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Cantel Medical Reports Financial Results for its Third Quarter Fiscal Year 2019

Strong double digit growth in Medical, organic growth returns in Dental

- Net sales of $228.6M, up 5.2%, with organic sales growth of 2.7%

- GAAP diluted EPS of $0.20, down 56.4%

- Non-GAAP diluted EPS of $0.55, down 7.5%

- GAAP net income of $8.2M, down 56.4%

- Non-GAAP net income of $23.0M, down 7.9%

LITTLE FALLS, N.J., June 4, 2019 /PRNewswire/ -- Cantel Medical Corp. (CMD) today announced financial results for its third quarter ended April 30, 2019.

(PRNewsfoto/Cantel Medical Corp.)

Third quarter 2019 net sales were $228.6M, up 5.2% compared to the prior year. Excluding the impact from foreign currency, net sales increased by 6.5%, driven by organic growth of 2.7%, and the impact from acquisitions of 3.8%.

Third quarter 2019 GAAP earnings per diluted share decreased 56.4% to $0.20, compared to GAAP earnings per diluted share of $0.45 in the prior year period. GAAP earnings per diluted share was negatively impacted by payments and related costs associated with executive leadership changes in the quarter.

Third quarter 2019 Non-GAAP earnings per diluted share decreased 7.5% to $0.55, compared to Non-GAAP earnings per diluted share of $0.60 in the prior year period.

This year the Company has made specific investments in the business that have had an impact on both GAAP and Non-GAAP earnings. The impact to GAAP and Non-GAAP diluted EPS from these investments is estimated to be a negative $0.11 per diluted share compared to the prior year period.

The Company's balance sheet remains strong with ample capacity. The third quarter ended with cash of $51.3M and gross debt of $235.5M, while generating adjusted EBITDAS of $41.4M in the quarter, down 5.0%.

George Fotiades, President and Chief Executive Officer, stated, "We are pleased to report strong double-digit sales growth in both our Medical and Dental segments. Medical sales increased 12.2% organically, with total sales growth of 10.4%. Organic growth returned in Dental with an increase of 3.4%, offsetting general inventory adjustments at our channel partners earlier in the year. Dental sales grew 18.5% in total, driven by the acquisition of Omnia S.p.A. which closed earlier in the quarter. Life Sciences decreased 14.0%, due to continued softness in our Hemodialysis Water business, and the sale of our High Purity Water business in Canada in the prior quarter. Internationally, sales increased 12.6%, with 8.3% organic growth."

Conference Call Information:
The Company will hold a conference call to discuss the results for its third quarter ended April 30, 2019 on Tuesday, June 4, 2019 at 9:30 a.m. Eastern Time.

To participate in the conference call, dial 1-877-407-8033 (US & Canada) or 1-201-689-8033 (International) approximately 5 to 10 minutes before the beginning of the call. If you are unable to participate, a digital replay of the call will be available from Tuesday, June 4, 2019 through midnight on July 4, 2019 by dialing 1-877-481-4010 (US & Canada) or 1-919-882-2331 (International) and using conference ID #: 49309.

An audio webcast will be available via the Cantel website at www.cantelmedical.com. A replay of the presentation will be archived on the Cantel web site for those unable to listen live. In addition, the Company will provide a supplemental presentation to complement the conference call. The presentation can be accessed on Cantel's website in the Investor Relations section under presentations.

About Cantel Medical:
Cantel Medical is a leading global company dedicated to delivering innovative infection prevention products and services for patients, caregivers, and other healthcare providers which improve outcomes, enhance safety and help save lives. Our products include specialized medical device reprocessing systems for endoscopy and renal dialysis, advanced water purification equipment, sterilants, disinfectants and cleaners, sterility assurance monitoring products for hospitals and dental clinics, disposable infection control products primarily for dental and GI endoscopy markets, dialysate concentrates, hollow fiber membrane filtration and separation products. Additionally, we provide technical service for our products.

For further information, visit the Cantel website at www.cantelmedical.com.

This press release may contain "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. 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 our 2018 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.

CANTEL MEDICAL CORP.

