ANNUAL REPORT Cantel is a leading provider of infection prevention products and services in the healthcare market,
specializing in the following operating segments:
• Medical: Medical device reprocessing systems, disinfectants, detergents and other supplies used to high-
level disinfect rigid endoscopes, flexible endoscopes and other instrumentation, single-use valves, sterile
irrigation tubing and other 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. The segment also sells endoscope transport and storage
systems, endoscopy consumable accessories and endoscope process tracking products and software.
Additionally, this segment performs technical maintenance service on its products.
• Dental: Portfolio of personal protection equipment (PPE), dental unit waterline treatments, chemistries,
sterilization, preventives, nitrous-oxide equipment, amalgam separators, and single-use disposable
products. This segment is dedicated to making vital contributions to healthcare through high quality
solutions, compliance services and education in the acute-care, alternate-care, dental and industrial
(medical device, life science and other manufacturers) markets. Our recent acquisition of Hu-Friedy will
allow us to expand our product portfolio offering, most notably dental instrumentation, in fiscal year
2020 and beyond.
Life Sciences: Water purification equipment and services, filtration and separation products,
disinfectants, hollow fiber filters for water and blood filtration, sterilization and decontamination
products and services for the medical, pharmaceutical, biotech, beverage and commercial industrial
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)
2019
2018
2017
Net sales
Net income
Adjusted net income 1
Adjusted EBITDAS 1
Earnings per diluted share
Adjusted earnings per diluted share 1
Dividends per common share
Total assets
Net debt 1
$
918,155
$
871,922
$
770,157
$
55,042
$
91,041
$
71,378
$
98,999
$
104,346
$
86,740
$
174,848
$
178,270
$
160,942
$1.32
$2.37
$0.20
$2.18
$1.71
$2.51
$0.17
$2.08
$0.14
$
1,070,366
$
963,708
$
786,373
$
188,465
$
105,903
$
89,416
Stockholders' equity
$
661,537
$
608,867
$
523,932
Equity per outstanding share
$15.84
$14.60
$12.56
1 Please refer to pages 24-27 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 year 2019 was a transformative year for Cantel and its shareholders, as our
Company delivered record sales and strong earnings performance while making
significant strategic investments in our business and evolving our leadership team. These
leadership changes and investments, combined with organic growth, new product
development, and successful mergers and acquisitions, position us well to fulfill our
Mission to deliver innovative infection prevention products and services, and reprocessing
workflow solutions that improve outcomes and help save lives. We have also adapted to
the shifting landscape by adding strategic new talent, reorganizing to better serve our
customers, and expanding our business to better position us for today and tomorrow. We
are pleased with our growth and the accomplishments in fiscal year 2019 and look forward
to continued success in fiscal year 2020.
FINANCIAL PERFORMANCE
In fiscal year 2019, net sales increased 5.3% to a record $918.0 million, with organic
growth of 3.9%. This was a positive result in the face of significant challenges in our Life
Sciences segment. Our adjusted net income for the year was $99.0 million, or $2.37 per
diluted share (non-GAAP), a decline of 5.1% versus fiscal 2018. This was primarily driven
by higher depreciation expense associated with our enterprise resource planning (ERP)
system and our new Medical segment headquarters building in Minnesota, higher
restructuring-related actions and acquisition-related costs. Adjusted earnings before
interest, taxes, depreciation, amortization, and stock-based compensation (EBITDAS)
decreased 1.9% to $174.8 million.
Our businesses both in the U.S. and internationally delivered solid overall growth, with
the U.S. business growing at 3.4% and overall international growth of 10.7%.
Our balance sheet remains very strong. At the end of the year, our net debt was $188.4
million, up $82.5 million from the prior year as a result of acquisitions during the year and
the footprint expansion of our new Medical headquarters.
SEGMENT HIGHLIGHTS
The medical segment had another record year, with 11.5% organic growth driven by
consistent low double-digit recurring revenue growth and strong demand for capital
equipment.
The dental segment ended flat on an organic basis, driven by a return to growth in the
third and fourth quarters following inventory de-stocking and a key chemistry shortage in
the beginning of the year.
While the Life Sciences segment remained challenged throughout the year, we expect to
see a return to growth in the back half of fiscal year 2020.
NEW PRODUCT DEVELOPMENT
We have continued to invest in R&D and key technologies across the Company over
the past several years. In 2019, we launched our SCOPE BUDDY™ PLUS Endoscope
Flushing Aid in the U.S. and have recently launched our DEFENDO™ Olympus single-
use valves in the U.S and internationally. We are confident that our robust R&D pipeline
and future product launches will continue to advance our leadership position in fiscal
year 2020 and beyond.
MERGERS AND ACQUISITIONS
In fiscal year 2019, Cantel successfully completed two acquisitions, further advancing its
M&A strategy and entered into a transformative acquisition in our dental segment which
closed in the first quarter of fiscal 2020:
•
•
In the first quarter, we closed the acquisition of Stericycle’s Controlled
Environmental Solutions (CES) business for a cash purchase price of $17.0
million. This business allows us to offer testing and certification, monitoring,
and decontamination services for clean rooms, enhancing the value Cantel
provides to existing and future customers by coupling the CES business’ strong
reputation for technical and service excellence with our expertise delivering
high-quality and innovative infection prevention solutions.
In the third quarter, we closed the acquisition of Omnia S.p.A., an Italian-based
market leader in dental surgical consumables solutions, for total consideration
of $19.8 million consisting of $16.6 million of cash and $3.2 million of stock
consideration plus additional earn-outs based on the achievement of certain
performance-based financial targets. Omnia’s business consists of a wide-
ranging portfolio of sutures, irrigation tubing and customized dental surgical
procedure kits, with a focus on procedure room set-up and cross-contamination
prevention.
STRATEGIC OUTLOOK
Entering fiscal year 2020, we successfully completed the acquisition of Hu-Friedy Mfg.
Co., LLC (Hu-Friedy), a leading global dental manufacturer with a comprehensive
portfolio of high-quality dental instruments and its proprietary Instrument Management
System. The addition of Hu-Friedy not only transforms our dental business, but
meaningfully accelerates our strategy to be the leading global provider of innovative
infection prevention and reprocessing workflow solutions and education across our key
end markets. The integration of the Hu-Friedy business into the Cantel dental segment
infection prevention consumables,
will create a comprehensive portfolio of
instrumentation and instrument management solutions to deliver protection, performance
and productivity to dental practitioners. We expect our new complementary product
portfolios, strong customer relationships, and scale operations to drive significant cost
and revenue synergies over the next several years.
The Hu-Friedy acquisition also demonstrated the strength of Cantel’s credit profile and
our healthy relationship with the banking commmunity as seen with our ability to obtain
significant financing support in a short period of time. The expansion of our banking
syndicate and refinancing of our credit facility agreement also better situates our
Company to further execute our acquisition strategy into the future. While the additional
acquisition-related borrowings requires us to operate at a leverage ratio higher than
historical Cantel trends, the robust cash profile of Cantel and the Hu-Friedy business
provides the opportunity to service our new debt and rapidly de-lever. This will enable
Cantel to continue to execute on our acquisition strategy in the near future.
Mergers and acquisitions will continue to play an important role in our overall strategy.
We have a robust pipeline of acquisition targets and we continually evaluate a variety of
opportunities both in our existing businesses, as well as in new verticals that are
complementary to our core business of infection prevention and reprocessing workflow
solutions.
LEADERSHIP CHANGES
In March 2019, George Fotiades was named President and Chief Executive Officer of
Cantel replacing Jorgen Hansen. George has served on the Board of Cantel and as a
non-executive member of the Office of the Chairman since April 2008.
In addition, Peter Clifford, our former Chief Financial Officer, was promoted to Executive
Vice President and Chief Operating Officer. Peter will provide leadership in driving
performance across all of our businesses and regions. Shaun Blakeman rejoined Cantel
as our Senior Vice President and Chief Financial Officer after a brief period at Medtronic
and Jean Casner was appointed as Senior Vice President and Chief Human Resources
Officer. Jean has been with Cantel since July 2017.
After 32 years of service to Cantel, Eric Nodiff retired as our Executive Vice President,
General Counsel and Secretary. Jeff Mann, then our Vice President and Deputy General
Counsel, was promoted as his successor and now serves as our Senior Vice President,
General Counsel and Secretary.
We also appointed Mike Spicer as President, Medical, Michael McGrath as President,
Canada and Asia Pacific, and Neil Blewitt, as President, Europe in March 2019. With the
successful completion of the Hu-Friedy acquisition in October 2019, Ken Serota, then
President of Hu-Friedy, joined our leadership team as President, Dental.
In October 2019, Cantel appointed a new Board of Director member, Karen N. Prange.
Karen has more than twenty-five years of healthcare and life sciences leadership
experience. Most recently, Ms. Prange was Executive Vice President and Chief Executive
Officer of the Global Animal Health, Medical and Dental Surgical Group at Henry Schein.
Collectively, these additions and changes to our Leadership Team and Board of Directors
provide an unprecedented level of experience, strategy and passion to our mission of
providing the Complete Circle of Infection Prevention. We could not be more excited
about our leadership and management as we head into fiscal year 2020.
IN SUMMARY
Fiscal year 2019 was another strong year for Cantel and, despite some short-term
challenges, our core business performed in line with our expectations and the outlook for
the future remains robust. Our focus remains on profitably growing our Company while
serving our customers and patients around the globe.
Our Mission is driven by our culture and core values — treat all people with respect, act
with integrity, deliver high-quality products, work as part of high-performance teams, and
act with accountability. We are grateful for all our employees who continue to work
diligently across segments, enabling us to deliver on our goals and Mission to deliver
innovative infection prevention and reprocessing workflow products, services, and
solutions that improve outcomes and help save lives. We look ahead to fiscal year 2020
with a continued focus on areas of opportunity and a return to a typical Cantel growth
profile, while staying true to our strategy, our Mission, and our values.
In conclusion, we would like to thank all of our shareholders and other stakeholders for
their continued confidence in us and also thank our Directors for their support and
guidance throughout the year.
Charles M. Diker
Chairman of the
Board
George L. Fotiades
President & Chief
Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
Form 10-K
For the fiscal year ended July 31, 2019
Or
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
Commission File No. 001-31337
Cantel Medical Corp.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
Delaware
22-1760285
150 Clove Road, Little Falls, New Jersey
(Address of principal executive offices)
07424
(Zip code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number: (973) 890-7220
Title of each class
Common Stock, $0.10 par value
Trading symbol
CMD
Name of exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “small reporting company,” and "emerging growth company" in Rule 12b-2
of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
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: $3,396,948,246.
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, 2019: 41,771,036
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 2019 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.
Cantel Medical Corp.
2019 Annual Report on Form 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II - Schedule of Valuation and Qualifying Accounts
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits, Financial Statement Schedules
Form 10-K Summary
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures.
Page No.
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2
Cantel Medical Corp.
2019 Annual Report on Form 10-K
PART I
Item 1. Business.
Overview:
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. Unless otherwise indicated, references in this Form 10-K to 2019, 2018, 2017 or “fiscal” 2019, 2018, 2017 or other
years refer to our fiscal year ended July 31, of that respective year, and references to “fiscal” 2020 refer to our fiscal year ending
July 31, 2020.
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key
customers and the markets we serve. This decision resulted in a change from a financial reporting perspective as the industrial
biological and chemical indicator business has moved from the Dental segment to the Life Sciences segment. Prior year segment
disclosures have been recast to conform to the current year presentation.
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the
following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies
are used to help prevent the occurrence or spread of infections. We operate our four segments through wholly-owned subsidiaries
in the United States and internationally.
Information Related to Reportable Segments:
Medical
General. Our Medical segment designs, develops, manufactures, sells and installs a comprehensive offering of products
and services comprising a complete circle of infection prevention solutions. Our products include endoscope reprocessing and
endoscopy procedure products. Our endoscope reprocessing products and services include:
a full range of automated endoscope reprocessing systems,
high-level disinfectants and sterilants,
detergents,
leak testing and manual cleaning products,
storage cabinets and transport systems,
•
•
•
•
•
• manual cleaning products,
•
•
endoscope process tracking products, including software,
other consumables, accessories and supplies used to high-level disinfect rigid endoscopes, flexible endoscopes and
other instrumentation, and
technical maintenance service on our products.
•
Our endoscopy procedure products are designed to eliminate the challenges associated with proper cleaning and high-
level disinfection of numerous reusable components used in gastrointestinal (GI) endoscopy procedures. Our procedure products
include:
• CO2 and water irrigation pumps and disposable procedure kits,
•
•
sterile irrigation tubing, and
single-use valves.
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/healthcare facility 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 products. In particular, such products are intended to reduce the challenges associated
with proper cleaning and high-level disinfection of numerous reusable components used in GI endoscopy procedures.
We design, develop and manufacture most of our endoscopy products. Our Medical 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.
(dollar amounts in thousands except share and per share data or as otherwise specified) 3
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Sales, Marketing and Distribution. We sell and service our full line of endoscopy products through our direct field sales
and clinical support service organizations in the United States, Canada, the United Kingdom, Italy, the Netherlands, Belgium,
Germany, France, Singapore, Malaysia, Australia and Dubai. Elsewhere in Europe, Asia Pacific and Latin America, we sell primarily
through independent distribution partners. In China, we sell both directly and through distributors, based on regional market
demands.
Competition. We compete with a number of large companies that have significant product portfolios, market share and
global reach, which enable them to offer wide-ranging product bundles to larger customers, such as Group Purchasing Organizations
(“GPOs”) and Integrated Delivery Networks (“IDNs”). This competition has the potential to impact our net sales, market share
and profit margin. We also compete with a number of small companies with very limited product offerings and operations in one
or a limited number of countries. On a product basis, our principal competitors are Steris, Olympus, Boston Scientific, ASP (a
division of Fortiv), Metrex, Ruhof, Ecolab, ERBE, Getinge, SteelCo and Wassenburg. We believe that our principal competitive
advantages include the strength of our dedicated sales teams, our comprehensive product line of differentiated automated endoscope
reprocessors, disposable procedure products and proprietary chemistries, and our reputation for providing high-quality and reliable
products supported by our highly responsive clinical support and service teams.
Acquisitions. On March 21, 2018, we purchased all of the issued and outstanding stock of Aexis Medical BVBA (“Aexis
Medical”), which is based in Belgium. Aexis Medical specializes in advanced software solutions focused on the tracking and
monitoring of instrument reprocessing for hospitals and healthcare professionals.
On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Hygienetechnik Holding GmbH (“BHT
Group”), a leader in the German market in automated endoscope reprocessing and related equipment and services. BHT Group
consists of a portfolio of high-quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products
globally distributed by our Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central
sterile applications, associated technical service and parts as well as flexible endoscope repair services.
Life Sciences
General. Our Life Sciences segment designs, develops, manufactures, sells, and installs water purification systems for
medical and other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical
and life science markets through a worldwide distributor network. Our products and services include:
•
•
•
•
•
•
•
•
central dialysis water purification systems,
portable dialysis water purification systems,
bicarbonate mixing systems,
hollow fiber filters and other filtration and separation products,
liquid disinfectants and cold sterilization products,
“dry fog” products,
room temperature sterilization equipment and services, and
clean-room certification and decontamination services.
Our products are generally designed for dialysis and other specific healthcare applications, research laboratories, food
and beverage, and commercial industrial customers. Our water systems provide biologically pure water 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 provide service and maintenance for water purification systems through an extensive network
of regional offices in the United States and, to a smaller degree, in Canada.
Our 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 U.S. Pharmacopeia (“USP”) water (i.e., water meeting the U.S. Food and Drug Administration (“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 commercial industrial market requirements.
We also offer a full line of proprietary and third party filters utilizing hollow fiber membrane technology to remove
impurities from liquid streams for a wide range of applications. Such applications include the filtering of ultrapure water to remove
endotoxins, bacteria and other contaminants in medical environments to provide protection for patients undergoing treatments
that use ultrapure water. Our therapeutic filtration products include hemoconcentrators, hemofilters and specialty filters utilized
for therapeutic medical applications.
(dollar amounts in thousands except share and per share data or as otherwise specified)
4
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Our liquid disinfectant and cold sterilant products are used in the dialysis, medical, pharmaceutical and other industries.
These products include surface disinfectants as well as chemistries used to disinfect ultrapure water systems as part of overall
procedures to control the contamination of systems by microorganisms and spores. 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.
Our REVOX® Sterilization Systems and Services business provides an innovative room-temperature vapor sterilization
method for the medical device, pharmaceutical and biomedical industries. It provides customers 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.
Sales, Marketing and Distribution. We generally sell our equipment on a direct basis in the United States and Canada
and through third-party distributors in other international markets. We are a leading supplier of FDA 510(k) cleared water
purification systems to the dialysis industry in North America. A significant portion of our sales in this segment are derived from
sales of products and service to dialysis clinics and hospitals in North America.
Competition. We compete with a number of large companies that have significant product portfolios and global reach,
as well as a number of small companies with very limited product offerings and operations in one or a limited number of countries.
On a product basis, competitors include Evoqua, IsoPure, Baxter and Steris. We believe that the ability of our Life Sciences 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 our national service coverage.
We have observed a continued trend toward formal or informal bundling partnerships and arrangements between kidney
dialysis machine suppliers and companies offering medical water purification systems that compete with our systems. The ability
to bundle these products offers a competitive advantage to such suppliers, which include Baxter (dialysis machine)/Gambro (water
system), B. Braun (dialysis machine)/Lauer (water system), and Fresenius (dialysis machine)/Vivonic (water system). The bundling
approach being used in the United States by B. Braun/Lauer represents a competitive threat to our dialysis water business, as does
the business combination of Fresenius and Vivonic. See Item 1A, “Risk Factors.”
Acquisitions. On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its controlled environmental
solutions business (“CES Business”). The CES Business is a leading provider of testing and certification, environmental monitoring
and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance and
quality control.
Dental
General. We design, manufacture, sell, supply and distribute a broad selection of infection prevention healthcare products,
the majority of which are single-use products used by dental practitioners. Our products include the following:
•
•
•
•
sterility assurance products such as biological indicators, chemical integrators and sterilization pouches,
consumables such as towels, bibs, tray liners and sponges,
nitrous oxide/oxygen sedation equipment and related single-use disposable nasal masks,
personal barrier products such as face masks, shields, and hand protection products such as hand sanitizers and
germicidal wipes,
•
cleaning solutions, high level disinfectants and surface disinfectants,
• waterline treatment products for maintaining safe dental unit waterlines,
•
•
•
amalgam separators,
treatment accessories such as saliva ejectors, evacuator tips and plastic cups, and
preventatives such as prophy angles and prophy paste.
Significant brand names for our healthcare disposable products include SECURE FIT® Masks, ISOFLUID® Masks,
RAPICIDE® Disinfectant and DentaPure® Cartridges.
Our most significant business in this segment derives from our sterility assurance business. We offer 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 U.S. Centers for Disease Control and Prevention and industry guidelines for daily or weekly
testing. Our expanded portfolio in the dental wastewater management market now includes amalgam separator technology which
will help dental practitioners meet a U.S. Environmental Protection Agency (“EPA”) ruling on wastewater management compliance.
Our products also include a wide-array of biological indicators, chemical integrators and related products and services that enable
(dollar amounts in thousands except share and per share data or as otherwise specified) 5
Cantel Medical Corp.
2019 Annual Report on Form 10-K
hospitals, surgical centers, office-based practitioners and dental facilities to safely and accurately monitor and verify their
sterilization practices and protocols.
We maintain a leading market position in the United States for face masks and dental unit waterline treatments as well
as several of our other products used in the dental market.
Sales, Marketing, and Distribution. Our dental 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 dental products are sold under the
Crosstex brand name. We also produce private label products for several of our distribution partners.
Competition. We compete with a number of large companies that have significant product portfolios and global reach,
as well as a number of small companies with very limited product offerings. On a product basis, competitors include Halyard
Health, 3M, ASP, Steris, Danaher/Sybron, Dentsply/Sultan Healthcare, Amcor, Porter Instrument, Sterisil, ProEdge and less
expensive imported generic products from Asia and other lower cost manufacturing locations. We believe that our long-standing
brands, product quality, superior customer service and breadth of portfolio are competitive advantages and are the basis for our
success in this segment.
Acquisitions. On February 1, 2019, we purchased all of the issued and outstanding stock of Omnia S.p.A. (“Omnia”), an
Italian-based leader in dental surgical consumables solutions. Omnia’s business consists of a wide-ranging portfolio of sutures,
irrigation tubing and customized dental surgical procedure kits, with a focus on procedure room set-up and cross-contamination
prevention.
On July 30, 2019, we signed a definitive agreement to acquire Hu-Friedy Mfg. Co., LLC (“Hu-Friedy”), a leading global
manufacturer of instruments and instrument reprocessing workflow systems serving the dental industry. The acquisition is subject
to regulatory approvals and other customary closing conditions, and is expected to close during our first quarter fiscal 2020.
Dialysis
General. We design, develop, manufacture, sell and service 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 renal dialysis products
include:
hemodialysis concentrates and other ancillary supplies,
•
• medical device reprocessing systems, and
•
sterilants and disinfectants.
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 (described below) are being utilized.
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. There has been a significant
downward trend in dialyzer reuse since 2001, which has significantly decreased sales of our dialysis products tied to reuse during
that period. We are exploring dialysis-related opportunities with the potential to mitigate the loss of such business. Likewise, we
are expanding marketing efforts of reuse products in emerging markets in Asia, South America and elsewhere. However, no
assurance can be given that such opportunities and efforts will prove successful. See Item 1A, “Risk Factors.”
Sales, Marketing and Distribution. 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.
Competition. 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.
(dollar amounts in thousands except share and per share data or as otherwise specified) 6
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Information with Respect to Our Business Generally:
Government Regulation
Our business and products are subject to various degrees of governmental regulation in the countries in which we operate.
In the United States, the FDA, EPA and other governmental authorities regulate the development, manufacture, labeling, sale,
storage and distribution of our products and services. Our international operations also are subject to a significant amount of
government regulation, including country-specific rules and regulations and U.S. regulations applicable to our international
operations. Compliance with applicable government regulations is a significant expense for us.
Numerous aspects of our business are subject to government regulations including, among other things, research and
development, product approvals, product manufacturing, labeling, marketing and promotion, distribution, record-keeping, storage
and disposal practices. For example, the FDA inspects medical device manufacturers for compliance with the current Quality
Systems Regulations (“QSRs”), 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, introductions of new medical devices
are generally subject to regulatory clearance or approval. Failure to receive or maintain, or delays in receiving, such clearance or
approvals may hurt our competitiveness and have other material adverse consequences on our business, results of operations and
cash flows.
We cannot predict the effect on our operations resulting from current or future governmental regulations or the
interpretation or application of these regulations. However, such governmental regulations could prevent, delay, or result in the
revocation or rejection of regulatory clearance of our products. In addition, if we fail to comply with any applicable regulatory
requirements, fines, sanctions, regulatory actions and other penalties could be imposed on us.
