Investor Presentation November 2017 NYSE:CMD NYSE:CMN
Forward Looking Statement This document contains forward-looking statements that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as expect, anticipate, intend, plan, believe, seek, see, will, would, or target. Forward-looking statements - such as statements about our revenues; income; organic growth; acquisition strategy; and five-year strategic plan are generally based on current estimates and forecasts. By their nature, forward looking statements address matters that are, to different degrees, subject to a risks, uncertainties and factors that could cause our actual results to be materially different than those expressed in such statements. Many of the material risks, uncertainties and factors are described in Risk Factors in our Annual Report on Form 10-K for the year ended July 31, 2017 and filings with the Securities and Exchange Commission. We do not intend, or assumes any obligation, to update or revise these forward-looking statements in light of developments which differ from those anticipated. This document also contains non-gaap financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of non-gaap measures presented in this document, see the accompanying appendix. 2
Mission Statement Purpose Cantel Medical is dedicated to delivering innovative infection prevention ( IP ) products and services for patients, caregivers, and other healthcare providers, which improve outcomes and help save lives. 1 Treat all people with respect while embracing diversity and cultural differences Values 2 3 4 5 Operate with integrity, ethics and comply with all regulations globally Understand customers needs and deliver high quality, innovative, safe solutions better than our competitors Work in high-performance teams, empowered to make a difference and continue to learn and grow Act with accountability and a sense of urgency to deliver on our goals Business Priorities New Products Market Expansion Strategic Acquisitions Continuous Improvement Financial Performance 3
2,400+ Global Team members 40 LOCATIONS IN NORTH AMERICA AUSTRALIA BELGIUM CANADA CHINA FRANCE GERMANY HONG KONG ITALY MALAYSIA NETHERLANDS UNITED KINGDOM UNITED STATES SINGAPORE ~250 distributors in 105 countries Cantel Medical Facilities 4
Sources of Strength Leading pure-play in the growing $50B global infection prevention market with existing businesses in addressable markets of ~$7B Government / industry focus on infection prevention is a growth driver, shielding our markets from weak economic cycles 10%+ organic growth in 11 of past 16 quarters Strong financial performance for more than 10 YEARS Proven expertise in identifying, executing and integrating acquisitions 32 ACQUISITIONS since 2000 5
Infection Prevention Markets Our commitment is addressing critical infection prevention challenges globally Endoscopy Water Purification & Healthcare Filtration Disposables $399M 1 $196M 1 $144M 1 More than 80M global procedures annually, estimated 7% CAGR 2. 3.6 million patients worldwide have ESRD 3, US de novo clinics growing 5% annually. 2 million dental practitioners globally 4, growing at an estimated 2% - 3% annually. TAM: ~ $4.5 Billion TAM: ~ $1.0 Billion TAM: ~ $1.2 Billion 1 Segment Revenue (LTM) Last Twelve Months ending 7/31/2017 2 Zimlichman, E, et al., Healthcare-associated infections: a Meta-analysis of Costs and Financial Impact on the US Health Care System, JAMA Intern Med., 2013, 173(22) 3 Hemodialysis & Peritoneal Dialysis Market - Global Forecast to 2020 4 UN World Health Statistics, 2014 6
Market Leader in Each of Our Segments Product portfolio providing differentiated infection prevention solutions Endoscopy Water Purification & Filtration Healthcare Disposables Endoscopy Reprocessing & Procedure Room Products Medical & Life Science Water Purification & Filters Dental, Hospital, Sterility Assurance 7
$ in millions 10+ Years of Long Term Growth & Margin Expansion Strong cash flow funds acquisition program with modest leverage $800 $700 CAGR: 03-17 16% $600 $500 $400 $300 $200 $100 $0 FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09 FY'10 FY'11* FY'12 FY'13 FY'14 FY'15 FY'16 FY'17 1,2 2,3 Net Sales Adj. EBITDAS Net Debt / (Cash) 21% 21% * FY 11 Net Debt includes $98M in debt assumed on the first day of fiscal year 2012 upon closing of the Byrne Medical acquisition. 1 Earnings before Interest, Taxes, Depreciation, Amortization, Stock compensation expense, (Gain)/Loss on Disposal of Fixed Asset, Acquisition-related items and Atypical items. 2 See Appendix for GAAP to Non-GAAP reconciliation 3 Net Debt calculated as Gross Debt minus cash on balance sheet 8
Strong Financial Performance with High Quality Earnings Fiscal Year 2017 Ended July 31, 2017 NET SALES: $770.2M OPERATING INCOME: $142.8M 1 OPERATING INCOME MARGIN: 18.5% 1 Healthcare Disposables, $144.5 Dialysis, $30.5 Healthcare Disposables, $28.0 19.4% Dialysis, $8.2 26.8% Endoscopy, $398.8 Endoscopy, $73.4 18.4% Water Purification & Filtration, $196.4 Total Revenue Growth = 15.9% Organic Revenue Growth = 11.0% Water Purification & Filtration, $33.2 16.9% Adjusted EBITDAS = $161.5M 2,3 Adjusted EBITDAS Margin = 21.0% 2,3 1 Before allocation of corporate expenses of ~$32.3M. 2 Earnings before Interest, Taxes, Depreciation, Amortization, Stock compensation expense, (Gain)/Loss on Disposal of Fixed Asset, Acquisition-related items and Atypical items. 3 See appendix for GAAP to Non-GAAP reconciliation. The effect of rounding may create minor data variances. 9
Long Term Growth Drivers: Endoscopy MARKET SIZE AND GROWTH INDUSTRY DRIVERS THE CANTEL DIFFERENCE Large and growing global addressable market totaling over $4.5 billion 80M procedures globally growing at mid-single digits Colorectal cancer is a leading global cause of death, driving worldwide screening and treatment efforts Improved adenoma detection rates will accelerate colonoscopy procedures Focus on single-use products to decrease crosscontamination Transition from manual to automated reprocessing in emerging markets Single-shot AERs drive continued high-margin chemistry growth Only pure-play infection prevention provider Full-circle product solutions for infection challenges 3 new AER platforms Direct sales and service teams in the US, Canada, UK, Italy, Germany, Benelux, France and China 10
Long Term Growth Drivers: Water Purification & Filtration MARKET SIZE AND GROWTH INDUSTRY DRIVERS THE CANTEL DIFFERENCE End-Stage Renal Disease (ESRD) patient demographics drive de novo clinic build in the US US ESRD patient population growing at 3-4% annually 1 De novo clinic build increasing 5% annually 1 Continued expansion of ESRD population Upgrade opportunity: ~6,500 1 US clinics today, majority use old technology Market adoption of heatbased water disinfection technology New opportunities in filtration and chemical sterilants Leading technology in Hemodialysis water treatment Comprehensive network of US-based service centers available 24/7/365 Strong partnerships with leading dialysis providers REVOX sterilization 1 2015 US Renal Data System 11
Long Term Growth Drivers: Healthcare Disposables MARKET SIZE AND GROWTH INDUSTRY DRIVERS THE CANTEL DIFFERENCE ~ 210,000 dentists in the US 213 million annual 1 US dental visits growing at 2-3% US single largest market for dental infection prevention products Aging global demographics will drive patient volumes Infection prevention remains headline risk for dental practitioners globally Evolution of DSOs consolidating providers driving requirements for comprehensive solutions Higher compliance standards Leading branded player in the dental infection prevention Expansion of higher margin Circle of Protection products DentaPure Waterline Disinfection System adds new growth category Innovative face masks / pandemic preparedness Leader in education and training of dental community 1 May 2014 American Dental Association News 12
Experienced Executive Team Jørgen B. Hansen President & Chief Executive Officer Seth M. Yellin Exec. Vice President Strategy and Corporate Development Eric W. Nodiff Exec. Vice President General Counsel Dottie Donnelly Brienza SVP and Chief Human Resources Officer Milicent Brooks Director Corporate Communications Peter G. Clifford Exec. Vice President Chief Financial Officer David Hemink President Endoscopy Gary Steinberg President Healthcare Disposables Curtis Weitnauer President Water Purification and Filtration David Rosen President Continental EU, MEA & Asia Pac Michael Spicer President Americas, Sales, UK & Global Service Craig Smith Vice President RA & QA Compliance Officer Paul Helms Exec. Vice President Operations Lawrence Conway Vice President Business Systems & Procurement 13
Cantel Growth Strategy Achieve global IP leadership by executing our business priorities New Products Global Market Expansion Strategic Acquisitions Cantel Operating Model Commercial Excellence Team Development Infrastructure Continuous Improvement 14
New Products: Global R&D process driving new product development Endoscopy Water Purification & Filtration Healthcare Disposables RapidAER Advantage Plus Pass- Thru Medivators ISA Procedure kits Rapicide PA CleanaScope Revox Sterilization Solutions ROVER Dialysis Water Transport System CWP Dialysis Water System Millenium HX Dialysis Water System Unique Sure-Check pouch Secure Fit masks Rapicide OPA / 28 BI/CI product-line extensions 15
Market Expansion: Significant Global Investment in Sales & Marketing Substantial Growth of US Direct Sales Team Endoscopy team doubled in the last 3 years with proven Commercial Excellence model Water and HC disposable teams expanding International Sales & Marketing Accelerating investments Go-direct in Australia, Canada, UK, Germany, Italy, France, Benelux, Singapore and China Expansion into New Market Segments OR, central sterile, physician offices, GI Adenoma detection, industrial, conscious sedation, etc. 16
Strategic Acquisitions: Proven ability to integrate, leverage and grow acquired businesses Endoscopy Healthcare Disposables Water Purification & Filtration International Byrne Medical, PuriCore, IMS, Medical Innovations, CR Kennedy Strategic Fit: New products & markets, manufacturing expansion & international presence SPS Medical, DentaPure, NAMSA s Sterility Assurance Products division, Accutron Strategic Fit: Leadership in dental IP, sterility assurance monitoring, dental waterline disinfection, conscious sedation Roll-up of US-based water purification assets: Gambro Medical Water Systems, Eagle Pure Water Systems, Siemens Strategic Fit: New technology, customer relationships & geographic footprint Germany: BHT Group UK: PuriCore, Medical Innovations Italy: IMS France: Medical Innovations Canada: Vantage endoscopy assets Australia: CR Kennedy endoscopy assets 17
The Cantel Operating Model is the Foundation to Enable Growth and Leverage Commercial Excellence Infrastructure Team Development Continuous Improvement Target sales growth in all Cantel divisions at above market rates Establish systems & procedures to optimize global supply chain Attract, retain and develop the best team in the business Deploy strategic procurement & lean processes globally 18
5-Yr Strategic Plan Double Sales & EPS from FY16 to FY21 FY21 targeted sales of $1.3B and non-gaap net income of $150M Accelerate international sales by more than 2x North America growth rates Invest in infrastructure, technology and systems to drive efficiencies and scale Investments to develop best-in-class team industry wide New products contribute half of organic growth Successfully execute M&A program to drive a third of total sales growth Deploy Commercial Excellence globally to drive organic sales growth 19
$770M 1 NYSE Infection Prevention Leader Recurring revenue and $161.5M in LTM Adj. EBITDAS 1,2,3 32 Strong financial performance for more than Successful acquisitions since 2000 10 YEARS 73% Strong, recessionbuffered core business with high future growth prospects Sustainable double digit growth in sales and earnings for 10+ years Total available market 10x sales - Global opportunities organically and via M&A Excellent record with the FDA, EPA and global regulatory bodies Strong cash flow and balance sheet (0.55x leverage ratio 3,4 ) 1 For last twelve months ended July 31, 2017. 2 Earnings before Interest, Taxes, Depreciation, Amortization, Stock compensation expense, (Gain)/Loss on Disposal of Fixed Asset, Acquisition-related items and Atypical items. 3 See appendix for GAAP to Non-GAAP reconciliation. 4 Net debt to LTM Adj. EBITDAS as of July 31, 2017. Net debt calculated as Gross Debt minus cash on balance sheet. 20
THANK YOU 21
APPENDIX NYSE:CMN
BHT Group August 23, 2017 German leader in automated endoscope reprocessing, endoscope storage and drying cabinets, washer-disinfectors for central sterile applications and flexible endoscope repair Purchase price of $60.8M in cash consideration For the trailing twelve months ending May 31, 2017, BHT Group reported revenues of $24.5M Transaction expected to close at the end of August 2017 Combination creates leading German AER manufacturer with >25% market share Provides ownership and control over Cantel s ENDODRY Storage and Drying System Opportunity to offer complete line of infection prevention product portfolio to new customer base 23
Accutron August 1, 2016 Leading manufacturer of nitrous oxide delivery systems and single-use nasal masks Purchase price of $53.0M in cash consideration For calendar year ending December 31, 2015, Accutron had reported revenues of $21.5M Transaction further differentiates CMD s infection prevention product offering #1 US market share in both nitrous oxide equipment and nasal masks Leading manufacturer of single-use nasal masks driving the ongoing transition of industry away from reusable nasal hoods, eliminating cross contamination Allows early stage access to new dental office openings / dental office decision makers 24
Medical Innovations September 14, 2015 Global endoscope storage and transport manufacturer Purchase price of $79.6M in cash consideration For last twelve months ending June 30, 2015, MI had reported revenues of $28.5M Transaction further enhances CMD s position as leading provider of infection prevention solutions in the Gastrointestinal endoscopy market Provides CMD a market leading endoscope storage and transport system, which is highly complimentary to existing endoscopy infection prevention portfolio CMD s ability to leverage existing sales channels, particularly in US and direct markets, will further accelerate growth MI s presence in over 80% of UK hospitals represents significant opportunity for CMD to drive additional growth in the UK market 25
NAMSA s Sterility Assurance Products Division March 1, 2016 Manufacturer of high-quality biological and chemical indicators Purchase price of $13.4M in cash consideration For year ending December 31, 2015, Sterility Assurance Products division had adjusted revenues of $5.7M Transaction further broadens HC Disposable s Sterility Assurance product offering Expands HC Disposable segment s presence into attractive industrial markets Opportunity to offer complete line of infection prevention and control product portfolio to new customer base Strengthens new product development capabilities in sterility monitoring segment 26
Historical P&L Reveals Success of Growth Programs Fiscal Year Ending 7/31/2017 ($ in millions, except per share data) FY11 FY12 FY13 FY14 FY15 FY16 FY17 CAGR: 11-17 Net Sales $321.7 $386.5 $425.0 $488.7 $565.0 $665.0 $770.2 16% Gross Profit Gross Margin $122.8 38.2% $164.2 42.5% $183.5 43.2% $213.3 43.6% $253.5 44.9% $309.2 46.5% $367.2 47.7% 20% Adjusted EBITDAS 1, 2 % of sales $48.5 15.1% $71.9 18.6% $83.7 17.3% $97.5 20.0% $113.8 20.1% $137.9 20.8% $161.5 21.0% 22% Op. Profit $31.3 $52.1 $63.2 $70.9 $80.8 $97.3 $110.4 23% Net Income $20.4 $31.3 $39.2 $43.3 $48.0 $60.0 $71.4 23% Diluted GAAP EPS 3 $0.52 $0.77 $0.95 $1.04 $1.15 $1.44 $1.71 22% Non-GAAP Diluted EPS 2,3 $0.64 $0.90 $1.10 $1.24 $1.44 $1.75 $2.08 22% 1 Earnings before Interest, Taxes, Depreciation, Amortization, Stock compensation expense, (Gain)/Loss on Disposal of Fixed Asset, Acquisition-related items and Atypical items. 2 See appendix for GAAP to Non-GAAP reconciliation. 3 Retroactively applies the 3:2 stock splits effective February 2012 and July 2013. 27
Strong Balance Sheet & Cash Flow Generation Fiscal Year 2017 Ending 7/31/2017 ($ and shares in millions) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Total Assets $263.7 $279.2 $277.9 $280.7 $321.4 $434.8 $487.7 $536.1 $584.0 $694.5 $786.4 Current Ratio 2.1:1 2.2:1 2.3:1 2.3:1 2.6:1 2.4:1 2.5:1 2.5:1 2.7:1 2.3:1 2.4:1 Equity $155.1 $168.7 $187.1 $209.4 $234.3 $275.9 $321.1 $365.2 $406.6 $454.4 $523.9 Operating Cash Flow $6.0 $18.6 $31.0 $29.0 $28.2 $50.6 $51.5 $64.3 $59.1 $80.3 $108.2 Net Debt 1,2 / Adjusted EBITDAS 2,3 1.4x 1.2x 0.5x 0.0x 2.1x 0.8x 0.7x 0.5x 0.4x 0.6x 0.6x # of Diluted Shares 3, 4 36.4 37.0 37.3 38.2 39.0 40.8 41.2 41.5 41.6 41.7 41.8 1 Net Debt calculated as Gross Debt minus cash on balance sheet. 2 See appendix for GAAP to Non-GAAP reconciliation. 3 Earnings before Interest, Taxes, Depreciation, Amortization, Stock compensation expense, (Gain)/Loss on Disposal of Fixed Asset, Acquisition-related items and Atypical items. 4 Retroactively reflects 3:2 stock splits effective February, 2012 and July, 2013. 28
GAAP to Non-GAAP EPS Reconciliation Fiscal Year 2017 Ending 7/31/2017 FY11 FY12 FY13 FY14 FY15 FY16 FY17 GAAP Diluted EPS 1 $0.52 $0.77 $0.95 $1.04 $1.15 $1.44 $1.71 + Intangible amortization $0.10 $0.14 $0.16 $0.16 $0.21 $0.22 $0.30 + Acquisition related items $0.02 ($0.02) ($0.02) $0.02 $0.02 $0.06 $0.04 + Other Atypical items $0.00 $0.01 $0.01 $0.01 $0.06 $0.03 $0.03 Non-GAAP Diluted EPS 1 $0.64 $0.90 $1.10 $1.24 $1.44 $1.75 $2.08 1 Retroactively applies the 3:2 stock splits effective February 2012 and July 2013. The effect of rounding may create minor data variances. 29
Net Income to Adjusted EBITDAS Net Income to Adjusted EBITDAS Reconciliation Fiscal Year 2017 Ending 7/31/2017 ($ in millions) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Net Income $8.1 $8.7 $15.6 $19.9 $20.4 $31.3 $39.2 $43.3 $48.0 $60.0 $71.4 + Income taxes 6.0 5.2 9.4 11.6 10.0 16.5 21.1 25.3 28.2 34.0 34.9 + Net Interest expense 2.8 4.1 2.4 1.3 0.9 3.8 2.9 2.3 2.4 3.3 4.3 + D&A 10.2 11.7 11.4 11.4 12.4 15.9 17.3 18.9 24.0 25.1 33.5 + Loss on disposal of fixed asset - 0.1 0.1 0.2-0.1 0.2 0.5 0.4 0.5 1.0 + Stock-based comp 1.5 2.0 3.2 3.1 3.4 3.8 3.7 5.4 5.9 8.4 8.8 + Acquisition-related items - - - - 1.4 (1.2) (1.4) 1.1 1.6 3.2 2.4 + Loss on sale of business - - - - - - - - 2.2 - - + Other atypical items 0.5 1.0 - - - 1.7 0.8 0.6 1.3 3.5 5.2 Adjusted EBITDAS $29.1 $32.8 $42.1 $47.5 $48.5 $71.9 $83.7 $97.5 $113.8 $137.9 $161.5 The effect of rounding may create minor data variances. 30
Gross Debt to Net Debt Reconciliation Fiscal Year 2017 Ending 7/31/2017 ($ in millions) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 3Q17 Gross Debt $57.0 $58.3 $43.3 $21.0 $122.0 $90.0 $95.0 $80.5 $78.5 $116.0 $126.0 - Cash (15.9) (18.3) (23.4) (22.6) (18.4) (30.2) (34.1) (31.8) (31.7) (28.4) (36.6) Net Debt $41.1 $40.0 $19.9 ($1.6) $103.6 $59.8 $60.9 $48.7 $46.8 $87.6 $89.4 1 FY 11 Net Debt includes $98M in debt assumed on the first day of fiscal year 2012 upon closing of the Byrne Medical acquisition. 1 FY 11 Net Debt includes $98M in debt assumed on the first day of fiscal year 2012 upon closing of the Byrne Medical acquisition. 31
GAAP to Non-GAAP EPS Disclosure Non-GAAP financial measures contained herein supplement information previously reported in filings on Form 10-Q and Form 10-K as well as in presentations by Company management to investors, analysts and others. The information below will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference in any filing under the Securities Act of 1933, as amended. 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 the Company's 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 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. (a) Organic Sales We define organic sales as net sales less (i) the impact of foreign currency translation and (ii) net sales related to acquired businesses during the first twelve months of ownership and (iii) divestures 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 because the nature, size, and number of acquisitions can vary dramatically from period to period and can obscure underlying business trends and make comparisons of financial performance difficult. 32
GAAP to Non-GAAP EPS Disclosure (continued) (b) Non-GAAP Gross Profit Rate We define non-gaap gross profit rate, adjusted to exclude acquisition related items as management deems these items to be irregular or non-operating in nature. For the three months and fiscal year ended July 31, 2017 and 2016, respectively, we made adjustments to non-gaap gross profit rate to exclude acquisition related items, as further explained below. (c) Non-GAAP Income from Operations We define non-gaap income from operations, adjusted to exclude (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. For the three months ended July 31, 2017, we made adjustments to income from operations to exclude (i) amortization expense of purchased intangible assets; (ii) acquisition related items; and (iii) business optimization and restructuring-related costs. For the three months ended July 31, 2016, we made adjustments to income from operations to exclude (i) amortization expense of purchased intangible assets and (ii) costs associated with the retirement of our former Chief Executive Officer. For the fiscal year ended July 31, 2017, we made adjustments to income from operations to exclude (i) amortization expense of purchased intangible assets; (ii) acquisition related items; (iii) costs associated with the retirement of our former Chief Executive Officer; and (iv) business optimization and restructuring-related costs. For the fiscal year ended July 31, 2016, we made adjustments to income from operations to exclude (i) amortization expense of purchased intangible assets; (ii) acquisition related items; and (iii) costs associated with the retirement of our former Chief Executive Officer. 33