Condensed Consolidated Statements of Income

(Unaudited)



Three Months Ended


Nine Months Ended


April 30,


April 30,


2019


2018


2019


2018

Net sales

$

228,552


$

217,268


$

678,679


$

643,068









Cost of sales

121,675


112,594


361,878


336,500









Gross profit

106,877


104,674


316,801


306,568









Expenses:








Selling

36,077


33,252


103,233


95,774

General and administrative

48,634


37,784


122,527


102,068

Research and development

7,354


6,571


22,355


17,543

Total operating expenses

92,065


77,607


248,115


215,385









Income from operations

14,812


27,067


68,686


91,183









Interest expense, net

2,509


1,498


6,742


3,822

Other income, net



(1,313)


(1,138)









Income before income taxes

12,303


25,569


63,257


88,499









Income taxes

4,128


6,833


17,040


14,346









Net income

$

8,175


$

18,736


$

46,217


$

74,153









Earnings per common share - diluted

$

0.20


$

0.45


$

1.11


$

1.77









Dividends declared per common share

$


$


$

0.10


$

0.09









Weighted average shares - diluted

41,759,438


41,649,521


41,726,231


41,622,954


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

 

CANTEL MEDICAL CORP.

Condensed Consolidated Balance Sheets

(Unaudited)



April 30,
2019


July 31, 
2018

Assets




Cash and cash equivalents

$

51,348


$

94,097

Accounts receivable, net

142,504


118,642

Inventories, net

134,193


107,592

Prepaid expenses and other current assets

23,018


17,912

Income taxes receivable

1,483


Property and equipment, net

173,070


111,417

Intangible assets, net

148,075


137,361

Goodwill

378,144


368,027

Other assets

7,337


5,749

Deferred income taxes

3,621


2,911

Total assets

$

1,062,793


$

963,708





Liabilities and stockholders' equity




Current liabilities

$

151,068


$

134,783

Long-term debt

223,214


187,302

Deferred income taxes

25,663


27,624

Other long-term liabilities

6,983


5,132

Stockholders' equity

655,865


608,867

Total liabilities and stockholders' equity

$

1,062,793


$

963,708


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

 

CANTEL MEDICAL CORP.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



Nine Months Ended April 30,


2019


2018

Cash flows from operating activities




Net income

$

46,217


$

74,153

Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation

15,455


12,816

Amortization

15,508


12,892

Stock-based compensation expense

11,885


7,033

Deferred income taxes

(2,671)


(7,499)

Other non-cash items, net

263


586

Changes in assets and liabilities, net of effects of acquisitions/dispositions

(36,391)


(9,978)

Net cash provided by operating activities

50,266


90,003





Cash flows from investing activities




Capital expenditures

(75,387)


(23,772)

Proceeds from sale of business

3,053


Acquisitions, net of cash acquired

(40,644)


(84,595)

Net cash used in investing activities

(112,978)


(108,367)





Cash flows from financing activities




Repayments of long-term debt

(12,707)


Borrowings under revolving credit facility

50,000


82,300

Repayments under revolving credit facility

(7,000)


(39,300)

Dividends paid

(4,173)


(3,546)

Purchases of treasury stock

(4,628)


(6,216)

Net cash provided by financing activities

21,492


33,238





Effect of exchange rate changes on cash and cash equivalents

(1,529)


458





(Decrease) increase in cash and cash equivalents

(42,749)


15,332

Cash and cash equivalents at beginning of period

94,097


36,584

Cash and cash equivalents at end of period

$

51,348


$

51,916


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




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 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 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.

Excess tax benefits (expense) resulting from stock compensation are recorded as an adjustment to income tax expense. The magnitude of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon our future grants of equity awards, our future share price on the date awards vest in relation to the fair value of awards on grant date and the exercise behavior of our stock award holders. Since these tax benefits are largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded their impact on net income and diluted EPS to arrive at our non-GAAP financial measures.

During the nine months ended April 30, 2019, we recorded specific discrete tax items associated with our international operations that were unrelated to fiscal 2019. As these items are 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.

The 2017 Tax Act significantly revised U.S. tax law by, among other provisions, (a) lowering the applicable U.S. federal statutory income tax rate from 35% to 21%, (b) creating a partial territorial tax system that includes imposing a mandatory one-time transition tax on previously deferred foreign earnings, (c) creating provisions regarding the (1) Global Intangible Low Tax Income, (2) the Foreign Derived Intangible Income deduction, and (3) the Base Erosion Anti-Abuse Tax and (d) eliminating or reducing certain income tax deductions, such as interest expense, executive compensation expenses and certain employee expenses. During the nine months ended April 30, 2018, we recorded a one-time net benefit as a provisional estimate of the net accounting impact of the 2017 Tax Act in accordance with SAB 118. Since the net favorable tax benefit is largely unrelated to our results and unrepresentative of our normal effective tax rate, we excluded its impact on net income and diluted EPS to arrive at our non-GAAP financial measures.

