CANTEL MEDICAL CORP.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help you understand Cantel. The
MD&A is provided as a supplement to and should be read in conjunction with our
financial statements and the accompanying notes.
Overview
Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections. Merger Agreement with STERIS OnJanuary 12, 2021 , we entered into a definitive merger agreement with two wholly owned subsidiaries of STERIS, plc ("STERIS"), under which STERIS will acquire Cantel in a cash and stock transaction with an equity value of approximately$3.6 billion , based on the closing price of STERIS shares of$200.46 onJanuary 11, 2021 (STERIS and Cantel Merger). The STERIS and Cantel Merger is expected to close in the fourth quarter of fiscal 2021. In connection with the STERIS and Cantel Merger, we have incurred, and will continue to incur, merger-related and integration-related preparation costs. A significant portion of those costs are contingent on the merger closing, such as investment banking fees, legal fees, and other employee related costs. We incurred$11,620 of such costs during the three and six month periods endedJanuary 31, 2021 , which were recorded in general and administrative expense within the Condensed Consolidated Statements of Income.
COVID-19
The COVID-19 pandemic continues to spread throughoutthe United States and other countries across the world, and the duration and severity of its effects are currently unknown. The global pandemic has adversely impacted and is likely to further adversely impact our business and markets, including our workforce and operations and the operations of our customers, suppliers, and business partners. Considerable uncertainty still surrounds the COVID-19 virus and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including social distancing measures, travel bans and restrictions, and business and government shutdowns, have already created significant negative economic impacts on a global basis. To date, we have been able to continue our operations with limited disruptions in supply and manufacturing. Although, it is difficult to predict the broad macroeconomic effects that the COVID-19 pandemic will have on industries or individual companies, we have assessed the possible effects and outcomes of the pandemic on, among other things, our supply chain, customers and distributors, discounts and rebates, employee base, product sustainability, research and development efforts, product pipeline and consumer demand. During the second half of fiscal 2020, we implemented several measures to reduce operating costs, conserve liquidity and navigate through this unprecedented situation. These management cost reduction measures included salary reductions, employee furloughs, travel reductions and the deferral of certain operating and capital expenditures. During the second half of fiscal 2020, the COVID-19 pandemic negatively impacted net sales and the related operations of both our Medical and Dental segments as a result of the postponement of elective medical procedures and routine dental procedures. Towards the end of fiscal 2020, we experienced gradual improvements in these respective businesses as (dollar amounts in thousands except share and per share data or as otherwise noted) 21 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q
restrictions were lifted and limitations eased. Demand in both of our medical and dental businesses continued to improve this quarter.
While we currently expect to see improvement in the remainder of fiscal 2021, the effects of the COVID-19 pandemic remains fluid and continues to evolve differently across various geographies and still could have a negative impact on our businesses if a resurgence of the virus occurs around the world. See "Results of Operations" for a more detailed discussion. Second Quarter 2020 Summary (on a comparative basis) Key GAAP financial results for the three months endedJanuary 31, 2021 were as follows: •Net sales increased by 1.9% to$294,038 from$288,498 , •Net income increased to$12,068 from a net loss of$2,263 and •Earnings per diluted share increased to$0.27 from a net loss per diluted share of$(0.05) . Key Non-GAAP financial results for the three months endedJanuary 31, 2021 were as follows: •Non-GAAP net income increased by 34.0% to$34,640 from$25,844 , •Non-GAAP earnings per diluted share increased by 29.5% to$0.79 from$0.61 and •Adjusted EBITDAS increased by 37.5% to$147,283 from$107,105 .
Please see a description of our Non-GAAP Financial Measures below.
Results of Operations
The following tables give information as to the percentages of net sales represented by selected items reflected in our condensed consolidated statements of income.
Three Months Ended January 31,
Statement of Income Data: 2021 2020 Percentage Change
Net sales $ 294,038 100.0 % $ 288,498 100.0 % 1.9 %
Cost of sales 150,560 51.2 % 166,254 57.6 % (9.4) %
Gross profit 143,478 48.8 % 122,244 42.4 % 17.4 %
Selling 38,434 13.1 % 44,740 15.5 % (14.1) %
General and administrative 65,855 22.4 % 62,051 21.5 % 6.1 %
Research and development 7,560 2.5 % 7,857 2.8 % (3.8) %
Total operating expenses 111,849 38.0 % 114,648 39.8 % (2.4) %
Income from operations 31,629 10.8 % 7,596 2.6 % 316.4 %
Interest expense, net 15,491 5.3 % 10,250 3.5 % 51.1 %
Income (loss) before income taxes 16,138 5.5 % (2,654) (0.9) % NM
Income taxes 4,070 1.4 % (391) (0.1) % NM
Net income (loss) $ 12,068 4.1 % $ (2,263) (0.8) % NM
NM = Not meaningful
(dollar amounts in thousands except share and per share data or as otherwise
noted) 22
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Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Six Months Ended January 31,
Statement of Income Data: 2021 2020 Percentage Change
Net sales $ 591,067 100.0 % $ 545,744 100.0 % 8.3 %
Cost of sales 300,223 50.8 % 307,631 56.4 % (2.4) %
Gross profit 290,844 49.2 % 238,113 43.6 % 22.1 %
Selling 78,497 13.3 % 83,151 15.2 % (5.6) %
General and administrative 115,233 19.5 % 117,338 21.5 % (1.8) %
Research and development 15,133 2.5 % 15,604 2.9 % (3.0) %
Total operating expenses 208,863 35.3 % 216,093 39.6 % (3.3) %
Income from operations 81,981 13.9 % 22,020 4.0 % 272.3 %
Interest expense, net 31,784 5.4 % 15,969 2.9 % 99.0 %
Income before income taxes 50,197 8.5 % 6,051 1.1 % 729.6 %
Income taxes 13,665 2.3 % 2,547 0.5 % 436.5 %
Net income $ 36,532 6.2 % $ 3,504 0.6 % 942.6 %
The following table gives information as to the net sales by reportable segment
and geography, as well as the related percentage of such net sales to the total
net sales, for each of our reportable segments.
