
to
reduce
the
challenges
associated
with
proper
cleaning
and
high-‐level
disinfection
of
numerous
reusable
components
used
in
gastrointestinal
(GI)
endoscopy
procedures.
This
segment
recently
commenced
the
sale
of
endoscope
transport
and
storage
systems,
a
comprehensive
range
of
endoscopy
consumable
accessories,
and
OEM
mobile
medical
carts.
Additionally,
this
segment
includes
technical
maintenance
service
on
its
products.
• Water
Purification
and
Filtration: Water
purification
equipment
and
services,
filtration
and
separation
products,
and
disinfectants,
sterilization
and
decontamination
products
and
services
for
the
medical,
pharmaceutical,
biotech,
beverage
and
commercial
industrial
markets.
• Healthcare
Disposables: Single-‐use,
infection
prevention
and
control
healthcare
products
including
face
masks,
sterilization
pouches,
towels
and
bibs,
tray
covers,
saliva
ejectors,
germicidal
wipes,
plastic
cups
and
disinfectants,
as
well
as
a
filter
system
for
maintaining
safe
dental
unit
waterlines.
This
segment
also
manufactures
and
sells
biological
and
chemical
indicators
for
sterility
assurance
monitoring
services
in
the
acute-‐care,
alternate-‐care
and
dental
markets.
• Dialysis: Medical
device
reprocessing
systems,
sterilants/disinfectants,
dialysate
concentrates
and
other
supplies
for
renal
dialysis.
Selected
Financial
Highlights
(Dollar
amounts
in
thousands,
except
per
share
data)
2015
2014
2013
Net
sales
Net
income
1
Adjusted
net
income
1
Adjusted
EBITDAS
$
565,004
$
488,749
$
425,026
$
47,953
$
43,265
$
39,239
$
60,039
$
51,384
$
45,358
$
113,811
$
97,463
$
83,697
Diluted
earnings
per
common
share
$
1.15
$
1.04
$
0.95
Adjusted
diluted
earnings
per
common
share
1
$
1.44
$
1.24
$
1.10
Dividends
per
common
share
$
0.10
$
0.09
$
0.07
Total
assets
1
Net
debt
$
584,031
$
536,145
$
487,671
$
46,780
$
48,719
$
60,924
Stockholders'
equity
$
406,633
$
365,246
$
321,132
Equity
per
outstanding
share
$
9.77
$
8.81
$
7.81
1
Please
see
page
113
of
this
Annual
Report
for
a
reconciliation
to
the
most
directly
comparable
financial
measure
in
accordance
with
accounting
principles
generally
accepted
in
the
United
States
(“GAAP”)
as
well
as
the
definitions
of
our
non-‐GAAP
financial
measures.
To Our Shareholders:
Fiscal 2015 was another outstanding year for Cantel Medical and its shareholders. More importantly, our future growth
opportunities have never been more positive given our differentiated and expanding product offering and unique focus on
the growing global infection prevention and control markets. Our businesses are delivering record financial performance,
while the market potential for our products and services continues to expand. In addition, we added strategic acquisitions
in all three of our major segments and expanded our international presence.
Healthcare providers throughout the world are steadily recognizing that better awareness and prevention of healthcare
associated infections (HAIs) not only saves lives, but ultimately saves money and drives greater efficiencies in the healthcare
system. It takes unique expertise, commitment, skills and the right products to do this correctly, and growing numbers of
providers are devoting additional resources to this important area. Cantel Medical develops novel solutions that address
these critical issues as we believe infection prevention and control markets will continue to exhibit strong growth in the
coming years. As Cantel Medical exceeded half a billion dollars in annual sales in fiscal 2015, we are one of the largest
companies solely dedicated to these markets and customers, and we are thriving in a worldwide market approximately
eighty times our size.
In fiscal 2015, we generated revenue of $565,004,000, a 16% increase over the prior year’s revenue of $488,749,000.
Adjusted net income for the year of $60,039,000, or $1.44 per diluted share, grew 17% over the previous year’s adjusted
net income of $51,384,000, or $1.24 per diluted share. At July 31, 2015, we had cash and cash equivalents of $31,720,000,
gross debt of $78,500,000 and stockholders’ equity of $406,633,000. Despite borrowing $47 million to fund acquisitions
during the fiscal year, our net debt position at year-end declined by $2 million to approximately $47 million driven by our
strong cash flow. Adjusted earnings before interest, taxes, depreciation, amortization and stock-based compensation
(EBITDAS) increased by 17% to nearly $114 million in fiscal 2015.
While there is comprehensive detail cited in this Annual Report and on our website, we want to draw your attention to the
most significant events occurring in fiscal 2015 and their positive impact on our future.
Highlights
Fiscal 2015 was by nearly all standards the best year in the Company’s history. We achieved record financial performance
and solid growth in each of our three largest segments: Endoscopy, Water Purification and Filtration, and Healthcare
Disposables.
In Endoscopy, our largest segment, sales grew by 31% to nearly $250 million. Organic sales growth was 16% for the year.
Operating profit increased 20% which was good performance given the significant investments needed to grow and
integrate recent acquisitions in the UK and Italy, to expand our international presence in major markets in Europe and Asia,
and to strengthen our United States sales and service teams. During the year, even excluding our recent acquisitions, we
continued to expand our installed base of capital equipment - primarily from the success of our two leading automated
endoscope reprocessors (AERs), the MEDIVATORS® ADVANTAGE PLUS® and the MEDIVATORS® DSD EDGE® Endoscope
Reprocessors. These machines offer our valued customers not only best in class solutions to mitigate infection control risk,
but also feature our highly effective proprietary, single-use chemistry, RAPICIDE® PA High-Level Disinfectant, which provides
Cantel Medical with a strong recurring revenue stream. In fact, in fiscal 2015, sales of our liquid chemical germicides and
detergents in our legacy business grew by 19%. We also achieved 17% growth in our procedure room products category,
while our Endoscopy service and parts grew by 11%.
By far the fastest growing market for our Endoscopy business was in the United States, where we continued investing in our
specialized direct Endoscopy field sales and service organization. Our 200 plus dedicated sales and service team members
1
provide a unique competitive advantage for us as we promote our growing full circle of infection prevention and control
product offering in the gastrointestinal department.
ln fiscal 2015, we acquired International Medical Service S.r.l. (IMS), now Cantel Medical (Italy) S.r.l. This acquisition added
an Italy-based manufacturer of high level disinfectants, chemistries and AERs to our European footprint. This operation has
been well integrated during the fiscal year and has added significant strategic capabilities to grow our Endoscopy business
internationally, as well as enhance our go-direct strategies in Europe.
We successfully integrated the operations of PuriCore International Ltd., now Cantel Medical (UK) Limited, acquired in July
2014. A leading provider of AER equipment, chemistries and consumables in the UK with a well-established customer base
in the UK market, this transaction added a new state-of-the-art pass-through AER platform to our product portfolio. This
pass-through product is critical to our continued success in the UK and Europe. On a further positive note, we were pleased
to announce the acquisition of UK-based Medical Innovations Group Holdings Limited in September 2015. Medical
Innovations is a leading global provider of endoscope storage and transport systems and further strengthens both our
international presence and our global position as the premier full service provider of infection prevention and control
solutions and systems in the global gastrointestinal endoscopy market. The combination of Cantel Medical (UK) and Medical
Innovations provides a strong UK-based Endoscopy platform with high level design, manufacturing and sales capabilities and
growth opportunities in the UK, France, Germany and other markets in Europe, Asia and the United States.
In our Water Purification and Filtration segment, a key highlight in fiscal 2015 was the continued strong demand for dialysis
clinic water purification systems for the fourth consecutive year. Overall sales of $174 million increased 9% for the year of
which 7% was organic. Operating profit grew by 19% benefiting from increased shipments of equipment, higher sales of
consumables, operating leverage, sourcing savings, and very tight expense control.
While sales were strong in all product categories in the Water Purification and Filtration segment, the majority of the growth
came from shipments of our higher technology heat-based disinfection central and portable water purification systems.
Cantel Medical is leading this important technological evolution in the dialysis industry. The heat-sanitization feature
automatically improves disinfection efficacy, consistency and safety, while reducing operating and maintenance costs for
the customer. Additionally, this more advanced equipment has higher selling prices than the manually chemical disinfected
systems they replace. These systems have been well adopted and now account for more than 75% of our water purification
equipment orders and shipments as our customers recognize the performance benefits and cost savings provided by these
new products. The drivers of sustainable growth in this segment are the continued market adoption of our higher
technology platform and dialysis center upgrades and new construction. This segment has the potential to benefit from
acceleration in the replacement of the aged equipment in many of the 6,300 dialysis clinics in the United States, the vast
majority of which continue to use legacy technology.
In the Water Purification and Filtration segment’s important Biosciences Products area, which includes Cantel Medical’s
filters and chemistry products, sales have grown by double digits. We had good growth in clean room sterilants and water
disinfection chemistries. We are also optimistic about the future opportunities with our unique hollow fiber filters, as well
as our novel new REVOX® Sterilization Solutions technology. Cantel Medical continues to invest in these product areas in
sales, marketing and R&D.
Another source of expansion in the Water Purification and Filtration segment is acquisitions. In January 2015, we announced
the acquisition of Pure Water Solutions, Inc. With eight regional offices in the southeastern United States and with 80% of
sales being non-dialysis, this acquisition enhanced our service footprint and added diversification to our service portfolio.
In our Healthcare Disposables segment, fiscal 2015 revenue of $107 million represented a 5% increase from fiscal 2014, of
which 4% was organic. Revenue growth was driven by strong shipments of face masks, sterility assurance products, and our
2
new RAPICIDE® OPA/28 High-Level Disinfectant. Operating profit grew by 6% as gross margins improved due to operating
efficiencies and favorable mix of higher margin products such as face masks, partially offset by significant increases in sales
and marketing investments.
The sterility assurance business had solid growth and is now our largest product category in this segment. These products
also expanded our presence in hospital, alternate channel and international markets. Additionally, we restructured and
significantly expanded our United States sales and marketing team to drive continued growth in the dental market. This
restructuring included adding incremental resources, launching new products and taking several new approaches to various
customer segments. We also acquired the DentaPure® Dental Waterline Purification Cartridge System in the third quarter.
The acquired product line enhances our leadership position in infection prevention and control in the dental market and
provides promising global growth potential.
As we look to fiscal 2016 and beyond, we see numerous growth prospects in this business. These include the global
opportunity in waterline disinfection, and our expanding sterilization accessories business which is also increasing our
presence in hospital and alternative care markets. Additionally, we see growth potential in international markets for both
our core Crosstex branded products, as well as the sterility assurance product portfolio. Another category for growth is with
RAPICIDE® OPA/28 High-Level Disinfectant, which is Cantel Medical’s third reprocessing chemistry and our first chemistry
that can be used in the large market for manual soaking of instruments for disinfection. The sales effort on this product is
being led by our hospital distribution and alternate channel team, while being supported by our much larger Endoscopy
sales team. We were encouraged by the sales growth of this product in fiscal 2015 and we see good potential for further
growth in the United States and abroad.
In fiscal 2015, Craig Sheldon retired as Cantel Medical’s Chief Financial Officer after more than 20 years of service to the
Company. We extend our great thanks and appreciation to him. We are very pleased that in June 2015, Peter Clifford joined
Cantel Medical as our new Executive Vice President and Chief Financial Officer. Peter brings over 20 years of senior finance
and accounting experience in the manufacturing and industrial space with General Electric and most recently with IDEX
Corporation. His experience at IDEX, as it grew from $800 million to $2 billion, will be invaluable to Cantel Medical as we
expand our international footprint and continue to execute on the Company’s active acquisition program. Peter is an expert
not only in finance and accounting, but also has an extensive background in leading and building global teams, M&A and
related integrations, international business and information technology.
As Cantel Medical continues its global expansion and rapid growth it became clear that we needed to recruit experienced
management at the most senior level to help lead our Endoscopy segment and our international growth. During the fourth
quarter, we were pleased to appoint Dave Hemink as President of Medivators Endoscopy. Dave has previously worked for
C.R. Bard and Boston Scientific at the divisional President level. We were also pleased to appoint David Rosen as Cantel
Medical’s President, Asia/Pacific and Emerging Markets. David most recently was President of Getinge’s Asia/Pacific
Infection and Control business based in Hong Kong. We also promoted an internal executive, Michael Spicer, who as our
SVP Sales and Service for Medivators Endoscopy successfully led the rapid growth of our United States endoscopy business
over the past 2 years. Mike, who has held senior commercial positions at Smith and Nephew and Boston Scientific, will now
have an expanded role as Cantel Medical’s President, Americas Sales and Global Service. We are extremely fortunate to be
able to attract such top industry talent to the Company.
This year we were pleased that Dr. Laura Forese joined the Cantel Medical Board of Directors. Dr. Forese serves as Executive
Vice President and Chief Operating Officer of NewYork-Presbyterian, a comprehensive academic health care delivery system
in collaboration with two renowned medical schools, Weill Cornell Medicine and Columbia University College of Physicians
& Surgeons. Dr. Forese is responsible for all enterprise operations as well as strategy and execution of acquisitions and
partnerships. Her operational and leadership experience at one of the leading medical institutions in the world, together
with her practical medical background, makes her an exceptional board member.
3
On October 16, 2015, the Board of Directors was pleased to announce a 20% increase in our semiannual dividend to $0.06
per share, or $0.12 per share annually. This was our fifth double digit dividend increase in five years. The Board believes
that it is in the best interest of our shareholders to pay regular semiannual dividends.
In Summary
This past year’s performance exemplifies why we are so optimistic about the future of Cantel Medical. The worldwide market
potential for our products continues to grow and has never been greater. Fiscal 2015 represented the second year of our
five-year strategic plan in which we outlined our aspiration to double sales and profits by fiscal 2018. We are pleased to
note that we performed ahead of our internal projections for the second consecutive year. This plan is our aspiration and
not a prediction; however, we are optimistic that these are achievable objectives for Cantel Medical without taking
unacceptable risks or otherwise deviating from our proven operating model. Our market analyses indicate that the global
markets where we currently compete represent sales potential in excess of $6 billion with significant opportunities for
growth in all our major businesses.
We look to accelerate growth of all product categories in international markets. A key part of this international strategy
includes going direct in certain countries, which should lead to further improvement in sales and margins. These were
mostly aspirations two years ago, however we have now closed significant international acquisitions and have made major
additional investments to go direct in the UK, Italy, Germany and China. In the past two years, our international sales have
grown from 17% to 21% of total consolidated sales. We are projecting with organic growth and the addition of Medical
Innovations, that international sales should approximate 25% of revenue in fiscal 2016. While these strategies have great
potential over the medium and long-term, they will undoubtedly call for further upfront investments. We are implementing
cost and operating expense efficiency programs throughout Cantel Medical to partially offset our incremental strategic
investments. We will also continue our success in identifying, executing and integrating acquisitions. We believe there are
many opportunities for further synergistic acquisitions including the possibility of adding a fourth infection prevention
platform.
HAIs remain a leading cause of mortality and morbidity on a global basis and Cantel Medical is dedicated to providing novel
solutions to address this critical need. We are focused on continuing to develop new products and services for infection
prevention and control both in our current markets, as well as in new healthcare markets where there are critical HAI
concerns that can be successfully addressed by Cantel Medical solutions. Our core mission is the delivery of innovative
infection prevention and control products and services for patients, caregivers and healthcare providers, to improve
outcomes and ultimately help save lives. Our entire organization has a great sense of pride in working every day to deliver
on this important mission.
In conclusion, we thank all of our customers, suppliers and shareholders for their continued confidence, and our Directors
for support and guidance throughout the year. The Cantel Medical team is committed to providing our customers with
superior products and service, while profitably growing our businesses to the benefit of our shareholders. Most importantly,
we sincerely thank our 1,800 employees for their dedication and invaluable contributions to the Company’s continued
success. It is through their efforts that Cantel Medical achieved record performance in fiscal 2015. Further, it will be through
their exceptional hard work that Cantel Medical will successfully implement its ambitious growth strategy and continue
improving the Company’s performance for years to come.
Charles M. Diker
Chairman of the Board
Andrew A. Krakauer
Chief Executive Officer
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2015
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 No. 001-31337
CANTEL MEDICAL CORP.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
150 Clove Road, Little Falls, New Jersey
(Address of principal executive offices)
22-1760285
(I.R.S. employer
identification no.)
07424
(Zip code)
Registrant’s telephone number, including area code: (973) 890-7220
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.10 par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange
on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the 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 and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter, as quoted by the New York Stock Exchange on that date: $1,397,751,759.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the close of business on August 31, 2015:
41,606,747.
Documents incorporated by reference: Portions of the definitive proxy statement to be filed pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934 in connection with the 2015 Annual Meeting of Stockholders of Registrant are hereby incorporated by reference
into Part III of this Form 10-K and certain documents are incorporated by reference into Part IV.
5
PART I
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 Medical Corp. itself and not its
subsidiaries.
Forward Looking Statements
This Annual Report on Form 10-K contains “forward-looking statements” as that term is defined under the Private Securities
Litigation Reform Act of 1995. These statements are based on current expectations, estimates, or forecasts about our businesses, the
industries in which we operate, and the current beliefs and assumptions of management; they do not relate strictly to historical or
current facts. Without limiting the foregoing, words or phrases such as “expect,” “anticipate,” “goal,” “will continue,” “project,”
“intend,” “plan,” “believe,” “seek,” “may,” “could,” and variations of such words and similar expressions generally identify forward-
looking statements. In addition, any statements that refer to predictions or projections of our future financial performance, anticipated
growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements.
Readers are cautioned that these forward-looking statements are only predictions about future events, activities or developments and
are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. We caution that undue reliance should not be
placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to
differ from those expressed in any forward-looking statement are set forth under Item 1A of this Form 10-K, entitled Risk Factors. We
expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
Item 1.
BUSINESS.
General
We are a leading provider of infection prevention and control products and services in the healthcare market, specializing in
the following operating segments:
Endoscopy: Medical device reprocessing systems, disinfectants, detergents and other supplies used to high-level disinfect flexible
endoscopes and disposable infection control products intended to reduce the challenges associated with proper cleaning and high-
level disinfection of numerous reusable components used in gastrointestinal (GI) endoscopy procedures. This segment recently
commenced the sale of endoscope transport and storage systems, a comprehensive range of endoscopy consumable accessories,
and OEM mobile medical carts. Additionally, this segment includes technical maintenance service on its products.
Water Purification and Filtration: Water purification equipment and services, filtration and separation products, and disinfectants,
sterilization and decontamination products and services for the medical, pharmaceutical, biotech, beverage and commercial
industrial markets.
Healthcare Disposables: Single-use, infection prevention and control healthcare products including face masks, sterilization
pouches, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups and disinfectants, as well as a filter system
for maintaining safe dental unit waterlines. This segment also manufactures and sells biological and chemical indicators for
sterility assurance monitoring services in the acute-care, alternate-care and dental markets.
Dialysis: Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.
Recent Acquisition — Subsequent to July 31, 2015
Acquisition of Medical Innovations Group Holdings Limited
On September 14, 2015, we acquired all of the issued and outstanding stock of Medical Innovations Group Holdings Limited
and certain affiliated companies (collectively “MI”), a leading provider in the United Kingdom of specialized endoscopy medical
devices and products with pre-acquisition annual revenues (unaudited) of approximately $28,500,000 (the “MI Business” or the “MI
Acquisition”). Principal products of MI include proprietary short-term and long-term endoscope transport and storage systems, a
comprehensive range of endoscopy consumable accessories, OEM mobile medical carts, as well as specialized products for patient
warming and patient transfer. With an employee base of approximately 100 individuals, including complete sales and service teams
and manufacturing facilities in Southend-on-Sea, England, the addition of MI complements our existing endoscopy business in the
6
United States, the United Kingdom and other global markets. The MI Business will be included in our Endoscopy segment. The total
consideration for the transaction, excluding acquisition-related costs, was $80,064,000.
The principal reasons for the MI Acquisition were: (i) the global expansion of our product offerings in endoscopy, (ii) the
opportunity to sell our existing endoscopy products to MI’s installed base, (iii) the ability to combine the MI sales force with our
existing United Kingdom organization to create what we believe will be a dominant global sales force in endoscopy product sales and
service, (iv) to achieve cost savings through various operating synergies, (v) the ability to leverage our direct sales force to accelerate
the growth of MI products in the U.S. and various international markets, and (vi) the expectation that the acquisition will be accretive
to our earnings per share (“EPS”) in fiscal 2017 and beyond (and accretive to our Non-GAAP EPS in fiscal 2016 and beyond). The MI
Acquisition is not included in our results of operations for any portion of fiscal 2015 or any prior period. See Note 3 to the
Consolidated Financial Statements.
Fiscal 2015 Acquisitions and Disposition
Acquisition of DentaPure® Product Line
On February 20, 2015, we purchased all of the issued and outstanding stock of MRLB International, Inc. (“MRLB”), a
private company with pre-acquisition annual revenues (unaudited) of approximately $2,300,000, to obtain the DentaPure® product line
(the “DentaPure Business” or the “DentaPure Acquisition”). The DentaPure product line is a proprietary, iodinated resin filter
cartridge system used by dentists to maintain safe water quality in dental unit waterlines. It has been integrated into our Crosstex
product portfolio. The DentaPure Business is included in our Healthcare Disposables segment. The total consideration for the
transaction was $9,980,000, excluding acquisition-related costs.
The principal reasons for the DentaPure Acquisition were to (i) leverage the sales and marketing infrastructure of Crosstex by
adding a branded, technologically differentiated, proprietary product line, (ii) strengthen our leadership position in a rapidly growing
area of infection prevention and control, (iii) add a new product line that will provide for opportunities to cross-sell to biological
monitoring customers and expand our waterline disinfection products, and (iv) the expectation that the acquisition will be accretive to
our EPS in fiscal 2016 and beyond.
Acquisition of Pure Water Solutions, Inc.
On January 1, 2015, we purchased substantially all of the net assets of Pure Water Solutions, Inc. (“PWS”), a private
company based out of Ridgeland, Mississippi with pre-acquisition annual revenues (unaudited) of approximately $8,000,000 that
provides water treatment services for commercial and industrial, laboratory and medical customers (the “PWS Business” or the “PWS
Acquisition”). The PWS Business is included in our Water Purification and Filtration segment. The total consideration for the
transaction was $11,835,000, excluding acquisition-related costs.
The principal reasons for the PWS Acquisition were (i) to strengthen our sales and service business by adding PWS’s
strategic southeastern United States market presence to enable us to better serve our national customers, (ii) to further expand our
business into the commercial, laboratory and research segments, and (iii) the expectation that the acquisition will be accretive to our
EPS in fiscal 2016 and beyond.
Acquisition of International Medical Service S.r.l.
On November 3, 2014, we acquired all of the issued and outstanding stock of International Medical Service S.r.l. (“IMS”), a
privately owned company in Italy with pre-acquisition annual revenues (unaudited) of approximately $13,500,000 that manufactures
and sells automated endoscope reprocessors (“AERs”), high-level disinfectant chemistries used in AERs, other infection prevention
and control chemistries used in healthcare and dental markets, as well as technical service (the “IMS Business” or the “IMS
Acquisition”). The IMS Business is included in our Endoscopy segment. The total consideration for the transaction, excluding
acquisition-related costs, was $24,610,000, which includes assumed debt of $2,498,000, a significant portion of which was
subsequently repaid.
The principal reasons for the IMS Acquisition were: (i) to add a high quality manufacturing facility in Europe, (ii) the
expansion of our product offerings with a broader range of advanced endoscope reprocessing equipment suitable for various
international markets, (iii) the opportunity to transition our existing Italy business from a distribution model to a direct sales model,
(iv) the opportunity to leverage IMS’s chemistry manufacturing capabilities to enhance and expand our existing product portfolio
while reducing freight and logistics expenses related to the export of chemistries from the United States, (v) the ability to expand our
footprint and infrastructure in Europe, and (vi) the expectation that the acquisition will be accretive to our EPS in fiscal 2016 and
beyond.
7
Divestiture of Specialty Packaging Business
In fiscal 2015, we conducted a strategic review of our Specialty Packaging business and evaluated its potential value in the
marketplace relative to the business’s historic and expected returns and concluded that the business was not part of our core strategy
and could return a higher value to stockholders by its divestiture. Accordingly, our Specialty Packaging business (reported in the
Other reporting segment) was classified as held-for-sale within our Condensed Consolidated Balance Sheet beginning October 31,
2014. Since the operating results of the Specialty Packaging segment, as shown in Note 19 to the Consolidated Financial Statements,
were not significant in relation to our overall consolidated operating results, the lack of operating results from this business due to its
divestiture will not have a major effect on our operations and financial results, and accordingly, has not been classified as a
discontinued operation for any of the periods presented.
On April 7, 2015, we completed the sale of our Specialty Packaging business to a global packaging and service company by
selling all the issued and outstanding stock of our Specialty Packaging subsidiary in exchange for $7,531,000 in cash proceeds, of
which $660,000 is held in escrow for indemnity obligations, if any, until October 7, 2016 and is recorded in other assets in our
Consolidated Balance Sheet. Overall, this transaction, including costs associated with the disposition and the recognition of a foreign
currency translation gain, resulted in a $2,206,000 loss, or $0.04 in diluted earnings per share, which was recorded in loss on sale of
business in our Consolidated Statements of Income in fiscal 2015. Such amount is subject to further adjustments upon finalization of
taxes or indemnity obligations, if any.
Reporting Segments
The following table gives information as to the percentage of consolidated net sales accounted for by each of our reporting
segments:
Endoscopy ........................................
Water Purification and Filtration ......
Healthcare Disposables ....................
Dialysis .............................................
Other .................................................
2015
%
Year Ended July 31,
2014
%
2013
%
44.0
30.8
18.9
5.5
0.8
100.0
39.0
32.7
20.8
6.3
1.2
100.0
37.7
31.6
21.4
7.8
1.5
100.0
For a presentation of net sales, operating income and total assets by reporting segment, see Note 18 to the Consolidated
Financial Statements.
Endoscopy
General
Endoscopes are highly sophisticated and fragile medical instruments used for visual examination within a body cavity for
diagnostic and therapeutic purposes, and typically contain one or more channels for the passage of smaller instruments such as
forceps, snares, clips and retrieval devices. Endoscopes are reused from procedure to procedure and patient to patient, but only after
undergoing a very arduous and controlled cleaning and disinfection process. A critical part of our endoscopy business is tied to such
process. Our endoscopy products, most of which are proprietary medical devices subject to rigorous standards and regulations,
contribute to the safe and effective use of endoscopes in healthcare facilities throughout the world and improve the quality of
healthcare delivery by reducing the threat of nosocomial (hospital acquired) infections. In addition, our disposable procedure products
provide greater patient safety and infection prevention, through the replacement of reusable devices requiring disinfection with our
single-use sterile products.
Our Endoscopy segment provides a full circle of infection prevention solutions through a comprehensive offering of
MEDIVATORS® branded products and services in two critical areas — endoscope reprocessing and endoscopy procedure products.
Our endoscope reprocessing products include a full range of endoscope reprocessing systems, high-level disinfectants and sterilants,
detergents, leak testing and manual cleaning products, storage cabinets, endoscope process tracking and related consumables,
accessories and supplies. Our endoscopy procedure products include CO2 and water irrigation pumps and disposable procedure kits,
sterile irrigation tubing and single-use valves designed to eliminate the challenges associated with proper cleaning and high-level
disinfection of numerous reusable components used in GI endoscopy procedures. In addition, as a result of the MI Acquisition, our
product portfolio now includes short-term and long-term endoscope transport and storage systems, a comprehensive range of
endoscopy consumable accessories, OEM mobile medical carts, and specialized products for patient warming and patient transfer. We
design, develop and manufacture most of our endoscopy products.
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Endoscope Reprocessing Products and Services
General. Our Medivators endoscope reprocessing product portfolio represents a comprehensive global offering of capital
equipment, chemistries, consumables and services that are used to pre-clean, leak test, clean, disinfect, store and electronically track
flexible endoscopes from the point of removal from a patient through utilization in the next patient procedure. Our flagship products
are proprietary automated endoscope reprocessors (AERs) and high-level disinfectant chemistries, which together disinfect
endoscopes. The AERs are capital equipment designed to pre-wash endoscopes, with the ADVANTAGE PLUS® reprocessing system
containing a cleaning claim cleared by the United States Food and Drug Administration (“FDA”). The AER’s cycle continuously
pumps disinfectant around the outside surface of the endoscope and also through all of its internal working channels. After the
disinfection phase, all internal channels and external surfaces are thoroughly rinsed to completely remove any disinfectant residue.
This automated process inhibits the buildup of biofilms in the working channels and renders the endoscope safe for the next patient
use. The entire high-level disinfection process can be completed with minimal participation by the operator, freeing the operator for
other tasks, reducing the exposure of personnel to the chemicals used in the disinfection process and reducing the risk of transmission
of infectious diseases.
Although endoscopes generally can be manually disinfected, there are many problems associated with such methods,
including the lack of uniform disinfection procedures, increased personnel exposure to disinfectant fumes and incomplete rinsing that
could result in disinfectant residue remaining in or on the endoscope. We believe our automated endoscope reprocessing systems offer
several advantages over manual immersion in disinfectants, particularly the reduction of risks associated with inconsistent manual
disinfecting. The use of an AER also reduces the potential for operation distractions or missed steps, and establishes a consistent and
reliable reprocessing process for best practices.
Products and Services. Our Medivators line of endoscope reprocessing systems includes a full and comprehensive range of
AERs, designed to meet our customer needs in the United States or specific regional or global markets we serve. From “pass-through”
to non “pass-through” designs, our AERs are all microprocessor-controlled, ergonomically designed, single-basin or dual-basin
asynchronous endoscope disinfection systems, with our high-end models utilizing what we believe are the most advanced reprocessing
capabilities and technological innovations.
Our AER offering is highlighted by our state-of-the-art RAPIDAER® “pass-through” automated endoscope reprocessor,
which offers the highest standards of reliability, productivity, and flexibility. The RAPIDAER reprocessor is currently manufactured
and sold in the United Kingdom. We recently commenced the sale of “pass-through” AERs in other European markets, focusing on
those countries promoting this advanced technology. Our “pass-through” AER provides complete separation between the dirty and
clean sides of the reprocessing area for maximum endoscope infection prevention, features a quick disinfection cycle time for a
significant competitive advantage. The RAPIDAER AER is validated for use with our proprietary single-use RAPICIDE® PA
chemistry, a peracetic acid-based, high-level disinfectant with a five-minute contact time used at 30 degrees Celsius, giving it superior
material compatibility.
Our top selling AERs are ADVANTAGE PLUS® reprocessing systems, which represent technologically advanced fully
automated systems designed to be compliant with all North American and European standards and to compete against other
sophisticated systems currently available both in Europe and North America. All of the Medivators AERs can be used on a broad
variety of flexible, immersible endoscopes and soak-only devices and are programmable by the user. The ADVANTAGE PLUS AER
system, a single-use chemistry reprocessor, has FDA and Health Canada clearance for use exclusively with our single-use
RAPICIDE® PA chemistry. Our other key endoscope reprocessors include the DSD EDGE®, DSD-201, SSD-102 and CER
OPTIMA® reprocessing systems.
Our acquisitions of United Kingdom-based Puricore International Limited (“PuriCore”) in June 2014 and Italy-based IMS in
November 2014 have provided us with two European technology and R&D centers focused on endoscope reprocessing and high-level
disinfectant chemistries used in AERs and for manual disinfection. In addition to expanding our bases of operations, the products
designed, manufactured and sold by us through those locations have significantly expanded our global product offerings within our
endoscope reprocessing business. For example, the RAPIDAER “pass through” endoscope reprocessor was developed by PuriCore.
In addition to reprocessors, our Medivators endoscope reprocessing product line includes:
Chemistries: chemistries such as glutaraldehyde-based high-level disinfectant and sterilant and peracetic acid-based high-
level disinfectants work in concert with our AERs. In November 2014, with the acquisition of IMS, we added an important
peracetic acid-based chemistry to our global endoscopy product portfolio, the ADASPOR® high-level disinfectant. We
believe that our FDA 510(k) clearances for claims, including those for high-level disinfection times (at specific temperatures)
and superior rinsibility, provide a competitive market advantage. For example, the disinfection contact times for our
RAPICIDE glutaraledehyde and RAPICIDE PA high-level disinfectants are currently some of the fastest available of any
high-level disinfection products sold in the United States.
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Endoscope leak detection device: provides customers with high accuracy, complete automation and comprehensive electronic
record keeping.
Endoscope flushing device: minimizes the risk of worker repetitive motion injury associated with manual flushing of
endoscopes, while increasing the consistency of cleaning results through standardization of the pre-cleaning process.
Detergents and wipes: designed to be used on endoscopes before high-level disinfection.
Storage and drying cabinets: Our ENDODRYTM storage and drying system is designed to ensure that endoscopes remain
bacteria free after completion of high-level disinfection.
Endoscope tracking: Our ENDORATM Tracking System tracks and documents every step of the endoscope reprocessing cycle
and alerts operator and facility management if there is a breach in the reprocessing workflow. ENDORA is an active software
system that continuously monitors every step of the process for compliance, verifying completion of each required step. It
ensures that only a clean, patient-ready endoscope will be used in a procedure.
Our Endoscopy segment offers various preventative maintenance programs, repair services and user training programs to
support the effective operation of reprocessing systems over their lifetime. Our field service personnel and international third-party
distributors install, maintain, upgrade and repair equipment.
Endoscopy Procedure Products and Transport
General. We manufacture, market and sell an innovative array of high quality disposable products designed to mitigate
infection risks in the endoscopy arena. These products evidence our commitment to deliver infection prevention solutions that reduce
risks to caregivers and patients in GI endoscopy. Our Medivators line of “procedure” products are used in the endoscopy procedure
room itself as opposed to our endoscope reprocessing products, which address infection prevention and control after a procedure is
completed. These disposable products are intended to eliminate the challenges associated with proper cleaning and high-level
disinfection of numerous reusable components used in gastrointestinal endoscopy procedures. As such, they reduce the risk of cross
contamination while providing greater traceability than reusable products in the event of a hospital acquired infection.
Products. Our proprietary procedure products include sterile disposable air/water, suction and biopsy valves, CO2 and
irrigation pumps, irrigation tubing, polyp traps, procedure kits, procedure room accessories and rinse and insufflation tubing products.
Our lead products include DEFENDO® sterile disposable valves, ENDOGATOR® disposable GI endoscopy irrigation tubing and the
ENDO SMARTCAP™ disposable sterile water bottle adaptor, all of which are utilized during flexible endoscopy procedures. The
DEFENDO valves are designed to replace reusable air/water, suction and biopsy valves on an endoscope. While reusable endoscope
valves are sophisticated devices that require multiple steps to clean in adherence to current manufacturer’s reprocessing instructions,
our DEFENDO valves are single use devices that get discarded after each procedure. This reduces the risk to patients of hospital-
acquired infections. In addition, if a patient has acquired such an infection, our valves provide the benefit of improved traceability
relative to reusable valves, since most hospitals cannot track reusable valves due to their lack of serial numbers.
The ENDOGATOR tubing allows for 24-hour use without the need to repeatedly sterilize reusable irrigation tubing. The
ENDO SMARTCAP adaptor provides a disposable sterile alternative to the reusable water bottle in GI endoscopy designed to
minimize infection control risks that are associated with manual cleaning and high-level disinfection of the water bottle and its
associated connection to the endoscope. We also offer a product known as the ENDOGATOR hybrid tubing, which combines the
ENDO SMARTCAP and ENDOGATOR products into one innovative system. Utilizing a single disposable water bottle both for
irrigation and cleaning the lens of the scope, this system maintains the superior patient safety standards characterizing Medivators
endoscopy procedure products.
For improved visualization, our disposable ENDOGATOR® Tubing and ENDO SMARTCAP® Tubing integrate with our
ENDO STRATUS® Irrigation Pump for colonic rinsing and an ENDO STRATUS® CO2 Insufflator that maximizes patient comfort
during a colonoscopy. Our disposable line also offers accessibility to an all-in-one ENDO-CARRY ON® custom procedure kit,
designed to meet the individual needs of our customer base and the particular procedures that they are performing. The kits combine
our proprietary products such as DEFENDO™ Single-Use Valves with procedure-related devices and is packed in one convenient
bundle, always ready for each procedure.
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Other Products; New Products. The ENDOCUFF™(1) Endoscopic Overtube, a non-proprietary product designed to
improve a physician’s ability to visualize and examine the mucosa during an endoscopy procedure, is another important product in our
procedure product portfolio. The ENDOCUFF Endoscopic Overtube slips over the tip of an endoscope and during withdrawal, its
flexible arms open the bowel for inspection, everting large mucosal folds providing clear views of mucosa previously difficult to
visualize. We sell this product under a distribution agreement with rights to sell solely in the United States.
With the acquisition of MI in September 2015, we now offer proprietary short-term and long-term endoscope transport and
storage systems as well as mobile medical cart systems, specialized surgical products and a comprehensive range of endoscopy
accessories. We have also added a range of endoscopy accessories that complement our existing consumable accessories. Principal
products of MI include the CLEANASCOPE® short-term endoscope storage and transport system, the SURESTORE® long-term
endoscope storage and transport system, a comprehensive range of endoscopy accessories, mobile medical carts, specialized hospital
products such as MEDIWRAP® patient warming and protection products and the FLEXISLIDE® single-use patient transfer system.
While the largest markets for MI products have been the United Kingdom and, to a lesser extent, the United States and France, we
intend to expand the sales effort in the United States and worldwide.
Finally, through the acquisition of Jet Prep Ltd. during fiscal 2014, we acquired the JET PREP® Flushing Device, a single-
use irrigation and aspiration catheter designed to improve visualization during colonoscopy procedures. The device has required
significant reengineering that delayed market introduction. We are continuing development work and will commence
commercialization as we deem appropriate.
Marketing and Sales
We sell and service our Medivators endoscope reprocessing equipment, high-level disinfectants, cleaners and consumables as
well as our endoscopy procedure products through our own direct United States field sales and service organizations. Outside of the
United States, these products are sold primarily through independent distribution partners in Europe, Canada, Asia, Australia and
Latin America as well as our own sales and service organizations in the United Kingdom, Italy, the Netherlands, Singapore, Malaysia
and Germany. In China, we sell both direct and through distributors, but we continue to build an infrastructure designed to enable us
to increase our direct sales. Over time, we may look to further reduce our reliance on third party distributors in other territories outside
of the United States.
Water Purification and Filtration
General
We design, develop, manufacture, sell, install and service water purification systems and accessories for dialysis and other
specific healthcare applications, research laboratories and pharmaceutical, beverage and commercial industrial customers. These
systems always start with a public water source and provide total purification solutions specific to our customers’ needs and site
conditions, ranging from low-volume, reverse osmosis (“RO”) and deionization systems, to high-volume, complete turnkey
purification systems. We generally sell the equipment directly to our customers in the United States, Puerto Rico, and Canada and
through various third-party distributors in other international markets.
Water purification systems can include combinations of proven treatment methods such as (i) RO, which is a filtration
process that forces liquid through non-porous or semi-porous membranes to remove particles, microorganisms and dissolved minerals
and organics, (ii) carbon filtration, which removes chlorine and dissolved organic contamination by adsorption, (iii) ultra-filtration,
which removes bacteria, viruses and other ultrafine impurities from water using a membrane similar in design to a RO membrane,
(iv) deionization, which is an ion exchange platform that requires resin regeneration (see “Service & Maintenance; Resin
Regeneration” below), and (v) electro-deionization, which is a form of deionization that is based on the conductance of electrical
charges. We have significant expertise in packaging these technologies to meet specific requirements of customers requiring high-
purity water that is free of contamination.
We are the market leader in the supply of FDA 510(k) cleared water purification systems to the dialysis industry in North
America. During fiscal 2015, a significant portion of our sales in this segment were derived from sales of products and service to
dialysis clinics and hospitals in North America.
(1) ENDOCUFF is a trademark owned by ARC Medical, LTD. that is exclusively licensed to us for use in the United States.
11
Our growth in the Water Purification and Filtration segment, particularly in the medical/dialysis arena, over the past several
years has been driven principally from acquisitions as well as new product introductions such as heat sanitized water systems.
During fiscal 2015, we purchased PWS, a provider of water treatment services for commercial and industrial, laboratory, and
medical customers, primarily in the southeastern portion of the United States.
Water Purification Equipment
Our product line of water purification systems has been designed to produce biologically pure water targeted for use in the
healthcare, life sciences, food and beverage, and commercial industrial markets. We have significant expertise in the design and
manufacture of water treatment systems engineered to meet specific water requirements of these markets. Such expertise includes
designing systems capable of delivering water for hemodialysis that meets the water quality standards and good manufacturing
standards of the Association for the Advancement of Medical Instrumentation (“AAMI”) and all grades of United States
Pharmacopeia (“USP”) water (i.e., water meeting the FDA enforced standards of the USP including “USP Purified Water” which is a
FDA requirement for the labeling of “purified” bottled water. We also package these same technologies and expertise in industrial
designs to meet the requirements for high-purity water in the commercial industrial markets, such as boiler feedwater production or
high quality rinse water production.
Our equipment line for high purity water includes systems that utilize either chemical or heat disinfection to sanitize the
equipment. Our HX product line provides total heat disinfection of the entire water purification system and water distribution loop.
Heat disinfection is especially attractive to the life science marketplace, which requires the highest levels of biological purity. Heat
sanitization is environmentally friendly and prevents the formation of dangerous biofilms. Heat disinfection has been used in the
pharmaceutical industry for years and has been gaining increased acceptance in the dialysis market.
Our standard line of water purification equipment with 510(k) clearances that are used for medical (dialysis) applications
includes the 2200M, 4400M, and 23G RO systems, enhanced by our heat sanitizable systems: the BIOPURE HX2® central dialysis
water system and the MILLENIUM HX® medical portable heat disinfection system.
These product lines are complemented in the United States by the product lines manufactured and sold by us under a
perpetual, exclusive license from Gambro Renal Products, Inc. and Gambro Lundia AB (collectively, “Gambro”), including the WRO
300, WRO 300H, CWP 100, WRO 101-104 and 106H, a leading heat disinfecting system. Included in our medical product portfolio
are pretreatment equipment, a full range of service deionization tanks and specific equipment designed to support the life sciences and
industrial markets, including peripheral equipment such as carts, bicarbonate and acid delivery systems with central and single mix
distribution units, and concentrate systems with central concentrate holding tanks.
We also have a full line of equipment designed for the commercial USP purified water market, which includes our 2200L,
and 4400L® integrated water systems, using conventional technologies integrated into a single system design. We also have several
lines of heat disinfection systems designed for this market, integrating both RO and electro deionization technologies into a single
system design, with the additional feature of heat disinfection. These products lines include the VPURE, 4400H®, LSX and USPure
platform systems.
Service & Maintenance; Resin Regeneration
We provide service and maintenance for water purification systems in the United States and Canada through an extensive
network of regional offices in the United States and, to a smaller degree, in Canada. These service centers are generally staffed with
sales and service personnel to support both scheduled and emergency customer requirements. We provide 24-hour emergency service
for our customers through a fleet of stocked service vehicles. Seven of the offices (Toronto, Montreal, Philadelphia, Boston, San
Antonio, Chicago and Atlanta) are equipped with resin regeneration plants (described below).
Resin regeneration (also known as service deionization and carbon exchange) is the process in which cylinders (pressure
vessels with an inlet connection and an outlet connection) are assembled, sanitized, and filled with ion exchange resin, which is
processed using hydrochloric acid and caustic soda. These cylinders are connected to a customer’s water supply. As the water passes
through the ion exchange resin beads, minerals carrying an electrical charge bind to the resin beads and are removed from the water.
When the electrical charge that is placed on the resin beads during the regeneration process is exhausted, the cylinders are exchanged
for identical cylinders with regenerated resin. The cylinders with exhausted resin are returned by service personnel to one of our
regeneration plants, and the resin is regenerated for use by the same or another customer. Customers are charged for each cylinder
replacement.
