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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549
 
Form 10-Q

☒Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 2020.

or
☐Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from            to           .
 
Commission file number:   001-31337
CMD-20201031_G1.JPG  
 Cantel Medical Corp.
(Exact name of registrant as specified in its charter)

Delaware   22-1760285
(State or other jurisdiction of incorporation or organization)   (I.R.S. employer identification no.)

150 Clove Road Little Falls New Jersey 07424 (973) 890-7220
(Address of principal executive offices) (Zip code) (Registrant’s telephone number, including area code)

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
 
Number of shares of common stock outstanding as of November 30, 2020: 42,244,649.



Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
TABLE OF CONTENTS

Page No.
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
1
1
2
3
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
4
5
6
Item 2.
20
Item 3.
29
Item 4.
29
PART II – OTHER INFORMATION
Item 1.
30
Item 1A.
30
Item 2.
31
Item 3.
31
Item 4.
31
Item 5.
31
Item 6.
31
Signatures
31



Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
PART I – FINANCIAL INFORMATION
Item 1.    Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
  October 31, 2020 July 31, 2020
Assets    
Cash and cash equivalents $ 258,021  $ 277,871 
Accounts receivable, net of allowance for doubtful accounts of $4,029 and $3,905
158,763  148,419 
Inventories, net 163,880  167,960 
Prepaid expenses and other current assets 19,429  18,443 
Income taxes receivable 27,036  33,933 
Total current assets 627,129  646,626 
Property and equipment, net 223,510  225,222 
Right-of-use assets, net 47,901  48,684 
Intangible assets, net 471,337  480,032 
Goodwill 660,421  660,172 
Other long-term assets 6,467  6,231 
Deferred income taxes 3,738  4,787 
Total assets $ 2,040,503  $ 2,071,754 
Liabilities and stockholders’ equity    
Accounts payable $ 46,891  $ 42,008 
Compensation payable 47,788  47,769 
Accrued expenses 45,525  41,480 
Deferred revenue 28,454  26,223 
Current portion of long-term debt 14,750  7,375 
Income taxes payable 6,759  4,373 
Current portion of lease liabilities 10,044  10,268 
Total current liabilities 200,211  179,496 
Long-term debt 845,142  926,834 
Convertible debt 126,617  124,835 
Deferred income taxes 49,533  49,533 
Long-term lease liabilities 40,296  40,679 
Other long-term liabilities 20,323  20,778 
Total liabilities 1,282,122  1,342,155 
Commitments and contingencies (Note 12)
Preferred Stock, par value $1.00 per share; authorized 1,000,000 shares; none issued
—  — 
Common Stock, par value $0.10 per share; authorized 75,000,000 shares; issued 46,924,945 shares and outstanding 42,243,881 shares at October 31, 2020; issued 46,812,750 shares and outstanding 42,162,218 shares at July 31, 2020
4,693  4,681 
Additional paid-in capital 276,450  273,040 
Retained earnings 572,798  548,334 
Accumulated other comprehensive loss (25,249) (27,599)
Treasury Stock; 4,681,064 shares at October 31, 2020; 4,650,532 shares at July 31, 2020
(70,311) (68,857)
Total stockholders’ equity 758,381  729,599 
Total liabilities and stockholders’ equity $ 2,040,503  $ 2,071,754 

See accompanying notes to Condensed Consolidated Financial Statements.


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Condensed Consolidated Statements of Income
(Unaudited)
  Three Months Ended October 31,
  2020 2019
Net sales    
Product sales $ 263,570  $ 225,678 
Product service 33,459  31,568 
Total net sales 297,029  257,246 
Cost of sales    
Product sales 129,655  120,586 
Product service 20,008  20,791 
Total cost of sales 149,663  141,377 
Gross profit 147,366  115,869 
Expenses:
Selling 40,063  38,411 
General and administrative 49,378  55,287 
Research and development 7,573  7,747 
Total operating expenses 97,014  101,445 
Income from operations 50,352  14,424 
Interest expense, net 16,293  5,719 
Income before income taxes 34,059  8,705 
Income taxes 9,595  2,938 
Net income $ 24,464  $ 5,767 
Earnings per common share:    
Basic $ 0.58  $ 0.14 
Diluted $ 0.57  $ 0.14 
Dividends per common share $ —  $ — 
 
See accompanying notes to Condensed Consolidated Financial Statements.


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
  Three Months Ended October 31,
  2020 2019
Net income $ 24,464  $ 5,767 
Other comprehensive income:    
Foreign currency translation 502  3,932 
Interest rate swap, net of tax 1,848  1,245 
Total other comprehensive income: 2,350  5,177 
Comprehensive income $ 26,814  $ 10,944 

See accompanying notes to Condensed Consolidated Financial Statements.


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
  Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury stock,
at cost 		Total Stockholders’ Equity
  Shares Amount
Balance, July 31, 2020 42,162,218  $ 4,681  $ 273,040  $ 548,334  $ (27,599) $ (68,857) $ 729,599 
Repurchases of shares (30,532) —  —  —  —  (1,454) (1,454)
Stock-based compensation —  —  3,422  —  —  —  3,422 
Equity vests/option exercises 112,195  12  (12) —  —  —  — 
Net income —  —  —  24,464  —  —  24,464 
Other comprehensive income —  —  —  —  2,350  —  2,350 
Balance, October 31, 2020 42,243,881  $ 4,693  $ 276,450  $ 572,798  $ (25,249) $ (70,311) $ 758,381 

See accompanying notes to Condensed Consolidated Financial Statements.

  Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury stock,
at cost 		Total Stockholders’ Equity
  Shares Amount
Balance, July 31, 2019 41,771,228  $ 4,636  $ 204,795  $ 539,097  $ (22,197) $ (64,794) $ 661,537 
Repurchases of shares (49,614) —  —  —  —  (3,613) (3,613)
Stock-based compensation —  —  2,404  —  —  —  2,404 
Issuance of shares 751,471  75  59,925  —  —  —  60,000 
Equity vests/option exercises 104,686  11  908  —  —  —  919 
Cancellations of restricted stock (946) —  —  —  —  —  — 
Net income —  —  —  5,767  —  —  5,767 
Other comprehensive income —  —  —  —  5,177  —  5,177 
Balance, October 31, 2019 42,576,825  $ 4,722  $ 268,032  $ 544,864  $ (17,020) $ (68,407) $ 732,191 

See accompanying notes to Condensed Consolidated Financial Statements.


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Condensed Consolidated Statements of Cash Flows
(Unaudited)
  Three Months Ended October 31,
  2020 2019
Cash flows from operating activities    
Net income $ 24,464  $ 5,767 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation 8,409  6,338 
Amortization 8,918  6,029 
Stock-based compensation expense 3,422  2,404 
Deferred income taxes 441  1,454 
Amortization of right-of-use assets 2,982  2,310 
Non-cash interest expense 4,445  925 
Inventory step-up amortization —  4,772 
Other non-cash items, net 8  (1,061)
Changes in assets and liabilities, net of effects of acquisitions/dispositions:    
Accounts receivable (10,302) (348)
Inventories 4,214  (6,254)
Prepaid expenses and other assets (1,206) 1,147 
Accounts payable and other liabilities 10,221  (13,664)
Income taxes 9,284  1,450 
Operating lease payments (3,293) (2,338)
Net cash provided by operating activities 62,007  8,931 
Cash flows from investing activities    
Capital expenditures (5,495) (10,390)
Proceeds from sale of businesses, net of cash retained 348  — 
Acquisition of businesses, net of cash acquired —  (658,932)
Net cash used in investing activities (5,147) (669,322)
Cash flows from financing activities    
Proceeds from issuance of long term debt —  400,000 
Repayments of long-term debt —  (2,375)
Borrowings under revolving credit facility —  291,400 
Repayments under revolving credit facility (75,000) (10,900)
Debt issuance costs —  (9,234)
Finance lease payments (103) (127)
Purchases of treasury stock (1,454) (3,613)
Net cash (used in) provided by financing activities (76,557) 665,151 
Effect of exchange rate changes on cash and cash equivalents (153) (10)
(Decrease) increase in cash and cash equivalents (19,850) 4,750 
Cash and cash equivalents at beginning of period 277,871  44,535 
Cash and cash equivalents at end of period $ 258,021  $ 49,285 

See accompanying notes to Condensed Consolidated Financial Statements.