Three Months Ended January 31, Six Months Ended January 31,
Net sales by segment 2021 2020 2021 2020
Medical $ 133,754 45.5 % $ 130,959 45.4 % $ 266,073 45.0 % $ 264,312 48.4 %
Life Sciences 46,223 15.7 % 50,122 17.4 % 91,791 15.5 % 99,263 18.2 %
Dental 105,419 35.9 % 101,044 35.0 % 216,425 36.6 % 168,287 30.8 %
Dialysis 8,642 2.9 % 6,373 2.2 % 16,778 2.9 % 13,882 2.6 %
Total net sales $ 294,038 100.0 % $ 288,498 100.0 % $ 591,067 100.0 % $ 545,744 100.0 %
Net sales by geography
United States $ 205,694 70.0 % $ 207,598 72.0 % $ 420,781 71.2 % $ 397,682 72.9 %
International 88,344 30.0 % 80,900 28.0 % 170,286 28.8 % 148,062 27.1 %
Total net sales $ 294,038 100.0 % $ 288,498 100.0 % $ 591,067 100.0 % $ 545,744 100.0 %
The following table gives information as to the amount of income from operations, as well as income from operations as a percentage of net sales, for each of our reportable segments.
Three Months Ended January 31, Six Months Ended January 31,
Income from operations 2021 2020 2021 2020
Medical $ 27,274 20.4 % $ 21,534 16.4 % $ 53,990 20.3 % $ 42,653 16.1 %
Life Sciences 9,034 19.5 % 7,700 15.4 % 17,109 18.6 % 14,835 14.9 %
Dental 16,339 15.5 % (856) (0.8) % 41,646 19.2 % 4,148 2.5 %
Dialysis 2,118 24.5 % 1,507 23.6 % 4,684 27.9 % 3,129 22.5 %
54,765 18.6 % 29,885 10.4 % 117,429 19.9 % 64,765 11.9 %
General corporate expenses 23,136 7.8 % 22,289 7.8 % 35,448 6.0 % 42,745 7.9 %
Total income from operations $ 31,629 10.8 % $ 7,596 2.6 % $ 81,981 13.9 % $ 22,020 4.0 %
Net Sales
Total net sales increased by $5,540 or 1.9%, to $294,038 for the three months
ended January 31, 2021 from $288,498 for the three months ended January 31,
2020 , which consisted of an increase of 1.1% in organic sales and an increase of
0.8%
(dollar amounts in thousands except share and per share data or as otherwise
noted) 23
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Cantel Medical Corp. 2021 Second Quarter Form 10-Q
due to favorable foreign currency translation. International net sales increased
by $7,444 or 9.2%, to $88,344 for the three months ended January 31, 2021 from
$80,900 for the three months ended January 31, 2020 . The 9.2% increase in
international net sales consisted of a 5.8% increase in organic sales and an
increase of 3.4% due to favorable foreign currency translation of our net sales
in Europe , the United Kingdom and Australia . Total net sales increased by
$45,323 or 8.3%, to $591,067 for the six months ended January 31, 2021 from
$545,744 for the six months ended January 31, 2020 , which consisted of a 7.8%
increase in net sales due to acquisitions (net of dispositions) and an increase
of 0.8% due to foreign currency translation, slightly offset by a decrease of
0.3% in organic sales. International net sales increased by $22,224 or 15.0%, to
$170,286 for the six months ended January 31, 2021 from $148,062 for the six
months ended January 31, 2020 . The 15.0% increase in international net sales
consisted of a 7.3% increase in organic sales, an increase in net sales due to
acquisitions of 4.6% (offset by dispositions) and an increase of 3.1% due to
favorable foreign currency translation of our net sales in Europe , the United
Kingdom and Australia .
Medical. Net sales increased by $2,795 or 2.1%, for the three months ended
January 31, 2021 compared with the three months ended January 31, 2020 , which
consisted of an increase of 2.0% due to foreign currency translation and an 0.1%
increase in organic sales. Net sales increased by $1,761 or 0.7%, for the six
months ended January 31, 2021 compared with the six months ended January 31,
2020 , which consisted of an increase of 1.7% due to foreign currency translation
partially offset by a decrease of 1.0% in organic sales. The decrease in organic
net sales for the six month period was primarily driven by the delayed timing of
capital equipment sales due to the COVID-19 pandemic. Although U.S. endoscopy
procedure volumes have declined compared to the prior year, procedural product
sales have outperformed the underlying volume declines across all regions. While
we expect to see improvement during the remainder of fiscal 2021 (demonstrated
by the slight improvement in organic sales for the three month period) as
surgical and elective procedure volumes return to pre-COVID-19 levels, we could
experience variable impacts on our Medical business if a resurgence of the virus
emerges and elective procedures were postponed again.