12
Filtration - Water
We offer a full line of proprietary and third party filters utilizing hollow fiber membrane technology. Our proprietary filters,
sold under the FIBERFLO® capsule filters and FIBERFLO cartridge filters names, are utilized to remove impurities from liquid
streams for a wide range of applications. We also offer the POSICLEAR® (2) pleated proprietary filter, another FDA 510(k) cleared
product for hemodialysis water filtration. Such applications include the filtering of ultrapure water to remove bacteria and other
contaminants in medical environments to provide protection for patients undergoing treatments that use ultrapure water. Our cartridge
filters are validated to remove endotoxins in dialysis water, which is included in our registration of the filters as medical devices under
FDA 510(k) regulations. The filters are also used in medical device reprocessing systems to help meet reprocessing water quality
guidelines outlined by the AAMI. In industrial applications, the filters are used to protect systems from contamination from
particulates and microorganisms.
Our FIBERFLO® filters are also used in a variety of industries including pharmaceutical manufacturing, food and beverage
processing, cosmetic manufacturing and electronics manufacturing. The filters are used increasingly for the removal of bacteria and
other contaminants from aqueous solutions. These filters are engineered for point-of-use applications that require very fine filtration.
Their hollow fiber design provides a surface area that is up to four times larger than traditional pleated filters that are used in the same
markets. The large surface area provides greater capacity and longer filter life for the customer. FIBERFLO capsule filters and
cartridge filters are available in a variety of styles, sizes and configurations to meet a comprehensive range of customer needs and
applications.
Other products include microfiber and flat sheet membrane prefiltration products designed to protect the FIBERFLO filter
products and prolong their life in their intended applications.
FIBERFLO filter products are sold directly and through various third-party distributors in the United States, Puerto Rico,
Canada and other international markets.
Filtration - Therapeutic
Our therapeutic filtration products are extracorporeal filters that utilize our proprietary hollow fiber membrane technology.
These filters include hemoconcentrators, hemofilters and specialty filters utilized for therapeutic medical applications.
We offer a comprehensive line of hemoconcentrators. A hemoconcentrator is a device used by a perfusionist (a health care
professional who operates heart-lung bypass equipment) to concentrate red blood cells and remove excess fluid from the bloodstream
during open-heart surgery. Because the entire blood volume of the patient passes through the hemoconcentrator during an open-heart
procedure, the biocompatibility of the blood-contact components of the device is critical.
Our hemoconcentrators are designed to meet the clinical requirements of neonatal through adult patients. Our principal
products are the HEMOCOR HPH® hemoconcentrators, which contain our proprietary polysulfone hollow fiber and also feature a
unique “no-rinse” design that allows it to be quickly and efficiently inserted into the bypass circuit at any time during an open-heart
procedure.
We also offer a line of RENAFLO® II hemofilters. A hemofilter is a device that performs hemofiltration in a slow,
continuous blood filtration therapy used to control fluid overload and acute renal failure in unstable, critically ill patients who cannot
tolerate the rapid filtration rates of conventional hemodialysis. The hemofilter removes water, waste products and toxins from the
circulating blood of patients while conserving the cellular and protein content of the patient’s blood. Our hemofilter line features no-
rinse, polysulfone hollow fiber filters that require minimal set-up time for healthcare professionals. The hemofilter is available in six
different models to meet the clinical needs of neonatal through adult patients.
Our proprietary hollow fiber membranes and therapeutic products are sold to biotechnology manufacturers that integrate the
filters into their own proprietary systems and through third-party distributors.
(2) POSICLEAR is a trademark owned by Gambro that is exclusively licensed to us for use in the United States.
13
Sterilants
MINNCARE® cold sterilant is a liquid sterilant product used to sanitize and disinfect high-purity water systems.
MINNCARE cold sterilant is based on our proprietary peracetic acid sterilant technology and is engineered to clean and disinfect RO
membranes and associated water distribution systems. MINNCARE cold sterilant is widely used in the dialysis, medical,
pharmaceutical and other industries to disinfect ultrapure water systems as part of overall procedures to control the contamination of
systems by microorganisms and spores. ACTRIL® cold sterilant is a ready-to-use formulation of our proprietary peracetic acid-based
sterilant technology. It is used for surface disinfection in a variety of industries, including the medical and pharmaceutical industries.
The sporicidal capabilities of ACTRIL cold sterilant make it an appropriate selection for sterile manufacturing facilities that require
such sporicidal disinfection on a monthly basis.
Our “Dry Fog” equipment dispenses our cold sterilant products in a mist form into rooms and certain structures with complex
geometries in order to achieve validated surface disinfection. These systems currently are sold principally for clean room applications
and sterile manufacturing markets in Europe and the United States.
Industrial Sterilization
Our REVOX® Sterilization Solutions business offers what we believe is the only true room-temperature vapor sterilization
(18 - 30°C) method for the medical device, pharmaceutical, and biomedical industries and is the first novel sterilization method since
1993 utilized for FDA 510(k) clearance of a class II implantable medical device. The technology, based upon a variation of one of our
peracetic acid-based products, allows heat-sensitive products to be sterilized without compromising product quality or integrity. It
provides companies the capability to sterilize their products at room temperature, through either contract service or on-site
agreements, while reducing overall processing times and inventory and capital requirements associated with other industrial
sterilization methods.
Healthcare Disposables
We are a leading manufacturer and reseller of single-use, infection prevention and control healthcare products. We offer a
broad selection of core disposable products, comprising over 60 categories of merchandise, including face masks, sterilization
pouches, biological monitoring systems and integrators/indicators, towels and bibs, tray covers, saliva ejectors and evacuators,
germicidal wipes, plastic cups, surface barriers, disinfectants and cleaners, hand care products, gloves, prophy angles and prophy
pastes, cotton products, needles and syringes, scalpels and blades, and fluoride trays and gels.
We maintain a leading market position in the United States for face masks, towels and bibs, tray covers, saliva ejectors,
germicidal wipes, sterilization pouches, biological monitoring systems and plastic cups used in the dental market. Our strategy
includes the continued development, licensing and/or acquisition of innovative branded products with unique and value-added selling
propositions. One of our newer unique and innovative products is an earloop face mask sold under the SECURE FIT ® face mask
name. This product incorporates an aluminum strip on the top and bottom of the mask, allowing the wearer to adjust and conform the
fit of the mask to the contour of their face, significantly minimizing the gapping that often occurs when wearing traditional earloop
face masks. This feature is available in all three of our United States-manufactured American Society for Testing and Materials
(ASTM) product performance classification face masks — Level 1 (ISOFLUID® masks), Level 2 (Procedural) and Level 3 (ULTRA®
masks).
Our sterility assurance business offers both mail-in services and in-office biological monitoring (spore test) systems enabling
healthcare professionals to verify the performance of their sterilizers in accordance with the United States Centers for Disease Control
and Prevention (“CDC”) and industry guidelines for daily or weekly testing. Through strategic acquisitions, we have strengthened our
position in the acute-care and alternate-care markets while broadening our sterility assurance product portfolio. We offer a wide-array
of products and services that enable hospitals, surgical centers, office-based practitioners and dental facilities to safely and accurately
monitor and verify their sterilization practices and protocols.
Through our Endoscopy and Healthcare Disposables sales teams, we sell RAPICIDE® OPA/28, an ortho-phthalaldehyde
(OPA)-based high-level disinfectant for the reprocessing of semi-critical devices. RAPICIDE OPA/28 is a FDA 510(k) cleared high-
level disinfectant that has a reuse period of 28 days, twice the reuse life of all other OPA-based high-level disinfectants available on
the market with the fastest disinfection time — 10 minutes at room temperature. OPA/28 is our first reprocessing chemical that can be
used in manual soak applications as well as a high-level disinfectant in endoscope reprocessing machines.
14
Other important healthcare disposable products include our SURE-CHECK® sterilization pouches and COMFORT PLUS®
saliva ejectors. SURE-CHECK sterilization pouches are self-sealing pouches with a multi-variable (parameter) chemical indicator ink
printed on the pouch both internally and externally. This multi-variable chemical indicator is a sterility assurance monitoring device
providing the user with a reliable visual indication that the conditions for sterilization occurred without having to insert a separate
chemical indicator into the pouch itself. The chemical indicators on the pouch undergo a color change reaction when all three key
sterilization parameters - time, temperature and presence of steam - have occurred. The COMFORT PLUS saliva ejector uses a
patented design featuring rounded edges, smooth surfaces and strategically placed suction ports that help to enhance patient comfort
while protecting delicate mucosal tissue.
During fiscal 2015 we acquired DentaPure, which developed a proprietary, iodinated resin filter cartridge system used by
dentists to maintain safe water quality in dental unit waterlines. It is designed to ensure that the water is free of bacteria, viruses and
any other harmful organisms. The filter system eliminates the need to use tablets or mix chemicals and thus has no risk of leaving
caustic chemicals in the waterlines.
We believe that the continued concern generated over respiratory viruses such as MERS Middle East Respiratory Syndrome
(“MERS”) and the novel H1N1 flu pandemic during fiscals 2010 and 2009, have resulted in widespread awareness of the need for
prevention and control measures to address these infectious diseases. Additionally, there is increasing demand for United States-
manufactured face masks in China and other Far East countries as a result of the pollution crisis in those areas. We believe we are well
qualified to address the global need for face masks, disinfectants and other products relating to infection prevention and control,
including pandemic influenza preparedness as well as for pollution related protection. Based on our significant face mask
manufacturing capabilities, we are well positioned to increase production of face masks should the need arise due to a recurrence of
another pandemic influenza outbreak or other outbreaks of infectious disease(s) or for pollution related protection.
Our healthcare disposable products are sold globally to approximately 350 wholesale customers in over 100 countries, with a
significant majority located in the United States. Our distribution partners generally include major healthcare distributors, group
purchasing organizations and buying co-operatives that sell our products to dental practices, medical facilities, veterinary clinics, and
government and educational institutions. The majority of our healthcare disposable products are sold under the Crosstex brand name.
We also produce private label products for several of our distribution partners.
Dialysis
General
We design, develop, manufacture and sell reprocessing systems and sterilants for dialyzers (a device serving as an artificial
kidney), as well as dialysate concentrates and supplies utilized for renal dialysis. Our products are sold in the United States and, to a
significantly lesser extent, throughout the world. Our customer base is comprised of large and small dialysis chains as well as
independent dialysis clinics. We sell products in the United States primarily through our own direct distribution network, and in many
international markets either directly or under various third-party distribution agreements.
Dialyzer Reprocessing Products and Services
During dialysis, a dialyzer is used to filter fluids and wastes from a dialysis patient’s blood. Our dialyzer reprocessing
products are limited to use by centers that choose to clean, disinfect and reuse dialyzers for the same patient, known as “dialyzer
reuse,” rather than discard the dialyzers after a single use. Our products meet rigorous sterility assurance standards and regulations,
thereby providing for the safe and effective reuse of dialyzers used in dialysis clinics.
We believe that dialysis centers in the United States that reuse dialyzers generally derive an economic benefit since the per-
procedure cost is less when utilizing the dialyzer multiple times for the same patient rather than the wasteful and less environmentally
friendly practice of using a dialyzer only one time per treatment. Additionally, dialyzer reuse significantly reduces the negative
environmental consequences of single-use dialyzers by dramatically decreasing the amount of bio-hazardous medical waste in
landfills. Although public information is not available to accurately quantify the number of dialysis centers currently employing
dialyzer reuse versus single-use, it is apparent that, despite the cost effectiveness and environmental advantages of dialyzer reuse,
there has been a significant market shift to single-use dialyzers during the past decade.
Since 2001, there has been a significant decline in dialyzer reuse. Today, we believe that less than 25% of all dialysis
procedures in the United States reuse dialyzers, although there is no independent information available to verify that approximation.
The shift from reusable to single-use dialyzers during the past decade is principally due to the decreasing cost of single-use dialyzers,
the ease of using a dialyzer one time, and the commitment of Fresenius Medical Care (“Fresenius”), the largest dialysis provider chain
in the United States and a manufacturer of single-use dialyzers, to convert dialysis clinics performing reuse to single-use facilities.
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Based on discussions with customers, we expect the downward trend in re-use dialyzers in the United States will continue and likely
accelerate during fiscal 2016 and thereafter. A substantial reduction of our dialysis re-use business will likely have a significant
adverse effect on our dialysis segment business and reduce our margins and net income in that segment. Such reduction would also
adversely affect our consolidated results of operations. See “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Our dialyzer reprocessing products include the RENATRON® II automated dialyzer reprocessing system (“RENATRON
system”), the RENALOG® RM data management system and RENALIN® 100 cold sterilant, a peracetic acid-based sterilant.
The RENATRON system provides an automated method of rinsing, cleaning, testing and sterilizing dialyzers for reuse. The
RENATRON system includes a bar-code reader, a computer and the RENALOG RM data management system, a software accessory
that provides dialysis centers with automated record keeping and data analysis capabilities. We believe our RENATRON systems are
more dependable, easier to use and more efficient than competitive automated systems. We also believe that the RENATRON systems
are the top selling automated dialyzer reprocessing systems in the world.
Our RENALIN 100 cold sterilant is a proprietary peracetic acid-based formula that, when used with our RENATRON
system, effectively cleans, disinfects and sterilizes dialyzers without the hazardous fumes and potential disposal issues related to
gluteraldehyde and formaldehyde reprocessing solutions. RENALIN 100 cold sterilant is the leading dialyzer reprocessing solution in
the United States.
We also manufacture a comprehensive product line of test strips to measure concentration levels of the peracetic acid
chemistries we produce. These test strips ensure that the appropriate concentration of sterilant is maintained throughout the required
contact period, in addition to verifying that all sterilant has been removed from the dialyzer prior to patient use. We also sell a variety
of dialysis supplies manufactured by third parties.
Our Dialysis segment offers various preventative maintenance programs and repair services to support the effective operation
of reprocessing systems over their lifetime. Our field service personnel, dialysis center technicians and international third-party
distributors install, maintain, upgrade, repair and troubleshoot equipment.
Dialysate Concentrates
Our renal dialysis treatment products include a line of acid and bicarbonate concentrates, referred to as dialysate concentrates,
used by kidney dialysis centers to prepare dialysate, a chemical solution that draws waste products from the patient’s blood through a
dialyzer membrane during the hemodialysis treatment. Dialysate concentrates are used in the dialysis process, whether single-use or
reuse dialyzers are being utilized. These concentrates are freight sensitive and, due to the competitive landscape, carry overall lower
gross margins in our product portfolio.
Government Regulation
Many of our products are subject to regulation by the FDA, which regulates the testing, manufacturing, packaging,
distribution and marketing of our medical devices and water purification devices in the United States. Delays in FDA review can
significantly delay new product introduction and may result in a product becoming “dated” or losing its market opportunity before it
can be introduced. Certain of our products may also be regulated by other governmental or private agencies, including the
Environmental Protection Agency (“EPA”), Underwriters Lab, Inc. (“UL”), and comparable agencies in certain foreign countries. The
FDA and other agency clearances generally are required before we can market such new or significantly changed existing products in
the United States or internationally. The FDA and certain international governmental agencies also have the authority to require a
recall or modification of products in the event of a defect or other issues.
Both before and after a product is commercially released, we have ongoing responsibilities under FDA and other
governmental regulations. The Food, Drug and Cosmetic Act of 1938 and Safe Medical Device Act of 1990 require compliance with
specific manufacturing and quality assurance standards for certain of our products. The FDA reviews design and manufacturing
practices, labeling and record keeping, and manufacturers’ required reports of adverse experiences and other information to identify
potential problems with marketed medical devices. The regulations also require manufacturers to establish a quality assurance
program to monitor the design and manufacturing process and maintain records that show compliance with FDA regulations and the
manufacturer’s written specifications and procedures relating to its medical devices. The FDA inspects medical device manufacturers
for compliance with the current Quality Systems Regulations (“QSR’s”), which govern the methods used in, and the facilities and
controls used for, the design, manufacture, packaging, and servicing of all finished medical devices intended for human use. In
addition, the FDA and other U.S. regulatory bodies monitor the manner in which we promote and advertise our products.
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If we fail to meet the QSR’s or violate applicable FDA, EPA or other laws or regulations or if any of our medical devices are
found to be ineffective or pose an unreasonable health risk, we could be subject to reports or warning letters, citations and fines as
well as additional regulatory action including an order to recall, replace, repair, or refund non-compliant medical devices. Further, the
FDA could detain or seize adulterated or misbranded medical devices, or ban such medical devices. The FDA may also impose
operating restrictions, enjoin and/or restrain certain conduct resulting in violations of applicable law pertaining to medical devices,
including a hold on approving new devices until issues are resolved to its satisfaction, and assess civil or criminal penalties against our
officers, employees, or us. The FDA may also recommend prosecution to the Department of Justice (“DOJ”).
In addition, many of our infection prevention and control products sold in Canada, Europe, Japan and China are subject to
comparable regulations and requirements as those described above. International regulatory bodies often establish varying regulations
governing product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. For example, since we sell our products in Europe, we were required to be certified as having a Quality System that
meets the ISO 13485-2003 standard.
Many of our products must also meet the requirements of the European Medical Device Directive (“MDD”) for their sale into
the European Union. This certification allows us, upon completion of a comprehensive technical file, to affix the CE mark to our
products and to freely distribute such products throughout the European Union. Failure to maintain CE mark certification could have a
material adverse effect on our business.
Our endoscope and dialyzer reprocessing products, as well as our Canadian water purification equipment manufacturing
facility and many of our products manufactured in Canada, are subject to regulation by Health Canada — Therapeutic Products
Directorate (“TPD”), which regulates the distribution and marketing of medical devices in Canada. Certain of such products may be
regulated by other governmental or private agencies, including Canadian Standards Agency (“CSA”). TPD and other agency
clearances generally are required before we can market new medical products in Canada. The Health Products and Food Branch
Inspectorate (“HPFBI”) governs problem reporting, modifications and recalls. HPFBI also has the authority to require a recall or
modification in the event of defect. In order to market our medical products in Canada, we hold the requisite Canadian recognized ISO
13485-2003 certification, as well as certain medical device licenses by product, as provided by HPFBI.
Federal, state and foreign regulations regarding the manufacture and sale of our products as well as the enforcement criteria
and procedures used by governmental and private agencies are subject to change. We cannot predict what impact, if any, such changes
might have on our products and business.
Sources and Availability of Raw Materials
We purchase raw materials, sub-assemblies, components and other supplies essential to our operations from numerous
suppliers in the United States and abroad. The principal raw materials that we use to conduct operations include chemicals, paper,
resin, stainless steel and plastic components. These raw materials are obtainable from several sources and are generally available
within the lead times specified to vendors.
From time to time we experience price increases for raw materials, with no guarantee that such increases can be passed along
to our customers. Although we do not currently foresee extraordinary difficulty in obtaining the materials, sub-assemblies,
components, or other supplies necessary for our business operations, we cannot predict whether we will encounter difficulties or incur
substantial price increases in the future that adversely affect our business.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the SEC has implemented
reporting and disclosure requirements related to public companies that use certain minerals and metals, known as “conflict minerals”
in their products. The rules require us to undertake measures to understand the origin and, as need be, source of conflict minerals
within our supply chain and to report those measures and whether or not any such conflict minerals originated from the Democratic
Republic of the Congo and adjoining countries. As such, the implementation of these rules could adversely affect the sourcing,
availability, and pricing of materials used in our products if they are found to be sourced from that region.
Intellectual Property
We protect our technology and products by, among other means, filing United States and foreign patent applications. There
can be no assurance, however, that any patent will provide adequate protection for the technology, system, product, service or process
it covers. In addition, the process of obtaining and protecting patents can be long and expensive. We also rely upon trade secrets,
technical know-how and continuing technological innovation to develop and maintain our proprietary position.
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As of August 31, 2015, we held 43 United States patents and 81 foreign patents, and had 28 United States patents pending
and 49 foreign patents pending. The majority of our United States and foreign patents, for individual products, are effective for twenty
years from the filing date. The actual protection afforded by a patent, which can vary from country to country, depends upon the type
of patent, the scope of its coverage and the availability of legal remedies in the country. In addition, we license from independent third
parties under certain patents, trade secrets and other intellectual property, the right to manufacture and sell our sterilants and
RAPICIDE disinfectant (see “—Reporting Segments-Endoscopy”) and water purification equipment using Gambro technology (see
“—Reporting Segments-Water Purification and Filtration”). In the aggregate, these intellectual property assets and licenses (each of
which is long-term) are of material importance to our business.
Our products and services are sold around the world under various trade names, trademarks and brand names. We consider
our trade names, trademarks and brand names to be valuable in the marketing of our products in each segment. As of August 31, 2015,
we had a total of 1,022 trademark registrations in the United States and in various foreign countries in which we conduct business, as
well as 86 trademark applications pending worldwide.
Seasonality
Our businesses generally are not seasonal in nature.
Principal Customers
None of our customers accounted for 10% or more of our consolidated net sales during fiscals 2015 and 2014, except for
DaVita Inc. (“DaVita”), which accounted for approximately 10.0% of our consolidated net sales in fiscal 2014.
Except as described below, none of our segments are reliant upon a single customer, or a few customers, the loss of any one
or more of which could have a material adverse effect on the segment.
In our Water Purification and Filtration segment, Fresenius and DaVita collectively accounted for approximately 45.9% of
our segment net sales during fiscal 2015. The loss of a significant amount of business from Fresenius or DaVita could have a material
adverse effect on our Water Purification and Filtration segment.
Our Healthcare Disposables segment is reliant on four customers who collectively accounted for approximately 49.0% of our
Healthcare Disposables segment net sales and 9.3% of our consolidated net sales during fiscal 2015. The loss of a significant amount
of business from any of these four customers or a further consolidation of such customers could have a material adverse effect on our
Healthcare Disposables segment.
During fiscal 2015, one customer, DaVita, accounted for approximately 27.7% of our Dialysis segment net sales. The loss of
a significant amount of business from this customer would have a material adverse effect on our Dialysis segment, as further
explained in “—Reporting Segments—Dialysis,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
Backlog
On August 31, 2015, our consolidated backlog was approximately $66,870,000 compared with approximately $62,747,000
on August 31, 2014. The majority of the backlog was in our Water Purification and Filtration segment which had backlog of
$47,519,000 and $46,413,000 at August 31, 2015 and August 31, 2014, respectively. The increase in overall backlog is primarily
attributable to the growth of our Endoscopy segment and to a lesser extent, our Water Purification and Filtration segment. The entire
backlog is expected to be recognized as revenue within one year of such date.
Competition
General
The markets in which our business is conducted are highly competitive. Competition is intense in all of our business
segments and includes many large and small competitors. Important competitive factors generally include product design and quality,
safety, ease of use, product service, and price. We believe that the long-term competitive position for all of our segments depends
principally on our success in developing, manufacturing and marketing innovative, cost-effective products and services.
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Many of our competitors have greater financial, technical, and human resources than we do, are well-established with
reputations for success in the sale and service of their products, and may have certain other competitive advantages over us. However,
we believe that the worldwide reputation for the quality and innovation of our products among customers and our reputation for
providing quality product service gives us a competitive advantage with respect to many of our products.
In addition, certain companies have developed, or may be expected to develop, new technologies or products that directly or
indirectly compete with our products. We anticipate that we may face increased competition in the future as new infection prevention
and control products and services enter the market. Numerous organizations are believed to be working with a variety of technologies
and sterilizing agents. In addition, a number of companies have developed or are developing disposable medical instruments and other
devices designed to address the risks of infection and contamination. There can be no assurance that new products or services
developed by our competitors will not be more commercially successful than those provided or developed by us in the future.
Segments
Information with respect to competition within our most significant individual segments is as follows:
In our Endoscopy segment, our principal competitors are Steris, Custom Ultrasonics, Olympus, ASP division of Johnson &
Johnson, Metrex, Ruhof, Ecolab, Endo Choice, ERBE, Getinge and Wassenburg. We believe that our principal competitive
advantages include the strength of our dedicated sales, clinical and service team in the United States, our comprehensive product line
of automated endoscope reprocessors, disposable procedure products, and proprietary chemistries, the advanced features and product
innovation of our automated endoscope reprocessors and other endoscopy products, our reputation for providing high-quality and
reliable products, and our highly responsive clinical support and service teams focused on endoscopy.
We believe that the ability of our Water Purification and Filtration segment to successfully compete in the water purification,
filtration and disinfectant market derives from our expertise in a FDA regulated environment, our broad product offerings and the high
value and quality of our products and services. We are the market leader in the supply of FDA 510(k) cleared water purification
systems to the dialysis industry in North America. Our numerous acquisitions of both large and small companies in the medical water
purification field have given us a competitive advantage due to our expanded product offerings and our national service coverage. We
believe that by focusing our efforts principally on the dialysis, pharmaceutical, biotechnology, medical and commercial industrial
markets, providing a high level of customer service and making selective acquisitions, we can continue to grow this segment.
In our Healthcare Disposables segment, our principal competitors vary by product type but principally encompass bigger
companies, several of which serve a broader range of markets. Such competitors include Kimberly-Clark, 3M, Steris, Danaher/Sybron,
Dentsply/Sultan Healthcare, Amcor and more generically less expensive imported products from Asia and other lower cost locations.
We believe that our long-standing Crosstex brand reputation in the dental market and SPS Medical brand in the medical market,
product quality, superior customer service and breadth of product line are competitive advantages and are the basis for our success in
this segment.
In our Dialysis segment, our most significant competition comes from manufacturers of single-use dialyzers, particularly
Fresenius, the largest dialysis chain in the United States and a manufacturer of single-use dialyzers. All or substantially all Fresenius
dialysis clinics exclusively use single-use dialyzers and therefore have no need for dialyzer reprocessing equipment. See “—Reporting
Segments—Dialysis,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Research and Development
Research and development expenses (which include continuing engineering costs) increased by $3,209,000 to $14,022,000 in
fiscal 2015 from $10,813,000 in fiscal 2014. Our research and development expenses primarily relate to development work on new
products in our three largest segments, Endoscopy, Water Purification and Filtration and Healthcare Disposables, as well as continuing
engineering costs primarily related to endoscopy products.
Environmental Matters
We anticipate that our compliance with federal, state, and local laws and regulations, relating to the discharge of materials
into the environment, or otherwise relating to the protection of the environment, will not have any material effect on our capital
expenditures, earnings or competitive position.
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Employees
As of August 31, 2015, we employed 1,680 persons, of whom 1,310 are located in the United States, 249 are located in
Europe, Africa and the Middle East, 68 are located in Southeast Asia and 53 are located in Canada. As a result of the MI Acquisition
on September 14, 2015, we employed approximately 100 additional employees; almost all are located in Europe. None of our
employees are represented by labor unions. We consider our relations with our employees to be satisfactory.
Financial Information about Geographic Areas
We have operations in Canada, Europe, Asia and other areas outside of the United States. These operations involve the same
business segments as our domestic operations. For a geographic presentation of revenues and other financial data for the three years
ended July 31, 2015, see Note 18 to the Consolidated Financial Statements.
Our foreign operations are subject, in varying degrees, to a number of inherent risks. These risks include, among other items,
foreign currency exchange rate fluctuations, changes in local economic conditions and tax regulations, unsettled political, regulatory
or business conditions, and government-sponsored boycotts and tariffs on our products or services.
Depending on the direction of change relative to the U.S. dollar, foreign currency exchange rate fluctuations can increase or
reduce the reported dollar amounts of the Company’s net assets and results of operations. Overall, foreign currency movements
relative to the U.S. dollar did not have a significant impact on net income during fiscal 2015. We cannot predict future changes in
foreign currency exchange rates or the effect they will have on our operations. See “Risk Factors.”
Available Information
We make available to the public, free of charge, on or through the Investor Relations section of our internet website, copies
of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as
soon as reasonably practicable after we electronically file such materials with the SEC. We also similarly make available, free of
charge on our internet website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to
Section 16 under the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after copies of those filings are
provided to us by those persons. Our filings are available to the public from commercial document retrieval services, our website and
at the SEC’s website at www.sec.gov. Our website address is www.cantelmedical.com. Also available on our website are our
Corporate Governance Guidelines, Charters of the Nominating and Governance Committee, Compensation Committee and Audit
Committee, and Code of Business Conduct and Ethics. Information contained on our website is not incorporated by reference into this
Report.
Item 1A.
RISK FACTORS.
We are subject to various risks and uncertainties relating to or arising out of the nature of our businesses and general
business, economic, financing, legal and other factors or conditions that may affect us. We provide the following cautionary
discussion of risks and uncertainties relevant to our businesses, which we believe are factors that, individually or in the aggregate,
could have a material and adverse impact on our business, results of operations and financial condition, or could cause our actual
results to differ materially from expected or historical results. We note these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
We face intense competition and may not be able to keep pace with the rapid technological changes in the medical device industry,
which could have a material adverse effect on our business, financial condition or results of operations.
The medical device markets in which we primarily participate are highly competitive. We encounter significant competition
across our product lines and in each market in which our products are sold from various medical device companies, many of which
may have greater financial, technical and marketing resources than we do and are well-established. Some competitors have developed
or may be expected to develop technologies or products that could compete with our products or that would render our products
obsolete or noncompetitive. In addition, our competitors may achieve patent protection, regulatory approval or product
commercialization that would limit our ability to compete with them. See “Business — Competition.”
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Additionally, the medical device markets in which we primarily participate are characterized by extensive research and
development, new product introductions and product enhancements, rapid technological change and evolving industry standards.
Developments by other companies of new or improved products, processes or technologies may make our products or proposed
products obsolete or less competitive and may negatively impact our net sales. Accordingly, our ability to compete is in part
dependent on our ability to continually offer enhanced and improved products that meet the changing requirements of our customers.
As such, we are required to devote continued efforts and financial resources to develop or acquire scientifically advanced technologies
and products, apply our technologies cost-effectively across product lines and markets, obtain patent and other protection for our
technologies and products, obtain required regulatory and reimbursement approvals and successfully manufacture and market our
products consistent with our quality standards. If we fail to develop new products or enhance existing products, it could have a
material adverse effect on our business, financial condition or results of operations.
The market for our dialysis reprocessing products is limited to dialysis centers that reuse dialyzers. The reuse portion of the dialysis
market continues to decrease in the United States and is expected to decrease significantly at an accelerated rate.
Our dialyzer reprocessing products are limited to use by centers that choose to clean, sterilize and reuse dialyzers, rather than
discard the dialyzers after a single-use. We believe dialysis centers in the United States that reuse dialyzers derive an economic benefit
since the per-procedure cost is less when utilizing dialyzer reuse compared with single-use and such dialysis clinics generally receive
a capitated payment for providing hemodialysis treatment. Although current public information is not available to accurately quantify
the number of dialysis centers currently employing dialyzer reuse versus single-use, it is apparent that the market share of single-use
dialyzers has been increasing since 2001 relative to reuse dialyzers. We believe that less than 25% of all dialysis procedures in the
United States currently reuse dialyzers, although there is no independent information available to verify that approximation.
Since 2001, there has been a continuing shift from reusable to single-use dialyzers, principally due to the lowering cost of
single-use dialyzers, the ease of using a dialyzer one time, and the commitment of Fresenius, the largest dialysis chain in the United
States and a manufacturer of single-use dialyzers, to convert dialysis clinics performing reuse to single-use facilities. All or
substantially all dialysis clinics owned by Fresenius are single-use facilities. In addition, DaVita, the second largest dialysis chain in
the United States, currently performs less than fifty percent of its dialysis procedures using reuse and it has been converting a growing
number of clinics from reuse to single-use and opening new clinics as single-use clinics.
Based on discussions with customers, we expect the downward trend in re-use dialyzers in the United States will continue
and likely accelerate during fiscal 2016 and thereafter. A substantial reduction of our dialysis re-use business will likely have a
significant adverse effect on our dialysis segment business and reduce our margins and net income in that segment as well as result in
potential future impairments of long-lived assets. Such reduction would also adversely affect our consolidated results of operations.
Net sales of our Dialysis segment accounted for 5.5% of our total net sales in fiscal 2015 compared with 6.3% of net sales in
fiscal 2014 and 7.8% of net sales in fiscal 2013. Our Dialysis segment accounted for 6.8%, 8.7%, and 11.5% of our total reporting
segments’ operating income (before general corporate expenses and interest expense) in fiscals 2015, 2014 and 2013, respectively.
This reduction in percentage of total sales is expected to continue during fiscal 2016 and thereafter primarily due to reduced purchases
of dialysis reuse products combined with the organic growth of our segments other than Dialysis and the effect on our future results of
operations from acquisitions. See “Business - Principal Customers,” “Business - Competition” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Results of Operations.”
We face significant challenges in growing our dialysate concentrate sales.
In recent years prior to fiscal 2014, sales of dialysate concentrate have declined from year to year. Although sales increased
in fiscals 2015 and 2014 and we anticipate an increase in fiscal 2016, we believe that sales may decline in future years. Fresenius
manufactures dialysate concentrate itself and therefore provides dialysate concentrate to its own dialysis clinics. DaVita and certain
international customers have also continued their reduction of dialysate concentrate purchases from us as a result of the highly
competitive and price sensitive market for such product. In addition, there is increased demand in the market for powdered dialysate
products, which we do not manufacture, principally due to the lower freight costs associated with the powdered products.
Notwithstanding these challenges, we are actively pursuing opportunities to increase sales of dialysate products. However, no
assurance can be given that we will succeed at increasing sales in the near or long term.
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Because a significant portion of our Water Purification and Filtration, Dialysis and Healthcare Disposables segments net sales
comes from a few large customers, any significant decrease in sales to these customers, due to industry consolidation or otherwise,
could harm our operating results.
In our Water Purification and Filtration segment, two customers, Fresenius and DaVita, collectively accounted for 45.9% of
our fiscal 2015 net sales for this segment. The loss of a significant amount of business from either of these two customers would have
a material adverse effect on our Water Purification and Filtration segment.
During fiscal 2015, DaVita accounted for 27.7% of the Dialysis segment net sales. We are highly dependent on DaVita as a
customer and any material shift by this customer away from reuse would have a material adverse effect on our Dialysis segment net
sales except to the extent we successfully mitigate the loss of U.S. reuse business with increased foreign business, the successful
commercialization of new or acquired products and increased sales of dialysate.
The distribution network in the United States dental industry is concentrated, with relatively few distributors of consumable
products accounting for a significant share of the sales volume to dentists. Accordingly, net sales and profitability of our Healthcare
Disposables segment are highly dependent on our relationships with a limited number of large distributors. During fiscal 2015, the top
four customers of our Healthcare Disposables segment accounted for 49.0% of its net sales. The loss or a significant reduction of
business from any of the major customers of the Healthcare Disposables segment could adversely affect our results of operations. In
addition, because our Healthcare Disposables segment products are primarily sold through third-party distributors and not directly to
end users, we cannot control the amount and timing of resources that our distributors devote to our products.
There can be no assurance that there will not be a loss or reduction in business from one or more of our major customers. In
addition, we cannot assure that net sales from customers that have accounted for significant net sales in the past, either individually or
as a group, will reach or exceed historical levels in any future period.
Our industry is experiencing significant scrutiny and regulation by governmental authorities, which may lead to greater regulation
in the future.
Our medical devices and our business activities are subject to rigorous regulation, including by the FDA, DOJ, and numerous
other federal, state, and foreign governmental authorities. These authorities and members of Congress have been increasing their
scrutiny of our industry. In addition, certain state governments and the federal government have enacted legislation aimed at
increasing transparency of our interactions with health care providers. As a result, we are required by law to disclose payments and
other transfers of value to health care providers licensed by certain states and to all U.S. physicians and U.S. teaching hospitals at the
federal level. Any failure to comply with these legal and regulatory requirements could impact our business. In addition, we may
continue to devote substantial additional time and financial resources to further develop and implement policies, systems, and
processes to comply with enhanced legal and regulatory requirements, which may also impact our business. We anticipate that
governmental authorities will continue to scrutinize our industry closely, and that additional regulation may increase compliance and
legal costs, exposure to litigation, and other adverse effects to our operations.
Moreover, as directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the SEC has
implemented reporting and disclosure requirements related to the use of certain minerals, known as “conflict minerals” (specifically,
tantalum, tin, tungsten (or their ores), and gold) which are mined from the Democratic Republic of the Congo and adjoining countries.
Pursuant to these requirements, we are required to report on Form SD the procedures we employ to determine the sourcing of such
minerals and metals produced from those minerals and whether we can determine if conflict minerals are used in products that we
manufacture. There are costs associated with complying with these disclosure requirements, including for diligence in regards to the
sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes,
or sources of supply as a consequence of such verification activities, if appropriate. In addition, the implementation of these
rules could adversely affect the sourcing, supply, and pricing of materials used in our products. As of the date of our conflict minerals
report for the 2014 calendar year, although we fully complied with the regulation, we were unable to obtain the necessary information
on conflict minerals from all of our suppliers and were unable to determine that all of our products are conflict free. We may continue
to face difficulties in gathering this information in the future. We may face reputational challenges if we determine that certain of our
products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict
minerals used in our products through the procedures we implement.
Our businesses are heavily reliant on certain raw materials and can be adversely impacted by rising prices.
We purchase raw materials, sub-assemblies, components and other supplies essential to our operations from numerous
suppliers in the United States and abroad. The principal raw materials that we use to conduct operations include chemicals, paper,
resin, stainless steel and plastic components.
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From time to time we experience price increases for raw materials, with no guarantee that such increases can be passed along
to our customers. During fiscal 2008, for example, we experienced unprecedented price increases in certain raw materials due in large
part to the rising price of fuel and oil, including chemicals, paper and plastics (resins and bottles) which had a significant adverse
impact on our gross margins. In addition, we experienced significant difficulty in obtaining certain chemicals in fiscal 2008 due to
apparent shortages by certain suppliers. Although we do not currently foresee extraordinary difficulty in obtaining the materials, sub-
assemblies, components or other supplies necessary for our business operations, we cannot predict if similar difficulties as those
experienced in the past will occur again in the future, including further price increases, that may adversely affect our business.
In addition, although fuel and oil prices have been at relatively low levels, an increase in prices can also have a significant
adverse impact on transportation costs related to both the purchasing and delivery of products and services. If costs materially
increase in the future, we may not be able to implement price increases to our customers, which would adversely impact our gross
margins.
The acquisition of new businesses and product lines, which has inherent risks, is an important part of our growth strategy.
We intend to grow, in part, by acquiring businesses. The success of this strategy depends upon several factors, including our
ability to:
identify and acquire appropriate businesses;
obtain financing for acquisitions on terms that are favorable or acceptable;
integrate acquired operations, personnel, products, technologies and regulatory procedures into our organization
effectively;
retain and motivate key personnel and retain the customers and suppliers of acquired companies; and
successfully promote and increase sales and profits of acquired product lines.
Even if acceptable financing is obtained, such financing may result in charges associated with the potential write-off of
existing deferred financing costs. We also may not be able to sustain the rates of growth that we have experienced in the past, whether
by acquiring businesses or otherwise. In addition, we often experience competition from third parties interested in the same
acquisition candidate. This may result in increases in the price paid for acquisition candidates.
Other risks and uncertainties related to acquisitions include:
delays in realizing the benefits of the transactions, including achievement of anticipated operating efficiencies and
synergies and other transaction benefits as well as forecasted sales and earnings;
diversion of management’s time and attention;
difficulties in implementing and maintaining uniform standards, controls, procedures and policies; and
risks associated with the assumption of contingent or undisclosed liabilities of acquired companies.
We are subject to Accounting Standards Codification (“ASC”) 805, “Business Combinations,” (“ASC 805”), which
establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, contingent future consideration, any non-controlling interest in the acquiree and the goodwill
acquired. The provisions of ASC 805 relating to contingent future consideration, or earn-outs, require us to record the fair value of
such estimated amounts at the date of acquisition and continually remeasure the liability at each balance sheet date, which has the
potential for creating significant earnings volatility.
In particular, on November 5, 2013 we recorded a $2,490,000 liability for the estimated fair value of contingent consideration
and a $1,720,000 liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government relating
to the Jet Prep Acquisition, as further described in Note 3 to the Consolidated Financial Statements. These two liabilities are adjusted
periodically by recording changes in the fair value through our Consolidated Statements of Income driven by the time value of money
and changes in the assumptions that were initially used in the valuations. The actual contingent consideration and assumed contingent
obligation have the potential of being between zero and a percentage of unlimited sales that could occur until the completion of the
seven year period with respect to the contingent consideration liability and until the assumed contingent obligation is satisfied in full,
or until the sales of the Jet Prep Ltd. products no longer exist. The initial fair values of these two contingent liabilities of $2,490,000
and $1,720,000 decreased to $751,000 and $1,138,000, respectively, at July 31, 2015 primarily due to changes in probability factors
and future sales projections based on recently completed market research, product modification plans and the passage of time. Such
fair value amounts would have been higher or lower if we had used different probability factors, future sales projections or discount
factors. Given the subjective nature of the assumptions used in the determinations of fair value, we may potentially have further
earnings volatility in our future results of operations related to these Jet Prep obligations.
23
Furthermore in connection with the PuriCore Acquisition, we acquired certain ordinary course business assets and liabilities
which included a contingent guaranteed obligation to reimburse an endoscope service company for endoscope repair costs it incurs
when servicing its customers’ endoscopes that are damaged by one of PuriCore’s discontinued endoscope reprocessing machine
models. Although the terms of the guarantee provide for no limit to the maximum potential future payments, we have estimated the
present value of the liability on the date of the acquisition to be approximately $1,414,000. The determination of the fair value of this
contingent guarantee obligation is subjective in nature and can be impacted by significant changes in third party service repair rates,
the frequency of claims and a change in the expected life of these discontinued machines. This liability will be adjusted periodically
by recording changes in the fair value through our Consolidated Statements of Income driven by the time value of money and changes
in the assumptions that were initially used in the valuation.
Given the subjective nature of the assumptions used in the determination of fair value calculations, we may potentially have
significant earnings volatility in our future results of operations.
In addition, we have occasionally used our stock as partial consideration for acquisitions. Our common stock may not remain
at a price at which it can be used as consideration for acquisitions without diluting our existing stockholders, and potential acquisition
candidates may not view our stock attractively.
We have a significant amount of goodwill and intangible assets on our balance sheet related to acquisitions. If future
operating results of the acquired businesses are significantly less than the results anticipated at the time of the acquisitions, we may be
required to incur impairment charges. At July 31, 2015, the average fair value of all of our reporting units exceeded book value by
substantial amounts, except our Dialysis segment, which had an average estimated fair value that exceeded book value by 17%.
Assumptions regarding the growth of businesses we acquire may differ from actual results.
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a
result we may face unexpected liabilities.
Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us
against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the
liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We
cannot assure you that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities
that adversely affect our financial condition or results of operations.
Our limited operating experience and market recognition in new international markets may limit our international expansion
strategy and cause our international return on investments and growth to suffer.
Our future growth depends in part on our international expansion efforts, including efforts in emerging markets such as
China. We have limited experience with regulatory environments and market practices internationally, and we may not be able to
penetrate or successfully operate in locations and environments unfamiliar to us. Additionally, global operations are subject to risks,
including political and economic instability, general economic conditions, imposition of government controls, the need to comply with
a wide variety of foreign and United States export laws and trade restrictions. In connection with our expansion efforts we may
encounter obstacles we did not face in North America, including cultural and linguistic differences, differences in regulatory
environments, labor and market practices, difficulties in keeping abreast of market, business and technical developments, foreign
customers’ requirements and preferences, and the difficulty of administering business overseas. Further, sales practices in certain
international markets may be inconsistent with our desired business practices and U.S. and other legal requirements, which may
impact our ability to expand as planned. We may also encounter difficulty expanding in new international markets because of
competitors already entrenched in the market, and our limited brand recognition leading to delayed acceptance of our products in these
new international markets. Our failure to develop new markets or disappointing growth outside of existing markets may negatively
affect our return on investments relating to our international expansion efforts.
During fiscal 2015 we continued to invest significantly in infrastructure in China so that we can more readily import and sell
our products. However, risks and uncertainties related to political and economic conditions in China, traditional business practices,
foreign currency fluctuations, interest rate fluctuations, regulatory and reimbursement approvals, competitive offerings, infrastructure
development complications and intellectual property protection may adversely impact our ability to implement our business strategy in
this market and, as a result, our sales growth and operating profits from our international operations may be adversely affected.
24
Further, international markets are increasingly being affected by economic pressure to contain reimbursement levels and
healthcare costs, and certain international markets may also be impacted by foreign government efforts to understand healthcare
practices and pricing in other countries, which could result in increased pricing transparency across geographies and pressure to
harmonize reimbursement and ultimately reduce the selling prices of our products.