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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Notes to Condensed Consolidated Financial Statements (Unaudited).

1.    Basis of Presentation

Throughout this document, references to “Cantel,” “us,” “we,” “our,” and the “Company” are references to Cantel Medical Corp. and its subsidiaries, except where the context makes it clear the reference is to Cantel itself and not its subsidiaries.

Cantel is a leading provider of infection prevention products and services in the healthcare market, specializing in the following reportable segments: Medical, Life Sciences, Dental and Dialysis. See Note 15, “Reportable Segments.” Most of our equipment, consumables and supplies are used to help prevent the occurrence or spread of infections.

The unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial reporting and the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include certain information and note disclosures required by GAAP for annual financial reporting and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Annual Report of Cantel Medical Corp. on Form 10-K for the fiscal year ended July 31, 2020 (the “2020 Annual Report on Form 10-K”) and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The unaudited interim financial statements reflect all adjustments (of a normal and recurring nature) which management considers necessary for a fair presentation of the results of operations for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year. The Condensed Consolidated Balance Sheet at July 31, 2020 was derived from the audited Consolidated Balance Sheet of Cantel at that date. Certain prior year amounts have been reclassified to conform to the current year presentation.

COVID-19

In March 2020, the World Health Organization categorized the novel Coronavirus disease 2019, or (COVID-19) as a pandemic. We are subject to risks and uncertainties as a result of the COVID-19 pandemic. 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 shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, continue to create significant negative economic impacts on a global basis. The extent of the impact of the COVID-19 pandemic on our business remains uncertain and difficult to predict, as the response to the pandemic continues to evolve.

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 restrictions were lifted and limitations eased. In the first quarter of fiscal 2021, patient procedure volume trends have improved as demand for both medical and dental procedures have increase during this period.

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. We believe it is likely to continue to experience unexpected impacts on our business due to the resurgence of the virus occurring in cities across the globe.

In preparing the Condensed Consolidated Financial Statements, management is required to make estimates and assumptions, including estimates and assumptions specific to any impact that the COVID-19 pandemic will have on our operations and cash flows. The estimates and assumptions used by management affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting periods. Changes to estimates related to the COVID-19 disruptions could result in other impacts, including but not limited to goodwill and long-lived asset impairment charges, inventory write downs and bad debt expense. Actual results could differ from these estimates and the differences could be material. If historical experience and other factors used by management to make these estimates do not reasonably reflect future activity, our results of operations, financial position and cash flows could be adversely impacted.

Subsequent Events

We performed a review of events subsequent to October 31, 2020 through the date of issuance of the accompanying unaudited consolidated interim financial statements.


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
2.           Accounting Pronouncements
Newly Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” (“ASU 2020-04”) to provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. ASU 2020-04 is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 was subject to election as of March 20, 2020 and can be elected for both interim and annual periods through December 31, 2022. We adopted ASU 2020-04 on August 1, 2020. The adoption of ASU 2020-04 did not have a material impact on our financial position, results of operations or cash flows.

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. We adopted ASU 2018-15 on August 1, 2020. The adoption of ASU 2018-15 did not have a material impact on our financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”) to modify the disclosure requirements on fair value measurements in ASC 820, “Fair Value Measurement.” ASU 2018-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021), including interim periods within that reporting period. We adopted ASU 2018-13 on August 1, 2020. The adoption of ASU 2018-13 did not 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. We adopted ASU 2017-04 on August 1, 2020. The adoption of ASU 2017-04 did not have a material impact on our financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”) to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021). We adopted ASU 2016-13 on August 1, 2020. The adoption of ASU 2016-13 did not have a material impact on our financial position, results of operations or cash flows.

Recently Issued Accounting Standards

In August 2020, the FASB issued ASU 2020-06, “(Subtopic 470-20): Debt—Debt with Conversion and Other Options” (“ASU 2020-06”) to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 (our fiscal year 2022), including interim periods within those fiscal years. We are currently evaluating the impact of ASU 2020-06 on our financial position, results of operations or cash flows. The impact on our diluted earnings per share could be material upon the adoption of ASU 2020-06.

In December 2019, the FASB issued ASU 2019-12, “(Topic 740) Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”) to simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify GAAP for other areas of ASC 740 by clarifying and

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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 (our fiscal year 2022), including interim periods within that reporting period. The adoption of ASU 2019-12 is not expected to have a material impact on our financial position, results of operations or cash flows.

3.    Acquisitions
 
Hu-Friedy: On October 1, 2019, we purchased all of the issued and outstanding membership interests of Hu-Friedy Mfg. Co. LLC (“Hu-Friedy”), for total consideration (net of cash acquired), excluding acquisition-related costs, of $716,542, consisting of $662,151 of cash and $54,391 of common stock consideration (subject to adjustment), plus contingent consideration payable in cash. The additional contingent consideration payments are (i) subject to the achievement of certain commercial milestones through March 31, 2021 ranging from zero to a maximum of $50,000 and (ii) contingent upon changes in our stock price from the date of closing through a future date subject to a registration rights agreement. See Note 9, “Fair Value Measurements,” for further details regarding these contingent payments. Hu-Friedy is a leading global manufacturer of instruments and instrument reprocessing systems serving the dental industry and is included in our Dental segment.

The following table presents our purchase price allocation of our material acquisition (which was accounted for as a business combination in accordance with ASC Topic 805 “Business Combinations”):
2020
Purchase Price Allocation
Hu-Friedy(1)(2)
(Final)
Purchase Price:
Cash paid $ 662,151 
Fair value of contingent consideration 38,371 
Common stock issued 54,391 
Total $ 754,913 
Allocation:
Property and equipment 38,613 
Intangible assets:
Customer relationships 225,000 
Technology 32,000 
Brand names 112,000 
Goodwill 276,744 
Deferred income taxes (222)
Inventories 63,680 
Other working capital 7,098 
Total $ 754,913 
_______________________________________________
(1)During the second quarter of fiscal 2020, we paid $25,000 to settle a portion of the contingent consideration, and during the third quarter of fiscal 2020, we paid $35,000 to repurchase a portion of the common stock issued, both of which were included in Acquisitions, net of cash acquired in the Condensed Consolidated Statement of Cash Flows. See Note 9, “Fair Value Measurements” for additional information.
(2)The excess purchase price over net assets acquired was assigned to goodwill, all of which is deductible for income tax purposes.

Unaudited Pro Forma Summary of Operations
The following pro forma summary of operations presents our operations as if the Hu-Friedy acquisition had occurred as of the beginning of fiscal 2019. In addition to including the results of operations of this acquisition, the pro forma information gives effect to amortization of the step-up in inventory, depreciation of the step-up in property and equipment, the interest on additional borrowings, the amortization of intangible assets and the issuance of shares of common stock. On an actual basis, the

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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Hu-Friedy acquisition contributed $60,806 and $18,725 to our consolidated net sales for the three months ended October 31, 2020 and 2019 respectively.
Pro Forma Summary of Operations Three Months Ended
October 31, 2019
Net sales $ 296,454 
Net income $ 952 
Earnings per common share:
Basic $ 0.02 
Diluted $ 0.02 

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

4.      Stock-Based Compensation
2016 Equity Incentive Plan
 
At October 31, 2020, 763,315 nonvested restricted stock awards were outstanding under the 2016 plan. No options were outstanding under the 2016 plan. At October 31, 2020, 51,760 shares were collectively available for issuance pursuant to restricted stock and other stock awards, stock options and stock appreciation rights.
 
The following table shows the components of stock-based compensation expense recognized in the condensed consolidated statements of income:
  Three Months Ended October 31,
  2020 2019
Cost of sales $ 299  $ 260 
Operating expenses:    
Selling 826  536 
General and administrative 2,208  1,527 
Research and development 89  81 
Total operating expenses 3,123  2,144 
Stock-based compensation expense $ 3,422  $ 2,404 

At October 31, 2020, total unrecognized stock-based compensation expense related to total nonvested stock options and restricted stock awards was $36,996 with a remaining weighted average period of 21 months over which such expense is expected to be recognized.

We determined the fair value of our market-based restricted stock awards using a Monte Carlo simulation on the date of grant using the following assumptions:
Three Months Ended October 31,
2020 2019
Volatility of common stock 57.27  % 30.73  %
Average volatility of peer companies 45.37  % 36.28  %
Average correlation coefficient of peer companies 34.81  % 24.63  %
Risk-free interest rate 0.20  % 1.49  %


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
A summary of nonvested stock award activity for the three months ended October 31, 2020 is as follows:
  Number of
Time-based Awards 		Number of Performance-based Awards Number of Market-based Awards Number of
Total
Awards 		Weighted Average
Fair Value
At July 31, 2020 318,702  29,174  63,839  411,715  $ 76.29 
Granted 388,605  (4,455) 86,915  471,065  $ 46.80 
Vested(1)
(103,819) (3,037) (6,383) (113,239) $ 82.34 
Forfeited (5,255) —  (971) (6,226) $ 74.10 
At October 31, 2020 598,233  21,682  143,400  763,315  $ 57.53 
_______________________________________________
(1)The aggregate fair value of all nonvested stock awards which vested was approximately $9,328.

A summary of stock option activity for the three months ended October 31, 2020 is as follows:
  Number of shares Weighted Average Exercise Price
Outstanding at July 31, 2020 15,000  $ 55.36 
Expired (15,000) $ 55.36 
Outstanding at October 31, 2020 —  $ — 

Excess tax benefits arise when the ultimate tax effect of the deduction for tax purposes is greater than the income tax benefit on stock-based compensation. For the three months ended October 31, 2020, income tax deductions of $1,698 were generated, of which $2,778 was recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $1,080 was recorded as an increase in income tax expense. For the three months ended October 31, 2019, income tax deductions of $2,022 were generated, of which $2,581 were recorded as a reduction in income tax expense over the equity awards’ vesting period and the remaining excess tax expense of $559 was recorded as an increase to income tax expense.

5.    Revenue Recognition

The following table gives information as to the net sales disaggregated by geography and product line:
  Three Months Ended October 31,
Net sales by geography 2020 2019
United States $ 215,087  $ 190,084 
Europe/Africa/Middle East 47,785  41,018 
Asia/Pacific 19,931  17,065 
Canada 11,499  7,833 
Latin America/South America 2,727  1,246 
Total $ 297,029  $ 257,246 
Net sales by product line
Capital equipment $ 48,640  $ 58,748 
Consumables 167,350  153,279 
Product service 33,459  31,568 
Instrument 45,430  13,520 
All other(1)
2,150  131 
Total $ 297,029  $ 257,246 
_______________________________________________
(1)Primarily includes software licensing revenues.

Remaining Performance Obligations

At October 31, 2020, the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) was approximately $81,556, primarily within the Medical segment. We expect to recognize revenue on approximately 70% of these remaining performance obligations over the remainder of fiscal 2021 and fiscal 2022. These performance obligations primarily reflect the future product service revenues for multi-period service arrangements.

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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Contract Liabilities

A summary of contract liabilities activity follows:
Three Months Ended October 31,
2020 2019
Beginning balance $ 26,520  $ 28,235 
Revenue deferred in current year 18,300  2,007 
Deferred revenue recognized (15,590) (2,982)
Foreign currency translation 33  104 
Ending balance 29,263  27,364 
Contract liabilities included in Other long-term liabilities (809) (384)
Deferred revenue $ 28,454  $ 26,980 

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.

6.    Leases

Adoption of “Leases (ASC 842)”

We adopted ASC 842, effective August 1, 2019, using the modified retrospective transition approach with optional transition relief, and recognized the cumulative effect of applying the new leasing standard to existing contracts on our condensed consolidated balance sheet on August 1, 2019. Our lease portfolio consists primarily of real estate, equipment and vehicles. We have approximately 90 real estate leases with lease terms ranging from 1 year to 16 years, which include our corporate headquarters, regional headquarters, and other facilities for sales and administration, warehousing, manufacturing and training. Our equipment leases primarily consist of furniture, computers and other office equipment.

Supplemental balance sheet information related to our leases follows:
Lease Type October 31, 2020 July 31, 2020
Assets:
Operating lease assets $ 43,679  $ 44,267 
Finance lease assets 4,222  4,417 
Right-of-use assets, net $ 47,901  $ 48,684 
Liabilities:
Operating lease liabilities $ 9,602  $ 9,852 
Finance lease liabilities 442  416 
Current portion of lease liabilities 10,044  10,268 
Operating lease liabilities 36,263  36,515 
Finance lease liabilities 4,033  4,164 
Long-term lease liabilities 40,296  40,679 
Total lease liabilities $ 50,340  $ 50,947 
Additional Lease Data
Weighted average remaining lease term:
Operating leases 6.04 years 6.11 years
Finance leases 5.61 years 5.86 years
Weighted average discount rate:
Operating leases 2.75  % 2.73  %
Finance leases 22.84  % 23.39  %


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
At October 31, 2020, maturities of lease liabilities for the periods set forth below were as follows:
Fiscal year Operating Finance Total
Remaining 2021 $ 8,324  $ 1,086  $ 9,410 
2022 9,410  1,432  10,842 
2023 8,332  1,425  9,757 
2024 7,037  1,434  8,471 
2025 5,264  1,422  6,686 
Thereafter 11,900  919  12,819 
Total lease payments 50,267  7,718  57,985 
Less: interest (4,402) (3,243) (7,645)
Present value of lease liabilities $ 45,865  $ 4,475  $ 50,340 

Supplemental income statement information related to our leases follows:
Three Months Ended October 31,
  2020 2019
Operating lease costs:
Amortization of right-of-use assets $ 2,786  $ 2,239 
Interest on lease obligations 312  412 
Finance lease costs:  
Amortization of right-of-use assets 196  71 
Interest on lease obligations 255  90 
Variable lease costs 895  846 
Short-term lease costs 286  248 
Net lease cost $ 4,730  $ 3,906 

Supplemental cash flow information related to leases follows:
Three Months Ended October 31,
  2020 2019
Right-of-use assets obtained in exchange for lease liabilities:
Operating leases(1)
$ 2,206  $ 14,153 
Finance leases(2)
$ —  $ 4,798 
_______________________________________________
(1) The three months ended October 31, 2019 primarily relates to new warehouse facility included in our Dental segment and operating leases acquired in the Hu-Friedy acquisition.
(2) The three months ended October 31, 2019 includes finance leases acquired in the Hu-Friedy acquisition.