Life Sciences. Net sales decreased by $3,899 or 7.8% for the three months ended
January 31, 2021 compared with the three months ended January 31, 2020 , which
consisted of a 8.0% decrease in organic sales, slightly offset by an increase of
0.2% due to foreign currency translation. Net sales decreased by $7,472 or 7.5%
for the six months ended January 31, 2021 compared with the six months ended
January 31, 2020 , which consisted of a 7.6% decrease in organic sales, slightly
offset by an increase of 0.1% due to foreign currency translation. The decreases
in net sales for the three and six month periods were primarily due to lower
demand for portable reverse osmosis units and delayed capital projects in our
hemodialysis water business. As the majority of our Life Sciences business
supports non-elective medical treatment, the COVID-19 pandemic has not
materially impacted this business, with the exception of the timing of portable
reverse osmosis units and delayed capital projects at our customers. If the
pandemic continues, it could further impact capital equipment volume and future
service revenues at our customers.
Dental. Net sales increased by $4,375 or 4.3%, for the three months ended
January 31, 2021 compared with the three months ended January 31, 2020 , which
consisted of a 4.3% organic sales increase. Net sales increased by $48,138 or
28.6%, for the six months ended January 31, 2021 compared with the six months
ended January 31, 2020 , which consisted of a 25.3% increase due to acquisitions
and a 3.3% organic sales increase. The Hu-Friedy acquisition contributed $39,835
of incremental net sales for the six month period. The increases in organic
sales for the three and six months periods were driven by increased personal
protective equipment (PPE) and disinfectant chemistries sales. In the latter
half of fiscal 2020, the COVID-19 pandemic had significantly impacted the Dental
segment due to reduced dental procedures. However, dental procedure volumes have
improved and continue to stabilize in fiscal 2021. While we expect to see
continued improvement during the remainder of fiscal 2021 as routine and
elective dental procedure volumes return to pre-COVID-19 levels, we could
experience variable impacts on our Dental business if a resurgence of the virus
emerges and such procedures were postponed again.
Dialysis. Net sales increased by $2,269 or 35.6%, for the three months ended
January 31, 2021 compared with the three months ended January 31, 2020 . Net
sales increased by $2,896 or 20.9%, for the six months ended January 31, 2021
compared with the six months ended January 31, 2020 .
Gross Profit
Gross profit increased by$21,234 or 17.4%, to$143,478 for the three months endedJanuary 31, 2021 from$122,244 for the three months endedJanuary 31, 2020 . The increase in gross profit primarily relates to certain actions taken by management to reduce variable costs in response to lower sales volume due to the COVID-19 pandemic and net sales increases in Medical and Dental segments. Gross profit increased by$52,731 or 22.1%, to$290,844 for the six months endedJanuary 31, 2021 from$238,113 for the six months endedJanuary 31, 2020 . The increase in gross profit for the six month period primarily relates to$40,258 of incremental gross profit contributed by Hu-Friedy and certain actions taken by management to reduce variable costs in response to lower sales volume due to the COVID-19 pandemic. (dollar amounts in thousands except share and per share data or as otherwise noted) 24 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q Gross profit as a percentage of net sales for the three months endedJanuary 31, 2021 and 2020 was 48.8% and 42.4%, respectively. Gross profit as a percentage of net sales for the six months endedJanuary 31, 2021 and 2020 was 49.2% and 43.6%, respectively. The increases in gross profit as a percentage of net sales for the three and six month periods were driven by a lower cost base as a result of measures taken as a result of the COVID-19 pandemic and favorable leverage of our fixed manufacturing costs, primarily in our Medical and Dental segments.
Operating Expenses
Operating expenses decreased by$2,799 or 2.4% to$111,849 for the three months endedJanuary 31, 2021 from$114,648 for the three months endedJanuary 31, 2020 . Operating expenses decreased by$7,230 or 3.3% to$208,863 for the three months endedJanuary 31, 2021 from$216,093 for the three months endedJanuary 31, 2020 . For the three and six month periods, these decreases were due to the reduction in integration and acquisition-related costs incurred in the prior-year periods associated with the Hu-Friedy acquisition and a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic, partially offset by merger-related costs associated with the STERIS and Cantel Merger. Operating expenses as a percentage of net sales for the three months endedJanuary 31, 2021 and 2020 were 38.0% and 39.8%, respectively. Operating expenses as a percentage of net sales for the six months endedJanuary 31, 2021 and 2020 were 35.3% and 39.6%, respectively. Selling expenses decreased by$6,306 or 14.1%, to$38,434 for the three months endedJanuary 31, 2021 from$44,740 for the three months endedJanuary 31, 2020 . The decrease was primarily due to reduced marketing spend and salesperson compensation in the Dental segment, inclusive of cost synergies from the Hu-Friedy acquisition. Selling expenses decreased by$4,654 or 5.6%, to$78,497 for the six months endedJanuary 31, 2021 from$83,151 for the six months endedJanuary 31, 2020 . The decrease was primarily due to reduced marketing spend and compensation expense in the Dental segment (which includes synergies from the Hu-Friedy acquisition). Selling expenses as a percentage of net sales were 13.1% and 15.5% for the three months endedJanuary 31, 2021 and 2020, respectively. Selling expenses as a percentage of net sales were 13.3% and 15.2% for the six months endedJanuary 31, 2021 and 2020, respectively. General and administrative expenses increased by$3,804 or 6.1%, to$65,855 for the three months endedJanuary 31, 2021 from$62,051 for the three months