Most international jurisdictions have regulatory approval and periodic renewal requirements for medical devices, and
countries that previously did not have regulatory requirements for medical devices may adopt such requirements; we must comply
with these requirements in order to market our products in these jurisdictions. In addition, the trend in countries around the world
toward more stringent regulatory requirements for product clearance, changing reimbursement models, and more rigorous inspection
and enforcement activities has generally caused or may cause us and other medical device manufacturers to experience more
uncertainty, delay, risk, and expense. We expect the international regulatory environment will continue to evolve, which could impact
our ability to obtain approvals for our products in those jurisdictions, which may have a material impact on our business.
Further, any significant changes in the competitive, political, legal, regulatory, reimbursement or economic environment
where we conduct international operations may have a material impact on our business, financial condition or results of operations.
Health care policy changes, including U.S. health care reform legislation signed in 2010, may have a material adverse effect on us.
In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the
federal government, state governments, regulators, and third-party payers to control these costs and, more generally, to reform the
U.S. health care system. Certain of these proposals could limit the prices we are able to charge for our products or the amounts of
reimbursement available for our products and could limit the acceptance and availability of our products. The adoption of some or all
of these proposals could have a material adverse effect on our financial position and results of operations.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of
2010 were signed into law. The legislation imposes significant new taxes on medical device makers in the form of a 2.3% excise tax
on all U.S. medical device sales since January 2013. Under the legislation, the total cost to the medical device industry is expected to
be approximately $20 billion over ten years. This significant increase in the tax burden on our industry could have a material, negative
impact on our results of operations and our cash flows. Since a significant portion of our sales are considered medical device sales
under this new legislation, beginning in January 2013 we record the excise tax in cost of sales, thereby adversely affecting our gross
profit percentage. During fiscals 2015 and 2014, our total excise tax incurred were $4,369,000 and $3,872,000, respectively, which
decreased our gross profit by such amounts. Although we have been implementing cost reductions and revenue enhancement
initiatives to mitigate this excise tax, the tax has adversely affected our results of operations and cash flows as indicated above. Other
elements of this legislation, such as comparative effectiveness research, an independent payment advisory board, payment system
reforms, including shared savings pilots, and other provisions, could meaningfully change the way health care is developed and
delivered, and may materially impact numerous aspects of our business. In addition, various healthcare reform proposals have also
emerged at the state level. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level,
or what the ultimate effect of federal healthcare reform or any future legislation or regulation may have on us or on our customers’
purchasing decisions regarding our products and services.
Our stock price has been volatile from time to time and may experience continued significant price and volume fluctuations in the
future that could reduce the value of outstanding shares.
The market for our common stock has, from time to time, experienced significant price and volume fluctuations that may
have been unrelated to our operating performance. Factors such as announcements of our quarterly financial results and new business
developments could also cause the market price of our common stock to fluctuate significantly.
Competition from lower cost manufacturing facilities such as those located in China, Southeast Asia and certain locations within
North America could result in a reduction in our net sales of healthcare disposable products due to reduced average selling prices
or our customers no longer purchasing certain products from us.
Despite expensive shipping costs, quality concerns, sustainability issues and other matters, some of our competitors
manufacture certain healthcare disposable products in lower cost locations such as China, Southeast Asia and certain locations within
North America. Although we believe the quality of our healthcare disposable products, which are generally produced in the United
States, are superior, our sales in the future may be adversely affected by either loss of sales or reductions in the prices of our products
as a result of this lower cost competition. Price erosion resulting from lower cost competition did not have a material adverse impact
on our business during fiscal year 2015, but no assurance can be given that we will not face increased competition in the future.
25
We are subject to extensive government regulation, which may delay or prevent new product introduction.
Our operations are subject to extensive regulation by governmental and private agencies in both the United States and in
other countries where we do business. In the United States, our products and services are regulated by the FDA and other regulatory
authorities. In many foreign countries, sales of our products are subject to extensive regulations that may or may not be comparable to
those of the FDA. In Europe, our products are regulated primarily by country and community regulations of those countries within the
European Economic Area and must conform to the requirements of those authorities.
The regulatory agencies regulate the testing, manufacturing, recordkeeping, storage, packaging, labeling, marketing,
distribution, marketing, reporting, safety and import and export of medical supplies and devices. Certain international regulatory
bodies also impose import restrictions, tariff regulations, duties and tax requirements. In general, unless an exemption applies, a
medical device or product or service must receive regulatory approval or clearance before it can be marketed or sold. Delays in agency
review can significantly delay new product introduction and may result in a product becoming “dated” or losing its market opportunity
before it can be introduced. In addition, the FDA and other agency clearances generally are required before we can make significant
modifications to existing products or market new claims or uses for existing products.
The FDA also has the authority to require a recall or modification of products in the event of a defect or other issues. The
process of obtaining marketing clearances and approvals from regulatory agencies for new products (or modifications to, or additional
claims or uses for, existing products) can be time consuming and expensive. There is no assurance that clearances or approvals will be
granted or that agency review will not involve delays that would adversely affect our ability to commercialize our products.
During the past several years, the FDA, in accordance with its standard practice, has conducted a number of inspections of
our manufacturing facilities to ensure compliance with regulatory standards relating to our testing, manufacturing, storage and
packaging of products. On occasion, following an inspection, the FDA has called our attention to certain “Good Manufacturing
Practices” compliance deficiencies.
If we fail to meet QSR’s or violate applicable FDA, EPA or other laws or regulations or if any of our medical devices are
found to be ineffective or pose an unreasonable health risk, or if we fail to adequately correct violations or comply with requests by
regulatory agencies, we could be subject to reports or warning letters, citations and fines as well as additional regulatory action
including an order to recall, replace, repair, or refund non-compliant medical devices. Further, regulatory agencies could detain or
seize adulterated or misbranded medical devices, or ban such medical devices. The regulatory agencies may also impose operating
restrictions, enjoin and/or restrain certain conduct resulting in violations of applicable law pertaining to medical devices, including a
hold on approving new devices until issues are resolved to its satisfaction, and assess civil or criminal penalties against our officers,
employees, or us. The regulatory agencies may also recommend prosecution to the DOJ.
Federal, state and foreign regulations regarding the manufacture and sale of our products are subject to change. We cannot
predict what impact, if any, such changes might have on our business. In addition, there can be no assurance that regulation of our
products will not become more restrictive in the future and that any such development would not have a material adverse effect on our
business. For a more detailed discussion on government regulation and related risks, see “Business - Government Regulation.”
Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that
could adversely affect our reputation and financial results.
Our operations, products and services are subject to environmental laws and regulations, which impose limitations on the
discharge of pollutants into the environment and establish standards for the use, generation, treatment, storage and disposal of
hazardous and non-hazardous wastes. We must also comply with various health and safety regulations in the United States and abroad
in connection with our operations. We cannot assure you that our environmental, health and safety compliance programs have been or
will at all times be effective. Failure to comply with any of these laws and regulations could result in civil and criminal, monetary and
non-monetary penalties and damage to our reputation. In addition, we cannot provide assurance that our costs of complying with
current or future environmental protection and health and safety laws and regulations will not exceed our estimates or adversely affect
our financial condition or results of operations.
In addition, we may incur costs related to remedial efforts or alleged environmental damage associated with past or current
waste disposal practices or other hazardous materials handling practices. We are also from time to time party to personal injury or
other claims brought by private parties alleging injury due to the presence of or exposure to hazardous substances. We may also
become subject to additional remedial, compliance or personal injury costs due to future events such as changes in existing laws or
regulations, changes in agency direction or enforcement policies, developments in remediation technologies, changes in the conduct of
our operations and changes in accounting rules. We cannot assure you that any liabilities arising from past or future releases of, or
26
exposures to, hazardous substances will not adversely affect our reputation or adversely affect our financial condition or results of
operations.
Healthcare cost containment pressures and legislative or administrative reforms resulting in restrictive reimbursement practices of
third-party payors or preferences for alternate therapies could decrease the demand for our products, the prices which customers
are willing to pay for those products and the number of procedures performed using our devices, which could have an adverse
effect on our business, financial condition or results of operations.
Many of our products are purchased by hospitals, physicians and other healthcare providers that typically bill various third-
party payors, including governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs,
for the healthcare services provided to their patients. The ability of customers to obtain appropriate reimbursement for their products
and services from private and governmental third-party payors is critical to the success of medical device companies. The availability
of reimbursement affects which products customers purchase and the prices they are willing to pay. Reimbursement varies from
country to country and can significantly impact the acceptance of new products and services. Even if we offer a promising new
product, we may find limited demand for the product unless reimbursement approval is obtained from private and governmental third-
party payors. Further legislative or administrative reforms to the reimbursement systems in the U.S. and foreign countries in a manner
that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures, including
price regulation, competitive pricing, coverage and payment policies, comparative effectiveness of therapies, technology assessments
and managed-care arrangements, could have a material adverse effect on our business, financial condition or results of operations.
Increases in interest rates may adversely affect our future results of operations.
At September 29, 2015, we had total outstanding borrowings of $154,500,000 under our existing credit facility that bore
interest at rates that ranged from 1.44% to 2.02%. Interest rates on outstanding borrowings are variable and substantially all of our
outstanding borrowings are typically under LIBOR contracts. Therefore, our future results of operations may be adversely affected if
LIBOR interest rates on our outstanding balance were to increase substantially, as more fully explained in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
Currency fluctuations and trade barriers could adversely affect our results of operations.
A portion of our products in all of our business segments are exported to and imported from a variety of geographic locations,
and our business could be materially and adversely affected by the imposition of trade barriers, fluctuations in the rates of exchange of
various currencies, tariff increases and import and export restrictions, affecting all of such geographies including but not limited to the
United States, Canada, the European Union, the United Kingdom, Australia, and the Far East.
Changes in the value of the Euro, British Pound, Canadian dollar, Singapore dollar and Chinese Renminbi against the United
States dollar affect our results of operations because certain cash bank accounts, accounts receivable and liabilities of Cantel and its
subsidiaries are denominated and ultimately settled in United States dollars, Euros, British Pounds, Canadian dollars, Singapore
dollars or Chinese Renminbi but must be converted into each entity’s functional currency. Furthermore, the financial statements of our
Italy, the Netherlands, United Kingdom, Canada and China subsidiaries are translated using the accounting policies described in Note
2 to the Consolidated Financial Statements and therefore are impacted by changes in the Euro, British Pound, Canadian dollar and
Chinese Renminbi exchange rates relative to the United States dollar.
We may be exposed to product liability claims resulting from the use of products we sell and distribute.
We may be exposed to product liability claims resulting from the products we sell and distribute. We maintain product
liability insurance, which we believe is adequate for our businesses. However, there can be no assurance that insurance coverage for
these risks will continue to be available or, if available, that it will be sufficient to cover potential claims or that the present level of
coverage will continue to be available at a reasonable cost. A partially or completely uninsured successful claim against us could have
a material adverse effect on us.
We use chemicals and other regulated substances in the manufacturing of our products.
In the ordinary course of certain of our manufacturing processes, we use various chemicals and other regulated substances.
Although we are not aware of any material claims involving violation of environmental or occupational health and safety laws or
regulations, there can be no assurance that such a claim may not arise in the future, which could have a material adverse effect on us.
27
We rely on intellectual property and proprietary rights to maintain our competitive position.
We rely heavily on proprietary technology that we protect primarily through licensing arrangements, patents, trade secrets
and proprietary know-how. There can be no assurance that any pending or future patent applications will be granted or that any current
or future patents, regardless of whether we are an owner or a licensee of the patent, will not be challenged, rendered unenforceable,
invalidated or circumvented or that the rights will provide a competitive advantage to us. There can also be no assurance that our trade
secrets or non-disclosure agreements will provide meaningful protection of our proprietary information. There can also be no
assurance that others will not independently develop similar technologies or duplicate any technology developed by us or that our
technology will not infringe upon patents or other rights owned by others.
If we are unable to retain key personnel, our business could be adversely affected.
Our success is dependent to a significant degree upon the efforts of key members of our management. Although none of our
key executives has an employment agreement with the Company, each executive, including division CEOs, is party to a severance
agreement with the Company. In addition, we have short and long term incentive plans for our key executives that are designed in
part to have a retentive effect on the executives. However, there can be no assurance that the terms of the severance agreements or
incentive plans will have such an effect. We believe the loss or unavailability of any such individuals could have a material adverse
effect on our business. In addition, our success depends in large part on our ability to attract and retain highly qualified scientific,
technical, sales, marketing and other personnel. Competition for such personnel is intense and there can be no assurance that we will
be able to attract and retain the personnel necessary for the development and operation of our businesses.
Item 1B.
UNRESOLVED STAFF COMMENTS.
None.
Item 2.
PROPERTIES.
Owned Facilities
Our principal owned facilities include the following:
Location
Plymouth, MN ............
Executive, administrative and sales staff, research
110,000 Endoscopy, Dialysis, Water
Purpose
Square Footage
Principal Operating
Segment
Plymouth, MN ............
operations, manufacturing and warehousing
Manufacturing, warehousing and vacant land
Purification and Filtration
65,000 Endoscopy, Dialysis, Water
Purification and Filtration
Plymouth, MN ............
Manufacturing, warehousing, administrative and
43,000 Water Purification and
sales staff
Filtration
Hauppauge, NY ..........
Executive, administrative and sales staff,
65,000 Healthcare Disposables
Buena Park, CA ..........
manufacturing and warehousing
Warehousing and regeneration plan
14,000 Water Purification and
Filtration
Conroe, TX .................
Manufacturing, warehousing and administrative,
60,000 Endoscopy
sales and other staff
Conroe, TX .................
Rush, NY ....................
Manufacturing and vacant land
Manufacturing, warehousing and administrative,
12,000 Endoscopy
38,000 Healthcare Disposables
Pomezia, Italy .............
Manufacturing, warehousing and administrative
35,000 Endoscopy
sales and other staff
offices
Southend-on-
Sea, United
Kingdom .................
Manufacturing, warehousing and administrative
offices
55,000 Endoscopy
28
Leased Facilities
Our principal leased facilities include the following:
Location
Plymouth, MN ..............
Hauppauge, NY ............
Sharon, PA ....................
Santa Fe Springs, CA ....
Lawrenceville, GA ........
Cuba, NY ......................
Burlington, Ontario .......
Skippack, PA ................
Purpose
Square Footage
Principal Operating
Segment
Warehousing
Warehousing
Manufacturing and warehousing
Manufacturing and warehousing
Manufacturing and warehousing
Administrative offices, manufacturing, warehousing
and laboratory
Sales and administrative offices, research and
engineering, manufacturing and warehousing
Sales and administrative offices, manufacturing,
warehousing and regeneration plant
44,000 Various
48,000 Healthcare Disposables
50,000 Healthcare Disposables
32,000 Healthcare Disposables
41,000 Healthcare Disposables
19,000 Healthcare Disposables
22,000 Water Purification and Filtration
23,000 Water Purification and Filtration
Heerlen, the
Sales and service offices, warehouse and distribution
26,000 Various
Netherlands ...............
Lowell, MA ...................
hub
Sales and administrative offices, manufacturing,
26,000 Water Purification and Filtration
warehousing and regeneration plant
Clevedon, United
Administrative offices, manufacturing and
20,000 Endoscopy
Kingdom ...................
Conroe, TX ...................
warehousing
Executive, sales and finance offices, research and
18,000 Endoscopy
development, training
Mebane, NC ..................
Columbia, SC ................
Little Falls, NJ...............
Administrative offices and warehousing
Administrative offices and warehousing
Corporate executive offices
16,000 Water Purification and Filtration
13,000 Water Purification and Filtration
13,000 Cantel Medical Corp.
In addition, we lease office and sales space in Singapore; Beijing, China; and Shanghai, China that is used for all of our
operating segments.
We lease additional space for our Water Purification and Filtration segment in Concord, California; Golden, Colorado;
Lakeland, Florida; Norcross, Georgia; Downers Grove, Illinois; Indianapolis, Indiana; Port Allen, Louisiana; Auburn Hills, Michigan;
Ridgeland, Mississippi; Fairfield, New Jersey; Indian Trail, North Carolina; Raleigh, North Carolina; North Royalton, Ohio;
Claremore, Oklahoma; Columbia, South Carolina; Memphis, Tennessee; Murfreesboro, Tennessee; Carrollton, Texas; Porter, Texas;
San Antonio, Texas; South Houston, Texas; Mount Jackson, Virginia; South Kent, Washington; Toronto, Ontario; and Montreal,
Quebec. The Downers Grove, Norcross, Toronto and Montreal facilities serve as warehouses and regeneration plants, while the other
locations are small storage facilities supporting local service operations.
We lease additional space for our Endoscopy segment in Southport, North Carolina; Stafford, United Kingdom; Forli, Italy;
and Toulouse, France. The Stafford, United Kingdom facility is used for administrative offices, training, technical service and
microbiology services, while the other locations provide warehousing and administrative offices.
We also lease additional space for our Healthcare Disposables segment in Englewood, Colorado that is used for
administrative offices and laboratory services.
Net rentals for leased space for fiscal 2015 aggregated $4,380,000 compared with $3,642,000 in fiscal 2014.
Item 3.
LEGAL PROCEEDINGS.
In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts
related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be
reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material effect on our business,
financial condition, results of operations or cash flows.
Item 4.
MINE SAFETY DISCLOSURES.
Not applicable.
29
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock trades on the New York Stock Exchange (NYSE) under the symbol “CMN.”
The following table sets forth, for the periods indicated, the high and low sales prices for the common stock as reported by
the NYSE.
HIGH
LOW
Fiscal Year Ended July 31, 2015
First Quarter .................................................................................................
Second Quarter ............................................................................................
Third Quarter ...............................................................................................
Fourth Quarter .............................................................................................
Fiscal Year Ended July 31, 2014
First Quarter .................................................................................................
Second Quarter ............................................................................................
Third Quarter ...............................................................................................
Fourth Quarter .............................................................................................
$
$
$
$
42.40
45.02
49.35
55.68
35.65
37.71
35.12
37.52
33.81
40.57
41.38
44.73
25.86
31.70
30.05
30.52
During fiscal 2015, we paid semi-annual cash dividends totaling $0.10 per outstanding share of common stock of which
$0.05 per share was paid on each of January 30, 2015 and July 31, 2015. During fiscal 2014, we paid semi-annual cash dividends
totaling $0.09 per outstanding share of common stock of which $0.045 per share was paid on each of January 31, 2014 and July 31,
2014. Future declaration of dividends and the establishment of future record and payment dates are subject to the final determination
of the Company’s Board of Directors. However, it is our current expectation that semiannual cash dividends of at least $0.05 per
common share will continue to be paid in the foreseeable future.
On August 31, 2015, the closing price of our common stock was $49.63 as reported by the NYSE and we had 380 record
holders of common stock. A number of such holders of record are brokers and other institutions holding shares of common stock in
“street name” for more than one beneficial owner.
The following table represents information with respect to purchases of common stock made by the Company during the
fourth quarter of fiscal 2015:
Month
of
Purchase
May ..............................
June ..............................
July ...............................
Total .............................
Total number of
shares purchased
Average price
paid per share
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number of
shares that may yet
be purchased under
the program
3,969
96
2,614
6,679
$
$
46.62
52.55
54.61
49.83
—
—
—
—
—
—
—
—
The Company does not currently have a repurchase program. All of the shares purchased during the fourth quarter of fiscal
2015 represent shares surrendered to the Company relating to cashless exercises and to pay employee withholding taxes due upon the
vesting of restricted stock or the exercise of stock options.
30
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock for the last five fiscal years with
the cumulative total returns of the Russell 2000 index and the Dow Jones US Health Care Equipment & Services index over the
same period (assuming an investment of $100 in our common stock and in each of the indexes on July 31, 2010, and where
applicable, the reinvestment of all dividends).
31
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected financial data are derived from the financial statements of Cantel Medical Corp., which have been
audited by Ernst & Young LLP, independent registered public accounting firm. The financial data in the following table is qualified
in its entirety by, and should be read in conjunction with, the financial statements and notes thereto and other information incorporated
by reference in this Form 10-K. Since the acquisitions of International Medical Service S.r.l. (“IMS”), Pure Water Solutions, Inc.
(“PWS”) and DentaPure® (“DentaPure”) were consummated on November 3, 2014, January 1, 2015 and February 20, 2015,
respectively, their results of operations are included in the Consolidated Statements of Income Data for the portion of fiscal 2015
subsequent to their respective acquisition dates. Since the acquisitions of Jet Prep Ltd. (“Jet Prep”), Sterilator Company, Inc.
(“Sterilator”) and PuriCore International Limited (“PuriCore”) were completed on November 5, 2013, January 7, 2014 and June 30,
2014, respectively, their results of operations are included in the Consolidated Statements of Income Data for fiscal 2015 and the
portion of fiscal 2014 subsequent to their respective acquisition dates. Since the acquisition of SPS Medical Supply Corp. (“SPS
Medical”) and the acquisitions of the assets and business of Eagle Pure Water Systems, Inc. (“Eagle Pure Water”) and the
hemodialysis water business of Siemens Industry, Inc. and Siemens Canada Limited (collectively, “Siemens”) were completed on
November 1, 2012, December 31, 2012 and July 30, 2013, respectively, their results of operations are included in the Consolidated
Statements of Income Data for fiscals 2015, 2014 and the portion of fiscal 2013 subsequent to their respective acquisition dates. Since
the acquisition of the assets and business of Byrne Medical, Inc. (“Byrne Medical”) was consummated on August 1, 2011, its results
of operations are included in the Consolidated Statements of Income Data for fiscals 2015, 2014, 2013 and 2012. The acquired
business of ConFirm Monitoring Systems, Inc. (“ConFirm Monitoring”) and the hemodialysis water business of Gambro (the
“Gambro Water”) on February 11, 2011 and October 6, 2010, respectively, are reflected in the Consolidated Statements of Income
Data for fiscals 2015, 2014, 2013, 2012 and the portion of fiscal 2011 subsequent to their respective acquisition dates. The acquired
businesses of IMS, PWS, DentaPure, Jet Prep, Sterilator, PuriCore, SPS Medical, Eagle Pure Water, Siemens, Byrne Medical,
ConFirm Monitoring, and Gambro Water are not reflected in the Consolidated Statements of Income Data for any other periods
presented.
Consolidated Statements of Income Data
(Amounts in thousands, except per share data)
2015
2014
Year Ended July 31,
2013
2012
2011
Net sales ............................................................
Cost of sales ......................................................
Gross profit .......................................................
$
$
565,004
311,537
253,467
$
488,749
275,450
213,299
425,026
241,550
183,476
$
$
386,490
222,323
164,167
321,651
198,868
122,783
Income from operations ....................................
Interest expense, net ..........................................
Other expense ...................................................
Income before income taxes .............................
Income taxes .....................................................
Net income ........................................................
Earnings per common share:
Basic .............................................................
Diluted ..........................................................
Dividends per common share ............................
80,761
2,364
2,206
76,191
28,238
47,953
1.16
1.15
0.10
$
$
$
$
70,928
2,317
—
68,611
25,346
43,265
1.05
1.04
0.09
$
$
$
$
63,188
2,834
—
60,354
21,115
39,239
0.96
0.95
0.07
$
$
$
$
52,124
3,650
605
47,869
16,532
31,337
0.78
0.77
0.06
$
$
$
$
31,336
874
—
30,462
10,037
20,425
0.53
0.52
0.05
$
$
$
$
Weighted average number of shares and
common stock equivalents attributable
to both common stock and participating
securities
Basic .................................................................
Diluted ..............................................................
41,518
41,581
41,310
41,470
40,908
41,197
40,338
40,777
38,474
38,979
32
Consolidated Balance Sheets Data
(Amounts in thousands, except per share data)
2015
2014
July 31,
2013
2012
2011
Total assets ........................................................
Current assets ....................................................
Current liabilities ..............................................
Working capital .................................................
Long-term debt .................................................
Stockholders’ equity .........................................
Book value per outstanding common share ......
Common shares outstanding .............................
$
$
584,031
188,361
70,624
117,737
78,500
406,633
9.77
41,604
$
$
536,145
163,909
66,499
97,410
80,500
365,246
8.81
41,442
$
$
487,671
150,660
59,151
91,509
85,000
321,132
7.81
41,138
$
$
434,812
133,892
55,141
78,751
80,000
275,936
6.79
40,651
$
$
321,443
111,324
43,411
67,913
24,000
234,315
6.03
38,865
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help you understand Cantel Medical Corp. (“Cantel”). The MD&A is provided as a supplement to and should be read in
conjunction with our financial statements and the accompanying notes. Our MD&A includes the following sections:
Overview provides a brief description of our business and a summary of significant activity that has affected or may affect our results
of operations and financial condition.
Results of Operations provides a discussion of the consolidated results of operations for fiscal 2015 compared with fiscal 2014, and
fiscal 2014 compared with fiscal 2013.
Liquidity and Capital Resources provides an overview of our working capital, cash flows, contractual obligations, financing and
foreign currency activities.
Critical Accounting Policies provides a discussion of our accounting policies that require critical judgments, assumptions and
estimates.
Overview
Cantel is a leading provider of infection prevention and control products and services in the healthcare market, specializing in
the following operating segments:
Endoscopy: Medical device reprocessing systems, disinfectants, detergents and other supplies used to high-level disinfect flexible
endoscopes and disposable infection control products intended to reduce the challenges associated with proper cleaning and high-
level disinfection of numerous reusable components used in gastrointestinal (“GI”) endoscopy procedures. This segment recently
commenced the sale of endoscope transport and storage systems, a comprehensive range of endoscopy consumable accessories,
and OEM mobile medical carts. Additionally, this segment includes technical maintenance service on its products.
Water Purification and Filtration: Water purification equipment and services, filtration and separation products and disinfectant,
sterilization and decontamination products and services for the medical, pharmaceutical, biotech, beverage and commercial
industrial markets.
Healthcare Disposables: Single-use, infection prevention and control healthcare products including face masks, sterilization
pouches, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups and disinfectants, as well as a filter system
for maintaining safe dental unit waterlines. This segment also manufactures and sells biological and chemical indicators for
sterility assurance monitoring services in the acute-care, alternate-care and dental markets.
Dialysis: Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.
In addition, we had another operating segment through April 7, 2015, known as Specialty Packaging. This segment included
specialty packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological
specimens and thermally sensitive pharmaceutical, medical and other products. The Specialty Packaging operating segment, which
comprised the Other reporting segment for financial reporting purposes, was divested on April 7, 2015 as further described elsewhere
in this MD&A and in Note 19 to the Consolidated Financial Statements.
33
Most of our equipment, consumables and supplies are used to help prevent or control the occurrence or spread of infections.
Significant Activity
(i)
In fiscal 2015 compared with fiscal 2014, net sales increased by 15.6% and net income under United States generally
accepted accounting principles (GAAP) increased by 10.8%, respectively. However, after adjusting net income for
amortization expense and atypical items, non-GAAP adjusted net income increased by 16.8%, as further described
elsewhere in this MD&A. (See Non-GAAP Financial Measures section below for a further discussion and reconciliation
of net income to adjusted net income). We continue to benefit from having a broad portfolio of infection prevention and
control products sold into diverse business segments, where approximately 73% of our net sales are attributable to
consumable products and service. The primary factors that contributed to this financial performance, as further described
elsewhere in this MD&A, were as follows:
higher sales in our Endoscopy segment principally due to (i) increases in sales volume of endoscope reprocessing
disinfectant, service, equipment accessories and filter products as a result of the increased field population of
equipment, as well as disposable infection control products used in GI endoscopy procedures due to marketing
efforts, (ii) increased demand for our endoscope reprocessing equipment and (iii) the inclusion of sales of our
recent acquisitions,
higher sales and improved gross profit percentage in our Water Purification and Filtration segment due to higher
sales of our capital equipment, consumables and service in the dialysis industry mainly attributable to the
increased overall demand driven by the growing number of dialysis patients and clinics in the United States and
the increasing market acceptance of the disinfection efficacy and cost benefits of our heat sanitized water
purification systems,
higher sales in our Healthcare Disposables segment due to increased demand for our face masks and sterilants, as
well as the inclusion of sales of a recent acquisition, and
a favorable net change of $2,804,000 in fiscal 2015 compared with fiscal 2014 of fair value adjustments in
general and administrative expenses in our Endoscopy segment primarily related to the Jet Prep Acquisition,
which also favorably impacted our effective tax rate, as further described elsewhere in this MD&A and in Notes
3, 6 and 10 to the Consolidated Financial Statements.
The above factors were partially offset by:
our strategic decision to invest in selling initiatives designed to expand into new markets and gain or maintain
market share,
an increase of $3,289,000 in acquisition related charges recorded in cost of sales and general and administrative
expenses primarily in our Endoscopy segment, which also adversely impacted our effective tax rate since most of
such costs were not tax deductible,
an increase in R&D expense due to additional product development initiatives,
the recording of a $2,206,000 loss on sale of our Specialty Packaging Business in April 2015, which also
adversely impacted our effective tax rate, as further described elsewhere in this MD&A and in Note 19 to the
Consolidated Financial Statements, and
a $1,287,000 asset impairment charge in fiscal 2015 relating to an acquired license, as further described
elsewhere in this MD&A and in Note 6 to the Consolidated Financial Statements.
(ii) We sell our dialysis products to a concentrated number of customers. Sales in our Dialysis segment have been adversely
impacted in recent years by the decrease in demand for our sterilants, RENATRON® reprocessing equipment and
dialysate concentrate products. This reduction in dialysis sales has reduced overall profitability in this segment as
compared with profitability in prior periods. Our market for dialysis reprocessing products is limited to dialysis centers
that reuse dialyzers, which market has been decreasing in the United States despite the environmental advantages and our
belief that the per-procedure cost of reuse dialyzers is more economical than single-use dialyzers. Based on discussions
with customers, we expect the downward trend in re-use dialyzers in the United States will continue and likely accelerate
during fiscal 2016 and thereafter. A substantial reduction of our dialysis re-use business will likely have a significant
adverse effect on our dialysis segment business and reduce our margins and net income in that segment as well as result
34
in potential future impairments of long-lived assets. Such reduction would also adversely affect our consolidated results
of operations. See “Risk Factors” elsewhere in this form 10-K.
(iii)
(iv)
(v)
(vi)
On February 20, 2015, we acquired all the issued and outstanding capital stock of MRLB International, Inc.
(“DentaPure”), as more fully described in Note 3 to the Consolidated Financial Statements (the “DentaPure
Acquisition”).
On January 1, 2015, we acquired certain net assets of Pure Water Solutions, Inc. (“PWS”), as more fully described in
Note 3 to the Consolidated Financial Statements (the “PWS Acquisition”).
On November 3, 2014, we acquired all of the issued and outstanding stock of International Medical Service S.r.l.
(“IMS”), as more fully described in Note 3 to the Consolidated Financial Statements (the “IMS Acquisition”). Following
the acquisition, we changed the name of IMS to Cantel Medical (Italy) S.r.l.
On June 30, 2014, we acquired all the issued and outstanding capital stock of PuriCore International Limited
(“PuriCore”), as more fully described in Note 3 to the Consolidated Financial Statements (the “PuriCore Acquisition”).
Following the acquisition, we changed the name of PuriCore to Cantel Medical (UK) Limited.
(vii) On January 7, 2014, we acquired all the issued and outstanding stock of Sterilator Company, Inc. (“Sterilator”), as more
fully described in Note 3 to the Consolidated Financial Statements (the “Sterilator Acquisition”).
(viii) On November 5, 2013, we acquired all the issued and outstanding stock of Jet Prep Ltd. (“Jet Prep”), as more fully
described in Note 3 to the Consolidated Financial Statements (the “Jet Prep Acquisition”). Certain components of the
acquisition’s purchase price were recorded at fair value and will be continually remeasured at each balance sheet date,
which has the potential for creating earnings volatility as further described elsewhere in this MD&A and in Notes 3 and 6
to the Consolidated Financial Statements.
(ix)
(x)
On March 4, 2014, we entered into a $250,000,000 Third Amended and Restated Credit Agreement with our senior
lenders to refinance our working capital credit facilities, as more fully described elsewhere in this MD&A and in Note 9
to the Consolidated Financial Statements.
On November 6, 2014, our Board of Directors approved an increase in its semi-annual cash dividend from $0.045 to
$0.05 per outstanding share of our common stock, which was paid on each of January 30, 2015 and July 31, 2015, as
more fully described elsewhere in this MD&A.
Results of Operations
The results of operations described below reflect the operating results of Cantel and its wholly-owned subsidiaries.
The acquisitions of DentaPure, PWS and IMS were consummated on February 20, 2015, January 1, 2015 and November 3,
2014, respectively. Accordingly, the results of operations of DentaPure, PWS and IMS are included in our consolidated results of
operations for the portions of fiscal 2015 subsequent to their acquisition dates. These three acquisitions are not included in our results
of operations in fiscals 2014 and 2013. However, with the exception of acquisition related costs as more fully described in the Non-
GAAP Financial Measures section below, their results of operations did not have a significant effect on our consolidated results of
operations in fiscal 2015 due to the size of the acquisitions in relation to our overall consolidated results of operations. The DentaPure
Business is included in our Healthcare Disposables segment, the PWS Acquisition is included in our Water Purification and Filtration
segment and the IMS Acquisition is included in our Endoscopy segment.
Since the acquisitions of PuriCore, Sterilator and Jet Prep were consummated on June 30, 2014, January 7, 2014 and
November 5, 2013, respectively, their results of operations are included in our consolidated results of operations in fiscal 2015 and the
portions of fiscal 2014 subsequent to their respective acquisition dates. Their results of operations are not included in our results in
fiscal 2013. With the exception of acquisition related costs and fair value adjustments as more fully described in the Non-GAAP
Financial Measures section below, these acquisitions did not have a significant effect on our consolidated results of operations due to
the size of the acquisitions in relation to our overall consolidated results of operations. The PuriCore and Jet Prep businesses are
included in our Endoscopy segment and the Sterilator business is included in our Healthcare Disposables segment.
As a result of the divestiture of our Specialty Packaging business on April 7, 2015, the results of operations of the business
are included in our consolidated results of operations in fiscal 2015 prior to its divestiture date and are included in our consolidated
results of operations for fiscals 2014 and 2013. Since the operating results of the Specialty Packaging segment, which is recorded in
35
business did not have a major effect on our operations and financial results, and accordingly, has not been classified as a discontinued
operation for any of the periods presented.
The following tables give information as to the net sales by reporting segment and geography (which represent the
geographic area from which the Company derives its net sales from external customers), as well as the related percentage of such sales
to the total net sales.
2015
$
%
Year Ended July 31,
2014
(Dollar amounts in thousands)
$
%
2013
$
%
248,654
44.0
190,440
39.0
160,317
173,834
106,920
31,240
4,356
565,004
447,848
117,156
565,004
30.8
18.9
5.5
0.8
100.0
79.3
20.7
100.0
159,505
101,809
30,926
6,069
488,749
403,892
84,857
488,749
Fiscal 2015 compared with Fiscal 2014
32.7
20.8
6.3
1.2
100.0
82.6
17.4
100.0
134,196
90,904
33,148
6,461
425,026
357,378
67,648
425,026
37.7
31.6
21.4
7.8
1.5
100.0
84.1
15.9
100.0
Net Sales by Segment
Endoscopy ....................................
Water Purification and
Filtration ..................................
Healthcare Disposables ................
Dialysis ........................................
Other ............................................
Total net sales ..............................
Net Sales by Geography
United States ................................
International .................................
Total net sales ..............................
Net Sales
Total net sales increased by $76,255,000, or 15.6%, to $565,004,000 in fiscal 2015 from $488,749,000 in fiscal 2014.
Excluding the impact of recent acquisitions and the business divestiture, total organic sales increased by $44,179,000, or 9.2%. The
increase in organic net sales for fiscal 2015 was primarily attributable to increases in net sales of our endoscopy and water purification
and filtration products and services and healthcare disposables products.
International net sales increased by $32,299,000, or 38.1%, to $117,156,000 in fiscal 2015 from $84,857,000 in fiscal 2014.
The increase in international net sales was primarily due to increases in net sales of endoscopy products and services in the United
Kingdom and Italy as a result of the acquisitions of PuriCore and IMS. A significant portion of the net sales of the acquired United
Kingdom business relates to product service, and therefore the acquisition was a significant reason for our worldwide product service
net sales to increase by $17,130,000, or 31.6%, to $71,348,000 in fiscal 2015 from $54,218,000 in fiscal 2014.
Net sales of endoscopy products and services increased by $58,214,000, or 30.6%, in fiscal 2015 compared with fiscal 2014,
primarily due to increases in demand in the United States and internationally for our (i) disinfectants, service, equipment accessories
and filters due to the increase in the installed base of endoscope reprocessing equipment, (ii) procedure room products (disposable
infection control products used in GI endoscopy procedures) and (iii) endoscope reprocessing equipment. We expect sales of
disinfectants, service, equipment accessories and filters, most of which carry higher margins, to continue to benefit as we increase the
installed base of endoscope reprocessing equipment. Additionally, the increase in fiscal 2015 was attributable to the inclusion of net
sales generated in the United Kingdom and Italy as a result of acquiring PuriCore on June 30, 2014 and IMS on November 3, 2014.
Excluding the incremental net sales provided by these acquisitions, organic net sales in our Endoscopy segment increased by 15.5%
for fiscal 2015. These increases were partially offset by overall lower selling prices in most endoscopy product offerings totaling
approximately $4,100,000 as a result of strategic growth programs and increased competition, as well as the adverse impact on
international sales of a stronger dollar relative to the euro, which accounted for approximately a third of the lower selling prices.
Net sales of water purification and filtration products and services increased by $14,329,000, or 8.9%, in fiscal 2015
compared with fiscal 2014 primarily attributable to (i) higher sales of our capital equipment, consumables and service in the dialysis
industry mainly attributable to our expanding service network as well as the increased overall demand driven by the growing number
of dialysis patients and clinics in the United States and the increasing market acceptance of the disinfection efficacy and cost benefits
of our heat sanitized water purification systems, which carry higher average selling prices than the systems with the traditional non-
heated sanitization and to a much lesser extent (ii) the inclusion of net sales generated by the PWS Acquisition. Excluding net sales
relating to the PWS Acquisition, organic net sales in our Water Purification and Filtration segment increased by 6.8% for fiscal 2015.
36
Net sales of healthcare disposables products increased by $5,111,000, or 5.0%, in fiscal 2015 compared with fiscal 2014
principally due to increases in customer demand in the United States for our face masks, ortho-phthalaldehyde (OPA)-based high-level
disinfectant and sterility assurance products as well as the inclusion of net sales generated by the DentaPure Acquisition, which was
completed on February 20, 2015. Excluding net sales relating to the DentaPure Acquisition, organic net sales in our Healthcare
Disposables segment increased by 3.7% for fiscal 2015.
Gross Profit
Gross profit increased by $40,168,000, or 18.8%, to $253,467,000 in fiscal 2015 from $213,299,000 in fiscal 2014. Gross
profit as a percentage of net sales in fiscals 2015 and 2014 was 44.9% and 43.6%, respectively.
The higher gross profit as a percentage of net sales in fiscals 2015 and 2014, was primarily attributable to more favorable
sales mix due to increases in sales volume of certain products that carry higher gross margin percentages such as our (i) sterilants,
filters and procedure products in our Endoscopy segment, (ii) sterilants, filters and certain equipment products in our Water
Purification and Filtration segment, and (iii) face masks, disinfectants, sterility assurance products and our recently acquired
DentaPure products in our Healthcare Disposables segment. These items were partially offset by (i) acquisition accounting charges for
fiscal 2015 of $1,981,000, relating to fair value adjustments of inventory and deferred revenue acquired in the acquisitions of
DentaPure, IMS and PuriCore and (ii) the inclusion in our Endoscopy segment of the PuriCore Acquisition, which had a lower gross
profit as a percentage of net sales. Excluding the impact of acquisition accounting charges, gross profit as a percentage of net sales in
fiscals 2015 and 2014 were 45.2% and 43.6%, respectively.
We cannot provide assurances that our gross profit percentage will not be adversely affected in the future (i) by uncertainties
associated with our product mix, (ii) by price competition, (iii) the market shift from reusable to single-use dialyzers in our Dialysis
segment as further explained elsewhere in this MD&A, or (iv) if raw materials and distribution costs increase and we are unable to
implement offsetting price increases.
Operating Expenses
Selling expenses increased by $14,268,000, or 21.5%, to $80,787,000 in fiscal 2015 from $66,519,000 in fiscal 2014
primarily due to (i) increased sales and marketing initiatives to expand into new markets, including international markets, and gain or
maintain market share by hiring and training additional sales and marketing personnel and increasing travel budgets in our Endoscopy
and Water Purification and Filtration segments and to a lesser extent, our Healthcare Disposables segment, (ii) the inclusion of selling
and marketing expenses of DentaPure, PWS, IMS and PuriCore in fiscal 2015, (iii) higher commission expense principally in our
Endoscopy segment as a result of higher sales and (iv) increases in annual salaries.
Selling expenses as a percentage of net sales were 14.3% in fiscal 2015 compared with 13.6% in fiscal 2014.
General and administrative expenses increased by $12,858,000, or 19.8%, to $77,897,000 in fiscal 2015 from $65,039,000 in
fiscal 2014 primarily due to (i) the inclusion of general and administrative expenses of DentaPure, PWS and IMS for the portion of
fiscal 2015 subsequent to their acquisition dates, (ii) the inclusion of general and administrative expenses of Jet Prep, Sterilator and
PuriCore for the portion of fiscal 2014 subsequent to their fiscal 2014 acquisition dates compared with twelve months of such
expenses in fiscal 2015, (iii) an increase of $2,624,000 in intangible amortization as a result of acquisitions, (iv) an increase of
$1,308,000 in acquisition related charges primarily in our Endoscopy segment, (v) a $1,287,000 asset impairment charge in fiscal
2015 relating to an acquired license in our Endoscopy segment, and (vi) increases in annual salaries and incentive compensation
including stock-based compensation. These items were partially offset by a favorable net change of $2,804,000 in fiscal 2015
compared with fiscal 2014 for fair value adjustments of contingent liabilities primarily associated with the Jet Prep Acquisition in our
Endoscopy segment, as further described elsewhere in this MD&A and in Notes 3 and 6 to the Consolidated Financial Statements, as
well as fiscal 2014 costs associated with the retirement of our Chief Financial Officer. Excluding (i) current and prior year
amortization expense, (ii) current and prior year significant acquisition related items such as transaction and integration charges and
fair value adjustments, (iii) the current year impairment of an acquired license, and (iv) prior year costs associated with the retirement
of our Chief Financial Officer, as further described within Non-GAAP Financial Measures elsewhere in this MD&A, general and
administrative expenses increased by $11,087,000, or 21.1%, to $63,747,000 in fiscal 2015 from $52,660,000 in fiscal 2014.
General and administrative expenses as a percentage of net sales were 13.8% in fiscal 2015 compared with 13.3% in fiscal
2014.
Research and development expenses (which include continuing engineering costs) increased by $3,209,000, or 29.7%, to
$14,022,000 in fiscal 2015 from $10,813,000 in fiscal 2014 primarily due to additional product development initiatives primarily in
our Endoscopy segment, including the inclusion of projects relating to the acquired PuriCore and IMS businesses. Since the additional
37
our Endoscopy segment, including the inclusion of projects relating to the acquired PuriCore and IMS businesses. Since the additional
product development initiatives are on-going, we expect future research and development expenses to continue to exceed amounts
reported in prior years.
Research and development expense as a percentage of net sales were 2.5% and 2.2% in fiscals 2015 and 2014, respectively.
Operating Income by Segment
The following table gives information as to the amount of operating income, as well as operating income as a percentage of
net sales, for each of our reporting segments.
Year Ended July 31,
2015
2014
Operating
Income
(Dollar amounts in thousands)
Operating
Income
% of
Net sales
% of
Net sales
Endoscopy ...........................................
Water Purification and Filtration ........
Healthcare Disposables .......................
Dialysis ...............................................
Other ...................................................
Operating income by segment ............
General corporate expenses ................
Income from operations ......................