We believe that we are currently compliant in all material respects with applicable regulatory requirements. However,
there can be no assurance that future or current regulatory, governmental, or private action will not have a material adverse effect
on us or on our performance, results, or financial condition. See Item 1A, “Risk Factors.”
Sources and Availability of Raw Materials
We purchase raw materials, sub-assemblies, components and other supplies from numerous suppliers in the United States
and abroad. The principal raw materials and supplies that we use to conduct operations include chemicals, paper, resin, stainless
steel and plastic components. These raw materials are generally obtainable from several sources and in sufficient quantities within
the lead times specified to vendors.
Intellectual Property
We protect our technology and products by, among other means, filing U.S. 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.
As of July 31, 2019, we held 68 U.S. patents and 312 foreign patents, with 72 U.S. patents pending and 106 foreign
patents pending. The majority of our U.S. and foreign patents, for individual products, are effective for twenty years from the
initial 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 patents, trade secrets and other intellectual property, the right to manufacture and sell certain of our products. 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 July 31,
2019, we had 2,084 trademark registrations in the United States and in various foreign countries in which we conduct business,
as well as 38 trademark applications pending worldwide.
Seasonality
Our businesses generally are not seasonal in nature.
(dollar amounts in thousands except share and per share data or as otherwise specified)
7
Cantel Medical Corp.
Principal Customers
2019 Annual Report on Form 10-K
None of our customers accounted for 10% or more of our consolidated net sales during fiscal 2019, 2018 or 2017. As
described below, none of our segments are reliant upon a single customer, but some of our segments are currently reliant on a few
customers. See Item 1A, “Risk Factors.”
Our Life Sciences segment is reliant on two customers, who collectively accounted for approximately 40.2%, 48.0% and
50.2% of segment net sales in fiscal 2019, 2018 and 2017, respectively.
Our Dental segment is reliant on three customers, who collectively accounted for approximately 47.6%, 45.1% and 43.4%
of segment net sales in fiscal 2019, 2018 and 2017, respectively. We expect to have a similar customer profile after the completion
of our pending acquisition of Hu-Friedy, further described in Note 19 to our consolidated financial statements in Part II, Item 8
of this report.
Our Dialysis segment is reliant on two customers (which are the same two customers noted above under our Life Sciences
segment), who collectively accounted for approximately 41.0%, 40.6% and 44.2% of our Dialysis segment net sales in fiscal 2019,
2018 and 2017, respectively.
Backlog
As of July 31, 2019, our consolidated backlog was approximately $102,925 compared with approximately $91,687 as of
July 31, 2018. The majority of the backlog was in our Life Sciences segment which had backlog of $50,272 and $58,556 as of
July 31, 2019 and July 31, 2018, respectively. The majority of our backlog is expected to be recognized as revenue within one
year of such date.
Competition
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 breadth of product
offering, product design and quality, safety, ease of use, brand, product service and support, and price. We expect to face continued
intense competition and 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.
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 give 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 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.
For further discussion of competition-related and other risk factors, see Item 1A, “Risk Factors.”
Quality Assurance
We manufacture, assemble and package most of our products in the United States and, to a significantly lesser extent, in
Italy, Germany and elsewhere. Each of our production facilities is dedicated to particular processes and products. We have
implemented quality assurance procedures to support the quality and integrity of our production processes.
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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
8
Cantel Medical Corp.
Employees
2019 Annual Report on Form 10-K
As of July 31, 2019, we employed 2,775 persons, of whom 1,947 are located in the United States, 568 are located in
Europe, the Middle East and Africa, 194 are located in Asia and Australia, and 66 are located in Canada. None of our employees
are represented by labor unions. We consider our relations with our employees to be satisfactory.
Sales to Iran
We ship certain of our products to Iran, and conduct related activities, in accordance with licenses issued by the Office
of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury. The Iranian sales were generally conducted through
distributors, some of whose customers may include public hospitals owned or controlled directly or indirectly by the Iranian
government.
Available Information
Under the Securities Exchange Act of 1934, as amended (“Exchange Act”), we are required to file with or furnish to the
SEC annual, quarterly and current reports, proxy and information statements and other information. The SEC maintains a website
at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. We file electronically with the SEC.
We make available, free of charge through the investor relations section of our website, our reports on Forms 10 K, 10 Q
and 8 K, and amendments to those reports, filed with or furnished to the SEC as soon as reasonably practicable after they are filed
or furnished to the SEC. The address for our website 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 part of, and is not incorporated in, this or any other report we file with or furnish to the SEC.
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 and other securities laws. These statements are based on current expectations, estimates,
or forecasts about our businesses, the industries in which we operate, and the current beliefs and assumptions of management;
they do not relate strictly to historical or current facts. Without limiting the foregoing, words or phrases such as “expect,”
“anticipate,” “goal,” “project,” “intend,” “plan,” “believe,” “seek,” “may,” “could” and variations of such words and similar
expressions generally identify forward-looking statements. In addition, any statements that refer to predictions or projections of
our future financial performance, anticipated growth and trends in our businesses, and other characterizations of future events or
circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions
about future events, activities or developments and are subject to numerous risks, uncertainties, and assumptions that are difficult
to predict. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the
date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set
forth under Item 1A, “Risk Factors” of this Annual Report on Form 10-K. Except as required by law, 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 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, results of operations or cash flows.
The medical device markets in which we primarily participate are highly competitive. We encounter significant competition across
(dollar amounts in thousands except share and per share data or as otherwise specified) 9
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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. 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, results of operations or cash flows.
We face continued competition in our endoscopy disposable procedure products from larger competitors. We have seen increased
activity by our larger competitors to include infection prevention endoscopy disposable procedure products in their existing market
share and bundling agreements. As purchasing decisions continue to be consolidated with GPOs and in a smaller number of IDNs,
competitors with broader portfolios will have a competitive advantage in offering a wider range of discounts. If such approach
expands, we could face declines in growth or loss of market share, as well as reduced profit margin, for our endoscopy procedural
products.
We face increased competition in the water purification system market due to the alliance of kidney dialysis machine suppliers
and water purification system suppliers. Outside of the United States, we believe there is a trend in formal or informal bundling
partnerships and arrangements between kidney dialysis machine suppliers and companies offering medical water purification
systems that compete with our systems. The ability to bundle these products offers a competitive advantage to such suppliers,
which include Baxter (dialysis machine)/Gambro (water system), B. Braun (dialysis machine)/Lauer (water system), and Fresenius
(dialysis machine)/Vivonic (water system). The bundling approach being used by B. Braun/Lauer, and the business combination
of Fresenius and Vivonic, represent competitive threats to our dialysis water business. If such business combinations and bundling
approaches expand in the United States and we do not succeed in forming an alliance with a high-quality supplier of kidney dialysis
machines, we can lose our current competitive advantages and experience a material loss of net sales and a decrease in margins
in our water purification system business.
The market for our dialysis reprocessing products is limited to dialysis centers that reuse dialyzers. The decrease in the reuse
portion of the dialysis market in the United States accelerated significantly in recent years and such decrease is expected to
continue. Our dialyzer reprocessing products are limited to use by clinics that choose to clean, sterilize and reuse dialyzers, rather
than discard the dialyzers after a single-use. Today, only a small number of all dialysis procedures in the United States reuse
dialyzers. The downward trend in reuse dialyzers in the United States had accelerated in recent years which resulted in the sale
of no reuse dialyzers in the United States for the past several fiscal years. Further, the most significant manufacturers of reuse
dialyzers have indicated that they will be ceasing their manufacture of such products. As such, clinics that currently utilize reuse
dialyzers will continue to convert to single use dialyzers, which will continue the downward trend and likely eliminate our sale
of dialyzer reprocessors and related single-use products in the United States at some point in the near future. The reduction of our
dialysis reuse business has had an adverse effect on our Dialysis segment business, which has reduced our margins and net income
in this segment.
We face significant challenges in growing our dialysate concentrate sales. The reduced sales of our dialysis reuse products were
significantly mitigated by increased sales in our dialysate concentrate during the past several years, which sales are anticipated to
remain at similar levels during fiscal 2020. However, no assurance can be given that we will succeed at increasing sales in the
near or long term. Fresenius, the largest dialysis chain in the United States, 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 principally due to the lower costs
associated with shipping such products. However, we do not manufacture powdered dialysate products.
(dollar amounts in thousands except share and per share data or as otherwise specified)
10
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Because a significant portion of our Life Sciences and Dental 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 Life Sciences segment, two customers collectively accounted for 40.2% of our fiscal 2019 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 Life
Sciences segment. 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 Dental segment are highly dependent on our relationships with a limited number of large distributors. During fiscal 2019,
the top three customers of our Dental segment accounted for 47.6% of its net sales. We expect similar concentration among our
top customers after the anticipated completion of the Hu-Friedy transaction further described in Note 19 to our consolidated
financial statements in Part II, Item 8 of this report. The loss of a significant amount of business from any of these three customers
would have a material adverse effect on our Dental segment. In addition, because our Dental 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,
EPA, Department of Justice (“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 healthcare providers. As a result,
we are required by law to disclose payments and other transfers of value to healthcare 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 adversely impact our business. In addition, we may continue to devote substantial time and financial resources
to further develop and implement policies, systems, and processes to comply with enhanced legal and regulatory requirements,
such as the European Union's General Data Protection Regulation, several of which may expose us to significant penalties or fines
and 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. 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. Although we
have not historically had any issues, that could change if such materials are found to be used in our products. As of the date of our
conflict minerals report for the 2018 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 implementation of an Enterprise Resource Planning (“ERP”) software solution and other information technology systems
could result in significant disruptions to our operations. We are engaged in a multi-year implementation of a new global ERP
solution and other complementary information technology systems, with the first phase of such implementation having been
completed during fiscal 2019. Implementation of these solutions and systems is highly dependent on coordination of numerous
software and system providers and internal business teams. The interdependence of these solutions and systems is a significant
risk to the successful completion of the initiatives and the failure of any one system could have a material adverse effect on the
implementation of our overall information technology infrastructure. We may experience difficulties as we transition to these new
or upgraded systems and processes, including loss or corruption of data, delayed shipments, decreases in productivity as our
personnel and third party providers implement and become familiar with new systems, increased costs and lost revenues. In
addition, transitioning to these new systems requires significant capital investments and personnel resources. Difficulties in
implementing new or upgraded information systems or significant system failures could disrupt our operations and have a material
adverse effect on our capital resources, financial condition, results of operations or cash flows.
Our businesses are heavily reliant on certain raw materials and can be adversely impacted by rising prices and potential
governmental changes to import and tariff policies. 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. From time to time we experience price
increases for raw materials, with no guarantee that such increases can be passed along to our customers. In addition, although fuel
(dollar amounts in thousands except share and per share data or as otherwise specified) 11
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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. Our business is also
subject to risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or
taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import products
at current or increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping
or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased,
additional workplace regulations or other restrictions on our imports will be imposed upon the importation of our products in the
future or adversely modified, or what effect such actions would have on our costs of operations. Future quotas, duties or tariffs
may have a material adverse effect on our business, financial condition, results of operations or cash flows. Future trade agreements
could also provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse
effect on our business, financial condition, results of operations or cash flows.
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 new products and businesses. The success of this strategy depends upon several factors,
including our ability to:
•
•
•
•
•
•
identify and acquire appropriate products and businesses, including obtaining required regulatory (such as antitrust)
approvals,
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,
realize expected benefits such as perceived tax benefits and synergies, and
successfully promote and increase sales and profits of acquired product lines.
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. In addition, assumptions regarding the growth of businesses we
acquire may differ from actual results.
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.
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.
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 that these indemnification provisions will protect us fully or at all, and as a
result we may face unexpected liabilities that adversely affect our business, financial condition, results of operations or cash flows.
Our international business subjects us to a number of risks and 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 international business subjects us to a number of risks and complications associated with manufacturing,
sales, services, and other operations outside of the United States. These include: risks associated with foreign currency exchange
rate fluctuations; difficulties in enforcing agreements and collecting receivables through some foreign legal systems; enhanced
credit risks in certain European countries as well as emerging market regions; foreign customers with longer payment cycles than
customers in the United States; tax laws that restrict our ability to use tax credits, offset gains, or repatriate funds; tariffs and
(dollar amounts in thousands except share and per share data or as otherwise specified) 12
Cantel Medical Corp.
2019 Annual Report on Form 10-K
exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold
to an affiliated entity in another country. 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 and uncertainties, including political and economic instability, general economic conditions,
imposition of government controls, the need to comply with a wide variety of foreign and U.S. 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. In
addition, we may experience difficulties in enforcing intellectual property rights or weaker intellectual property right protections
in some countries.
On June 23, 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union (“E.U.”),
commonly referred to as “Brexit.” As a result of the referendum, the British government has begun negotiating the terms of the
United Kingdom’s future relationship with the E.U. Although it is unknown what the final outcome of such negotiated terms will
be, it is possible that there will be greater restrictions on imports and exports between the United Kingdom and E.U. countries and
increased regulatory complexities. These changes may adversely affect our operations and financial results since we have a
significant presence in the U.K. 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, including the E.U.'s enactment of the Medical Devices Regulation. We expect that the international regulatory
environment will continue to evolve, which could impact our ability to obtain approvals for our products in those jurisdictions,
and thereby 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, results of operations or cash flows.
Health care policy changes on both the federal and state levels 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, results of operations or cash flows. In addition, the U.S. Patient
Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, contains
provisions that could have a material impact on our business. Among other provisions, this legislation imposes a 2.3% excise tax
on all U.S. medical device sales. In January 2018, Congress enacted legislation that further suspended the excise tax until calendar
year 2020. Furthermore, we have been required to commit significant resources to “Sunshine Act” compliance. 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 and trading volume has been volatile from time to time and has experienced significant fluctuations over the
past several months and years as a result of various market factors. We may experience continued fluctuations in price and
volume in the future that could negatively impact the value of our 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.
In addition, the trading market for our common stock relies in part on the research and reports that industry and other financial
analysts publish about us, our business and our industry. We do not control these or any other analysts, nor do we control their
respective reports. Our future operating results are subject to substantial uncertainty, and our stock price could decline significantly
if we fail to meet or exceed analysts’ forecasts and expectations. If any of the analysts who cover us downgrade our stock, lower
(dollar amounts in thousands except share and per share data or as otherwise specified)
13
Cantel Medical Corp.
2019 Annual Report on Form 10-K
their price target or issue commentary or observations about us or our stock that are perceived by the market as negative, our stock
price would likely decline rapidly. In addition, there are many other large, well-established, publicly traded companies active in
our industry and market, which may cause our company to garner less attention from industry analysts. If these analysts decrease
coverage or otherwise cease to cover our company, we could lose visibility in the market, which in turn could cause our stock
price to decline.
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 dental 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 dental products in lower cost locations such as China,
Southeast Asia and certain locations within North America. Although we believe the quality of our dental 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 2019, but no assurance can be given that we will not face
increased competition in the future.
We are subject to extensive government regulation, which may delay or prevent new product introduction and subject us to
citations, fines and other regulatory actions. 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 QSRs 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, which may have material reputational and financial
impacts. 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, financial condition, results of operations or cash flows.
Compliance with international laws and regulations, import and export limitations, anti-corruption laws, and exchange controls
may be difficult, burdensome and expensive. We are subject to compliance with various laws and regulations, including the U.S.
Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar anti-bribery laws, which generally prohibit companies and their
intermediaries from making bribes or other improper payments to officials for the purpose of obtaining or retaining business. We
are also subject to limitations on trade with persons in sanctioned countries. Our growing exposure to international markets increase
the inherent risks of encountering such issues. While our employees, distributors and agents are required to comply with these
laws, no assurance can be given that our training and internal policies and procedures will always protect us from violations of
these laws, despite our commitment to legal compliance and corporate ethics. The failure to comply with these laws and regulations
could subject us to severe fines and penalties material in scope.
(dollar amounts in thousands except share and per share data or as otherwise specified) 14
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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. In the ordinary course of certain of our manufacturing processes,
we use various chemicals and other regulated substances. 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. 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. We must also comply with various
health and safety regulations in the United States and abroad in connection with our operations. We can give no assurance 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, results of operations or
cash flows. 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 exposures to, hazardous substances will not adversely affect our reputation or adversely affect our
business, financial condition, results of operations or cash flows.
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. 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 (or associated with) 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 for such product (or associated with its use). Further legislative or administrative reforms to the
reimbursement systems in the United States 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, results of operations or cash flows.
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 Asia. Changes in the value of the Euro, British Pound, Canadian dollar,
Australian dollar, Singapore dollar, Chinese Renminbi and Sri Lankan Rupee against the U.S. 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 U.S. dollars, Euros, British Pounds, Canadian dollars, Australian dollars, Singapore dollars, Chinese Renminbi or Sri
Lanka Rupees, but must be converted into each entity’s functional currency. Furthermore, the financial statements of subsidiaries
in the European Union, United Kingdom, Canada, Australia, China and Sri Lanka are translated using the accounting policies
described in Note 2 to our consolidated financial statements in Part II, Item 8 of this report, and therefore are impacted by changes
in the Euro, British Pound, Canadian dollar, Australian dollar, Chinese Renminbi and Sri Lankan Rupee exchange rates relative
to the U.S. dollar.
We may be exposed to product liability claims resulting from the use of products we sell and distribute. Our sales and distribution
of products may expose us to product liability claims. 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. In
addition, we may not have insurance covering claims of emotional harm or mental distress related to our products or services
when not associated with physical injury. This could result in our incurring significant uninsured damages.
(dollar amounts in thousands except share and per share data or as otherwise specified)
15
Cantel Medical Corp.
2019 Annual Report on Form 10-K
We rely on intellectual property and proprietary rights to maintain our competitive position. We rely 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.
Breaches of our information technology systems could have a material adverse effect on our operations. We rely on information
technology systems to process, transmit, and store electronic information in our day-to-day operations and install certain software
systems on our customers' networks. Our information technology systems have been subjected to computer viruses, or other
malicious codes, and cyber or phishing attacks. Although past attacks did not have a significant adverse impact on our business,
these types of attacks could result in our intellectual property and other confidential information being lost or stolen, disruption
of our operations, or other negative consequences, such as increased costs for security measures or remediation costs, diversion
of management attention and adverse impact on our relationships with vendors and customers. Such attacks could also impact our
customers' networks. Cyber attacks are becoming more sophisticated and frequent and the techniques used in such attacks change
rapidly. While we have made investments seeking to address these threats, including monitoring of networks and systems, hiring
of experts, employee training and security policies for employees and third-party providers, the techniques used in these attacks
change frequently and may be difficult to detect for periods of time and we may face difficulties in anticipating and implementing
adequate preventative measures. If our IT systems are damaged or cease to function properly, the networks or service providers
we rely upon fail to function properly, or we or one of our third-party providers suffer a loss or disclosure of our business or
stakeholder information due to any number of causes ranging from catastrophic events or power outages to improper data handling
or security breaches and our business continuity plans do not effectively address these failures on a timely basis, we may be
exposed to reputational, competitive and business harm as well as litigation and regulatory action. There can be no assurances
that our protective measures will prevent future attacks that could have a significant impact on our business.
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 key executive is covered by the Company's Executive Severance and Change in Control Plan. 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.
Some of our facilities are located near coastal zones, and the occurrence of a hurricane or other natural disasters could damage
our facilities and equipment, which could harm our operations. Some of our facilities are vulnerable to damage from hurricanes
and from other types of disasters, including fire, floods, power loss, communications failures, terrorism and similar events since
any insurance we may maintain may not be adequate to cover our losses. If any disaster were to occur, our ability to operate our
business at our facilities could be seriously, or potentially completely, impaired.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located at 150 Clove Road, Little Falls, NJ. Listed below are our manufacturing facilities
and the principal warehouses, distribution centers, research facilities and administrative offices that we own or lease. In addition,
we maintain administrative and sales offices and warehousing and distribution centers in other locations domestically and globally.
We believe that our properties are suitable and adequate for the manufacture and distribution of our products.
(dollar amounts in thousands except share and per share data or as otherwise specified) 16
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Location
Owned/
Leased
Purpose
Square
Footage
Segment
Plymouth, MN (multiple)
Owned
Administrative, sales, R&D & land
267,000 Medical, Dialysis, Life Sciences
Pomezia, Italy
Henrietta, NY
Owned Manufacturing, warehousing & administrative
156,000 Medical
Leased Manufacturing, warehousing & administrative
134,000 Dental
Hauppauge, NY
Owned
Administrative, sales, manufacturing & warehousing
65,000
Dental
Conroe, TX (multiple)
Owned
Administrative, sales, R&D, manufacturing,
warehousing & training
Hauppauge, NY
Leased Warehousing
Sharon, PA
Owned Manufacturing & warehousing
72,000 Medical
52,000
Dental
50,000
Dental
Southend-on-Sea, U.K.
Owned Manufacturing, warehousing & administrative
49,500 Medical
Plymouth, MN
Leased Warehousing
154,000 Life Sciences
Conroe, TX (multiple)
Leased
Executive, sales, administrative, R&D & training
42,000 Medical
Lawrenceville, GA
Leased Manufacturing & warehousing
41,000
Dental
Rush, NY
Phoenix, AZ
Owned Manufacturing, warehousing, administrative & sales
38,000
Dental
Leased Manufacturing, administrative & warehousing
37,000
Dental
Gersthofen, Germany
Leased Manufacturing, administrative & warehousing
35,000 Medical
Santa Fe Springs, CA
Leased Manufacturing & warehousing
32,000
Dental
Heerlen, the Netherlands
Lowell, MA
Skippack, PA
Leased
Leased
Leased
Sales, service, warehousing & distribution
26,000
All segments
Sales, administrative, warehousing & regeneration
26,000
Life Sciences
Sales, administrative, warehousing and regeneration
23,000
Life Sciences
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 adverse effect
on our business, financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
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 under the symbol “CMD.” On August 31, 2019, we had 303
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 2019:
May 1 - May 31
June 1 - June 30
July 1 - July 31
Period
Total number of
shares purchased
Average price
paid per share
22 (1) $
224 (1) $
1,094 (1) $
1,340 (1) $
68.94
71.01
87.85
84.73
Total number of shares
purchased as part of
publicly announced
plans or programs
Maximum number of
shares that may yet be
under the plan or
programs
—
—
—
—
—
—
—
—
_______________________________________________
(1) The Company does not currently have a share repurchase program. All of the shares purchased during the fourth quarter of fiscal 2019
represent shares surrendered to the Company to pay employee withholding taxes due upon the vesting of restricted stock.
(dollar amounts in thousands except share and per share data or as otherwise specified) 17
Cantel Medical Corp.
Stock Performance Graph
2019 Annual Report on Form 10-K
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 U.S. 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, 2014, and where
applicable, the reinvestment of all dividends).
Comparison of 5 Year Cumulative Total Return
Among Cantel Medical Corp. Common Stock, the Russell 2000 Index
and the Dow Jones U.S. Health Care Equipment & Services Index
Cantel Medical Corp.(1)
Russell 2000 Index
July 31,
2014
2015
2016
2017
2018
2019
$ 100.00
$ 164.02
$ 200.47
$ 222.59
$ 278.58
$ 277.99
$ 100.00
$ 112.03
$ 112.03
$ 132.70
$ 157.56
$ 149.74
Dow Jones U.S. Health Care Equipment & Services Index
$ 100.00
$ 131.02
$ 138.64
$ 160.32
$ 200.55
$ 221.78
________________________________________________
(1) $100 invested on July 31, 2014 in Cantel Medical Corp.'s common stock or index, including reinvestment of dividends. Indexes are calculated
on month-end basis.
(dollar amounts in thousands except share and per share data or as otherwise specified) 18
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Item 6. Selected Consolidated Financial Data.
The following selected consolidated statements of income, balance sheets and other financial data have been derived
from our audited consolidated financial statements. The selected consolidated financial and operating information set forth below
should be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations” and our Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
Consolidated Statements of Income Data
2019
2018
2017
2016
2015
Year Ended July 31,
Net sales
Cost of Sales
Gross profit
Income from operations
Interest expense, net
Other income
Loss on sale of business
Income before income taxes
Income taxes
Net income
Earnings Per Share Data
$
918,155
$
871,922
$
770,157
$
664,755
$
565,004
490,701
427,454
457,951
413,971
402,997
367,160
355,569
309,186
311,537
253,467
83,519
9,505
(1,305)
—
75,319
20,277
121,664
110,410
5,289
(1,138)
—
117,513
26,472
4,303
(126)
—
106,233
34,855
97,251
3,320
—
—
93,931
33,978
$
55,042
$
91,041
$
71,378
$
59,953
$
80,761
2,364
—
2,206
76,191
28,238
47,953
Weighted average basic shares outstanding
41,700,926
41,567,722
41,468,487
41,344,013
41,139,467
Weighted average diluted shares outstanding
41,757,116
41,635,078
41,542,765
41,390,194
41,202,600
Basic earnings per common share
Diluted earnings per common share
Dividends per common share
Other Financial Data
Net cash provided by operating activities
Capital expenditures
Acquisition of businesses, net of cash acquired
Depreciation
Amortization
$
$
$
$
1.32
1.32
0.20
$
$
$
2.18
2.18
0.17
66,931
95,438
40,644
21,510
20,849
125,912
37,698
87,488
17,473
17,357
Consolidated Balance Sheets Data
2019
2018
$
$
$
$
$
$
$
$
1.71
1.71
0.14
108,193
27,065
70,044
15,045
18,407
July 31,
2017
$
$
$
$
1.44
1.44
0.12
80,268
18,889
94,528
11,989
13,095
1.16
1.15
0.10
59,070
12,760
43,567
10,692
13,265
2016
2015
Cash and cash equivalents
$
44,535
$
94,097
$
36,584
$
28,367
$
31,720
Total assets
Working capital
Long-term debt (excluding debt issuance costs)
Stockholders’ equity
1,070,366
200,396
233,000
661,537
963,708
203,460
200,000
608,867
786,373
150,592
126,000
523,932
694,532
126,407
116,000
454,370
584,031
117,737
78,500
406,633
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 and its subsidiaries. The MD&A is provided as a supplement to and should be read in
conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Our financial
statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
(dollar amounts in thousands except share and per share data or as otherwise specified)
19
Cantel Medical Corp.
Overview
2019 Annual Report on Form 10-K
Cantel is a leading provider of infection prevention and control products and services in the healthcare market, specializing
in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and
supplies are used to help prevent the occurrence or spread of infections. We operate our four segments through wholly-owned
subsidiaries in the United States and internationally.
During the first quarter of fiscal 2019, we changed the names of our reportable segments to better align with our key
customers and the markets we serve. As a result of this change, our industrial biological and chemical indicator business has moved
from the Dental segment to the Life Sciences segment. Prior year segment disclosures have been recast to conform to the current
year presentation.
Fiscal 2019 Summary
Key GAAP financial results for fiscal 2019 compared with fiscal 2018 were as follows:
•
•
•
Net sales increased by 5.3% to $918,155 from $871,922, with organic sales growth of 3.9%,
Net income decreased by 39.5% to $55,042 from $91,041, and
Earnings per diluted share decreased by 39.6% to $1.32 from $2.18.
Key non-GAAP financial results for fiscal 2019 compared with fiscal 2018 were as follows:
•
•
•
Non-GAAP net income decreased by 5.1% to $98,999 from $104,346,
Non-GAAP earnings per diluted share decreased by 5.4% to $2.37 from $2.51, and
Adjusted EBITDAS decreased by 1.9% to $174,848 from $178,270.
Please see a description of our Non-GAAP Financial Measures below.
Acquisitions
Post-Fiscal 2019
On July 30, 2019, we signed a definitive agreement to acquire Hu-Friedy, a leading global manufacturer of instruments
and instrument reprocessing workflow systems serving the dental industry. The acquisition is subject to regulatory approvals and
other customary closing conditions, and is expected to close during our first quarter fiscal 2020. After closing, we plan to combine
Hu-Friedy with our Dental segment. Under the terms of the acquisition, Cantel will pay $725,000 upfront for Hu-Friedy, a portion
of which will be paid in our stock (with the specific amount at our election) with the remainder to be paid in cash. An
additional amount in potential cash and stock earnout payments may be payable to Hu-Friedy shareholders upon achievement of
certain commercial milestones in the eighteen months following closing of the transaction. As a result of the transaction structure,
the acquisition will generate an anticipated tax benefit, which we estimate at more than $100,000, which we expect to use to reduce
cash taxes over approximately 15 years.
The cash portion of the transaction is being financed through a combination of the borrowings under our amended and
restated credit facility, new term loan financing and cash on hand. We anticipate that our enhanced financial profile and scale
following closing of the transaction will enable strong cash flow generation and accelerated deleveraging. See “Debt” below for
further discussion of the related financing.
Fiscal 2019
On February 1, 2019, we purchased all of the issued and outstanding stock of Omnia, an Italian-based leader in dental
surgical consumables solutions, for total consideration (net of cash acquired), excluding acquisition-related costs, of $19,808,
consisting of $16,598 of cash and $3,210 of stock consideration, plus additional earn-outs ranging from zero to a maximum of
$5,800, which is payable upon the achievement of certain performance-based financial targets. Omnia’s business consists of a
wide-ranging portfolio of sutures, irrigation tubing and customized dental surgical procedure kits, with a focus on procedure room
set-up and cross-contamination prevention, and is included in our Dental segment.
(dollar amounts in thousands except share and per share data or as otherwise specified)
20
Cantel Medical Corp.
2019 Annual Report on Form 10-K
On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its CES Business for total cash consideration,
excluding acquisition-related costs, of $17,047. The CES Business is a leading provider of testing and certification, environmental
monitoring and decontamination services for clean rooms and other controlled environments to ensure safety, regulatory compliance
and quality control, and is included in our Life Sciences segment.
See Note 4 to our consolidated financial statements in Part II, Item 8 of this report.
Results of Operations
The following table gives information as to the percentages of net sales represented by selected items reflected in our
consolidated statements of income.
Statement of income data
2019
2018
2017
2019 / 2018
2018 / 2017
Year Ended July 31,
Percentage Change
Net sales
Cost of sales
Gross profit
$ 918,155
100.0 % $ 871,922
100.0 % $ 770,157
100.0 %
490,701
427,454
53.4 %
46.6 %
457,951
413,971
52.5 %
47.5 %
402,997
367,160
52.3 %
47.7 %
Selling
General and administrative
Research and development
140,232
172,383
31,320
15.3 %
18.8 %
3.4 %
129,642
138,019
24,646
14.9 %
15.8 %
2.8 %
116,113
122,270
18,367
15.1 %
15.9 %
2.4 %
Total operating expenses
343,935
37.5 %
292,307
33.5 %
256,750
33.4 %
5.3 %
7.2 %
3.3 %
8.2 %
24.9 %
27.1 %
17.7 %
13.2 %
13.6 %
12.7 %
11.7 %
12.9 %
34.2 %
13.8 %
Income from operations
83,519
9.1 %
121,664
14.0 %
110,410
14.3 % (31.4)%
10.2 %
Interest expense, net
Other income
Income before income taxes
Income taxes
Net income
9,505
1.0 %
(1,305)
(0.1)%
75,319
20,277
8.2 %
2.2 %
5,289
(1,138)
117,513
26,472
0.6 %
(0.1)%
13.5 %
3.1 %
4,303
(126)
106,233
0.5 %
— %
79.7 %
22.9 %
— %
— %
13.8 % (35.9)%
10.6 %
34,855
4.5 % (23.4)% (24.1)%
$
55,042
6.0 % $
91,041
10.4 % $
71,378
9.3 % (39.5)%
27.5 %
The following table gives information as to the net sales by reportable segment and geography, as well as the related
percentage of such sales to the total net sales.
Net sales by segment
Medical
Life Sciences
Dental
Dialysis
Total net sales
Net sales by geography
United States
International
Total net sales
Year Ended July 31,
2019
2018
2017
$ 523,669
201,022
161,608
31,856
57.0% $ 473,937
217,030
21.9%
54.4% $ 398,773
196,446
24.9%
17.6%
149,360
17.1%
144,457
3.5%
31,595
3.6%
30,481
51.8%
25.5%
18.7%
4.0%
$ 918,155
100.0% $ 871,922
100.0% $ 770,157
100.0%
$ 665,661
72.5% $ 643,744
73.9% $ 599,657
252,494
27.5%
228,178
26.1%
170,500
77.9%
22.1%
$ 918,155
100.0% $ 871,922
100.0% $ 770,157
100.0%
(dollar amounts in thousands except share and per share data or as otherwise specified)
21
Cantel Medical Corp.
2019 Annual Report on Form 10-K
The following table gives information as to the amount of income from operations, as well as income from operations
as a percentage of net sales, for each of our reportable segments.
Income from operations
Medical
Life Sciences
Dental
Dialysis
Operating income by segment
General corporate expenses
Income from operations
Fiscal 2019 compared with Fiscal 2018
Net Sales
Year Ended July 31,
2019
2018
2017
$
98,356
18.8% $
86,833
18.3% $
73,440
20,552
22,289
4,922
146,119
62,600
10.2%
13.8%
15.5%
15.9%
6.8%
36,803
30,004
7,380
161,020
39,356
17.0%
20.1%
23.4%
18.5%
4.5%
33,159
28,000
8,154
142,753
32,343
$
83,519
9.1% $ 121,664
14.0% $ 110,410
18.4%
16.9%
19.4%
26.8%
18.5%
4.2%
14.3%
Total net sales increased by $46,233, or 5.3%, to $918,155 for fiscal 2019 from $871,922 for fiscal 2018. The 5.3%
increase in net sales includes an increase of 3.9% in organic sales, an increase of 2.4% in net sales due to acquisitions (offset by
dispositions) and a decrease of 1.0% due to foreign currency translation. International net sales increased by $24,316, or 10.7%,
to $252,494 for fiscal 2019 from $228,178 for fiscal 2018. The 10.7% increase in international net sales consists of a 5.0% increase
due to acquisitions (offset by dispositions), 9.4% organic sales growth and a decrease of 3.7% due to foreign currency translation,
resulting from the strengthening of the U.S. dollar.
Medical. Net sales increased by $49,732, or 10.5%, for fiscal 2019 compared with fiscal 2018, which consisted of 11.5%
organic sales growth, a 0.7% increase due to acquisitions and a decrease of 1.7% due to foreign currency translation. The increase
in organic net sales was primarily driven by increased sales of our reprocessing products (across all product lines) and to a lesser
extent, our procedure room products and consumables. The sales growth was primarily driven by our domestic business, and also
supported by international sales increases, mostly from the Asia/Pacific region.
Life Sciences. Net sales decreased by $16,008, or 7.4%, for fiscal 2019 compared with fiscal 2018. The decrease was
primarily due to continued softness in demand for capital equipment, primarily in the medical water business, and the divestiture
of our high purity water business in Canada, partially offset by acquisition-related growth. We expect this softness in demand to
continue into the next fiscal year as orders for our hemodialysis water business were down throughout this fiscal year, primarily
resulting from a key customer moving toward a dual source approach and a cyclical downturn in this business. For a more detailed
discussion on the competitive threat to our hemodialysis water business, see Part I, Item 1A, “Risk Factors.” Foreign currency
translation decreased net sales by 0.3% for fiscal 2019.
Dental. Net sales increased by $12,248, or 8.2%, for fiscal 2019 compared with fiscal 2018. The increase was primarily
driven by acquisition-related growth, partially offset by a decrease in sales to our distributor network due to inventory adjustments
within our channel at the start of this fiscal year. We expect our Dental segment's net sales to increase in fiscal 2020 and beyond
as a result of the previously discussed Hu-Friedy acquisition and its related operations.
Dialysis. Net sales increased by $261, or 0.8%, for fiscal 2019 compared with fiscal 2018. The increase was primarily
due to the increase in sales volume for our domestic concentrate business, offset by decreases in reprocessing sales and the loss
of concentrate business in certain international regions.
Gross Profit
Gross profit increased by $13,483, or 3.3%, to $427,454 for fiscal 2019 from $413,971 for fiscal 2018. Gross profit as
a percentage of net sales for fiscal 2019 and 2018 was 46.6% and 47.5%, respectively. The decrease in gross profit as a percentage
of net sales for fiscal 2019 was due to increased labor costs resulting from livable wage increases, and the reclassification of certain
compensation and benefit-related costs that had previously been recorded in operating expenses into cost of sales. The
reclassification negatively impacted gross profit as a percentage of net sales by approximately 0.4% for fiscal 2019. Excluding
the impact of acquisition-related and restructuring-related items, gross profit as a percentage of net sales for fiscal 2019 and 2018
was 46.9% and 47.8%, respectively.
(dollar amounts in thousands except share and per share data or as otherwise specified) 22
Cantel Medical Corp.
Operating Expenses
2019 Annual Report on Form 10-K
Operating expenses as a percentage of net sales for fiscal 2019 and 2018 were 37.5% and 33.5%, respectively. As stated
above, there was a reclassification of certain salary and benefit related costs that had previously been recorded in operating expenses
into cost of sales, which positively impacted operating expenses as a percentage of net sales by approximately 0.4% for fiscal
2019.
Selling expenses increased by $10,590, or 8.2%, to $140,232 for fiscal 2019 from $129,642 for fiscal 2018. The increase
was due to primarily due to selling and marketing expenses of our recent acquisitions, and to a lesser extent higher compensation-
related costs. Selling expenses as a percentage of net sales were 15.3% and 14.9% for fiscal 2019 and 2018, respectively.
General and administrative expenses increased by $34,364, or 24.9%, to $172,383 for fiscal 2019 from $138,019 for
fiscal 2018. The increase was primarily due to ERP implementation costs, including depreciation expense associated with the
related ERP assets, higher restructuring-related costs resulting from organizational leadership changes, acquisition-related items
(such as transaction and integration-related costs), depreciation expense associated with our Medical segment's new headquarters,
and higher amortization expense as a result of our recent acquisitions. General and administrative expenses for fiscal 2018 were
negatively impacted by the settlement of a patent infringement matter, resulting in less of an overall increase in fiscal 2019. General
and administrative expenses as a percentage of net sales were 18.8% and 15.8% for fiscal 2019 and 2018, respectively.
Research and development expenses (which include continuing engineering costs) increased by $6,674, or 27.1%, to
$31,320 for fiscal 2019 from $24,646 for fiscal 2018. The increase was primarily due to additional product development initiatives
primarily in our Medical segment, and to a lesser extent due to increased headcount. Research and development expenses as a
percentage of net sales were 3.4% and 2.8% for fiscal 2019 and 2018, respectively.
We expect our overall operating expense profile to be higher in fiscal 2020 and beyond as a result of the previously
discussed acquisition of Hu-Friedy and its related operations.
Operating Income
Medical. Operating income increased by $11,523, or 13.3%, for fiscal 2019 compared with fiscal 2018. The increase was
primarily due to increased sales volume in the United States and internationally, as further explained above. The increase was
partially offset by elevated ERP implementation costs, including depreciation expense associated with the related ERP assets,
higher restructuring-related charges and depreciation expense associated with our Medical segment's new headquarters. The
settlement of a patent infringement matter negatively affected operating income as a percentage of sales by approximately 0.5%
in fiscal 2018.
Life Sciences. Operating income decreased by $16,251, or 44.2%, for fiscal 2019 compared with fiscal 2018. The decrease
was primarily due to lower net sales, restructuring-related costs (including the accelerated amortization of certain intangible assets)
and an increase in research and development costs. We expect this continued softness in demand to continue in the upcoming
fiscal year as orders for our hemodialysis water business were down in fiscal 2019, as a result of a key customer moving toward
a dual source approach and a cyclical downturn in this business.
Dental. Operating income decreased by $7,715, or 25.7%, for fiscal 2019 compared with fiscal 2018. The decrease was
primarily due to reduced gross profit (resulting from livable wage increases, decreased productivity and inflationary pressures)
and increased selling and marketing expenses, partially offset by income from operations related to acquisitions. We expect our
Dental segment's operating income to increase in fiscal 2020 and beyond as a result of the previously discussed Hu-Friedy
acquisition and its related operations.
Dialysis. Operating income decreased by $2,458, or 33.3%, for fiscal 2019 compared with fiscal 2018. The decrease was
primarily due to the shift to lower margin products and increased selling expenses, partially offset by higher net sales.
General Corporate Expenses
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel
as well as costs associated with certain facets of our acquisition program and being a publicly traded company. Such expenses
increased by $23,244, or 59.1%, for fiscal 2019 from fiscal 2018. These increases were primarily due to an increase of restructuring-
related costs resulting from organizational leadership changes, acquisition-related charges and ERP implementation costs.
(dollar amounts in thousands except share and per share data or as otherwise specified)
23
Cantel Medical Corp.
Interest Expense, Net
2019 Annual Report on Form 10-K
Interest expense, net increased by $4,216, or 79.7%, to $9,505 for fiscal 2019 from $5,289 for fiscal 2018. The increase
resulted from an increase in the average outstanding borrowings due to both our term loan and revolver borrowings (described
below) to support the funding of acquisitions, and to a lesser extent, higher variable interest rates. We expect our interest expense,
net to be elevated in fiscal 2020 and beyond due to the financing of the previously discussed Hu-Friedy acquisition.
Other Income
Other income of $1,305 for fiscal 2019 represents the gain on sale of our high purity water business in Canada. Other
income of $1,138 for fiscal 2018 represents the favorable resolution of the contingent liability associated with a previous acquisition.
Income Taxes
The consolidated effective tax rate increased to 26.9% for fiscal 2019 from 22.5% for fiscal 2018. The increase in our
consolidated effective tax rate was primarily due to the recognition of a discrete tax benefit in fiscal 2018 as a result of the Tax
Cuts and Jobs Act of 2017 (“2017 Tax Act”) associated with the remeasurement of our U.S. deferred tax items which impacted
the comparability to fiscal 2019. The rate impact from the discrete tax benefit was partially offset in fiscal 2018 by the recording
of a $2,785 valuation allowance on deferred tax assets related to a previous acquisition.
Fiscal 2018 compared with Fiscal 2017
For a discussion of fiscal 2018 compared with fiscal 2017, see Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2018.
Non-GAAP Financial Measures
In evaluating our operating performance, we supplement the reporting of our financial information determined under
GAAP with certain non-GAAP financial measures including (i) non-GAAP net income, (ii) non-GAAP earnings per diluted share
(“EPS”), (iii) earnings before interest, taxes, depreciation, amortization, loss on disposal of fixed assets, and stock-based
compensation expense (“EBITDAS”), (iv) adjusted EBITDAS, (v) net debt and (vi) organic sales. These non-GAAP financial
measures are indicators of our performance that are not required by, or presented in accordance with, GAAP. They are presented
with the intent of providing greater transparency to financial information used by us in our financial analysis and operational
decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, stockholders and
other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the
underlying performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not
be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures.
To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect comparability
of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and
future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following
are examples of the types of adjustments that are excluded: (i) amortization of purchased intangible assets, (ii) acquisition-related
items, (iii) business optimization and restructuring-related charges, (iv) certain significant and discrete tax matters and (v) other
significant items management deems irregular or non-operating in nature.
Amortization expense of purchased intangible assets is a non-cash expense related to intangibles that were primarily the
result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible
assets that reduce our net income. The removal of amortization from our overall operating performance helps in assessing our
cash generated from operations including our return on invested capital, which we believe is an important analysis for measuring
our ability to generate cash and invest in our continued growth.
Acquisition-related items consist of (i) fair value adjustments to contingent consideration and other contingent liabilities
resulting from acquisitions, (ii) due diligence, integration, legal fees and other transaction costs associated with our acquisition
program and (iii) acquisition accounting charges for the amortization of the initial fair value adjustments of acquired inventory
and deferred revenue. The adjustments of contingent consideration and other contingent liabilities are periodic adjustments to
record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the determination
of fair value calculations, fair value adjustments may potentially cause significant earnings volatility that are not representative
of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with our acquisition
program, including accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be
(dollar amounts in thousands except share and per share data or as otherwise specified) 24
Cantel Medical Corp.
2019 Annual Report on Form 10-K
significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since these acquisition-
related items are irregular and often mask underlying operating performance, we exclude these amounts for purposes of calculating
these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past
operating performance.
Restructuring-related and business optimization items consist of severance-related costs associated with work force
reductions and other restructuring-related activities. Such costs include (i) salary continuation, (ii) bonus payments, (iii)
outplacement services, (iv) medical-related premium costs and (v) accelerated stock-based compensation expense.
Excess tax benefits resulting from stock compensation are recorded as an adjustment to income tax expense. The magnitude
of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon our future
grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on grant date and the
exercise behavior of our stock award holders. Since these tax benefits are largely unrelated to our results and unrepresentative of
our normal effective tax rate, we excluded their impact on net income and diluted EPS to arrive at our non-GAAP financial
measures.
Fiscal 2019
During fiscal 2019, we recorded specific discrete tax items associated with our international operations that were unrelated
to fiscal 2019. As these items were unrepresentative of our normal effective tax rate, we excluded their impact on net income and
diluted EPS for fiscal 2019 to arrive at our non-GAAP financial measures.
During fiscal 2019, we completed the disposition of our high purity water business in Canada. This resulted in a pre-tax gain
of $1,305 through other income. Since this gain was not representative of past or future operations, we made an adjustment to our
net income and diluted EPS for fiscal 2019 to exclude this gain to arrive at our non-GAAP financial measures.
During fiscal 2019, we recorded an adjustment to a minor litigation matter in our consolidated financial statements. Since
these costs are irregular and mask our underlying operating performance, we made an adjustment to our net income and diluted
EPS for fiscal 2019 to exclude such costs to arrive at our non-GAAP financial measures.
Fiscal 2018
The 2017 Tax Act significantly revised U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal
statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-
time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax
Income, (2) the Foreign Derived Intangible Income deduction, and (3) the Base Erosion Anti-Abuse Tax and (d) eliminating or
reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses.
During fiscal 2018, we recorded a one-time net benefit as a provisional estimate of the net accounting impact of the 2017 Tax Act
in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”). Since the net favorable tax benefit is largely unrelated to our
results and unrepresentative of our normal effective tax rate, we excluded its impact on net income and diluted EPS for fiscal 2018
to arrive at our non-GAAP financial measures.
During fiscal 2018, the Israeli Government notified us that they would forgive any future amounts due under a contingent
obligation payable from a previous acquisition. As a result of this formal notification, we reduced the $1,138 contingent obligation
payable to $0 during fiscal 2018, resulting in a gain through other income. Since this gain was irregular, we made an adjustment
to our net income and diluted EPS for fiscal 2018 to exclude this gain to arrive at our non-GAAP financial measures.
During fiscal 2018, we settled a patent infringement matter and also recorded an adjustment to another minor litigation
matter in our consolidated financial statements. Since these costs are irregular and mask our underlying operating performance,
we made an adjustment to our net income and diluted EPS for fiscal 2018 to exclude such costs to arrive at our non-GAAP financial
measures.
During fiscal 2018, we recorded a $2,785 valuation allowance on deferred tax assets related to a prior acquisition. Since
this tax adjustment is related to acquired net operating losses and is not representative of our normal effective tax rate, we excluded
its impact on net income and diluted EPS for fiscal 2018 to arrive at our non-GAAP financial measures.
(dollar amounts in thousands except share and per share data or as otherwise specified) 25
Cantel Medical Corp.
Fiscal 2017
2019 Annual Report on Form 10-K
During fiscal 2017, we recorded the costs associated with the retirement plans of our former Chief Executive Officer in
our consolidated financial statements. Since these costs are irregular and mask our underlying operating performance, we made
an adjustment to our net income and diluted EPS for fiscal 2017 to exclude such costs to arrive at our non-GAAP financial measures.
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated
as follows:
2019
9,689
16,021
18,015
$ 55,042
Net income/Diluted EPS, as reported
Intangible amortization, net of tax(1)
Acquisition-related items, net of tax(2)
Restructuring-related charges, net of tax(3)
Litigation matters, net of tax(1)
CEO retirement costs, net of tax(1)
Loss on debt extinguishment, net of tax(4)
Gain on disposition of business, net of tax(5)
Resolution of contingent liability(5)
Excess tax benefits(6)
Tax matters(6)
Non-GAAP net income/Non-GAAP diluted EPS $ 98,999
1,625
134
—
—
(943)
—
(584)
$
$
1.32
0.38
0.23
0.43
—
—
—
(0.02)
—
(0.01)
0.04
2.37
July 31,
2018
$ 91,041
$
13,267
2,835
4,658
1,637
—
91
—
(1,138)
(2,173)
(5,872)
$ 104,346
$
2.18
0.32
0.07
0.11
0.04
—
—
—
(0.03)
(0.05)
(0.13)
2.51
2017
$ 71,378
$
12,800
1,533
2,057
—
1,213
—
—
—
(2,241)
—
$ 86,740
$
1.71
0.30
0.04
0.05
—
0.03
—
—
—
(0.05)
—
2.08
________________________________________________
(1) Amounts were recorded in general and administrative expenses.
(2) In fiscal 2019, pre-tax acquisition-related items of $351 were recorded in net sales, $537 were recorded in cost of sales and $12,241 were
recorded in general and administrative expenses. In fiscal 2018, pre-tax acquisition-related items of $893 were recorded in cost of sales
and $3,154 were recorded in general and administrative expenses. In fiscal 2017, pre-tax acquisition-related items of $353 were recorded
in cost of sales and $2,094 were recorded in general and administrative expenses.
(3) In fiscal 2019, pre-tax restructuring-related items of $2,243 were recorded in cost of sales and $21,507 were recorded in general and
administrative expenses. In fiscal 2018, pre-tax restructuring-related items of $1,517 were recorded in cost of sales and $3,814 were recorded
in general and administrative expenses. In fiscal 2017, pre-tax restructuring-related items of $3,284 were recorded in general and
administrative expenses.
(4) Amounts were recorded in interest expense, net.
(5) Amounts were recorded in other income.
(6) Amounts were recorded in income taxes.
We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect
that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment
have on net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased
intangible assets that reduce net income. Additionally, we regard EBITDAS as a useful measure of operating performance and
cash flow before the effect of interest expense and is a complement to income from operations, net income and other GAAP
financial performance measures.
We define adjusted EBITDAS as EBITDAS excluding the same non-GAAP adjustments to net income discussed
previously in this document. We use adjusted EBITDAS when evaluating operating performance because we believe the exclusion
of such adjustments, of which a significant portion are non-cash items, is necessary to provide the most accurate measure of on-
going core operating results and to evaluate comparative results period over period.
(dollar amounts in thousands except share and per share data or as otherwise specified) 26
Cantel Medical Corp.
2019 Annual Report on Form 10-K
The reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
Net income, as reported
Interest expense, net
Income taxes
Depreciation
Amortization
Loss on disposal of fixed assets
Stock-based compensation expense
EBITDAS
Acquisition-related items
Restructuring-related charges(1)
Litigation matters
CEO retirement costs(2)
Gain on disposition of business
Resolution of contingent liability
Adjusted EBITDAS
2019
July 31,
2018
2017
$
55,042
$
91,041
$
9,505
20,277
21,510
20,849
1,592
15,562
5,289
26,472
17,473
17,357
768
9,615
71,378
4,303
34,855
15,045
18,407
966
8,844
144,337
168,015
153,798
13,129
18,524
163
—
(1,305)
—
$
174,848
$
4,047
5,001
2,345
—
—
(1,138)
178,270
2,447
2,760
—
1,937
—
—
$
160,942
________________________________________________
(1) Excludes stock-based compensation expense.
(2) For comparative purposes, we have revised the amounts associated with CEO retirement costs for the twelve months ended July 31, 2017
to exclude stock-based compensation expense which was reported in “Stock-based compensation expense” above.
We define net debt as long-term debt less cash and cash equivalents. Each of the components of net debt appears on our
consolidated balance sheets. We believe that the presentation of net debt provides useful information to investors because we
review net debt as part of our management of our overall liquidity, financial flexibility, capital structure and leverage.
Long-term debt (excluding debt issuance costs)
Less cash and cash equivalents
Net debt
2019
233,000
(44,535)
188,465
$
$
$
$
July 31,
2018
200,000
(94,097)
105,903
$
$
2017
126,000
(36,584)
89,416
We define organic sales as net sales less (i) the impact of foreign currency translation, (ii) net sales related to acquired
businesses during the first twelve months of ownership and (iii) divestitures during the periods being compared. We believe that
reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and
facilitating easier comparisons of our revenue performance with prior periods. We exclude the effect of foreign currency translation
from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure
underlying business trends. We exclude the effect of acquisitions and divestitures because the nature, size, and number of
acquisitions and divestitures can vary dramatically from period to period and can obscure underlying business trends and make
comparisons of financial performance difficult. The reconciliation of net sales growth to organic sales growth for total net sales
and net sales of our four reportable segments were calculated as follows:
Net sales growth
Impact due to foreign currency translation
Sales related to acquisitions
Organic sales growth
Net Sales
Medical
Net Sales
Life Sciences
Net Sales
Dental
Net Sales
Dialysis
Net Sales
5.3 %
1.0 %
(2.4)%
3.9 %
10.5 %
1.7 %
(0.7)%
11.5 %
(7.4)%
0.3 %
(2.2)%
(9.3)%
8.2 %
— %
(8.4)%
(0.2)%
0.8%
0.2%
—%
1.0%
(dollar amounts in thousands except share and per share data or as otherwise specified) 27
Cantel Medical Corp.
Liquidity and Capital Resources
2019 Annual Report on Form 10-K
We assess our liquidity in terms of our ability to generate cash to fund operating, investing and financing activities.
Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures,
acquisitions of businesses and cash dividends. Cash provided by operating activities continues to be a primary source of funds.
As necessary, we supplement operating cash flow with borrowings from our revolving credit facility to fund our acquisitions and
related business activities.
Cash Flows
Net Cash Provided by Operating Activities. Net cash provided by operating activities decreased to $66,931 in fiscal 2019
from $125,912 in fiscal 2018, primarily due to a decrease in net income (after adjusting for non-cash items) associated with
restructuring-related initiatives and acquisition-related costs. In addition, inventory purchases were higher due to the anticipation
of our ERP go-live in fiscal 2019 and to continue to support demand in our Medical segment. The timing of receipts associated
with accounts receivable and the timing of payments associated with accounts payable (both net of acquisitions) also contributed
to this decrease. The timing of collections associated with accounts receivable was primarily driven by the implementation of our
ERP system in our Medical segment during the second half of fiscal 2019. We expect our collection efforts associated with our
outstanding accounts receivable to improve during fiscal 2020. Net cash provided by operating activities increased to $125,912
in fiscal 2018 from $108,193 in fiscal 2017 primarily due to the increase in net income (after adjusting for non-cash items) and
decreases in inventory levels (net of acquisitions), partially offset by decreases in accounts payable due to the timing of payments.
Net Cash Used in Investing Activities. Net cash used in investing activities increased by $7,843 to $133,029 in fiscal 2019
from $125,186 in fiscal 2018, primarily due to an increase in capital expenditures, partially offset by a decrease in cash paid for
acquisitions. Net cash used in investing activities increased by $28,124 to $125,186 in fiscal 2018 from $97,062 in fiscal 2017,
primarily due to an increase in cash paid for acquisitions and an increase in capital expenditures. During fiscal 2019, 2018 and
2017, net cash used in investing activities included capital expenditures of $95,438, $37,698 and $27,065, respectively, which
included expenditures for ERP software, building improvements and purchases of manufacturing and computer equipment. Capital
expenditures for fiscal 2019 increased significantly when to compared to fiscal 2018 as a result of the ERP system implementation
and the purchase of our Medical segment's new headquarters.
Net Cash Provided by Financing Activities. Net cash provided by financing activities decreased by $42,435 to $14,702
in fiscal 2019 from $57,137 in fiscal 2018, primarily due to a net decrease in borrowings used to support acquisition-related activity,
partially offset by an increase in dividend payments. Net cash used in financing activities increased by $59,888 to $57,137 of cash
provided in fiscal 2018 from $2,751 of cash used in fiscal 2017. The changes in net cash provided by (used in) financing activities
were primarily due to the refinancing of our credit facility, resulting in $200,000 in term loan borrowings in fiscal 2018, and the
net effect of borrowings and repayments under our revolving credit facility.
Dividends
During fiscal 2019, we paid semi-annual cash dividends that totaled $0.20 per outstanding share of common stock, of
which $0.10 per share was paid on each of January 31, 2019 and July 31, 2019. During fiscal 2018, we paid semi-annual cash
dividends that totaled $0.17 per outstanding share of common stock, of which $0.085 per share was paid on each of January 31,
2018 and July 31, 2018. Future declaration of dividends and the establishment of future record and payment dates are subject to
the final determination of our Board of Directors. However, it is our current expectation that semi-annual cash dividends of at
least $0.10 per common share will continue to be paid in the foreseeable future.
Debt (Fourth Amended and Restated Credit Agreement)
On June 28, 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”).
The Amended Credit Agreement refinanced our credit facility under the Third Amended and Restated Credit Agreement dated
March 4, 2011, to include a $200,000 tranche A term loan and a $400,000 revolving credit facility. Subject to the satisfaction of
certain conditions precedent, including the consent of the lenders, we may from time to time increase our borrowing capacity
under the revolving credit facility or tranche A term loan by an aggregate amount not to exceed $300,000. The 2018 Credit
Agreement expires on June 28, 2023. Additionally, subject to certain restrictions and conditions (i) any of our domestic or foreign
subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies.
As of July 31, 2019, we had $43,000 of revolver borrowings and $190,000 of term loan A borrowings under the 2018
Credit Agreement.
(dollar amounts in thousands except share and per share data or as otherwise specified) 28
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Until amended as described below, borrowings under the 2018 Credit Agreement bore interest at rates ranging from
0.00% to 1.00% above prime rate for base rate borrowings, or at rates ranging from 1.00% to 2.00% above the London Interbank
Offered Rate (“LIBOR”), depending upon our “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total
funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2018
Credit Agreement (“Consolidated EBITDA”). The 2018 Credit Agreement also provided for fees on the unused portion of the
revolving credit facility at rates ranging from 0.20% to 0.35%, depending on our Consolidated Leverage Ratio. As of July 31,
2019, the average interest rate on our outstanding borrowings was approximately 3.48%.
We are in compliance with all financial and other covenants under the 2018 Credit Agreement at July 31, 2019. For further
information regarding the 2018 Credit Agreement, including a description of affirmative and negative covenants, see Note 10 to
our consolidated financial statements in Part II, Item 8 of this report.
Debt (Amendment to 2018 Credit Agreement)
On September 6, 2019, we entered into a First Amendment (the “Amendment”), amending the 2018 Credit Agreement,
and as amended by the Amendment, the (“Amended Credit Agreement”). The Amendment adds a $400,000 delayed draw term
loan facility (the “Delayed Draw Facility”), which the we may draw subject to the satisfaction of certain limited conditions
precedent, to our 2018 Credit Agreement, in addition to the existing tranche A term loan and existing revolving credit
facility. Pursuant to the Amended Credit Agreement, subject to the satisfaction of certain conditions precedent, including the
consent of the lenders, the Company may from time to time increase its borrowing capacity under the revolving credit facility by,
or incur incremental term loans in, an aggregate amount not to exceed the sum of (i) the greater of (x) $300,000 or (y) an amount
equal to two times the our consolidated EBITDA, calculated on a pro forma basis, plus (ii) the aggregate principal amount of
voluntary prepayments of the revolving loans and term loans.
Borrowings under the Amended Credit Agreement bear interest at rates ranging from 0.00% to 1.25% above prime rate
for base rate borrowings, or at rates ranging from 1.00% to 2.25% above LIBOR for LIBOR based borrowings, depending on our
“Consolidated Leverage Ratio,” which is the consolidated ratio of total funded debt (minus certain unrestricted cash) to consolidated
EBITDA. The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates
ranging from 0.20% to 0.40%, depending on our Consolidated Leverage Ratio. At September 25, 2019, the average interest rate
on our outstanding borrowings was 3.31%.
The Amended Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit
facilities and is secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by each Loan Party
of all of the outstanding shares of its U.S.-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-
based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries.
Financing Needs
At July 31, 2019, our total long-term debt (excluding debt issuance costs) of $233,000, net of our cash and cash equivalents
of $44,535, was $188,465. Stockholders' equity as of that date was $661,537. Our reportable segments generate significant cash
from operations. At July 31, 2019, we had a cash balance of $44,535, of which approximately one-half was held by foreign
subsidiaries. Our foreign cash is needed by our foreign subsidiaries for working capital purposes as well as for current international
growth initiatives. Accordingly, our foreign unremitted earnings are considered indefinitely reinvested and unavailable for
repatriation. We believe that our current cash position, anticipated cash flows from operations and the funds available under our
Amended 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 25, 2019, approximately $355,000 was available under our Amended Credit Agreement.
The Delayed Draw Facility and a portion of the revolving credit facility under our Amended Credit Agreement will be
used to finance all or a portion of the cash consideration for our acquisition of Hu-Friedy. The remaining proceeds of the Amended
Credit Agreement will be used to refinance certain existing indebtedness of Cantel and Hu-Friedy, and to pay the fees and expenses
incurred in connection therewith, as well as for working capital, capital expenditures and other lawful corporate purposes. We
anticipate that our enhanced financial profile and scale following closing of the acquisition will enable strong cash flow generation
and accelerated deleveraging.
(dollar amounts in thousands except share and per share data or as otherwise specified)
29
Cantel Medical Corp.
Inflation
2019 Annual Report on Form 10-K
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 margin could be
adversely affected.
Commitments and Contractual Obligations
As of July 31, 2019, aggregate annual required payments over the next five years and thereafter under our contractual
obligations that have long-term components are as follows:
Maturity of the credit facility(1)
Expected interest payments under
the credit facility
Minimum commitments under
noncancelable operating leases
Contingent consideration
Other long-term obligations(2)
Total contractual obligations
2020
2021
2022
2023
2024
Thereafter
Total
$ 10,000
$ 10,000
$ 10,000
$ 203,000
$
— $
— $ 233,000
Year Ended July 31,
8,663
8,315
7,967
7,000
—
—
31,945
9,099
1,411
353
7,671
—
836
6,021
—
73
5,659
—
240
5,159
—
—
15,251
—
—
48,860
1,411
1,502
$ 29,526
$ 26,822
$ 24,061
$ 215,899
$
5,159
$ 15,251
$ 316,718
_______________________________________________
(1) Does not include anticipated required payments under the Delayed Draw Facility related to the financing of the Hu-Friedy acquisition.
However, anticipated payments will be $7,125, $9,500, $9,500 and $373,875 for fiscal 2020, 2021, 2022 and 2023, respectively.
Includes uncertain tax positions.
(2)
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.
Our significant accounting policies are described more fully in Note 2 to our consolidated financial statements in Part II,
Item 8 of this report. We believe the following critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Goodwill and Indefinite-lived Intangible Assets
We have recorded goodwill and trademarks and trade names, all of which have indefinite useful lives and are therefore
not amortized. All of our indefinite-lived 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.
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 our 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
30
Cantel Medical Corp.
Business Combinations
2019 Annual Report on Form 10-K
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. 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.
We allocate the purchase price of an acquired company to the tangible and identifiable intangible assets and liabilities
acquired, with the remaining amount being recorded as goodwill. Intangible assets primarily include customer relationships,
technology, brand names and trademarks. The assignment of fair value to the identifiable intangible assets requires judgment. We
apply an income-based valuation methodology in measuring the customer relationships acquired, which include certain assumptions
such as forecasted future cash flows, customer attrition rates, terminal growth rates and discount rates. Intangibles assets are
generally amortized on a straight-line basis, reflecting the pattern in which the economic benefits are consumed, and are amortized
over their estimated useful lives.
Off-balance Sheet Arrangements
As of July 31, 2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation
S-K.
Recent Accounting Pronouncements
Refer to Note 2 to the consolidated financial statements in Part II, Item 8 of this report.
Cybersecurity
We have established an enterprise risk management committee to monitor and escalate enterprise level issues, including
cybersecurity matters, to the appropriate management levels within our organization and to members of our Board of Directors
as appropriate. Utilizing an escalation framework, our enterprise risk management committee and internal auditor are charged
with reviewing cybersecurity risks and incidents for potential financial, operational, and reputational risks. Matters determined to
present potential material impacts to our financial results, operations or reputation are reported by management to the chair of our
Audit Committee. In addition, the enterprise risk committee is charged with ensuring that management responsible for overseeing
the effectiveness of disclosure controls is informed in a timely manner of known cybersecurity risks and incidents that may
materially impact our operations so that timely public disclosure can be made as appropriate.
Our directors and executive officers are subject to our Securities Trading Policy, which is designed to facilitate compliance
with insider trading laws and governs transactions in our common stock and related derivative securities. Our Stock Trading Policy
designates certain blackout periods, dictated by our financial quarters and the release of financial results, during which trading is
restricted for individuals in information-sensitive positions, including directors and executive officers. Our Stock Trading Policy
also expressly restricts trading at any time while in possession of material non-public information, and permits designated officers
to impose additional blackout periods. Cybersecurity risks are one of several matters that may be deemed material information
under our Stock Trading Policy, and therefore form the basis of restricting participation in the market outside of a blackout period,
or for designating a blackout period.
(dollar amounts in thousands except share and per share data or as otherwise specified) 31
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks arising principally from changes in interest rates and foreign currency.
Interest Rate Market Risk
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 $233,000 at
July 31, 2019 has expected annual interest payments of approximately $8,663 using an effective interest rate of 3.48%. Therefore,
a 100 basis-point increase in average LIBOR interest rates would result in incremental interest expense of approximately $2,330.
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, on April 9,
2019, we entered into two interest rate swaps, which fixed interest rates at 2.265% on a combined notional value of $150,000.
The swap contracts expire on June 28, 2023, in conjunction with the Amended Credit Agreement.
Foreign Currency Market Risk
Changes in the value of the Euro, British Pound, Singapore dollar, Canadian dollar, Australian dollar, Chinese Renminbi
and the Sri Lankan Rupee against the U.S. 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 U.S. dollars or these foreign
currencies, but must be converted into each entity’s functional currency. Furthermore, the financial statements of most of our
international subsidiaries are translated using the accounting policies described in Note 2 to the consolidated financial statements
in Part II, Item 8 of this report, and therefore are impacted by changes in the international entities’ functional currency relative to
the U.S. 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 fiscal 2019 and 2018, a uniform 15% adverse movement in foreign currency rates would have resulted in realized losses (after
tax) of approximately $32,500 and $4,788, respectively. Conversely, for fiscal 2019 and 2018, a uniform 15% favorable movement
in foreign currency rates would have resulted in realized gains (after tax) of approximately $32,500 and $4,788, respectively.
For fiscal 2019 and 2018, the realized losses (after tax) primarily resulted from decreases in the values of the Euro,
Australian dollar, Canadian dollar, and British Pound relative to the U.S. dollar due to the composition of our assets and liabilities
denominated in foreign currencies and the translation of our foreign subsidiaries’ financial statements. However, the use of foreign
currency forward contracts partially offset such realized losses.
In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian
dollar, Singapore dollar and Chinese Renminbi relative to the U.S. dollar on the conversion of such net assets into the functional
currencies, we enter into short-term contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars, Singapore
dollars and Chinese Renminbi forward, which contracts are one-month in duration. These short-term contracts are designated as
fair value hedge instruments. There were seven foreign currency forward contracts with an aggregate notional value of $78,264
at July 31, 2019, and seven foreign currency forward contracts with an aggregate notional value of $30,159 at July 31, 2018, which
covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. 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 are immediately realized within general and administrative expenses due to the short-term nature of such
contracts. For the fiscal years ended July 31, 2019, 2018 and 2017, such forward contracts offset the impact on operations relating
to certain assets and liabilities that were 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 Sri Lankan Rupee relative to the U.S. dollar because the overall foreign
currency exposure relating to this currency is currently not deemed significant. Overall, fluctuations in the rates of currency
exchange did not have a material impact upon our net income in fiscal 2019 compared with fiscal 2018. For purposes of translating
the balance sheet at July 31, 2019 compared with July 31, 2018, the total of the foreign currency movements resulted in a foreign
currency translation loss of $13,287 for fiscal 2019, primarily due to the increase in the value of the U.S. dollar relative to the
Euro, Australian dollar, British Pound and Canadian dollar.