endedJanuary 31, 2020 . The increase primarily relates to merger-related costs associated with the recently announced STERIS and Cantel Merger and increased incentive-based compensation costs, offset by a reduction in acquisition-related costs incurred in the prior-year period associated with the Hu-Friedy acquisition. General and administrative expenses decreased by$2,105 or 1.8%, to$115,233 for the six months endedJanuary 31, 2021 from$117,338 for the six months endedJanuary 31, 2020 . The decrease primarily relates to lower acquisition-related costs incurred in the prior-year period related to the Hu-Friedy acquisition. This was partially offset by merger-related costs associated with the recently announced STERIS and Cantel Merger, higher incentive-based compensation costs, higher amortization expense and incremental expenses related to the Hu-Friedy business for a full six month period as compared to the prior year period. General and administrative expenses as a percentage of net sales were 22.4% and 21.5% for the three months endedJanuary 31, 2021 and 2020, respectively. General and administrative expenses as a percentage of net sales were 19.5% and 21.5% for the six months endedJanuary 31, 2021 and 2020, respectively. Research and development expenses (which include continuing engineering costs) decreased by$297 or 3.8%, to$7,560 for the three months endedJanuary 31, 2021 from$7,857 for the three months endedJanuary 31, 2020 . Research and development expenses decreased by$471 or 3.0%, to$15,133 for the six months endedJanuary 31, 2021 from$15,604 for the six months endedJanuary 31, 2020 . The decreases in the three and six month periods were primarily a result of a reduction in expenses in our Life Sciences segment, partially offset by increases in our Medical segment. Research and development expenses as a percentage of net sales were 2.5% and 2.8% for the three months endedJanuary 31, 2021 and 2020, respectively. Research and development expenses as a percentage of net sales were 2.5% and 2.9% for the six months endedJanuary 31, 2021 and 2020, respectively. Income from Operations Medical. Income from operations increased by$5,740 or 26.7%, for the three months endedJanuary 31, 2021 compared with the three months endedJanuary 31, 2020 . Income from operations increased by$11,337 or 26.6%, for the six months endedJanuary 31, 2021 compared with the six months endedJanuary 31, 2020 . Net sales have increased slightly for both the three and six month periods which contributed to an increase of income from operations. In addition, decreases in certain operating expenses resulting from management cost reduction measures taken in response to the COVID-19 pandemic and a shift towards higher margin products also contributed to this overall increase in both periods. (dollar amounts in thousands except share and per share data or as otherwise noted) 25 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q Life Sciences. Income from operations increased by$1,334 or 17.3%, for the three months endedJanuary 31, 2021 compared with the three months endedJanuary 31, 2020 . Income from operations increased by$2,274 or 15.3%, for the six months endedJanuary 31, 2021 compared with the six months endedJanuary 31, 2020 . Although net sales declined as noted above, income from operations improved due to the decrease in certain operating expenses resulting from management cost reduction measures taken in response to the COVID-19 pandemic and to a lesser extent, a shift towards higher margin products. Dental. Income from operations increased by$17,195 or 2,008.8%, for the three months endedJanuary 31, 2021 compared with the three months endedJanuary 31, 2020 . The increase is primarily driven by a reduction in integration and acquisition-related costs and inventory step-up amortization related to the Hu-Friedy acquisition in the prior year period and an increase in net sales noted above. Income from operations increased by$37,498 or 904.0%, for the six months endedJanuary 31, 2021 compared with the six months endedJanuary 31, 2020 . The increase was primarily due to inclusion of Hu-Friedy operations (which includes overall higher margin products) for a full six months in the current fiscal year, increased net sales, cost synergies resulting from the Hu-Friedy integration and the reduction of certain acquisition and integration-related costs and inventory step-up amortization in the prior year period. Dialysis. Income from operations increased by$611 or 40.5%, for the three months endedJanuary 31, 2021 compared with the three months endedJanuary 31, 2020 . Income from operations increased by$1,555 or 49.7%, for the six months endedJanuary 31, 2021 compared with the six months endedJanuary 31, 2020 .
General Corporate Expenses
General corporate expenses relate to unallocated corporate costs primarily related to executive management personnel as well as costs associated with certain facets of our acquisition and integration programs (including fair value adjustments to contingent consideration) and costs of being a publicly traded company. General corporate expenses increased by$847 or 3.8%, for the three months endedJanuary 31, 2021 from the three months endedJanuary 31, 2020 . This increase was primarily driven by merger-related costs associated with the STERIS and Cantel Merger and higher incentive-based compensation costs, partially offset by the lower acquisition-related and transaction items incurred in connection with the Hu-Friedy acquisition and to a lesser extent, a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic. General corporate expenses decreased by$7,297 or 17.1%, for the six months endedJanuary 31, 2021 from the six months endedJanuary 31, 2020 . This decrease was primarily driven by significant reduction in acquisition-related and transaction charges incurred in connection with the Hu-Friedy acquisition in the prior year period and to a lesser extent, a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic, partially offset by merger-related costs associated with the STERIS and Cantel Merger and higher incentive-based compensation costs.