$
$
40,863
30,606
19,904
6,749
1,118
99,240
(18,479 )
80,761
16.4 % $
17.6 %
18.6 %
21.6 %
25.7 %
17.6 %
14.3 % $
34,194
25,750
18,720
7,547
815
87,026
(16,098 )
70,928
18.0 %
16.1 %
18.4 %
24.4 %
13.4 %
17.8 %
14.5 %
The Endoscopy segment’s operating income increased by $6,669,000, or 19.5%, in fiscal 2015 compared with fiscal 2014
primarily due to increases in demand in the United States and internationally for our endoscopy products and services, as further
explained above, and a favorable net change of $2,804,000 in general and administrative expenses relating to fair value contingent
liabilities adjustments that were favorable in the current year compared to moderately unfavorable in the prior year, as further
described Notes 3 and 6 to the Consolidated Financial Statements. These items were partially offset by (i) increased investment in our
sales team and other selling initiatives, (ii) lower selling prices of certain endoscopy products, (iii) an increase in acquisition related
charges, (iv) increased research and development expenses due to additional product development initiatives, (v) increased intangible
amortization as a result of acquisitions, (vi) a $1,287,000 asset impairment charge in fiscal 2015 relating to an acquired license, and
(vii) increases in annual salaries and incentive compensation. Excluding the fair value adjustments, acquisition related charges and the
asset impairment stated above and further described within Non-GAAP Financial Measures elsewhere in this MD&A, the Endoscopy
segment’s operating income increased by $7,922,000, or 22.5% in fiscal 2015 compared with fiscal 2014.
The Water Purification and Filtration segment’s operating income increased by $4,856,000, or 18.9%, in fiscal 2015
compared with fiscal 2014 primarily as a result of higher sales and improved gross profit percentage, as further explained above,
partially offset by increases in annual salaries and the hiring of additional sales personnel, which is expected to continue to increase
through fiscal 2016.
The Healthcare Disposables segment’s operating income increased by $1,184,000, or 6.3% in fiscal 2015 compared with
fiscal 2014 primarily due to an increase in net sales, as further explained above, partially offset by (i) an increase of $280,000 of
acquisition related charges primarily relating to the fair value adjustment of DentaPure’s inventory, (ii) the hiring of additional sales
personnel, and (iii) annual salary raises. Excluding acquisition related charges further described within Non-GAAP Financial
Measures elsewhere in this MD&A, the Healthcare Disposables segment’s operating income increased by $1,464,000, or 7.8% in
fiscal 2015 compared with fiscal 2014.
The Dialysis segment’s operating income decreased by $798,000, or 10.6%, in fiscal 2015 compared with fiscal 2014
primarily due to a decrease in demand for our sterilant product and RENATRON® dialyzer reprocessing equipment, partially offset by
an increase in demand for our low margin concentrate product. In recent years, sales in our Dialysis segment have been adversely
impacted by the decrease in demand for our sterilants and RENATRON® reprocessing equipment principally due to the shift from
reusable to single-use dialyzers as a result of the declining cost of single-use dialyzers, the ease of using a dialyzer one time, and the
commitment of Fresenius Medical Care, the largest dialysis provider chain in the United States and a manufacturer of single-use
dialyzers, to convert dialysis clinics performing reuse to single-use facilities. In addition, DaVita, a customer who accounted for
approximately 28% of net sales in this segment, has been evaluating the economics and other factors associated with single-use versus
reuse on a regional basis. This evaluation has resulted in the conversion by DaVita of certain clinics from reuse to single-use and in
38
market for reprocessing products is likely to result in a significant loss of net sales and a lower level of profitability and operating cash
flow in this segment in the future as well as potential future impairments of long-lived assets. Such reduction would also adversely
affect our consolidated results of operations. See “Risk Factors” elsewhere in this form 10-K.
The operating income of our Specialty Packaging business, which was reported in the Other reporting segment and divested
on April 7, 2015, as further described elsewhere in this MD&A and in Note 19 to the Consolidated Financial Statements, increased by
$303,000 for the portion of fiscal 2015 prior to its divestiture compared with fiscal 2014 primarily due to an increase in demand for
our specialty packaging products resulting from the Ebola virus as well as recording foreign exchange gains associated with
translating certain United States dollar denominated assets into our subsidiary’s functional currency, the Canadian dollar.
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel, costs
associated with certain facets of our acquisition program and being a publicly traded company. Such expenses increased by
$2,381,000, or 14.8%, in fiscal 2015 compared with fiscal 2014 primarily due to (i) the addition of internal and external resources to
address various growth initiatives and compliance requirements, (ii) costs associated with the retirement of our Chief Financial Officer
and recruiting of executive personnel, (iii) increases in costs associated with our acquisition program, and (iv) increases in annual
salaries and stock-based compensation.
Interest
Interest expense increased by $52,000 to $2,432,000 from $2,380,000 in fiscal 2015, compared with fiscal 2014, as a result of
an increase in the average outstanding borrowings due to the funding of acquisitions, partially offset by the recording of an $113,000
charge in fiscal 2014 for the ineffective hedge on our term credit facility and an $84,000 charge in fiscal 2014 to expense the
remaining debt issuance costs on our term credit facility, as further explained in Note 5 to the Consolidated Financial Statements.
Interest income increased by $5,000 to $68,000 in fiscal 2015 from $63,000 in fiscal 2014.
Loss on Sale of Business
In fiscal 2015, we conducted a strategic review of our Specialty Packaging business and evaluated its potential value in the
marketplace relative to the business’s historic and expected returns and concluded that the business was not part of our core strategy
and could return a higher value to stockholders by its divestiture. Accordingly, our Specialty Packaging business (reported in the
Other reporting segment) was classified as held-for-sale within our Condensed Consolidated Balance Sheet beginning October 31,
2014. Since the operating results of the Specialty Packaging segment, as shown in Note 18 to the Consolidated Financial Statements,
were not significant in relation to our overall consolidated operating results, the lack of operating results from this business due to its
divestiture will not have a major effect on our operations and financial results, and accordingly, has not been classified as a
discontinued operation for any of the periods presented.
On April 7, 2015, we completed the sale of our Specialty Packaging business to a global packaging and service company by
selling all the issued and outstanding stock of our Specialty Packaging subsidiary in exchange for $7,531,000 in cash proceeds, of
which $660,000 is held in escrow for indemnity obligations, if any, until October 7, 2016 and is recorded in other assets in our
Condensed Consolidated Balance Sheet. In addition, we incurred approximately $1,128,000 in costs associated with the disposition of
this business including bonuses associated with the sale, accelerated stock-based compensation and to a lesser extent certain advisory
fees. Furthermore as a result of this disposition, we recognized a foreign currency translation gain of $1,264,000 in our Condensed
Consolidated Statement of Income, which was recorded in stockholders’ equity immediately preceding the disposition. Such foreign
currency translation gain was a result of the monthly translation of the Specialty Packaging segment’s balance sheets beginning in
2004, when the business was acquired. In addition, due to the inability to currently deduct a capital loss and the uncertainty of utilizing
a capital loss tax benefit in the future, a tax benefit was not recognized on a portion of the recorded loss on sale of the business.
Overall, this transaction, including costs associated with the disposition and the recognition of a foreign currency translation gain,
resulted in a $2,206,000 loss, or $0.04 in diluted earnings per share, which was recorded in loss on sale of business in our Condensed
Consolidated Statements of Income for fiscal 2015. Such amount is subject to further adjustments upon finalization of a net asset
value adjustment, which such estimate is currently recorded as a nominal amount, or indemnity obligations, if any.
39
Income Taxes
A reconciliation of the consolidated effective income tax rate for fiscals 2015 and 2014 is as follows:
Fiscal 2014 .......................................................................................
Differential attributable to:
International operations ................................................................
Loss on sale of business ...............................................................
Acquisition related items, net .......................................................
Other .............................................................................................
Fiscal 2015 .......................................................................................
Consolidated
Effective
Income Tax Rate
36.9 %
1.2 %
1.1 %
-2.3 %
0.2 %
37.1 %
The consolidated effective tax rate in fiscal 2015 was adversely affected by initial operating losses of our international
operations located in lower tax rate jurisdictions, as well as the $2,206,000 loss on sale of our Specialty Packaging business, as further
described elsewhere in this MD&A and in Note 19 to the Consolidated Financial Statements. Due to the inability to currently deduct a
capital loss and the uncertainty of utilizing a capital loss tax benefit in the future, a tax benefit was not recognized on a portion of the
loss on sale of the Specialty Packaging business, thereby increasing our consolidated effective tax rate.
These unfavorable items were offset by the impact of recording acquisition related items consisting of net favorable
acquisition related fair value adjustments recorded in general and administrative expenses relating to the Jet Prep Acquisition that
were not tax effected due to the structure of the acquisition, as further described elsewhere in this MD&A and in Notes 3 and 6 to the
Consolidated Financial Statements, partially offset by non-deductible acquisition related charges.
We concluded an audit by the Internal Revenue Service for fiscal years 2013 and 2012. With respect to state or foreign
income tax examinations, we are generally no longer subject to examinations for fiscal years ended prior to July 31, 2007.
Stock-Based Compensation
The following table shows the income statement components of stock-based compensation expense recognized in the
Consolidated Statements of Income:
Year Ended July 31,
2015
2014
Cost of sales .....................................................................
Operating expenses:
Selling ..........................................................................
General and administrative ..........................................
Research and development ..........................................
Total operating expenses .................................................
Stock-based compensation before income taxes ..............
Income tax benefits ..........................................................
Total stock-based compensation expense, net of tax .......
$
270,000
$
337,000
608,000
4,897,000
92,000
5,597,000
5,867,000
(2,026,000 )
3,841,000
$
665,000
4,339,000
68,000
5,072,000
5,409,000
(1,909,000 )
3,500,000
$
The above stock-based compensation expense before income taxes was recorded in the Consolidated Financial Statements as
stock-based compensation expense and an increase to additional paid-in capital. The related income tax benefits were recorded as
either an increase to current deferred income tax assets or long-term deferred income tax assets (which are netted with long-term
deferred income tax liabilities) and a reduction to income tax expense. All of our stock options and stock awards (which consist only
of restricted shares) are expected to be deductible for tax purposes, except for certain options and restricted shares granted to
employees residing outside of the United States, and were tax-effected using the Company’s estimated U.S. effective tax rate at the
time of grant.
The stock-based compensation expense recorded in the Consolidated Financial Statements may not be representative of the
effect of stock-based compensation expense in future periods due to the level of awards issued in past years (which level may not be
similar in the future), modifications of existing awards, accelerated vesting related to certain employment terminations and
40
assumptions used in determining expected lives and estimated forfeitures. The fair value of each option grant is determined on the date
of grant using the Black-Scholes option valuation model. We determine the fair value of each stock award using the closing market
price of our common stock on the date of grant. If the market price of our common stock increases or factors change and we employ
different assumptions in the application of Accounting Standards Codification (“ASC”) Topic 718, “Compensation — Stock
Compensation,” (“ASC 718”), the compensation expense that we would record for future stock awards may differ significantly from
what we have recorded in the current period.
All of our stock options and stock awards are subject to graded vesting in which portions of the award vest at different times
during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for
awards subject to graded vesting using the straight-line basis over the vesting period, reduced by estimated forfeitures. At July 31,
2015, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock
awards was $7,491,000 with a remaining weighted average period of 17 months over which such expense is expected to be
recognized. Most of our nonvested awards relate to stock awards.
If certain criteria are met when options are exercised or restricted stock becomes vested, we are allowed a deduction on its
United States income tax return. Accordingly, we account for the income tax effect on such income tax deductions as a reduction of
previously recorded deferred income tax assets and as a reduction of income taxes payable in the year of the deduction. Excess tax
benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation
expense which was determined based upon the award’s fair value at the time the award was granted. The differences noted above
between actual tax deductions and the previously recorded deferred income tax assets are recorded as additional paid-in capital. In
fiscal 2015 and 2014, income tax deductions of $5,317,000 and $5,905,000, respectively, were generated and increased additional
paid-in capital by $3,168,000 and $4,391,000, respectively. We classify the cash flows resulting from excess tax benefits as financing
cash flows in our Consolidated Statements of Cash Flows.
Net Sales
Fiscal 2014 compared with Fiscal 2013
Total net sales increased by $63,723,000, or 15.0%, to $488,749,000 in fiscal 2014 from $425,026,000 in fiscal 2013.
International net sales increased by $17,209,000, or 25.4%, to $84,857,000 in fiscal 2014 from $67,648,000 in fiscal 2013.
The increase in total net sales in fiscal 2014 was principally attributable to increases in sales of endoscopy products and
services, water purification and filtration products and services and healthcare disposables products. The increase in international net
sales was principally attributable to increases in sales of endoscopy products, primarily in Europe and the Asia-Pacific region.
Net sales of endoscopy products and services increased by $30,123,000, or 18.8%, in fiscal 2014 compared with fiscal 2013
primarily due to increases in demand in the United States and internationally for (i) our disinfectants, service, equipment accessories
and filters due to the increase in the installed base of endoscope reprocessing equipment, (ii) our valves, kits and tubing procedure
products (disposable infection control products used in gastrointestinal endoscopy procedures), and (iii) our endoscope reprocessing
equipment. We expect sales of disinfectants, service, equipment accessories and filters, most of which carry higher margins, to
continue to benefit as we increase the installed base of endoscope reprocessing equipment. Additionally, the increase was attributable
to a higher percentage of customers reimbursing us for freight costs on sales of disinfectants and the inclusion of one month of net
sales of $1,607,000 generated in the United Kingdom as a result of acquiring PuriCore on June 30, 2014. These increases were
partially offset by overall lower selling prices principally related to procedure products as a result of our strategic growth plan as well
as increased competition.
Net sales of water purification and filtration products and services increased by $25,309,000, or 18.9%, in fiscal 2014
compared with fiscal 2013 primarily due to (i) increased demand for our water purification capital equipment, consumables and
service in the dialysis industry mainly attributable to the increased overall demand driven by both the growing number of dialysis
patients and clinics in the United States, as well as our new product introductions such as our heat sanitized water purification
systems, which have higher average selling prices than the systems with the traditional non-heated sanitization technology, and the
Siemens Water Acquisition, (ii) price increases on certain water purification and filtration products, which were implemented to
partially offset increasing costs, and (iii) increased demand for our water purification equipment used for commercial and industrial
(large capital) applications. These increases were partially offset by a decrease in sales volume of our hemoconcentrator products
(filter devices used to concentrate red blood cells and remove excess fluid from the bloodstream during open-heart surgery) in fiscal
2014 due to elevated demand in the prior year as a result of a market shortage of these filters due to damage done from an earthquake
to the manufacturing facilities of a large competitor, which were subsequently repaired.
41
Net sales of healthcare disposables products increased by $10,905,000, or 12.0%, in fiscal 2014 compared with fiscal 2013
principally due to (i) the inclusion of only nine months of net sales of the SPS Business in fiscal 2013 as a result of acquiring SPS
Medical on November 1, 2012, (ii) increases in customer demand in the United States for our face masks and sterility assurance
products, (iii) a new product introduction of an ortho-phthalaldehyde (OPA)-based high-level disinfectant that can be used for manual
soak applications for the reprocessing of semi-critical devices, and (iv) price increases on certain healthcare disposables products,
which were implemented to partially offset increased costs.
Net sales of dialysis products and services decreased by $2,222,000, or 6.7%, in fiscal 2014 compared with fiscal 2013
primarily due to (i) a decrease in demand in the United States (including a decrease from our largest dialysis customer, DaVita, Inc.
(“DaVita”)) for our sterilants and RENATRON® dialyzer reprocessing equipment and (ii) lower selling prices which adversely
impacted net sales by $685,000 in fiscal 2014. Our market for dialysis reprocessing products is limited to dialysis centers that reuse
dialyzers, which market has been decreasing in the United States despite the environmental advantages and our belief that the per-
procedure cost of reuse dialyzers is more economical than single-use dialyzers. The shift from reusable to single-use dialyzers is
principally due to the declining cost of single-use dialyzers, the ease of using a dialyzer one time, and the commitment of Fresenius
Medical Care, the largest dialysis provider chain in the United States and a manufacturer of single-use dialyzers, to convert dialysis
clinics performing reuse to single-use facilities. In addition, DaVita has been evaluating the economics and other factors associated
with single-use versus reuse on a regional basis. This evaluation has resulted in the conversion by DaVita of certain clinics from reuse
to single-use and in many cases the opening of new clinics as single-use clinics. A material decrease in the market for reprocessing
products is likely to result in a significant loss of net sales and a lower level of profitability and operating cash flow in this segment in
the future as well as potential future impairments of long-lived assets. Additionally, our Dialysis segment is highly dependent upon
DaVita as a customer and any further shift by this customer away from reuse would have a material adverse effect on our Dialysis
segment net sales.
Gross Profit
Gross profit increased by $29,823,000, or 16.3%, to $213,299,000 in fiscal 2014 from $183,476,000 in fiscal 2013. Gross
profit as a percentage of net sales in fiscals 2014 and 2013 was 43.6% and 43.2%, respectively.
The higher gross profit as a percentage of net sales in fiscal 2014 compared with fiscal 2013 was primarily due to more
favorable sales mix in our three largest segments primarily due to increases in sales volume of certain products that carry higher gross
margin percentages such as our sterilants, filters and certain equipment products in our Water Purification and Filtration segment,
disinfectants, equipment accessories, filters and procedure products in our Endoscopy segment, and face masks, disinfectants and
sterility assurance products in our Healthcare Disposables segment. The higher gross profit percentage was also due to the increased
sales volume and profitability of service in our Endoscopy segment, which carries a higher gross margin percentage than our other
service offerings, as well as the inclusion in the prior year of $417,000 in severance related charges as part of cost reduction initiatives
and a $177,000 one-time acquisition accounting charge relating to the acquired inventory in the SPS Acquisition. These items were
partially offset by (i) the incremental impact of $1,785,000 in fiscal 2014 compared with fiscal 2013 relating to a new excise tax on
qualified United States medical device sales beginning January 2013 and (ii) lower selling prices of certain products primarily in our
Endoscopy segment as a result of our strategic growth plan and increased competition.
Operating Expenses
Selling expenses increased by $8,733,000, or 15.1%, to $66,519,000 in fiscal 2014 from $57,786,000 in fiscal 2013 primarily
due to (i) increased sales and marketing initiatives to expand into new markets, including international markets, and gain or maintain
market share by hiring and training additional sales and marketing personnel and increasing travel budgets primarily in our Endoscopy
segment and to a lesser extent our Water Purification and Filtration and Healthcare Disposables segments, (ii) increases in annual
salaries and incentive compensation including stock-based compensation, (iii) higher commission expense principally in our
Endoscopy segment as a result of higher sales, and (iv) the inclusion of only nine months of selling and marketing expenses of the SPS
Business in fiscal 2013 as a result of acquiring SPS Medical on November 1, 2012.
Selling expenses as a percentage of net sales were 13.6% for both fiscals 2014 and 2013.
General and administrative expenses increased by $11,857,000, or 22.3%, to $65,039,000 in fiscal 2014 from $53,182,000 in
fiscal 2013 primarily due to (i) an unfavorable net change of $2,711,000 in fiscal 2014 compared with fiscal 2013 of fair value
adjustments of contingent consideration, a price floor financial instrument and an assumed contingent liability recorded in general and
administrative expenses in our Endoscopy segment as fiscal 2014 had a net adverse fair value change of $219,000 and fiscal 2013 had
a favorable fair value change of $2,492,000, as further described in Note 6 to the Consolidated Financial Statements, (ii) hiring
additional personnel as part of our strategic growth initiative as well as to address new compliance requirements, (iii) increases in
annual salaries and stock-based compensation, (iv) the inclusion of only nine months of general and administrative expenses of the
42
SPS Business in fiscal 2013 as a result of acquiring SPS Medical on November 1, 2012, (v) an increase of $854,000 in costs
associated with our acquisition program in fiscal 2014, (vi) costs associated with the retirement of our Chief Financial Officer, (vii) an
increase of $580,000 in intangible amortization as a result of acquisitions, and (viii) the inclusion of general and administrative
expenses of PuriCore, Sterilator and Jet Prep for the periods subsequent to their acquisition dates.
General and administrative expenses as a percentage of net sales were 13.3% in fiscal 2014 compared with 12.5% in fiscal
2013.
Research and development expenses (which include continuing engineering costs) increased by $1,493,000 to $10,813,000 in
fiscal 2014 from $9,320,000 in fiscal 2013 primarily due to development work on certain new products in our Endoscopy segment as
well as the inclusion of research and development costs relating to the Jet Prep Acquisition. We expect research and development
expenses to continue to increase in fiscal 2015 as we further invest in new product development.
Operating Income by Segment
The following table gives information as to the amount of operating income, as well as operating income as a percentage of
net sales, for each of our reporting segments.
Year Ended July 31,
2014
2013
Operating
Income
(Dollar amounts in thousands)
Operating
Income
% of
Net sales
% of
Net sales
Endoscopy ..........................
Water Purification and
Filtration .........................
Healthcare Disposables ......
Dialysis ...............................
Other ...................................
Operating income by
segment ..........................
General corporate
$
34,194
18.0 % $
32,361
25,750
18,720
7,547
815
87,026
16.1 %
18.4 %
24.4 %
13.4 %
16,381
17,576
8,705
857
17.8 %
75,880
expenses .........................
Income from operations......
(16,098 )
70,928
$
14.5 % $
(12,692 )
63,188
20.2 %
12.2 %
19.3 %
26.3 %
13.3 %
17.9 %
14.9 %
The Endoscopy segment’s operating income increased by $1,833,000, or 5.7%, in fiscal 2014 compared with fiscal 2013
primarily due to higher sales and improved gross profit percentage principally due to a shift of product mix to higher margin products,
as further explained above, and the prior year inclusion of severance related charges in fiscal 2013 as part of the prior year cost
reduction initiatives. These items were partially offset by (i) unfavorable net changes of $2,711,000 of fair value adjustments of
contingent consideration, a price floor financial instrument and an assumed contingent liability recorded in general and administrative
expenses in our Endoscopy segment as the majority of these fair value adjustments were more favorable in the prior year, as further
described in Note 6 to the Consolidated Financial Statements, (ii) lower selling prices of certain endoscopy products, (iii) the
recording of medical device excise taxes in cost of sales beginning in January 2013, (iv) increased investment in our sales team and
other selling initiatives, (v) an increase in costs associated with our acquisition program, (vi) the inclusion of the initial operating
expenses relating to the November 5, 2013 acquisition of Jet Prep with no corresponding sales since the commercialization of the
product is in the beginning phase, and (vii) increases in annual salaries and incentive compensation including stock-based
compensation.
The Water Purification and Filtration segment’s operating income increased by $9,369,000, or 57.2%, in fiscal 2014
compared with fiscal 2013 primarily due to increased demand for our water purification capital equipment, consumables and service
in the dialysis industry and our water purification equipment used for commercial and industrial (large capital) applications, improved
gross profit percentage and the prior year inclusion of approximately $362,000 of acquisition costs related to the Siemens Acquisition,
partially offset by lower sales volume of hemoconcentrator products, as further explained above. Additionally, operating income was
adversely affected by increases in annual salaries and stock-based compensation, the inclusion of an excise tax on qualified U.S.
medical device sales beginning January 2013, the hiring of additional sales personnel and an increase in warranty expense per unit
relating to certain water purification capital equipment.
43
The Healthcare Disposables segment’s operating income increased by $1,144,000, or 6.5%, in fiscal 2014 compared with
fiscal 2013 primarily due to the inclusion of only nine months of operating results of the SPS Business in fiscal 2013 as a result of
acquiring the SPS Business on November 1, 2012, improved sales as explained above, and the prior year inclusion of a $177,000 one-
time acquisition accounting charge recorded in fiscal 2013 relating to the acquired inventory in the SPS Acquisition. These items were
partially offset by (i) the inclusion of an excise tax on qualified U.S. medical device sales beginning January 2013, (ii) increases in
annual salaries and stock-based compensation, (iii) the hiring of additional personnel, and (iv) an increase in marketing and
advertising expense.
The Dialysis segment’s operating income decreased by $1,158,000, or 13.3%, in fiscal 2014 compared with fiscal 2013
primarily due to decreases in demand for our higher margin sterilant products as well as lower selling prices, as further explained
above. Additionally, operating income was adversely affected by increases in annual salaries and the inclusion of an excise tax on
qualified U.S. medical device sales beginning January 2013.
General corporate expenses increased by $3,406,000, or 26.8%, in fiscal 2014 compared with fiscal 2013. General corporate
expenses relate to certain unallocated corporate costs primarily related to executive management personnel, being a publicly traded
company and executing various corporate initiatives. The increase in such costs in fiscal 2014 compared with fiscal 2013 is primarily
due to (i) the addition of internal and external resources to address various growth initiatives and new compliance requirements,
(ii) increases in annual salaries and incentive compensation including stock-based compensation, (iii) costs associated with the
retirement of our Chief Financial Officer, and (iv) increases in costs associated with our acquisition program.
Interest
Interest expense decreased by $515,000 to $2,380,000 in fiscal 2014, from $2,895,000 in fiscal 2013, primarily due to a
decrease in the average outstanding borrowings and lower interest rates, partially offset by the recording of a $113,000 charge for the
ineffective hedge on our term credit facility in January 2014 and an $84,000 charge in March 2014 to expense the remaining debt
issuance costs on our term credit facility as a result of the modification of our credit facilities, as further explained in Note 5 to the
Consolidated Financial Statements.
Interest income increased by $2,000 to $63,000 in fiscal 2014 from $61,000 in fiscal 2013.
Income Taxes
The consolidated effective tax rate was 36.9% and 35.0% in fiscals 2014 and 2013, respectively. The increase in the
consolidated effective tax rate was principally due to the geographic mix of pre-tax income, the inability to record tax benefits on
certain international expenses, the impact of Federal tax legislation re-enacted in January 2013 but subsequently expired in
December 2013 and the prior year favorable impact of the finalization of tax examinations in March 2013, as described below.
In fiscals 2014 and 2013, approximately 98.0% and 96.0%, respectively, of our income before income taxes was generated
from our United States operations, which had an overall effective tax rate of 36.5% and 36.2%, respectively. The higher overall
effective tax rate in fiscal 2014 was principally caused by Federal tax legislation that had expired in December 2011, but was re-
enacted retroactively in January 2013, that enabled us to record the research and experimentation tax credit relating to the entire
calendar 2012 in fiscal 2013. Furthermore, this same Federal tax legislation expired in December 2013 preventing us from recording a
full research and experimentation tax credit for fiscal 2014 thereby adversely affecting our fiscal 2014 effective tax rate. This adverse
impact was partially offset by the recognition of tax benefits upon resolution of income tax uncertainties.
In fiscals 2014 and 2013, approximately 2.0% and 4.0%, respectively, of our income before income taxes was generated from
our international operations, which include Canada, Singapore, the Netherlands, Israel and the United Kingdom. Collectively, these
operations had an overall effective tax rate of 47.7% and 4.7% in fiscals 2014 and 2013, respectively, but on a low level of pre-tax
income. All of these locations have lower statutory income tax rates compared to the United States. However, our fiscal 2014 effective
tax rate was adversely affected by (i) certain acquisition costs that are not tax deductible in certain foreign countries and (ii) the initial
operating losses in our newly acquired Jet Prep entity for which no corresponding tax benefit was recorded since the
commercialization of the product was in the beginning phase. The low effective tax rate in fiscal 2013 was the result of the recording
of a tax benefit in fiscal 2013 due to removing a valuation allowance on our net operating loss carryforwards (“NOLs”) in the
Netherlands as a result of the simultaneous finalization in March 2013 of an IRS examination in the United States and a Dutch tax
authority examination in the Netherlands.
44
Stock-Based Compensation
The following table shows the income statement components of stock-based compensation expense recognized in the
Consolidated Statements of Income:
Year Ended July 31,
2014
2013
Cost of sales .......................................................................................
Operating expenses:
Selling ............................................................................................
General and administrative ............................................................
Research and development ............................................................
Total operating expenses ....................................................................
Stock-based compensation before income taxes ................................
Income tax benefits ............................................................................
Total stock-based compensation expense, net of tax .........................
$
337,000
$
174,000
665,000
4,339,000
68,000
5,072,000
5,409,000
(1,909,000 )
3,500,000
$
329,000
3,198,000
32,000
3,559,000
3,733,000
(1,343,000 )
2,390,000
$
The increase in stock-based compensation expense in fiscal 2014 compared with fiscal 2013 is due to increases in the number
of employees receiving restricted stock awards and the fair value of the company’s common stock.
Non-GAAP Financial Measures
In evaluating our operating performance, we supplement the reporting of our financial information determined under
accounting principles generally accepted in the United States (“GAAP”) with certain internally derived non-GAAP financial
measures, namely adjusted net income and adjusted diluted earnings per share (“EPS”). These non-GAAP financial measures are
indicators of the Company’s performance that is not required by, or presented in accordance with, GAAP. They are presented with the
intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making.
We believe that these non-GAAP measures provide meaningful information to assist investors, shareholders and other readers of our
Consolidated Financial Statements in making comparisons to our historical operating results and analyzing the underlying
performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered
separately from, or as an alternative to, the most directly comparable GAAP financial measures.
We define adjusted net income and adjusted diluted EPS as net income and diluted EPS, respectively, adjusted to exclude
amortization, acquisition related items, significant reorganization and restructuring charges, major tax events and other significant
items management deems atypical or non-operating in nature.
In fiscal 2015, we made adjustments to net income and diluted EPS to exclude (i) amortization expense, (ii) significant
acquisition related items impacting current operating performance including transaction and integration charges and ongoing fair value
adjustments, (iii) the loss on sale of our Specialty Packaging business and (iv) the impairment of an acquired license to arrive at our
non-GAAP financial measures, adjusted net income and adjusted EPS.
In fiscal 2014, we made adjustments to net income and diluted EPS to exclude (i) amortization expense, (ii) significant
acquisition related items impacting current operating performance primarily relating to transaction charges and ongoing fair value
adjustments, and (iii) costs associated with the retirement of our Chief Financial Officer to arrive at our non-GAAP financial
measures.
In fiscal 2013, we made adjustments to net income and diluted EPS to exclude (i) amortization expense, (ii) significant
acquisition related items impacting current operating performance primarily relating to transaction charges and ongoing fair value
adjustments, and (iii) atypical severance and recruiting costs to arrive at our non-GAAP financial measures.
Amortization expense is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our
history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduced the Company’s net
income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations
including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and
invest in our continued growth.
45
Acquisition related items in fiscals 2015 and 2014 consist of (i) fair value adjustments to contingent consideration and other
contingent liabilities resulting from acquisitions and (ii) due diligence, integration, legal fees and other transaction costs associated
with specific acquisitions. Additionally, acquisition related items in fiscal 2015 included (i) acquisition accounting charges for the
amortization of the initial fair value adjustments of acquired inventory and deferred revenue and (ii) foreign currency losses relating to
the funding of an international acquisition. The adjustments of contingent consideration and other contingent liabilities are periodic
adjustments to record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the
determination of fair value calculations, fair value adjustments may potentially cause significant earnings volatility that are not
representative of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with specific
acquisitions, including acquisition accounting charges relating to recording acquired inventory and deferred revenue at fair market
value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since all of these
acquisition related items are atypical and often mask underlying operating performance, we excluded these amounts for purposes of
calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to
past operating performance.
On April 7, 2015, we completed the sale of our Specialty Packaging business to a global packaging and service company, as
further described elsewhere in this MD&A and in Note 19 to the Consolidated Financial Statements. Overall, this transaction,
including costs associated with the disposition and the recognition of a foreign currency translation gain, resulted in a $2,206,000 loss,
or $0.04 in diluted earnings per share, which was recorded in loss on sale of business in our Consolidated Statements of Income. Since
the divestiture of a business is atypical and non-operating in nature and the loss on sale masks our underlying operating performance,
we excluded the loss on sale of business for purposes of calculating these non-GAAP financial measures.
In September 2013, we acquired a license from a third party granting us the exclusive right to manufacture, commercialize,
distribute and sell an endoscopy product in its beginning stage of commercialization in exchange for a series of payments, which
totaled $1,000,000 by our second quarter of fiscal 2015 and was recorded in other assets in our Consolidated Balance Sheets. We
evaluated this long-lived asset in fiscal 2015 for potential impairment and determined that the future use of this acquired license was
unlikely based on a recent product analysis. Accordingly, we deemed the acquired license, together with related fixed assets of
$287,000 to be fully impaired and recorded a loss of $1,287,000 during fiscal 2015, which was recorded in general and administrative
expenses and as reductions in other assets and property and equipment in the Consolidated Financial Statements. Since the acquisition
of the license and subsequent impairment were outside our standard endoscopy business operations, we excluded the impairment of
the acquired license for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating
performance and a comparison to past operating performance.
The reconciliations of net income to adjusted net income were calculated as follows:
(Amounts in Thousands)
2015
July 31,
2014
2013
Net income, as reported ..................................
Intangible amortization (1) .............................
Acquisition related items (2) ..........................
Severance and recruiting (3) ...........................
CFO retirement costs (1) ................................
Loss on sale of business ..................................
Impairment of acquired license (1) .................
Income tax benefit on above adjustments .......
Adjusted net income .......................................
$
$
47,953
13,265
1,579
—
—
2,206
1,287
(6,251 )
60,039
$
$
43,265
10,641
1,150
—
589
—
—
(4,261 )
51,384
$
$
39,239
10,061
(1,449 )
778
—
—
—
(3,271 )
45,358
(1) Amounts are recorded in general and administrative expenses.
(2) In fiscal 2015, acquisition related items of $1,981,000 and ($402,000) were recorded in cost of sales and general
administrative expenses, respectively. In fiscal 2014, all acquisition related items were recorded in general and administrative
expenses. In fiscal 2013, acquisition related items of $366,000 and ($1,815,000) were recorded in cost of sales and general
administrative expenses, respectively.
(3) In fiscal 2013, severance and recruiting expense of $417,000 and $361,000 were recorded in cost of sales and general
administrative expenses, respectively.
46
The reconciliations of diluted EPS to adjusted diluted EPS were calculated as follows:
2015
July 31,
2014
2013
$
Diluted EPS, as reported ................................
Intangible amortization, net of tax .................
Acquisition related items, net of tax ..............
Severance and recruiting, net of tax ...............
CFO retirement costs, net of tax ....................
Loss on sale of business, net of tax ................
Impairment of acquired license, net of tax .....
Adjusted diluted EPS .....................................
$
$
1.15
0.21
0.02
—
—
0.04
0.02
1.44
$
1.04
0.16
0.02
—
0.01
—
—
$
1.24 (1) $
0.95
0.16
(0.02 )
0.01
—
—
—
1.10
(1) The summation of each diluted EPS does not equal the adjusted diluted EPS due to rounding.
Liquidity and Capital Resources
Working Capital
At July 31, 2015, our working capital was $117,737,000, compared with $97,410,000 at July 31, 2014. The increase was
primarily due to the impact of the acquisitions of IMS, PWS and DentaPure as well as the sale of our Specialty Packaging business, as
further explained elsewhere in this MD&A and in Note 19 to the Consolidated Financial Statements.
Cash Flows from Operating, Investing and Financing Activities
The following table shows significant components of our cash flows for fiscals 2015, 2014 and 2013.
2015
July 31,
2014
2013
Net cash provided by operating activities .....................
Net cash used in investing activities .............................
Net cash (used in) provided by financing activities ......
$
$
$
$
59,070
(52,294 ) $
(6,105 ) $
64,272
$
(47,432 ) $
(18,949 ) $
51,494
(52,046 )
4,424
Cash Flows from Operating Activities
Net cash provided by operating activities decreased by $5,202,000, or 8.1%, in fiscal 2015 compared with fiscal 2014
primarily due to planned strategic increases in stock levels of certain products maintained in inventory primarily in our Endoscopy
segment and the repayment of liabilities acquired in conjunction with the IMS Acquisition, partially offset by the increase in net
income (after adjusting for depreciation, amortization, stock-based compensation expense, loss on sale of business, impairment of
assets, fair value adjustments of acquisition related liabilities and deferred income taxes).
Net cash provided by operating activities increased by $12,778,000, or 24.8%, in fiscal 2014 compared with fiscal 2013
primarily due to the increase in net income (after adjusting for depreciation, amortization, stock-based compensation expense and
deferred income taxes) and the increase in accounts payable and other current liabilities due to the timing associated with payments of
vendor invoices.
Cash Flows from Investing Activities
Net cash used in investing activities increased by $4,862,000, or 10.3%, in fiscal 2015 compared with fiscal 2014 primarily
due to an increase in cash consideration paid for acquisitions.
Net cash used in investing activities decreased by $4,614,000, or 8.9%, in fiscal 2014 compared with fiscal 2013 primarily
due to a decrease in cash consideration paid for acquisitions.
47
Cash Flows from Financing Activities
In fiscal 2015, net cash used in financing activities was primarily due to repayments under our credit facility, partially offset
by borrowings under our revolving credit facility to fund the acquisitions of IMS, PWS and DentaPure.
In fiscal 2014, net cash used in financing activities was primarily due to repayments under our credit facilities, partially offset
by borrowings under our revolving credit facility for the PuriCore Acquisition.
In fiscal 2013, net cash provided by financing activities was primarily due to borrowings under our revolving credit facility
relating to the acquisitions of SPS Medical and Siemens Water Business, partially offset by repayments under our credit facilities.
Cash Dividends
In fiscal 2015, our Board of Directors approved an 11.1% increase in the semiannual cash dividend to $0.05 per share of
outstanding common stock, which was paid on each of January 30, 2015 and July 31, 2015 and totaled $4,154,000.
In fiscal 2014, our Board of Directors approved a 22.0% increase in the semiannual cash dividend to $0.045 per share of
outstanding common stock, which was paid on each of January 31, 2014 and July 31, 2014 and totaled $3,721,000.
In fiscal 2013, our Board of Directors approved an 18.0% increase in the semiannual cash dividend to $0.0367 per share
(adjusted for stock splits) of outstanding common stock, which was paid on each December 14, 2012 and July 31, 2013 and totaled
$3,016,000.
Future declaration of dividends and the establishment of future record and payment dates are subject to the final
determination of the Company’s Board of Directors.
Long-Term Contractual Obligations
As of July 31, 2015, aggregate annual required payments over the next five years and thereafter under our contractual
obligations that have long-term components are as follows:
2016
2017
2018
Year Ended July 31,
(Amounts in thousands)
2019
2020
Thereafter
Total
Maturity of the credit facility ................ $
Expected interest payments under
— $
— $
— $ 78,500 $
— $
— $ 78,500
the credit facility (1)..........................
1,421
1,421
1,421
828
—
—
5,091
Minimum commitments under
noncancelable operating leases .........
Compensation agreements (2) ...............
Contingent consideration (3) .................
Assumed contingent liability (4) ...........
Contingent guaranteed obligation (5) ...
Deferred compensation and other .........
Total contractual obligations ................. $
4,940
7,985
—
1
401
235
14,983 $
3,972
1,391
—
19
211
239
7,253 $
2,788
206
135
93
157
199
2,041
206
360
188
145
94
4,999 $ 82,362 $
2,831
206
492
246
—
12
3,787 $
977
85
129
719
—
3
17,549
10,079
1,116
1,266
914
782
1,913 $ 115,297
(1) To fund the cash consideration paid and the costs associated with the MI Acquisition, we borrowed $83,000,000 in
September 2015 under our revolving credit facility, thereby increasing the 2019 maturities of the credit facility from
$78,500,000 at July 31, 2015 to $154,500,000 at September 29, 2015, net of repayments made during that period.
Accordingly, the expected interest payments under the credit facility will be approximately $1,375,000 higher on an
annualized basis as of September 29, 2015 as compared with July 31, 2015. The expected interest payments under our credit
facility reflect an interest rate of 1.81%, which was our weighted average interest rate on outstanding borrowings at July 31,
2015.
(2) In conjunction with the MI Acquisition on September 14, 2015, we entered into compensation agreements with six
employees of the acquired business. As a result of these new agreements, the annual required payments for compensation
48
agreements increased subsequent to July 31, 2015 by $1,134,000 and $223,000 for the years ending July 31, 2016 and 2017,
respectively.
(3) These future potential payments of contingent consideration relate to the Jet Prep Acquisition, as further explained below,
and are reflected in the July 31, 2015 Consolidated Balance Sheet at its net present value of $751,000 using a discount rate of
12.6%.
(4) These future potential payments of an assumed contingent liability relate to the Jet Prep Acquisition, as further explained
below, and are reflected in the July 31, 2015 Consolidated Balance Sheet at its net present value of $1,138,000 using a
discount rate of 2.5%.
(5) These future potential payments of a contingent guaranteed obligation relate to the PuriCore Acquisition, as further explained
below, and are reflected in the July 31, 2015 Consolidated Balance Sheet at its net present value of $888,000 using a discount
rate of 10.1%.
Credit Facility and Interest Rate Market Risk
In March 2014, we modified our $100,000,000 senior secured revolving credit facility (the “Former Revolving Credit
Facility”) and $50,000,000 senior secured term loan facility (the “Former Term Loan Facility”) by entering into a $250,000,000 Third
Amended and Restated Credit Agreement dated as of March 4, 2014 (the “2014 Credit Agreement”). The 2014 Credit Agreement
includes a five-year $250,000,000 senior secured revolving facility with sublimits of up to $100,000,000 for borrowings in foreign
currencies, $30,000,000 for letters of credit and $10,000,000 for swing line loans (the “2014 Revolving Credit Facility”). The Former
Term Loan Facility was terminated after the outstanding balance was reassigned to the 2014 Revolving Credit Facility. Subject to the
satisfaction of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the
2014 Revolving Credit Facility by an aggregate amount not to exceed $100,000,000. The senior lenders include Bank of America
N.A. (the lead bank and administrative agent), PNC Bank, National Association, and Wells Fargo Bank, National Association. The
2014 Credit Agreement expires on March 4, 2019. 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. Furthermore, we incurred debt
issuance costs of $1,318,000 relating to the 2014 Credit Agreement which was recorded in other assets along with the remaining
unamortized debt issuance costs of $512,000 relating to the Former Revolving Credit Facility. The total of these two amounts is being
amortized over the life of the 2014 Credit Agreement. The remaining unamortized debt issuance costs of $84,000 relating to the
Former Term Loan Facility was charged to interest expense on March 4, 2014 when the Former Term Loan Facility was terminated.
At July 31, 2015, unamortized debt issuance costs recorded in other assets amounted to $1,312,000.
Borrowings under the 2014 Credit Agreement bear interest at rates ranging from 0.25% to 1.25% above the lender’s base
rate, or at rates ranging from 1.25% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s
“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 2014 Credit Agreement (“Consolidated EBITDA”). At
August 31, 2015, the lender’s base rate was 3.50% and the LIBOR rates ranged from 0.19% to 0.77%. 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 August 31, 2015. The 2014 Credit Agreement also provides for fees on the unused portion of our facility at
rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio; such rate was 0.20% at July 31, 2015.
The 2014 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 United States-based subsidiaries, (ii) a pledge by Cantel of all of the
outstanding shares of its United States-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 and other covenants under
the 2014 Credit Agreement.
On July 31, 2015, we had $78,500,000 of outstanding borrowings under the 2014 Credit Agreement. Subsequent to July 31,
2015, we repaid $7,000,000. In September, we borrowed $83,000,000 to fund the purchase price and transaction costs of the MI
Acquisition resulting in total outstanding borrowings of $154,500,000 at September 29, 2015.
With respect to interest rate risk, since our credit facility consists of outstanding debt at prevailing market rates of interest,
principally under LIBOR contracts ranging from one to twelve months, our market risk with respect to such debt is the increase in
interest expense which would result from higher interest rates associated with LIBOR. Our outstanding debt of $154,500,000 at
September 29, 2015 has expected annual interest payments of $2,796,000 using an effective interest rate of 1.81% as described above.
Therefore, a 100 basis-point increase in average LIBOR interest rates would result in incremental interest expense of approximately
$1,545,000. We monitor our interest rate risk, but presently do not utilize any interest rate derivatives that would substantially mitigate
49
our interest rate exposure. However, all of our outstanding borrowings were under LIBOR contracts at September 29, 2015 that have
expiration dates ranging from one to twelve months at fixed interest rates for the contract periods; therefore, we are substantially
protected throughout the majority of fiscal 2016 from any significant exposure associated with increasing LIBOR rates, assuming we
do not increase our outstanding debt. Additionally, we maintained a cash balance of $31,720,000 at July 31, 2015 which is maintained
in cash or invested in low risk and low return cash equivalents such as United States money market funds with leading banking
institutions. An increase in interest rates would generate additional interest income for us from these low risk cash equivalents, which
would partially offset the adverse impact of the additional interest expense. Our other long-term liabilities would not be materially
affected by an increase in interest rates.