7.    Inventories, Net
 
A summary of inventories, net is as follows:
  October 31, 2020 July 31, 2020
Raw materials and parts $ 65,577  $ 64,888 
Work-in-process 7,661  6,745 
Finished goods 110,809  114,606 
Reserve for excess and obsolete inventory (20,167) (18,279)
Total inventories, net $ 163,880  $ 167,960 


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
8.    Derivatives
Foreign Currency

In order to hedge against the impact of fluctuations in the value of the Euro, British Pound, Canadian dollar, Australian dollar, Singapore dollar and Chinese Renminbi relative to the U.S. dollar on the conversion of such net assets into the functional currencies, we enter into short-term forward contracts to purchase or sell 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 six foreign currency forward contracts with an aggregate notional value of $63,836 and $81,677 at October 31, 2020 and July 31, 2020, respectively, which covered certain assets and liabilities that were denominated in currencies other than each entity’s functional currency. For the three months ended October 31, 2020 and 2019, the settlements of our forward contracts resulted in immaterial amounts of currency conversion gains and losses on the hedged items in the aggregate.

Variable Rate Borrowings

In order to hedge against the impact of fluctuations in the interest rate associated with our variable rate borrowings, in fiscal 2019, we entered into two interest rate swaps with a combined notional value of $150,000, expiring on June 28, 2023. The swaps fixed interest rates at 2.265%. 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 on September 6, 2024. As the original forecasted hedged transactions (interest payments on variable rate debt) are still probable to occur, the $8,534 net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination date will be amortized to interest expense through June 28, 2023, the original maturity date of the swaps.

On May 13, 2020, in connection with the Second Amendment to our credit agreement, we terminated the March 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 on September 6, 2024. As the original forecasted hedged transactions related to the March 2020 Swap (interest payments on variable rate debt) are still probable to occur, the $19,980 net loss related to the terminated swaps reported in accumulated other comprehensive income on the termination date will be amortized to interest expense through September 6, 2024, the original maturity date of the swap. The new interest rate swap reflects the 1.00% LIBOR floor included in the Amended Credit Agreement, which allows for continued hedge accounting treatment. Changes in the fair value of the amended interest rate swap contract will continue to be recognized in other comprehensive income.

At October 31, 2020, the fair value of the interest rate swap was $20,119, which included $5,465 recorded in accrued expenses and $14,654 recorded in other long-term liabilities. As of July 31, 2020, the fair value of the interest rate swap was $21,156, which included $5,462 recorded in accrued expenses and $15,694 recorded in other long-term liabilities. The fair value of the interest rate swap is subject to movements in LIBOR and will fluctuate in future periods.

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

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

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

The fair value of the interest rate swaps, all of which qualify for cash flow hedge accounting, is recorded on our condensed consolidated balance sheet as an asset or liability with the related gains or losses reported as a component of accumulated other comprehensive income. The changes in fair value are reclassified from accumulated other comprehensive income into earnings in the same period that the hedged items affect earnings. The valuation technique used to determine fair value is the income approach. Under this approach, we use projected future interest rates, which fall into Level 2 of the fair value hierarchy as

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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
defined by ASC 820, as provided by counterparties to the interest rate swap agreements and the fixed rates that we are obligated to pay under the agreements. See Note 8, “Derivatives” for additional information.

For the Hu-Friedy acquisition, additional purchase price payments were (i) contingent upon the achievement of certain commercial milestones through March 31, 2021, and (ii) contingent upon changes in our common stock price from the date of closing through a future date subject to a registration rights agreement. We estimated the aggregate fair value of these contingent consideration arrangements to be $38,371 at the date of acquisition, which was reported separately in our consolidated balance sheet. For the contingent consideration arrangements based upon the achievement of certain commercial milestones, the initial value assigned at the date of acquisition was determined on the basis of forecasted sales and gross profit percentage of Hu-Friedy products over the next twelve to eighteen months. During the second quarter of fiscal 2020, we paid $25,000 to settle a portion of this contingent consideration arrangement related to net sales achieved for the twelve month period ended December 31, 2019. For the remaining contingent consideration arrangement related to net sales and gross profit percentage, we reduced the fair value from a liability of approximately $17,210 to $0 due to the impact of the COVID-19 pandemic on Hu-Friedy’s current and expected performance.

For the contingent consideration arrangement based upon changes in our common stock price through a future date, we were required to pay to the sellers of Hu-Friedy an amount in cash equal to $35,000 minus the aggregate net proceeds received by the seller in connection with a future equity issuance if the amount of such aggregate net proceeds was less than $35,000. The initial fair value assigned to this contingent consideration arrangement was determined based on the closing price of our common stock at the date that the acquisition closed (October 1, 2019) relative to the contracted stock price stipulated in the purchase agreement. On February 13, 2020, we entered into a stock repurchase agreement with Dental Holding LLC, the former owners of Hu-Friedy (the “Repurchase Agreement”). The Repurchase Agreement amended the Hu-Friedy purchase and sale agreement and the related registration rights agreement to provide that we repurchase a portion of the shares from the seller included in the equity consideration transferred at a price per share of $64.51 (the “Repurchase”), which equals the closing price of shares of our common stock traded on the New York Stock Exchange on February 12, 2020. The Repurchase of 438,359 common shares was completed on February 13, 2020, and the shares were thereafter canceled and retired. The Hu-Friedy purchase and sale agreement further required us to pay to the seller an amount in cash equal to $35,000 minus the aggregate net proceeds received by the seller from an equity issuance if the amount of such aggregate net proceeds was less than $35,000 (the “True-Up Obligation”). The Repurchase Agreement further amended the purchase and sale agreement to provide that in satisfaction of the True-Up Obligation, we make a payment to the sellers in an amount equal to $6,721 to settle the contingent obligation, which amount equals $35,000 minus the aggregate amount of $28,279 paid to Dental Holding as consideration for the Repurchase. These payments were made to Dental Holding on February 13, 2020.

For the fiscal 2018 Aexis Medical BVBA acquisition, additional purchase price payments ranging from zero to $1,850 were 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. In June 2020, we paid $1,691 to settle the contingent consideration.

We are required to reassess the fair value of contingent consideration payments on a periodic basis. Although we believe our assumptions are reasonable, different assumptions or changes in the future may result in different estimated amounts.

The fair values of our financial instruments measured on a recurring basis were categorized as follows:
  October 31, 2020
  Level 1 Level 2 Level 3 Total
Cash and cash equivalents:
Money markets $ 106  $ —  $ —  $ 106 
Total assets $ 106  $ —  $ —  $ 106 
Accrued expenses:
Interest rate swap $ —  $ 5,465  $ —  $ 5,465 
Contingent consideration —  —  —  — 
Other long-term liabilities:
Interest rate swap —  14,654  —  14,654 
Total liabilities $ —  $ 20,119  $ —  $ 20,119 


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

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
  July 31, 2020
  Level 1 Level 2 Level 3 Total
Cash and cash equivalents:
Money markets $ 106  $ —  $ —  $ 106 
Total assets $ 106  $ —  $ —  $ 106 
Accrued expenses:
Interest rate swap $ —  $ 5,462  $ —  $ 5,462 
Other long-term liabilities:
Interest rate swap —  15,694  —  15,694 
Total liabilities $ —  $ 21,156  $ —  $ 21,156 

Disclosure of Fair Value of Financial Instruments
 
At October 31, 2020 and July 31, 2020, the carrying amounts for cash and cash equivalents (excluding money markets), accounts receivable and accounts payable approximated fair value due to the short maturity of these instruments.

We estimate the fair value of our convertible debt carried at face value less unamortized discount and issuance costs on a quarterly basis for disclosure purposes. The estimated fair value of our convertible debt is determined by Level 2 inputs and is based on observable market data including prices for similar instruments. At October 31, 2020 and July 31, 2020, the fair value of our convertible debt was $226,066 and $224,330, respectively.