GAAP to Non-GAAP EPS Disclosure (continued) (d) Non-GAAP Diluted EPS We define non-gaap net income and non-gaap diluted EPS as net income and diluted EPS, respectively, adjusted to exclude (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. For the three months ended July 31, 2017, we made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets; (ii) acquisition related items; and (iii) business optimization and restructuring-related costs to arrive at our non-gaap financial measures, non-gaap net income and non-gaap diluted EPS. For the three months ended July 31, 2016, we made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets and (ii) costs associated with the retirement of our former Chief Executive Officer to arrive at our non-gaap financial measures, non-gaap net income and non-gaap diluted EPS. For the fiscal year ended July 31, 2017, we made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets; (ii) acquisition related items; (iii) costs associated with the retirement of our former Chief Executive Officer; (iv) business optimization and restructuring-related costs; and (v) the favorable impact of certain income tax benefits to arrive at our non- GAAP financial measures, non-gaap net income and non-gaap diluted EPS. For the fiscal year ended July 31, 2016, we made adjustments to net income and diluted EPS to exclude (i) amortization expense of purchased intangible assets; (ii) acquisition related items; (iii) costs associated with the retirement of our former Chief Executive Officer; and (iv) the favorable impact of tax legislation to arrive at our non-gaap financial measures, non-gaap net income and non-gaap diluted EPS. Amortization expense of purchased intangible assets: 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 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. 34
GAAP to Non-GAAP EPS Disclosure (continued) Acquisition Related Items 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 these acquisition related items are irregular 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. Other Adjustments In fiscal 2016, we announced the retirement of our former Chief Executive Officer and recorded costs associated with his planned retirement in our Condensed Consolidated Financial Statements in the second half of fiscal 2016 and the first quarter of fiscal 2017. Since these costs are irregular and mask our underlying operating performance, we made an adjustment to our net income and EPS to exclude such costs to arrive at our non-gaap financial measures. In the second, third and fourth quarters of fiscal 2017, we recorded business optimization and restructuring-related costs to improve operating efficiencies and realign resources for continued investment in strategic initiatives. Since business optimization and restructuringrelated costs have historically been irregular and mask our underlying operating performance, we have made an adjustment to our net income and EPS to exclude such restructuring costs to arrive at our non-gaap financial measures. 35
GAAP to Non-GAAP EPS Disclosure (continued) Other Adjustments (continued) The consolidated effective tax rate for fiscal 2017 was favorably affected by the recording of excess tax benefits relating to stock awards that vested in October 2016. As a result of the adoption of a new accounting pronouncement on August 1, 2016, we no longer record excess tax benefits as an increase to additional paid-in capital, but record such excess tax benefits on a prospective basis as a reduction of income tax expense, which amounted to $2,241 in fiscal 2017. The magnitude of the impact of excess tax benefits generated in the future, which may be favorable or unfavorable, are dependent upon the Company s future grants of stock-based compensation, the Company s future stock price on the date awards vest in relation to the fair value of awards on grant date and the exercise behavior of the Company s option holders. 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 fiscal 2017 for the purposes of calculating these non-gaap financial measures to facilitate an evaluation of our current performance and a comparison to past performance. The prior year consolidated effective tax rate was favorably affected by tax legislation enacted in the United States and internationally that enabled us to record favorable tax benefits in fiscal 2016 relating to the 2015 calendar year. Since these favorable tax benefits were largely unrelated to our fiscal 2016 income before taxes and was 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. 36