Operating Leases
Minimum commitments under operating leases include minimum rental commitments for our leased manufacturing facilities,
warehouses, office space and equipment.
Rent expense related to operating leases for fiscal 2015 was recorded on a straight-line basis and aggregated $6,025,000,
compared with $4,409,000 and $4,147,000 for fiscals 2014 and 2013, respectively.
Contingent Consideration and Assumed Contingent Liability
In relation to the Jet Prep Acquisition, we have recorded at July 31, 2015 a $751,000 liability for the estimated fair value of
contingent consideration payable to the sellers and a $1,138,000 liability for the estimated fair value of an assumed contingent
obligation payable to the Israeli Government, as further described in Notes 3 and 6 to the Consolidated Financial Statements, which
will be payable based on future sales of the Jet Prep Business (above a minimum threshold with respect to the contingent
consideration liability). Additionally, in connection with the PuriCore Acquisition, we assumed a contingent guaranteed obligation to
reimburse an endoscope service company for endoscope repair costs it incurs when servicing its customers’ endoscopes that are
damaged by one of PuriCore’s discontinued endoscope reprocessing machine models, which has an estimated fair value of $888,000
at July 31, 2015, as further described in Notes 3 and 6 to the Consolidated Financial Statements. As such, the estimates of the annual
required payments as well as the fair value of these contingent liabilities are subjective in nature and highly dependent on future sales
projections. Additionally, since we will be continually re-measuring these liabilities at each balance sheet date and recording changes
in the respective fair values through our Consolidated Statements of Income, we may potentially have significant earnings volatility in
our future results of operations until the completion of the seven year period with respect to the contingent consideration liability and
until the assumed contingent obligation and contingent guaranteed obligation are satisfied, or until the sales of the Jet Prep products no
longer exist.
Compensation Agreements
We have previously entered into various severance contracts with executives of the Company, including our Corporate
executive officers and the Chief Executive Officers of three of our subsidiaries, which define certain compensation arrangements
relating to various employment termination scenarios. Additionally, we have previously entered into multi-year employment
agreements with certain executive officers of businesses we have acquired.
Other Long-Term Obligations
In relation to the IMS Acquisition on November 3, 2014, we assumed an $843,000 liability to the central bank of Italy as part
of funding provided by an Italian government agency, of which $187,000 and $656,000 were recorded in accrued expenses and other
long-term liabilities, respectively. Such amount was a portion of the financial support obtained from the Italian government’s Ministry
of Education, Universities and Research to fund research and development activity relating to IMS’s automated endoscope
reprocessors. The liability is payable in semi-annual installments, bears interest at 0.25% per annum and has a maturity date of
January 1, 2019. At July 31, 2015, $572,000 is outstanding, of which $162,000 is recorded in accrued expense and $410,000 is
recorded in other long-term liabilities.
Additionally, other long-term obligations include deferred compensation arrangements for certain former Medivators
directors and officers and is recorded in other long-term liabilities.
Financing Needs
Our operating segments generate significant cash from operations. At July 31, 2015, we had a cash balance of $31,720,000,
of which $8,361,000 was held by foreign subsidiaries. Our foreign cash is needed by our foreign subsidiaries for working capital
purposes as well as for current international growth initiatives. In addition to the acquisitions of IMS and MI, such international
50
growth initiatives have included the funding of $5,332,000 from one of our foreign subsidiaries for the November 5, 2013 Jet Prep
Acquisition as further described in Note 3 to the Consolidated Financial Statements. Accordingly, our foreign unremitted earnings are
considered permanently reinvested and unavailable for repatriation.
We believe that our current cash position, anticipated cash flows from operations and the funds available under our 2014
Credit Agreement will be sufficient to satisfy our worldwide cash operating requirements for the foreseeable future based upon our
existing operations, particularly given that we historically have not needed to borrow for working capital purposes. At September 29,
2015, $95,500,000 was available under our 2014 Credit Agreement.
Foreign Currency Market Risk
Changes in the value of the Euro, Canadian dollar, British Pound, Singapore dollar and the Chinese Renminbi against the
United States dollar affect our results of operations because certain cash bank accounts, accounts receivable and liabilities of Cantel
and its subsidiaries are denominated and ultimately settled in United States dollars or these foreign currencies but must be converted
into each entity’s functional currency. Furthermore, the financial statements of our Italy, Netherlands, Canada, United Kingdom and
China subsidiaries are translated using the accounting policies described in Note 2 to the Consolidated Financial Statements and
therefore are impacted by changes in the Euro, Canadian dollar, British Pound and China Renminbi exchange rates relative to the
United States dollar.
We use a sensitivity analysis to assess the market risk associated with our foreign currency transactions. Market risk is
defined here as the potential change in fair value resulting from an adverse movement in foreign currency exchange rates. Overall for
fiscals 2015 and 2014, a uniform 15% adverse movement in foreign currency rates would have resulted in realized losses (after tax) of
approximately $1,371,000 and $2,394,000, respectively. Conversely, for fiscals 2015 and 2014, a uniform 15% favorable movement
in foreign currency rates would have resulted in realized gains (after tax) of approximately $1,371,000 and $2,394,000, respectively.
For fiscal 2015, the realized losses (after tax) would have resulted primarily from (i) increases in the values of the Euro and
Canadian dollar relative to the United States dollar and (ii) decreases in the values of the British Pound and Singapore dollar relative
to the United States dollar due to the composition of our assets and liabilities denominated in foreign currencies and the translation of
our foreign subsidiaries’ financials. For fiscal 2014, the realized losses (after tax) would have resulted from (i) an increase in the value
of the Canadian dollar relative to the United States dollar and (ii) decreases in the values of the Euro and British Pound relative to the
United States dollar due to the composition of our assets and liabilities denominated in foreign currencies and the translation of our
foreign subsidiaries’ financials. However, the use of foreign currency forward contracts would partially offset such realized losses.
In order to hedge against the impact of fluctuations in the value of the Euro, British Pound and Singapore dollar relative to
the United States dollar on the conversion of such net assets into the functional currencies, we enter into short-term contracts to
purchase Euros, British Pounds and Singapore dollars forward, which contracts are one-month in duration. These short-term contracts
are designated as fair value hedge instruments. There were five foreign currency forward contracts with an aggregate value of
$13,339,000 at August 31, 2015, which covered certain assets and liabilities that were denominated in currencies other than each
entity’s functional currency. Such contracts expire on September 30, 2015. 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 these hedging contracts to buy Euros, British
Pounds and Singapore dollars forward are immediately realized within general and administrative expenses due to the short-term
nature of such contracts. For fiscal 2015, such forward contracts substantially offset the impact on operations related to certain assets
and liabilities that are denominated in currencies other than each entity’s functional currency. We do not currently hedge against the
impact of fluctuations in the value of the Canadian dollar and Chinese Renminbi relative to the United States dollar because the
overall foreign currency exposures relating to those currencies are currently not deemed significant. Additionally, we do not hedge
transactions associated with the funding of international acquisitions due to the short-term nature of the foreign currency exposure.
Overall, fluctuations in the rates of currency exchange had an insignificant impact upon our net income in fiscal 2015
compared with fiscal 2014.
For purposes of translating the balance sheet at July 31, 2015 compared with July 31, 2014, the total of the foreign currency
movements resulted in a foreign currency translation loss of $7,064,000 for fiscal 2015, primarily due to the increase in the value of
the United States dollar relative to the Euro, Canadian dollar and British Pound, thereby decreasing stockholders’ equity. Furthermore
as a result of the disposition of our Specialty Packaging business as further described elsewhere in this MD&A and in Note 19 to the
Consolidated Financial Statements, we recognized a foreign currency translation gain of $1,264,000, which was recorded as a
decrease in accumulated other comprehensive income in stockholders’ equity and included in the loss on sale of business in our
Consolidated Statement of Income. Such foreign currency translation gain was a result of the monthly translation of the Specialty
Packaging segment’s balance sheets beginning in 2004, when the business was acquired.
51
Inflation
Although overall inflation did not have a significant effect on our business, an increase in commodity prices can adversely
affect our gross margins. Specifically, our businesses can be adversely impacted by rising fuel and oil prices and are heavily reliant on
certain raw materials, such as chemicals, paper, resin, stainless steel and plastic components. From time to time, we experience price
increases for raw materials. If we are unable to implement price increases to our customers, our gross margins could be adversely
affected.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we continually
evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the
preparation of our Consolidated Financial Statements.
Revenue Recognition
Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is
determined based upon the FOB terms specified for each shipment. With respect to endoscopy and dialysis products, shipment terms
are generally FOB origin for common carrier and when our distribution fleet is utilized (except for one large customer in dialysis
whereby all products are shipped FOB destination). With respect to water purification and filtration and healthcare disposable
products, shipment terms may be either FOB origin or destination. Customer acceptance for the majority of our product sales occurs at
the time of delivery. With respect to a portion of water purification and filtration and endoscopy product sales, equipment is sold as
part of a system for which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as
a condition of delivery; revenue recognition on such sales is deferred until all equipment has been delivered, or post-delivery
obligations such as installation have been substantially fulfilled such that the products are deemed functional by the end-user. All
shipping and handling fees invoiced to customers, such as freight, are recorded as revenue (and related costs are included within cost
of sales) at the time the sale is recognized.
A portion of our endoscopy, water purification and filtration and dialysis sales are recognized as multiple element
arrangements, whereby revenue is allocated to the equipment, installation and consumable components based upon vendor specific
objective evidence, which includes comparable historical transactions of similar equipment, installation and consumables sold as
stand-alone components. If vendor-specific objective evidence of selling price is not available, we allocate revenue to the elements of
the bundled arrangement using the estimated selling price method in order to qualify the components as separate units of accounting.
Revenue on the equipment and consumables components are recognized as the equipment or consumable is shipped to customers and
title passes. Revenue on the installation component is recognized when the installation is complete.
A portion of our healthcare disposables sales relating to the mail-in spore test kit is recorded as deferred revenue when
initially sold. We recognize the revenue on these test kits using an estimate based on historical experience of the amount of time that
elapses from the point of sale to when the kit is returned to us and we communicate to the customer the results of the required
laboratory test. The related cost of the kits is recorded in inventory and recognized in cost of sales as the revenue is earned.
Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed
at our facilities and the products are shipped to customers. With respect to certain service contracts in our Endoscopy and Water
Purification and Filtration operating segments, service revenue is recognized on a straight-line basis over the contractual term of the
arrangement.
None of our sales contain right-of-return provisions. Customer claims for credit or return due to damage, defect, shortage or
other reason must be pre-approved by us before credit is issued or such product is accepted for return. No cash discounts for early
payment are offered except with respect to a small portion of our product sales in each segment. We do not offer price protection,
although advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers
with respect to many of our products. With respect to certain of our dialysis, healthcare disposables, water purification and filtration
and endoscopy customers, rebates are provided; such rebates, which consist primarily of volume rebates, are provided for as a
52
reduction of sales at the time of revenue recognition and amounted to $5,597,000, $4,498,000, and $4,277,000 in fiscals 2015, 2014,
and 2013, respectively. 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.
Our endoscopy products and services are sold directly to hospitals and other end-users in the United States and primarily to
distributors internationally except for the United Kingdom, Italy, Netherlands, Singapore, China and Germany where we sell directly
to hospitals and other end-users; water purification and filtration products and services are sold directly to hospitals, dialysis clinics,
pharmaceutical and biotechnology companies, laboratories, medical products and service companies and other end-users as well as
through third-party distributors; the majority of our healthcare disposable products are sold to third party distributors and with respect
to some of our sterility assurance products, to hospitals, surgery centers, physician and dental offices, dental schools, medical research
companies, laboratories and other end-users; and the majority of our dialysis products are sold to dialysis clinics and hospitals. Sales
to all of these customers follow our revenue recognition policies.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are
reserves for the estimated loss from the inability of customers to make required payments. We use historical experience as well as
current market information in determining the estimate. While actual losses have historically been within management’s expectations
and provisions established, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. Alternatively, if certain customers paid their delinquent receivables,
reductions in allowances may be required.
Inventories
Inventories consist of raw materials, work-in-process and finished products which are sold in the ordinary course of our
business and are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, we must make estimates
and judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the
saleable condition of products. In performing such evaluations, we use historical experience as well as current market information.
With few exceptions, the saleable value of our inventories has historically been within management’s expectation and provisions
established, however, rapid changes in the market due to competition, technology and various other factors could have an adverse
effect on the saleable value of our inventories, resulting in the need for additional reserves.
Goodwill and Intangible Assets
Certain of our identifiable intangible assets, including customer relationships, technology, brand names, non-compete
agreements and patents, are amortized using the straight-line method over their estimated useful lives which range from 3 to 20 years.
Additionally, we have recorded goodwill and trademarks and trade names, all of which have indefinite useful lives and are therefore
not amortized. All of our intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are
reviewed for impairment at least annually. Our management is responsible for determining if impairment exists and considers a
number of factors, including third-party valuations, when making these determinations.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is
less than the carrying amount before proceeding to step one of the two-step quantitative goodwill impairment test, if necessary. Such
qualitative factors that are assessed include evaluating a segment’s financial performance, industry and market conditions,
macroeconomic conditions and specific issues that can directly affect the segment such as changes in business strategies, competition,
supplier relationships, operating costs, regulatory matters, litigation and the composition of the segment’s assets due to acquisitions or
other events. At July 31, 2015, because we determined through qualitative factors that the fair values of our Endoscopy, Water
Purification and Filtration and Healthcare Disposables segments were unlikely to be less than the carrying value, we did not proceed
to step one of the two-step quantitative goodwill impairment test for those three segments. We performed step one of the two-step
quantitative goodwill impairment test for Dialysis (due to the decreasing operating results). In performing a detailed quantitative
review for goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related
operating segments by using weighted fair value results of the discounted cash flow methodology, as well as the market multiple and
comparable transaction methodologies, where applicable. The first step is a review for potential impairment, and the second step
measures the amount of impairment, if any.
We perform our annual impairment review for indefinite lived intangibles by first assessing qualitative factors, such as those
described above, to determine whether it is more likely than not that the fair value of such assets is less than the carrying values, and if
53
necessary, we perform a quantitative analysis comparing the current fair value of our indefinite lived intangibles assets to their
carrying values. At July 31, 2015, because we determined through qualitative factors that the fair values of our indefinite lived
intangible assets in our Endoscopy, Water Purification and Filtration and Healthcare Disposables segments were unlikely to be less
than the carrying value, we did not perform a quantitative analysis for those assets. We performed a quantitative analysis for indefinite
lived intangible assets in our Dialysis segment, for the same reasons stated above for our goodwill impairment test. With respect to
amortizable intangible assets when impairment indicators are present, management would determine whether expected future non-
discounted cash flows would be sufficient to recover the carrying value of the assets; if not, the carrying value of the assets would be
adjusted to their fair value.
Management concluded that none of our intangible assets or goodwill was impaired as of July 31, 2015.
While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly
dependent on management’s projections of our future operating results and cash flows (which management believes to be reasonable),
discount rates based on the Company’s weighted average cost of capital and appropriate benchmark peer companies. Assumptions
used in determining future operating results and cash flows include current and expected market conditions and future sales and
earnings forecasts. Subsequent changes in these assumptions and estimates could result in future impairment. Although we
consistently use the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates
are uncertain by nature and can vary from actual results. At July 31, 2015, the fair value of all of our reporting units exceeded book
value by substantial amounts, except our Dialysis segment, which had an estimated fair value that exceeded book value by 17%. We
believe the most significant assumptions impacting the impairment assessment of Dialysis relate to the assumed compounded annual
sales growth and future operating efficiencies included in our projections of future operating results and cash flows of this segment. If
future operating results and cash flows are substantially less than our projections, future impairment charges may be recorded.
Long-Lived Assets
We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of
the expected future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the
sum of the expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value.
With the exception of the impairment on an acquired license as further described in Note 7 to the Consolidated Financial Statements,
our historical assessments of our long-lived assets have not differed significantly from the actual amounts realized. However, the
determination of fair value requires us to make certain assumptions and estimates and is highly subjective. On July 31, 2015,
management concluded that no other events or changes in circumstances have occurred that would indicate that the carrying amount
of our long-lived assets may not be recoverable.
Warranties
We provide for estimated costs that may be incurred to remedy deficiencies of quality or performance of our products at the
time of revenue recognition. Most of our products have a one year warranty, although certain Endoscopy and Water Purification and
Filtration products that require installation may carry a warranty period of up to fifteen months. Additionally, many of our
consumables, accessories and parts have a 90 day warranty. We record provisions for product warranties as a component of cost of
sales based upon an estimate of the amounts necessary to settle existing and future claims on products sold. The historical relationship
of warranty costs to products sold is the primary basis for the estimate. A significant increase in third party service repair rates, the
cost and availability of parts or the frequency of claims could have a material adverse impact on our results for the period or periods in
which such claims or additional costs materialize. Management reviews its warranty exposure periodically and believes that the
warranty reserves are adequate; however, actual claims incurred could differ from original estimates, requiring adjustments to the
reserves.
Stock-Based Compensation
Stock compensation expense is recognized for any option or stock award grant based upon the award’s fair value. All of our
stock options and stock awards (which consist only of restricted stock) are subject to graded vesting in which portions of the award
vest at different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize
compensation expense for awards subject to graded vesting using the straight-line basis, reduced by estimated forfeitures. Forfeitures
are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Forfeitures are estimated based on historical experience.
The stock-based compensation expense recorded in our Consolidated Financial Statements may not be representative of the
effect of stock-based compensation expense in future periods due to the level of awards issued in past years (which level may not be
54
similar in the future), modifications to existing awards, accelerated vesting related to certain employment terminations and
assumptions used in determining fair value, expected lives and estimated forfeitures. We determine the fair value of each stock award
using the closing market price of our common stock on the date of grant. We estimate the fair value of each option grant on the date of
grant using the Black-Scholes option valuation model. The determination of fair value using an option-pricing model is affected by
our stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the expected option life (which is determined by using the historical closing prices of
our common stock), the expected dividend yield (which is approximately 0.2%), and the expected option life (which is based on
historical exercise behavior).
Legal Proceedings
In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts
related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be
reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material adverse effect on our
business, financial condition, results of operations or cash flows.
Income Taxes
Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities,
statutory income tax rates, changes in uncertain tax benefits and the deductibility of expenses or availability of tax credits in various
taxing jurisdictions. Tax laws are complex, subject to different interpretations by the taxpayer and the respective governmental taxing
authorities and are subject to future modification, expiration or repeal by government legislative bodies. We use significant judgment
on a quarterly basis in determining our annual effective income tax rate and evaluating our tax positions.
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets and liabilities also include items recorded in conjunction with the purchase
accounting for business acquisitions as well as net operating loss carryforwards. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance, if necessary, based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it
is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized. Additionally,
deferred tax liabilities are regularly reviewed to confirm that such amounts are appropriately stated. A review of our deferred tax items
considers known future changes in various income tax rates, principally in the United States. If income tax rates were to change in the
future, particularly in the United States and to a lesser extent Canada, the United Kingdom and Italy, our items of deferred tax could
be materially affected. All of such evaluations require significant management judgments.
We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to
be taken on a tax return, but is not recognized in our Consolidated Financial Statements because it does not meet the more-likely-than-
not recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. Any
adjustments upon resolution of income tax uncertainties are recognized in our results of operations. Unrecognized tax benefits are
analyzed periodically and adjustments are made as events occur to warrant adjustment to the related liability. Historically, we have not
had significant unrecognized tax benefits.
Medical Device Taxes
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 imposes
significant taxes on medical device makers in the form of an excise tax on certain U.S. medical device sales that began in
January 2013. A significant portion of our sales are considered medical device sales under this new legislation. We calculate medical
device excise taxes based on the latest available regulations and IRS notices and recognize the excise taxes in cost of sales at the time
the medical device revenue is recognized in our Condensed Consolidated Statements of Income. In fiscal 2015 and 2014, we recorded
excise taxes of $4,369,000 and $3,872,000, respectively, in cost of sales. The regulations regarding the calculations of the medical
device taxes are complex and certain aspects can be subject to interpretation causing the IRS to issue notices clarifying various aspects
of these taxes. Although we have made all reasonable efforts to record accurate excise taxes, the determination of the tax requires us to
make certain assumptions and estimates. Actual taxes for the period could differ from original estimates requiring adjustments to our
Condensed Consolidated Financial Statements.
Business Combinations
Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed.
We determine fair value based on the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly
55
transaction between market participants at the measurement date. Such initial fair value amounts as well as other acquired assets and
liabilities, including deferred tax assets and liabilities, are sometimes refined requiring subsequent adjustments.
Certain liabilities and reserves are subjective in nature. We reflect such liabilities and reserves based upon the most recent
information available. In conjunction with our acquisitions, such subjective liabilities and reserves principally include contingent
consideration, certain deferred income tax liabilities, income tax and sales and use tax exposures, including tax liabilities related to our
foreign subsidiaries, as well as reserves for accounts receivable, inventories, warranties and contingent obligations. We account for
contingent consideration relating to business combinations as a liability and an increase to goodwill at the date of the acquisition and
continually re-measure the liability at each balance sheet date by recording changes in the fair value through our Consolidated
Statements of Income. We determine the fair value of contingent consideration based on future operating projections under various
potential scenarios and weight the probability of these outcomes. Similarly, other acquisition related liabilities can be required to be
recorded at fair value at the date of the acquisition and continually re-measured at each balance sheet date, such as the assumed
contingent obligation relating to the Jet Prep Acquisition and the contingent guaranteed obligation relating to the PuriCore
Acquisition, as further described in Note 6 to the Consolidated Financial Statements. The ultimate settlement of liabilities relating to
business combinations may be for amounts which are materially different from the amounts initially recorded and may cause volatility
in our results of operations.
Other Matters
We do not have any off balance sheet financial arrangements, other than future commitments under operating leases and
executive severance and license agreements.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risks arising principally from adverse changes in interest rates and foreign currency.
The information required by this item is included in Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations, and is incorporated herein by reference.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements, which is Item 15(a), and the Consolidated Financial Statements and
schedule included in this Report.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
56
Item 9A.
CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, we
conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 31, 2015. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer each concluded that the design and operation of these disclosure controls and procedures were, as of the
end of the period covered by this report, effective and designed to ensure that material information relating to the Company, including
our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within
the time periods specified by the SEC and (ii) accumulated and communicated to the Company’s management, including the Chief
Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Management’s Report on Internal Control over Financial Reporting
The management of Cantel Medical Corp. is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. The Company’s internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with United States generally accepted accounting principles. The Company’s internal control over financial reporting
includes those policies and procedures that:
(i)
(ii)
(iii)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company,
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company, and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in condition, or that the degree of compliance with the policies and procedures included in such controls may deteriorate.
We, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, carried
out an evaluation of the effectiveness of our internal controls over financial reporting based on the framework and criteria established
in “Internal Control — Integrated Framework (2013 framework),” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer each
concluded that our internal control over financial reporting was effective as of July 31, 2015.
Our independent auditors, Ernst & Young LLP, have issued an attestation report on our internal control over financial
reporting, which is included below.
Changes in Internal Control
We have evaluated our internal controls over financial reporting and determined that no changes occurred during the period
covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial
reporting, except as described below.
On November 3, 2014 we acquired IMS, as more fully described in Note 3 to the Consolidated Financial Statements. The
IMS Business is included in our 2015 consolidated financial statements and constituted 5% of both total assets and net assets,
respectively, as of July 31, 2014 and less than 1% of revenues and net income for the year then ended. During the initial transition
period following the acquisition, we enhanced our internal control process to ensure that all financial information related to this
acquisition was properly reflected in our Consolidated Financial Statements. However, since the IMS Business was acquired on
November 3, 2014, a complete integration of the internal controls relating to the acquired businesses was not practical for purposes of
inclusion in our evaluation of the effectiveness of our internal controls over financial reporting. We expect that all aspects of the IMS
Business will be fully integrated into our existing internal control structure in fiscal 2016.
57
Attestation Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cantel Medical Corp.
We have audited Cantel Medical Corp.’s internal control over financial reporting as of July 31, 2015, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the COSO criteria). Cantel Medical Corp.’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of
and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the operations of
Cantel Medical (Italy) S.r.l. (formerly known as International Medical Service S.r.l), which are included in the 2015 consolidated
financial statements of Cantel Medical Corp. and constituted 5% of both total and net assets, respectively, as of July 31, 2015 and less
than 1% of revenues and net income for the year then ended. Our audit of internal control over financial reporting of Cantel Medical
Corp. also did not include an evaluation of the internal control over financial reporting of the Cantel Medical (Italy) S.r.l. operations.
In our opinion, Cantel Medical Corp. maintained, in all material respects, effective internal control over financial reporting as of
July 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Cantel Medical Corp. as of July 31, 2015 and 2014 and the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended July 31, 2015 of
Cantel Medical Corp. and our report dated September 29, 2015 expressed an unqualified opinion thereon.
MetroPark, New Jersey
September 29, 2015
/s/ Ernst & Young LLP
58
Item 9B.
OTHER INFORMATION.
None.
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information required to be disclosed by this Item with respect to our executive officers is incorporated in this Annual Report
on Form 10-K by reference from the section entitled “Executive Officers of Cantel” contained in our definitive proxy statement for
our 2015 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
Information required to be disclosed by this Item about our board of directors is incorporated in this Annual Report on
Form 10-K by reference from the section entitled “Election of Directors” contained in our definitive proxy statement for our 2015
annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
Information required to be disclosed by this Item about the Section 16(a) compliance of our directors and executive officers
is incorporated in this Annual Report on Form 10-K by reference from the section entitled “Section 16(a) Beneficial Ownership
Reporting Compliance” contained in our definitive proxy statement for our 2015 annual meeting of stockholders, which we intend to
file within 120 days of the end of our fiscal year.
Information required to be disclosed by this Item about the audit committee of our board of directors, our audit committee
financial expert, and other board of directors and corporate governance matters is incorporated in this Annual Report on Form 10-K by
reference from the sections entitled “Board Matters; Committees” and “Corporate Governance Matters” contained in our definitive
proxy statement related to our 2015 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal
year.
We have adopted a Code of Ethics for the Chief Executive Officer, the Chief Financial Officer and other officers and
management personnel that is posted on our website, www.cantelmedical.com. We intend to satisfy the disclosure requirement
regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Chief Executive Officer, Chief Financial Officer
and other officers and management personnel by posting such information on our website.
Item 11.
EXECUTIVE COMPENSATION.
Information required to be disclosed by this Item is incorporated in this Annual Report on Form 10-K by reference from the
sections entitled “Board Matters; Committees,” “Compensation Committee Report” and “Executive Compensation” contained in our
definitive proxy statement for our 2015 annual meeting of stockholders, which we intend to file within 120 days of the end of our
fiscal year.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following sets forth certain information as of July 31, 2015 with respect to our equity compensation plans under which
our securities may be issued:
Plan Category
Equity compensation plans approved
by security holders ...................................
Equity compensation plans not
approved by security holders ...................
Total .............................................................
Number of securities
to be issued
upon exercise of
outstanding options
(a)
Weighted-average
exercise price of
outstanding options
(b)
Number of securities remaining
available for future issuance
under compensation plans
(excluding securities reflected in (a))
(c)
107,500
—
107,500
$
$
$
25.73
—
25.73
872,899 (1)
—
872,899 (1)
(1) Consists solely of 361,810 stock option and SARs awards and 511,089 restricted stock and performance awards available for grant
under the Plan.
59
Other Information required to be disclosed by this Item is incorporated in this Annual Report on Form 10-K by reference
from the section entitled “Security Ownership of Principal Stockholders and Management” contained in our definitive proxy statement
for our 2015 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
The information required to be disclosed by this Item is incorporated in this Annual Report on Form 10-K by reference from
the sections entitled “Corporate Governance,” “Election of Directors,” and “Board Matters; Committees” contained in our definitive
proxy statement for our 2015 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
This information required to be disclosed by this Item is incorporated in this Annual Report on Form 10-K by reference from
the section entitled “Ratification of Appointment of Independent Registered Public Accounting Firm” contained in our definitive
proxy statement for our 2015 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
PART IV
(a)
The following documents are filed as part of this Annual Report on Form 10-K for the fiscal year ended July 31,
2015.
1.
Consolidated Financial Statements:
(i)
Report of Independent Registered Public Accounting Firm.
(ii)
Consolidated Balance Sheets as of July 31, 2015 and 2014.
(iii)
Consolidated Statements of Income for the years ended July 31, 2015, 2014 and 2013.
(iv)
Consolidated Statements of Comprehensive Income for the years ended July 31, 2015, 2014 and 2013.
(v)
Consolidated Statements of Changes in Stockholders’ Equity for the years ended July 31, 2015, 2014 and
2013.
(vi)
Consolidated Statements of Cash Flows for the years ended July 31, 2015, 2014 and 2013.
(vii)
Notes to Consolidated Financial Statements.
2.
Consolidated Financial Statement Schedules:
(i)
Schedule II - Valuation and Qualifying Accounts for the years ended July 31, 2015, 2014 and 2013.
been included in the Consolidated Financial Statements or Notes thereto.
All other financial statement schedules are omitted since they are not required, not applicable, or the information has
3.
Exhibits:
Exhibit 3(a) to Registrant’s 1981 Annual Report on Form 10-K.)
3(a) - Registrant’s Restated Certificate of Incorporation dated July 20, 1978. (Incorporated herein by reference to
(Incorporated herein by reference to Exhibit 3(b) to Registrant’s 1982 Annual Report on Form 10-K.)
3(b) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on February 16, 1982.
herein by reference to Exhibit 3(c) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1984.)
3(c) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on May 4, 1984. (Incorporated
60
(Incorporated herein by reference to Exhibit 3(d) to Registrant’s 1986 Annual Report on Form 10-K.)
3(d) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on August 19, 1986.
(Incorporated herein by reference to Exhibit 3(e) to Registrant’s 1987 Annual Report on Form 10-K [the “1987 10-K”].)
3(e) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on December 12, 1986.
herein by reference to Exhibit 3(f) to Registrant’s 1987 10-K.)
3(f) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on April 3, 1987. (Incorporated
Exhibit 3(g) to Registrant’s 1988 Annual Report on Form 10-K.)
3(g) - Certificate of Change of Registrant, filed on July 12, 1988. (Incorporated herein by reference to
herein by reference to Exhibit 3(h) to Registrant’s 1989 Annual Report on Form 10-K.)
3(h) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on April 17, 1989. (Incorporated
herein by reference to Exhibit 3(i) to Registrant’s 2000 Annual Report on Form 10-K [the “2000 10-K”].)
3(i) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on May 10, 1999. (Incorporated
herein by reference to Exhibit 3(j) to Registrant’s 2000 10-K.)
3(j) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on April 5, 2000. (Incorporated
(Incorporated herein by reference to Exhibit 3(k) to Registrant’s 2001 Annual Report on Form 10-K.)
3(k) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on September 6, 2001.
herein by reference to Exhibit 3(l) to Registrant’s 2002 Annual Report on Form 10-K.)
3(l) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on June 7, 2002. (Incorporated
(Incorporated herein by reference to Exhibit 3(m) to Registrant’s 2006 Annual Report on Form 10-K.)
3(m) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on December 22, 2005.
(Incorporated herein by reference to Exhibit 3(n) to Registrant’s 2013 Annual Report on Form 10-K.)
3(n) — Certificate of Amendment of Certificate of Incorporation of Registrant filed on January 14, 2013.
Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on November 7, 2013.)
3(o) - Registrant’s By-Laws, as amended through November 1, 2013. (Incorporated herein by reference to
Quarterly Report on Form 10-Q for the quarter ended October 31, 2013.)
10(a) - 2006 Equity Incentive Plan, as amended. (Incorporated herein by reference to Exhibit 10(a) to Registrant’s
10(b) - Form of Stock Option Agreement for option grants to directors and executive officers, as amended, under
Registrant’s 2006 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.4 to Registrant’s Current Report on Form 8-K
filed on October 27, 2011 [the “October 2011 8-K”].)
officers. (Incorporated herein by reference to Exhibit 10.5 to Registrant’s October 2011 8-K.)
10(c) - Form of Restricted Stock Agreement under Registrant’s 2006 Equity Incentive Plan for grants to executive
(Incorporated herein by reference to Exhibit 10.6 to Registrant’s October 2011 8-K.)
10(d) - Form of Restricted Stock Agreement under Registrant’s 2006 Equity Incentive Plan for grants to directors.
10(e) - Third Amended and Restated Credit Agreement dated as of March 4, 2014 among Registrant, Bank of
America N.A., PNC Bank, National Association, and Wells Fargo Bank, National Association (Incorporated herein by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on March 10, 2014.)
10(f) - Amended and Restated Executive Severance Agreement dated as of November 17, 2014 between Registrant
and Andrew A. Krakauer (Incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on
November 19, 2014 [the “November 2014 8-K”].)
and Jorgen B. Hansen. (Incorporated herein by reference to Exhibit 10.2 of Registrant’s November 2014 8-K.)
10(g) - Amended and Restated Executive Severance Agreement dated as of November 17, 2014 between Registrant
61
and Eric W. Nodiff (Incorporated herein by reference to Exhibit 10.3 of Registrant’s November 2014 8-K.)
10(h) - Amended and Restated Executive Severance Agreement dated as of November 17, 2014 between Registrant
10(i) - Executive Severance Agreement dated as of March 23, 2015 between Registrant and Peter Clifford
(Incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on March 25, 2015 [the
“March 2015 8-K”].)
10(j) - Confidentiality and Non-Competition Agreement dated as of January 1, 2010 between Registrant and
Andrew A. Krakauer (Incorporated herein by reference to Exhibit 10.6 of Registrant’s Current Report on Form 8-K filed on
February 12, 2010 [the “February 2010 8-K”].)
10(k) - Confidentiality and Non-Competition Agreement dated as of November 15, 2012 between Registrant and
Jorgen B. Hansen (Incorporated herein by reference to Exhibit 10(m) of Registrant’s Annual Report on Form 10-K for the fiscal year
ended July 31, 2012.)
Nodiff (Incorporated herein by reference to Exhibit 10.9 of Registrant’s February 2010 8-K.)
10(l) - Confidentiality and Non-Competition Agreement dated as of January 1, 2010 between Registrant and Eric W.
Clifford (Incorporated herein by reference to Exhibit 10.2 of Registrant’s March 2015 8-K.)
10(m) - Confidentiality and Non-Competition Agreement dated as of March 23, 2015 between Registrant and Peter
by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 17, 2014.)
10(n) — Letter Agreement between Registrant and Craig A. Sheldon dated as of April 15, 2014 (Incorporated herein
of the Registrant’s October 2011 8-K.)
10(o) - Cantel Medical Corp. Annual Incentive Compensation Plan (Incorporated herein by reference to Exhibit 10.2
Exhibit 10.3 of the Registrant’s October 2011 8-K.)
10(p) - Cantel Medical Corp. Long Term Incentive Compensation Plan (Incorporated herein by reference to
21 - Subsidiaries of Registrant.
23 - Consent of Ernst & Young LLP.
31.1 - Certification of Principal Executive Officer.
31.2 - Certification of Principal Financial Officer.
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32 - Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
101
The following materials from Cantel Medical Corp.’s Form 10-K for the fiscal year ended July 31, 2015,
formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at July 31, 2015 and 2014,
(ii) Consolidated Statements of Income for each of the three years in the period ended July 31, 2015, (iii) Consolidated Statements of
Comprehensive Income for each of the three years in the period ended July 31, 2015, (iv) Consolidated Statements of Changes in
Stockholders’ Equity for each of the three years in the period ended July 31, 2015, (v) Consolidated Statements of Cash Flows for
each of the three years in the period ended July 31, 2015 and (vi) Notes to Consolidated Financial Statements.
62
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 29, 2015
CANTEL MEDICAL CORP.
/s/ Andrew A. Krakauer
By:
Andrew A. Krakauer, Chief Executive
Officer (Principal Executive Officer)
/s/ Peter G. Clifford
By:
Peter G. Clifford, Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
/s/ Steven C. Anaya
By:
Steven C. Anaya, Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ Charles M. Diker
Charles M. Diker, a Director and Chairman of the Board
Date:
September 29, 2015
/s/ George L. Fotiades
George L. Fotiades, a Director
and Vice Chairman of the Board
/s/ Alan. R. Batkin
Alan R. Batkin, a Director
/s/ Ann E. Berman
Ann E. Berman, a Director
/s/ Joseph M. Cohen
Joseph M. Cohen, a Director
/s/ Mark N. Diker
Mark N. Diker, a Director
/s/ Laura L. Forese
Laura L. Forese, a Director
/s/ Andrew A. Krakauer
Andrew A. Krakauer, a Director and CEO
/s/ Bruce Slovin
Bruce Slovin, a Director
Date:
September 29, 2015
Date:
September 29, 2015
Date:
September 29, 2015
Date:
September 29, 2015
Date:
September 29, 2015
Date:
September 29, 2015
Date:
September 29, 2015
Date:
September 29, 2015
63
CANTEL MEDICAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2015
64
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Cantel Medical Corp.
We have audited the accompanying consolidated balance sheets of Cantel Medical Corp. as of July 31, 2015 and 2014, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years
in the period ended July 31, 2015. Our audits also included the financial statement schedule included in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Cantel Medical Corp. at July 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended July 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cantel
Medical Corp.’s internal control over financial reporting as of July 31, 2015, based on criteria established in Internal Control-
Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway
Commission and our report dated September 29, 2015 expressed an unqualified opinion thereon.
MetroPark, New Jersey
September 29, 2015
/s/ Ernst & Young LLP
65
CANTEL MEDICAL CORP.
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Share Data)
Assets
Current assets:
Cash and cash equivalents ...................................................................................................
Accounts receivable, net of allowance for doubtful accounts of $2,092 in 2015 and
$1,874 in 2014 .................................................................................................................
Inventories, net .....................................................................................................................
Deferred income taxes .........................................................................................................
Prepaid expenses and other current assets ...........................................................................
Total current assets ..................................................................................................................
Property and equipment, at cost:
Land, buildings and improvements ......................................................................................
Furniture and equipment ......................................................................................................
Leasehold improvements .....................................................................................................
Less accumulated depreciation and amortization.................................................................
Intangible assets, net ................................................................................................................
Goodwill ..................................................................................................................................
Other assets ..............................................................................................................................
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable .................................................................................................................
Compensation payable .........................................................................................................
Accrued expenses ................................................................................................................
Deferred revenue ..................................................................................................................
Income taxes payable ...........................................................................................................
Total current liabilities .............................................................................................................
Long-term debt ........................................................................................................................
Deferred income taxes .............................................................................................................
Contingent consideration .........................................................................................................
Other long-term liabilities ........................................................................................................
Commitments and contingencies .............................................................................................
Stockholders’ equity:
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued .......
Common Stock, par value $.10 per share; authorized 75,000,000 shares; issued 2015
- 45,913,154 shares, outstanding 2015 - 41,604,359 shares; issued 2014 -
45,641,688 shares, outstanding 2014 - 41,442,260 shares ...............................................
Additional paid-in capital ....................................................................................................
Retained earnings .................................................................................................................
Accumulated other comprehensive income .........................................................................
Treasury Stock, 2015 - 4,308,795 shares at cost; 2014 - 4,199,428 shares at cost ..............
Total stockholders’ equity ........................................................................................................
See accompanying notes.
66
July 31,
2015
2014
$
31,720
$
31,781
69,805
72,078
6,233
8,525
188,361
38,224
81,585
4,786
124,595
(62,054 )
62,541
85,836
241,951
5,342
584,031
16,184
18,557
15,092
18,323
2,468
70,624
78,500
23,722
751
3,801
—
—
$
$
62,225
59,737
3,551
6,615
163,909
32,774
70,694
4,492
107,960
(55,242 )
52,718
82,952
231,647
4,919
536,145
19,529
14,866
15,109
16,102
893
66,499
80,500
17,805
2,722
3,373
—
—
4,591
156,050
287,105
1,224
(42,337 )
406,633
584,031
$
4,564
146,048
243,306
9,552
(38,224 )
365,246
536,145
$
$
$
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Data)
2015
Year Ended July 31,
2014
2013
Net sales
Product sales .........................................................................................
Product service ......................................................................................
Total net sales ...........................................................................................
$
$
493,656
71,348
565,004
$
434,531
54,218
488,749
383,520
41,506
425,026
Cost of sales ..............................................................................................
Product sales .........................................................................................
Product service ......................................................................................
Total cost of sales .....................................................................................
260,903
50,634
311,537
236,429
39,021
275,450
210,433
31,117
241,550
Gross profit ...............................................................................................
253,467
213,299
183,476
Expenses:
Selling ...................................................................................................
General and administrative ...................................................................
Research and development ...................................................................
Total operating expenses ...........................................................................
80,787
77,897
14,022
172,706
66,519
65,039
10,813
142,371
57,786
53,182
9,320
120,288
Income from operations ............................................................................
80,761
70,928
63,188
Interest expense .........................................................................................
Interest income ..........................................................................................
Loss on sale of business ............................................................................
Income before income taxes .....................................................................
Income taxes .............................................................................................
2,432
(68 )
2,206
76,191
28,238
2,380
(63 )
—
68,611
25,346
2,895
(61 )
—
60,354
21,115
Net income ................................................................................................
$
47,953
$
43,265
$
39,239
Earnings per common share:
Basic .....................................................................................................
Diluted ..................................................................................................
Dividends per common share ....................................................................
$
$
$
1.16
$
1.05
$
1.15
$
1.04
$
0.10
$
0.09
$
0.96
0.95
0.07
See accompanying notes.
67
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar Amounts in Thousands)
2015
Year Ended July 31,
2014
2013
Net income ................................................................................................
$
47,953
$
43,265
$
39,239
Other comprehensive (loss) income:
Foreign currency translation, net of tax ................................................
Reclassification adjustment to loss on sale of business for
foreign currency translation gain included in net income
during the period ...............................................................................
Unrealized holding losses on interest rate swaps arising during
the year, net of tax .............................................................................
Reclassification adjustments to interest expense for losses on
interest rate swaps included in net income during the year, net
of tax .................................................................................................
Reclassification adjustment to interest expense for ineffective
hedge on interest rate swap included in net income during the
year, net of tax ..................................................................................
Total other comprehensive (loss) income, net of tax ................................
(7,064 )
(1,528 )
2,695
(1,264 )
—
—
—
(30 )
60
—
(32 )
139
—
(8,328 )
73
(1,425 )
—
2,802
Comprehensive income .............................................................................
$
39,625
$
41,840
$
42,041
See accompanying notes.
68
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollar amounts in Thousands, Except Share Data)
Years Ended July 31, 2015, 2014 and 2013
Common Stock
Accumulated
Number of
Shares
Outstanding
Amount
Additional
Other
Treasury
Paid-in
Capital
Retained
Earnings
Comprehensive
Income
Stock,
at Cost
Total
Stock-
holders’
Equity
Balance, July 31, 2012 .....................................
40,651,093
$
4,500
$
125,838
$
167,539
$
8,175
$
(30,116 ) $ 275,936
Exercises of options ....................................
Stock-split fractional share adjustment........
Repurchases of shares .................................
Stock-based compensation ..........................
Issuance of restricted stock .........................
Cancellations of restricted stock ..................
Excess tax benefit from exercises of
stock options and vesting of
restricted stock .......................................
Dividends on common stock .......................
Net income ..................................................
Other comprehensive loss ...........................
Balance, July 31, 2013 .....................................
Exercises of options ....................................
Repurchases of shares .................................
Stock-based compensation ..........................
Issuance of restricted stock .........................
Cancellations of restricted stock ..................
Excess tax benefit from exercises of
stock options and vesting of
restricted stock .......................................
Dividends on common stock .......................
Net income ..................................................
Other comprehensive income ......................
Balance, July 31, 2014 .....................................
Exercises of options ....................................
Repurchases of shares .................................
Stock-based compensation ..........................
Issuance of restricted stock .........................
Cancellations of restricted stock ..................
Excess tax benefit from exercises of
stock options and vesting of
restricted stock .......................................
Dividends on common stock .......................
Net income ..................................................
Other comprehensive income ......................
Balance, July 31, 2015 .....................................