(dollar amounts in thousands except share and per share data or as otherwise specified) 32
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Cantel Medical Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Cantel Medical Corp. and subsidiaries (the “Company”) as of
July 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders' equity,
and cash flows for the years ended July 31, 2019 and 2018, and the related notes and the schedule listed in the Index at Item 15
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of July 31, 2019 and 2018, and the results of its operations and its cash flows for the
years ended July 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of July 31, 2019, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated September 25, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Valuation of Customer Relationship Intangible Assets in the Omnia S.p.A. and CES Business Acquisitions - Refer to Notes 2
and 4 to the financial statements
Critical Audit Matter Description
During 2019 the Company completed the acquisitions of Omnia S.p.A. and certain net assets of Stericycle Inc. related to its
controlled environmental solutions business (the “CES Business”) for approximately $19.8 million and $17.0 million, respectively
(collectively referred to as “the acquired entities”). The Company accounted for the acquisitions under the acquisition method of
accounting for business combinations. Accordingly, the purchase price was allocated, on a preliminary basis, to the assets acquired
and liabilities assumed based on their respective fair values, including customer relationship identified intangible assets with an
aggregate fair value of approximately $18.3 million. The Company estimated the fair value of the customer relationship intangible
assets using an income- based valuation methodology, which is a specific discounted cash flow method. The fair value determination
of the customer relationship intangible assets required management to make significant estimates and assumptions related to
forecasted future cash flows, including the selection of customer attrition rates, terminal growth rates and discount rates.
(dollar amounts in thousands except share and per share data or as otherwise specified)
33
Cantel Medical Corp.
2019 Annual Report on Form 10-K
We identified the customer relationship intangible assets for the acquired entities as a critical audit matter because of the significant
estimates and assumptions management made to fair value these assets. This required a high degree of auditor judgment and an
increased extent of effort, including the involvement of our fair value specialists, when performing audit procedures to evaluate
the reasonableness of management’s forecasts of future cash flows, including the selection of customer attrition rates, terminal
growth rates, and discount rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts of future cash flows and the selection of the customer attrition rates, terminal growth
rates and discount rates for the customer relationship intangible assets for the acquired entities included the following, among
others:
• We tested the effectiveness of controls over the valuation of the customer relationship intangible assets, including
management’s controls over forecasts of future cash flows and the selection of the customer attrition rates, terminal
growth rates and discount rates.
• We assessed the reasonableness of fiscal year 2019 forecasted cash flows of revenues and operating margins by comparing
them to the acquired entities actual 2019 cash flows.
• We assessed the reasonableness of the forecasted revenue growth rates and operating margins over the cash flow forecast
period by comparing them to the acquired entities’ actual revenue growth rates and operating margins during the most
recent historical periods.
• We performed sensitivity analyses of the significant assumptions used in the valuation model to evaluate the change in
fair value resulting from changes in the significant assumptions.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies; (2)
terminal growth rates by comparing them to industry growth rates and the projected nominal gross domestic product
(GDP) growth rate; (3) customer attrition rates by testing the mathematical accuracy of the rates used and comparing
them to historical customer data; and (4) discount rates, which included testing the source information underlying the
determination of the discount rates, testing the mathematical accuracy of the calculations, and developing a range of
independent estimates and comparing those to the discount rates selected by management.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 25, 2019
We have served as the Company's auditor since 2017.
34
Cantel Medical Corp.
2019 Annual Report on Form 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Cantel Medical Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Cantel Medical Corp. and subsidiaries (the “Company”) as of July
31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of July 31, 2019, based on criteria established in Internal Control - Integrated Framework
(2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended July 31, 2019, of the Company and our report dated
September 25, 2019, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment
the internal control over financial reporting at Omnia S.p.A. (“Omnia”), which was acquired on February 1, 2019 and whose
financial statements constitute 3.5% of total assets and 3.3% of net assets, 1.3% of net sales, and 1.1% of net income of the
consolidated financial statement amounts as of and for the year ended July 31, 2019. Accordingly, our audit did not include the
internal control over financial reporting at Omnia.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
September 25, 2019
35
Cantel Medical Corp.
2019 Annual Report on Form 10-K
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Cantel Medical Corp.
We have audited the accompanying consolidated statements of income, comprehensive income, changes in stockholders’ equity
and cash flows of Cantel Medical Corp. for the period ended July 31, 2017. Our audit also included the financial statement schedule
included in the Index at Item 15(a) for the period ended July 31, 2017. 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 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 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 audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of its
operations and its cash flows for the the period ended July 31, 2017, 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.
/s/ Ernst & Young LLP
New York, New York
September 28, 2017
36
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Consolidated Balance Sheets
Current assets:
Assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $2,322 and $1,149
Inventories, net
Prepaid expenses and other current assets
Income taxes receivable
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other assets
Deferred income taxes
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Compensation payable
Accrued expenses
Deferred revenue
Current portion of long-term debt
Income taxes payable
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and Contingencies (Note 12)
Stockholders’ equity:
July 31,
2019
2018
$
$
$
$
$
$
44,535
146,910
138,234
20,920
1,197
351,796
185,242
141,513
378,109
9,425
4,281
1,070,366
39,450
32,762
38,545
27,840
10,000
2,803
151,400
220,851
29,278
7,300
408,829
94,097
118,642
107,592
17,912
—
338,243
111,417
137,361
368,027
5,749
2,911
963,708
34,258
30,595
28,525
28,614
10,000
2,791
134,783
187,302
27,624
5,132
354,841
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
46,362,902 shares and outstanding 41,771,228 shares as of July 31, 2019; issued
46,243,582 shares and outstanding 41,706,084 shares as of July 31, 2018
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury Stock, at cost; 4,591,674 shares as of July 31, 2019; 4,537,498 shares as of July
31, 2018
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
4,636
204,795
539,097
(22,197)
(64,794)
661,537
1,070,366
$
$
4,624
184,212
491,540
(11,456)
(60,053)
608,867
963,708
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified) 37
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Consolidated Statements of Income
Net sales
Product sales
Product service
Total net sales
Cost of sales
Product sales
Product service
Total cost of sales
Gross profit
Expenses:
Selling
General and administrative
Research and development
Total operating expenses
Income from operations
Interest expense, net
Other income
Year Ended July 31,
2019
2018
2017
$
795,403
$
765,158
$
684,678
122,752
918,155
106,764
871,922
85,479
770,157
406,514
84,187
490,701
385,597
72,354
457,951
343,641
59,356
402,997
427,454
413,971
367,160
140,232
172,383
31,320
343,935
129,642
138,019
24,646
292,307
116,113
122,270
18,367
256,750
83,519
121,664
110,410
9,505
(1,305)
5,289
(1,138)
4,303
(126)
Income before income taxes
75,319
117,513
106,233
Income taxes
Net income
Earnings per common share:
Basic
Diluted
Dividends per common share
20,277
26,472
34,855
55,042
$
91,041
$
71,378
1.32
1.32
0.20
$
$
$
2.18
2.18
0.17
$
$
$
1.71
1.71
0.14
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified) 38
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Consolidated Statements of Comprehensive Income
Net income
Other comprehensive (loss) income:
Foreign currency translation
Interest rate swap, net of tax
Total other comprehensive (loss) income:
Year Ended July 31,
2019
2018
2017
$
55,042
$
91,041
$
71,378
(13,287)
2,546
(10,741)
(1,556)
—
(1,556)
1,895
—
1,895
Comprehensive income
$
44,301
$
89,485
$
73,273
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
39
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Consolidated Statements of Changes in Stockholders’ Equity
Balance, August 1, 2016
Repurchases of shares
Stock-based compensation
Equity vests/option exercises
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, 2017
Repurchases of shares
Stock-based compensation
Equity vests/option exercises
Cancellations of restricted stock
Dividends on common stock
Net income
Other comprehensive loss
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock,
at cost
Total
Stockholders’
Equity
41,708,214
$ 4,608
$ 165,573
$342,053
$
(11,795) $ (46,069) $
454,370
(89,607)
—
116,506
(6,179)
—
—
—
—
—
—
12
(1)
—
—
—
—
—
8,844
(12)
1
196
—
—
—
—
—
—
—
—
(5,841)
71,378
—
—
—
—
—
—
—
—
1,895
(6,910)
—
—
—
—
—
—
—
(6,910)
8,844
—
—
196
(5,841)
71,378
1,895
41,728,934
$ 4,619
$ 174,602
$407,590
$
(9,900) $ (52,979) $
523,932
(62,559)
—
46,551
(6,842)
—
—
—
—
—
5
—
—
—
—
—
9,615
(5)
—
—
—
—
—
—
—
—
(7,091)
91,041
—
—
—
—
—
—
—
(1,556)
(7,074)
—
—
—
—
—
—
(7,074)
9,615
—
—
(7,091)
91,041
(1,556)
Balance, July 31, 2018
41,706,084
$ 4,624
$ 184,212
$491,540
$
(11,456) $ (60,053) $
608,867
Repurchases of shares
Stock-based compensation
Issuance of shares
Equity vests/option exercises
Cancellations of restricted stock
Dividends on common stock
Net income
Cumulative impact of ASC 606 adoption
Other comprehensive loss
Other
(43,734)
—
42,703
67,862
(1,687)
—
—
—
—
—
—
—
4
8
—
—
—
—
—
—
—
15,562
3,206
942
—
—
—
—
—
873
—
—
—
—
—
(8,350)
55,042
865
—
—
—
—
—
—
—
—
—
—
(10,741)
—
(4,741)
—
—
—
—
—
—
—
—
—
(4,741)
15,562
3,210
950
—
(8,350)
55,042
865
(10,741)
873
Balance, July 31, 2019
41,771,228
$ 4,636
$ 204,795
$539,097
$
(22,197) $ (64,794) $
661,537
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified)
40
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Consolidated Statements of Cash Flows
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
Deferred income taxes
Other non-cash items, net
Changes in assets and liabilities, net of effects of business acquisitions/
divestitures:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and other 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 businesses, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of long-term debt
Repayments of long-term debt
Borrowings under revolving credit facility
Repayments under revolving credit facility
Debt issuance costs
Dividends paid
Purchases of treasury stock
Net cash provided by (used in) 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 period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Cash interest payments
Cash income tax payments
Accruals related to purchases of property and equipment
Year Ended July 31,
2019
2018
2017
$
55,042
$
91,041
$
71,378
21,510
20,849
15,562
(2,062)
(1,940)
(23,048)
(28,711)
(2,364)
13,325
(1,232)
66,931
17,473
17,357
9,615
(7,520)
1,076
(3,700)
(3,785)
(5,169)
10,614
(1,090)
15,045
18,407
8,844
118
1,102
(12,860)
887
(957)
7,124
(895)
125,912
108,193
(95,438)
(37,698)
(27,065)
—
3,053
(40,644)
(133,029)
—
(15,207)
50,000
(7,000)
—
(8,350)
(4,741)
14,702
1,834
(49,562)
94,097
—
—
(87,488)
(125,186)
200,000
—
82,300
(208,300)
(2,698)
(7,091)
(7,074)
57,137
(350)
57,513
36,584
44,535
$
94,097
$
47
—
(70,044)
(97,062)
—
—
74,000
(64,000)
—
(5,841)
(6,910)
(2,751)
(163)
8,217
28,367
36,584
9,296
19,024
3,311
$
$
$
5,156
35,251
2,281
$
$
$
3,455
35,858
192
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
(dollar amounts in thousands except share and per share data or as otherwise specified) 41
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Notes to Consolidated Financial Statements.
1.
Business Description
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. Unless otherwise
indicated, references in this Form 10-K to 2019, 2018, 2017 or “fiscal” 2019, 2018, 2017 or other years refer to our fiscal year
ended July 31 of that respective year, and references to 2020 or “fiscal” 2020 refer to our fiscal year ending July 31, 2020.
Cantel is a leading provider of infection prevention and control products and services in the healthcare market, specializing in the
following reportable segments:
Medical: designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a
complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.
Life Sciences: designs, develops, manufactures, sells and installs water purification systems for medical, pharmaceutical and other
bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life science
markets through a worldwide distributor network.
Dental: designs, manufactures, sells, supplies and distributes a broad selection of infection prevention healthcare products, the
majority of which are single-use products used by dental practitioners.
Dialysis: designs, develops, manufactures, sells and services reprocessing systems and sterilants for dialyzers (a device serving
as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis.
See Note 17, “Reportable Segments.”
Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.
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. Certain prior year amounts have been reclassified to conform to
the current year's presentation.
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, 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.
Subsequent Events
We performed a review of events subsequent to July 31, 2019 through the date of issuance of the accompanying consolidated
financial statements. See Note 19, “Subsequent Events.”
(dollar amounts in thousands except share and per share data or as otherwise specified) 42
Cantel Medical Corp.
Revenue Recognition
2019 Annual Report on Form 10-K
Sales are recognized as the performance obligations to deliver products or services are satisfied and are recorded based on the
amount of consideration we expect to receive in exchange for satisfying the performance obligations. Our sales continue to be
recognized primarily when we transfer control to the customer, which can be on the date of shipment or on the date of receipt by
the customer. Products and services are primarily transferred to customers at a point in time, with some transfers of services taking
place over time. A provision for estimated sales returns, discounts and rebates is recognized as a reduction of sales in the same
period that the sales are recognized. Our estimate of the provision for sales returns has been established based on contract terms
with our customers and historical business practices and current trends. Shipping and handling costs incurred after the customer
has obtained control of our products are treated as a fulfillment cost rather than as an additional promised service. Additionally,
in certain U.S. states, we are required to collect sales taxes from our customers, and in certain international jurisdictions, we are
required to collect value added taxes. The tax collected is recorded as a liability until remitted to the taxing authority.
With respect to certain of our customers, rebates are provided. Such rebates, which consist primarily of volume rebates, are provided
for as a reduction of sales at the time of revenue recognition. Such allowances are determined based on estimated projections of
sales volume for the entire rebate periods. If it becomes known that sales volume to customers will deviate from original projections,
the rebate provisions originally established would be adjusted accordingly. We also offer certain volume-based rebates to our
distribution customers, which we record as variable consideration when calculating the transaction price. We use information
available at the time and our historical experience with each customer to estimate the rebate amount by applying the expected
value method. 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 $9,469, $8,401, and $6,291 in fiscal 2019, 2018, and 2017, respectively.
Translation of Foreign Currency Financial Statements
Assets and liabilities of our foreign subsidiaries are translated into U.S. 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.
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 net realizable value. 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
impact the value of our inventories, resulting in the need for additional reserves.
(dollar amounts in thousands except share and per share data or as otherwise specified)
43
Cantel Medical Corp.
Property and Equipment
2019 Annual Report on Form 10-K
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, 3-10 years for software, 5-40 years for buildings and improvements and the shorter of the life of the asset or the life
of the lease for leasehold improvements. Depreciation expense related to property and equipment in fiscal 2019, 2018 and 2017
was $21,510, $17,473 and $15,045, 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 May 1, 2019, because we determined through qualitative factors that the fair values of our
Medical, and Dental segments were more likely than not to be greater than the carrying value, we did not proceed to step one of
the two-step quantitative goodwill impairment test for those two segments. We performed step one of the two-step quantitative
goodwill impairment test for Dialysis due to the continuing shift by our customers from reusable to single-use dialyzers, which is
having an adverse impact on our business and is expected to continue. In addition, we also performed step one of the two-step
quantitative goodwill impairment test for Life Sciences as one of the segment’s key customers has been moving toward a dual
source approach, in combination with a cyclical downturn in this business. 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 reporting units 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 May 1, 2019, because we determined through qualitative factors that the fair values of all of our indefinite
lived intangible assets were more likely than not to be greater than the carrying value, we did not perform a quantitative analysis
for those assets. 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.
We did not recognize any impairment charges for goodwill or indefinite lived intangibles in the years presented.
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. 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, 2019,
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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
44
Cantel Medical Corp.
Customer Relationship Intangible Assets
2019 Annual Report on Form 10-K
Customer-relationship intangible assets are valued using an income-based valuation methodology which included certain
assumptions such as forecasted cash flows, customer attrition rates, terminal growth rates and discount rates. The assumptions
used in the financial forecasts are based on historical data, supplemented by current and anticipated growth rates, management
plans, and market-comparable information. Fair-value determinations require considerable judgment and are sensitive to changes
in underlying assumptions and factors. Preliminary assumptions may change and may result in significant changes to the final
valuation.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized to interest expense over the term of the related credit agreements. As of July 31,
2019 and 2018, such debt issuance costs, net of related amortization, were included as a reduction to long-term debt and amounted
to $2,149 and $2,698, 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 24 months. Additionally, many of our consumables,
accessories, parts and service 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. As of July 31, 2019 and
2018, our warranty reserves are included in accrued expenses in the consolidated balance sheets and amounted to $2,372 and
$3,280, respectively. Our warranty provisions and settlements in fiscal 2019 and 2018 were not material and principally relate to
our endoscope reprocessing and water purification products.
Stock-Based Compensation
Stock-based compensation expense is recognized for any option or stock award grant based upon the fair value of the award. Our
stock options and time-based stock awards are subject to graded vesting in which portions of the award vest ratably over the vesting
period. We recognize compensation expense for the awards with performance conditions using the accelerated attribution method
over the requisite service period for each separately vesting portion of the award when it is probable that the performance condition
will be achieved. We record expense for the awards with market conditions ratably over the vesting period regardless of whether
the market condition is satisfied. We account for forfeitures as they occur, rather than estimate forfeitures over the course of the
vesting period.
We determine the fair value of each time-based stock award and performance-based stock award by using the closing market price
of our common stock on the last trading date immediately prior to the date of grant. We determine the fair value of each award
with market conditions using a Monte Carlo simulation model 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 valuation models is
affected by our stock price as well as assumptions regarding a number of subjective variables. These variables may include, but
are not limited to, the expected price volatility over the term of the award, the expected dividend yield, the expected term of the
award, the probability of meeting performance objectives and the stock price of our peers in the S&P Healthcare Equipment Index.
Advertising Costs
Our policy is to expense advertising costs as they are incurred. Advertising costs charged to expense were $2,885, $4,115 and
$3,694 in fiscal 2019, 2018 and 2017, 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.
(dollar amounts in thousands except share and per share data or as otherwise specified)
45
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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 Germany,
the U.K. 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.
Newly Adopted Accounting Standards
In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” (“ASU 2017-12”)
to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management
activities in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 (our fiscal year
2020), including interim periods within that reporting period. We early adopted ASU 2017-12 effective August 1, 2018. The
adoption of ASU 2017-12 did not have a material impact on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, “(Topic 718) Scope of Modification Accounting,” (“ASU 2017-09”) to provide
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in ASC 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019),
including interim periods within that reporting period. Accordingly, we adopted ASU 2017-09 on August 1, 2018. The adoption
of ASU 2017-09 did not have a material impact on our financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, “(Topic 230) Classification of Certain Cash Receipts and Cash Payments,” (“ASU
2016-15”). This guidance makes eight targeted changes to how cash receipts and cash payments are presented and classified in
the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019).
Accordingly, we adopted ASU 2016-15 on August 1, 2018. The adoption of ASU 2016-15 did not have a material impact on our
financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”), which
supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition” (“ASC 605”).
ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract.
In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2015-14”), which
defers the effective date of ASU 2014-09 by one year to fiscal years beginning after December 15, 2017 (our fiscal year 2019),
including interim periods within that reporting period. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts
with Customers (Topic 606),” (“ASU 2016-12”), which provided narrow scope improvements and practical expedients relating
to ASU 2014-09. We adopted the collective standard (“ASC 606”) on August 1, 2018. See Note 3, “Revenue Recognition” for a
discussion of the impact and required disclosures.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract” (“ASU 2018-15”) to help entities evaluate the accounting for fees paid by a customer
in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes
a software license. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including
interim periods within that reporting period. The adoption of ASU 2018-15 is not expected to have a material impact on our financial
position, results of operations or cash flows.
(dollar amounts in thousands except share and per share data or as otherwise specified)
46
Cantel Medical Corp.
2019 Annual Report on Form 10-K
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement” (“ASU 2018-13”) to modify the disclosure requirements on fair value measurements in ASC 820, “Fair Value
Measurement”. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including
interim periods within that reporting period. The adoption of ASU 2018-13 is not expected to have a material impact on our financial
position, results of operations or cash flows.
In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income” (“ASU 2018-02”) to allow for the reclassification from accumulated other comprehensive income to retained earnings
of stranded tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. ASU 2018-02 is effective for fiscal
years beginning after December 15, 2018 (our fiscal year 2020), including interim periods within that reporting period. The adoption
of ASU 2018-02 is not expected to have a material impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, “(Topic 350) Simplifying the Test for Goodwill Impairment,” (“ASU 2017-04”)
to simplify the test for goodwill impairment. The revised guidance eliminates the existing Step 2 of the goodwill impairment test
which required an entity to compute the implied fair value of its goodwill at the testing date in order to measure the amount of the
impairment charge when the fair value of the reporting unit failed Step 1 of the goodwill impairment test. The guidance will be
applied on a prospective basis on or after the effective date. ASU 2017-04 is effective for fiscal years beginning after December
31, 2019 (our fiscal year 2021) and early adoption is permitted for interim or annual goodwill impairment tests performed on
testing dates after January 1, 2017. The adoption of ASU 2017-04 is not expected to have a material impact on our financial
position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, “(Topic 842) Leases,” (“ASU 2016-02”) which requires lease assets and liabilities
to be recorded on the balance sheet for leases with terms greater than twelve months. We will adopt this ASU and related amendments
on August 1, 2019 and will elect certain practical expedients permitted under the transition guidance. Additionally, we will elect
the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior
periods. We are substantially complete in assessing the transitional impact from adopting the standard; however, we are still
assessing the lessor provisions under the standard but do not expect any material adjustments to the estimated right of use asset
and/or lease liability. Excluding any impact associated with a recently announced acquisition, we currently estimate the impact of
the adoption will result in the recognition of right of use assets and lease liabilities of approximately $30,000 to $35,000 as of
August 1, 2019. The adoption of ASU 2016-02 is not expected to have a material impact on our results of operations or cash flows.
3.
Revenue Recognition
Adoption of “Revenue from Contracts with Customers (ASC 606)”
We adopted ASC 606, effective August 1, 2018, using the modified retrospective method applied to those contracts which were
not completed as of August 1, 2018. Results for reporting beginning after August 1, 2018 are presented under ASC 606, while
prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC 605.