Interest Expense, Net
Interest expense, net increased by$5,241 or 51.1%, to$15,491 for the three months endedJanuary 31, 2021 from$10,250 for the three months endedJanuary 31, 2020 . Interest expense, net increased by$15,815 or 99.0%, to$31,784 for the six months endedJanuary 31, 2021 from$15,969 for the six months endedJanuary 31, 2020 . The increases in both the three and six month periods resulted from an increase in the average outstanding debt, which includes both our term loan and our revolver borrowings to support the funding of the Hu-Friedy acquisition inOctober 2019 and the interest expense associated with the issuance of convertible debt inMay 2020 . Interest expense, net includes non-cash interest related to the amortization of debt issuance costs of$836 and$562 for the three months endedJanuary 31, 2021 and 2020, respectively, and$1,664 and$983 for the six months endedJanuary 31, 2021 and 2020, respectively. Non-cash interest of$1,674 and$3,311 related to the amortization of the discount on the convertible debt was also included in the three and six months endedJanuary 31, 2021 . Non-cash interest of$1,384 and$2,797 related to the amortization of the loss on terminated interest rate swaps was also included in the three and six months endedJanuary 31, 2021 . We expect interest expense to be elevated during fiscal 2021 as a result of a full year of interest expense associated with our convertible debt and the amortization of the loss on terminated interest rate swaps. Including the$50,000 repayment made inMarch 2021 , we have made a total of$175,000 of repayments towards our outstanding revolver borrowings. Such repayments will help offset any incremental interest expense for the remainder of fiscal 2021.
Income Taxes
The consolidated effective tax rate increased to 25.2% for the three months endedJanuary 31, 2021 from 14.7% for the three months endedJanuary 31, 2020 . The increase was primarily driven by positive income from operations in the current quarter and the unfavorable impact of stock-based compensation, partially offset by favorable geographic income mix. The consolidated effective tax rate decreased to 27.2% for the six months endedJanuary 31, 2021 from 42.1% for the six months (dollar amounts in thousands except share and per share data or as otherwise noted) 26 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q
ended
Non-GAAP Financial Measures In evaluating our operating performance, we supplement the reporting of our financial information determined under generally accepted accounting principles inthe United States ("GAAP") with certain non-GAAP financial measures including (i) non-GAAP net income, (ii) non-GAAP earnings per diluted share ("EPS"), (iii) earnings before interest, taxes, depreciation, amortization, loss on disposal of fixed assets, and stock-based compensation expense ("EBITDAS"), (iv) adjusted EBITDAS, (v) net debt and (vi) organic sales. These non-GAAP financial measures are indicators of our performance that are not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, stockholders and other readers of our consolidated financial statements in making comparisons to our historical operating results and analyzing the underlying performance of our results of operations. These non-GAAP financial measures are not intended to be, and should not be, considered separately from, or as an alternative to, the most directly comparable GAAP financial measures. To measure earnings performance on a consistent and comparable basis, we exclude certain items that affect comparability of operating results and the trend of earnings. These adjustments are irregular in timing, may not be indicative of our past and future performance and are therefore excluded to allow investors to better understand underlying operating trends. The following are examples of the types of adjustments that are excluded: (i) amortization of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, (iv) certain significant and discrete tax matters and (v) other significant items management deems irregular or non-operating in nature. Amortization expense of purchased intangible assets is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduce our net income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and invest in our continued growth. Acquisition-related items consist of (i) fair value adjustments to contingent consideration and other contingent liabilities resulting from acquisitions, (ii) due diligence, integration, legal fees and other transaction costs associated with our acquisition program and (iii) acquisition accounting charges for the amortization of the initial fair value adjustments of acquired inventory and deferred revenue. The adjustments of contingent consideration and other contingent liabilities are periodic adjustments to record such amounts at fair value at each balance sheet date. Given the subjective nature of the assumptions used in the determination of fair value calculations, fair value adjustments may potentially cause significant earnings volatility that are not representative of our operating results. Similarly, due diligence, integration, legal and other acquisition costs associated with our acquisition program, including accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since these acquisition-related items are irregular and often mask underlying operating performance, we exclude these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance. 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-compensation costs. Since these restructuring-related and business optimization items 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. Merger-related items consist primarily of transaction-related costs such as banking and legal fees associated with the STERIS and Cantel Merger which was announced inJanuary 2021 . Since these merger-related items are irregular and specific to this acquisition, we excluded these amounts for purposes of calculating our non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance. Excess tax benefits and expenses 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 effects are largely unrelated to our (dollar amounts in thousands except share and per share data or as otherwise noted) 27 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q
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.
We are required under GAAP to separately account for the liability (debt) and equity (conversion option) components of our convertible debt issued inMay 2020 . Accordingly, we are required to recognize non-cash interest expense that is associated with the debt discount component recorded in equity. Since the amortization of the debt discount is a non-cash expense, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures as we believe that the exclusion of the non-cash interest expense provides investors an enhanced view of our operational performance related to cash flow and liquidity. As a result of terminating our interest rate swaps during fiscal 2020, we recorded a loss in other comprehensive income which is required by GAAP to be amortized and recorded in interest expense through the original maturity date of the terminated swaps. Since the amortization of the loss is a non-cash expense, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures as we believe that the exclusion of the non-cash interest expense provides investors an enhanced view of our operational performance related to cash flow and liquidity.
Three Months Ended
During the three months endedJanuary 31, 2021 , we completed the disposition of certain assets of our Aexis business and the disposition of a service business inCanada , which resulted in a pre-tax loss of$391 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, we made an adjustment to our net income and diluted EPS to exclude this loss to arrive at our non-GAAP financial measures.
