Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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. ☐

 

 

Number of shares of common stock outstanding as of February 28,June 1, 2018: 41,714,324.41,709,335.

 

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 $60,787. The 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 Endoscopy segment.

On April 1, 2017, we purchased certain endoscopy-related net assets of CR Kennedy & Company Pty Ltd. (“CR Kennedy”) related to its distribution and sale of our Medivators endoscopy products in Australia for total consideration, excluding acquisition related costs, of $11,999. The CR Kennedy business includes a full sales and service organization and our Medivators-branded automated endoscope reprocessors, chemistries, endoscopy procedure products and other consumables in Australia, and is included in our Endoscopy segment.

On September 26, 2016, we acquired certain net assets of Vantage Endoscopy Inc. (“Vantage”) related to its distribution and sale of our Medivators endoscopy products in Canada for total consideration, excluding acquisition-related costs, of $4,044. Vantage was our exclusive distributor of Medivators capital equipment (e.g., automated endoscope reprocessors) and related consumables and accessories in Canada, and is included in our Endoscopy segment.

On August 1, 2016, we acquired all of the issued and outstanding stock of Accutron Inc. (“Accutron”), a Phoenix-based company, for total consideration, excluding acquisition-related costs, of $53,049. The Accutron business designs, manufactures and sells nitrous oxide conscious sedation equipment and single use nasal masks for use in dental procedures, and is included in our Healthcare Disposables segment.

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.

At January 31,April 30, 2018, 202,431 unvested191,708 nonvested restricted stock awards were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At January 31,April 30, 2018, 968,456972,312 shares are collectively available pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.

The 2006 Plan was terminated on January 7, 2016 in conjunction with the adoption of the 2016 Plan. At January 31,April 30, 2018, options to purchase 70,000 shares of common stock were outstanding, and 46,942 unvested38,295 nonvested restricted stock awards were outstanding under the 2006 Plan. No additional awards will be granted under this plan.

The following table shows the income statement components of stock-based compensation expense recognized in the condensed consolidated statements of income:

At January 31,April 30, 2018, total unrecognized stock-based compensation expense, before income taxes, related to total nonvested stock options and restricted stock awards was $17,437$14,420 with a remaining weighted average period of 2220 months over which such expense is expected to be recognized.

We determinedetermined the fair value of restricted stock awards with market conditions using a Monte Carlo simulation on the date of grant using the following assumptions:

A summary of nonvested stock award activity for the sixnine months ended January 31,April 30, 2018 follows:

A summary of stock option activity for the sixnine months ended January 31,April 30, 2018 follows:

During the sixnine months ended January 31,April 30, 2018, 5,000 options vested, with an aggregate fair value of approximately $132. During the sixnine months ended January 31,April 30, 2018, 52,500 options were exercised, with an aggregate fair value of approximately $4,049. As of January 31,April 30, 2018, all of the outstanding options had vested or were expected to vest in future periods. No options were granted during the sixnine months ended January 31,April 30, 2018.

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 the sixnine months ended January 31,April 30, 2018, income tax deductions of $3,406 were generated, of which $1,394 were previously recorded as a reduction to income taxes over the equity awards’ vesting period and the remaining excess tax benefit of $2,012 (which includes the state income tax benefit) was recorded as a reduction to income taxes. For the sixnine months ended January 31,April 30, 2017, income tax deductions of $5,545$5,520 were generated, of which $3,259$3,329 were previously recorded as a reduction to income taxes over the equity awards’ vesting period and the remaining excess tax benefit of $2,286$2,191 was recorded as a reduction to income taxes.

In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar and Singapore dollar relative to the U.S. dollar on the conversion of such net assets into the functional currencies, we enter into short-term forward contracts to purchase Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars, which contracts are one-month in duration. These short-term contracts are designated as fair value hedge instruments. These foreign currency forward contracts are continually replaced with new one-month contracts as long as we have significant net assets that are denominated and ultimately settled in currencies other than each entity’s functional currency. Gains and losses related to hedging contracts to buy Euros, British Pounds, Canadian dollars, Australian dollars and Singapore dollars forward are immediately realized within general and administrative expenses due to the short-term nature of such contracts. We do not currently hedge against the impact of fluctuations in the value of the Chinese Renminbi and Sri Lankan Rupee relative to the U.S. dollar because the overall foreign currency exposure relating to the currencythese currencies is currently not deemed significant.

There were seveneight foreign currency forward contracts with an aggregate notional value of $24,169$29,897 and $24,762 at January 31,April 30, 2018 and July 31, 2017, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the three and sixnine months ended January 31,April 30, 2018 and 2017, the settlementsettlements of our forward contracts resulted in immaterial amounts of net currency conversion gains and losses on the hedged items.items in the aggregate.

 

 

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

In 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 10, "Commitments and Contingencies."

WithThe following table summarizes the exception of the resolution of the Jet Prep obligation, there was no Level 3 activity during the three and six months ended January 31, 2018. The Level 3 activity during the three and six months ended January 31, 2017 was not material.of our financial instruments:

As of January 31,April 30, 2018 and July 31, 2017, 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.