Due to the cumulative impact of adopting ASC 606, we recorded a net increase of $865 to opening retained earnings, net of tax,
as of August 1, 2018. The impact is primarily related to the timing of revenue recognition for the shipment of products in both our
Medical and Life Sciences segments where risk of loss provisions are present (“synthetic FOB destination”). The new standard
does not require us to defer revenue for these products and allows us to recognize revenue at the time of shipment. The cumulative
adjustment to retained earnings also includes the impact of the change in timing of revenue recognition associated with software
licensing arrangements in our Medical segment. Additionally, revenue related to software renewals was historically recognized
on a ratable basis over the license period. Under ASC 606, the license is considered functional intellectual property, and is considered
to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period. As a result, revenue
related to our annual software license renewals has been accelerated. Contract liabilities primarily relate to payments received
from customers in advance of performance under the contract.
As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract.
Under ASC 606, we have elected to expense these costs as incurred when the period of benefit is less than one year. For certain
multi-period contracts, we capitalize these amounts as contract costs, and amortize them based on the contract duration to which
the assets relate, which ranges from two to five years. The amounts at July 31, 2019, were not material. For certain international
contracts with distributors, we recognize a receivable at the point in time in which we have an unconditional right to payment.
Most customers are required to pay a portion of the transaction price in advance and the remaining balance within 30 days of
receiving the related products. Accordingly, we have elected to use the practical expedient which allows us to ignore the possible
existence of a significant financing component within these contracts.
(dollar amounts in thousands except share and per share data or as otherwise specified) 47
Cantel Medical Corp.
2019 Annual Report on Form 10-K
The following table gives information as to the net sales disaggregated by geography and product line:
Net sales by geography
United States
Europe/Africa/Middle East
Asia/Pacific
Canada
Latin America/South America
Total
Net sales by product line
Capital equipment
Consumables
Product service
All other(2)
Year Ended July 31,
2019
2018(1)
$
665,661
$
148,334
66,228
32,152
5,780
918,155
221,668
569,412
122,752
4,323
$
$
$
$
643,744
131,130
57,108
33,524
6,416
871,922
240,153
523,073
106,764
1,932
Total
_______________________________________________
(1) As noted above, prior year amounts have not been adjusted under the modified retrospective method.
(2) Primarily includes software licensing revenues.
$
918,155
$
871,922
Remaining Performance Obligations
As of July 31, 2019, the estimated revenue expected to be recognized in the future related to performance obligations that are
unsatisfied (or partially unsatisfied) was approximately $73,735, primarily within the Medical segment. We expect to recognize
revenue on approximately 50% of these remaining performance obligations in fiscal 2020. These performance obligations primarily
reflect the future product service revenues for multi-period service arrangements.
Contract Liabilities
A summary of contract liabilities activity for the year ended July 31, 2019 follows:
Balance, August 1, 2018
Revenue deferred in current year
Deferred revenue recognized
Foreign currency translation
Balance, July 31, 2019
Contract liabilities included in Other long-term liabilities
Deferred revenue
Contract
Liabilities
29,015
61,996
(61,913)
(863)
28,235
(395)
27,840
$
$
$
Our contract liabilities arise primarily in the Medical and Life Sciences segments when payment is received upfront for various
multi-period extended service arrangements. We expect to recognize substantially all of this revenue over the next twelve months.
4.
Acquisitions
Fiscal 2019
Omnia: On February 1, 2019, we purchased all of the issued and outstanding stock of Omnia S.p.A. (“Omnia”), an Italian-based
market leader in dental surgical consumables solutions, for total consideration (net of cash acquired), excluding acquisition-related
costs, of $19,808, consisting of $16,598 of cash and $3,210 of stock consideration, plus additional earn-outs ranging from zero to
a maximum of $5,800, which is payable upon the achievement of certain performance-based financial targets. Omnia’s business
consists of a wide-ranging portfolio of sutures, irrigation tubing and customized dental surgical procedure kits, with a focus on
procedure room set-up and cross-contamination prevention, and is included in our Dental segment.
(dollar amounts in thousands except share and per share data or as otherwise specified) 48
Cantel Medical Corp.
2019 Annual Report on Form 10-K
CES business: On August 1, 2018, we acquired certain net assets of Stericycle Inc. related to its controlled environmental solutions
business (“CES business”) for total cash consideration, excluding acquisition-related costs, of $17,047. The CES business is a
leading provider of testing and certification, environmental monitoring and decontamination services for clean rooms and other
controlled environments to ensure safety, regulatory compliance and quality control, and is included in our Life Sciences segment.
Fiscal 2018
Aexis: On March 21, 2018, we purchased all of the issued and outstanding stock of Aexis Medical BVBA (“Aexis”), which is
based in Belgium, for total consideration, excluding acquisition-related costs, of $21,600, consisting of $20,308 of cash
consideration (net of cash acquired), plus contingent consideration ranging from zero to a maximum of $1,850, which is payable
upon the achievement of certain purchase order targets through March 21, 2020. Aexis specializes in advanced software solutions
focused on the tracking and monitoring of instrument reprocessing for hospitals and healthcare professionals, and is included in
our Medical segment.
BHT Group: On August 23, 2017, we purchased all of the issued and outstanding stock of BHT Hygienetechnik Holding GmbH
(“BHT Group”), a leader in the German market in automated endoscope reprocessing and related equipment and services for total
consideration (net of cash acquired), excluding acquisition related costs, of $60,216. BHT Group consists of a portfolio of high-
quality automatic endoscope reprocessors, advanced endoscope storage and drying cabinets (products globally distributed by our
Company prior to the acquisition under an agreement with BHT Group), washer-disinfectors for central sterile applications,
associated technical service and parts as well as flexible endoscope repair services. BHT Group is included in our Medical segment.
The following table presents our purchase price allocation of our material acquisitions (each of which was accounted for as a
business combination in accordance with ASC Topic 805, “Business Combinations”):
Purchase Price Allocation
Purchase Price:
Cash paid
Fair value of contingent consideration
Common stock issued
Total
Allocation:
Property and equipment
Amortizable intangible assets:
Customer relationships
Technology
Brand names
Goodwill
Deferred income taxes
Other working capital
Contingent consideration
Long-term debt
Total
2019
2018
Omnia
CES Business(1)
(Preliminary)
(Preliminary)
Aexis
(Final)
BHT Group
(Final)
16,598
$
17,047
$
20,308
$
60,216
—
3,210
—
—
1,292
—
—
—
19,808
$
17,047
$
21,600
$
60,216
1,285
10,206
1,257
1,600
11,340
(2,346)
1,673
—
(5,207)
19,808
539
8,100
—
—
6,137
—
2,271
—
—
130
835
1,800
4,600
—
17,092
(1,639)
909
(1,292)
—
12,500
6,200
—
40,934
(5,881)
5,628
—
—
$
17,047
$
21,600
$
60,216
$
$
$
_______________________________________________
(1) The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.
Unaudited Pro Forma Summary of Operations
The acquisitions above, both individually and in the aggregate, were not material to our consolidated results of operations or
financial position and, therefore, pro forma financial information is not presented.
(dollar amounts in thousands except share and per share data or as otherwise specified)
49
Cantel Medical Corp.
5.
Inventories, Net
A summary of inventories, net, is as follows:
Raw materials and parts
Work-in-process
Finished goods
Less: reserve for excess and obsolete inventory
Total inventories, net
6.
Property and Equipment, Net
A summary of property and equipment, net, is as follows:
Land, buildings and improvements
Furniture and equipment
Leasehold improvements
Software
Construction in process
Less: accumulated depreciation
Total property and equipment, net
7.
Derivatives
Foreign Currency
2019 Annual Report on Form 10-K
July 31,
2019
2018
69,498
$
5,801
73,050
(10,115)
138,234
$
49,054
13,189
53,948
(8,599)
107,592
$
$
July 31,
2019
2018
$
81,556
$
130,852
14,428
33,869
38,728
(114,191)
185,242
$
$
50,162
112,661
9,544
8,587
26,003
(95,540)
111,417
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, 2019 and 2018, 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, British Pound, Singapore dollar, Canadian dollar, Australian dollar, Chinese Renminbi and Sri
Lankan Rupee against the U.S. 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 U.S. 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, Canadian dollar, Australian dollar,
Singapore dollar and Chinese Renminbi relative to the U.S. dollar on the conversion of such net assets into the functional currencies,
we enter into short-term forward contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars, Singapore
dollars and Chinese Renminbi, which contracts are one-month in duration. These short-term contracts are designated as fair value
hedge instruments. There were seven foreign currency forward contracts with an aggregate notional value of $78,264 at July 31,
2019, and seven foreign currency forward contracts with an aggregate notional value of $30,159 at July 31, 2018, which covered
certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. 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 years ended July 31,
2019, 2018 and 2017, such forward contracts offset the impact on operations relating to certain assets and liabilities that were
denominated in currencies other than each entity’s functional currency. This resulted in an immaterial amounts of net currency
conversion gains, net of tax, on the hedged items for each of those fiscal years. Gains and losses related to hedging contracts to
(dollar amounts in thousands except share and per share data or as otherwise specified)
50
Cantel Medical Corp.
2019 Annual Report on Form 10-K
buy Euros, British Pounds, Canadian dollars, Australian dollars, Singapore dollars and Chinese Renminbi 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 Sri Lankan Rupee relative to the U.S. dollar because the overall foreign
currency exposures relating to this currency is currently not deemed significant.
Variable Rate Borrowings
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, on April 9,
2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps
fixed interest rates at 2.265%. As of July 31, 2019, we had a short term asset of $486 recorded in prepaid expenses and other current
assets, and a long term asset of $2,826 recorded in other assets, which represent the fair value of the interest rate swaps. The fair
value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods.
8.
Fair Value Measurements
Fair Value Hierarchy
We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”), for our financial assets and
liabilities that are re-measured and reported at fair value each reporting period and our nonfinancial assets and liabilities that are
re-measured and reported at fair value on a non-recurring basis. We define fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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.
For the Aexis acquisition, additional purchase price payments ranging from $0 to $1,850 are contingent upon the achievement of
certain purchase order targets through March 21, 2020. We estimated the original fair value of the contingent consideration using
the weighted probabilities of the possible contingent payments. At the date of acquisition, we estimated the original fair value of
the contingent consideration to be $1,292. We are required to reassess the fair value of contingent payments on a periodic basis.
The significant inputs used in these estimates include numerous possible scenarios for the payments based on the contractual terms
of the contingent consideration, for which probabilities are assigned to each scenario. Given the short term nature of the financial
instrument, the contingent consideration will not be discounted to present value. Although we believe our assumptions are
reasonable, different assumptions or changes in the future may result in different estimated amounts.
In connection with the Jet Prep Ltd. (“Jet Prep”) acquisition in fiscal 2014, we assumed a contingent obligation payable to the
Israeli Government based on future sales. This fair value measurement was based on significant inputs not observed in the market
and thus represent Level 3 measurements. In November 2017, the Israeli Government formally notified us that they would forgive
any future amounts payable due to our decision to exit the Jet Prep business. During the first quarter of fiscal 2018, we reduced
the fair value of this obligation to $0. See Note 12, “Commitments and Contingencies.”
(dollar amounts in thousands except share and per share data or as otherwise specified)
51
Cantel Medical Corp.
2019 Annual Report on Form 10-K
The fair values of our financial instruments measured on a recurring basis were categorized as follows:
Assets:
Cash and cash equivalents:
Money markets
Prepaid expenses and other current assets:
Interest rate swap
Other Assets:
Interest rate swap
Total assets
Liabilities:
Other long-term liabilities:
Contingent consideration
Total liabilities
Assets:
Cash and cash equivalents:
Money markets
Total assets
Liabilities:
Other long-term liabilities:
Contingent consideration
Total liabilities
Level 1
Level 2
Level 3
Total
July 31, 2019
104
$
— $
— $
—
—
486
2,826
—
—
104
$
3,312
$
— $
104
486
2,826
3,416
—
— $
—
— $
1,411
1,411
$
1,411
1,411
Level 1
Level 2
Level 3
Total
July 31, 2018
104
104
$
$
— $
— $
— $
— $
104
104
—
— $
—
— $
1,298
1,298
$
1,298
1,298
$
$
$
$
$
$
A reconciliation of our liabilities that are measured and recorded at fair value on a recurring basis using significant unobservable
inputs (Level 3) for fiscal 2019, 2018 and 2017 is as follows:
Aexis Medical
Contingent
Consideration
Jet Prep
Assumed
Contingent
Obligation
Cantel Medical
(U.K.)
Contingent
Guaranteed
Obligation
Total
Balance, August 1, 2016
$
— $
1,138
$
Income included in general and administrative expenses
Net purchases, issuances, sales and settlements
Balance, July 31, 2017
Original fair value of contingent consideration
Loss included in general and administrative expenses
Net purchases, issuances, sales and settlements
Balance, July 31, 2018
Loss included in general and administrative expense
—
—
—
1,292
6
—
1,298
113
Balance, July 31, 2019
$
1,411
$
—
—
1,138
—
—
(1,138)
—
—
— $
$
441
(265)
(176)
—
—
—
—
—
—
— $
1,579
(265)
(176)
1,138
1,292
6
(1,138)
1,298
113
1,411
Disclosure of Fair Value of Financial Instruments
As of July 31, 2019 and 2018, the carrying amounts for cash and cash equivalents (excluding money markets), accounts
receivable and accounts payable approximated fair value due to the short maturity of these instruments. As of July 31, 2019 and
(dollar amounts in thousands except share and per share data or as otherwise specified)
52
Cantel Medical Corp.
2019 Annual Report on Form 10-K
2018, the carrying value of our outstanding borrowings under our credit facility approximated the fair value of these obligations
as the borrowing rates reflect prevailing market interest rates.
9.
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 12 years. Amortization expense related to
intangible assets was $20,849, $17,357 and $18,407 for fiscal 2019, 2018 and 2017, respectively. Our intangible assets that have
indefinite useful lives, and therefore are not amortized, consist of trademarks and trade names.
Our intangible assets consist of the following:
July 31, 2019
Accumulated
Amortization
Gross
Net
Gross
July 31, 2018
Accumulated
Amortization
Intangible assets with finite lives(1):
Customer relationships(2)
Technology(3)
Brand names(2)
Non-compete agreements(4)
Patents and other registrations(5)
Trademarks and tradenames
Total intangible assets
$ 146,204
$
60,032
8,361
2,880
2,866
220,343
6,278
$ 226,621
$
(54,866) $
(24,081)
(3,256)
(1,653)
(1,252)
(85,108)
—
91,338
$ 133,347
$
35,951
54,585
5,105
1,227
1,614
8,141
3,060
2,826
135,235
201,959
(45,618) $
(19,836)
(3,857)
(1,628)
(1,179)
(72,118)
—
6,278
(85,108) $ 141,513
7,520
$ 209,479
$
7,520
(72,118) $ 137,361
Net
87,729
34,749
4,284
1,432
1,647
129,841
_______________________________________________
(1) During fiscal 2019, we wrote off $6,087 of fully amortized intangible assets.
(2) Weighted average amortization period remaining of 13 years.
(3) Weighted average amortization period remaining of 10 years.
(4) Weighted average amortization period remaining of 15 years.
(5) Weighted average amortization period remaining of 18 years.
During fiscal 2017, we decided to exit the Jet Prep business that was acquired in fiscal 2014. The Jet Prep acquisition was a fully
integrated business within our Medical segment. The useful life of the technology related intangible asset was revised to its
respective cease use date, which resulted in accelerated amortization of approximately $2,401 that was recorded in the consolidated
statement of income.
We expect to recognize $18,025, $17,706, $17,324, $16,294 and $15,427 of amortization expense related to intangible assets in
fiscal 2020, 2021, 2022, 2023 and 2024, respectively. The expected amortization expense reflects those purchased intangible assets
on our consolidated balance sheet as of July 31, 2019.
Goodwill changed during fiscal 2019 and 2018 as follows:
Balance, August 1, 2017
Acquisitions
Foreign currency translation
Balance, July 31, 2018
Acquisitions
Divestitures
Foreign currency translation
Balance, July 31, 2019
Medical
Life Sciences
Dental
Dialysis
Total
Goodwill
$
129,945
$
59,088
$
114,279
$
8,133
$
311,445
58,026
(1,281)
186,690
—
—
(6,493)
180,197
$
$
—
(163)
58,925
6,137
(491)
(90)
64,481
$
—
—
114,279
11,340
—
(321)
125,298
—
—
8,133
—
—
—
$
8,133
$
58,026
(1,444)
368,027
17,477
(491)
(6,904)
378,109
(dollar amounts in thousands except share and per share data or as otherwise specified)
53
Cantel Medical Corp.
10.
Financing Arrangements
Our long-term debt consists of the following:
Revolving credit loans outstanding
Tranche A term loan outstanding
Unamortized debt issuance costs
Total long-term debt, net of unamortized debt issuance costs
Current portion of long-term debt
Long-term debt, net of unamortized debt issuance costs and excluding current portion
2019 Annual Report on Form 10-K
July 31,
2019
2018
$
$
43,000
190,000
(2,149)
230,851
(10,000)
220,851
$
$
—
200,000
(2,698)
197,302
(10,000)
187,302
On June 28, 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “2018 Credit Agreement”). The Amended
Credit Agreement refinances our credit facility under the Third Amended and Restated Credit Agreement (the “Existing Credit
Agreement”) dated March 4, 2011, to include a $200,000 tranche A term loan and a $400,000 revolving credit facility. Subject to
the satisfaction of certain conditions precedent, including the consent of the lenders, we may from time to time increase its borrowing
capacity under the revolving credit facility or tranche A term loan by an aggregate amount not to exceed $300,000. The 2018 Credit
Agreement expires on June 28, 2023. Additionally, subject to certain restrictions and conditions (i) any of our domestic or foreign
subsidiaries may become borrowers and (ii) borrowings may occur in multi-currencies.
As of July 31, 2019, we had $190,000 of term loan A borrowings outstanding and $43,000 revolver borrowings under the 2018
Credit Agreement. The tranche A term loan is subject to principal amortization, with $10,000 due and payable in each of fiscal
2019, 2020, 2021 and 2022, with the remaining $160,000 due and payable at maturity on June 28, 2023. During fiscal 2019, we
made principal payments of $10,000. We also settled $5,207 of debt which was assumed as part of the Omnia acquisition.
Borrowings under the 2018 Credit Agreement bear interest at rates ranging from 0.00% to 1.00% above prime rate for base rate
borrowings, or at rates ranging from 1.00% to 2.00% above the London Interbank Offered Rate (“LIBOR”), depending upon our
“Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes,
depreciation and amortization, and as further adjusted under the terms of the 2018 Credit Agreement (“Consolidated EBITDA”). The
Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates ranging from 0.20%
to 0.35%, depending on our Consolidated Leverage Ratio. At July 31, 2019, the lender’s base rate was 5.50% and the LIBOR rate
was 2.23%. 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, 2019. The 2018 Credit Agreement also provides for
fees on the unused portion of our facility at rates ranging from 0.20% to 0.35%, depending upon our Consolidated Leverage Ratio,
which was 1.26x at July 31, 2019. At July 31, 2019, the interest rate on our outstanding borrowings was approximately 3.48%.
The 2018 Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is
secured by (i) substantially all assets of Cantel and its U.S.-based subsidiaries, (ii) a pledge by Cantel of all of the outstanding
shares of its U.S.-based subsidiaries and 65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii)
a guaranty by Cantel’s domestic subsidiaries. We are in compliance with all financial covenants under the 2018 Credit Agreement.
11.
Income Taxes
On December 22, 2017, the U.S. government enacted wide-ranging tax legislation, the Tax Cuts and Jobs Act (the “2017 Tax Act”).
The 2017 Tax Act significantly revised U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory
income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition
tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income (“GILTI”),
(2) the Foreign Derived Intangible Income (“FDII”) deduction, and (3) the Base Erosion Anti-Abuse Tax (“BEAT”), and (d)
eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain
employee expenses.
ASC 740, “Income Taxes,” requires the effects of changes in tax laws to be recognized in the period in which the legislation is
enacted. However, due to the complexity and significance of the 2017 Tax Act’s provisions, the SEC staff issued Staff Accounting
Bulletin No. 118 (“SAB 118”), which allows companies to record the tax effects of the 2017 Tax Act on a provisional basis and
then, if necessary, subsequently adjust such amounts during a limited measurement period as more information becomes available.
The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its
(dollar amounts in thousands except share and per share data or as otherwise specified) 54
Cantel Medical Corp.
2019 Annual Report on Form 10-K
accounting, but cannot extend beyond one year from enactment. As a result, we provided a provisional estimate of the effect of
the 2017 Tax Act for the fiscal year ended July 31, 2018, and recorded a net benefit of $8,657 due to the impact on our deferred
taxes on the basis of the actual fiscal 2018 results of operations. The measurement period provided by SAB 118 concluded during
the second quarter of fiscal 2019, and no material adjustments were made to the provisional estimates recorded.
As part of U.S. tax reform, the 2017 Tax Act imposed a one-time transition tax on certain accumulated positive foreign earnings
(net of foreign deficits) across all non-U.S. subsidiaries, as computed under U.S. tax principles. As of December 31, 2017, our
non-U.S. subsidiaries were in a net foreign deficit position in the aggregate, and therefore no accrual for the transition tax was
made.
Section 15 of the Internal Revenue Code (the “Code”) governs rate changes and was not amended by the 2017 Tax Act. Section
15 requires a blended tax rate for fiscal-year taxpayers for their fiscal year that includes the effective date of the rate change, which
was January 1, 2018. As a result of the 2017 Tax Act, we revised our estimated annual effective rate to reflect the change in the
U.S. federal statutory rate by computing a tentative tax under both rates, and then prorating the tentative tax based on the number
of days with and without the rate change to arrive at a blended tax rate of 26.9%, as required by the Code. This blended rate was
applied for fiscal 2018 (beginning with the second quarter) and the new U.S. federal statutory rate of 21% applies to fiscal 2019
and beyond.
As noted above, the 2017 Tax Act also establishes new tax laws that will affect the fiscal year ending July 31, 2019, which include
the GILTI provision, the FDII deduction, a new minimum tax related to payments to foreign subsidiaries and affiliates known as
BEAT and certain employee expense deductions. The provisional estimates were based on our understanding of the 2017 Tax Act
and other information available at the time of the estimates, including assumptions and expectations about future events, such as
projected financial performance, and are subject to further refinement as additional information becomes available, including
potential new or interpretative guidance issued by the SEC, the FASB, or Internal Revenue Service (“IRS”).
The consolidated effective tax rate was 26.9%, 22.5% and 32.8% for fiscal 2019, 2018 and 2017, respectively, and reflects income
tax expense for our U.S. and international operations at their respective statutory rates.