See accompanying notes.
412,279
(92 )
(121,399 )
—
210,484
(14,244 )
—
—
—
—
41,138,121
187,468
(132,023 )
—
258,760
(10,066 )
—
—
—
—
41,442,260
130,911
(100,286 )
—
144,278
(12,804 )
18
—
—
—
1
(1 )
—
—
—
—
4,518
21
—
—
26
(1 )
—
—
—
—
4,564
13
—
—
15
(1 )
2,606
(2 )
—
3,733
(198 )
1
2,875
—
—
—
134,853
1,420
—
5,409
(26 )
1
4,391
—
—
—
146,048
981
—
5,867
(15 )
1
—
—
—
—
—
—
—
(3,016 )
39,239
—
203,762
—
—
—
—
—
—
(3,721 )
43,265
—
243,306
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,802
10,977
—
—
—
—
—
—
—
—
(1,425 )
9,552
—
—
—
—
—
(807 )
—
(2,252 )
—
197
—
—
—
—
—
(32,978 )
(807 )
(4,439 )
—
—
—
—
—
—
—
(38,224 )
(386 )
(3,727 )
—
—
—
1,817
(2 )
(2,252 )
3,733
—
—
2,875
(3,016 )
39,239
2,802
321,132
634
(4,439 )
5,409
—
—
4,391
(3,721 )
43,265
(1,425 )
365,246
608
(3,727 )
5,867
—
—
—
—
—
—
41,604,359
$
—
—
—
—
4,591
$
3,168
—
—
—
156,050
$
—
(4,154 )
47,953
—
287,105
$
—
—
—
(8,328 )
1,224
$
—
—
—
—
3,168
(4,154 )
47,953
(8,328 )
(42,337 ) $ 406,633
69
CANTEL MEDICAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
2015
Year Ended July 31,
2014
2013
$
47,953
$
43,265
$
39,239
Cash flows from operating activities
Net income ......................................................................................................
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ............................................................................................
Amortization ...........................................................................................
Stock-based compensation expense ........................................................
Amortization of debt issuance costs ........................................................
Loss on disposal of fixed assets ..............................................................
Loss on sale of business ..........................................................................
Impairment of assets ...............................................................................
Fair value adjustments to acquisition related liabilities ..........................
Deferred income taxes ............................................................................
Excess tax benefits from stock-based compensation ..............................
Changes in assets and liabilities, net of effects of business
acquisitions/divestiture:
Accounts receivable ........................................................................
Inventories, net ...............................................................................
Prepaid expenses and other current assets ......................................
Accounts payable and other current liabilities ................................
Income taxes ...................................................................................
Net cash provided by operating activities........................................................
Cash flows from investing activities
Capital expenditures ........................................................................................
Proceeds from disposal of fixed assets ............................................................
Proceeds from sale of business, net of cash retained and disposal costs .........
Acquisition of DentaPure, net of cash acquired ..............................................
Acquisition of Pure Water Solutions ...............................................................
Acquisition of IMS, net of cash acquired ........................................................
Acquisition of PuriCore, net of cash acquired .................................................
Acquisition of Sterilator, net of cash acquired ................................................
Acquisition of Jet Prep, net of cash acquired ..................................................
Acquisition of Siemens Water .........................................................................
Acquisition of Eagle Pure Water .....................................................................
Acquisition of Polyp Trap ...............................................................................
Acquisition of SPS, net of cash acquired ........................................................
Other, net .........................................................................................................
Net cash used in investing activities ................................................................
Cash flows from financing activities
Borrowings under revolving credit facility .....................................................
Repayments under term loan facility ...............................................................
Repayments under revolving credit facility .....................................................
Debt modification costs ...................................................................................
Proceeds from exercises of stock options ........................................................
Dividends paid ................................................................................................
Excess tax benefits from stock-based compensation .......................................
Purchases of treasury stock .............................................................................
Net cash (used in) provided by financing activities .........................................
Effect of exchange rate changes on cash and cash equivalents .......................
(Decrease) increase in cash and cash equivalents ............................................
Cash and cash equivalents at beginning of year ..............................................
Cash and cash equivalents at end of year ........................................................
$
See accompanying notes.
70
10,692
13,265
5,867
401
360
2,206
1,287
(2,585 )
(1,449 )
(3,168 )
(3,905 )
(10,075 )
(2,996 )
(3,347 )
4,564
59,070
(12,760 )
25
3,767
(9,957 )
(11,835 )
(22,112 )
337
—
—
—
—
—
—
241
(52,294 )
47,000
—
(49,000 )
—
608
(4,154 )
3,168
(3,727 )
(6,105 )
(732 )
(61 )
31,781
31,720
$
8,245
10,641
5,409
440
501
—
—
219
(1,218 )
(4,391 )
(6,149 )
(2,658 )
(2,388 )
6,205
6,151
64,272
(13,541 )
14
—
—
—
—
(25,386 )
(2,829 )
(5,332 )
—
—
—
—
(358 )
(47,432 )
28,000
(5,000 )
(37,500 )
(1,314 )
634
(3,721 )
4,391
(4,439 )
(18,949 )
(186 )
(2,295 )
34,076
31,781
$
7,202
10,061
3,733
345
184
—
—
(2,492 )
(368 )
(2,875 )
(2,447 )
(5,262 )
(1,387 )
931
4,630
51,494
(6,745 )
32
—
—
—
—
—
—
—
(8,300 )
(870 )
(486 )
(35,415 )
(262 )
(52,046 )
45,000
(10,000 )
(30,000 )
—
1,817
(3,016 )
2,875
(2,252 )
4,424
18
3,890
30,186
34,076
CANTEL MEDICAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended July 31, 2015, 2014 and 2013
1.
Business Description
Cantel Medical Corp. (“Cantel”) is a leading provider of infection prevention and control products and services in the healthcare
market, specializing in the following operating segments:
Endoscopy: Medical device reprocessing systems, disinfectants, detergents and other supplies used to high-level disinfect flexible
endoscopes and disposable infection control products intended to eliminate the challenges associated with proper cleaning and
high-level disinfection of numerous reusable components used in gastrointestinal (“GI”) endoscopy procedures. This segment
recently commenced the sale of endoscope transport and storage systems, a comprehensive range of endoscopy consumable
accessories, and OEM mobile medical carts. Additionally, this segment includes technical maintenance service on its products.
Water Purification and Filtration: Water purification equipment and services, filtration and separation products and disinfectant,
sterilization and decontamination products and services for the medical, pharmaceutical, biotech, beverage and commercial
industrial markets.
Healthcare Disposables: Single-use, infection prevention and control healthcare products including face masks, sterilization
pouches, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups and disinfectants, as well as a filter system
for maintaining safe dental unit waterlines. This segment also manufactures and sells biological and chemical indicators for
sterility assurance monitoring services in the acute-care, alternate-care and dental markets.
Dialysis: Medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for renal dialysis.
In addition, through April 7, 2015, we had another operating segment, known as Specialty Packaging. This segment included
specialty packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological
specimens and thermally sensitive pharmaceutical, medical and other products. The Specialty Packaging operating segment, which
comprised the Other reporting segment for financial reporting purposes, was divested on April 7, 2015 as further described in Note 19
to the Consolidated Financial Statements.
Most of our equipment, consumables and supplies are used to help prevent or control the occurrence or spread of infections.
We operate our four operating segments through wholly-owned subsidiaries in the United States and internationally. Our principal
operating subsidiaries in the United States are Medivators Inc., Mar Cor Purification, Inc., Crosstex International, Inc. and SPS
Medical Supply Corp. Internationally, our primary operating subsidiaries include Cantel Medical (UK) Limited, Cantel Medical
Asia/Pacific Ltd., Cantel Medical Devices (China) Co., Ltd., Biolab Equipment Ltd., Medivators B.V., and Cantel Medical (Italy)
S.r.l.
In fiscal 2015, we acquired (i) all of the issued and outstanding stock of MRLB International, Inc. (“MRLB”) on February 20, 2015
(the “DentaPure Acquisition”), (ii) certain net assets of Pure Water Solutions, Inc. (“PWS”) on January 1, 2015 (the “PWS
Acquisition”) and (iii) all of the issued and outstanding stock of International Medical Service S.r.l. (“IMS”) on November 3, 2014
(the “IMS Acquisition”), as more fully described in Note 3 to the Consolidated Financial Statements. With the exception of
acquisition related costs of $2,776,000 primarily related to the IMS Acquisition, the businesses of MRLB (the “DentaPure Business),
PWS (the “PWS Business”) and IMS (the “IMS Business”) did not have a significant effect on our consolidated results of operations
in fiscal 2015 due to the size of the businesses in relation to our overall consolidated results of operations and are not reflected in our
consolidated results of operations in fiscals 2014 and 2013. The DentaPure Business is included in our Healthcare Disposables
segment. The PWS Business is included in our Water Purification and Filtration segment and the IMS Business is included in our
Endoscopy segment. Subsequent to its acquisition, we changed the name of International Medical Service S.r.l. to Cantel Medical
(Italy) S.r.l.
In fiscal 2014, we acquired all the issued and outstanding capital stock of (i) PuriCore International Limited (“PuriCore”) on June 30,
2014 (the “PuriCore Acquisition”), (ii) Sterilator Company, Inc. (“Sterilator”) on January 7, 2014 (the “Sterilator Acquisition”) and
(iii) Jet Prep Ltd. (“Jet Prep”) on November 5, 2013 (the “Jet Prep Acquisition”), as more fully described in Note 3 to the
Consolidated Financial Statements. Accordingly, the businesses of Sterilator (the “Sterilator Business”), Jet Prep (the “Jet Prep
Business”) and PuriCore (the “PuriCore Business”) are reflected in our consolidated results of operations in fiscal 2015 and the
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portion of fiscal 2014 subsequent to their acquisition dates and are not reflected in fiscal 2013. With the exception of acquisition
related costs related to the PuriCore Acquisition and acquisition related fair value adjustments related to the Jet Prep Business, these
acquisitions did not have a significant effect on our consolidated results of operations in fiscals 2015 and 2014 due to the size of the
acquisitions in relation to our overall consolidated results of operations. The PuriCore and Jet Prep Businesses are included in our
Endoscopy segment and the Sterilator Business is included in our Healthcare Disposables segment. Subsequent to its acquisition, we
changed the name of PuriCore to Cantel Medical (UK) Limited.
In fiscal 2013, we acquired (i) certain net assets from Siemens Industry, Inc. and Siemens Canada Limited (collectively, “Siemens”)
on July 30, 2013 relating to Siemens’ hemodialysis water business (the “Siemens Water Business”), (ii) certain net assets of Eagle
Pure Water Systems, Inc. (“Eagle Pure Water”) on December 31, 2012 (the “Eagle Pure Water Acquisition”) and (iii) all the issued
and outstanding stock of SPS Medical Supply Corp. (“SPS Medical”) on November 1, 2012 (the “SPS Medical Acquisition”), as more
fully described in Note 3 to the Consolidated Financial Statements. Accordingly, the Siemens Water Business as well as the
businesses of Eagle Pure Water (the “Eagle Pure Water Business”) and SPS Medical (the “SPS Medical Business”) are reflected in our
consolidated results of operations in fiscals 2015 and 2014 and the portion of fiscal 2013 subsequent to their acquisition dates. The
Siemens Water Business and the Eagle Pure Water Business are included in our Water Purification and Filtration segment and the SPS
Medical Business is included in our Healthcare Disposables segment.
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.
Subsequent Events
On September 14, 2015, we acquired all of the issued and outstanding stock of Medical Innovations Group Holdings Limited and
certain affiliated companies (collectively “MI”), as more fully described in Note 3 to the Consolidated Financial Statements. Since this
acquisition occurred after July 31, 2015, its results of operations are not included in any periods presented. The acquisition of MI will
be included in our Endoscopy segment. To fund the cash consideration paid and the costs associated with the MI Acquisition, we
borrowed $83,000,000 in September 2015 under our revolving credit facility, as more fully described in Notes 9 and 11 to the
Consolidated Financial Statements.
We performed a review of events subsequent to July 31, 2015. Based upon that review, no other subsequent events occurred that
required updating to our Consolidated Financial Statements or disclosures.
2.
Summary of Significant Accounting Policies
The following is a summary of our significant accounting policies used to prepare our Consolidated Financial Statements.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Cantel and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Revenue Recognition
Revenue on product sales is recognized as products are shipped to customers and title passes. The passing of title is determined based
upon the FOB terms specified for each shipment. With respect to endoscopy and dialysis products, shipment terms are generally FOB
origin for common carrier and when our distribution fleet is utilized (except for one large customer in dialysis whereby all products
are shipped FOB destination). With respect to water purification and filtration and healthcare disposable products, shipment terms
may be either FOB origin or destination. Customer acceptance for the majority of our product sales occurs at the time of delivery.
With respect to a portion of water purification and filtration and endoscopy product sales, equipment is sold as part of a system for
which the equipment is functionally interdependent or the customer’s purchase order specifies “ship-complete” as a condition of
delivery;
revenue recognition on such sales is deferred until all equipment has been delivered, or post-delivery obligations such as installation
have been substantially fulfilled such that the products are deemed functional by the end-user. All shipping and handling fees invoiced
to customers, such as freight, are recorded as revenue (and related costs are included within cost of sales) at the time the sale is
recognized.
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A portion of our endoscopy, water purification and filtration and dialysis sales are recognized as multiple element arrangements,
whereby revenue is allocated to the equipment, installation and consumable components based upon vendor specific objective
evidence, which includes comparable historical transactions of similar equipment, installation and consumables sold as stand-alone
components. If vendor-specific objective evidence of selling price is not available, we allocate revenue to the elements of the bundled
arrangement using the estimated selling price method in order to qualify the components as separate units of accounting. Revenue on
the equipment and consumables components are recognized as the equipment or consumable is shipped to customers and title passes.
Revenue on the installation component is recognized when the installation is complete.
A portion of our healthcare disposables sales relating to the mail-in spore test kit is recorded as deferred revenue when initially sold.
We recognize the revenue on these test kits using an estimate based on historical experience of the amount of time that elapses from
the point of sale to when the kit is returned to us and we communicate to the customer the results of the required laboratory test. The
related cost of the kits is recorded in inventory and recognized in cost of sales as the revenue is earned.
Revenue on service sales is recognized when repairs are completed at the customer’s location or when repairs are completed at our
facilities and the products are shipped to customers. With respect to certain service contracts in our Endoscopy and Water Purification
and Filtration operating segments, service revenue is recognized on a straight-line basis over the contractual term of the arrangement.
None of our sales contain right-of-return provisions. Customer claims for credit or return due to damage, defect, shortage or other
reason must be pre-approved by us before credit is issued or such product is accepted for return. No cash discounts for early payment
are offered except with respect to a small portion of our product sales in each segment. We do not offer price protection, although
advance pricing contracts or required notice periods prior to implementation of price increases exist for certain customers with respect
to many of our products. With respect to certain of our dialysis, healthcare disposables, water purification and filtration and endoscopy
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 and amounted to $5,597,000, $4,498,000, and $4,277,000 in fiscals 2015, 2014, and 2013, respectively.
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.
Our endoscopy products and services are sold directly to hospitals and other end-users in the United States and primarily to
distributors internationally except for the United Kingdom, Italy, Netherlands, Singapore, China and Germany where we sell directly
to hospitals and other end-users; water purification and filtration products and services are sold directly to hospitals, dialysis clinics,
pharmaceutical and biotechnology companies, laboratories, medical products and service companies and other end-users as well as
through third-party distributors; the majority of our healthcare disposable products are sold to third party distributors and with respect
to some of our sterility assurance products, to hospitals, surgery centers, physician and dental offices, dental schools, medical research
companies, laboratories and other end-users; and the majority of our dialysis products are sold to dialysis clinics and hospitals. Sales
to all of these customers follow our revenue recognition policies.
Translation of Foreign Currency Financial Statements
Assets and liabilities of our foreign subsidiaries are translated into United States dollars at year-end exchange rates; sales and expenses
are translated using average exchange rates during the year. The cumulative effect of the translation of the accounts of the foreign
subsidiaries is presented as a component of accumulated other comprehensive income or loss. Foreign exchange gains and losses
related to the purchase of inventories denominated in foreign currencies are included in cost of sales and foreign exchange gains and
losses related to the incurrence of operating costs denominated in foreign currencies and the conversion of foreign assets and liabilities
into functional currencies are included in general and administrative expenses.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are reserves for
the estimated loss from the inability of customers to make required payments. We use historical experience as well as current market
information in determining the estimate. While actual losses have historically been within management’s expectations and provisions
established, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Alternatively, if certain customers paid their delinquent receivables, reductions in
allowances may be required.
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Inventories
Inventories consist of raw materials, work-in-process and finished products which are sold in the ordinary course of our business and
are stated at the lower of cost (first-in, first-out) or market. In assessing the value of inventories, we must make estimates and
judgments regarding reserves required for product obsolescence, aging of inventories and other issues potentially affecting the
saleable condition of products. In performing such evaluations, we use historical experience as well as current market information.
With few exceptions, the saleable value of our inventories has historically been within management’s expectation and provisions
established, however, rapid changes in the market due to competition, technology and various other factors could have an adverse
effect on the saleable value of our inventories, resulting in the need for additional reserves.
Property and Equipment
Property and equipment are stated at cost. Additions and improvements are capitalized, while maintenance and repair costs are
expensed. When assets are retired or otherwise disposed, the cost and related accumulated depreciation or amortization is removed
from the respective accounts and any resulting gain or loss is included in income. Depreciation and amortization is provided on the
straight-line method over the estimated useful lives of the assets which generally range from 2-15 years for furniture and equipment,
5-32 years for buildings and improvements and the shorter of the life of the asset or the life of the lease for leasehold improvements.
Depreciation and amortization expense related to property and equipment in fiscals 2015, 2014 and 2013 was $10,692,000,
$8,245,000 and $7,202,000, respectively.
Goodwill and Intangible Assets
Certain of our identifiable intangible assets, including customer relationships, technology, brand names, non-compete agreements and
patents, are amortized using the straight-line method over their estimated useful lives which range from 3 to 20 years. Additionally,
we have recorded goodwill and trademarks and trade names, all of which have indefinite useful lives and are therefore not amortized.
All of our intangible assets and goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, and goodwill and intangible assets with indefinite lives are reviewed for
impairment at least annually. Our management is responsible for determining if impairment exists and considers a number of factors,
including third-party valuations, when making these determinations.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than the
carrying amount before proceeding to step one of the two-step quantitative goodwill impairment test, if necessary. Such qualitative
factors that are assessed include evaluating a segment’s financial performance, industry and market conditions, macroeconomic
conditions and specific issues that can directly affect the segment such as changes in business strategies, competition, supplier
relationships, operating costs, regulatory matters, litigation and the composition of the segment’s assets due to acquisitions or other
events. At July 31, 2015, because we determined through qualitative factors that the fair values of our Endoscopy, Water Purification
and Filtration and Healthcare Disposables segments were unlikely to be less than the carrying value, we did not proceed to step one of
the two-step quantitative goodwill impairment test for those three segments. We performed step one of the two-step quantitative
goodwill impairment test for Dialysis (due to the decreasing operating results). In performing a detailed quantitative review for
goodwill impairment, management uses a two-step process that begins with an estimation of the fair value of the related operating
segments by using weighted fair value results of the discounted cash flow methodology, as well as the market multiple and
comparable transaction methodologies, where applicable. The first step is a review for potential impairment, and the second step
measures the amount of impairment, if any.
We perform our annual impairment review for indefinite lived intangibles by first assessing qualitative factors, such as those described
above, to determine whether it is more likely than not that the fair value of such assets is less than the carrying values, and if
necessary, we perform a quantitative analysis comparing the current fair value of our indefinite lived intangibles assets to their
carrying values. At July 31, 2015, because we determined through qualitative factors that the fair values of our indefinite lived
intangible assets in our Endoscopy, Water Purification and Filtration and Healthcare Disposables segments were unlikely to be less
than the carrying value, we did not perform a quantitative analysis for those assets. We performed a quantitative analysis for indefinite
lived intangible assets in our Dialysis segment, for the same reasons stated above for our goodwill impairment test. With respect to
amortizable intangible assets when impairment indicators are present, management would determine whether expected future non-
discounted cash flows would be sufficient to recover the carrying value of the assets; if not, the carrying value of the assets would be
adjusted to their fair value.
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Management concluded that none of our intangible assets or goodwill was impaired as of July 31, 2015.
While the results of these annual reviews have historically not indicated impairment, impairment reviews are highly dependent on
management’s projections of our future operating results and cash flows (which management believes to be reasonable), discount rates
based on the Company’s weighted average cost of capital and appropriate benchmark peer companies. Assumptions used in
determining future operating results and cash flows include current and expected market conditions and future sales and earnings
forecasts. Subsequent changes in these assumptions and estimates could result in future impairment. Although we consistently use the
same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by
nature and can vary from actual results. At July 31, 2015, the fair value of all of our reporting units exceeded book value by
substantial amounts, except our Dialysis segment, which had an estimated fair value that exceeded book value by 17%, as further
explained in Note 7 to the Consolidated Financial Statements.
Long-Lived Assets
We evaluate the carrying value of long-lived assets including property, equipment and other assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. An assessment is made to determine if the sum of the expected
future non-discounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the
expected non-discounted cash flows is less than the carrying value, an impairment loss is recognized based on fair value. With the
exception of the impairment on an acquired license as further described in Note 7 to the Consolidated Financial Statements, our
historical assessments of our long-lived assets have not differed significantly from the actual amounts realized. However, the
determination of fair value requires us to make certain assumptions and estimates and is highly subjective. On July 31, 2015,
management concluded that no other events or changes in circumstances have occurred that would indicate that the carrying amount
of our long-lived assets may not be recoverable.
Other Assets
Debt issuance costs associated with our credit facilities are amortized to interest expense over the life of the credit facilities. As of
July 31, 2015 and 2014, such debt issuance costs, net of related amortization, were included in other assets and amounted to
$1,312,000 and $1,678,000, respectively.
Warranties
We provide for estimated costs that may be incurred to remedy deficiencies of quality or performance of our products at the time of
revenue recognition. Most of our products have a one year warranty, although certain Endoscopy and Water Purification and Filtration
products that require installation may carry a warranty period of up to fifteen months. Additionally, many of our consumables,
accessories and parts have a 90 day warranty. We record provisions for product warranties as a component of cost of sales based upon
an estimate of the amounts necessary to settle existing and future claims on products sold. The historical relationship of warranty costs
to products sold is the primary basis for the estimate. A significant increase in third party service repair rates, the cost and availability
of parts or the frequency of claims could have a material adverse impact on our results for the period or periods in which such claims
or additional costs materialize.
Management reviews its warranty exposure periodically and believes that the warranty reserves are adequate; however, actual claims
incurred could differ from original estimates, requiring adjustments to the reserves.
Stock-Based Compensation
Stock compensation expense is recognized for any option or stock award grant based upon the award’s fair value. All of our stock
options and stock awards (which consist only of restricted stock) are subject to graded vesting in which portions of the award vest at
different times during the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation
expense for awards subject to graded vesting using the straight-line basis, reduced by estimated forfeitures. Forfeitures are estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are
estimated based on historical experience.
The stock-based compensation expense recorded in our Consolidated Financial Statements may not be representative of the effect of
stock-based compensation expense in future periods due to the level of awards issued in past years (which level may not be similar in
the future), modifications to existing awards, accelerated vesting related to certain employment terminations and assumptions used in
determining fair value, expected lives and estimated forfeitures. We determine the fair value of each stock award using the closing
market price of our common stock on the date of grant. We estimate the fair value of each option grant on the date of grant using the
Black-Scholes option valuation model. The determination of fair value using an option-pricing model is affected by our stock price as
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well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, the expected stock
price volatility over the term of the expected option life (which is determined by using the historical closing prices of our common
stock), the expected dividend yield (which is approximately 0.2%), and the expected option life (which is based on historical exercise
behavior).
Legal Proceedings
In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related
to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably
estimated. We do not believe that any of these pending claims or legal actions will have a material adverse effect on our business,
financial condition, results of operations or cash flows.
Costs Associated with Exit or Disposal Activities
We recognize costs associated with exit or disposal activities, such as costs to terminate a contract, the exit or disposal of a business,
or the early termination of a leased property, by recognizing the liability at fair value when incurred, except for certain one-time
termination benefits, such as severance costs, for which the period of recognition begins when a severance plan is communicated to
effected employees.
Inherent in the calculation of liabilities relating to exit and disposal activities are significant management judgments and estimates,
including estimates of termination costs, employee attrition and the interest rate used to discount certain expected net cash payments.
Such judgments and estimates are reviewed by us on a regular basis. The cumulative effect of a change to a liability resulting from a
revision to either timing or the amount of estimated cash flows is recognized by us as an adjustment to the liability in the period of the
change.
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 (unvested 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 unvested 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.
Advertising Costs
Our policy is to expense advertising costs as they are incurred. Advertising costs charged to expense were $3,333,000, $2,656,000 and
$2,308,000 in fiscals 2015, 2014 and 2013, respectively.
Income Taxes
Our provision for income taxes is based on our current period income, changes in deferred income tax assets and liabilities, statutory
income tax rates, changes in uncertain tax benefits and the deductibility of expenses or availability of tax credits in various taxing
jurisdictions. Tax laws are complex, subject to different interpretations by the taxpayer and the respective governmental taxing
authorities and are subject to future modification, expiration or repeal by government legislative bodies. We use significant judgment
on a quarterly basis in determining our annual effective income tax rate and evaluating our tax positions.
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax
basis of assets and liabilities. Deferred tax assets and liabilities also include items recorded in conjunction with the purchase
accounting for business acquisitions as well as net operating loss carryforwards. We regularly review our deferred tax assets for
recoverability and establish a valuation allowance, if necessary, based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences. Although realization is not assured, management believes it
is more likely than not that the recorded deferred tax assets, as adjusted for valuation allowances, will be realized. Additionally,
deferred tax liabilities are regularly reviewed to confirm that such amounts are appropriately stated. A review of our deferred tax items
considers known future changes in various income tax rates, principally in the United States. If income tax rates were to change in the
future, particularly in the United States and to a lesser extent Canada, the UK and Italy, our items of deferred tax could be materially
affected. All of such evaluations require significant management judgments.
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We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken
on a tax return, but is not recognized in our Consolidated Financial Statements because it does not meet the more-likely-than-not
recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. Any
adjustments upon resolution of income tax uncertainties are recognized in our results of operations. Unrecognized tax benefits are
analyzed periodically and adjustments are made as events occur to warrant adjustment to the related liability. Historically, we have not
had significant unrecognized tax benefits.
Medical Device Taxes
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 imposes significant
taxes on medical device makers in the form of an excise tax on certain U.S. medical device sales that began in January 2013. A
significant portion of our sales are considered medical device sales under this new legislation. We calculate medical device excise
taxes based on the latest available regulations and IRS notices and recognize the excise taxes in cost of sales at the time the medical
device revenue is recognized in our Consolidated Statements of Income. In fiscals 2015, 2014 and 2013, we recorded excise taxes of
$4,369,000, $3,872,000 and $2,087,000, respectively, in cost of sales. The regulations regarding the calculations of the medical device
taxes are complex and certain aspects can be subject to interpretation causing the IRS to issue notices clarifying various aspects of
these taxes. Although we have made all reasonable efforts to record accurate excise taxes, the determination of the tax requires us to
make certain assumptions and estimates. Actual taxes for the period could differ from original estimates requiring adjustments to our
Consolidated Financial Statements.
Business Combinations
Acquisitions require significant estimates and judgments related to the fair value of assets acquired and liabilities assumed. We
determine fair value based on the estimated 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. Such initial fair value amounts as well as other acquired assets and
liabilities, including deferred tax assets and liabilities, are sometimes refined requiring subsequent adjustments.
Certain liabilities and reserves are subjective in nature. We reflect such liabilities and reserves based upon the most recent information
available. In conjunction with our acquisitions, such subjective liabilities and reserves principally include contingent consideration,
certain deferred income tax liabilities, income tax and sales and use tax exposures, including tax liabilities related to our foreign
subsidiaries, as well as reserves for accounts receivable, inventories, warranties and contingent obligations. We account for contingent
consideration relating to business combinations as a liability and an increase to goodwill at the date of the acquisition and continually
re-measure the liability at each balance sheet date by recording changes in the fair value through our Consolidated Statements of
Income. We determine the fair value of contingent consideration based on future operating projections under various potential
scenarios and weight the probability of these outcomes. Similarly, other acquisition related liabilities can be required to be recorded at
fair value at the date of the acquisition and continually re-measured at each balance sheet date, such as the assumed contingent
obligation relating to the Jet Prep Acquisition and the contingent guaranteed obligation relating to the PuriCore Acquisition, as further
described in Note 6 to the Consolidated Financial Statements. The ultimate settlement of liabilities relating to business combinations
may be for amounts which are materially different from the amounts initially recorded and may cause volatility in our results of
operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. On an ongoing basis, we evaluate the adequacy of our reserves and the estimates used in
calculations of reserves as well as other judgmental financial statement items, including, but not limited to: collectability of accounts
receivable, volume rebates and trade-in allowances, inventory values and obsolescence reserves, warranty reserves, contingent
consideration, contingent guaranteed obligations, depreciation and amortization periods, deferred income taxes, goodwill and
intangible assets, impairment of long-lived assets, unrecognized tax benefits for uncertain tax positions, medical device excise tax
expense, reserves for legal exposure, stock-based compensation and expense accruals. Such estimates and assumptions are subjective
in nature. We reflect such amounts based upon the most recent information available.
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Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11,
“Inventory (Topic 330) Simplifying the Measurement of Inventory,” (“ASU 2015-11”). The new guidance more closely aligns the
measurement of inventory in U.S. GAAP with the measurement of inventory in International Financial Reporting Standards by
requiring companies using the first-in, first-out and average costs methods to measure inventory using the lower of cost and net
realizable value, where net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for fiscal years beginning after December 15,
2016 (our fiscal year 2018), including interim periods within that reporting period. We are currently in the process of evaluating the
impact of ASU 2015-11 on our financial position and results of operations.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs (Topic 835),” (“ASU 2015-03”).
Under the new guidance, debt issuance costs are presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability and not recorded as a separate asset. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 (our
fiscal year 2017), including interim periods within that reporting period. We are currently in the process of evaluating the impact of
ASU 2015-03 on our financial position and results of operations.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”), which will
supersede the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” 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),” 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. We are
currently in the process of evaluating the impact of ASU 2014-09 on our financial position and results of operations.
In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” (“ASU 2014-08”). Under
the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those
strategic shifts should have a major effect on an organization’s operations and financial results. In addition, the new guidance requires
expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets,
liabilities, income and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income
attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. ASU
2014-08 is effective for fiscal years beginning after December 15, 2014, with early adoption allowed. On October 31, 2014, we early
adopted ASU 2014-08 and applied the new accounting guidance to our divestiture of our Specialty Packaging business, instead of
recording it as a discontinued operation under the prior accounting guidance, as further explained in Note 19 of the Consolidated
Financial Statements.
3.
Acquisitions
Medical Innovations Ltd.
Post-Fiscal 2015
On September 14, 2015, we acquired all of the issued and outstanding stock of MI, a private company with pre-acquisition annual
revenues (unaudited) of approximately $28,500,000 providing specialized endoscopy medical devices and products primarily in the
United Kingdom (the “MI Business” or the “MI Acquisition”). Principal products of MI include proprietary short-term and long-term
endoscope transport and storage systems, a comprehensive range of endoscopic consumable accessories, OEM mobile medical carts as
well as specialized products for patient warming and patient transfer. With an employee base of approximately 100 individuals,
including complete sales and service teams and manufacturing facilities in Southend-on-Sea, England, the addition of MI
complements our existing endoscopy business in the United States, the United Kingdom and other global markets. The MI Business
will be included in our Endoscopy segment. The total consideration for the transaction, excluding acquisition-related costs, was
$80,064,000.
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The principal reasons for the MI Acquisition were: (i) the global expansion of our product offerings in Endoscopy, (ii) the opportunity
to sell our existing endoscopy products to MI’s installed base, (iii) the ability to combine the MI sales force with our existing United
Kingdom organization to create what we believe will be a dominant global sales force in endoscopy product sales and service, (iv) to
achieve cost savings through various operating synergies, (v) the ability to leverage our direct sales force to accelerate the growth of
MI products in the U.S. and various international markets, and (vi) the expectation that the acquisition will be accretive to our earnings
per share (“EPS”) in fiscal 2017 and beyond. Such reasons constitute the significant factors that contributed to a purchase price that
resulted in recognition of goodwill. The MI Acquisition is not included in our results of operations for any portion of fiscal 2015 or
any prior period.
DentaPure
Fiscal 2015
On February 20, 2015, we purchased all of the issued and outstanding stock of MRLB, a private company with pre-acquisition annual
revenues (unaudited) of approximately $2,300,000, to obtain the DentaPure® product line. The DentaPure product line is a proprietary,
iodinated resin filter cartridge system used by dentists to maintain safe water quality in dental unit waterlines. It has been integrated
into our Crosstex product portfolio. The DentaPure Business is included in our Healthcare Disposables segment. The total
consideration for the transaction was $9,980,000, excluding acquisition-related costs.
The purchase price was preliminarily allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets ...............................................................................................................
Property, plant and equipment ......................................................................................
Amortizable intangible assets:
Customer relationships (10- year life) ......................................................................
Technology (10- year life) ........................................................................................
Brand names (10- year life) ......................................................................................
Current liabilities ..........................................................................................................
Deferred income tax liabilities .....................................................................................
Net assets acquired .......................................................................................................
Preliminary
Allocation
$
566,000
50,000
4,640,000
780,000
260,000
(248,000 )
(2,172,000 )
3,876,000
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$6,104,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, is included in our
Healthcare Disposables segment.
The principal reasons for the DentaPure Acquisition were to (i) leverage the sales and marketing infrastructure of Crosstex by adding a
branded, technologically differentiated, proprietary product line, (ii) strengthen our leadership position in a rapidly growing area of
infection prevention and control, (iii) add a new product line that will provide for opportunities to cross-sell to biological monitoring
customers and expand our waterline disinfection products and (iv) the expectation that the acquisition will be accretive to our EPS in
fiscal 2016 and beyond. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition
of goodwill.
The DentaPure Business is included in our results of operations for fiscal 2015 subsequent to its acquisition date and is not reflected in
fiscals 2014 and 2013. This acquisition did not have a significant effect on our consolidated results of operations for fiscal 2015 due to
the size of the business in relation to our overall consolidated results of operations.
Pure Water Solutions, Inc.
On January 1, 2015, we purchased substantially all of the net assets of PWS, a private company based out of Ridgeland, Mississippi
with pre-acquisition annual revenues (unaudited) of approximately $8,000,000 that provides water treatment services for commercial
and industrial, laboratory and medical customers. The PWS Business is included in our Water Purification and Filtration segment. The
total consideration for the transaction, excluding acquisition-related costs, was $11,835,000.
79
The purchase price was preliminarily allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets ...............................................................................................................
Property, plant and equipment ......................................................................................
Amortizable intangible assets (12- year weighted average life):
Customer relationships (12- year life) ......................................................................
Brand names (1- year life) ........................................................................................
Other assets...................................................................................................................
Current liabilities ..........................................................................................................
Net assets acquired .......................................................................................................
Preliminary
Allocation
$
1,417,000
1,966,000
5,940,000
30,000
20,000
(503,000 )
8,870,000
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$2,965,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, is included in our Water
Purification and Filtration segment.
The principal reasons for the PWS Acquisition were (i) to strengthen our sales and service business by adding PWS’s strategic
southeastern United States market presence to enable us to better serve our national customers, (ii) to further expand our business into
the commercial, laboratory and research segments and (iii) the expectation that the acquisition will be accretive to our EPS in fiscal
2016 and beyond. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of
goodwill.
The PWS Business is included in our results of operations in fiscal 2015 subsequent to its acquisition date and is not reflected in
fiscals 2014 and 2013. This acquisition did not have a significant effect on our consolidated results of operations in fiscal 2015 due to
the size of the business in relation to our overall consolidated results of operations.
International Medical Service S.r.l.
On November 3, 2014, we acquired all of the issued and outstanding stock of IMS, a privately owned company in Italy with pre-
acquisition annual revenues (unaudited) of approximately $13,500,000 that manufactures and sells automated endoscope reprocessors
(“AERs”), high-level disinfectant chemistries used in AERs, other infection prevention and control chemistries used in healthcare and
dental markets, as well as technical service. The IMS Business is included in our Endoscopy segment. The total consideration for the
transaction, excluding acquisition-related costs, was $24,610,000, which includes assumed debt of $2,498,000, a significant portion of
which was subsequently repaid.
The purchase price was preliminarily allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets ................................................................................................................
Property, plant and equipment ......................................................................................
Amortizable intangible assets (9- year weighted average life):
Customer relationships (9- year life) ........................................................................
Technology (9- year life) ..........................................................................................
Other assets ...................................................................................................................
Current liabilities ..........................................................................................................
Deferred income tax liabilities ......................................................................................
Other long-term liabilities.............................................................................................
Net assets acquired .......................................................................................................
Preliminary
Allocation
$
8,111,000
7,922,000
5,669,000
1,381,000
177,000
(5,735,000 )
(3,028,000 )
(1,020,000 )
13,477,000
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$11,133,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, is included in our
Endoscopy segment. Following the acquisition, we changed the name of IMS to Cantel Medical (Italy) S.r.l.
80
The principal reasons for the IMS Acquisition were: (i) to add a high quality manufacturing facility in Europe, (ii) the expansion of
our product offerings with a broader range of advanced endoscope reprocessing equipment suitable for various international markets,
(iii) the opportunity to transition our existing Italy business from a distribution model to a direct sales model, (iv) the opportunity to
leverage IMS’s chemistry manufacturing capabilities to enhance and expand our existing product portfolio while reducing freight and
logistics expenses related to the export of chemistries from the United States, (v) the ability to expand our footprint and infrastructure
in Europe and (vi) the expectation that the acquisition will be accretive to our EPS in fiscal 2016 and beyond. Such reasons constitute
the significant factors that contributed to a purchase price that resulted in recognition of goodwill.
The IMS Business is included in our results of operations in fiscal 2015 subsequent to its acquisition date and is not reflected in fiscals
2014 and 2013. With the exception of acquisition related costs, the IMS Business did not have a significant effect on our consolidated
results of operations in fiscal 2015 due to the size of the business in relation to our overall consolidated results of operations.
For all three fiscal 2015 acquisitions, the allocations of purchase price were considered preliminary since income tax returns relating
to these acquisitions have not been finalized.
PuriCore International Limited
Fiscal 2014
On June 30, 2014, we acquired from PuriCore plc, a publicly traded company in the United Kingdom (“UK”), all the issued and
outstanding stock of its subsidiary PuriCore International Limited, a company located in the UK with pre-acquisition annual revenues
(unaudited) of approximately $25,000,000 that sells automated endoscope reprocessors, endoscope drying and storage cabinets,
chemistry and consumables, as well as comprehensive maintenance and validation services, primarily in the UK. The total
consideration for the transaction, excluding acquisition-related costs, was $27,675,000, net of a $337,000 net asset value adjustment
paid by the seller in August 2014. The PuriCore Business is included in our Endoscopy segment.
The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets .......................................................................................................................
Property, plant and equipment .............................................................................................
Amortizable intangible assets (9- year weighted average life):
Customer relationships (10- year life) ..............................................................................
Technology (6- year life) .................................................................................................
Other (3- year life) ...........................................................................................................
Non-current deferred income tax assets, net ........................................................................
Current liabilities .................................................................................................................
Other long-term liabilities ....................................................................................................
Net assets acquired ...............................................................................................................
Final
Allocation
$
8,982,000
972,000
11,340,000
1,760,000
93,000
1,924,000
(10,085,000 )
(753,000 )
14,233,000
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$13,442,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our
Endoscopy segment. Following the acquisition, we changed the name of PuriCore to Cantel Medical (UK) Limited.
In connection with the acquisition, we acquired certain ordinary course business assets and liabilities which included a contingent
guaranteed obligation to reimburse an endoscope service company for endoscope repair costs it incurs when servicing its customers’
endoscopes that are damaged by one of PuriCore’s discontinued endoscope reprocessing machine models. Although the terms of the
guarantee provide for no limit to the maximum potential future payments, we have estimated the fair value of the liability on the date
of the acquisition to be approximately $1,414,000, of which $693,000 was recorded in current liabilities and $721,000 was recorded in
other long-term liabilities at June 30, 2014. This contingent guaranteed obligation increased goodwill on the date of the acquisition
and is continually re-measured at each balance sheet date by recording changes in the fair value of the liability to general
administrative expenses in our Consolidated Statements of Income, as further explained in Note 6 of the Consolidated Financial
Statements. At July 31, 2015, such liability was $888,000 of which $566,000 was recorded in current liabilities and $322,000 was
recorded in other long-term liabilities.
Since we will be continually re-measuring the contingent guaranteed obligation at each balance sheet date and recording changes in
the fair value through our Consolidated Statements of Income, we may potentially have significant earnings volatility in our future
results of operations until the discontinued endoscope reprocessing machine model is no longer used in the marketplace.
81
The principal reasons for the acquisition are as follows: (i) the expansion of our product offerings with a broader range of advanced
endoscope reprocessing equipment suitable for various international markets, (ii) the opportunity to sell our chemistries and other
products to PuriCore’s installed base through a direct sales force, (iii) the opportunity to transition our existing UK business from a
distribution model to a direct sales model, (iv) the ability to expand our footprint and infrastructure in Europe and (v) the expectation
that the acquisition will be accretive to our earnings per share in fiscal 2015 and beyond. Such reasons constitute the significant factors
that contributed to a purchase price that resulted in recognition of goodwill.
The PuriCore Business is included in our results of operations in fiscal 2015 and the portion of fiscal 2014 subsequent to its
acquisition date, and is not reflected in fiscal 2013.
Sterilator Company, Inc.
On January 7, 2014, we acquired all the issued and outstanding stock of Sterilator, a private company based in Cuba, New York that
manufactures biological indicators and supplies for sterility assurance products, which are used to accurately monitor the effectiveness
of sterilization processes. The total consideration for the transaction was $3,349,000, excluding transaction costs.
The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets ............................................................................................................................................
Property, plant and equipment ..................................................................................................................
Amortizable intangible assets (9- year weighted average life):
Customer relationships (11- year life) ...................................................................................................
Technology (8- year life) ......................................................................................................................
Current liabilities ......................................................................................................................................
Deferred income tax liabilities ..................................................................................................................
Net assets acquired ....................................................................................................................................
Final
Allocation
$
1,058,000
521,000
130,000
510,000
(321,000 )
(276,000 )
1,622,000
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$1,727,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our
Healthcare Disposables segment.
The principal reasons for this vertical acquisition were to (i) add one of our key long-standing suppliers of biological indicators to our
portfolio providing a strategic benefit and cost savings to our overall sterility assurance monitoring business and (ii) strengthen our
new product development and overall research and development capabilities. Such reasons constitute the significant factors that
contributed to a purchase price that resulted in recognition of goodwill.
The Sterilator Business is included in our results of operations in fiscal 2015 and the portion of fiscal 2014 subsequent to its
acquisition date, and is not reflected in fiscal 2013.
Jet Prep Ltd.
On November 5, 2013, we acquired all the issued and outstanding capital stock of Jet Prep, a private Israeli company that developed
the Jet PrepTM Endoscopic Flushing Device, a novel single-use irrigation and aspiration catheter to improve visualization during
colonoscopy procedures. The device has FDA 510(k) and CE Mark clearances and is in the beginning phase of commercialization by
our global endoscopy sales force. Total consideration for the transaction, excluding transaction costs, was $5,350,000 plus
preliminarily estimated contingent consideration of $2,490,000 based on a percentage of sales above a minimum threshold over a
seven year period, as further explained below. The Jet Prep Acquisition is included in our Endoscopy segment.
We account for contingent consideration by recording the fair value of contingent consideration as a liability and an increase in
goodwill on the date of the acquisition and continually re-measure the liability at each balance sheet date by recording changes in the
fair value through our Consolidated Statements of Income. Accordingly, on November 5, 2013 we increased contingent consideration
and goodwill by $2,490,000 to record our initial estimated fair value of the contingent consideration that would be earned over the
seven year period ending November 4, 2020. On a quarterly basis subsequent to November 5, 2013, we re-measured the fair value of
the contingent consideration and recorded the changes in fair value by increasing both contingent consideration and general
administrative expenses, as further explained in Note 6 of the Consolidated Financial Statements. At July 31, 2015, the estimated fair
value was $751,000 and was recorded in contingent consideration in the Consolidated Balance Sheets.