In November 2018, we completed the disposition of our high purity water business in Canada. This resulted in a pre-tax gain of $1,313 through other income, net for the nine months ended April 30, 2019. Since this gain was irregular, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.

In November 2017, the Israeli Government notified us that they would forgive any future amounts due under a contingent obligation payable from a previous acquisition. As a result of this formal notification, we reduced the $1,138 contingent obligation payable to zero during the nine months ended April 30, 2018, resulting in a gain through other income. Since this gain was irregular, we made an adjustment to our net income and diluted EPS to exclude this gain to arrive at our non-GAAP financial measures.

Three Months Ended April 30, 2019

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, primarily related to organizational leadership changes, (iv) an adjustment to the excess tax benefits applicable to stock compensation and (v) tax matters to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.

Three Months Ended April 30, 2018

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, (iv) litigation matters, and (v)the reduction of a repatriation tax related to the 2017 Tax Act to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.

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 April 30,

(Unaudited)

2019


2018

Net income/Diluted EPS, as reported

$

8,175


$

0.20


$

18,736


$

0.45

Intangible amortization, net of tax(1)

3,850


0.09


3,468


0.08

Acquisition-related items, net of tax(2)

2,047


0.05


651


0.02

Restructuring-related charges, net of tax(3)

8,401


0.20


991


0.02

Litigation matters(1)



1,637


0.04

Excess tax expenses(4)

434


0.01



Tax matters(4)

59



(554)


(0.01)

Non-GAAP net income/Non-GAAP diluted EPS

$

22,966


$

0.55


$

24,929


$

0.60

_______________________________________

(1)

Amounts were recorded in general and administrative expenses.

(2)

For the three months ended April 30, 2019, pre-tax acquisition-related items of $47 were recorded in net sales, $394 were recorded in cost of sales and $2,400 were recorded in general and administrative expenses. For the three months ended April 30, 2018, pre-tax acquisition-related items of $953 were recorded in general and administrative expenses.

(3)

For the three months ended April 30, 2019, pre-tax restructuring-related items of $272 were recorded in cost of sales and $9,840 were recorded in general and administrative expenses. For the three months ended April 30, 2018, pre-tax restructuring-related items of $17 were recorded in cost of sales and $1,466 were recorded in general and administrative expenses.

(4)

Amounts were recorded in income taxes.


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


Nine Months Ended April 30, 2019

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, primarily related to organizational leadership changes, (iv) gain on disposition of business,  (v) excess tax benefits applicable to stock compensation, (vi) tax matters and (vii) litigation matters to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.

Nine Months Ended April 30, 2018

We made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets, (ii) acquisition-related items, (iii) business optimization and restructuring-related charges, (iv) excess tax benefits applicable to stock compensation, (v) the net tax benefit associated with the estimated impact of the revaluation of our U.S. net deferred tax liabilities as a result of the 2017 Tax Act, (vi) litigation matters and (vii) the resolution of the contingent liability associated with the Jet Prep acquisition to arrive at our non-GAAP financial measures, non-GAAP net income and non-GAAP diluted EPS.

The reconciliations of net income and diluted EPS to non-GAAP net income and non-GAAP diluted EPS were calculated as follows:


Nine Months Ended April 30,

(Unaudited)

2019


2018

Net income/Diluted EPS, as reported

$

46,217


$

1.11


$

74,153


$

1.77

Intangible amortization, net of tax(1)

11,928


0.29


9,844


0.24

Acquisition-related items, net of tax(2)

4,236


0.10


2,307


0.06

Restructuring-related charges, net of tax(3)

10,486


0.25


2,844


0.07

Gain on disposition of business, net of tax(4)

(929)


(0.02)



Excess tax benefits(5)

(563)


(0.01)


(2,012)


(0.05)

Tax matters(5)

959


0.02


(8,952)


(0.22)

Litigation matters(1)

134



1,637


0.04

Resolution of contingent liability(4)



(1,138)


(0.03)

Non-GAAP net income/Non-GAAP diluted EPS

$

72,468


$

1.74


$

78,683


$

1.88

_______________________________________

(1)

Amounts were recorded in general and administrative expenses.