10.    Intangibles and Goodwill
 
Our intangible assets consist of the following:
  October 31, 2020 July 31, 2020
  Gross Accumulated Amortization Net Gross Accumulated Amortization Net
Intangible assets with finite lives:      
Customer relationships $ 373,183  $ (86,328) $ 286,855  $ 373,018  $ (79,386) $ 293,632 
Technology 91,706  (32,288) 59,418  91,613  (30,552) 61,061 
Brand names 8,738  (4,187) 4,551  8,721  (4,002) 4,719 
Non-compete agreements 2,850  (1,866) 984  2,850  (1,818) 1,032 
Patents and other registrations 2,696  (1,278) 1,418  2,637  (1,160) 1,477 
  479,173  (125,947) 353,226  478,839  (116,918) 361,921 
Trademarks, trade names and brand names 118,111  —  118,111  118,111  —  118,111 
Total intangible assets $ 597,284  $ (125,947) $ 471,337  $ 596,950  $ (116,918) $ 480,032 

Amortization expense related to intangible assets was $8,918 and $6,029 for the three months ended October 31, 2020 and 2019, respectively. We expect to recognize an additional $26,434 of amortization expense related to intangible assets for the remainder of fiscal 2021, and thereafter $34,912, $33,641, $32,742, $29,985 and $28,260 of amortization expense for fiscal years 2022, 2023, 2024, 2025 and 2026, respectively.

Goodwill changed during the three months ended October 31, 2020 as follows:
  Medical Life Sciences Dental Dialysis Total
Balance, July 31, 2020 $ 185,922  $ 64,394  $ 401,723  $ 8,133  $ 660,172 
Dispositions —  (56) —  —  (56)
Foreign currency translation 267  19  19  —  305 
Balance, October 31, 2020 $ 186,189  $ 64,357  $ 401,742  $ 8,133  $ 660,421 


(dollar amounts in thousands except share and per share data or as otherwise noted) 15

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
11.    Financing Arrangements
Long-term debt
  October 31, 2020 July 31, 2020
Revolving credit loans outstanding $ 324,000  $ 399,000 
Tranche A term loans outstanding 546,375  546,375 
Unamortized debt issuance costs (10,483) (11,166)
Total long-term debt, net of unamortized debt issuance costs 859,892  934,209 
Current portion of long-term debt (14,750) (7,375)
Long-term debt, net of unamortized debt issuance costs and excluding current portion $ 845,142  $ 926,834 

First Amendment to Credit Agreement

On September 6, 2019, we entered into a First Amendment (the “First Amendment”), amending our Fourth Amended and Restated Credit Agreement. The First Amendment added a $400,000 delayed draw term loan facility (the “Delayed Draw Facility”), in addition to the existing tranche A term loan and existing revolving credit facility. The Delayed Draw Facility and a portion of the revolving credit facility were used to finance a portion of the cash consideration for our acquisition of Hu-Friedy. The remaining proceeds were 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 corporate purposes.

Second Amendment to Credit Agreement

On May 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 ended April 30, 2020 from 4.25x to 5.25x, (ii) suspending such financial maintenance covenant until October 31, 2021, (iii) maintaining a minimum liquidity (as defined in the Amended Credit Agreement) of at least $50,000 during the fiscal quarter ended July 31, 2020 and $75,000 during each of the following fiscal quarters ending with the fiscal quarter ending July 31, 2021, (iv) requiring us to maintain minimum consolidated EBITDA (as defined in the Amended Credit Agreement) for each period of four fiscal quarters ending on the last day of the fiscal quarters ended July 31, 2020 through July 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 ending October 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, 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 (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. As of October 31, 2020, the average interest rate on our outstanding borrowings was approximately 4.00%.

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 Cantel and its U.S.-based subsidiaries that guarantees the obligations under the Amended Credit Agreement 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. As of October 31, 2020, we were in compliance with all financial covenants under the Amended Credit Agreement.

During the three months ended October 31, 2020, we were not required to make loan A principal payments. The tranche A term loan is subject to principal amortization, with $7,375 due and payable in the fourth quarter of fiscal 2021, $29,500 due and payable in each of fiscal 2022, 2023 and 2024, with the remaining $450,500 due and payable at maturity on September 6, 2024. During the three months ended October 31, 2019, we made principal payments of $2,375. During the three months ended

(dollar amounts in thousands except share and per share data or as otherwise noted) 16

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
October 31, 2020, we repaid $75,000 of the revolving credit facility under the Amended Credit Agreement. In November 2020, we repaid an additional $50,000 of borrowings under our revolving credit facility.

Convertible Debt
  October 31, 2020 July 31, 2020
Convertible debt principal amount $ 168,000  $ 168,000 
Unamortized original issue discount (37,282) (38,919)
Unamortized debt issuance costs (4,101) (4,246)
Total convertible debt, net of unamortized discount and debt issuance costs $ 126,617  $ 124,835 

On May 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 on May 15, 2020. The initial conversion price is $41.51 per share of common stock (based on an initial conversion rate of 24.0912 shares of common stock per $1,000 principal amount of Notes) and will be subject to adjustment if certain events occur. 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. As required by the Amended Credit Agreement, we were required to apply at least 50% of the amount by which the net proceeds exceed $100,000, or $31,500, to the repayment of debt under our credit facilities in fiscal 2020.

Due to the cash conversion feature included in the Notes, the carrying value of the Notes was allocated between a liability and an equity component. Upon issuance, the liability component of the convertible debt was $123,346, net of a $40,289 discount and net of debt issuance costs of $4,365. The initial carrying value of the equity component recorded in additional paid-in-capital was $29,184, net of a $10,072 deferred tax liability, $1,377 of debt issuance costs and a $344 deferred tax asset. The $40,289 debt discount and $4,365 of debt issuance costs are amortized as non-cash interest expense over the contractual term of the convertible debt using the effective interest method, at a rate of 9.36%. Cash interest for the three months ended October 31, 2020 was $1,365.

COVID-19

As further described in Note 1 “Basis of Presentation,” the magnitude and depth of disruption to our business resulting from the COVID-19 pandemic continue to remain highly uncertain. However, based on our current estimates, we do not anticipate these disruptions will impact our ability to maintain compliance with our debt covenants through the end of fiscal 2021.

12.    Commitments and Contingencies

Legal Proceedings

In the normal course of business, we are subject to pending and threatened legal actions. It is our policy to accrue for amounts related to these legal matters if it is probable that a liability has been incurred and an amount of anticipated exposure can be reasonably estimated. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows.

Restructuring Matters

In connection with our response to COVID-19, our ongoing efforts to streamline and consolidate our global operations and integrate the Hu-Friedy acquisition with our legacy Dental business, we have incurred approximately $5,592 and $5,428 of restructuring-related charges in each of the three months periods ended October 31, 2020, and 2019, respectively. The majority of these charges consisted of onetime benefit-related costs (severance, accelerated stock-based compensation costs and other benefit costs) associated with actions taken to reduce headcount. At October 31, 2020 and July 31, 2020, $8,468 and $7,887 was included in compensation payable on our condensed consolidated balance sheet. For the three months ended October 31, 2020, we made $5,011 of severance-related cash payments. The remaining unpaid severance at October 31, 2020, will be paid out ratably during the remainder of fiscal 2021 and into fiscal 2022 in accordance with our employee separation policy.


(dollar amounts in thousands except share and per share data or as otherwise noted) 17

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
13.    Accumulated Other Comprehensive Loss
 
The components and changes in accumulated other comprehensive loss follow:
  Three Months Ended October 31,
  2020 2019
Beginning balance $ (27,599) $ (22,197)
Foreign currency translation 502  3,932 
Interest rate swap, net of taxes(1)(2)
1,848  1,245 
Ending balance $ (25,249) $ (17,020)
_______________________________________________
(1)Includes tax effect of $602 and $375 for the three months ended October 31, 2020 and 2019, respectively.
(2)For the three months ended October 31, 2020, we recognized $1,413 in interest expense, net relating to the non-cash amortization of the net loss on terminated swaps reported in accumulated other comprehensive loss.