82
In connection with the acquisition, we acquired certain ordinary course business assets and liabilities as well as an obligation to repay
the Israeli Government for $810,000 of seed funding that was previously granted to Jet Prep. In accordance with the seed funding
agreement, the Israeli Government is entitled to a return on their investment that can range from one to nine times their total grant
based upon specific conditions set forth in the seed funding agreement and applicable Israeli law, including the acceleration of
payments if we transfer certain operations of the company or intellectual property outside of Israel. We account for this assumed
contingent obligation to the Israeli Government by recording the fair value as a liability and an increase in goodwill on the date of the
acquisition and continually re-measure the liability at each balance sheet date by recording changes in the fair value through our
Consolidated Statements of Income. Accordingly, on November 5, 2013 we increased accrued expenses by $4,000, other long-term
liabilities by $1,716,000 and goodwill by $1,720,000 to record our initial estimated fair value of the assumed contingent obligation to
the Israeli Government that would be earned on a percentage of sales over a forecasted period. On a quarterly basis subsequent to
November 5, 2013, we re-measured the fair value of the assumed contingent liability and recorded the changes in fair value by
increasing both other long-term liabilities and general administrative expenses, as further explained in Note 6 of the Consolidated
Financial Statements. At July 31, 2015, the estimated fair value was $1,138,000, of which $12,000 was recorded in accrued expenses
and $1,126,000 was recorded in other long-term liabilities.
Since we will be continually re-measuring the contingent consideration liability and the assumed contingent obligation at each balance
sheet date and recording changes in the respective fair values through our Consolidated Statements of Income, we may potentially
have significant earnings volatility in our future results of operations until the completion of the seven year period with respect to the
contingent consideration and until the assumed contingent obligation is satisfied or until sales of the Jet Prep Ltd. products no longer
exist.
The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets .................................................................................................
Property, plant and equipment .......................................................................
Amortizable intangible asset:
Technology (7- year life) ...........................................................................
Current liabilities ...........................................................................................
Other long-term liabilities ..............................................................................
Net assets acquired .........................................................................................
Final
Allocation
82,000
65,000
3,730,000
(104,000 )
(1,716,000 )
2,057,000
$
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$5,783,000 was assigned to goodwill. Such goodwill, none of which is deductible for income tax purposes, has been included in our
Endoscopy segment.
The principal reasons for the acquisition were (i) to address a market need for an effective technology that improves colonoscopy
visualization through the use of irrigation and suction, (ii) to expand our endoscopy product portfolio further bolstering the Medivators
brand in the gastrointestinal (“GI”) suite, (iii) to further expand our research and development capability by adding accomplished
engineers to our existing research and development team and (iv) the expectation that the acquisition will be accretive to our earnings
per share in the future. Such reasons constitute the significant factors that contributed to a purchase price that resulted in recognition of
goodwill.
The Jet Prep Business is included in our results of operations in fiscal 2015 and the portion of fiscal 2014 subsequent to its acquisition
date and is not reflected in fiscal 2013. Since the full commercialization of the Jet Prep Endoscopic Flushing Device has been delayed,
this acquisition has not yet generated any sales and did not have a significant impact on our results of operations, except for recording
the changes in fair values of the contingent consideration liability and the assumed contingent obligation through our Consolidated
Statements of Income, as further explained in Note 6 to the Consolidated Financial Statements.
83
Siemens’ Hemodialysis Water Business
Fiscal 2013
On March 22, 2013, we entered into an asset purchase agreement under which we acquired certain net assets of Siemens’
hemodialysis water business primarily consisting of customer service agreements for over 600 dialysis customers in the United States
and Canada. Such service agreements had contributed over $9 million in revenue to Siemens in calendar year 2012 (unaudited) and
were assigned from Siemens to us on an individual customer by customer basis to ensure a seamless transition. The acquisition date of
the Siemens Water Business was July 30, 2013, which is when the majority of the customer service agreements were transferred and
therefore control of the business had been achieved. The total consideration for the transaction, excluding transaction costs of
$362,000, was $8,300,000, which was paid on March 22, 2013.
The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets .................................................................................................
Property, plant and equipment ........................................................................
Amortizable intangible assets:
Customer relationships (12- year life) ........................................................
Current liabilities ............................................................................................
Net assets acquired .........................................................................................
Final
Allocation
728,000
231,000
4,310,000
(415,000 )
4,854,000
$
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$3,446,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, is included in our Water
Purification and Filtration segment.
The principal reasons for the acquisition were as follows: (i) the opportunity to increase service revenue and profitability of our Water
Purification and Filtration service network due to improved operating leverage, (ii) the expansion of our business’s North American
footprint into new geographies, (iii) the opportunity to sell capital equipment and recurring consumables to new customers and (iv) the
expectation that the acquisition will be accretive to our earnings per share beyond fiscal 2013. Such reasons constitute the significant
factors that contributed to a purchase price that resulted in recognition of goodwill.
Due to the size of this business in relation to our overall consolidated results of operations, the Siemens Water Acquisition did not
have a significant effect on our results of operations in fiscals 2015 and 2014 and the portion of fiscal 2013 subsequent to its
acquisition date. The Siemens Water Business is included in our Water Purification and Filtration segment.
Eagle Pure Water Systems, Inc.
On December 31, 2012, we purchased substantially all of the assets of Eagle Pure Water Systems, Inc., a private company with pre-
acquisition annual revenues (unaudited) of approximately $500,000 based in the suburbs of Philadelphia, Pennsylvania that provides
water treatment services for laboratory, industrial and medical customers. The total consideration for the transaction was $870,000.
The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets ...............................................................................................................
Property, plant and equipment ......................................................................................
Amortizable intangible assets (3- year weighted average life):
Customer relationships (3- year life) ........................................................................
Brand names (3- year life) ........................................................................................
Non-compete agreement (5- year life) ......................................................................
Current liabilities ..........................................................................................................
Net assets acquired .......................................................................................................
Final
Allocation
8,000
70,000
150,000
18,000
32,000
(5,000 )
273,000
$
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$597,000 was assigned to goodwill. Such goodwill, all of which is deductible for income tax purposes, is included in our Water
Purification and Filtration reporting segment.
84
The principal reasons for the acquisition were the strengthening of our sales and service business by adding Eagle Pure Water’s
strategic Philadelphia market presence to enable us to better serve our national customers and to further expand our business into the
laboratory and research segments. Such reasons constitute the significant factors that contributed to a purchase price that resulted in
recognition of goodwill.
The acquisition of Eagle Pure Water is included in our results of operations for fiscals 2015 and 2014 and the portion of fiscal 2013
subsequent to its acquisition date. This acquisition had an insignificant impact on our results of operations.
SPS Medical Supply Corp.
On November 1, 2012, we acquired all the issued and outstanding stock of SPS Medical Supply Corp., a private company based in
Rochester, New York with pre-acquisition annual revenues (unaudited) of approximately $17,500,000 that manufactures and provides
biological and chemical indicators for sterility assurance monitoring services in the acute-care, alternate-care and dental markets. The
SPS Business offers a wide-array of products and services that enable healthcare facilities to safely and accurately monitor and verify
their sterilization practices and protocols. Total consideration for the transaction, excluding transaction costs of $157,000, was
$32,500,000. In addition, we acquired the SPS manufacturing and warehouse facility in Rochester, New York for approximately
$3,500,000 from an affiliate of SPS Medical. The SPS Business is included in our Healthcare Disposables segment.
The purchase price was allocated to the assets acquired and assumed liabilities based on estimated fair values as follows:
Net Assets
Current assets ...............................................................................................................
Property, plant and equipment ......................................................................................
Amortizable intangible assets (9- year weighted average life):
Customer relationships (10- year life) ......................................................................
Brand names (5- year life) ........................................................................................
Technology (4- year life) ..........................................................................................
Non-compete agreements (6- year life) ....................................................................
Other assets...................................................................................................................
Current liabilities ..........................................................................................................
Noncurrent deferred income tax liabilities, net ............................................................
Net assets acquired .......................................................................................................
Final
Allocation
$
4,810,000
3,801,000
8,120,000
760,000
500,000
180,000
28,000
(2,784,000 )
(3,659,000 )
11,756,000
$
There were no in-process research and development projects acquired in connection with the acquisition. The excess purchase price of
$24,244,000 was assigned to goodwill. Such goodwill, all of which is not deductible for income tax purposes, has been included in our
Healthcare Disposables reporting segment.
The principal reasons for the acquisition were (i) to expand our sterility assurance monitoring product portfolio, (ii) to expand our
market share of the dental mail-in biological monitoring industry when combined with our existing monitoring business, (iii) to
expand into the acute-care hospital market and alternate care markets, (iv) to increase the likelihood of cross-selling our existing
products, (v) to leverage our Healthcare Disposables segment’s sales and marketing infrastructure and (vi) the expectation that the
acquisition will be accretive to our earnings per share in fiscal 2013 and beyond. Such reasons constitute the significant factors that
contributed to a purchase price that resulted in recognition of goodwill.
The acquisition of the SPS Business is included in our results of operations for fiscals 2015 and 2014, and the portion of fiscal 2013
subsequent to its acquisition date.
4.
Inventories, net
A summary of inventories is as follows:
July 31,
2015
2014
Raw materials and parts ...........................................
Work-in-process .......................................................
Finished goods..........................................................
Reserve for excess and obsolete inventory ...............
Total .........................................................................
$
$
36,585,000
10,017,000
29,371,000
(3,895,000 )
72,078,000
$
$
31,724,000
7,509,000
24,923,000
(4,419,000 )
59,737,000
85
5.
Derivatives
We recognize all derivatives on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair
value through earnings. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative will either be offset against the change in the fair value of the hedged assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the
change in fair value of a derivative that is designated as a hedge will be recognized immediately in earnings. As of July 31, 2015, all
of our derivatives were designated as hedges. We do not hold any derivative financial instruments for speculative or trading purposes.
Changes in the value of the Euro, Canadian dollar, British Pound, Singapore dollar and the Chinese Renminbi against the United
States dollar affect our results of operations because certain cash bank accounts, accounts receivable, and liabilities of Cantel and its
subsidiaries are denominated and ultimately settled in United States dollars or these foreign currencies but must be converted into each
entity’s functional currency.
In order to hedge against the impact of fluctuations in the value of the Euro, British Pound and Singapore dollar relative to the United
States dollar on the conversion of such net assets into the functional currencies, we enter into short-term contracts to purchase Euros,
British Pounds and Singapore dollars forward, which contracts are one-month in duration. These short-term contracts are designated
as fair value hedge instruments. There were five foreign currency forward contracts with an aggregate value of $12,833,000 at July 31,
2015, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency.
Such contracts expired on August 31, 2015. 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. For the fiscal year ended July 31, 2015, such forward contracts substantially offset the impact on operations
relating to certain assets and liabilities that were denominated in currencies other than each entity’s functional currency resulting in net
currency conversion losses, net of tax, of $143,000 on the items hedged. Gains and losses related to hedging contracts to buy Euros,
British Pounds 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 Canadian dollar or
Chinese Renminbi relative to the United States dollar because the overall foreign currency exposures relating to those currencies are
currently not deemed significant. Additionally, we do not hedge transactions associated with the funding of international acquisitions
due to the short-term nature of the foreign currency exposure.
The interest rate on our outstanding borrowings under our credit facilities is variable and is affected by the general level of interest
rates in the United States as well as LIBOR interest rates, as more fully described in Note 9 to the Consolidated Financial Statements.
In order to protect our interest rate exposure, we entered into forward starting interest rate swap agreements in February 2012 in which
we agreed to exchange our variable interest cash flows with fixed interest cash flows provided by one of our existing senior lenders.
Such interest rate swap agreements were designated as cash flow hedge instruments and were designed to be effective in offsetting
changes in the cash flows related to the hedged borrowings. With respect to our former term loan facility, the interest rate swap was
for the period that began August 8, 2012 and ended July 31, 2015, initially covering $40,000,000 of borrowings based on one-month
LIBOR and thereafter reducing in quarterly $2,500,000 increments consistent with the mandatory repayment schedule, and the fixed
interest cash flow was at a one-month LIBOR rate of 0.664%. With respect to our revolving credit facility, the interest rate swap was
for the period that began August 8, 2012 and ended January 31, 2014, initially covering $25,000,000 of borrowings based on one-
month LIBOR and thereafter reduced semi-annually by increments of $5,000,000, and the fixed interest cash flow was at a one month
LIBOR rate of 0.496%. As more fully described in Note 6 to the Consolidated Financial Statements, we account for the interest rate
swap agreements by initially recording the fair value of the derivative instrument on the balance sheet as either an asset or liability,
with a corresponding amount recorded in accumulated other comprehensive income. Amounts are reclassified from accumulated other
comprehensive income to interest expense in the Consolidated Statements of Income in the period the hedged transaction affects
earnings. At the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in
the fair value or cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged
items and whether they are expected to be highly effective in the future. This formal assessment includes a comparison of the terms of
the interest rate swap agreements and hedged borrowings to ensure they coincide as well as an evaluation of the continued ability of
the counterparty to the interest rate swap agreements and the Company to honor their obligations under such agreements. At
January 31, 2014, our formal assessment concluded that the changes in the fair value of both derivative instruments that began on
August 8, 2012 had been highly effective. However, the remaining derivative instrument, which related solely to our former term loan
facility, was determined to be ineffective beginning as of January 31, 2014 due to the modifications to our credit facilities in
March 2014, as more fully described in Note 9 to the Consolidated Financial Statements. Accordingly, the fair value of the interest
rate swap agreement of $113,000 relating to our former term loan facility was recognized in interest expense in January 2014.
Changes in the fair value of the derivative instrument subsequent to January 31, 2014 were recognized immediately in interest
expense.
86
6.
Fair Value Measurements
Fair Value Hierarchy
We apply the provisions of Accounting Standards Codification (“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. ASC 820 establishes a three level fair value hierarchy to prioritize the inputs used in valuations, as defined below:
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level 3: Unobservable inputs for the asset or liability.
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.
In order to protect our interest rate exposure in future years, we entered into forward starting interest rate swap agreements in
February 2012 in which we agreed to exchange our variable interest cash flows with fixed interest cash flows provided by one of our
existing senior lenders, as further described in Notes 5 and 9 to the Consolidated Financial Statements. Our interest rate swap
agreements were classified within Level 2 and were valued using discounted cash flow analyses based on the terms of the contracts
and interest rate curves. Changes in fair value in the interest rate swap agreement relating to our revolving credit facility were recorded
in accumulated other comprehensive income in the Consolidated Statements of Comprehensive Income until the expiration of this
interest rate swap on January 31, 2014. Amounts were reclassified from accumulated other comprehensive income in the period the
hedged transaction affected earnings. Similarly, changes in fair value in the interest rate swap agreement relating to our former term
loan facility were recorded in accumulated other comprehensive income in the Consolidated Statements of Comprehensive Income
until January 31, 2014, at which time the interest rate swap agreement was determined to be ineffective and the remaining fair value of
the derivative instrument was recognized in interest expense, as further explained in Note 5 to the Consolidated Financial Statements.
On June 30, 2014, we recorded a $1,414,000 liability for the estimated fair value of a contingent guaranteed obligation relating to the
PuriCore Acquisition, as further described in Note 3 to the Consolidated Financial Statements. This fair value measurement was based
on significant inputs not observed in the market and thus represents a Level 3 measurement. The fair value of the contingent
guaranteed obligation was based on the estimated cost to repair endoscopes that may be damaged by one of PuriCore’s discontinued
endoscope reprocessing machine models that remain in the marketplace, the historical frequency of claims and the likely timeframe
that each machine will continue to be used. As such, the determination of the fair value of this contingent guarantee obligation is
subjective in nature and can be impacted by significant changes in third party service repair rates, the frequency of claims and a
change in the expected life of these discontinued machines. At the date of the acquisition, the cash flow projection relating to this
contingent guaranteed obligation was discounted using a rate of 10.1%, which was based on the weighted average cost of capital of
the acquired business plus a credit risk premium for non-performance risk. This liability will be adjusted periodically by recording
changes in the fair value through our Consolidated Statements of Income driven by the time value of money and changes in the
assumptions that were initially used in the valuation. Given the subjective nature of the assumptions used in the determination of fair
value, we may potentially have significant earnings volatility in our future results of operations.
On November 5, 2013, we recorded a $2,490,000 liability for the estimated fair value of contingent consideration and a $1,720,000
liability for the estimated fair value of an assumed contingent obligation payable to the Israeli Government relating to the Jet Prep
Acquisition, as further described in Note 3 to the Consolidated Financial Statements. These fair value measurements were based on
significant inputs not observed in the market and thus represent Level 3 measurements.
87
The fair values of the contingent consideration liability and assumed contingent obligation were based on percentages of future sales
projections of the Jet Prep Business, above a minimum threshold with respect to the contingent consideration, under various potential
scenarios over a seven year period ending November 4, 2020 and weighting the probability of these outcomes. As such, the
determinations of fair values of these contingent liabilities are subjective in nature and highly dependent on future sales projections.
At the date of the acquisition, the cash flow projections relating to the contingent consideration and assumed contingent obligation
were discounted using rates of 12.6% and 2.5%, respectively. The discount rate relating to the contingent consideration was based on
the weighted average cost of capital of the acquired business plus a credit risk premium for non-performance risk. Since payment of
the assumed contingent obligation to the Israeli Government is highly probable, the discount rate relating to this government
obligation was based on a risk free rate plus a premium for non-performance risk. These two liabilities will be adjusted periodically by
recording changes in the fair value through our Consolidated Statements of Income driven by the time value of money and changes in
the assumptions that were initially used in the valuations. Due to the structure of the acquisition, any such adjustments through our
Consolidated Statements of Income will not be tax effected, except for amounts in excess of $810,000 with respect to the assumed
contingent obligation, therefore impacting our effective tax rate.
The actual contingent consideration and assumed contingent obligation have the potential of being between zero and a percentage of
unlimited sales that could occur until the completion of the seven year period with respect to the contingent consideration liability and
until the assumed contingent obligation is satisfied in full, or until the sales of the Jet Prep Ltd. products no longer exist. However,
with respect to the contingent consideration, the different likely scenarios of future sales projections used in our fair value
determination at July 31, 2015 resulted in total potential contingent consideration payments ranging between zero and approximately
$2,000,000 and the weighted average present value of such scenarios plus the accretion of interest for the passing of time resulted in a
fair value of $751,000 at July 31, 2015. The decrease in the initial fair value from $2,490,000 to $751,000 at July 31, 2015 was
primarily due to changes in probability factors and future sales projections based on recently completed market research, product
modification plans and the remaining years in the seven year measurement period. With respect to the assumed contingent obligation,
the different likely scenarios of future sales projections used in our fair value determination at July 31, 2015 resulted in total potential
future payments ranging between zero and approximately $2,100,000 and the weighted average present value of such scenarios plus
the accretion of interest for the passing of time resulted in a fair value of $1,138,000 at July 31, 2015. The decrease in the initial fair
value from $1,720,000 to $1,138,000 at July 31, 2015 was primarily due to changes in probability factors and future sales projections
based on recently completed market research and product modification plans. Given the subjective nature of the assumptions used in
the determinations of fair value, we may potentially have further earnings volatility in our future results of operations related to these
Jet Prep obligations.
The fair values of the Company’s financial instruments measured on a recurring basis were categorized as follows:
Assets:
Cash and cash equivalents:
Money markets ......................................................
Total assets .................................................................
Liabilities:
Accrued expenses:
Assumed contingent obligation ..............................
Contingent guaranteed obligation ..........................
Total accrued expenses ..........................................
Contingent consideration ...........................................
Other long-term liabilities:
Assumed contingent obligation ..............................
Contingent guaranteed obligation ..........................
Total other long-term liabilities:
$
$
$
Total liabilities ...........................................................
$
Level 1
Level 2
Level 3
Total
July 31, 2015
1,680,000
1,680,000
$
$
—
—
$
$
—
—
$
$
1,680,000
1,680,000
—
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
—
$
$
12,000
566,000
578,000
751,000
1,126,000
322,000
1,448,000
2,777,000
$
$
12,000
566,000
578,000
751,000
1,126,000
322,000
1,448,000
2,777,000
Level 1
Level 2
Level 3
Total
July 31, 2014
Assets:
Cash and cash equivalents:
Money markets ......................................................
Total assets .................................................................
$
$
1,702,000
1,702,000
$
$
—
—
$
$
—
—
$
$
1,702,000
1,702,000
88
Level 1
Level 2
Level 3
Total
July 31, 2014
Liabilities:
Accrued expenses:
$
Interest rate swap agreement ..................................
Contingent guaranteed obligation ..........................
Total accrued expenses ..........................................
Contingent consideration ...........................................
Other long-term liabilities:
Assumed contingent obligation ..............................
Contingent guaranteed obligation ..........................
Total other long-term liabilities:
Total liabilities ...........................................................
$
—
—
—
—
—
—
—
—
$
$
69,000
—
69,000
—
—
—
—
69,000
$
$
—
684,000
684,000
2,722,000
1,752,000
711,000
2,463,000
5,869,000
$
$
69,000
684,000
753,000
2,722,000
1,752,000
711,000
2,463,000
5,938,000
A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable
inputs (Level 3) for fiscals 2015, 2014 and 2013 is as follows:
Byrne
Contingent
Consideration
$ 1,500,000 $ 1,037,000 $
Byrne
Price
Floor
Jet Prep
Contingent
Consideration
Jet Prep
Assumed
Contingent
Obligation
PuriCore
Contingent
Guaranteed
Obligation
— $
— $
— $
Total
2,537,000
Balance, July 31, 2012 ..............
Total net unrealized gains
included in general and
administrative expense
in earnings .............................
Net purchases, issuances,
sales and settlements .............
Balance, July 31, 2013 ..............
Total net unrealized (gains)
losses included in
general and administrative
expense in earnings ...............
Net purchases, issuances,
sales and settlements .............
Balance, July 31, 2014 ..............
Total net unrealized gains
included in general and
administrative expense
in earnings .............................
Net purchases, issuances,
—
—
—
—
—
—
(1,500,000 )
(992,000 )
—
45,000
—
—
—
—
—
—
—
—
—
(2,492,000 )
—
45,000
(45,000 )
232,000
32,000
—
219,000
—
—
2,490,000
2,722,000
1,720,000
1,752,000
1,395,000
1,395,000
5,605,000
5,869,000
—
(1,971,000 )
(614,000 )
—
(2,585,000 )
sales and settlements .............
Balance, July 31, 2015 ..............
$
—
— $
—
— $
—
—
751,000 $ 1,138,000 $
(507,000 )
888,000 $
(507,000 )
2,777,000
Assets Measured and Recorded at Fair Value on a Nonrecurring Basis
We re-measure the fair value of certain assets, such as intangible assets, goodwill and long-lived assets, including property, equipment
and other assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable,
and goodwill and intangible assets with indefinite lives are reviewed for impairment at least annually.
In performing a review for goodwill impairment, management first assesses qualitative factors to determine whether it is more likely
than not that the fair value of the reporting unit is less than the carrying amount before proceeding to step one of the two-step
quantitative goodwill impairment test, if necessary. For our quantitative test, we use a two-step process that begins with an estimation
of the fair value of the related operating segments by using fair value results of the discounted cash flow methodology, as well as the
market multiple and comparable transaction methodologies, where appropriate. The first step is a review for potential impairment, and
the second step measures the amount of impairment, if any.
89
In performing our annual review for indefinite lived intangibles, management performs a qualitative assessment, and if a quantitative
assessment is necessary, we compare the current fair value of such assets to their carrying values. With respect to amortizable
intangible assets when impairment indicators are present, management determines whether expected future non-discounted cash flows
are sufficient to recover the carrying value of the assets; if not, the carrying value of the assets is adjusted to their fair value.
With respect to long-lived assets, an assessment is made to determine if the sum of the expected future non-discounted cash flows
from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected non-discounted cash
flows is less than the carrying value, an impairment loss is recognized based on fair value.
In September 2013, we acquired a license from a third party granting us the exclusive right to manufacture, commercialize, distribute
and sell an endoscopy product in exchange for a series of payments, which totaled $1,000,000 at January 31, 2015 and was recorded in
other assets in our Consolidated Balance Sheets. We evaluated this long-lived asset for potential impairment and determined that the
future use of this acquired license was unlikely based on a recent product analysis. Accordingly, we deemed the acquired license,
together with related fixed assets of $287,000, to be fully impaired and recorded a loss of $1,287,000 during fiscal 2015 based on
expected cash flows of the related endoscopy product, which was recorded in general and administrative expenses and as reductions in
other assets and property and equipment in the Consolidated Financial Statements.
As the inputs utilized for our periodic impairment assessments are not based on observable market data, but are based on
management’s assumptions and estimates, our goodwill, intangibles and long-lived assets are classified within Level 3 of the fair
value hierarchy on a non-recurring basis. Other than the impaired acquired license described above, management concluded on
July 31, 2015 that none of our long-lived assets, including goodwill and intangibles with indefinite-lives, were impaired and no other
events or changes in circumstances have occurred during fiscal 2015 that would indicate that the carrying amount of our long-lived
assets may not be recoverable.
Disclosure of Fair Value of Financial Instruments
As of July 31, 2015 and 2014, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable
and accounts payable approximated fair value due to the short maturity of these instruments. We believe that as of July 31, 2015 and
2014, the fair value of our outstanding borrowings under our credit facility approximated the carrying value of those obligations since
the borrowing rates were at prevailing market interest rates.
7.
Intangibles and Goodwill
Our intangible assets with definite lives consist primarily of customer relationships, technology, brand names, non-compete
agreements and patents. These intangible assets are being amortized on the straight-line method over the estimated useful lives of the
assets ranging from 3-20 years and have a weighted average amortization period of 11 years. Amortization expense related to
intangible assets was $13,265,000, $10,641,000 and $10,061,000 for fiscals 2015, 2014 and 2013, respectively. Our intangible assets
that have indefinite useful lives, and therefore are not amortized, consist of trademarks and trade names.
The Company’s intangible assets consist of the following:
Intangible assets with finite lives:
Customer relationships .......................................
Technology ........................................................
Brand names ......................................................
Non-compete agreements ...................................
Patents and other registrations ...........................
Trademarks and tradenames...................................
Total intangible assets ............................................
Gross
July 31, 2015
Accumulated
Amortization
$
97,697,000
26,508,000
12,970,000
3,129,000
2,235,000
142,539,000
8,152,000
$ 150,691,000
$
(39,549,000 ) $
(12,656,000 )
(10,865,000 )
(997,000 )
(788,000 )
(64,855,000 )
—
$
(64,855,000 ) $
Net
58,148,000
13,852,000
2,105,000
2,132,000
1,447,000
77,684,000
8,152,000
85,836,000
90
Intangible assets with finite lives:
Customer relationships .......................................
Technology ........................................................
Brand names ......................................................
Non-compete agreements ...................................
Patents and other registrations ...........................
Trademarks and tradenames...................................
Total intangible assets ............................................
Gross
July 31, 2014
Accumulated
Amortization
$
83,145,000
26,405,000
12,680,000
3,129,000
2,073,000
127,432,000
9,277,000
$ 136,709,000
$
(31,336,000 ) $
(11,444,000 )
(9,431,000 )
(754,000 )
(792,000 )
(53,757,000 )
—
$
(53,757,000 ) $
Net
51,809,000
14,961,000
3,249,000
2,375,000
1,281,000
73,675,000
9,277,000
82,952,000
Estimated annual amortization expense of our intangible assets for the next five years is as follows:
Year Ending July 31,
2016
2017
2018
2019
2020
$
10,444,000
9,872,000
9,569,000
9,246,000
7,488,000
Goodwill changed during fiscals 2015 and 2014 as follows:
Endoscopy
Water
Purification
and Filtration
Healthcare
Disposables
Dialysis
Other
Total
Goodwill
Balance, July 31,
2013 ........................
Acquisitions ................
Foreign currency
translation ...............
Balance, July 31,
2014 ........................
Acquisitions ................
Foreign currency
translation ...............
Sale of business ...........
Balance, July 31,
$
59,230,000 $
19,225,000
57,179,000 $
—
80,108,000 $ 8,133,000 $ 6,968,000 $ 211,618,000
20,952,000
1,727,000
—
—
(181,000 )
(341,000 )
—
—
(401,000 )
(923,000 )
78,274,000
11,093,000
56,838,000
2,965,000
81,835,000
6,104,000
8,133,000
—
6,567,000
—
231,647,000
20,162,000
(2,360,000 )
—
(931,000 )
—
—
—
—
—
(827,000 )
(5,740,000 )
(4,118,000 )
(5,740,000 )
2015 ........................
$
87,007,000 $
58,872,000 $
87,939,000 $ 8,133,000 $
— $ 241,951,000
On July 31, 2015, we performed impairment studies of the Company’s goodwill and indefinite lived trademarks and trade names and
concluded that such assets were not impaired. While the results of these annual reviews have historically not indicated impairment,
impairment reviews are highly dependent on management’s projections of our future operating results and cash flows (which
management believes to be reasonable), discount rates based on the Company’s weighted average cost of capital and appropriate
benchmark peer companies. Assumptions used in determining future operating results and cash flows include current and expected
market conditions and future sales forecasts. Subsequent changes in these assumptions and estimates could result in future
impairment. Although we consistently use the same methods in developing the assumptions and estimates underlying the fair value
calculations, such estimates are uncertain by nature and can vary from actual results. At July 31, 2015, the fair value of all of our
reporting units exceeded book value by substantial amounts, except our Dialysis segment, which had an estimated fair value that
exceeded book value by approximately 17%. We believe the most significant assumptions impacting the impairment assessment of
Dialysis relate to the assumed compounded annual sales growth and future operating efficiencies included in our projections of future
operating results and cash flows of this segment. If future operating results and cash flows are substantially less than our projections,
future impairment charges may be recorded. On July 31, 2015, management concluded that no events or changes in circumstances
have occurred in fiscal 2015 that would indicate that the carrying amount of our intangible assets and goodwill may not be
recoverable.
91
8.
Warranties
A summary of activity in the warranty reserves follows:
Year Ended July 31,
2015
2014
Beginning balance ......................................
Acquisitions ...............................................
Provisions ...................................................
Settlements .................................................
Foreign currency translation .......................
Ending balance ...........................................
$
$
1,589,000
118,000
2,583,000
(2,523,000 )
(27,000 )
1,740,000
$
$
1,261,000
221,000
2,627,000
(2,519,000 )
(1,000 )
1,589,000
The warranty provisions and settlements in fiscals 2015 and 2014 relate principally to the Company’s endoscope reprocessing and
water purification products. Warranty reserves are included in accrued expenses in the Consolidated Balance Sheets.
9.
Financing Arrangements
In March 2014, we modified our $100,000,000 senior secured revolving credit facility (the “Former Revolving Credit Facility”) and
$50,000,000 senior secured term loan facility (the “Former Term Loan Facility”) by entering into a $250,000,000 Third Amended and
Restated Credit Agreement dated as of March 4, 2014 (the “2014 Credit Agreement”). The 2014 Credit Agreement includes a five-
year $250,000,000 senior secured revolving facility with sublimits of up to $100,000,000 for borrowings in foreign currencies,
$30,000,000 for letters of credit and $10,000,000 for swing line loans (the “2014 Revolving Credit Facility”). The Former Term Loan
Facility was terminated after the outstanding balance was reassigned to the 2014 Revolving Credit Facility. Subject to the satisfaction
of certain conditions precedent including the consent of the lenders, the Company may from time to time increase the 2014 Revolving
Credit Facility by an aggregate amount not to exceed $100,000,000. The senior lenders include Bank of America N.A. (the lead bank
and administrative agent), PNC Bank, National Association, and Wells Fargo Bank, National Association. The 2014 Credit
Agreement expires on March 4, 2019. 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. Furthermore, we incurred debt issuance costs
of $1,318,000 relating to the 2014 Credit Agreement which was recorded in other assets along with the remaining unamortized debt
issuance costs of $512,000 relating to the Former Revolving Credit Facility. The total of these two amounts is being amortized over
the life of the 2014 Credit Agreement. The remaining unamortized debt issuance costs of $84,000 relating to the Former Term Loan
Facility was charged to interest expense on March 4, 2014 when the Former Term Loan Facility was terminated. At July 31, 2015,
unamortized debt issuance costs recorded in other assets amounted to $1,312,000.
Borrowings under the 2014 Credit Agreement bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at
rates ranging from 1.25% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s
“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 2014 Credit Agreement (“Consolidated EBITDA”). At
July 31, 2015, the lender’s base rate was 3.50% and the LIBOR rates ranged from 0.19% to 0.77%. 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 July 31, 2015. The 2014 Credit Agreement also provides for fees on the unused portion of our facility at
rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio; such rate was 0.20% at July 31, 2015.
In order to protect our interest rate exposure in future years, we entered into forward starting interest rate swap agreements in
February 2012 in which we agreed to exchange our variable interest cash flows with fixed interest cash flows provided by one of our
existing senior lenders. With respect to our Former Term Loan Facility, the interest rate swap was for the period that began August 8,
2012 and ended July 31, 2015, initially covering $40,000,000 of borrowings based on one-month LIBOR and thereafter reducing in
quarterly $2,500,000 increments consistent with the mandatory repayment schedule, and the fixed interest cash flow was at a one-
month LIBOR rate of 0.664%. As a result of the termination of our Former Term Loan Facility, this interest rate swap is no longer
considered effective in mitigating the adverse impact on interest expense of increases in LIBOR. With respect to our Former
Revolving Credit Facility, the interest rate swap was for the period that began August 8, 2012 and ended January 31, 2014, initially
covering $25,000,000 of borrowings based on one-month LIBOR and thereafter reducing semi-annually by increments of $5,000,000,
and the fixed interest cash flow was at a one-month LIBOR rate of 0.496%.
92
The 2014 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 United States-based subsidiaries, (ii) a pledge by Cantel of all of the outstanding
shares of its United States-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 and other covenants under the 2014 Credit
Agreement.
On July 31, 2015, we had $78,500,000 of outstanding borrowings under the 2014 Credit Agreement. Subsequent to July 31, 2015, we
repaid $7,000,000. In September, we borrowed $83,000,000 to fund the purchase price and transaction costs of the MI Acquisition
resulting in total outstanding borrowings of $154,500,000 at September 29, 2015.
10.
Income Taxes
The consolidated effective tax rate was 37.1%, 36.9% and 35.0% for fiscals 2015, 2014 and 2013, respectively, and reflects income
tax expense for our United States and international operations at their respective statutory rates.
The provision for income taxes consists of the following:
2015
Year Ended July 31,
2014
2013
Current
Deferred
Current
Deferred
Current
Deferred
United States:
Federal ..................
State ......................
International ..............
Total ..........................
$ 24,602,000
3,920,000
1,165,000
$ 29,687,000
$
$
(425,000 ) $ 22,119,000
3,710,000
(218,000 )
735,000
(806,000 )
(1,449,000 ) $ 26,564,000
$
$
(896,000 ) $ 18,122,000
3,010,000
(348,000 )
351,000
26,000
(1,218,000 ) $ 21,483,000
$
$
(351,000 )
223,000
(240,000 )
(368,000 )
The geographic components of income before income taxes are as follows:
2015
Year Ended July 31,
2014
2013
United States .............................
International ..............................
Total ..........................................
$
$
73,645,000
2,546,000
76,191,000
$
$
67,288,000
1,323,000
68,611,000
$
$
57,973,000
2,381,000
60,354,000
The consolidated effective income tax rate differed from the United States statutory tax rate of 35.0% in fiscals 2015, 2014 and 2013
due to the following:
Expected statutory tax ....................................
Differential attributable to:
Foreign operations ......................................
State and local taxes ...................................
Domestic production deduction ..................
Acquisition related items, net (a) ................
Loss on sale of business .............................
R&E tax credit ............................................
Other ...........................................................
Consolidated effective tax rate .......................
2015
Year Ended July 31,
2014
2013
35.0 %
1.2 %
3.4 %
-2.4 %
-1.6 %
1.1 %
-0.5 %
0.9 %
37.1 %
35.0 %
-0.1 %
3.2 %
-2.3 %
0.7 %
—
-0.3 %
0.7 %
36.9 %
35.0 %
-1.0 %
3.4 %
-2.1 %
—
—
-0.8 %
0.5 %
35.0 %
(a) For fiscal 2015, acquisition related items, net, consisted of favorable fair value adjustments of contingent liabilities, as more
fully described in Note 6 to the Consolidated Financial Statements, partially offset by non-deductible transaction costs. For
fiscal 2014, acquisition related items, net, consisted of unfavorable fair value adjustments of contingent liabilities and non-
deductible transaction costs.
93
Deferred income tax assets and liabilities are comprised of the following:
$
$
$
Current deferred tax assets:
Accrued expenses ......................................................................
Inventories .................................................................................
Accounts receivable...................................................................
Subtotal ......................................................................................
Valuation allowance ..................................................................
Non-current deferred tax assets:
Other long-term liabilities .........................................................
Stock-based compensation ........................................................
Capital investment .....................................................................
Foreign tax credit .......................................................................
Domestic NOLs .........................................................................
Foreign NOLs ............................................................................
Subtotal ......................................................................................
Valuation allowance ..................................................................
Non-current deferred tax liabilities:
Property and equipment .............................................................
Intangible assets ........................................................................
Goodwill ....................................................................................
Net non-current deferred tax liabilities ..........................................
$
July 31,
2015
2014
$
$
$
3,650,000
1,996,000
941,000
6,587,000
(354,000 )
6,233,000
690,000
2,640,000
546,000
—
498,000
4,861,000
9,235,000
(1,683,000 )
7,552,000
2,753,000
1,321,000
732,000
4,806,000
(1,255,000 )
3,551,000
928,000
2,633,000
175,000
133,000
2,660,000
4,552,000
11,081,000
(2,283,000 )
8,798,000
(6,154,000 )
(14,711,000 )
(10,409,000 )
(31,274,000 )
(23,722,000 ) $
(4,784,000 )
(12,554,000 )
(9,265,000 )
(26,603,000 )
(17,805,000 )
Deferred tax assets and liabilities have been adjusted for changes in statutory tax rates as appropriate. Such changes only have a
significant impact in the United States, where a substantial portion of our deferred tax items exist. Such deferred tax items existing in
the United States reflect a combined U.S. Federal and state effective rate of approximately 37.4% and 37.6% for fiscals 2015 and
2014, respectively.
At July 31, 2015, we had federal and state NOLs for domestic tax reporting purposes of $5,322,000. Included in this amount is
$74,000 in federal NOLs that originated from the acquisition of the Purity Water Company of San Antonio, Inc. on June 1, 2010 and
will begin to expire on July 31, 2029. The remainder of $5,248,000 relates to New Jersey State NOLs for fiscal year 2014. This NOL
will start to expire on July 31, 2034. Since we do not have any significant operations in New Jersey other than our corporate
headquarters, we currently believe it is more likely than not that we will be unable to utilize these NOLs. Accordingly, a valuation
allowance has been established for this state NOL.
For foreign tax reporting purposes, our NOLs at July 31, 2015 are approximately $21,945,000 and originated primarily from recent
foreign acquisitions. Most of these NOLs do not expire and are fully available for utilization against future profits in certain non-U.S.
tax jurisdictions. However, we have recorded a valuation allowance on $7,347,000 of these foreign NOLs, which are primarily
associated with certain early-stage foreign operations. Since these early-stage foreign operations are not yet generating profits, we
believe it is more likely than not that we will be unable to utilize these NOLs.
We decreased our overall valuation allowances during fiscal 2015 by $1,501,000 from $3,538,000 at July 31, 2014 to $2,037,000 at
July 31, 2015, primarily due to the decrease in the New Jersey State NOLs, which were utilized in conjunction with the domestic
internal movement of cash to our corporate headquarters in New Jersey. Such a decrease of our overall valuation allowances during
fiscal 2015 did not have an impact on our consolidated effective tax rate.
During fiscals 2015 and 2014, no dividends were repatriated from our foreign subsidiaries. All of the undistributed earnings of our
foreign subsidiaries are considered to be indefinitely reinvested at July 31, 2015. Accordingly, deferred taxes are not provided on
undistributed earnings of foreign subsidiaries that are indefinitely reinvested. At July 31, 2015, the cumulative amount of such
undistributed earnings indefinitely reinvested outside the United States was approximately $16,900,000. Determining the tax liability
that would arise if these earnings were remitted is not practical.
94
We record liabilities for an unrecognized tax benefit when a tax benefit for an uncertain tax position is taken or expected to be taken
on a tax return, but is not recognized in our Consolidated Financial Statements because it does not meet the more-likely-than-not
recognition threshold that the uncertain tax position would be sustained upon examination by the applicable taxing authority. The tax
benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon settlement with the tax authorities. Any adjustments upon resolution of income tax
uncertainties are recognized in our results of operations.
A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows:
Unrecognized
Tax Benefits
Unrecognized tax benefits on July 31, 2012 ............................................
Activity during fiscal 2013 ......................................................................
Unrecognized tax benefits on July 31, 2013 ............................................
Activity during fiscal 2014 ......................................................................
Unrecognized tax benefits on July 31, 2014 ............................................
Activity during fiscal 2015 ......................................................................
Unrecognized tax benefits on July 31, 2015 ............................................
$
$
124,000
—
124,000
(124,000 )
—
—
—
The Company concluded an audit by the Internal Revenue Service for fiscal years 2013 and 2012. With respect to state or foreign
income tax examinations, the Company is generally no longer subject to examinations for fiscal years ended prior to July 31, 2007.
Our policy is to record potential interest and penalties related to income tax positions in interest expense and general and
administrative expense, respectively, in our Consolidated Financial Statements. However, such amounts have been relatively
insignificant due to the amount of our unrecognized tax benefits relating to uncertain tax positions.
11.
Commitments and Contingencies
Long-Term Contractual Obligations
As of July 31, 2015, aggregate annual required payments over the next five years and thereafter under our contractual obligations that
have long-term components are as follows:
2016
2017
2018
2019
2020
Thereafter
Total
Year Ended July 31,
(Amounts in thousands)
Maturity of the credit facility .........
Expected interest payments
$ —
$
—
$
—
$ 78,500
$
—
$
—
$ 78,500
under the credit facility (1) ........
1,421
1,421
1,421
828
—
—
5,091
Minimum commitments under
noncancelable operating
leases ..........................................
Compensation agreements (2) ........
Contingent consideration (3) ..........
Assumed contingent liability
(4) ...............................................
Contingent guaranteed
obligation (5)..............................
Deferred compensation and
4,940
7,985
—
1
401
3,972
1,391
—
19
211
2,788
206
135
93
157
2,041
206
360
188
145
2,831
206
492
246
—
977
85
129
719
—
17,549
10,079
1,116
1,266
914
other ...........................................
Total contractual obligations ..........
235
$ 14,983
$
239
7,253
$
199
4,999
94
$ 82,362
$
12
3,787
$
3
1,913
782
$ 115,297
(1) To fund the cash consideration paid and the costs associated with the MI Acquisition, we borrowed $83,000,000 in
September 2015 under our revolving credit facility, thereby increasing the 2019 maturities of the credit facility from
$78,500,000 at July 31, 2015 to $154,500,000 at September 29, 2015, net of repayments made during that period.
Accordingly, the expected interest payments under the credit facility will be approximately $1,375,000 higher on an
annualized basis as of September 29, 2015 as compared with July 31, 2015. The expected interest payments under our credit
95
facility reflect an interest rate of 1.81%, which was our weighted average interest rate on outstanding borrowings at July 31,
2015.
(2) In conjunction with the MI Acquisition on September 14, 2015, we entered into compensation agreements with six
employees of the acquired business. As a result of these new agreements, the annual required payments for compensation
agreements increased subsequent to July 31, 2015 by $1,134,000 and $223,000 for the years ending July 31, 2016 and 2017,
respectively.
(3) These future potential payments of contingent consideration relate to the Jet Prep Acquisition, as further explained below,
and are reflected in the July 31, 2015 Consolidated Balance Sheet at its net present value of $751,000 using a discount rate of
12.6%.