The provision for income taxes consists of the following:
United States:
Federal
State
International
Total
2019
Year Ended July 31,
2018
2017
Current
Deferred
Current
Deferred
Current
Deferred
$
$
13,494
$
683
$
24,288
$
3,976
4,869
(15)
(2,730)
5,078
4,626
22,339
$
(2,062) $
33,992
$
(7,308) $
491
(703)
(7,520) $
28,900
$
4,352
1,545
34,797
$
2,020
261
(2,223)
58
The geographic components of income (loss) before income taxes are as follows:
United States
International
Total
Year Ended July 31,
2019
2018
2017
$
$
68,342
6,977
75,319
$
$
115,697
1,816
117,513
$
$
108,329
(2,096)
106,233
(dollar amounts in thousands except share and per share data or as otherwise specified) 55
Cantel Medical Corp.
2019 Annual Report on Form 10-K
The consolidated effective income tax rate differed from the U.S. statutory tax rate of 21.0% in fiscal 2019, 26.9% in fiscal 2018
and 35.0% in 2017 due to the following:
Expected statutory tax(1)
Differential attributable to:
Foreign operations
State and local taxes
Domestic production deduction
Acquisition-related items, net
Impact of tax legislation on deferred taxes
R&E tax credit
Executive compensation
Excess tax benefits
Valuation allowance
Other
Consolidated effective income tax rate
Year Ended July 31,
2019
2018
2017
21.0 %
26.9 %
35.0 %
0.8 %
4.8 %
— %
0.1 %
(0.1)%
(1.0)%
1.4 %
(0.7)%
0.1 %
0.5 %
26.9 %
0.6 %
3.7 %
(1.8)%
— %
(7.4)%
(0.7)%
0.2 %
(1.7)%
2.4 %
0.3 %
22.5 %
— %
3.9 %
(2.7)%
0.1 %
— %
(1.4)%
0.3 %
(2.2)%
— %
(0.2)%
32.8 %
_______________________________________________
(1) During fiscal 2018, we revised our estimated annual rate to reflect a blended U.S. federal statutory rate of 26.9% as compared to 35.0%.
(dollar amounts in thousands except share and per share data or as otherwise specified) 56
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Tax assets and liabilities, shown before and after jurisdictional netting of deferred tax assets (liabilities), are comprised of the
following:
July 31,
2019
2018
Deferred tax assets:
Accrued expenses
Inventories
Accounts receivable
Other long-term liabilities
Stock-based compensation
Capital investment
Domestic NOLs
Foreign NOLs
Subtotal
Valuation allowance
Deferred tax liabilities:
Property and equipment
Intangible assets
Goodwill
Net deferred income taxes
Reported in Consolidated Balance Sheets as:
Deferred income taxes (assets)
Deferred income taxes (liabilities)
$
4,175
$
5,408
593
211
3,586
426
137
10,284
24,820
(5,701)
19,119
(11,342)
(21,156)
(11,618)
(44,116)
(24,997) $
5,354
3,165
306
103
2,700
426
—
8,605
20,659
(6,358)
14,301
(7,352)
(21,300)
(10,362)
(39,014)
(24,713)
$
4,281
(29,278)
(24,997) $
2,911
(27,624)
(24,713)
$
$
$
For foreign tax reporting purposes, our Net Operating Losses (“NOLs”) are $10,421 and $8,605 as of July 31, 2019 and 2018,
respectively, which originated primarily from our foreign acquisitions and operations. 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 of $5,701 for these foreign NOLs, which are primarily associated with certain early-stage foreign operations, as well
as $2,785 recorded in fiscal 2018 relating to pre-acquisition losses attributed to our U.K. operations. Furthermore, the accumulated
loss is also related to the exit of the Jet Prep business which is more fully described in Note 9, “Intangibles and Goodwill.” We
believe it is more likely than not that we will be unable to utilize these NOLs.
During fiscal 2019 and 2018, no dividends were repatriated from our foreign subsidiaries. As a result of the mandatory one-time
transition tax required under the 2017 Tax Act, all of the undistributed earnings of our foreign subsidiaries are deemed repatriated
and considered previously taxed income (“PTI”). Additionally, we continue to be indefinitely reinvested and continue to evaluate
our assertion for certain legal entities. Accordingly, deferred taxes are not provided on undistributed earnings of foreign subsidiaries
that are indefinitely reinvested. Determining the tax liability that would arise if these earnings were remitted is not practicable. As
of July 31, 2019, the cumulative amount of such undistributed earnings, inclusive of PTI, indefinitely reinvested outside the U.S.
was approximately $45,566.
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. Our policy is to record potential interest and penalties
related to income tax positions in income tax expense in our consolidated financial statements. However, such amounts have been
(dollar amounts in thousands except share and per share data or as otherwise specified)
57
Cantel Medical Corp.
2019 Annual Report on Form 10-K
relatively insignificant due to the nominal amount of our unrecognized tax benefits relating to uncertain tax positions. We have
uncertain tax positions of $432, primarily related to acquisitions, as of July 31, 2019 and $0 as of July 31, 2018.
Although we remain subject to audit by the IRS for fiscal years ended July 31, 2016 and forward, we are currently under IRS audit
only for fiscal year 2017. 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, 2013.
12.
Commitments and Contingencies
Operating Leases
We have several non-cancelable operating leases, primarily for our corporate headquarters, certain of our leased manufacturing
facilities, warehouses, office space and equipment. Total rental expense related to our operating leases was $9,601, $8,801 and
$7,715 for fiscal 2019, 2018 and 2017, respectively.
As of July 31, 2019, future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms
in excess of one year) for the periods set forth below were as follows:
Fiscal year ending:
2020
2021
2022
2023
2024
Thereafter
Total
Contingent Consideration
Total
9,099
7,671
6,021
5,659
5,159
15,251
48,860
$
$
As of July 31, 2019, we had $1,411 recorded related to the Aexis acquisition, which is for the estimated fair value of contingent
consideration payable upon the achievement of certain purchase order targets through March 21, 2020. During fiscal 2017, we
decided to exit the Jet Prep business that was acquired in fiscal 2014. At the time of the acquisition, we assumed a contingent
obligation payable to the Israeli Government based on future sales. In November 2017, the Israeli Government formally notified
us that they would forgive any future amounts payable due to our decision to exit the Jet Prep business. As a result of this formal
notification, we reduced the $1,138 contingent obligation to $0 during the first quarter of fiscal 2018, resulting in a benefit through
other income for the fiscal year ended July 31, 2018.
Legal Proceedings
In May 2017, Cantel Medical (UK) Limited and Cantel (UK) Limited filed a lawsuit in the U.K. High Court of Justice against
ARC Medical Design Limited (“ARC”) seeking a judgment of invalidity on two of ARC’s patents and additionally/alternatively
a declaration of non-infringement of our AmplifEYETM Endoscopic device. ARC filed counterclaims alleging that the
AmplifEYETM device infringed the two patents as well as registered community design marks and unregistered design rights that
ARC had in its EndocuffTM and Endocuff VisionTM devices. In February 2018, the trial judge entered a judgment in favor of ARC,
and we decided not to appeal the decision. We entered into a settlement agreement with ARC in March 2018 under which we
agreed not to make, use, sell or offer to sell the AmplifEYETM device in the European Union until ARC’s rights expire, and
reimbursed ARC for a portion of their legal costs. During fiscal 2018, we recorded $2,608 of litigation costs within selling, general
and administrative expenses associated with this matter.
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.
(dollar amounts in thousands except share and per share data or as otherwise specified) 58
Cantel Medical Corp.
2019 Annual Report on Form 10-K
13.
Accumulated Other Comprehensive Loss
The components and changes in accumulated other comprehensive loss for fiscal 2019, 2018 and 2017 were as follows:
Balance, August 1, 2016
Other comprehensive income
Balance, July 31, 2017
Other comprehensive loss
Balance, July 31, 2018
Other comprehensive (loss) income
Balance, July 31, 2019
14.
Earnings Per Common Share
Foreign Currency
Translation
Adjustments
Changes in Fair
Value of Interest
Rate Swaps
Tax effects
Total
$
$
(11,795) $
1,895
(9,900)
(1,556)
(11,456)
(13,287)
(24,743) $
— $
— $
—
—
—
—
3,312
3,312
$
—
—
—
—
(766)
(766) $
(11,795)
1,895
(9,900)
(1,556)
(11,456)
(10,741)
(22,197)
Basic Earnings Per Common Share (“EPS”) is computed based upon the weighted average number of common shares outstanding
for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus
the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common
stock for the year. We include participating securities (nonvested share-based payment awards that contain non-forfeitable rights
to dividends or dividend equivalents) in the computation of EPS pursuant to the two-class method. Our participating securities
consist solely of nonvested restricted stock awards, which have contractual participation rights equivalent to those of stockholders
of unrestricted common stock. The two-class method of computing earnings per share is an allocation method that calculates
earnings per share for common stock and participating securities.
The following table sets forth the computation of basic and diluted EPS available to stockholders of common stock (excluding
participating securities):
Numerator for basic and diluted earnings per share:
Net income
Less income allocated to participating securities
Net income available to common shareholders
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
Earnings per share attributable to common stock:
Basic earnings per share
Diluted earnings per share
Stock options excluded from weighted average dilutive common shares
outstanding because their inclusion would have been antidilutive
$
$
$
$
Year Ended July 31,
2019
2018
2017
55,042
(51)
54,991
$
$
91,041
(320)
90,721
$
$
71,378
(431)
70,947
41,700,926
41,567,722
41,468,487
56,190
67,356
74,278
41,757,116
41,635,078
41,542,765
1.32
1.32
$
$
2.18
2.18
$
$
—
—
1.71
1.71
—
(dollar amounts in thousands except share and per share data or as otherwise specified) 59
Cantel Medical Corp.
2019 Annual Report on Form 10-K
A reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined
above, to our total weighted average number of shares and common stock equivalents, including participating securities, is set
forth in the following table:
Denominator for diluted earnings per share - weighted average number of
shares and common stock equivalents attributable to common stock
Participating securities
Total weighted average number of shares and common stock equivalents
attributable to both common stock and participating securities
Year Ended July 31,
2019
2018
2017
41,757,116
38,905
41,635,078
148,700
41,542,765
254,727
41,796,021
41,783,778
41,797,492
15.
Stock-Based Compensation
2016 Equity Incentive Plan
On January 7, 2016, we terminated the Cantel Medical Corp. 2006 Equity Incentive Plan (the “2006 Plan”) and adopted the Cantel
Medical Corp. 2016 Equity Incentive Plan (the “2016 Plan”). As a result, no further options or awards will be granted under the
2006 Plan. The 2016 Plan provides for the granting of stock options, stock appreciation rights (“SARs”), restricted stock awards,
restricted stock units (“RSUs”) and performance-based awards to our employees, independent contractors and consultants. It also
provides the flexibility to grant equity-based awards to our non-employee directors. The 2016 Plan does not permit the granting
of discounted options or discounted stock appreciation rights.
The maximum number of shares as to which equity awards may be granted under the 2016 Plan is 1,200,000 shares. The 2016
Plan will terminate on the date of our annual meeting of stockholders following the close of our fiscal year ending in 2025, unless
terminated earlier by the Board of Directors. Stock awards under this plan:
will be granted at the closing market price at the time of the grant,
will include terms which may not exceed ten years, subject to certain exceptions, and
•
•
• may be granted in the form of restricted stock and RSUs, performance awards, or dividends.
Stock awards outstanding under the 2016 Plan are subject to risk of forfeiture solely due to an employment length-of-service
restriction, with such restriction lapsing as to one-third of the shares of each of the first three anniversaries of the grant date subject
to being employed through such vesting date. At July 31, 2019, 307,153 unvested restricted stock shares were outstanding under
the 2016 Plan. No options were outstanding under the 2016 Plan. At July 31, 2019, 755,429 shares are collectively available
pursuant to restricted stock and other stock awards, stock options and SARs.
2006 Equity Incentive Plan
A total of 5,591,000 shares of common stock were granted under the 2006 Plan, of which 2,700,000 shares were authorized for
issuance pursuant to stock options and stock appreciation rights and 2,891,000 shares were authorized for issuance pursuant to
restricted stock and other stock awards. 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 through such vesting date. At July 31, 2019, options to purchase
40,000 shares of common stock were outstanding, and no unvested restricted stock shares were outstanding under the 2006 Plan.
The following table shows the components of stock-based compensation expense recognized in the consolidated statements of
income:
Cost of sales
Operating expenses:
Selling
General and administrative
Research and development
Total operating expenses
Stock-based compensation before income taxes
$
15,562
$
9,615
$
(dollar amounts in thousands except share and per share data or as otherwise specified)
Year Ended July 31,
2019
2018
2017
$
1,010
$
663
$
371
2,428
11,828
296
14,552
1,458
7,292
202
8,952
1,582
6,774
117
8,473
8,844
60
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Our stock options and time-based stock awards are subject to graded vesting in which portions of the awards vest at different times
during the vesting period. We recognize compensation expense for awards subject to graded vesting using the straight-line basis
over the vesting period.
In October 2016, we granted for the first time to certain employees both equity awards with performance conditions and equity
awards with market conditions. The actual number of equity awards earned and eligible to vest will be determined based on the
level of achievement against budgeted revenue and a defined gross profit percentage or based on the level of achievement against
budgeted earnings per share, with respect to the awards with performance conditions, and our 3-year relative total stockholder
return performance as measured against the S&P Healthcare Equipment Index, with respect to the awards with market conditions.
The maximum share attainment of these awards are 200% of the initial granted shares. We recognize compensation expense for
the awards with performance conditions using the accelerated attribution method over the requisite service period for each separately
vesting portion of the award when it is probable that the performance condition will be achieved. We record expense for the awards
that are subject to market conditions ratably over the vesting period regardless of whether the market condition is satisfied.
As of July 31, 2019, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock
options and restricted stock awards was $13,874 with a remaining weighted average period of 12 months over which such expense
is expected to be recognized. The majority of our nonvested awards relate to restricted stock awards. We account for forfeitures
as they occur, rather than estimate expected forfeitures over the vesting period.
We determine the fair value of each time-based stock award and performance-based stock award by using the closing market price
of our common stock on the date of grant. We determine the fair value of each stock award with market conditions using a Monte
Carlo simulation on the date of grant using the following assumptions:
Volatility of common stock
Average volatility of peer companies
Average correlation coefficient of peer companies
Risk-free interest rate
A summary of nonvested stock award activity for fiscal 2019, 2018 and 2017 follows:
2019
2018
27.54%
36.55%
27.18%
2.93%
26.60%
33.72%
32.26%
1.62%
August 1, 2016
Granted
Vested(1)
Forfeited
July 31, 2017
Granted
Vested(1)
Forfeited
July 31, 2018
Granted
Vested(1)
Forfeited
July 31, 2019
Number of
Time-based
Shares
Number of
Performance-
based Shares
Number of
Market-based
Shares
Number of
Total Shares
Weighted
Average Fair
Value
331,367
86,305
(214,932)
(5,922)
196,818
94,309
(115,943)
(6,864)
168,320
188,431
(105,516)
(16,371)
234,864
—
16,960
(725)
—
16,235
17,486
(5,845)
(1,800)
26,076
35,981
(13,327)
(8,520)
40,210
—
331,367
$
9,800
(555)
—
9,245
10,465
—
(2,000)
17,710
25,320
(5,265)
(5,686)
32,079
$
113,065
(216,212) $
(5,922) $
$
222,298
$
122,260
(121,788) $
(10,664) $
$
212,106
249,732
$
(124,108) $
(30,577) $
$
307,153
46.09
81.77
43.62
59.40
66.28
101.74
60.25
95.09
88.87
85.16
80.44
96.54
88.99
_______________________________________________
(1) The aggregate fair value of all nonvested stock awards which vested was approximately $9,985, $7,338 and $9,431 in fiscal 2019, 2018
and 2017, respectively.
(dollar amounts in thousands except share and per share data or as otherwise specified) 61
Cantel Medical Corp.
2019 Annual Report on Form 10-K
A summary of stock option activity for fiscal 2019, 2018 and 2017 follows:
Number of shares
Weighted Average
Exercise Price
Weighted Average
Contractual Life
Remaining
Aggregate
Intrinsic Value
Outstanding at August 1, 2016
Exercised
Outstanding at July 31, 2017
Exercised
Outstanding at July 31, 2018
Exercised
Outstanding at July 31, 2019
Exercisable at July 31, 2019
122,500
$
— $
$
122,500
(52,500) $
70,000
$
(30,000) $
$
40,000
$
40,000
29.36
—
29.36
17.04
38.60
31.81
43.70
43.70
0.57 years
0.57 years
$
$
1,943
1,943
In fiscal 2019, 2018 and 2017, 5,000, 13,333 and 23,333, respectively, options vested, with an aggregate fair value of approximately
$277, $226 and $349, respectively. At July 31, 2019, 2018 and 2017, there were 40,000, 70,000 and 122,500, respectively,
outstanding options with an aggregate fair value of $1,943, $3,788 and $5,493, respectively. At July 31, 2019 and 2018, all of the
outstanding options had vested or were expected to vest in future periods.
We do not currently have a publicly announced stock repurchase program. All of the shares purchased during fiscal 2019, 2018
and 2017 represent shares surrendered 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 fiscal 2019, 2018 and 2017, such purchases amounted to
54,176, 72,058 and 89,607 shares at a total average price per share of $87.51, $98.16 and $77.12, 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. Additionally, all options were considered to be deductible for tax purposes in the valuation model. Such non-
qualified options were tax-effected using our estimated U.S. effective tax rate at the time of grant. All of our stock options and
restricted stock awards are expected to be deductible for tax purposes, except for certain stock awards granted to employees residing
outside of the United States, and were tax-effected using our estimated U.S. effective tax rate at the time of grant.
Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on
stock-based compensation described above. For fiscal 2019, income tax deductions of $2,592 were generated, of which $2,008
were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax benefit
of $584 was recorded as a reduction in income tax expense. For fiscal 2018, income tax deductions of $4,161 were generated, of
which $1,988 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess
tax benefits of $2,173 were recorded as a reduction in income tax expense. For fiscal 2017, income tax deductions of $5,292 were
generated, of which $3,351 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the
remaining excess tax benefits of $2,241 were recorded as a reduction in income tax expense.
16.
Retirement Plans
We have 401(k) Savings and Retirement Plans for the benefit of eligible U.S. employees. Additionally, our Canadian and certain
European subsidiaries maintain profit sharing plans for the benefit of eligible employees. Employer contributions 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 $4,999, $4,676 and $3,863 for fiscal 2019, 2018 and 2017,
respectively.
17.
Reportable Segments
In accordance with ASC Topic 280, “Segment Reporting,” (“ASC 280”), we have determined our reportable business segments
based upon an assessment of product types, organizational structure, customers and internally prepared financial statements. The
primary factors used by us in analyzing segment performance are net sales and income from operations. During the first quarter
of fiscal 2019, we changed the names of our reportable segments to better align with our key customers and the markets we serve.
As a result of this change, our industrial biological and chemical indicator business has moved from the Dental segment to the
Life Sciences segment. Prior year segment disclosures have been recast to conform to the current year presentation.
(dollar amounts in thousands except share and per share data or as otherwise specified)
62
Cantel Medical Corp.
2019 Annual Report on Form 10-K
None of our customers accounted for 10% or more of our consolidated net sales during fiscal 2019, 2018 and 2017.
Our reportable segments are as follows:
Medical: designs, develops, manufactures, sells and installs a comprehensive offering of products and services comprising a
complete circle of infection prevention solutions. Our products include endoscope reprocessing and endoscopy procedure products.
Life Sciences: designs, develops, manufactures, sells, and installs water purification systems for medical, pharmaceutical and
other bacteria controlled applications. We also provide filtration/separation and disinfectant technologies to the medical and life
science markets through a worldwide distributor network. Two customers collectively accounted for approximately 40.2%, 48.0%
and 50.2% of our Life Sciences segment net sales in fiscal 2019, 2018 and 2017, respectively.
Dental: designs, manufactures, sells, supplies and distributes a broad selection of infection prevention healthcare products, the
majority of which are single-use products used by dental practitioners. Three customers collectively accounted for approximately
47.6%, 45.1% and 43.4% of our Dental segment net sales in fiscal 2019, 2018 and 2017, respectively.
Dialysis: designs, develops, manufactures, sells and services reprocessing systems and sterilants for dialyzers (a device serving
as an artificial kidney), as well as dialysate concentrates and supplies utilized for renal dialysis. Two customers collectively
accounted for approximately 41.0%, 40.6% and 44.2% of our Dialysis segment net sales in fiscal 2019, 2018 and 2017, respectively.
These customers are the same two customers noted above under our Life Sciences segment.
Information as to reportable segments is summarized below:
Net sales:
Medical
Life Sciences (1)
Dental (1)
Dialysis
Total
Year Ended July 31,
2019
2018
2017
$
523,669
$
473,937
$
201,022
161,608
31,856
217,030
149,360
31,595
398,773
196,446
144,457
30,481
$
918,155
$
871,922
$
770,157
_______________________________________________
(1)
In fiscal 2018, approximately $5,820 of net sales were reclassified out of our Dental segment and into our Life Sciences segment associated
with the changes in our segments noted above. Fiscal 2017 amounts were not material and were not adjusted.
Income from operations:
Medical
Life Sciences (1)
Dental (1)
Dialysis
General corporate expenses
Income from operations
Interest expense, net
Other income
Income before income taxes
Year Ended July 31,
2019
2018
2017
$
98,356
$
86,833
$
20,552
22,289
4,922
146,119
62,600
83,519
9,505
(1,305)
75,319
$
36,803
30,004
7,380
161,020
39,356
121,664
5,289
(1,138)
117,513
$
$
73,440
33,159
28,000
8,154
142,753
32,343
110,410
4,303
(126)
106,233
_______________________________________________
(1)
In fiscal 2018, approximately $1,704 of income from operations were reclassified out of our Dental segment and into our Life Sciences
segment associated with the changes in our segments noted above. Fiscal 2017 amounts were not material and were not adjusted.
(dollar amounts in thousands except share and per share data or as otherwise specified)
63
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Identifiable assets:
Medical
Life Sciences
Dental
Dialysis
General corporate, including cash and cash equivalents
Total
Capital expenditures:
Medical
Life Sciences
Dental
Dialysis
General corporate
Total
Depreciation and amortization:
Medical
Life Sciences
Dental
Dialysis
General corporate
Total
July 31,
2019
2018
$
532,250
$
184,737
272,309
19,016
62,054
490,702
151,460
210,831
22,614
88,101
$
1,070,366
$
963,708
Year Ended July 31,
2019
2018
2017
$
52,907
$
18,996
$
13,816
16,408
16,243
3,203
6,677
95,438
$
4,409
2,441
644
11,208
37,698
3,689
2,492
1,296
5,772
27,065
Year Ended July 31,
2019
2018
2017
$
23,033
$
19,002
$
18,245
7,482
9,844
39
1,961
5,628
8,756
711
733
5,706
8,556
427
518
$
42,359
$
34,830
$
33,452
Information as to geographic areas (including net sales which represent the geographic area from which we derive its net sales
from external customers) is summarized below:
Net sales:
United States
Europe/Africa/Middle East
Asia/Pacific
Canada
Latin America/South America
Total
Year Ended July 31,
2019
2018
2017
$
665,661
$
643,744
$
599,657
148,334
66,228
32,152
5,780
131,130
57,108
33,524
6,416
95,753
40,964
26,648
7,135
$
918,155
$
871,922
$
770,157
(dollar amounts in thousands except share and per share data or as otherwise specified) 64
Cantel Medical Corp.