14.    Earnings Per Common Share

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. As we expect to settle the principal amount of our outstanding convertible debt in cash and any excess in shares of our common stock, we use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share of common stock when the average market price of our common stock for a given period exceeds the conversion price of $41.51 per share. Our convertible debt is further described in Note 11, “Financing Arrangements.”

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):
Three Months Ended October 31,
  2020 2019
Numerator for basic and diluted earnings per share:  
Net income $ 24,464  $ 5,767 
Less income allocated to participating securities —  (2)
Net income available to common shareholders $ 24,464  $ 5,765 
Denominator for basic and diluted earnings per share, adjusted for participating securities:  
Denominator for basic earnings per share - weighted average number of shares outstanding attributable to common stock 42,184,486  42,022,383 
Dilutive effect of stock awards using the treasury stock method and the average market price for the year 154,352  146,422 
Dilutive effect of convertible debt outstanding 619,640  — 
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock 42,958,478  42,168,805 
Earnings per share attributable to common stock:  
Basic earnings per share $ 0.58  $ 0.14 
Diluted earnings per share $ 0.57  $ 0.14 
Stock awards excluded because their inclusion would have been anti-dilutive —  — 

(dollar amounts in thousands except share and per share data or as otherwise noted) 18

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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:
Three Months Ended October 31,
  2020 2019
Denominator for diluted earnings per share - weighted average number of shares and common stock equivalents attributable to common stock 42,958,478  42,168,805 
Participating securities —  16,857 
Total weighted average number of shares and common stock equivalents attributable to both common stock and participating securities 42,958,478  42,185,662 

15.    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.

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 48.3% and 45.7% of our Life Sciences segment net sales for the three months ended October 31, 2020 and 2019, respectively.

Dental: designs, manufactures, sells, supplies and distributes a broad selection of products used by the global dental profession comprising a complete circle of protection. Our products include hand and powered dental instruments, infection control products, personal protective equipment (PPE) and water quality products for the dental suite. Three customers collectively accounted for approximately 41.2% and 43.5% of our Dental segment net sales for the three months ended October 31, 2020 and 2019, 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. Three customers accounted for approximately 50.8% and 46.1% of our Dialysis segment net sales for the three months ended October 31, 2020 and 2019, respectively. These customers include one of the top two customers noted above under our Life Sciences segment.

No customer accounted for 10% or more of our consolidated net sales for the three months ended October 31, 2020 and 2019.

Information as to reportable segments is summarized below
  Three Months Ended October 31,
Net sales 2020 2019
Medical $ 132,319  $ 133,353 
Life Sciences 45,568  49,141 
Dental 111,006  67,243 
Dialysis 8,136  7,509 
Total net sales $ 297,029  $ 257,246 


(dollar amounts in thousands except share and per share data or as otherwise noted) 19

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
  Three Months Ended October 31,
Income from operations 2020 2019
Medical $ 26,716  $ 21,119 
Life Sciences 8,075  7,135 
Dental 25,307  5,004 
Dialysis 2,566  1,622 
  62,664  34,880 
General corporate expenses(1)
12,312  20,456 
Total income from operations $ 50,352  $ 14,424 
_______________________________________________
(1)The three months ended October 31, 2019 includes acquisition-related charges incurred in connection with the Hu-Friedy acquisition.

Item 2.    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. 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.

COVID-19
The COVID-19 pandemic continues to spread throughout the 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 shelter-in-place orders, 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 restrictions were lifted and limitations eased. In the first quarter of fiscal 2021, patient procedure volume trends have improved as demand for both medical and dental procedures have increase during this period.

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. We believe it is likely to continue to experience unexpected impacts on our business based on some of the resurgence of the virus that is now occurring in cities across the globe. See “Results of Operations” for a more detailed discussion.


(dollar amounts in thousands except share and per share data or as otherwise noted) 20

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
First Quarter 2020 Summary (on a comparative basis)
Key GAAP financial results for the three months ended October 31, 2020 were as follows:
•Net sales increased by 15.5% to $297,029 from $257,246,
•Net income increased by 324.2% to $24,464 from $5,767, and
•Diluted earnings per share increased by 307.1% to $0.57 from $0.14

Key Non-GAAP financial results for the three months ended October 31, 2020 were as follows:
•Organic net sales decreased by 1.8%
•Non-GAAP net income increased by 41.3% to $38,474 from $27,219,
•Non-GAAP diluted earnings per share increased by 38.5% to $0.90 from $0.65, and
•Adjusted EBITDAS increased by 48.6% to $76,257 from $51,306

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 October 31, Percentage Change
Statement of Income Data: 2020 2019
Net sales $ 297,029  100.0  % $ 257,246  100.0  % 15.5  %
Cost of sales 149,663  50.4  % 141,377  55.0  % 5.9  %
Gross profit 147,366  49.6  % 115,869  45.0  % 27.2  %
Selling 40,063  13.5  % 38,411  14.9  % 4.3  %
General and administrative 49,378  16.6  % 55,287  21.5  % (10.7) %
Research and development 7,573  2.5  % 7,747  3.0  % (2.2) %
Total operating expenses 97,014  32.6  % 101,445  39.4  % (4.4) %
Income from operations 50,352  17.0  % 14,424  5.6  % 249.1  %
Interest expense, net 16,293  5.5  % 5,719  2.2  % 184.9  %
Income before income taxes 34,059  11.5  % 8,705  3.4  % 291.3  %
Income taxes 9,595  3.3  % 2,938  1.2  % 226.6  %
Net income $ 24,464  8.2  % $ 5,767  2.2  % 324.2  %

(dollar amounts in thousands except share and per share data or as otherwise noted) 21

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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 October 31,
Net sales by segment 2020 2019
Medical $ 132,319  44.5  % $ 133,353  51.8  %
Life Sciences 45,568  15.3  % 49,141  19.1  %
Dental 111,006  37.4  % 67,243  26.1  %
Dialysis 8,136  2.8  % 7,509  3.0  %
Total net sales $ 297,029  100.0  % $ 257,246  100.0  %
Net sales by geography        
United States $ 215,087  72.4  % $ 190,084  73.9  %
International 81,942  27.6  % 67,162  26.1  %
Total net sales $ 297,029  100.0  % $ 257,246  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 October 31,
Income from operations 2020 2019
Medical $ 26,716  20.2  % $ 21,119  15.8  %
Life Sciences 8,075  17.7  % 7,135  14.5  %
Dental 25,307  22.8  % 5,004  7.4  %
Dialysis 2,566  31.5  % 1,622  21.6  %
62,664  21.1  % 34,880  13.6  %
General corporate expenses 12,312  4.1  % 20,456  8.0  %
Total income from operations $ 50,352  17.0  % $ 14,424  5.6  %
 
Net Sales

Total net sales increased by $39,783 or 15.5%, to $297,029 for the three months ended October 31, 2020 from $257,246 for the three months ended October 31, 2019, which consisted of an increase of 16.5% in net sales due to acquisitions and an increase of 0.8% due to foreign currency translation, partially offset by a decrease of 1.8% in organic sales. International net sales increased by $14,780 or 22.0%, to $81,942 for the three months ended October 31, 2020 from $67,162 for the three months ended October 31, 2019. The 22.0% increase in international net sales consisted of 10.1% increase in net sales due to acquisition and a 9.2% increase in organic sales and an increase of 2.7% due to foreign currency translation.