(4) These future potential payments of an assumed contingent liability relate to the Jet Prep Acquisition, as further explained
below, and are reflected in the July 31, 2015 Consolidated Balance Sheet at its net present value of $1,138,000 using a
discount rate of 2.5%.
(5) These future potential payments of a contingent guaranteed obligation relate to the PuriCore Acquisition, as further explained
below, and are reflected in the July 31, 2015 Consolidated Balance Sheet at its net present value of $888,000 using a discount
rate of 10.1%.
Operating Leases
Minimum commitments under operating leases include minimum rental commitments for our leased manufacturing facilities,
warehouses, office space and equipment.
Four of the more significant leases that contain escalation clauses are two building leases for our Water Purification and Filtration
business and two building leases for our Healthcare Disposables business. The two Water Purification and Filtration building leases
are for the United States headquarters in suburban Philadelphia, Pennsylvania and the Canadian headquarters in suburban Toronto,
Ontario. The lease for the Philadelphia building provides for monthly base rent of approximately $16,800 during fiscal 2016 and
escalates annually to approximately $20,100 in fiscal 2025 when it expires. The Toronto building lease provides for monthly base rent
of approximately $12,800 in fiscal 2016 and escalates annually to approximately $13,300 in fiscal 2020 when it expires. Both the
Philadelphia and Toronto building leases are guaranteed by Cantel. The Healthcare Disposables segment has two significant building
leases with escalation clauses that are used for manufacturing and warehousing. One building lease in Sharon, Pennsylvania provides
for monthly base rent of approximately $19,100 during fiscal 2016 and escalates annually to approximately $20,700 in fiscal 2024
when it expires. The second building lease in Santa Fe Springs, California provides for monthly base rent of approximately $18,000 in
fiscal 2016 and escalates annually to approximately $20,100 in fiscal 2020 when it expires.
Our Healthcare Disposables business also leases a building in Cuba, New York for manufacturing and warehousing with monthly base
rent of approximately $8,000 until it expires in fiscal 2019. This facility is owned by an entity controlled by two former owners of
Sterilator who are now also employees in our Healthcare Disposable segment.
Rent expense related to operating leases for fiscal 2015 was recorded on a straight-line basis and aggregated $6,025,000, compared
with $4,409,000 and $4,147,000 for fiscals 2014 and 2013, respectively. The increase in rent expense in fiscal 2015 was primarily due
to the acquisitions of PuriCore and IMS on June 30, 2014 and November 3, 2014, respectively.
Contingent Consideration and Assumed Contingent Liability
In relation to the Jet Prep Acquisition, we have recorded at July 31, 2015 a $751,000 liability for the estimated fair value of
contingent consideration payable to the sellers and a $1,138,000 liability for the estimated fair value of an assumed contingent
obligation payable to the Israeli Government, as further described in Notes 3 and 6 to the Consolidated Financial Statements, which
will be payable based on future sales of the Jet Prep Business (above a minimum threshold with respect to the contingent
consideration liability). Additionally, in connection with the PuriCore Acquisition, we assumed a contingent guaranteed obligation to
reimburse an endoscope service company for endoscope repair costs it incurs when servicing its customers’ endoscopes that are
damaged by one of PuriCore’s discontinued endoscope reprocessing machine models, which has an estimated fair value of $888,000
at July 31, 2015, as further described in Notes 3 and 6 to the Consolidated Financial Statements. As such, the estimates of the annual
required payments as well as the fair value of these contingent liabilities are subjective in nature and highly dependent on future sales
projections. Additionally, since we will be continually re-measuring these liabilities at each balance sheet date and recording changes
in the respective fair values through our Consolidated Statements of Income, we may potentially have significant earnings volatility in
our future results of operations until the completion of the seven year period with respect to the contingent consideration liability and
96
until the assumed contingent obligation and contingent guaranteed obligation are satisfied, or until the sales of the Jet Prep products no
longer exist.
Compensation Agreements
We have previously entered into various severance contracts with executives of the Company, including our Corporate executive
officers and our subsidiary Chief Executive Officers, which define certain compensation arrangements relating to various employment
termination scenarios. Additionally, we have previously entered into multi-year employment agreements with certain executive
officers of businesses we have acquired.
Other Long-Term Obligations
In relation to the IMS Acquisition on November 3, 2014, we assumed an $843,000 liability to the central bank of Italy as part of
funding provided by an Italian government agency, of which $187,000 and $656,000 were recorded in accrued expenses and other
long-term liabilities, respectively. Such amount was a portion of the financial support obtained from the Italian government’s Ministry
of Education, Universities and Research to fund research and development activity relating to IMS’s automated endoscope
reprocessors. The liability is payable in semi-annual installments, bears interest at 0.25% per annum and has a maturity date of
January 1, 2019. At July 31, 2015, $572,000 is outstanding, of which $162,000 is recorded in accrued expense and $410,000 is
recorded in other long-term liabilities.
Additionally, other long-term obligations include deferred compensation arrangements for certain former Medivators directors and
officers and is recorded in other long-term liabilities.
12.
Accumulated Other Comprehensive Income (Loss)
The components and changes in accumulated other comprehensive income (loss) for fiscals 2015, 2014 and 2013 were as follows:
Foreign
Currency
Translation
Adjustments
Interest Rate
Swap
Agreements
Total
Balance, July 31, 2012 .........................................................
Other comprehensive loss before reclassifications ..........
Income tax effect on other comprehensive loss
$
8,385,000
(435,000 )
$
(210,000 ) $
(50,000 )
8,175,000
(485,000 )
before reclassifications .................................................
3,130,000
18,000
3,148,000
Reclassification adjustments to interest expense for
losses on interest rate swaps included in net
income during the period .............................................
Income tax effect on reclassification adjustments ............
Balance, July 31, 2013 .........................................................
Other comprehensive loss before reclassifications ..........
Income tax effect on other comprehensive loss
before reclassifications .................................................
Reclassification adjustments to interest expense for
losses on interest rate swaps included in net
income during the period .............................................
Reclassification adjustments for ineffective hedge on
interest rate swap included in net income during
the period .....................................................................
Income tax effect on reclassification adjustments ............
Balance, July 31, 2014 .........................................................
Other comprehensive loss before reclassifications ..........
Reclassification adjustment to loss on sale of
business for foreign currency translation gain
included in net income during the period .....................
Balance, July 31, 2015 .........................................................
—
—
11,080,000
(1,528,000 )
222,000
(83,000 )
(103,000 )
(47,000 )
222,000
(83,000 )
10,977,000
(1,575,000 )
—
—
17,000
17,000
96,000
96,000
—
—
9,552,000
(7,064,000 )
113,000
(76,000 )
—
—
113,000
(76,000 )
9,552,000
(7,064,000 )
(1,264,000 )
1,224,000
$
$
—
—
$
(1,264,000 )
1,224,000
97
In fiscal 2013, we made a decision to permanently reinvest our unremitted foreign earnings into our international growth initiatives
and foreign working capital needs as part of our overall strategic growth plan. Accordingly, we recorded a tax adjustment of
$3,130,000 in fiscal 2013 reversing the income tax effect on accumulated foreign currency translation adjustments.
13.
Earnings Per Common Share
Basic EPS is computed based upon the weighted average number of common shares outstanding during the year. Diluted EPS is
computed based upon the weighted average number of common shares outstanding during 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 (unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities consist solely of unvested
restricted stock awards, which have contractual participation rights equivalent to those of stockholders of unrestricted common stock.
The two-class method of computing earnings per share is an allocation method that calculates earnings per share for common stock
and participating securities.
The following table sets forth the computation of basic and diluted EPS available to shareholders of common stock (excluding
participating securities):
Numerator for basic and diluted earnings per share:
Net income ..........................................................................
Less income allocated to participating securities ............
Net income available to common shareholders ..................
$
$
47,953,000
(433,000 )
47,520,000
$
$
43,265,000
(581,000 )
42,684,000
$
$
39,239,000
(608,000 )
38,631,000
2015
Year Ended July 31,
2014
2013
Denominator for basic and diluted earnings per share, as
adjusted for participating securities:
Denominator for basic earnings per share - weighted
average number of shares outstanding attributable
to common stock .............................................................
Dilutive effect of stock options using the treasury
stock method and the average market price for the
year .................................................................................
Denominator for diluted earnings per share - weighted
average number of shares and common stock
equivalents attributable to common stock .......................
41,139,467
40,751,629
40,267,885
63,133
159,685
289,007
41,202,600
40,911,314
40,556,892
Earnings per share attributable to common stock:
Basic earnings per share .....................................................
Diluted earnings per share ..................................................
$
$
1.16
$
1.05
$
1.15
$
1.04
$
0.96
0.95
Stock options excluded from weighted average dilutive
common shares outstanding because their inclusion
would have been antidilutive ..............................................
—
—
—
98
A reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined
above, to the Company’s total weighted average number of shares and common stock equivalents, including participating securities, is
set forth in the following table:
Denominator for diluted earnings per share - weighted
average number of shares and common stock
equivalents attributable to common stock ...........................
2015
Year Ended July 31,
2014
2013
41,202,600
40,911,314
40,556,892
Participating securities ............................................................
378,706
558,252
639,827
Total weighted average number of shares and common
stock equivalents attributable to both common stock
and participating securities .................................................
41,581,306
41,469,566
41,196,719
14.
Repurchase of Shares
The Company does not currently have a publicly announced stock repurchase program. All of the shares purchased during fiscals 2015
and 2014 represent shares surrendered to the Company relating to cashless exercises of stock options and to pay employee
withholding taxes due upon the vesting of restricted stock or the exercise of stock options. In fiscals 2015 and 2014, such purchases
amounted to 109,367 and 155,894 shares at a total average price per share of $37.61 and $33.65, respectively.
Upon exercise of stock options or grant of stock awards, we typically issue new shares of our common stock as opposed to using
treasury shares.
15.
Stock-Based Compensation
The following table shows the income statement components of stock-based compensation expense recognized in the Consolidated
Statements of Income:
2015
Year Ended July 31,
2014
2013
Cost of sales ................................................................................
Operating expenses:
Selling .....................................................................................
General and administrative .....................................................
Research and development .....................................................
Total operating expenses ............................................................
Stock-based compensation before income taxes .........................
Income tax benefits .....................................................................
Total stock-based compensation expense, net of tax ..................
$
270,000
$
337,000
$
174,000
608,000
4,897,000
92,000
5,597,000
5,867,000
(2,026,000 )
3,841,000
$
665,000
4,339,000
68,000
5,072,000
5,409,000
(1,909,000 )
3,500,000
$
329,000
3,198,000
32,000
3,559,000
3,733,000
(1,343,000 )
2,390,000
$
The above stock-based compensation expense before income taxes was recorded in the Consolidated Financial Statements as stock-
based compensation expense and an increase to additional paid-in capital. The related income tax benefits were recorded as either an
increase to current deferred income tax assets or long-term deferred income tax assets (which are netted with long-term deferred
income tax liabilities) and a reduction to income tax expense.
All of our stock options and stock awards are subject to graded vesting in which portions of the award vest at different times during
the vesting period, as opposed to awards that vest at the end of the vesting period. We recognize compensation expense for awards
subject to graded vesting using the straight-line basis over the vesting period, reduced by estimated forfeitures. At July 31, 2015, total
unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and stock awards was
$7,491,000 with a remaining weighted average period of 17 months over which such expense is expected to be recognized. The
majority of our nonvested awards relate to stock awards.
We determine the fair value of each stock award using the closing market price of our common stock on the date of grant.
99
A summary of nonvested stock award activity follows:
Nonvested stock awards at July 31, 2012 .................
Granted .................................................................
Canceled ...............................................................
Vested ...................................................................
Nonvested stock awards at July 31, 2013 .................
Granted .................................................................
Canceled ...............................................................
Vested ...................................................................
Nonvested stock awards at July 31, 2014 .................
Granted .................................................................
Canceled ...............................................................
Vested ...................................................................
Nonvested stock awards at July 31, 2015 .................
Number of
Shares
Weighted
Average
Fair Value
708,008
210,484
(14,244 )
(298,481 )
605,767
258,760
(10,066 )
(328,619 )
525,842
144,278
(12,804 )
(313,797 )
343,519
$
$
9.15
17.55
11.31
9.26
11.96
31.95
15.70
11.13
22.25
39.77
26.20
18.62
32.77
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model with the
following assumptions:
Weighted-Average
Black-Scholes Option
Valuation Assumptions
Year Ended
July 31, 2015
Year Ended
July 31, 2014
Dividend yield ..................................................
Expected volatility (1) ......................................
Risk-free interest rate (2) ..................................
Expected lives (in years) (3) .............................
0.25 %
33.90 %
1.55 %
5.00
0.28 %
42.70 %
1.44 %
5.00
(1) Volatility was based on historical closing prices of our common stock.
(2) The U.S. Treasury rate based on the expected life at the date of grant.
(3) Based on historical exercise behavior.
Additionally, all options were considered to be deductible for tax purposes in the valuation model. Such non-qualified options were
tax-effected using the Company’s estimated U.S. effective tax rate at the time of grant. In fiscals 2015 and 2014, the weighted average
fair value of options granted was $11.54 and $12.08, respectively. The aggregate intrinsic value (i.e. the excess market price over the
exercise price) of all options exercised was approximately $5,178,000, $5,702,000 and $6,616,000 in fiscals 2015, 2014 and 2013,
respectively. The aggregate fair value of all options vested was approximately $248,000, $127,000 and $677,000 in fiscals 2015, 2014
and 2013, respectively.
A summary of stock option activity follows:
Outstanding at July 31, 2012 .............................
Granted ..........................................................
Canceled ........................................................
Exercised .......................................................
Outstanding at July 31, 2013 .............................
Granted ..........................................................
Exercised .......................................................
Outstanding at July 31, 2014 .............................
Granted ..........................................................
Exercised .......................................................
Outstanding at July 31, 2015 ..........................
100
Number of
Shares
Weighted
Average
Exercise Price
823,235
52,500
(9,000 )
(462,904 )
403,831
30,000
(211,339 )
222,492
25,000
(139,992 )
107,500
$
$
6.57
17.04
8.40
6.26
8.25
31.81
6.82
12.78
36.70
7.11
25.73
Number of
Shares
Weighted
Average
Exercise Price
Exercisable at July 31, 2013 ..............................
351,331
$
Exercisable at July 31, 2014 ..............................
157,492
$
6.94
8.21
Exercisable at July 31, 2015 ............................
45,000
$
20.32
The outstanding options at July 31, 2015 and 2014 had an aggregate intrinsic value of approximately $3,133,000 and $4,616,000,
respectively. As of July 31, 2015 and 2014, all of the outstanding options had vested or were expected to vest in future periods.
Upon exercise of stock options or grant of stock awards, we typically issue new shares of our common stock as opposed to using
treasury shares.
If certain criteria are met when options are exercised or restricted stock becomes vested, the Company is allowed a deduction on its
United States income tax return. Accordingly, we account for the income tax effect on such income tax deductions as a reduction of
previously recorded deferred income tax assets and as a reduction of income taxes payable. Excess tax benefits arise when the ultimate
tax effect of the deduction for tax purposes is greater than the tax benefit on stock compensation expense which was determined based
upon the award’s fair value at the time the award is granted. The differences noted above between actual tax deductions and the
previously recorded deferred income tax assets are recorded as additional paid-in capital. In fiscals 2015 and 2014, such income tax
deductions reduced income taxes payable by $5,317,000 and $5,905,000, respectively, and increased additional paid-in-capital by
$3,168,000 and $4,391,000, respectively. We classify the cash flows resulting from excess tax benefits as financing cash flows on our
Consolidated Statements of Cash Flows.
The following table summarizes additional information related to stock options outstanding at July 31, 2015:
Range of Exercise
Prices
Number
Outstanding
at July 31, 2015
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
(Months)
Weighted
Average
Exercise
Price
Options Exercisable
Weighted
Average
Remaining
Contractual
Life
(Months)
Weighted
Average
Exercise
Price
Number
Exercisable
At July 31, 2015
$17.04
$31.81 - $36.70
$17.04 - $36.70
52,500
55,000
107,500
27 $
44 $
$
17.04
34.03
25.73
35,000
10,000
45,000
27 $
39 $
$
17.04
31.81
20.32
Total Intrinsic Value
$
3,133,000
$
1,555,000
A summary of our 2006 Equity Incentive Plan follows:
The Cantel Medical Corp. 2006 Equity Incentive Plan (the “2006 Plan”) provides for the granting of stock options (including incentive
stock options), restricted stock awards, stock appreciation rights and performance-based awards (collectively “equity awards”) to our
employees and non-employee directors. The 2006 Plan does not permit the granting of discounted options or discounted stock
appreciation rights. The maximum number of shares as to which stock options and stock awards may be granted under the 2006 Plan
is 5,591,000 shares, of which 2,700,000 shares are authorized for issuance pursuant to stock options and stock appreciation rights and
2,891,000 shares are authorized for issuance pursuant to restricted stock and other stock awards. Stock options outstanding under this
plan:
were granted at the closing market price at the time of the grant,
were granted as stock options that do not qualify as incentive stock options,
are exercisable in three equal annual installments commencing on the first anniversary of the grant date, and
expire five years from the date of the grant.
101
Effective August 1, 2010, the annual grants of 10,125 options to non-employee directors and 3,375 options to employee directors were
changed to annual grants of 3,375 shares of restricted stock to non-employee directors and 1,125 shares of restricted stock to employee
directors, with such restriction lapsing as to one-third of the shares on each of the first three anniversaries of the grant date subject to
being a director of the Company through such vesting date.
Commencing July 31, 2012, the annual grants of 3,375 shares of restricted stock to non-employee directors and 1,125 shares of
restricted stock to employee directors were changed to annual grants of shares of restricted stock to non-employee directors equivalent
to $35,000 based on the closing price of our common stock on July 31 of each year that are exercisable in full on the first anniversary
of the grant date. Employee directors no longer receive shares of restricted stock as part of the grants to the Board of Directors, but
would receive shares or stock options as part of their employment compensation.
Commencing July 31, 2014, the annual grants of shares of restricted stock to non-employee directors equivalent to $35,000 was
increased to $50,000 based on the closing price of our common stock on July 31 of each year and are exercisable in full on the first
anniversary of the grant date.
Restricted stock shares outstanding under this plan are subject to risk of forfeiture solely due to an employment length-of-service
restriction, with such restriction lapsing as to one-third of the shares on each of the first three anniversaries of the grant date subject to
being employed by the Company through such vesting date. At July 31, 2015, options to purchase 107,500 shares of common stock
were outstanding, and 343,519 unvested restricted stock shares were outstanding, under the 2006 Plan. At July 31, 2015, 361,810
shares are available for issuance pursuant to stock options and stock appreciation rights and 511,089 shares are available for issuance
pursuant to restricted stock and other stock awards. The 2006 Plan expires on November 13, 2016.
16.
Retirement Plans
We have 401(k) Savings and Retirement Plans for the benefit of eligible United States employees. Additionally, our Canadian and
certain European subsidiaries maintain profit sharing plans for the benefit of eligible employees. Contributions by the Company are
both discretionary and non-discretionary and are limited in any year to the amount allowable by government tax authorities.
Aggregate employer contributions recognized under these plans were $2,541,000, $2,196,000 and $2,540,000 for fiscals 2015, 2014
and 2013, respectively.
17.
Supplemental Cash Flow Information
Interest paid was $1,970,000, $1,787,000 and $2,643,000 for fiscals 2015, 2014 and 2013, respectively.
Income tax payments were $25,239,000, $20,481,000 and $17,116,000 for fiscals 2015, 2014 and 2013, respectively.
18.
Information as to Operating Segments and Foreign and Domestic Operations
Cantel Medical is a leading global company dedicated to delivering innovative infection prevention and control products and services
for patients, caregivers, and other healthcare providers which improve outcomes, enhance safety and help save lives. Our products
include specialized medical device reprocessing systems for endoscopy and renal dialysis, advanced water purification equipment,
sterilants, disinfectants and cleaners, sterility assurance monitoring products for hospitals and dental clinics, disposable infection
control products primarily for dental and GI endoscopy markets, dialysate concentrates and hollow fiber membrane filtration and
separation products. Additionally, we provide technical service for our products.
In accordance with FASB 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 operating income.
None of our customers accounted for 10% or more of our consolidated net sales during fiscals 2015, 2014 and 2013, except for DaVita
Inc. (“DaVita”), which accounted for approximately 10.0% and 10.4%, of our consolidated net sales in fiscals 2014 and 2013,
respectively. Net sales to DaVita were $48,620,000 and $44,204,000 in fiscals 2014 and 2013, respectively.
102
The Company’s segments are as follows:
Endoscopy, which includes medical device reprocessing systems, disinfectants, detergents and other supplies used to high-level
disinfect flexible endoscopes and disposable infection control products intended to reduce the challenges with proper cleaning and
high-level disinfection of numerous reusable components used in GI endoscopy procedures. This segment recently commenced the
sale of endoscope transport and storage systems, a comprehensive range of endoscopy consumable accessories, and OEM mobile
medical carts. Additionally, this segment includes technical maintenance service on its products.
Water Purification and Filtration, which includes water purification equipment and services, filtration and separation products and
disinfectants, sterilization and decontamination products and services for the medical, pharmaceutical, biotech, beverage and
commercial industrial markets.
Two customers collectively accounted for approximately 45.9% of our Water Purification and Filtration segment net sales in fiscal
2015.
Healthcare Disposables, which includes single-use, infection prevention and control healthcare products including face masks,
sterilization pouches, towels and bibs, tray covers, saliva ejectors, germicidal wipes, plastic cups and disinfectants, as well as a filter
system for maintaining safe dental unit waterlines. This segment also manufactures and sells biological and chemical indicators for
sterility assurance monitoring services in the acute-care, alternate-care and dental markets.
Four customers collectively accounted for approximately 49.0% of our Healthcare Disposables segment net sales in fiscal 2015.
Dialysis, which includes medical device reprocessing systems, sterilants/disinfectants, dialysate concentrates and other supplies for
renal dialysis. Additionally, this segment includes technical maintenance service on its products.
DaVita accounted for approximately 27.7% of our Dialysis segment net sales in fiscal 2015.
Other
In addition, we had another operating segment through April 7, 2015, known as Specialty Packaging. This segment included specialty
packaging and thermal control products, as well as related compliance training, for the transport of infectious and biological
specimens and thermally sensitive pharmaceutical, medical and other products. The Specialty Packaging operating segment, which
comprised the Other reporting segment for financial reporting purposes, was divested on April 7, 2015 as further described in Note 19
to the Consolidated Financial Statements.
The operating segments follow the same accounting policies used for our Consolidated Financial Statements as described in Note 2.
Information as to operating segments is summarized below:
2015
Year Ended July 31,
2014
2013
Net sales:
Endoscopy ................................................................
Water Purification and Filtration ..............................
Healthcare Disposables .............................................
Dialysis .....................................................................
Other .........................................................................
Total ..............................................................................
$ 248,654,000
173,834,000
106,920,000
31,240,000
4,356,000
$ 565,004,000
$ 190,440,000
159,505,000
101,809,000
30,926,000
6,069,000
$ 488,749,000
$ 160,317,000
134,196,000
90,904,000
33,148,000
6,461,000
$ 425,026,000
Operating income by segment:
Endoscopy ................................................................
Water Purification and Filtration ..............................
Healthcare Disposables .............................................
Dialysis .....................................................................
Other .........................................................................
2015
Year Ended July 31,
2014
2013
$
$
$
40,863,000
30,606,000
19,904,000
6,749,000
1,118,000
99,240,000
34,194,000
25,750,000
18,720,000
7,547,000
815,000
87,026,000
32,361,000
16,381,000
17,576,000
8,705,000
857,000
75,880,000
103
General corporate expenses ..........................................
Income from operations ................................................
Interest expense, net .....................................................
Other expense ...............................................................
2015
(18,479,000 )
80,761,000
(2,364,000 )
(2,206,000 )
Year Ended July 31,
2014
(16,098,000 )
70,928,000
(2,317,000 )
—
2013
(12,692,000 )
63,188,000
(2,834,000 )
—
Income before income taxes .........................................
$
76,191,000
$
68,611,000
$
60,354,000
Identifiable assets:
Endoscopy ................................................................
Water Purification and Filtration ..............................
Healthcare Disposables .............................................
Dialysis .....................................................................
Other .........................................................................
General corporate, including cash and cash
Year Ended July 31,
July 31,
2014
2013
2015
$ 238,799,000
138,069,000
145,391,000
26,452,000
—
$ 203,582,000
126,397,000
138,240,000
25,420,000
9,316,000
$ 157,340,000
123,454,000
137,577,000
24,394,000
10,078,000
equivalents ............................................................
Total ..............................................................................
35,320,000
$ 584,031,000
33,190,000
$ 536,145,000
34,828,000
$ 487,671,000
Capital expenditures:
Endoscopy ................................................................
Water Purification and Filtration ..............................
Healthcare Disposables .............................................
Dialysis .....................................................................
Other .........................................................................
General corporate .....................................................
Total ..............................................................................
Depreciation and amortization:
Endoscopy ................................................................
Water Purification and Filtration ..............................
Healthcare Disposables .............................................
Dialysis .....................................................................
Other .........................................................................
General corporate .....................................................
Total ..............................................................................
2015
Year Ended July 31,
2014
2013
$
$
$
$
7,042,000
2,984,000
1,587,000
894,000
19,000
234,000
12,760,000
$
$
6,820,000
3,318,000
1,367,000
1,444,000
34,000
558,000
13,541,000
2015
Year Ended July 31,
2014
10,729,000
5,257,000
6,354,000
1,382,000
78,000
157,000
23,957,000
$
$
7,001,000
4,416,000
5,968,000
1,142,000
294,000
65,000
18,886,000
$
$
$
$
3,058,000
2,319,000
699,000
576,000
30,000
63,000
6,745,000
2013
6,374,000
3,866,000
5,500,000
1,188,000
321,000
14,000
17,263,000
Information as to geographic areas (including net sales which represent the geographic area from which the Company derives its net
sales from external customers) is summarized below:
2015
Year Ended July 31,
2014
2013
Net sales:
United States .............................................................
Europe/Africa/Middle East .......................................
Asia/Pacific ...............................................................
Canada ......................................................................
Latin America/South America ..................................
Total ..............................................................................
$ 447,848,000
62,193,000
28,529,000
19,306,000
7,128,000
$ 565,004,000
$ 403,892,000
32,634,000
24,736,000
20,729,000
6,758,000
$ 488,749,000
$ 357,378,000
23,415,000
21,895,000
18,732,000
3,606,000
$ 425,026,000
104
2015
July 31,
2014
2013
Total long-lived assets:
United States .............................................................
Europe ......................................................................
Asia/Pacific ...............................................................
Canada ......................................................................
Total ..............................................................................
Goodwill and intangible assets, net ..............................
Total ..............................................................................
$
57,080,000
9,122,000
1,081,000
600,000
67,883,000
327,787,000
$ 395,670,000
$
53,221,000
2,275,000
1,112,000
1,029,000
57,637,000
314,599,000
$ 372,236,000
$
47,043,000
155,000
1,030,000
1,236,000
49,464,000
287,547,000
$ 337,011,000
19.
Disposition of Business
In fiscal 2015, we conducted a strategic review of our Specialty Packaging business and evaluated its potential value in the
marketplace relative to the business’s historic and expected returns and concluded that the business was not part of our core strategy
and could return a higher value to stockholders by its divestiture. Accordingly, our Specialty Packaging business (reported in the
Other reporting segment) was classified as held-for-sale within our Condensed Consolidated Balance Sheet beginning October 31,
2014. Since the operating results of the Specialty Packaging segment, as shown in Note 18 to the Consolidated Financial Statements,
were not significant in relation to our overall consolidated operating results, the lack of operating results from this business due to its
divestiture will not have a major effect on our operations and financial results, and accordingly, has not been classified as a
discontinued operation for any of the periods presented.
On April 7, 2015, we completed the sale of our Specialty Packaging business to a global packaging and service company by selling all
the issued and outstanding stock of our Specialty Packaging subsidiary in exchange for $7,531,000 in cash proceeds, of which
$660,000 is held in escrow for indemnity obligations, if any, until October 7, 2016 and is recorded in other assets in our Consolidated
Balance Sheet. In addition, we incurred approximately $1,128,000 in costs associated with the disposition of this business including
bonuses associated with the sale, accelerated stock-based compensation and to a lesser extent certain advisory fees. Furthermore as a
result of this disposition, we recognized a foreign currency translation gain of $1,264,000 in our Consolidated Statement of Income,
which was recorded in stockholders’ equity immediately preceding the disposition. Such foreign currency translation gain was a result
of the monthly translation of the Specialty Packaging segment’s balance sheets beginning in 2004, when the business was acquired. In
addition, due to the inability to currently deduct a capital loss and the uncertainty of utilizing a capital loss tax benefit in the future, a
tax benefit was not recognized on a portion of the recorded loss on sale of the business. Overall, this transaction, including costs
associated with the disposition and the recognition of a foreign currency translation gain, resulted in a $2,206,000 loss, or $0.04 in
diluted earnings per share, which was recorded in loss on sale of business in our Consolidated Statements of Income in fiscal 2015.
Such amount is subject to further adjustments upon finalization of taxes, which such estimate is currently recorded as a nominal
amount, or indemnity obligations, if any.
The following table presents the carrying amounts of assets and liabilities held-for-sale immediately preceding the disposition on
April 7, 2015, which are excluded from our Consolidated Balance Sheet at July 31, 2015.
April 7,
2015
(Amounts in thousands)
Cash and cash equivalents ................................................................................
Accounts receivable, net of allowance for doubtful accounts...........................
Inventories ........................................................................................................
Prepaid expenses and other current assets ........................................................
Property and equipment, net .............................................................................
Intangible assets, net .........................................................................................
Goodwill ...........................................................................................................
Other assets .......................................................................................................
Total assets held-for-sale ..............................................................................
Accounts payable ..............................................................................................
Compensation payable ......................................................................................
Accrued expenses .............................................................................................
Deferred revenue ..............................................................................................
Deferred income taxes ......................................................................................
Other liabilities .................................................................................................
Total liabilities held-for-sale .........................................................................
105
$
$
$
$
2,086
660
789
181
324
728
5,740
140
10,648
352
70
74
18
163
75
752
20.
Legal Proceedings
In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related
to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably
estimated. We do not believe that any of these pending claims or legal actions will have a material adverse effect on our business,
financial condition, results of operations or cash flows.
21.
Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for the years ended July 31, 2015 and 2014:
2015 ...........................................................................
Net sales .................................................................
Cost of sales ...........................................................
Gross profit ............................................................
Gross profit percentage ..........................................
$ 136,811,000
76,297,000
60,514,000
$ 135,430,000
74,839,000
60,591,000
$ 141,508,000
77,909,000
63,599,000
$ 151,255,000
82,492,000
68,763,000
44.2 %
44.7 %
44.9 %
45.5 %
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net income .............................................................
$
11,239,000
$
11,085,000
$
12,356,000
$ 13,273,000
Earnings per common share:
Basic ..................................................................
Diluted (1) ..........................................................
$
$
0.27
0.27
$
$
0.27
0.27
$
$
0.30
0.30
$
$
0.32
0.32
2014 ...........................................................................
Net sales .................................................................
Cost of sales ...........................................................
Gross profit ............................................................
Gross profit percentage ..........................................
$ 118,272,000
66,773,000
51,499,000
$ 119,042,000
66,707,000
52,335,000
$ 120,058,000
67,640,000
52,418,000
$ 131,377,000
74,330,000
57,047,000
43.5 %
44.0 %
43.7 %
43.4 %
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net income .............................................................
$
11,185,000
$
11,126,000
$
10,249,000
$ 10,705,000
Earnings per common share:
Basic .................................................................
Diluted (1) ..........................................................
$
$
0.27
0.27
$
$
0.27
0.27
$
$
0.25
0.25
$
$
0.26
0.26
(1) The summation of quarterly earnings per share does not equal the fiscal year earnings per share due to rounding.
106
CANTEL MEDICAL CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts:
Balance at
Beginning
of Period
Additions
(Deductions)
Translation
Adjustments
Balance
at End
of Period
Year ended July 31, 2015 ..........................
$ 1,874,000
$
464,000
$
(227,000 )
Year ended July 31, 2014 ..........................
$ 1,265,000
$
706,000
$
(95,000 )
Year ended July 31, 2013 ..........................
$ 1,041,000
$
516,000
$
(291,000 )
$
$
$
(19,000 ) $ 2,092,000
(2,000 ) $ 1,874,000
(1,000 ) $ 1,265,000
Reserve for excess and obsolete inventory:
Year ended July 31, 2015 ..........................
$ 4,419,000
$ 1,494,000
$ (1,796,000 )
$
(222,000 ) $ 3,895,000
Year ended July 31, 2014 ..........................
$ 1,781,000
$ 3,480,000
$
(802,000 )
Year ended July 31, 2013 ..........................
$ 1,957,000
.
$
750,000
$
(922,000 )
Deferred tax asset valuation allowance:
$
$
(40,000 ) $ 4,419,000
(4,000 ) $ 1,781,000
Year ended July 31, 2015 ..........................
$ 3,538,000
$ 1,010,000
$ (2,420,000 )(1) $
(91,000 ) $ 2,037,000
Year ended July 31, 2014 ..........................
$
308,000
$ 3,363,000 (1) $
(126,000 )
Year ended July 31, 2013 ..........................
$ 1,275,000
$
133,000
$ (1,023,000 )
$
$
(7,000 ) $ 3,538,000
(77,000 ) $
308,000
(1) The amounts primarily include additions and deductions of valuation allowances associated with New Jersey net operating
losses, as further explained in Note 10 to the Consolidated Financial Statements.
107
CANTEL MEDICAL CORP.
Subsidiaries of Registrant
EXHIBIT 21
Carsen Group, Inc. ...............................................
(Incorporated under the laws of Ontario, Canada)
Medivators Inc. ....................................................
(Incorporated under the laws of Minnesota)
Medivators B.V. ...................................................
(Incorporated under the laws of the Netherlands)
Cantel Medical Asia/Pacific Ltd. .........................
(Incorporated under the laws of Singapore)
Biolab Equipment Ltd. .........................................
(Amalgamated under the laws of Canada)
Mar Cor Purification, Inc. ....................................
(Incorporated under the laws of Pennsylvania)
Crosstex International, Inc. ..................................
(Incorporated under the laws of New York)
SPS Medical Supply Corp. ..................................
(Incorporated under the laws of New York)
Cantel Medical International LLC .......................
(Organized under the laws of Delaware)
CMCI C.V. ...........................................................
(Incorporated under the laws of the Netherlands)
Cantel Medical International B.V. .......................
(Incorporated under the laws of the Netherlands)
Cantel Medical (UK) Limited ..............................
(Incorporated under the laws of England and Wales)
Cantel Medical (Italy) S.r.l. .................................
(Incorporated under the laws of Italy)
Cantel Medical Devices (China) Co., Ltd. ...........
(Incorporated under the laws of China)
Medical Innovations Group Holdings Limited ....
(Incorporated under the laws of England and Wales)
Medical Innovations Group Limited ....................
(Incorporated under the laws of England and Wales)
Medical Innovations, Inc. ....................................
(Incorporated under the laws of Delaware)
108
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1) Registration Statements (Form S-8 Nos. 333-140388, 333-157033, 333-163806 and 333-180171) pertaining to the Cantel
Medical Corp. 2006 Equity Incentive Plan, as amended, of our reports dated September 29, 2015, with respect to the
consolidated financial statements and schedule of Cantel Medical Corp., and the effectiveness of internal control over
financial reporting of Cantel Medical Corp., included in this Annual Report (Form 10-K) for the year ended July 31, 2015.
EXHIBIT 23
MetroPark, New Jersey
September 29, 2015
/s/ Ernst & Young LLP
109
EXHIBIT 31.1
I, Andrew A. Krakauer, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cantel Medical Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: September 29, 2015
By: /s/ Andrew A. Krakauer
Andrew A. Krakauer, Chief Executive Officer (Principal Executive Officer)
110
EXHIBIT 31.2
I, Peter G. Clifford, certify that:
CERTIFICATIONS
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Cantel Medical Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal controls over financial reporting.
Date: September 29, 2015
By: /s/ Peter G. Clifford
Peter G. Clifford, Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
111
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18, UNITED STATES CODE)
Exhibit 32
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of Title 18, United
States Code), the undersigned officers of Cantel Medical Corp. (the “Company”), do hereby certify with respect to the Annual Report
of the Company on Form 10-K for the year ended July 31, 2015 as filed with the Securities and Exchange Commission (the “Form 10-
K”) that, to the best of their knowledge:
1. The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: September 29, 2015
/s/ Andrew A. Krakauer
Andrew A. Krakauer
Chief Executive Officer
(Principal Executive Officer)
/s/ Peter G. Clifford
Peter G. Clifford
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
112
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
In evaluating our operating performance, we supplement the reporting of our financial information determined under GAAP with certain internally
driven non-GAAP financial measures, namely (i) adjusted net income, (ii) adjusted diluted earnings per share (“EPS”), (iii) income before interest,
taxes, depreciation, amortization and stock-based compensation expense ("EBITDAS"), (iv) EBITDAS adjusted for atypical items ("Adjusted
EBITDAS") and (v) net debt. These non-GAAP financial measures are indicators of the Company’s performance that is not required by, or presented
in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial
analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors,
shareholders and other readers of our financial information in making comparisons to our historical operating results and analyzing the underlying
performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered separately from,
or as an alternative to, the most directly comparable GAAP financial measures.
With respect to adjusted net income and adjusted EPS, please see pages 45 through 47 “Non-GAAP Financial Measures” in Management’s
Discussion and Analysis for a reconciliation to the most directly comparable financial measure in accordance with GAAP.
We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such
as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment, has on the Company's net income. In
particular, acquisitions have historically resulted in significant increases in amortization of intangible assets that reduce the Company's net income.
Additionally, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a
complement to operating income, net income and other GAAP financial performance measures.
We define Adjusted EBITDAS as EBITDAS excluding the same atypical items as previously described in pages 45 through 47, “Non-GAAP
Financial Measures” in Management’s Discussion and Analysis, as adjustments to net income. We use Adjusted EBITDAS when evaluating the
operating performance of the Company because we believe the exclusion of such atypical items, which a majority are non-cash items, is necessary to
provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period. The reconciliations of
EBITDAS and Adjusted EBITDAS with net income for fiscals 2015, 2014 and 2013, respectively, are as follows:
We define net debt as long-term debt less cash and cash equivalents. Each of the components of net debt appears in our Consolidated Balance Sheets.
We believe that the presentation of net debt provides useful information to investors because we review net debt as part of our management of our
overall liquidity, financial flexibility, capital structure and leverage. The reconciliations of debt with net debt at July 31, 2015, 2014 and 2013 were
calculated as follows:
113
(Amounts in thousands) 201520142013Net income47,953$ 43,265$ 39,239$ Interest expense, net 2,364 2,317 2,834 Income taxes28,238 25,346 21,115 Depreciation10,692 8,245 7,202 Amortization13,265 10,641 10,061 Loss on disposal of fixed assets360 501 184 Stock-based compensation expense5,867 5,409 3,733 EBITDAS108,739 95,724 84,368 Acquisition related items1,579 1,150 (1,449) Loss on sale of business2,206 - - Impairment of acquired license1,287 - - Other atypical items- 589 778 Adjusted EBITDAS113,811$ 97,463$ 83,697$ July 31,July 31,July 31,(Amounts in thousands) 201520142013Long-term debt78,500$ 80,500$ 95,000$ Less cash and cash equivalents(31,720) (31,781) (34,076) Net debt46,780$ 48,719$ 60,924$
Medivators
David C. Hemink
President
Michael G. Spicer
President, Americas Sales and Global Service
Paul E. Helms
Executive Vice President, Operations
Todd R. Gray
Vice President, Operations (MN)
William D. Haydon
Vice President, Global Marketing and
Business Development
Bob Krajeski
Vice President, Sales
Michael P. Petersen
Vice President, Research and Development
Gilbert T. Rico
Vice President, Corporate Accounts
Amos Schneller
Vice President, Global Service and
Technical Support
Bruce F. Stoltzfus
Vice President, Operations (TX)
Charles B. Warich
Vice President, Global Sales
Training and Development
Crosstex
Gary D. Steinberg
President and Chief Executive Officer
Kenneth J. Plunkett
Senior Vice President, Global Sales
Andrew G. Whitehead
Senior Vice President, Marketing and
Business Development
Douglas T. Carpenter
Vice President, Finance and Treasurer
Shawn Doyle
Vice President, Research and Development
Sheldon M. Fisher
Vice President, Western Region
Les M. Gershon
Vice President, National Accounts
Jonathan H. Hughes
Vice President and General Manager,
Medical Division
Daniel J. Pitkowsky
Vice President, Global Operations
Ronald R. Psimas
Vice President, Southeastern Region
Mar Cor Purification
Curtis D. Weitnauer
President and Chief Executive Officer
Christopher J. Fournier
Vice President, Marketing
Kathryn D. McIsaac
Vice President, Finance
John A. Rickert
Vice President, Sales—Medical
Benjamin J. Roczniak
Vice President, Sales—Life Sciences /
Commercial & Industrial
Andrew G. Stitzinger
Vice President, U.S. Field Service
Sean J. West
Vice President, U.S. Operations
Jeffrey Conrad
Controller
Corporate Executives
Matthew J. Conlon
Vice President, Market Development
Lawrence Conway
Vice President, Business Systems & Procurement
Al Escudero
Vice President, Tax
Kevin B. Finkle
Vice President, Transactional Services
J. Christopher Geschickter
Vice President, Human Resources
Chuck Hughes
Vice President, Infection Prevention Consulting
Services
LuAnn M. Petersen
Vice President, Global Supply Chain Logistics
Robert J. Podesta
Vice President, Internal Audit
Craig W. Sandbulte
Vice President, Quality Assurance
Craig B. Smith
Vice President, Corporate Regulatory Affairs and
Quality Assurance
Auditors
Ernst & Young LLP
MetroPark, New Jersey
Transfer Agent
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
Form 10-K Report
Stockholders may obtain without charge a copy of
Cantel Medical Corp.’s 2015 Annual Report on
Form 10-K filed with the Securities and Exchange
Commission by visiting our website at
www.cantelmedical.com or writing to Ms. Wendy
Hagen, Corporate Paralegal, Cantel Medical Corp.
Corporate Information
Directors
Charles M. Diker
Chairman of the Board
Chairman, Diker Management LLC
George L. Fotiades1,2
Vice Chairman of the Board
Partner, Healthcare investments at
Diamond Castle Holdings, LLC
Alan R. Batkin1,3,4
Chairman and CEO, Converse
Associates, Inc.
Ann E. Berman1
Former Chief Financial Officer,
Harvard University
Joseph M. Cohen3
Chairman, JM Cohen & Co.
Mark N. Diker
CEO, Diker Management LLC
Laura L. Forese, MD3
Executive Vice President and
Chief Operating Officer,
NewYork-Presbyterian
Andrew A. Krakauer
Chief Executive Officer
Bruce Slovin2
President, 1 Eleven Associates, LLC
Corporate Officers
Charles M. Diker
Chairman of the Board
Andrew A. Krakauer
Chief Executive Officer
Jorgen B. Hansen
President and
Chief Operating Officer
Peter G. Clifford
Executive Vice President, Chief Financial Officer
Eric W. Nodiff
Executive Vice President, General Counsel
and Secretary
Steven C. Anaya
Senior Vice President and Chief Accounting Officer
Seth M. Yellin
Senior Vice President, Corporate Development
Cantel International
Denise A. Bauer
Vice President, HR Cantel International
David Rosen
President, Asia/Pacific and Emerging Markets
John D. Piontkowski
Vice President and Managing Director,
Cantel Asia Pacific
Andreas Schumann
Vice President and Managing Director,
Cantel Europe
Neil T. Blewitt
Managing Director,
Cantel Medical (UK) Limited
Mark Supekar
Managing Director, Cantel Italy
William Tao
Managing Director, Cantel China
____________________________________________________
1 Audit Committee
2 Nominating & Governance Committee
3 Compensation Committee
4 Presiding Independent Director
150 Clove Road — 9th Floor
Little Falls, New Jersey 07424 USA
Telephone: 973-890-7220
Fax: 973-890-7270
www.cantelmedical.com
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