The Company’s intangible assets consist of the following:

Amortization expense related to intangible assets was $4,364$4,480 and $4,057$3,964 for the three months ended January 31,April 30, 2018 and 2017, respectively, and $8,412$12,892 and $7,966$11,930 for the sixnine months ended January 31,April 30, 2018 and 2017, respectively. We expect to recognize an additional $8,825$5,253 of amortization expense related to intangible assets for the remainder of fiscal 2018, and thereafter $17,167, $15,447, $15,446, $15,095$18,008, $16,315, $16,313, $15,969 and $14,711$15,586 of amortization expense for fiscal years 2019, 2020, 2021, 2022 and 2023, respectively.

Goodwill changed during the sixnine months ended January 31,April 30, 2018 as follows:

Borrowings under our Third Amended and Restated Credit Agreement (the “2014 Credit Agreement”) bear interest at rates ranging from 0.25% to 1.25% above the lender’s base rate, or at rates ranging from 1.25% to 2.25% above the London Interbank Offered Rate (“LIBOR”), depending upon the Company’s “Consolidated Leverage Ratio,” which is defined as the consolidated ratio of total funded debt to earnings before interest, taxes, depreciation and amortization, and as further adjusted under the terms of the 2014 Credit Agreement (“Consolidated EBITDA”). At January 31,April 30, 2018, the lender’s base rate was 4.50%5.00% and the LIBOR rates ranged from 1.46%1.89% to 1.56%1.90%. The margins applicable to our outstanding borrowings were 0.50%0.25% above the lender’s base rate or 1.50%1.25% above LIBOR. All of our outstanding borrowings were under LIBOR contracts at January 31,April 30, 2018. The 2014 Credit Agreement also provides for fees on the unused portion of our facility at rates ranging from 0.20% to 0.40%, depending upon our Consolidated Leverage Ratio, which was 0.25%0.20% at January 31,April 30, 2018.

 

The 2014 Credit Agreement contains affirmative and negative covenants reasonably customary for similar credit facilities and is secured by (i) substantially all assets of Cantel and its 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 and other covenants under the 2014 Credit Agreement.

 

As of January 31,April 30, 2018 and July 31, 2017, we had $160,000$169,000 and $126,000, respectively, of outstanding borrowings under the 2014 Credit Agreement. Debt issuance costs associated with our credit facilities are capitalized and amortized to interest expense over

Debt issuance costs associated with our credit facilities are capitalized and amortized to interest expense over the term of the credit facilities. As of January 31,April 30, 2018 and July 31, 2017, such debt issuance costs, net of related amortization, were included in other assets, and amounted to $397$334 and $580, respectively.

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 sixnine months ended January 31,April 30, 2018.

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.

Basic EPS is computed based upon the weighted average number of common shares outstanding for the year. Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year. We include participating securities (unvested(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 unvestednonvested 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):

A reconciliation of weighted average number of shares and common stock equivalents attributable to common stock, as determined above, to the Company’s total weighted average number of shares and common stock equivalents, including participating securities, is set forth in the following table:

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 revises 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.

Section 15 of the Internal Revenue 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 and the new U.S. federal statutory rate of 21% will apply to fiscal 2019 and beyond. 

During the second quarter ended January 31, 2018, we recorded a one-time net benefit of $8,398 to the income tax provision as a provisional estimate of the net accounting impact of the 2017 Tax Act in accordance with SAB 118. The net chargebenefit is comprised of the following: (i) expense of $294 related to the mandatory transition tax for deemed repatriation of deferred foreign income and (ii) a benefit of $8,692 related to a revaluation of our deferred tax assets and liabilities. During the third quarter ended April 30, 2018, we reduced the mandatory transition tax by $294.

Given the significant complexity of the 2017 Tax Act, anticipated guidance from the U.S. Treasury concerning implementation of the 2017 Tax Act, and the potential for additional guidance from the SEC or the FASB related to the 2017 Tax Act, the provisional estimates we recorded may require adjustment during the measurement period. 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 our actual full fiscal 2018 results of operations, as well as potential new or interpretative guidance issued by the SEC, the FASB, or the Internal Revenue Service) and as we continue our analysis. We continue to analyze the changes to certain income tax deductions, assess calculations of earnings and profits in certain foreign subsidiaries, including whether those earnings are held in cash or other assets, and gather additional data to compute the full impact of the 2017 Tax Act on our deferred and current tax assets and liabilities. Furthermore, such analysis includes but is not limited to provisions regarding the GILTI FDII, BEAT, interest expense and certain employee expense deductions, as well as the state tax impact of the 2017 Tax Act. During the third quarter ended April 30, 2018, we reduced the mandatory transition tax by $294. We are currently in the process of further analyzing its structure and estimated future results and, as a result, are not yet able to reasonably estimate the effect of these provisions of the 2017 Tax Act.

A reconciliation of the consolidated effective income tax rate from the three and sixnine months ended January 31,April 30, 2017 to the three and sixnine months ended January 31,April 30, 2018 is as follows:

The Company’s reportable segments are as follows: