Cantel Medical Announces Record Financial Results for Third Quarter 2016

CANTEL MEDICAL CORP. 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

Three Months Ended

Nine Months Ended

April 30,

April 30,

2016

2015

2016

2015

Net sales

$   173,703

$   141,508

$ 485,753

$ 413,749

Cost of sales

93,382

77,909

261,897

229,045

Gross profit

80,321

63,599

223,856

184,704

Expenses:

  Selling

26,887

20,326

70,967

58,994

  General and administrative

26,106

18,456

70,555

56,785

  Research and development

4,065

3,536

10,899

10,296

Total operating expenses

57,058

42,318

152,421

126,075

Income from operations

23,263

21,281

71,435

58,629

Interest expense, net  

871

619

2,487

1,799

Loss on sale of business

-

2,206

-

2,206

Income before income taxes

22,392

18,456

68,948

54,624

Income taxes

8,373

6,100

25,286

19,944

Net income 

$     14,019

$     12,356

$  43,662

$  34,680

Earnings per common share - diluted  

$         0.34

$        0.30

$      1.05

$      0.83

Dividends per common share 

$              -

$              -

$      0.06

$      0.05

Weighted average shares - diluted 

41,751

41,591

41,723

41,574

CANTEL MEDICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

April 30,

July 31,

2016

2015

                    Assets

     Current assets

$     225,929

$     188,361

     Property and equipment, net

72,551

62,541

     Intangible assets, net

119,030

85,836

     Goodwill

284,018

241,951

     Other assets

5,371

5,342

$     706,899

            Liabilities and stockholders' equity

     Current liabilities

$       91,274

$       70,624

     Long-term debt

132,000

78,500

     Other long-term liabilities 

35,987

28,274

     Stockholders' equity

447,638

406,633

$     706,899

$     584,031

SUPPLEMENTARY INFORMATION - RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

In evaluating our operating performance, we supplement the reporting of our financial information determined under accounting principles generally accepted in the United States ("GAAP") with certain internally driven non-GAAP financial measures, namely (i) adjusted net income, (ii) adjusted diluted earnings per share ("EPS"), (iii) income before interest, taxes, depreciation, amortization and stock-based compensation expense ("EBITDAS"), (iv) EBITDAS adjusted for atypical items ("Adjusted EBITDAS") and (v) net debt. These non-GAAP financial measures are indicators of the Company's performance that is not required by, or presented in accordance with, GAAP. They are presented with the intent of providing greater transparency to financial information used by us in our financial analysis and operational decision-making. We believe that these non-GAAP measures provide meaningful information to assist investors, shareholders and other readers of our Condensed 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.

Reconciliations of Net Income and Diluted EPS to Adjusted Net Income and Adjusted Diluted EPS

We define adjusted net income and adjusted diluted EPS as net income and diluted EPS, respectively, adjusted to exclude amortization, acquisition related items, significant reorganization and restructuring charges, major tax events and other significant items management deems atypical or non-operating in nature.
 
For the three and nine months ended April 30, 2016, we made adjustments to net income and diluted EPS to exclude (i) amortization expense, (ii) significant acquisition related items impacting current operating performance including transaction and integration charges and ongoing fair value adjustments, (iii) costs associated with the retirement of our Chief Executive Officer and (iv) with respect to the nine months ended April 30, 2016, the impact of favorable tax legislation to arrive at our non-GAAP financial measures, adjusted net income and adjusted EPS.
 
For the three and nine months ended April 30, 2015, we made adjustments to net income and diluted EPS to exclude (i) amortization expense, (ii) significant acquisition related items impacting current operating performance including transaction and integration charges and ongoing fair value adjustments, (iii) the loss on sale of our Speciality Packaging business and (iv) the impairment of an acquired license to arrive at our non-GAAP financial measures, adjusted net income and adjusted EPS.
 
Amortization expense is a non-cash expense related to intangibles that were primarily the result of business acquisitions. Our history of acquiring businesses has resulted in significant increases in amortization of intangible assets that reduced the Company's net income. The removal of amortization from our overall operating performance helps in assessing our cash generated from operations including our return on invested capital, which we believe is an important analysis for measuring our ability to generate cash and invest in our continued growth.
 
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 acquisition accounting charges relating to recording acquired inventory and deferred revenue at fair market value, can be significant and also adversely impact our effective tax rate as certain costs are often not tax-deductible. Since all of these acquisition related items are atypical and often mask underlying operating performance, we excluded these amounts for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.
 
During our three months ended April 30, 2016, we announced the retirement of our Chief Executive Officer and recorded a portion of the costs associated with his retirement in our Condensed Consolidated Financial Statements. Since these costs are atypical and masks our underlying operating performance, we made an adjustment to our net income and EPS for the three and nine months ended April 30, 2016 to exclude such costs to arrive at our non-GAAP financial measures.
 
Tax legislation was enacted in the United States and internationally that enabled us to record favorable tax benefits in our second quarter of fiscal 2016 relating to the entire calendar 2015. Since these favorable tax benefits are largely unrelated to our current year's income before taxes and is unrepresentative of our normal effective tax rate, we excluded its impact on net income and EPS for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current performance and a comparison to past performance.

Reconciliations of Net Income and Diluted EPS to Adjusted Net Income and Adjusted Diluted EPS (con't)

On April 7, 2015, we completed the sale of our Specialty Packaging business to a global packaging and service company. Overall, this transaction, including costs associated with the disposition and the recognition of a foreign currency translation gain, resulted in a $2,206,000 loss, or $0.04 in diluted earnings per share, which was recorded in loss on sale of business in our Condensed Consolidated Statements of Income for the three and nine months ended April 30, 2015. Since the divestiture of a business is atypical and non-operating in nature and the loss on sale masks our underlying operating performance, we excluded the loss on sale of business for purposes of calculating these non-GAAP financial measures.
 