(2)

For the nine months ended April 30, 2019, pre-tax acquisition-related items of $351 were recorded in net sales, $486 were recorded in cost of sales and $4,960 were recorded in general and administrative expenses. For the nine months ended April 30, 2018, pre-tax acquisition-related items of $893 were recorded in cost of sales and $2,409 were recorded in general and administrative expenses.

(3)

For the nine months ended April 30, 2019, pre-tax restructuring-related items of $272 were recorded in cost of sales, $12,533 were recorded in general and administrative expenses and $1,313 of expenses were recorded in other income. For the nine months ended April 30, 2018, pre-tax restructuring-related items of $1,164 were recorded in cost of sales and $2,656 were recorded in general and administrative expenses.

(4)

Amounts were recorded in other income, net.

(5)

Amounts were recorded in income taxes.


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

 

Reconciliation of Net Income to EBITDAS and Adjusted EBITDAS

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 April 30,


Nine Months Ended April 30,

(Unaudited)

2019


2018


2019


2018

Net income, as reported

$

8,175


$

18,736


$

46,217


$

74,153

Interest expense, net

2,509


1,498


6,742


3,822

Income taxes

4,128


6,833


17,040


14,346

Depreciation

5,892


4,626


15,455


12,816

Amortization

4,956


4,480


15,508


12,892

Loss on disposal of fixed assets

529


187


1,368


521

Stock-based compensation expense

5,722


2,443


11,885


7,033

EBITDAS

31,911


38,803


114,215


125,583

Acquisition-related items

2,841


953


5,797


3,302

Restructuring-related charges(1)

6,632


1,468


8,871


3,721

Gain on disposition of business



(1,313)


Litigation matters


2,345


163


2,345

Resolution of contingent liability




(1,138)

Adjusted EBITDAS

$

41,384


$

43,569


$

127,733


$

133,813

______________________________

(1)

Excludes stock-based compensation expense.


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


Net Debt

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

(Unaudited)

April 30, 2019


July 31, 2018

Long-term debt (excluding debt issuance costs)

$

235,500


$

200,000

Less cash and cash equivalents

(51,348)


(94,097)

Net debt

$

184,152


$

105,903


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



Reconciliation of Net Sales Growth to Organic Sales Growth

We define organic sales as net sales less (i) the impact of foreign currency translation, (ii) net sales related to acquired businesses during the first twelve months of ownership and (iii) divestitures during the periods being compared. We believe that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior periods. We exclude the effect of foreign currency translation from organic sales because foreign currency translation is not under management's control, is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because the nature, size, and number of acquisitions and divestitures can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult.

For the three months ended April 30, 2019, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our reportable segments were calculated as follows:

(Unaudited)


Net Sales


Medical

Net Sales


Life Sciences

Net Sales


Dental

Net Sales


Dialysis

Net Sales

Net sales growth


5.2

%


10.4

%


(14.0)

%


18.5

%


(3.7)

%

Impact due to foreign currency translation


1.3

%


2.4

%


0.3

%


(0.1)

%


0.4

%

Sales related to acquisitions/divestitures


(3.8)

%


(0.6)

%


(3.9)

%


(15.0)

%


0.0

%

Organic sales growth


2.7

%


12.2

%


(17.6)

%


3.4

%


(3.3)

%

For the nine months ended April 30, 2019, the reconciliation of net sales growth to organic sales growth for total net sales and net sales of our reportable segments were calculated as follows:

(Unaudited)


Net Sales


Medical

Net Sales


Life Sciences

Net Sales


Dental

Net Sales


Dialysis

Net Sales

Net sales growth


5.5

%


11.3

%


(5.9)

%


5.1

%


0.2

%

Impact due to foreign currency translation


1.0

%


1.7

%


0.4

%


0.0

%


0.2

%

Sales related to acquisitions/divestitures


(2.4)

%


(0.9)

%


(3.8)

%


(5.6)

%


0.0

%

Organic sales growth


4.1

%


12.1

%


(9.3)

%


(0.5)

%


0.4

%


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

 

 

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