Three Months Ended
During the three months endedJanuary 31, 2020 , we completed the disposition of a dental product line. This resulted in a pre-tax loss of$170 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, we made an adjustment to our net income and diluted EPS to exclude this gain 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: Three Months Ended
2021 2020
Net income (loss)/Diluted EPS, as reported
6,966 0.16 7,967 0.19
Acquisition-related items, net of tax(2) 1,815 0.04 18,078 0.42
Restructuring-related charges, net of tax(3) 2,641 0.06 1,932 0.05
Merger-related items, net of tax(1) 8,452 0.19 - -
Non-cash interest, net of tax(4) 2,480 0.06 - -
Net loss on dispositions, net of tax(1) 282 0.01 130 -
Excess tax benefits(5) (64) - - -
Non-GAAP net income/Non-GAAP diluted EPS
________________________________________________
(1)Amounts were recorded in general and administrative expenses. (2)For the three months endedJanuary 31, 2021 , pre-tax acquisition-related items of$2,501 were recorded in general and administrative expenses. For the three months endedJanuary 31, 2020 , pre-tax acquisition-related items of$11,929 were recorded in cost of sales and$12,214 were recorded in general and administrative expenses. (3)For the three months endedJanuary 31, 2021 , pre-tax restructuring-related items of$729 were recorded in cost of sales and$2,797 were recorded in general and administrative expenses. For the three months endedJanuary 31, 2020 , pre-tax restructuring-related items of$1,662 were recorded in cost of sales and$2,562 were recorded in general and administrative expenses. (4)Amounts were recorded in interest expense, net. (5)Amounts were recorded in income taxes. (dollar amounts in thousands except share and per share data or as otherwise noted) 28 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q
Six Months Ended
During the six months endedJanuary 31, 2021 , we completed the disposition of certain assets of our Aexis business and the disposition of a service business inCanada , which resulted in a pre-tax loss of$142 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, we made an adjustment to our net income and diluted EPS to exclude this loss to arrive at our non-GAAP financial measures.
Six Months Ended
During the six months endedJanuary 31, 2020 , we completed the disposition of a dental product line. This resulted in a pre-tax loss of$170 recorded in general and administrative expenses. Since we believe that this loss was not representative of our ordinary course past or future operations, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.
The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:
Six Months Ended
2021 2020
Net income/Diluted EPS, as reported$ 36,532 $ 0.84 $ 3,504 $ 0.08 Intangible amortization, net of tax(1) 13,902 0.32 12,988 0.31 Acquisition-related items, net of tax(2) 2,318 0.05 30,598 0.72 Restructuring-related charges, net of tax(3) 6,416 0.15 5,284 0.13 Merger-related items, net of tax(1) 8,452 0.20 - - Non-cash interest, net of tax(4) 4,375 0.10 - - Net loss on dispositions, net of tax(1) 103 - 130 - Excess tax charges(5) 1,016 0.02
559 0.01
Non-GAAP net income/Non-GAAP diluted EPS
________________________________________________
(1)Amounts were recorded in general and administrative expenses. (2)For the six months endedJanuary 31, 2021 , pre-tax acquisition-related items of$3,041 were recorded in general and administrative expenses. For the six months endedJanuary 31, 2020 , pre-tax acquisition-related items of$16,700 were recorded in cost of sales and$24,020 were recorded in general and administrative expenses. (3)For the six months endedJanuary 31, 2021 , pre-tax restructuring-related items of$2,029 were recorded in cost of sales and$6,479 were recorded in general and administrative expenses. For the six months endedJanuary 31, 2020 , pre-tax restructuring-related items of$2,818 were recorded in cost of sales and$6,833 were recorded in general and administrative expenses. (4)Amounts were recorded in interest expense, net. (5)Amounts were recorded in income taxes. We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment have on net income. In particular, acquisitions have historically resulted in significant increases in amortization of purchased intangible assets that reduce net income. Additionally, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a complement to operating income, net income and other GAAP financial performance measures. We define adjusted EBITDAS as EBITDAS excluding the same non-GAAP adjustments to net income discussed above. We use adjusted EBITDAS when evaluating operating performance because we believe the exclusion of such adjustments, of which a significant portion are non-cash items, is necessary to provide the most accurate measure of on-going core operating results and to evaluate comparative results period over period. (dollar amounts in thousands except share and per share data or as otherwise noted) 29 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q
The reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
Three Months Ended January 31, Six Months Ended January 31,
2021 2020 2021 2020
Net income (loss), as reported $ 12,068 $ (2,263) $ 36,532 $ 3,504
Interest expense, net 15,491 10,250 31,784 15,969
Income taxes 4,070 (391) 13,665 2,547
Depreciation 8,209 7,877 16,618 14,215
Amortization 8,950 8,974 17,868 15,003
(Gain) loss on disposal of fixed assets - (101) - 66
Stock-based compensation expense 5,066 3,412 8,488 5,816
EBITDAS 53,854 27,758 124,955 57,120
Acquisition-related items(1) 2,705 24,143 3,216 40,720
Restructuring-related charges(1) 2,456 3,728 7,350 9,095
Merger-related items 11,620 - 11,620 -
Net loss on dispositions 391 170 142 170
Adjusted EBITDAS $ 71,026 $ 55,799 $ 147,283 $ 107,105 ________________________________________________
(1)Excludes stock-based compensation expense.