2019 Annual Report on Form 10-K
Total long-lived assets:
United States
Europe/Africa/Middle East
Asia/Pacific
Canada
Total
Goodwill and intangible assets, net
Total
July 31,
2019
2018
$
128,010
$
64,742
4,201
1,995
198,948
519,622
$
718,570
$
80,918
35,824
2,531
804
120,077
505,388
625,465
18.
Quarterly Results of Operations (unaudited)
The following is a summary of the quarterly results of operations for fiscal 2019 and 2018:
Fiscal 2019
Net sales
Cost of sales
Gross profit
Gross profit percentage
Net income
Earnings per common share:
Basic
Diluted
Fiscal 2018
Net sales
Cost of sales
Gross profit
Gross profit percentage
Net income
Earnings per common share:
Basic
Diluted
19.
Subsequent Events
Hu-Friedy Acquisition
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
225,589
$
224,538
$
228,552
$
239,476
120,340
105,249
46.7%
19,242
0.46
0.46
$
$
$
119,863
104,675
46.6%
18,800
0.45
0.45
$
$
$
121,675
106,877
46.8%
8,175
0.20
0.20
$
$
$
128,823
110,653
46.2%
8,825
0.21
0.21
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
212,766
$
213,034
$
217,268
$
228,854
112,107
100,659
47.3%
22,929
0.55
0.55
$
$
$
111,799
101,235
47.5%
32,488
0.78
0.78
$
$
$
112,594
104,674
48.2%
18,736
0.45
0.45
$
$
$
121,451
107,403
46.9%
16,888
0.41
0.41
$
$
$
$
$
$
$
On July 30, 2019, we signed a definitive agreement to acquire Hu-Friedy, a leading global manufacturer of instruments
and instrument reprocessing workflow systems serving the dental industry. The acquisition is subject to regulatory approvals and
other customary closing conditions, and is expected to close during our first quarter fiscal 2020. After closing, we plan to combine
Hu-Friedy with our Dental segment. Under the terms of the acquisition, Cantel will pay $725,000 upfront for Hu-Friedy, a portion
of which will be paid in our stock (with the specific amount at our election) with the remainder to be paid in cash. An
additional amount in potential cash and stock earnout payments may be payable to Hu-Friedy shareholders upon achievement of
certain commercial milestones in the eighteen months following closing of the transaction. As a result of the transaction structure,
the acquisition will generate an anticipated tax benefit, which we estimate at more than $100,000, which we expect to reduce our
cash taxes over approximately 15 years.
Amendment to 2018 Credit Agreement
On September 6, 2019, we entered into a First Amendment (the “Amendment”), amending the 2018 Credit Agreement,
and as amended by the Amendment, the (“Amended Credit Agreement”) dated as of June 28, 2018. The Amendment adds a
(dollar amounts in thousands except share and per share data or as otherwise specified)
65
Cantel Medical Corp.
2019 Annual Report on Form 10-K
$400,000 delayed draw term loan facility (the “Delayed Draw Facility”), which we may draw subject to the satisfaction of certain
limited conditions precedent, to our 2018 Credit Agreement, in addition to the existing tranche A term loan and existing revolving
credit facility. Pursuant to the Amended Credit Agreement, subject to the satisfaction of certain conditions precedent, including
the consent of the lenders, the Company may from time to time increase its borrowing capacity under the revolving credit facility
by, or incur incremental term loans in, an aggregate amount not to exceed the sum of (i) the greater of (x) $300,000 or (y) an
amount equal to two times the our consolidated EBITDA, calculated on a pro forma basis, plus (ii) the aggregate principal amount
of voluntary prepayments of the revolving loans and term loans.
The Delayed Draw Facility and a portion of the revolving credit facility will be used to finance all or a portion of the
cash consideration for our acquisition of Hu-Friedy. The remaining proceeds of the Amended Credit Agreement will be used to
refinance certain existing indebtedness of Cantel and Hu-Friedy, and to pay the fees and expenses incurred in connection therewith,
as well as for working capital, capital expenditures and other lawful corporate purposes.
Borrowings under the Amended Credit Agreement bear interest at rates ranging from 0.00% to 1.25% above prime rate
for base rate borrowings, or at rates ranging from 1.00% to 2.25% above LIBOR for LIBOR based borrowings, depending on our
“Consolidated Leverage Ratio,” which is the consolidated ratio of total funded debt (minus certain unrestricted cash) to consolidated
EBITDA. The Amended Credit Agreement also provides for fees on the unused portion of the revolving credit facility at rates
ranging from 0.20% to 0.40%, depending on our Consolidated Leverage Ratio. The Amended Credit Agreement contains affirmative
and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel
and its U.S.-based subsidiaries, (ii) a pledge by each Loan Party of all of the outstanding shares of its U.S.-based subsidiaries and
65% of the outstanding shares of certain of Cantel’s foreign-based subsidiaries and (iii) a guaranty by Cantel’s domestic subsidiaries.
Schedule II - Valuation and Qualifying Accounts
Allowance for doubtful accounts
Year ended July 31, 2019
Year ended July 31, 2018
Year ended July 31, 2017
Reserve for excess and obsolete inventory
Year ended July 31, 2019
Year ended July 31, 2018
Year ended July 31, 2017
Deferred tax asset valuation allowance
Year ended July 31, 2019
Year ended July 31, 2018
Year ended July 31, 2017
Balance
at Beginning
of Period
Additions
Deductions
Translation
Adjustments
Balance
at End
of Period
$
$
$
$
$
$
$
$
$
1,149
1,808
1,850
8,599
8,853
5,390
6,358
2,984
2,334
$
$
$
$
$
$
$
$
$
1,541
326
998
2,937
1,719
5,016
1,086
3,538
615
$
$
$
$
$
$
$
$
$
(336) $
(977) $
(1,056) $
(32) $
(8) $
$
16
2,322
1,149
1,808
(1,218) $
(1,862) $
(1,580) $
(203) $
(111) $
$
27
10,115
8,599
8,853
(1,891) $
(119) $
— $
148
$
(45) $
$
35
5,701
6,358
2,984
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
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, 2019. 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
(dollar amounts in thousands except share and per share data or as otherwise specified)
66
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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 U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes
those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company,
(ii) 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
(iii) 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, 2019.
Our independent auditors, Deloitte & Touche LLP, have issued a report on our internal control over financial reporting,
which is included in Part II, Item 8 of this report.
Changes in Internal Control
We have evaluated our internal control over financial reporting and determined that no changes occurred during the period
covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting, except as described below.
On February 1, 2019, we acquired Omnia, as more fully described in Note 4 to the consolidated financial statements.
This business is included in our 2019 consolidated financial statements and constituted 3.5% and 3.3% of total assets and net
assets, respectively, as of July 31, 2019, and 1.3% and 1.1% of net sales and net income, respectively, 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 Omnia was
acquired on February 1, 2019, 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 control over financial reporting. We expect that all
aspects of Omnia will be fully integrated into our existing internal control structure in fiscal 2020.
In 2017, we began the process of implementing a global operating and financial reporting information technology system,
SAP S4 Hana (“SAP”), as part of a multi-year plan to integrate and upgrade our systems and processes. The first phase of this
implementation became operational in February 2019, at our Medical segment's United States operations, our Medivators B.V.
operations and at our corporate headquarters. As the phased implementation of SAP continues, we are experiencing certain changes
to our processes and procedures which, in turn, result in changes to our internal control over financial reporting. We believe the
necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period
of change and we will continue to evaluate the operating effectiveness of related key controls during subsequent periods. While
we expect SAP to strengthen our internal financial controls by automating certain manual processes and standardizing business
processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each
of the affected areas evolves.
(dollar amounts in thousands except share and per share data or as otherwise specified) 67
Cantel Medical Corp.
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
2019 Annual Report on Form 10-K
We have adopted a Code of Ethics for the Chief Executive Officer, the Chief Financial Officer, Chief Accounting 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 Operating Officer, Chief Financial Officer and other officers and management personnel by posting such information
on our website.
The remainder of the information required by Item 10 is incorporated by reference to our definitive proxy statement for
our 2019 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
Item 11. Executive Compensation.
Information required to be disclosed by this Item is incorporated by reference from our definitive proxy statement for
our 2019 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, 2019 with respect to our equity compensation plans under
which our securities may be issued:
Number of securities
to be issued
upon exercise of
outstanding options
Weighted-average
exercise price of
outstanding options
Number of securities remaining
available for future issuance
under compensation plans
(excluding securities reflected in (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders
Total
40,000
$
—
40,000
$
43.70
—
43.70
755,429 (1)
—
755,429 (1)
________________________________________________
(1) Collectively consists of stock option and SARs awards and restricted stock and performance awards available for grant under the plans.
The remainder of the information required by Item 12 is incorporated by reference from our definitive proxy statement
for our 2019 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 by reference from our definitive proxy statement
for our 2019 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.
The information required to be disclosed by this Item is incorporated by reference from our definitive proxy statement
for our 2019 annual meeting of stockholders, which we intend to file within 120 days of the end of our fiscal year.
(dollar amounts in thousands except share and per share data or as otherwise specified) 68
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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, 2019.
1. Consolidated Financial Statements:
(i) Report of Independent Registered Public Accounting Firm.
(ii) Consolidated Balance Sheets as of July 31, 2019 and 2018.
(iii) Consolidated Statements of Income for the years ended July 31, 2019, 2018 and 2017.
(iv) Consolidated Statements of Comprehensive Income for the years ended July 31, 2019, 2018 and 2017.
(v) Consolidated Statements of Changes in Stockholders’ Equity for the years ended July 31, 2019, 2018 and 2017.
(vi) Consolidated Statements of Cash Flows for the years ended July 31, 2019, 2018 and 2017.
(vii) Notes to Consolidated Financial Statements.
2. Consolidated Financial Statement Schedules:
(i) Schedule II - Valuation and Qualifying Accounts for the years ended July 31, 2019, 2018 and 2017.
All other financial statement schedules are omitted since they are not required, not applicable, or the information
has been included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits:
2(a) - Purchase and Sale Agreement, dated as of July 29, 2019, by and among Cantel Medical Corp., Hu-Friedy Mfg.
Co., LLC, Dental Holding, LLC, and, for limited purposes set forth therein, Ken Serota and Ron Saslow. (Incorporated herein by
reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on July 30, 2019, File No. 001-31337.)
3(a) - Registrant’s Restated Certificate of Incorporation, dated July 20, 1978. (Incorporated herein by reference to
Exhibit 3(a) to Registrant’s 1981 Annual Report on Form 10-K.)
3(b) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on February 16, 1982.
(Incorporated herein by reference to Exhibit 3(b) to Registrant’s 1982 Annual Report on Form 10-K.)
3(c) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on May 4, 1984. (Incorporated
herein by reference to Exhibit 3(c) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 1984.)
3(d) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on August 19, 1986. (Incorporated
herein by reference to Exhibit 3(d) to Registrant’s 1986 Annual Report on Form 10-K.)
3(e) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on December 12, 1986.
(Incorporated herein by reference to Exhibit 3(e) to Registrant’s 1987 Annual Report on Form 10-K [the “1987 10-K”].)
3(f) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on April 3, 1987. (Incorporated
herein by reference to Exhibit 3(f) to Registrant’s 1987 10-K.)
3(g) - Certificate of Change of Registrant, filed on July 12, 1988. (Incorporated herein by reference to Exhibit 3(g) to
Registrant’s 1988 Annual Report on Form 10-K, File No. 001-31337.)
3(h) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on April 17, 1989. (Incorporated
herein by reference to Exhibit 3(h) to Registrant’s 1989 Annual Report on Form 10-K, File No. 001-31337.)
3(i) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on May 10, 1999. (Incorporated
herein by reference to Exhibit 3(i) to Registrant’s 2000 Annual Report on Form 10-K, File No. 001-31337 [the “2000 10-K”].)
69
Cantel Medical Corp.
2019 Annual Report on Form 10-K
3(j) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on April 5, 2000. (Incorporated
herein by reference to Exhibit 3(j) to Registrant’s 2000 10-K.)
3(k) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on September 6, 2001.
(Incorporated herein by reference to Exhibit 3(k) to Registrant’s 2001 Annual Report on Form 10-K, File No. 001-31337.)
3(l) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on June 7, 2002. (Incorporated
herein by reference to Exhibit 3(l) to Registrant’s 2002 Annual Report on Form 10-K, File No. 001-31337.)
3(m) - Certificate of Amendment of Certificate of Incorporation of Registrant, filed on December 22, 2005.
(Incorporated herein by reference to Exhibit 3(m) to Registrant’s 2006 Annual Report on Form 10-K, File No. 001-31337.)
3(n) - Certificate of Amendment of Certificate of Incorporation of Registrant filed on January 14, 2013. (Incorporated
herein by reference to Exhibit 3(n) to Registrant’s 2013 Annual Report on Form 10-K, File No. 001-31337.)
3(o) - Registrant’s By-Laws, as amended through November 1, 2013. (Incorporated herein by reference to Exhibit 3.1
to Registrant’s Current Report on Form 8-K filed on November 7, 2013, File No. 001-31337.)
3(p) - Registrant's By-Laws as amended through January 3, 2018. (Incorporated herein by reference to Exhibit 3.1
to Registrant’s Current Report on Form 8-K filed on January 9, 2018, File No. 001-31337.)
Exhibit 4 - Description of Securities.
10(a) - 2006 Equity Incentive Plan, as amended. (Incorporated herein by reference to Exhibit 10(a) to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended October 31, 2013, File No. 001-31337.)*
10(b) - Form of Stock Option Agreement for option grants to directors and executive officers 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, File No. 001-31337 [the “October 2011 8-K”].)*
10(c) - Form of Restricted Stock Agreement under Registrant’s 2006 Equity Incentive Plan for grants to executive
officers. (Incorporated herein by reference to Exhibit 10.5 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.
(Incorporated herein by reference to Exhibit 10.6 to Registrant’s October 2011 8-K.)*
10(e) - Separation Agreement and General Release dated as of March 8, 2019 between the Company and Jorgen B.
Hansen. (Incorporated herein by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on March 8, 2019,
File No. 001-31337.)*
10(f) - Retirement Agreement and General Release dated as of March 29, 2019 between the Company and Eric W.
Nodiff. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on June 6, 2019,
File No. 001-31337.)*
10(g) - Confidentiality and Non-Competition Agreement dated as of November 15, 2012 between Registrant and
Jorgen B. Hansen (Incorporated herein by reference to Exhibit 10.2 to Registrant’s Annual Report on Form 10-K for the fiscal
year ended July 31, 2012, File No. 001-31337.)*
10(h) - Confidentiality and Non-Competition Agreement dated as of January 1, 2010 between Registrant and Eric
W. Nodiff (Incorporated herein by reference to Exhibit 10.9 to Registrant’s February 2010 8-K.)*
10(i) - Confidentiality and Non-Competition Agreement dated as of March 23, 2015 between Registrant and Peter
Clifford (Incorporated herein by reference to Exhibit 10.2 to Registrant’s March 2015 8-K.)*
10(j) - Cantel Medical Corp. 2016 Equity Incentive Plan (Incorporated herein by reference to Exhibit 10.1 to
Registrant’s Quarterly Report on Form 10-Q filed on November 30, 2018, File No. 001-31337.)*
70
Cantel Medical Corp.
2019 Annual Report on Form 10-K
10(k) - Form of Restricted Stock Agreement (Time-Based Grants) under Cantel Medical Corp. 2016 Equity Incentive
Plan for grants to executive officers (Incorporated herein by reference to Exhibit 10(r) to Registrant's Annual Report on From 10-
K for the fiscal year ended July 31, 2016, File No. 001-31337 [the "2016 10-K"].) *
10(l) - Form of Restricted Stock Agreement (Time-Based Grants) under Cantel Medical Corp. 2016 Equity Incentive
Plan for grants to directors (Incorporated herein by reference to Exhibit 10(s) to Registrant's 2016 10-K.)*
10(m) - Form of Restricted Stock Agreement (Performance-Based Grants – Revenue Based) under Cantel Medical
Corp. 2016 Equity Incentive Plan for grants to executive officers (Incorporated herein by reference to Exhibit 10(t) to Registrant's
2016 10-K.) *
10(n) - Form of Restricted Stock Agreement (Performance-Based Grants – TSR Based) under Cantel Medical Corp.
2016 Equity Incentive Plan for grants to executive officers (Incorporated herein by reference to Exhibit 10(u) to Registrant's 2016
10-K.)*
10(o) - Form of Restricted Stock Agreement (Time-Based) under Cantel Medical Corp. 2016 Equity Incentive Plan
for annual grants to directors (Incorporated herein by reference to Exhibit 10(v) to Registrant's 2016 10-K.)*
10(p) - Fourth Amended and Restated Credit Agreement dated as of June 28, 2018 among Cantel Medical Corp.,
Bank of America, N.A., Wells Fargo Bank, National Association, JPMorgan Chase Bank, N.A., and the other lenders party hereto.
(Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on July 2, 2018, File
No. 001-31337.)
10(q) - Earnout Agreement, dated as of July 29, 2019, by and between Dental Holding, LLC and Cantel Medical
Corp. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on July 30, 2019, File
No. 001-31337.)
10(r) - First Amendment, dated as of September 6, 2019, among Cantel Medical Corp., the subsidiary obligors party
thereto, the lenders party thereto, and Bank of America, N.A. (Incorporated herein by reference to Exhibit 10.1 to Registrant’s
Current Report on Form 8-K filed on September 9, 2019, File No. 001-31337.)
Exhibit 10.1 - Cantel Medical Corp. Executive Severance and Change in Control Plan.
Exhibit 21 - Subsidiaries of Registrant.
Exhibit 23.1 - Consent of Deloitte & Touche LLP.
Exhibit 23.2 - Consent of Ernst & Young LLP.
Exhibit 31.1 - Certification of Principal Executive Officer.
Exhibit 31.2 - Certification of Principal Financial Officer.
Exhibit 32 - Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101 The following materials from Cantel Medical Corp.’s Form 10-K for the fiscal year ended July 31, 2019,
formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at July 31, 2019 and 2018,
(ii) Consolidated Statements of Income for each of the three years in the period ended July 31, 2019, (iii) Consolidated Statements
of Comprehensive Income for each of the three years in the period ended July 31, 2019, (iv) Consolidated Statements of Changes
in Stockholders’ Equity for each of the three years in the period ended July 31, 2019, (v) Consolidated Statements of Cash Flows
for each of the three years in the period ended July 31, 2019 and (vi) Notes to Consolidated Financial Statements.
*Management contract or compensatory plan or arrangement of the Company required to be filed as an exhibit.
Item 16. Form 10-K Summary
None.
71
Cantel Medical Corp.
2019 Annual Report on Form 10-K
SIGNATURES
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.
CANTEL MEDICAL CORP.
Date: September 25, 2019
By:
/s/ George L. Fotiades
George L. Fotiades, President,
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ Shaun M. Blakeman
Shaun M. Blakeman, Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
By:
/s/ Brian R. Capone
Brian R. Capone, Senior Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
72
Cantel Medical Corp.
2019 Annual Report on Form 10-K
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
Date:
September 25, 2019
Charles M. Diker, Director and Chairman of the Board
/s/ Alan. R. Batkin
Alan R. Batkin, Lead Independent Director
Date:
September 25, 2019
/s/ Ann E. Berman
Ann E. Berman, Director
/s/ Mark N. Diker
Mark N. Diker, Director
/s/ Anthony B. Evnin
Anthony B. Evnin, Director
/s/ Laura L. Forese
Laura L. Forese, Director
Date:
September 25, 2019
Date:
September 25, 2019
Date:
September 25, 2019
Date:
September 25, 2019
/s/ George L. Fotiades
Date:
September 25, 2019
George L. Fotiades, Director, President and CEO
/s/ Ronnie Myers
Ronnie Myers, Director
Date
September 25, 2019
/s/ Peter J. Pronovost, M.D., Ph.D.
Peter J. Pronovost, M.D., Ph.D., Director
Date:
September 25, 2019
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Executive Leadership Team
Neil Blewitt
President, Europe
Michael McGrath
President, Canada and Asia Pacific
Eric Moore
Senior Vice President, Regulatory and
Quality Assurance
Ken Serota
President, Dental
Michael Spicer
President, Medical
Scott Thome
Senior Vice President, Operations
Corporate Communications &
Investor Relations
Matthew Micowski
Vice President, Investor Relations and Financial Planning and Analysis
Auditors
Deloitte & Touche LLP
100 Kimball Drive
Parsippany, New Jersey 07054
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 2019 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. Ann Marie
Gitin, Executive Assistant, Cantel Medical
Corp.
Corporate Information
Directors
Charles M. Diker
Chairman of the Board
Chairman, Diker Management LLC
Alan R. Batkin1,3,4
Former Vice Chairman of Eton Park
Capital Management, L.P. and
Kissinger Associates, Inc.
Ann E. Berman1,3
Former Chief Financial Officer,
Harvard University
Mark N. Diker
CEO, Diker Management LLC
Anthony B. Evnin2
Partner, VR Management, LLC
Laura L. Forese, MD2,3
Executive Vice President and
Chief Operating Officer,
New York-Presbyterian
George L. Fotiades
President and Chief Executive Officer
Ronnie Myers, DDS1,3
Dean, Touro College of
Dental Medicine at New York Medical College
Karen N. Prange
Former Executive Vice President and Chief
Executive Officer of the Global Animal Health,
Medical and Dental Surgical Group at Henry
Schein, Inc.
Peter J. Pronovost, MD, Ph.D.2
Chief Clinical Transformation Officer, University
Hospitals
Corporate Officers
Charles M. Diker
Chairman of the Board
George L. Fotiades
President and Chief Executive Officer
Shaun M. Blakeman
Senior Vice President and Chief Financial Officer
Brian R. Capone
Senior Vice President, Corporate Controller and
Chief Accounting Officer
Jean M. Casner
Senior Vice President and Chief Human Resources
Officer
Peter G. Clifford
Executive Vice President and Chief Operating Officer
Lawrence Conway
Senior Vice President, Business Systems and
Integration
Jeff Z. Mann
Senior Vice President, General Counsel and
Secretary
Seth M. Yellin
Executive Vice President, Strategy and Corporate
Development
1 Audit Committee
2 Nominating & Governance Committee
3 Compensation Committee
4 Lead Independent Director
150 Clove Road, 9th FloorLittle Falls, New Jersey 07424Telephone: 973-890-7220Fax: 973-890-7270www.cantelmedical.com