Medical. Net sales decreased by $1,034 or 0.8%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019, which consisted of a decrease of 2.2% in organic sales offset by an increase of 1.4% due to foreign currency translation. The decrease in organic net sales 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 as surgical and elective procedure volumes return to pre-COVID 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 $3,573 or 7.3% for the three months ended October 31, 2020 compared with the three months ended October 31, 2019, which consisted of a 7.3% decrease in organic sales. The decrease in net sales was primarily due to lower demand for portable reverse osmosis units resulting from unprecedented demand shift in prior fiscal year and delayed capital projects in the 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.


(dollar amounts in thousands except share and per share data or as otherwise noted) 22

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Dental. Net sales increased by $43,763 or 65.1%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019, which consisted of a 63.3% increase due to acquisitions and 1.8% organic sales increase. The Hu-Friedy acquisition contributed $42,081 of incremental net sales in the quarter. Although we experienced an organic sales increase during the current period due to increased PPE sales, the COVID-19 pandemic has significantly impacted the Dental segment due to reduced dental procedures during the three months ended October 31, 2020. While we expect to see improvement during the remainder of fiscal 2021 as routine and elective dental procedure volumes return to pre-COVID 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 $627 or 8.3%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019.

Gross Profit
 
Gross profit increased by $31,497 or 27.2%, to $147,366 for the three months ended October 31, 2020 from $115,869 for the three months ended October 31, 2019. Gross profit as a percentage of net sales for the three months ended October 31, 2020 and 2019 was 49.6% and 45.0%, respectively. The increase in gross profit for the three month period primarily related to certain actions taken by management to reduce variable costs in response to lower sales volume due to the COVID-19 pandemic, partially offset by the decreases in net sales in the Medical segment due to the COVID-19 pandemic and the related excess capacity costs and changes in product mix. The increase in gross profit as a percentage of net sales was 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 $4,431 or 4.4% to $97,014 for the three months ended October 31, 2020 from $101,445 for the three months ended October 31, 2019, primarily resulting from a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic during fiscal 2020. This was partially offset by a full quarter of operating costs related to the Hu-Friedy acquisition. Operating expenses as a percentage of net sales for the three months ended October 31, 2020 and 2019 were 32.6% and 39.4%, respectively.

Selling expenses increased by $1,652 or 4.3%, to $40,063 for the three months ended October 31, 2020 from $38,411 for the three months ended October 31, 2019. The increase was primarily due to the acquired operations of Hu-Friedy for a full fiscal quarter in the current year. Selling expenses as a percentage of net sales were 13.5% and 14.9% for the three months ended October 31, 2020 and 2019, respectively.
 
General and administrative expenses decreased by $5,909 or 10.7%, to $49,378 for the three months ended October 31, 2020 from $55,287 for the three months ended October 31, 2019. The decrease for the three month period primarily relates to a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic during fiscal 2020. This was partially offset by restructuring-related costs, higher amortization expense and a full quarter of general and administrative expenses related to the Hu-Friedy acquisition. General and administrative expenses as a percentage of net sales were 16.6% and 21.5% for the three months ended October 31, 2020 and 2019, respectively.

Research and development expenses (which include continuing engineering costs) decreased by $174 or 2.2%, to $7,573 for the three months ended October 31, 2020 from $7,747 for the three months ended October 31, 2019. The decrease was primarily a result of a reduction in research and development expense in our Medical segment. Research and development expenses as a percentage of net sales were 2.5% and 3.0% for the three months ended October 31, 2020 and 2019, respectively.
 
Income from Operations

Medical. Income from operations increased by $5,597 or 26.5%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019. Although net sales declined slightly due to the impact of the COVID-19 pandemic 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 a shift towards higher margin products.

Life Sciences. Income from operations increased by $940 or 13.2%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019. Although net sales declined as noted above, income from operations

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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 $20,303 or 405.7%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019. The increase was primarily due to inclusion of Hu-Friedy operations (which includes overall higher margin products) for a full quarter in the current fiscal year, cost synergies resulting from the Hu-Friedy integration and the reduction of certain acquisition and integration-related costs and inventory step-up amortization. The three month period was negatively impacted by the COVID-19 pandemic with reduced procedure volumes as noted above and a reduction in our overall cost structure from actions taken by management in response to the COVID-19 pandemic.

Dialysis. Income from operations increased by $944 or 58.2%, for the three months ended October 31, 2020 compared with the three months ended October 31, 2019.

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. Such expenses decreased by $8,144 or 39.8%, for the three months ended October 31, 2020 from the three months ended October 31, 2019. This decrease was primarily driven by 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.

Interest Expense, Net

Interest expense, net increased by $10,574 or 184.9%, to $16,293 for the three months ended October 31, 2020 from $5,719 for the three months ended October 31, 2019. The increase resulted from an increase in the average outstanding debt, which includes both our term loan and revolver borrowings made to support the funding of the Hu-Friedy acquisition and to increase our liquidity. In addition, interest expense has also increased as a result of the May 2020 issuance of convertible debt, which was also done to increase our liquidity in response to the COVID-19 pandemic. Interest expense, net includes non-cash interest of $829 and $421 for the three months ended October 31, 2020 and 2019, respectively, related to the amortization of debt issuance costs. Non-cash interest of $1,637 related to the amortization of the discount on the convertible debt was also included in the three months ended October 31, 2020. Non-cash interest of $1,413 related to the amortization of the loss on terminated interest rate swaps was also included in the three months ended October 31, 2020. 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.

Income Taxes

The consolidated effective tax rate decreased to 28.2% for the three months ended October 31, 2020 from 33.8% for the three months ended October 31, 2019. The decrease was primarily driven by less permanent taxable items affecting our rate and a favorable geographic income mix.

Non-GAAP Financial Measures
In evaluating our operating performance, we supplement the reporting of our financial information determined under generally accepted accounting principles in the 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

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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.
    
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 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 in May 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 through interest expense through the original maturity date of the 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 October 31, 2020

During the three months ended October 31, 2020, we completed the disposition of a service business in Canada, which resulted in a pre-tax gain of $249 through general and administrative expenses. Since we believe that this gain 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.
 

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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 October 31,
2020 2019
Net income/Diluted EPS, as reported $ 24,464  $ 0.57  $ 5,767  $ 0.14 
Intangible amortization, net of tax(1)
6,936  0.16  5,021  0.12 
Acquisition-related items, net of tax(2)
503  0.01  12,520  0.30 
Restructuring-related charges, net of tax(3)
3,775  0.09  3,352  0.08 
Non-cash interest, net of tax(4)
1,895  0.04  —  — 
Gain on disposition of business, net of tax(1)
(179) —  —  — 
Excess tax benefits(5)
1,080  0.03  559  0.01 
Non-GAAP net income/Non-GAAP diluted EPS $ 38,474  $ 0.90  $ 27,219  $ 0.65 
________________________________________________
(1)Amounts were recorded in general and administrative expenses.
(2)For the three months ended October 31, 2020, pre-tax acquisition-related items of $540 were recorded in general and administrative expenses. For the three months ended October 31, 2019, pre-tax acquisition-related items of $4,771 were recorded in cost of sales and $11,806 were recorded in general and administrative expenses.
(3)For the three months ended October 31, 2020, pre-tax restructuring-related items of $1,299 were recorded in cost of sales and $3,682 were recorded in general and administrative expenses. For the three months ended October 31, 2019, pre-tax restructuring-related items of $1,157 were recorded in cost of sales and $4,271 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.