We define net debt as long-term debt (bank debt excluding unamortized debt
issuance costs) plus the convertible debt (excluding unamortized debt issuance
costs and unamortized discount), less cash and cash equivalents. Each of the
components of net debt appears on our condensed consolidated balance sheets and
in our notes to the consolidated financial statements included in Part I, Item 1
of this report. 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.
January 31,
2021 July 31, 2020
Long-term bank debt (excluding debt issuance costs) $
820,375
168,000
Less cash and cash equivalents (243,061) (277,871)
Net debt $ 745,314 $ 835,504
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) dispositions 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 dispositions because the nature, size, and number of
acquisitions and dispositions can vary dramatically from period to period and
can obscure underlying business trends and make comparisons of financial
performance difficult.
For the three months ended January 31, 2021 , the reconciliation of net sales
growth to organic sales growth for total net sales and net sales of our four
reportable segments was calculated as follows:
Medical Life Sciences Dental Dialysis
Net Sales Net Sales Net Sales Net Sales Net Sales
Net sales growth 1.9 % 2.1 % (7.8) % 4.3 % 35.6 %
Impact due to foreign currency
translation (0.8) % (2.0) % (0.2) % - % - %
Organic sales growth 1.1 % 0.1 % (8.0) % 4.3 % 35.6 %
(dollar amounts in thousands except share and per share data or as otherwise
noted) 30
--------------------------------------------------------------------------------
Cantel Medical Corp. 2021 Second Quarter Form 10-Q
For the six months ended
Medical Life Sciences Dental Dialysis
Net Sales Net Sales Net Sales Net Sales Net Sales
Net sales growth 8.3 % 0.7 % (7.5) % 28.6 % 20.9 %
Impact due to foreign currency translation (0.8) % (1.7) % (0.1) % - % - %
Sales related to acquisitions/dispositions (7.8) % - % - % (25.3) % - %
Organic sales growth (0.3) % (1.0) % (7.6) % 3.3 % 20.9 %
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to generate cash to fund operating, investing and financing activities. Significant factors affecting the management of liquidity are cash flows generated from operating activities, capital expenditures, acquisitions of businesses and cash dividends. Cash provided by operating activities continues to be a primary source of funds. As necessary, we have supplemented our operating cash flow with borrowings from our revolving credit facility and other financing resources, such as convertible debt, to fund our acquisitions and related business activities.
Cash Flows
Net Cash Provided by Operating Activities. Net cash provided by operating activities increased by$66,219 to$109,752 for the six months endedJanuary 31, 2021 from$43,533 for the six months endedJanuary 31, 2020 , primarily due to a reduction in acquisition-related payments, better inventory management and the timing of accounts payable and other accrued expenses. This was partially offset by higher federal income tax payments, the timing of the collection of our outstanding accounts receivables and the initial payment of certain banking and legal fees associated with the recently announced STERIS and Cantel Merger.Net Cash Used in Investing Activities. Net cash used in investing activities decreased by$688,029 to$17,183 for the six months endedJanuary 31, 2021 from$705,212 for the six months endedJanuary 31, 2020 , primarily due to the Hu-Friedy acquisition in the prior year, and a decrease in capital expenditures, as we have reduced spending associated with certain capital projects in response to the COVID-19 pandemic in order to maximize our liquidity and cash position. We continue to monitor our capital expenditure spending to ensure we maintain flexibility during the remainder of fiscal 2021.Net Cash Used in Financing Activities. Net cash used in financing activities increased by$802,185 to$127,549 for the six months endedJanuary 31, 2021 from$674,636 of cash provided for the six months endedJanuary 31, 2020 , primarily due to repayments of borrowings of our revolving credit facility in the current year. During the six months endedJanuary 31, 2020 , we made borrowings of approximately$678,125 to support the Hu-Friedy acquisition.
Second Amendment to Credit Agreement
AtJanuary 31, 2021 , we had$546,375 of outstanding term loan borrowings and$274,000 of revolver borrowings under the First Amendment to our Fourth Amended and Restated Credit Agreement. OnMay 11, 2020 , we entered into a Second Amendment (the "Second Amendment") further amending the Fourth Amended and Restated Credit Agreement (as amended, the "Amended Credit Agreement"). The Second Amendment's principal changes include (i) increasing the maximum consolidated leverage ratio covenant for the fiscal quarter endedApril 30, 2020 to 5.25x, (ii) suspending such financial maintenance covenant untilOctober 31, 2021 , (iii) maintaining a minimum liquidity (as defined in the credit agreement) of at least$50,000 during the fiscal quarter endingJuly 31, 2020 and$75,000 during each of the following fiscal quarters ending with the fiscal quarter endingJuly 31, 2021 , (iv) requiring us to maintain minimum consolidated EBITDA for each period of four fiscal quarters ending on the last day of the fiscal quarters endingJuly 31, 2020 throughJuly 31, 2021 and (v) limiting our ability to pay dividends and repurchase shares of our common stock during the period the consolidated leverage ratio and consolidated interest coverage ratio are suspended. The interest rates have been amended so that loans under the Amended Credit Agreement, until the third business day following the date on which a compliance certificate is delivered for the fiscal quarter endingOctober 31, 2021 , bear interest at 2.00% above the base rate for base rate borrowings, or at 3.00% above LIBOR for LIBOR-based borrowings, and also provides for fees on the unused portion of the revolving credit facility at a rate of 0.50%. Thereafter, (i) borrowings bear interest at rates ranging from 0.00% to 1.75% above base rate for base rate borrowings, or at rates ranging from 1.00% to 2.75% above LIBOR for LIBOR-based borrowings, depending on our consolidated leverage ratio, which is the consolidated ratio of total funded debt (dollar amounts in thousands except share and per share data or as otherwise noted) 31 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q (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 0.50%, depending on our consolidated leverage ratio. Interest rates have also been amended to include a 1.00% floor on all borrowings. 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 itsU.S. -based subsidiaries, (ii) a pledge by Cantel and itsU.S. -based subsidiaries that guarantees the obligations under the Credit agreement of all of the outstanding shares of itsU.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.