In September 2013, we acquired a license from a third party granting us the exclusive right to manufacture, commercialize, distribute and sell an endoscopy product in its beginning stage of commercialization in exchange for a series of payments, which totaled $1,000,000 by our second quarter of fiscal 2015 and was recorded in other assets in our Condensed Consolidated Balance Sheets. We evaluated this long-lived asset in fiscal 2015 for potential impairment and determined that the future use of this acquired license was unlikely based on a recent product analysis. Accordingly, we deemed the acquired license, together with related fixed assets of $287,000 to be fully impaired and recorded a loss of $1,287,000 during the three and nine months ended April 30, 2015, which was recorded in general and administrative expenses and as reductions in other assets and property and equipment in the Condensed Consolidated Financial Statements. Since the acquisition of the license and subsequent impairment were outside our standard endoscopy business operations, we excluded the impairment of the acquired license for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to past operating performance.

The reconciliations of net income to adjusted net income were calculated as follows:

   Three Months Ended

   Nine Months Ended

(Amounts in thousands)

April 30,

April 30,

(Unaudited)

2016

2015

2016

2015

Net Income, as reported

$         14,019

$         12,356

$    43,662

$    34,680

Intangible amortization (1)

3,346

3,460

9,737

9,648

Acquisition related items (2)

1,682

(2,327)

3,213

1,185

CEO retirement costs (1)

1,162

-

1,162

-

Loss on sale of business

-

2,206

-

2,206

Impairment of acquired license (1)

-

1,287

-

1,287

Income tax benefit on above adjustments (3)

(1,966)

(2,285)

(4,198)

(5,027)

Tax legislative changes (3)

-

-

(800)

-

Adjusted net income

$         18,243

$         14,697

$    52,776

$    43,979

(1) Amounts are recorded in general and administrative expenses.
(2) For the three and nine months ended April 30, 2016, acquisition related items of $388 and $959, respectively, were recorded in cost of sales and $1,294 and $2,254, respectively, were recorded in general administrative expenses. For the three and nine months ended April 30, 2015, acquisition related items of $408 and $1,951, respectively, were recorded in cost of sales and ($2,735) and ($766), respectively, were recorded in general administrative expenses.
(3) Amounts are recorded in income taxes.

The reconciliations of diluted EPS to adjusted diluted EPS were calculated as follows:

   Three Months Ended

   Nine Months Ended

April 30,

April 30,

(Unaudited)

2016

2015

2016

2015

Diluted EPS, as reported

$             0.34

$             0.30

$        1.05

$        0.83

Intangible amortization, net of tax

0.06

0.05

0.16

0.15

Acquisition related items, net of tax

0.03

(0.06)

0.05

0.01

CEO retirement costs, net of tax

0.02

-

0.02

-

Loss on sale of business, net of tax

-

0.04

-

0.04

Impairment of acquired license, net of tax

-

0.02

-

0.02

Tax legislative changes

-

-

(0.02)

-

Adjusted diluted EPS 

$             0.44

(1)

$             0.35

$        1.26

$        1.06

(1)

Reconciliation of EBITDAS and Adjusted EBITDAS with Net Income

We believe EBITDAS is an important valuation measurement for management and investors given the increasing effect that non-cash charges, such as stock-based compensation, amortization related to acquisitions and depreciation of capital equipment, has on the Company's net income. In particular, acquisitions have historically resulted in significant increases in amortization of intangible assets that reduce the Company's net income. Additionally, we regard EBITDAS as a useful measure of operating performance and cash flow before the effect of interest expense and is a complement to operating income, net income and other GAAP financial performance measures.
 
We define Adjusted EBITDAS as EBITDAS excluding the same atypical items as previously described as adjustments to net income. We use Adjusted EBITDAS when evaluating the operating performance of the Company because we believe the exclusion of such atypical items, 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 EBITDAS and Adjusted EBITDAS with net income were calculated as follows:

Three Months Ended

Nine Months Ended

(Amounts in thousands)

April 30,

April 30,

(Unaudited)

2016

2015

2016

2015

Net income, as reported

$     14,019

$     12,356

$     43,662

$  34,680

Interest expense, net  

871

619

2,487

1,799

Income taxes

8,373

6,100

25,286

19,944

Depreciation

3,061

2,720

8,754

7,573

Amortization

3,346

3,460

9,737

9,648

Loss on disposal of fixed assets

66

172

177

209

Stock-based compensation expense

2,242

1,353

5,837

4,354

EBITDAS

31,978

26,780

95,940

78,207

Acquisition related items

1,682

(2,327)

3,213

1,185

CEO retirement costs

1,162

-

1,162

-

Loss on sale of business

-

2,206

-

2,206

Impairment of acquired license

-

1,287

-

1,287

Adjusted EBITDAS

$     34,822

$     27,946

$    100,315

$  82,885

Reconciliation of Debt with Net Debt 

We define net debt as long-term debt less cash and cash equivalents. Each of the components of net debt appears in the Condensed Consolidated Balance Sheets. We believe that the presentation of net debt provides useful information to investors because we review net debt as part of our management of our overall liquidity, financial flexibility, capital structure and leverage.

The reconciliations of debt with net debt were calculated as follows:

(Amounts in thousands)

April 30,

July 31,

(Unaudited)

2016

2015

Long-term debt

$    132,000

$     78,500

Less cash and cash equivalents

(25,498)

(31,720)

Net debt

$    106,502

$     46,780