The reconciliations of net income to EBITDAS and adjusted EBITDAS were calculated as follows:
  Three Months Ended October 31,
2020 2019
Net income, as reported $ 24,464  $ 5,767 
Interest expense, net 16,293  5,719 
Income taxes 9,595  2,938 
Depreciation 8,409  6,338 
Amortization 8,918  6,029 
Loss on disposal of fixed assets —  167 
Stock-based compensation expense 3,422  2,404 
EBITDAS 71,101  29,362 
Acquisition-related items(1)
511  16,577 
Restructuring-related charges(1)
4,894  5,367 
Gain on disposition of business (249) — 
Adjusted EBITDAS $ 76,257  $ 51,306 
________________________________________________
(1)Excludes stock-based compensation expense.

    

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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.
October 31, 2020 July 31, 2020
Long-term bank debt (excluding debt issuance costs) $ 870,375  $ 945,375 
Convertible debt (excluding debt issuance costs and discount) 168,000  168,000 
Less cash and cash equivalents (258,021) (277,871)
Net debt $ 780,354  $ 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 October 31, 2020, 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:
Net Sales Medical
Net Sales 		Life Sciences
Net Sales 		Dental
Net Sales 		Dialysis
Net Sales
Net sales growth 15.5  % (0.8) % (7.3) % 65.1  % 8.3  %
Impact due to foreign currency translation (0.8) % (1.4) % —  % —  % 0.0  %
Sales related to acquisitions/dispositions (16.5) % —  % —  % (63.3) % —  %
Organic sales growth (1.8) % (2.2) % (7.3) % 1.8  % 8.3  %

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 $53,076 to $62,007 for the three months ended October 31, 2020 from $8,931 for the three months ended October 31, 2019, primarily due to a reduction in acquisition-related payments, the timing of federal income tax payments, lower cash bonus payments, and a reduction in inventory levels as a result of higher sales volumes and better inventory management, partially offset by the timing of the collection of our outstanding accounts receivables..
Net Cash Used in Investing Activities. Net cash used in investing activities decreased by $664,175 to $5,147 for the three months ended October 31, 2020 from $669,322 for the three months ended October 31, 2019, 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 $741,708 to $76,557 for the three months ended October 31, 2020 from $665,151 of cash provided for the three months ended October 31, 2019, primarily due to repayments of borrowings of our revolving credit facility in the current year. During the three months ended October 31, 2019, we had borrowings of approximately $678,125 to support the Hu-Friedy acquisition.

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Second Amendment to Credit Agreement

At October 31, 2020, we had $546,375 of outstanding term loan borrowings and $324,000 of revolver borrowings under the First Amendment to our Fourth Amended and Restated Credit Agreement.

On May 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 ended April 30, 2020 to 5.25x, (ii) suspending such financial maintenance covenant until October 31, 2021, (iii) maintaining a minimum liquidity (as defined in the credit agreement) of at least $50,000 during the fiscal quarter ending July 31, 2020 and $75,000 during each of the following fiscal quarters ending with the fiscal quarter ending July 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 ending July 31, 2020 through July 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 ending October 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 (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 its U.S.-based subsidiaries, (ii) a pledge by Cantel and its U.S.-based subsidiaries that guarantees the obligations under the Credit agreement 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.
    
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 on June 28, 2023. The swaps fixed interest rates at 2.265%. During the third quarter of fiscal 2020, we terminated our existing interest rate swaps and entered into a new interest rate swap with a notional value of $500,000, which fixed interest rates at 1.297% and expires on September 6, 2024. Upon terminating the existing interest rate swap agreements, we determined that the interest payments hedged with the credit agreement are still probable to occur, therefore the loss that accumulated on the swaps prior to the termination of $8,534 will be amortized to interest expense through June 28, 2023, the original maturity dates of the swaps. Additionally, as the cost of unwinding the liability associated with the terminated swaps was included in our new swap rate, the new swap instrument has been bifurcated into a financing component and a derivative component on our condensed consolidated balance sheet.

On May 13, 2020, in connection with the Second Amendment to the 2018 Credit Agreement, we amended our $500,000 interest rate swap to modify the LIBOR floor from 0.00% to 1.00%. The amended terms of the interest rate swap reflect the 1.00% LIBOR floor included in the Amended Credit Agreement. The amendment results in continued hedge accounting treatment as the changes in fair value will be recorded in other comprehensive income. The fair value of the amended interest rate swap is subject to movements in LIBOR and will fluctuate in future periods.

Convertible Senior Notes Offering

On May 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 on May 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

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
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
 
At October 31, 2020, our total debt (excluding debt issuance costs and unamortized discount) of $1,038,375, net of our cash and cash equivalents of $258,021, was $780,354. Stockholders’ equity as of that date was $758,381. Our operating segments generate significant cash from operations. At October 31, 2020, we had a cash balance of $258,021, of which $71,394 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 Notes offering in May 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. In November 2020, we repaid an additional $50,000 of borrowings under our revolving credit facility. At December 10, 2020, approximately $125,551 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 in United 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.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information reported in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2020 Annual Report on Form 10-K.
 
Item 4.    Controls and Procedures
    We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to our

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Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

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 of the end of the period covered by this Quarterly Report on Form 10-Q. 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 effective and designed to ensure that material information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports is (i) recorded, processed, summarized and reported within the time periods specified by the SEC and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

During the period covered by this Quarterly Report on Form 10-Q, no changes occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as described below.

On October 1, 2019, we acquired Hu-Friedy, as more fully described in Note 3 to the condensed consolidated financial statements. 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. As of October 31, 2020, the integration of the internal controls relating to the acquired business has been substantially completed, and the acquired business will be included in our evaluation of the effectiveness of our internal control over financial reporting for fiscal 2021.

Following the acquisition of Hu-Friedy, we also began the process of integrating our legacy U.S. Dental segment operations into the Hu-Friedy SAP operating and financial reporting system, which we expect to complete during fiscal 2021. As the integration 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.

PART II – OTHER INFORMATION

Item 1.    Legal Proceedings
    
None.

Environmental Matters

Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that we reasonably believeswill exceed a specified threshold. Pursuant to recent SEC amendments to this item, we will be using a threshold of $1 million for such proceedings. Applying this threshold, there are no environmental matters to disclose for this period.

Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A to our 2020 Annual Report on Form 10-K. The risk factors disclosed in Part I, Item 1A to our 2020 Annual Report on Form 10-K, in addition to the other information set forth in this report, could materially affect our business, financial condition, results of operations or cash flows.


30

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to common stock purchases we made during the current quarter:
Period Total number of
shares purchased 		Average price
paid per share 		Total number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the program
August 1 - August 31 572  $ 50.50  —  — 
September 1 - September 30 189  $ 47.25  —  — 
October 1 - October 31 29,771  $ 47.57  —  — 
Total 30,532  $ 47.62  —  — 

We do not currently have a repurchase program. All shares purchased during the current quarter represent shares surrendered to us to pay employee withholding taxes due upon the vesting of restricted stock.

Item 3.    Defaults Upon Senior Securities
None.

Item 4.    Mine Safety Disclosures

None.

Item 5.    Other Information
None.

Item 6.    Exhibits

Certification of Principal Executive Officer.
   
Certification of Principal Financial Officer.
     
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
     
101 The following materials from this report, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)



(dollar amounts in thousands except share and per share data or as otherwise noted) 31

Cantel Medical Corp.                                 2021 First Quarter Form 10-Q
SIGNATURES

Pursuant to the requirements 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: December 10, 2020  
   
  By: /s/ George L. Fotiades
    George L. Fotiades
    Chief Executive Officer
    (Principal Executive Officer)
   
   
  By: /s/ Shaun M. Blakeman
    Shaun M. Blakeman
    Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)
   
   
  By: /s/ Brian R. Capone
    Brian R. Capone
    Senior Vice President and Chief Accounting Officer
    (Principal Accounting Officer)


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