Interest Rate Swaps
In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, in fiscal 2019, we entered into two interest rate swaps with a combined notional value of$150,000 , expiring onJune 28, 2023 . The swaps fixed interest rates at 2.265%. In March, 2020, we terminated our existing interest rate swaps and entered into a new interest rate swap (the "March 2020 Swap") with a notional value of$500,000 , which fixed interest rates at 1.297% and was set to expire onSeptember 6, 2024 . OnMay 13, 2020 , in connection with the Second Amendment to our credit agreement, we terminated theMarch 2020 Swap and entered into a new interest rate swap (the "May 2020 Swap") with a notional value of$500,000 , which included a LIBOR floor of 1.00%, fixed interest rates at 2.08% and will expire onSeptember 6, 2024 . In connection with our interest rate swap transactions, we designate our hedge relationships as cash flow hedges. At inception, we employed the hypothetical derivative method to assess hedge effectiveness. AtJanuary 31, 2021 , we performed a qualitative analysis of hedge effectiveness and will perform such qualitative analysis in future reporting periods. AtJanuary 31, 2021 ,$5,462 was recorded in accrued expenses and$13,149 was recorded in other long-term liabilities, which represents the fair value of the interest rate swap. As ofJuly 31, 2020 ,$5,462 was recorded in accrued expenses and$15,694 was recorded in other long-term liabilities, which represents the fair value of the interest rate swap. As these interest rate swaps were accounted for as cash flow hedges, the changes in fair value were recorded in accumulated other comprehensive loss. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods. As the original forecasted hedged transactions (interest payments on variable rate debt) are still probable to occur, the net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination dates will be amortized to interest expense through the original maturity date of the original swaps. For the six months endedJanuary 31, 2021 , we recognized$2,797 in interest expense, net relating to the non-cash amortization of the net loss on the terminated swaps reported in accumulated other comprehensive loss. We expect to recognize approximately$2,687 in interest expense, net for the remainder of fiscal 2021.
Convertible Senior Notes Offering
OnMay 15, 2020 , we issued$168,000 aggregate principal amount of 3.25% convertible senior notes due 2025 (the "Notes") in a private placement, including pursuant to the grant to the initial purchasers of$140,000 aggregate principal amount of the Notes, an option to purchase up to an additional$28,000 aggregate principal amount of Notes. The private placement offering closed onMay 15, 2020 . The net proceeds from this offering were approximately$162,977 (including net proceeds relating to the issuance of the additional Notes), after deducting the initial purchasers' discount and before the cost of offering expenses. The initial conversion price will be approximately$41.51 per share of common stock and will be subject to adjustment if certain events occur. We intend to use the net proceeds from this offering for general corporate purposes, which includes applying at least 50% of the amount by which the net proceeds exceed$100,000 to the repayment of debt under our credit facilities as required by the Second Amended Credit Agreement. We expect our annual cash interest to increase by approximately$5,460 as a result of issuance of the Notes. In addition, diluted earnings per share may be negatively impacted by the Notes because of the dilutive nature of the potential conversion into shares of common stock.
Financing Needs
AtJanuary 31, 2021 , our total debt (excluding debt issuance costs and unamortized discount) of$988,375 , net of our cash and cash equivalents of$243,061 , was$745,314 . Stockholders' equity as of that date was$787,666 . Our operating segments generate significant cash from operations. AtJanuary 31, 2021 , we had a cash balance of$243,061 , of which$80,151 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, including the proceeds we received as part of the (dollar amounts in thousands except share and per share data or as otherwise noted) 32 --------------------------------------------------------------------------------Cantel Medical Corp. 2021 Second Quarter Form 10-Q Notes offering inMay 2020 , and our anticipated cash flows from operations in the upcoming quarters as we recover from the COVID-19 pandemic 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. InMarch 2021 , we repaid an additional$50,000 of borrowings under our revolving credit facility. AtMarch 10, 2021 , approximately$175,551 was available under our Amended Credit Agreement. Critical Accounting Policies There were no changes to our critical accounting policies from those disclosed in our 2020 Annual Report on Form 10-K. Forward -looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 and other securities laws. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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," "aspire," 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, strategic objectives, performance drivers 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, including the impacts of the COVID-19 pandemic on our operations and financial results, general economic conditions, technological and market changes in the medical device industry, our ability to execute on our strategy, risks associated with operating our international business, including limited operating experience and market recognition in new international markets, changes inUnited States healthcare policy at both the state and federal level, product liability claims resulting from the use of products we sell and distribute, and risks related to our intellectual property and proprietary rights needed to maintain our competitive position. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under Item 1A of the 2020 Annual Report on Form 10-K, entitled Risk Factors. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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